-----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, KFgQbtujGxrtO/iOdm8njKqKlJdttnDf2BaYXobUmGLmpUPZCbrTSkmbSM/pHccu 3zVT3P3hNBDObRFRbd9Lsw== 0000899243-98-000507.txt : 19980331 0000899243-98-000507.hdr.sgml : 19980331 ACCESSION NUMBER: 0000899243-98-000507 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 033-68842 FILM NUMBER: 98578059 BUSINESS ADDRESS: STREET 1: 1000 LOUISIANA STREET 2: STE 5800 CITY: HOUSTON STATE: TX ZIP: 77002 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, 1997 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ Commission file number: 1-11156 NGC CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-3248415 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification 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 $364,438,085 on March 25, 1998, (based on $14.8125 per share, the last sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape on such date). 151,524,970 shares of the registrant's Common Stock were outstanding as of March 25, 1998. DOCUMENTS INCORPORATED BY REFERENCE. Portions of Parts I, II and IV in the Annual Report to Shareholders for the fiscal year ended December 31, 1997. As to Part III (items 10, 11, 12 and 13), Notice and Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed not later than 120 days after December 31, 1997. 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 PART I
Page 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................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 23 Item 8. Financial Statements and Supplementary Data............................... 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................ 35 PART III Item 10. Directors and Executive Officers of the Registrant........................ 36 Item 11. Executive Compensation.................................................... 36 Item 12. Security Ownership of Certain Beneficial Owners and Management............ 36 Item 13. Certain Relationships and Related Transactions............................ 36 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 36 Signatures........................................................................... 42
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, electricity and crude oil and is engaged in natural gas gathering, processing and transportation through direct and indirect ownership and operation of natural gas processing plants, fractionators, storage facilities and pipelines and engages in electric power generation through direct and indirect ownership of cogeneration and other electric power producing facilities. Acting in the role of a large-scale aggregator, processor, marketer and reliable supplier of multiple energy products and services, NGC has evolved into a reliable energy commodity and service provider. The Company is a holding company that conducts substantially all of its business through its subsidiaries. From inception of operations in 1984 until 1990, Natural Gas Clearinghouse ("Clearinghouse") limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse began expanding its core business operations through acquisitions and strategic alliances with certain of its shareholders resulting in the formation of a midstream energy asset business and establishing energy marketing operations in both Canada and the United Kingdom. Effective March 1, 1995, Clearinghouse and Trident NGL Holding, Inc. ("Holding"), a fully integrated natural gas liquids company, merged and the combined entity was renamed NGC Corporation ("Trident Combination"). On August 31, 1996, NGC completed a strategic combination with Chevron U.S.A. Inc. and certain Chevron affiliates (collectively "Chevron") whereby substantially all of Chevron's midstream assets were merged with NGC ("Chevron Combination"). In June 1997, NGC acquired Destec Energy, Inc. ("Destec"), a leading independent power producer. By virtue of the growth of NGC's core businesses combined with the synergies derived from these transactions, NGC has established itself as an industry leader providing quality, competitively priced energy products and services to customers primarily throughout North America and in the United Kingdom. BG plc, Chevron and NOVA Corporation ("NOVA") each own approximately 26 percent of the outstanding common stock of NGC. 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 Atlanta, Georgia; Bogata, Columbia; Boston, Massachusetts; Calgary, Alberta; Chicago, Illinois; Dallas, Texas; Englewood, Colorado; London, England; Mexico City, Mexico; Midland, Texas; Oklahoma City, Oklahoma; Pleasanton, California; Tampa, Florida; Tulsa, Oklahoma; and Washington D.C. UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION This Form 10-K contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, words such as "anticipate", "estimate", "project", and "expect" are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key risk factors that may have a direct bearing on NGC's results of operations and financial condition are: (i) competitive practices in the industries in which NGC competes, (ii) fluctuations in energy commodity prices which have not been properly hedged or which are inconsistent with NGC's open position in its energy marketing activities, (iii) operational and systems risks, (iv) environmental liabilities which are not covered by indemnity or insurance, and (v) the impact of current and future laws and governmental regulations (particularly environmental regulations) affecting the energy industry in general, and NGC's operations in particular. 1 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. MMBbls Volume of one million barrels. MMcf/d Volume of one million cubic feet per day. Bcf Volume of one billion cubic feet Bcf/d Volume of one billion cubic feet per day. Bpd Barrels per day. LPG Liquid petroleum gas. MW s Megawatts. 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 three primary business segments: the natural gas and power marketing segment, the power generation segment and the natural gas liquids, crude oil and gas transmission segment. Natural Gas and Power Marketing NGC's Natural Gas and Power Marketing business uses its knowledge of the marketplace, considerable physical transmission, storage, processing and distribution assets and a multi-commodity mindset to provide customers with flexible, tailored solutions to meet their energy supply, asset management and financial risk management needs. NGC's business strategy in this segment includes expanding its relationships with existing local distribution companies ("LDCs") and industrial customers to broaden its customer base and role as a wholesale energy supplier. The Company's wholesale 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 LDCs, utilities, power plants and other end-users; and matching natural gas receipts and deliveries based on volumes required by customers. During 1997, the Company announced the formation of three retail energy alliances that will each provide energy services to industrial, commercial and residential customers. NGC's goal is to build a network of regionally focused alliance relationships that leverage the different strengths of each alliance partner by combining NGC's buying power and large-scale wholesale energy supply infrastructure with the ability of regional partners to assess and address local conditions quickly and effectively. In determining alliance partner candidates, NGC seeks partners having significant existing customer bases, strong regional name recognition and similar infrastructures. Management believes the formation of a series of alliances throughout North America will provide NGC with accelerated market penetration and a potential platform for selling products and services to a retail customer base at modest capital investment during a period of evolving regulation and restructuring. The Company is also a marketer of electricity and 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 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, if applicable, and quantities available. In 1997, the Company 2 purchased natural gas in every major producing basin in the United States and Canada from over 900 suppliers, ranging from major producers to small independent companies. Pursuant to ancillary agreements entered into as part of the Chevron Combination, NGC has the obligation to purchase and the right to 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. 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 wholesale customer base consists primarily of gas and electric utilities and industrial and commercial end-users and marketers of natural gas. In 1997, sales were made to approximately 1,100 customers located throughout the contiguous United States and parts of Canada. For the year ended December 31, 1997, the Company's North American operations sold an aggregate average of 8.0 Bcf per day of natural gas. Natural Gas Storage and Marketing Hubs. 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. The Company also utilizes 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. Foreign Markets. During 1997, the Company restructured the ownership of its joint ventures with NOVA to market natural gas in Canada and with British Gas plc to market natural gas in the United Kingdom. As a result of these restructurings, NGC is now pursuing energy marketing and midstream asset businesses through wholly owned subsidiaries in Canada and in the United Kingdom. Additionally, as part of the restructuring of operations in the United Kingdom, NGC retained a twenty-five percent participating preferred stock interest in Accord Energy Limited ("Accord"), a U.K.-based energy marketing company. Power Marketing. The Company formed ECI in February 1994 to pursue electric power marketing opportunities created by the deregulation of the domestic electric power industry. The U.S. electric industry is estimated to produce approximately $200 billion in industry revenues annually, and is at least double the U.S. natural gas business. As power becomes deregulated and thus commoditized, its value relative to natural gas will continue to converge. Complexity in the marketplace could be ever-increasing and management of customer energy requirements will require a multi-commodity focus. NGC believes that its ownership of strategically located generating assets will enable the Company to expand its electric power marketing business. In 1997, NGC made sales to approximately 180 3 customers and sold 94.7 million megawatt hours of electricity as compared with 14.9 million megawatt hours sold during 1996. POWER GENERATION NGC's Destec subsidiary is in the business of developing, operating and managing projects which produce electricity, thermal energy and synthetic gas. NGC's business strategy in power generation focuses on being a low-cost producer of electric power. Destec has interests in 16 partnerships, each formed to build, own and operate electric power generating facilities, and owns/leases and operates one cogeneration plant, one heat recovery plant and one coal gasification facility. The combined gross capacity of these facilities is approximately 2,839 megawatts of electricity and over 3.4 million pounds per hour of steam. Destec continues to pursue expansion of its asset base by acquiring, developing, constructing, managing and operating power generation facilities. The majority of the power generating facilities owned directly or indirectly by Destec are cogeneration plants. A cogeneration plant utilizes power production technology that results in the sequential generation of two or more useful forms of energy (e.g., electricity and steam) from a single fuel source (e.g., natural gas). Destec also owns an interest in a coal gasification plant that produces synthetic gas, which serves as an alternative fuel in power generation facilities. Destec provides services to the partnerships in which it owns an interest in the areas of project development, engineering, environmental affairs, operating services and management and fuel supply services. Such management services include: (i) engineering oversight of all conceptual planning, feasibility studies, environmental studies and plant, engineering and construction design; (ii) specialized and comprehensive operating, maintenance, testing and start-up services; and (iii) asset management services that coordinate project activities with, and maintain relationships among, all project stakeholders, which include owners, customers, lenders, suppliers, and operators. Various activities are performed with a goal of obtaining ongoing profitability, including negotiating new contracts and/or amending existing contracts, developing annual and long-term business plans and forecasts, developing and implementing profit improvement opportunities, monitoring regulatory, legislative, and environmental affairs, and providing various accounting and financial services. 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, natural gas liquids marketing, natural gas transmission and crude oil marketing and transportation operations. 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 natural gas liquids. The Company owns interests in 48 gas processing plants, including 36 plants which it operates. The Company also operates natural gas gathering pipeline systems, including certain assets held pending sale. These assets are primarily located in the key producing areas of New Mexico, Texas, Louisiana, Arkansas, Oklahoma and Kansas. During the year ended December 31, 1997, the Company processed an average of 2.8 Bcf per day of natural gas and produced an average of 136.2 thousand barrels per day of natural gas liquids. As part of the Chevron Combination's ancillary agreements, 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. Fractionation. The natural gas liquids 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 natural gas liquids are separated at fractionation facilities into the component products of ethane, propane, normal butane, isobutane and natural gasoline. At December 31, 1997, the Company had ownership interests in two fractionation facilities, each located in Mont Belvieu, Texas, plus significant fractionation capacity at the VESCO facility located in Plaquemines Parish, Louisiana. During 1997, these facilities fractionated an average of 252 gross barrels per day. The Company is in the process of constructing a fourth facility in Lake Charles, Louisiana, that is expected to be operational in the fourth quarter of 1998. Upon completion of this construction project, NGC will have gross fractionation capacity at these facilities of approximately 405 thousand barrels per day. In addition, the Company maintains fractionation capability at several of its gas processing facilities. 4 NGL Marketing. The Company markets its own natural gas liquids production and also purchases natural gas liquids from third parties for resale. Through the Company's strategic network of pipeline connections, terminals, rail cars, trucks, barges and storage facilities, the Company moves natural gas liquids from producing regions in the Gulf Coast, West and Midwest to most major domestic and international markets. The Company operates large-scale marine terminals in Texas, Florida and Louisiana, which offer importers a variety of methods for transporting products to the marketplace. In addition, NGC has access to over 60 million barrels of underground liquids storage providing customers with the ability to store, trade, buy and sell specification products. In 1997, the Company significantly expanded utilization of such storage, terminalling and shipping assets and services to support the growth of its international deepwater LPG business. During 1997, the Company sold approximately 414 thousand barrels per day of natural gas liquids to over 900 customers. Transmission Operations. The Company's transportation assets are inter- connected with the nation's gas liquids and natural gas pipeline systems. NGC owns a 49 percent interest in a partnership which operates the West Texas LPG Pipeline, a pipeline capable of delivering 160,000 barrels per day of liquids to fractionation facilities at Mont Belvieu, Texas. In addition, the Company owns and operates a 12-inch bi-directional pipeline, which can transport 50,000 barrels per day of liquids and finished products between major LPG Hubs, Lake Charles, Louisiana and Mont Belvieu. The Company operates an extensive Houston- area distribution system which provides market access to refiners and chemical plants on the Houston Ship Channel. The Company operates an intrastate natural gas pipeline system in south-central Kansas, which serves markets in the Wichita area and provides access to markets in the Midwest and Mid-Continent areas through interconnected intrastate and interstate pipelines. The Company also operates the Ozark Gas Transmission Pipeline ("Ozark"), an interstate pipeline system located in eastern Oklahoma and central Arkansas. Crude Oil Marketing. The Company provides a full range of crude oil marketing services to producers, and serves the North American 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 1997, the Company sold approximately 168 thousand barrels per day of crude oil to over 150 customers. INTERNATIONAL OPPORTUNITIES NGC's strategic investors, BG plc, NOVA and Chevron, provide the Company with international business opportunities through joint ventures or other means. 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 intends to bring multi-commodity products and services 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 NGC utilizes certain types of fixed-price forward purchase and sales contracts, futures and option contracts traded on the 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 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 guidelines, resulting from the management of its portfolio. Additionally, NGC monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to hedge and manage these exposures. In addition to the risk associated with price or interest rate 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 management believes minimize its overall credit risk. The commercial groups of NGC manage, on a portfolio basis, the resulting market risks inherent in the transactions, subject to parameters established by the NGC Board of Directors. Market risks are monitored by a risk control group that operates separately from the commercial units that create or actively manage these risk exposures 5 to ensure compliance with NGC's risk management policies. Risk measurement is also practiced against the NGC portfolios with stress testing and scenario analysis. STRATEGIC BUSINESS COMBINATIONS The Destec Acquisition. NGC acquired Destec, an independent power producer, for $1.26 billion in June 1997. Following the acquisition, NGC sold certain international and non-strategic Destec assets for aggregate proceeds of $735 million. NGC believes the acquisition of Destec's power generating assets will result in significant benefits through the integration of Destec's electricity and thermal energy marketing activities with NGC's existing power marketing business, conducted through ECI, and the introduction of Destec's customers to the variety of energy products and services provided by other NGC businesses. NGC expects Destec's expertise in power technology and engineering and experience in development, construction, management and operation of power facilities to provide a platform for expansion of its power generating business worldwide. Chevron Combination. On August 31, 1996, NGC completed the Chevron Combination pursuant to which substantially all of Chevron's midstream assets, 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, were combined into NGC. As a result of the Chevron Combination, Chevron received approximately 38.6 million shares of NGC common stock, approximately 7.8 million shares of NGC's Series A Participating Preferred Stock and $128 million in cash, and NGC assumed approximately $155 million of indebtedness. 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 obligation to purchase and the right to 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, a registrant on the New York Stock Exchange, consummated the Trident Combination. Pursuant to the terms of the Trident Combination, Holding, the legally surviving corporation in the Combination, was renamed NGC Corporation. The Trident Combination provided NGC with significant gas gathering, gas processing, fractionation and other midstream assets. RECENT DEVELOPMENTS Restructuring of Liquids Business. During the fourth quarter of 1997, the Company recognized a $275 million charge largely related to its plan to restructure the Company's natural gas liquids business, including rationalization and consolidation of assets acquired in both the Trident and Chevron Combinations, the reorganization of personnel to improve operational management of this segment and a reduction of employees involved in non- strategic operations. Execution of this comprehensive plan began in 1997 and will continue into 1998. Pursuant to this restructuring, the Company anticipates recording an additional severance charge of approximately $10 million during the first quarter of 1998. Sale of Ozark. In January 1998, the Company announced an agreement to sell the Ozark Gas Transmission System for $55 million, and expects to recognize an estimated pre-tax gain of approximately $27 million related to the sale. Closing of the transaction is expected in the third quarter of 1998, subject to certain conditions, including FERC and other governmental approvals. El Paso Capacity Commitment. For a two-year period beginning January 1, 1998, the Company contracted for 1.3 billion cubic feet per day of firm transportation capacity to California on the El Paso Natural Gas pipeline system. The arrangement has been implemented but is subject to regulatory approval in a pending proceeding in which challenges have been filed. The firm capacity provides NGC with the ability to serve an expanded California customer base arising from the recent Chevron Combination and Destec acquisition, as well as to take advantage of opportunities associated with the deregulation of the electric power industry in California. Pursuant to this arrangement, NGC is obligated to pay a minimum of $70 million of reservation charges over the two- year term. 6 New Power Project Commitments. In November 1997, the Company together with NRG Energy, Inc. ("NRG"), was awarded the contract to acquire the El Segundo Station, a 1,020 megawatt gas-fired power generating facility located in Los Angeles, California. The El Segundo facility will be acquired by an entity owned fifty percent by the Company and fifty percent by NRG. Additionally, in February 1998, NGC together with NRG, was awarded the contract to acquire a 560 megawatt gas-fired power facility located in Long Beach, California. The Long Beach facility will also be acquired by an entity owned fifty percent by NGC and fifty percent by NRG. The El Segundo facility is partially a merchant plant while the Long Beach facility is solely a merchant plant. Both acquisitions are expected to close in the second quarter of 1998. With respect to both these acquisitions, NGC will be the lead party on fuel procurement, power marketing and asset management, while NRG will be operator of the facilities. Additionally, Destec and a partner were selected to build a 766 megawatt independent power station near Townsville, in Queensland, Australia. The Townsville project is expected to be partially operational in July 2001, and fully operational by July 2003. Destec will own fifty percent of this project. Venice Energy Services Company, L.L.C. ("VESCO"). The VESCO members have entered into a definitive agreement with Koch Energy Services Company ("Koch") pursuant to which Koch will contribute a cryogenic gas processing unit to VESCO on behalf of NGC in exchange for approximately 10 percent of NGC's interest in the limited liability company. The transaction, which is expected to close in the second quarter of 1998, will reduce NGC's interest in VESCO to approximately 23 percent. 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 utilize transportation efficiently through third-party pipelines. With respect to its marketing operations, NGC believes that customers will increasingly scrutinize the financial condition of their suppliers to assure that contract obligations will be 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 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 to effectively combine value-added services, competitively priced supplies and price risk management services will determine the level of success in its natural gas marketing operations. NGC's power marketing business is similar to its gas marketing business in that it provides 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 independent power generation industry has grown rapidly over the past twenty years. The demand for power may be met by generation capacity based on several competing technologies, such as gas-fired or coal-fired cogeneration and power generating facilities fueled by alternative energy sources including hydro power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid waste and nuclear sources. The Company's Power Generation segment competes with other non-utility generators, regulated utilities, unregulated subsidiaries of regulated utilities and other energy service companies in the development and operation of energy-producing projects. The trend towards deregulation in the U.S. electric power industry has resulted in a highly competitive market for acquisition or development of domestic power generating facilities. As the nation's regulated utilities seek non-regulated investments and states move toward retail electric competition, these trends can be expected to continue for the foreseeable future. 7 The Company's natural gas liquids, 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 natural gas liquids, crude oil, residue gas, helium, condensate and sulfur, and the transportation of natural gas, natural gas liquids 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 effectively compete. REGULATION General. The Company is subject to the laws, rules and regulations of the countries in which it conducts its operations. 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. 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 natural gas liquids, and are subject to these or other federal regulations. Natural Gas Marketing. 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 has fostered the evolution of various unregulated, privately negotiated natural gas sales, purchase and transportation arrangements. Regulation determined by the FERC relating to the sale for resale of natural gas continues to evolve. While the ultimate impact of such determinations on the Company's operations 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. Gas Processing. The primary function of NGC's gas processing plants is the extraction of natural gas liquids and the conditioning of natural gas for marketing, 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 natural gas liquids 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 should 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, 8 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. Market Hubs. The market hub for which Hub Services, Inc., a wholly owned subsidiary of NGC, serves as hub administrator is a combined gas storage, transportation and interchange facility. To the extent the market hub provides 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 hub provides 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. 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. Electricity Marketing Regulation. The Federal Power Act ("FPA") and rules promulgated by the FERC regulate the transmission of electric power in interstate commerce and sales for resale of that power. As a result, portions of ECI's operations are under the jurisdiction of the FPA and FERC. In April 1996, the FERC adopted rules (Order 888) to expand transmission service and access and provide alternative methods of pricing for transmission services. Upon promulgation of the final rule by the FERC (and the Public Utility Commission of Texas for ERCOT), the interstate transmission grid in the continental United States was opened to all qualified persons that seek transmission services to wheel wholesale power. Utilities are required to provide transmission customers non-discriminatory open access to their transmission grids with rates, terms, and conditions comparable to that which the utility imposes on itself. Order 888 was upheld by the FERC in March 1997 and is subject to appeal. 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. Power Generation Regulation. Historically in the United States, regulated and government-owned utilities have been the only significant producers of electric power for sale to third parties. Pursuant to the enactment of the federal Public Utility Regulatory Policies Act of 1978 ("PURPA"), companies other than utilities were encouraged to enter the electric power business by reducing regulatory constraints. In addition, PURPA and its implementing regulations created unique opportunities for the development of cogeneration facilities by requiring utilities to purchase electric power generated in cogeneration plants meeting certain requirements (referred to as "Qualifying Facilities"). As a result of PURPA, a significant market for electric power produced by independent power producers developed in the United States. The exemptions from extensive federal and state regulation afforded by PURPA to Qualifying Facilities are important to NGC and its competitors. Many of the projects that NGC currently owns meet the requirements under PURPA to be Qualifying Facilities and are maintained on that basis. In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"), which amended the FPA and the Public Utility Holding Company Act of 1935 ("PUHCA") to create new exemptions from PUHCA for independent power producers selling electric energy at wholesale, to increase electricity transmission access for independent power producers and to reduce the burdens of complying with PUHCA's restrictions on corporate structures for owning or operating generating or transmission facilities in the United States or abroad. The Energy Act has enhanced the development of independent power projects and has further accelerated the changes in the electric utility industry that were initiated by PURPA. Changes in PURPA, PUHCA and other related federal statutes may occur in the next several years. The nature and impact of such changes on the Company's projects, operations and contracts is unknown at this time. NGC actively monitors these developments to determine such impacts as well as to evaluate new business opportunities created by restructuring of the electric power industry. Depending on the outcome of these legislative matters, changes in legislation could have an adverse effect on current contract terms. The enactment in 1978 of PURPA and the adoption of regulations thereunder by the FERC and individual states provide incentives for the development of small power production facilities and cogeneration facilities meeting certain criteria. In order to be a Qualifying Facility, a cogeneration facility must (i) produce not only electricity but also a certain quantity of thermal energy (such as steam) which is used for a qualified purpose other than power generation, (ii) meet 9 certain energy operating and efficiency standards when oil or natural gas is used as a fuel source and (iii) not be controlled or more than 50 percent owned by an electric utility or electric utility holding company, or any combination thereof. PURPA provides two primary benefits to Qualifying Facilities owned and operated by non-utility generators. First, Qualifying Facilities under PURPA are exempt from certain provisions of PUHCA, the FPA and, except under certain limited circumstances, state laws respecting rate and financial regulation. Second, PURPA requires that electric utilities purchase electricity generated by Qualifying Facilities at a price equal to the purchasing utility's full "avoided cost" and that the utility sell back-up power to the Qualifying Facility on a non-discriminatory basis. The FERC regulations also permit Qualifying Facilities and utilities to negotiate agreements for utility purchases of power at rates other than the purchasing utility's avoided cost. If Congress amends PURPA, the statutory requirement that an electric utility purchase electricity from a Qualifying Facility at full avoided costs could be eliminated. Although current legislative proposals specify the honoring of existing contracts, repeal of the statutory purchase requirements of PURPA going forward could increase pressure to renegotiate existing contracts. Any changes which result in lower contract prices could have an adverse effect on the Company's operations and financial position. The Congress passed the Energy Act to promote further competition in the development of new wholesale power generation sources. Through amendments to PUHCA, the Energy Act encourages the development of independent power projects which are certified by the FERC as exempt wholesale generators ("EWGs"). The owners or operators of qualifying EWGs are exempt from the provisions of PUHCA. The Energy Act also provides the FERC with extensive new authority to order electric utilities to provide other electric utilities, Qualifying Facilities and independent power projects with access to their transmission systems. However, the Energy Act does preclude the FERC from ordering transmission services to retail customers and prohibits "sham" wholesale energy transactions which appear to provide wholesale service, but actually are providing service to retail customers. The FPA grants the FERC exclusive rate-making jurisdiction over wholesale sales of electricity in interstate commerce. The FPA provides the FERC with ongoing as well as initial jurisdiction, enabling the FERC to revoke or modify previously approved rates. Such rates may be based on a cost-of-service approach or on rates that are determined through competitive bidding or negotiation on a market basis. Although Qualifying Facilities under PURPA are exempt from rate- making and certain other provisions of the FPA, independent power projects and certain power marketing activities are subject to the FPA and to the FERC's rate-making jurisdiction. Utilities are not obligated to purchase power from projects subject to regulation by the FERC under the FPA because they do not meet the requirements of PURPA. However, because such projects would not be bound by PURPA's thermal energy use requirement, they may have greater latitude in site selection and facility size. All of the projects currently owned or operated by NGC as Qualifying Facilities under PURPA are exempt from the FPA. NGC's EWGs, Commonwealth Atlantic and Hartwell, are subject to the FPA and the jurisdiction of the FERC. With approval from FERC, such entities, with certain exceptions, are exempted from being required to sell cost-based rates and can make all sales at market-based rates set through negotiations. Independent power projects in which the Company has an interest have been granted market based rate authority and comply with the FPA requirements governing approval of wholesale rates and subsequent transfers of ownership interests in such projects. Development of projects in international markets creates exposure and obligations to the national, provincial and local laws of each host country, worldwide environmental standards and requirements imposed by multi-lateral lending institutions. The principal regulatory consideration for international projects is PUHCA, since it is broadly applicable to the ownership and operation of power facilities (including generation and transmission facilities) both inside and outside of the United States. For international projects, the principal basis for exemption from PUHCA is by obtaining EWG status from the FERC. EWG status is very beneficial for international projects because EWGs are generally allowed to make retail sales in international markets. Another way to obtain an exemption from PUHCA for foreign ownership and operation activities is by filing a foreign utility company determination ("FUCO") with the Securities and Exchange Commission. However, FUCO filings are less frequently used, because unlike EWGs, no formal regulatory order is issued confirming the status of a FUCO. The development of international power generation and transmission projects also may entail other multi-national regulatory considerations arising under United States law, including export/import controls, trade laws and other similar legislation. NGC attempts to identify and manage those issues early in the development process to ensure compliance with such laws and regulations. State Regulatory Reforms. Legislation currently under review in various states impacting gas and electricity marketing and power generation businesses is most likely to impact NGC in the near term. However, 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. 10 ENVIRONMENTAL AND OTHER 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. Development of projects in international markets creates exposure and obligations to the national, provincial and local laws of each host country, including environmental standards and requirements imposed by these governments. Compliance with these statutes, rules and regulations requires capital and operating expenditures including those related to monitoring, pollution control equipment, emission fees and permitting at various operating facilities and remediation obligations. Failure to comply with these statutes, rules and regulations may result in the assessment of civil and even criminal penalties. 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 and types of assets operated by the Company subject to environmental regulation. No assurance can be given that future compliance with these environmental statutes, rules and regulations will not have a material adverse effect on the Company's operations or its financial condition. 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 Amendments and Reauthorization Act ("SARA") and in the corrective action provisions of the Federal Resource Conservation and Recovery Act ("RCRA"). Typically, the U.S. 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 facility and companies that disposed, or arranged for the disposal, of the hazardous substance found at a facility. 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 for the costs of cleaning up the hazardous substances that have been released and for damages to natural resources from such responsible party. Further, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. 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. In connection with discrete asset acquisitions and sales, NGC may obtain or be required to provide indemnification against certain environmental liabilities. These indemnities are typically limited in scope and time period. 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 or divestiture 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 statutes, 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 or pertaining to any indemnification obligations with respect to properties previously owned or operated by the Company which 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 approximated $9.4 million in 1997. Total environmental expenditures for both capital and operating maintenance and administrative costs are not expected to exceed $15 million in 1998. In addition to environmental regulatory issues, 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. The Company believes it is currently in substantial compliance, and expects to continue to comply in all material respects, with these rules and regulations. 11 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 currently in substantial compliance, and expects to continue to comply in all material respects, 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. During both 1997 and 1996, the Company designated two of its subsidiaries to assist in the management of certain liabilities principally relating to environmental, litigation and credit reserves. Together with the involvement of third parties whose primary consideration will be based on the realization of savings by the Company, the subsidiaries will attempt to find new ways to handle these costs in a more efficient manner. EMPLOYEES The Company employs approximately 1,100 employees at its administrative offices and approximately 1,472 employees at its operating facilities. Approximately 120 employees at Company-operated facilities are subject to collective bargaining agreements with the Oil, Chemical and Atomic Workers International Union or the 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.
Served with the Name Age * Position(s) Company Since - ---- ------ ----------- --------------- C. L. Watson 48 Chairman of the Board, Chief Executive Officer, 1985 and a Director of the Company Thomas M. Matthews 54 President and Director of the Company 1996 Stephen W. Bergstrom 40 Senior Vice President and Advisory Director 1986 of the Company and President of Clearinghouse John U. Clarke 45 Senior Vice President, Chief Financial Officer 1997 Stephen A. Furbacher 50 Senior Vice President of the Company and 1996 President of Warren Petroleum Limited Partnership Kenneth E. Randolph 41 Senior Vice President, General Counsel and 1984 Secretary of the Company Dan W. Ryser 48 Senior Vice President of the Company and 1993 President of Destec Energy, Inc.
- ---------- * As of April 1, 1998. 12 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. Mr. Watson also serves as a member of the Board of Directors of Baker Hughes Incorporated. 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 as an advisory 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. John U. Clarke joined the Company in April 1997 as Senior Vice President and Chief Financial Officer and serves as the Company's principal financial officer. Prior to joining NGC, Mr. Clarke was a managing director and co-head of a specialty energy practice group with Simmons & Company International, an investment banking firm for approximately one year. He previously had served as President of Concept Capital Group, Inc., a financial advisory firm formed by Mr. Clarke in May, 1995. Mr. Clarke was Executive Vice President and Chief Financial and Administrative Officer with Cabot Oil & Gas Corporation from August 1993 to February 1995, and worked for Transco Energy Company, from April 1981 to May 1993, last serving as Senior Vice President and Chief Financial Officer. Mr. Clarke began his career with Tenneco Inc. in January 1978. Stephen A. Furbacher serves as President of Warren Petroleum Limited Partnership and Senior Vice President of NGC Corporation. Mr. Furbacher manages the operations of NGC's natural gas gathering and processing, natural gas liquids fractionation, storage, transportation and terminalling 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. 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. Dan W. Ryser serves as President of Destec Energy, Inc. and Senior Vice President of NGC Corporation. Mr. Ryser manages the Company's power generation business. Since joining NGC in 1993, Mr. Ryser has served the Company in several capacities, including managing ECI's electricity marketing operations. Prior to joining the Company in 1993, Mr. Ryser held various positions at Enron Corp. including President of Enron Gas Processing Company, President of Transwestern Pipeline Company, Executive Vice President of Enron Gas Marketing and President of Houston Pipe Line Company. 13 Item 2. PROPERTIES All of the Company's operating assets are held through wholly owned subsidiaries. The Company's operations are located throughout the contiguous United States, 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, 1997. GATHERING SYSTEMS AND PROCESSING FACILITIES NGC's natural gas processing services are provided at two types of gas processing plants, referred to as field and straddle plants. Field plants aggregate volumes from multiple producing wells into quantities that can be economically processed to extract natural gas liquids and to remove water vapor, solids and other contaminants. Straddle plants are situated on mainline natural gas pipelines and allow operators to extract natural gas liquids from a natural gas stream when the market value of natural gas liquids separated from the natural gas stream is higher than the market value of the same unprocessed natural gas. The following table provides certain information, including operational data for the year ended December 31, 1997, concerning the gas processing plants and gathering systems in which NGC owns an interest.
Location Total Plant -------------------- ------------------------- Practical 1997 Inlet NGL Gas Processing Facilities % Owned County/Parish State Capacity (3) Throughput Production ------------------------------ ------- ------------- ----- ------------ ---------- ----------- (MMcf/d) (1) (Bpd) (2) Operated Field Plants: Arbuckle (14) 100.00 Murray OK 2 1.8 39.1 Binger (4) 100.00 Caddo OK 10 7.7 820.5 Breckenridge/Shackleford (4)(11) 100.00 Stephens & TX 30 17.2 2,708.2 Shackleford Bridger Lake (9) 100.00 Summit UT 25 14.8 461.8 Canadian (4)(12) 100.00 Hemphill TX 25 23.6 2,253.4 Chico (4)(11) 100.00 Wise TX 100 63.2 9,624.5 East Texas (4)(11) 100.00 Gregg TX 34 28.0 4,251.9 Eunice (4)(11) 100.00 Lea NM 67 57.3 6,657.6 Eustace (4)(11) 100.00 Henderson TX 54 33.9 2,098.5 Fashing (12) 44.74 Atascosa TX 29 20.6 269.7 Haynesville I & II 100.00 Claiborne LA 85 66.7 3,317.5 Kellerville (4)(10)(11) 100.00 Wheeler TX 10 5.9 1,375.4 Leedey (4)(11) 100.00 Roger Mills OK 50 35.1 3,283.0 Lefors (4)(11) 100.00 Gray TX 12 7.3 1,966.2 Madill (4)(11) 100.00 Marshall OK 25 15.6 858.9 Moores Orchard (4)(12) 100.00 Fort Bend TX 7 4.0 123.4 Monahans/Worsham (4)(12) 100.00 Ward TX 31 25.6 2,665.6 Monument (4)(12) 100.00 Lea NM 80 65.5 7,187.2 New Hope 100.00 Franklin TX 30 15.4 902.0 Ringwood (4)(10)(15) 100.00 Major OK 62 52.3 3,698.4 Roberts Ranch (4)(11) 56.25 Midland TX 46 24.5 2,536.5 Rodman (4)(11) 100.00 Garfield OK 50 43.3 3,528.6 Sand Hills (4)(12) 100.00 Crane TX 200 176.3 13,577.3 Saunders/Vada/Bluitt (4)(10)(12) 100.00 Lea NM 44 34.0 5,129.4 Sherman (4)(12) 100.00 Grayson TX 33 16.4 733.1 Sligo 100.00 Bossier LA 40 36.0 658.5 Spivey (5)(6)(11) 3.87 Harper KS 3 0.2 29.5 Texarkana (4) 100.00 Miller AR 22 14.8 492.0 West Seminole (4)(11) 40.14 Gaines TX 5 9.3 592.4 Operated Straddle Plants: Barracuda (8) 100.00 Cameron LA 190 149.8 3,872.5 Cheney (11) 100.00 Kingman KS 85 65.0 3,696.3 ===============================================================================================================
14
Location Total Plant -------------------- ------------------------- Practical 1997 Inlet NGL Gas Processing Facilities % Owned County/Parish State Capacity (3) Throughput Production ------------------------------ ------- ------------- ----- ------------ ---------- ----------- (MMcf/d) (1) (Bpd) (2) Lowry (4)(11) 100.00 Cameron LA 265 173.6 4,495.5 Stingray (8) 100.00 Cameron LA 300 231.0 2,719.6 Yscloskey (6)(11)(13) 32.36 St. Bernard LA 566 430.3 7,610.4 Non-Operated Field Plants: Diamond M (4) 3.98 Scurry TX 1 0.7 161.4 Dover Hennessey (4) 7.36 Kingfisher OK 6 2.7 275.7 Indian Basin (4)(12) 14.29 Eddy NM 30 29.9 1,358.8 Maysville (4)(11)(13) 44.00 Garvin OK 59 45.9 5,951.6 Snyder (7)(11) 3.25 Scurry TX 2 1.6 97.9 Non-Operated Straddle Plants: Bluewater (12) 16.72 Acadia LA 122 66.5 1,316.2 Calumet (6)(11)(13) 21.91 St. Mary's LA 300 81.9 3,545.5 Iowa (12) 9.92 Jefferson LA 50 20.1 427.7 Davis North Terrebone Robin (12) 0.83 Terrebone LA 10 13.2 249.8 Patterson (12) 1.09 St. Mary's LA 3 0.2 4.9 Sea Robin (12) 18.70 Vermillion LA 187 61.0 1,536.5 Toca (12) 8.86 St. Bernard LA 93 117.4 3,711.2 ===================================================================================================================
(1) Gross to the facility. (2) Gross production, net to the Company's ownership interest. (3) Capacity data is at practical recovery rates, net to NGC's interest. (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) The Enid, Kellerville, Vada and Bluitt facilities were closed during 1997 as part of NGC's program of asset rationalization and reorganization. (11) These assets, or a portion thereof, were acquired in the Trident Combination. (12) These assets were acquired in the Chevron Combination. (13) Additional interest in this facility was acquired as part of the Chevron Combination. (14) The Company's interest in this facility was disposed of in 1997. (15) Includes the Enid, Oklahoma plant. FRACTIONATION FACILITIES The following table provides certain information concerning stand alone fractionation facilities in which NGC owns an interest.
Location Total Plant ---------------------- ------------------------ 1997 Inlet Fractionation Facilities (1) % Owned County/Parish State Capacity (2) Throughput ---------------------------- ------- ------------- ----- ------------ ---------- (MBbls/d) Mont Belvieu (3) 100.00 Chambers TX 205 158 Gulf Coast Fractionators (4) 38.75 Chambers TX 42 32 ========================================================================================
(1) Table does not include fractionation operations at VESCO or at other gas processing facilities. (2) Capacity data is at practical recovery rates. (3) Interest in this facility was acquired as part of the Chevron Combination. (4) Interest was acquired as part of the Trident Combination. 15 A subsidiary of the Company is constructing a fractionation facility in Lake Charles, Louisiana. The facility, which is expected to be operational in the fourth quarter of 1998, will fractionate up to 55,000 barrels per day of natural gas liquids principally from Gulf of Mexico natural gas production. The new fractionator will extract ethane and propane for delivery to the Louisiana market with the remaining commingled product shipped through the Company's 12" bi-directional pipe line to Mont Belvieu, Texas, for further fractionation. The facility will receive and ship product by pipeline, truck and barge and will serve the petrochemical and refining industry in the Gulf Coast area. STORAGE AND TERMINAL FACILITIES The following table provides information concerning terminal and storage facilities owned by the Company:
Location Storage and -------------------- Terminal Facilities % Owned County/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 Galena Park 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 Tyler Terminal 100.00 Smith TX Product terminal Mont Belvieu 100.00 Chambers TX Offices and repair Transport shop Abilene Transport 100.00 Taylor TX Raw LPG transport terminal Bridgeport 100.00 Jack TX Raw LPG transport Transport terminal Gladewater 65.00 Gregg TX Raw LPG transport Transport terminal Grand Lakes Tank Farm 100.00 Cameron LA Condensate storage
MARKETING HUBS Through its wholly owned subsidiary Hub Services, Inc. ("HSI"), NGC participated in the formation of Enerchange L.L.C. ("Enerchange") which, among other things, owns and operates a natural gas market area hub. 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. The following table provides information with respect to the marketing hub in which NGC indirectly owns an interest.
Service Facility Name HSI's Partner % Owned area Names of Connecting Pipelines --------------- ------------- ------- ------- ---------------------------------- Chicago Hub NICOR Hub Services 76.61 Midwest ANR Pipeline Company, Midwestern Gas Transmission Company, Northern Natural Gas Company and Natural Gas Pipeline Company of America ============================================================================================
16 NATURAL GAS, LIQUIDS 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) an interstate liquids pipeline capable of transporting 160,000 Bpd from its origin in eastern New Mexico to fractionation facilities in Mont Belvieu, Texas; (iii) 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; (iv) the Kansas Gas Supply Corporation that owns and operates an approximate 1,200 mile regulated intrastate gas pipeline system in south-central Kansas with capacity to transport approximately 100 MMcf/d of natural gas; and (v) an 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:
% Pipeline Systems Owned 1997 Throughput (1) States Description ------------------------------ ------- -------------------- -------- ------------- Ozark Gas Transmission 100.00 131.4 OK/AR Interstate natural gas pipeline System West Texas LPG Pipeline 49.00 87.5 NM/TX Interstate LPG pipeline Crude Oil Pipeline System 100.00 81.2 TX/OK Crude oil pipelines Kansas Gas Supply 100.00 60.9 KS/OK Intrastate natural gas pipeline Warren NGL Pipeline 100.00 20.9 TX/LA Liquids pipeline Bridger Lake/Phantex Pipeline 100.00 0.4 UT/WY Interstate liquids pipeline Pelican Pipeline 100.00 73.9 LA Gas gathering pipeline Vermillion Pipeline 100.00 23.0 Gulf of Mexico Gas gathering pipeline Western Gas Gathering 100.00 3.5 KS Gas gathering pipeline Pawnee Rock 100.00 5.6 KS Gas gathering pipeline Searcy 100.00 8.8 OK/AR Interstate natural gas pipeline Seahawk 100.00 49.2 LA Intrastate natural gas pipeline Warren Intrastate Gas Pipeline 100.00 4.0 TX Intrastate natural gas pipeline Bradshaw Gathering 50.00 32.3 KS Gas gathering pipeline Lake Boudreaux 100.00 1.3 LA Gas gathering pipeline Grand Lake Liquids System 100.00 1.3 LA Intrastate liquids pipeline ==================================================================================================================
(1) 1997 throughput is based on thousands of barrels per day for the liquids and crude lines and million cubic feet per day for the gas gathering and transportation lines. In January 1998, the Company announced an agreement to sell the Ozark Gas Transmission System for $55 million, resulting in an estimated pre-tax gain of approximately $27 million. Closing of the transaction is expected in the third quarter of 1998, subject to certain conditions, including FERC and other governmental approvals. POWER GENERATION FACILITIES NGC has significant interests in nineteen power projects, the majority of which are cogeneration facilities operated by NGC. Sixteen of these projects are represented by varying interests owned in partnerships, each formed to build, own and operate electric power generating facilities. The remaining projects consist of one cogeneration plant, one heat recovery plant and one coal gasification facility. The combined gross capacity of these facilities is approximately 2,839 megawatts of electricity and over 3.4 million pounds per hour of steam. The following table provides information concerning power projects owned by the Company: 17
Gross % Capacity Power Generation Project Owned In MWs Location Primary Power Purchaser ----------------------------------------------------------------------------------------------------- CoGen Power (1) 100.00 5 Port Arthur, TX Great Lakes Carbon Corporation CoGen Lyondell (1) Lessee 590 Channelview, TX ARCO Chemical Company Oyster Creek 50.00 424 Freeport, TX The Dow Chemical Company Corona (1) 40.00 47 Corona, CA SOCAL Edison Company Kern Front (1) 50.00 48 Kern County, CA Pacific Gas & Electric Company High Sierra (1) 50.00 48 Kern County, CA Pacific Gas & Electric Company Double "C" (1) 50.00 48 Kern County, CA Pacific Gas & Electric Company San Joaquin (1) 25.00 48 Stockton, CA Pacific Gas & Electric Company Chalk Cliff (1) 25.00 46 Kern County, CA Pacific Gas & Electric Company Badger Creek (1) 50.00 46 Kern County, CA Pacific Gas & Electric Company McKittrick (1) 50.00 46 McKittrick, CA Pacific Gas & Electric Company Live Oak (1) 50.00 47 Kern County, CA Pacific Gas & Electric Company Crockett 8-12.00 240 Crockett, CA Pacific Gas & Electric Company Bear Mountain (1) 50.00 46 Bakersfield, CA Pacific Gas & Electric Company Commonwealth Atlantic 50.00 340 Chesapeake, VI Virginia Electric & Power Company Black Mountain 50.00 85 Las Vegas, NV Nevada Power Company Hartwell Energy 50.00 300 Hart County, GE Ogelthorpe Power Corporation Michigan Power (1) 50.00 123 Ludington, MI Consumers Energy Company Wabash (1)(2) Lessee 262 W. Terre Haute, IN PSI Energy, Inc. =========================================================================================================
(1) Facility operated by NGC. (2) Steam and synthetic gas capacity is translated into equivalent megawatts. The Company and NRG have been awarded contracts to acquire the El Segundo Station, a 1,020 megawatt gas-fired power generating facility located in Los Angeles, CA, and a 560 megawatt gas-fired power facility located in Long Beach, CA. Both acquisitions are expected to close in the second quarter of 1998. OTHER PROPERTY INVESTMENTS Effective November 1, 1996, the Company and Chevron formed Venice Gas Processing Company, a Texas limited partnership ("Partnership"). The Partnership was formed for the purpose of owning and operating the Venice Complex, located in Plaquemines Parish, Louisiana. The complex includes an extensive 810 Mmcf/d gathering system that extends into the Gulf of Mexico, a one Bcf/d lean oil gas processing plant, a 35,000 barrel per day fractionator, NGL storage facilities, a marine terminal and acreage. In 1997, Venice reorganized as a limited liability company changing its name to VESCO. In September 1997, the VESCO members announced they had agreed to expand ownership in VESCO to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's commitment of certain offshore reserves to VESCO. The transaction reduced NGC's interest in VESCO from 37 percent to approximately 32 percent as of the effective date. The VESCO members have entered into a definitive agreement with Koch pursuant to which Koch will contribute a 300 Mmcf/d cryogenic gas processing unit to VESCO on NGC's behalf in exchange for approximately 10 percent of NGC's interest in the limited liability company. The transaction, which is expected to close in the second quarter of 1998, will reduce NGC's interest in VESCO to approximately 23 percent. NGC operates the facility and has commercial responsibility for product distribution and sales. During 1997, the Company contributed the Waskom gas processing facility to the Waskom Gas Processing Company ("Waskom"), a Texas limited partnership. NGC owns a 33 percent interest in Waskom, operates the facility and has commercial responsibility for product distribution and sales. 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, would not have a material adverse effect on the use or value of said properties. 18 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, the Company has granted certain entities certain rights of first refusal with respect to any future sale of certain assets. Certain of the Company's power generation assets are subject to rights of first refusal or consent requirements with the Company's partners or power purchasers which restrict the transfer of interests in the facilities. 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 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. INDUSTRY SEGMENTS Segment financial information is included in Note 15 of NGC's consolidated financial statements contained elsewhere herein. ITEM 3. LEGAL PROCEEDINGS On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a lawsuit in the Superior Court of the State of California, City and County of San Francisco, against Destec, Destec Holdings, Inc. ("Holdings"), Destec Operating Company and San Joaquin CoGen, Inc., wholly owned direct and indirect subsidiaries of the Company as well as against San Joaquin CoGen Limited ("San Joaquin" or the "Partnership"), a limited partnership in which the Company has an indirect twenty-five percent general partner ownership interest. In the lawsuit, PG&E asserts claims and alleges unspecified damages for fraud, negligent misrepresentation, unfair business practices, breach of contract and breach of the implied covenant of good faith and fair dealing. PG&E alleges that due to the insufficient use of steam by San Joaquin's steam host, the Partnership did not qualify as a cogenerator pursuant to the California Public Utilities Code ("CPUC") Section 218.5, and thus was not entitled under CPUC Section 454.4 to the discount the Partnership received under gas transportation agreements entered into between PG&E and San Joaquin in 1989, 1991, 1993 and 1995. All of PG&E's claims in this suit arise out of the Partnership's alleged failure to comply with CPUC Section 218.5. The defendants filed a response to the suit on May 15, 1997. The parties are actively engaged in discovery, and a trial has been set by the Court for September 28, 1998. On October 20, 1997, PG&E named Libbey-Owens-Ford, the Partnership's steam host, as an additional defendant in the action. On February 23, 1998, PG&E served by mail its Second Amended Complaint on all defendants. On March 30, 1998, the defendants filed their response to PG&E's Second Amended Complaint, denying PG&E's allegations and alleging certain counterclaims against PG&E. The Company's subsidiaries intend to vigorously defend this action. In the opinion of management, the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. On March 24, 1995, Southern California Gas Company ("SOCAL") filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles, against Destec, Destec Holdings and Destec Gas Services, Inc., wholly- owned direct and indirect subsidiaries of the Company (collectively, the "Destec Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited (collectively, the "Partnerships"), limited partnerships in which the Company has an indirect twenty-five percent general partner interest together with an indirect 20 percent limited partner interest and an indirect fifty percent limited partner interest, respectively. All general partners of the Partnerships are also named defendants. The lawsuit alleges breach of contract against the Partnerships and their respective general partners, and interference and conspiracy to interfere with contracts against the Destec Defendants. The breach of contract claims arise out of the "transport-or-pay" provisions of the gas transportation service agreements between the Partnerships and SOCAL. SOCAL has sought damages from the Partnerships for past damages and anticipatory breach damages in an amount equal to approximately $31,000,000. On October 24, 1997, the Court granted SOCAL's Motion for Summary Judgment relating to the breach of contract causes of action against 19 the Partnerships and their respective general partners, and requested that SOCAL submit a proposed order consistent with that ruling for the Court's signature. On November 21, 1997, the Partnerships filed for voluntary Chapter 11 bankruptcy protection in the Eastern District of California. Normal business operations by the Partnerships will continue throughout the course of these reorganization proceedings. On January 12, 1998, the Court entered a Final Order that (a) severs out the Partnerships due to their Chapter 11 bankruptcy filings, (b) includes a finding of contract liability against the Destec Defendants, (c) dismisses the tortious interference claims against the Destec Defendants, and (d) assesses damages in an aggregate amount of approximately $31,000,000. The liability of the Destec Defendants under the judgment will be limited to that portion of the damage award not paid to SOCAL by the partnerships through the Chapter 11 bankruptcy proceedings. On January 12, 1998, the Destec Defendants filed their Notice of Appeal, and posted a security bond, with the Second Appellate District in Los Angeles based on the lack of allegations made or proven by SOCAL which support holding those entities liable in contract. On March 11, 1998, the Partnerships and their respective general partners filed Notices of Appeal with respect to those findings in the Court's January 12, 1998, Final Order that were adverse to those defendants. The appeal process is anticipated to take approximately eighteen months. The PG&E and SOCAL litigations represent pre-acquisition contingencies acquired by NGC in the Destec acquisition. Resolution of these lawsuits could impact the purchase price allocation contained in the accompanying balance sheet as described in Note 2. In a related matter, Chalk Cliff and San Joaquin have each guaranteed the obligations of the other partnership, represented by the project financing loans used to construct the power generation facilities owned by the respective partnerships. Chalk Cliff and San Joaquin believe there is little incentive for their lenders to call on this cross-guarantee at this time. In the opinion of management, the Company's financial position or results of operations would not be materially adversely affected if the lenders chose to exercise their option under the terms of such arrangements. On March 6, 1998, NGC settled all outstanding issues arising under a gas marketing contract between Apache Corporation and Clearinghouse. A previously recognized contingency reserve was sufficient to offset the confidential cash settlement. The Company assumed liability for various claims and litigation in connection with the Chevron Combination, the Trident Combination, the Destec acquisition and in connection with the acquisition of certain gas processing and gathering facilities from Mesa Operating Limited Partnership. NGC believes, based on its review of these matters and consultation with outside legal counsel, that the ultimate resolution of such items will not have a material adverse effect on the Company's financial position or results of operations. Further, the Company is subject to various legal proceedings and claims, which arise in the normal course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations 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 25, 1998, was 291. 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. 20
High Low Dividend ---------- -------- -------- 1997: Fourth Quarter $19.875 $16.000 $0.0125 Third Quarter 17.750 14.875 0.0125 Second Quarter 19.625 15.500 0.0125 First Quarter 24.000 15.375 0.0125 1996: Fourth Quarter $24.750 $15.625 $0.0125 Third Quarter 17.000 14.250 0.0125 Second Quarter 16.125 12.250 0.0125 First Quarter 12.750 8.625 0.0125 ===========================================================
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 quarter since the effective date of the Trident Combination. Beginning in the third quarter of 1996, the Company has paid quarterly cash dividends on its Series A Participating Preferred Stock of $0.0125 per share, or $0.05 per share on an annual basis. 21 ITEM 6. SELECTED FINANCIAL DATA The selected financial information presented below was derived from, and is qualified by reference to, the Consolidated Financial Statements of the Company, including the Notes thereto, contained elsewhere herein. Please refer to the Notes to Consolidated Financial Statements for information on transactions and accounting classifications which have affected the comparability of the periods presented below. The selected financial information should be read in conjunction with the Consolidated Financial Statements and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Year Ended December 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------- ----------- ----------- ----------- ----------- ($ in thousands, except per share data) Statement of Operations Data (1)(3): Revenues $13,378,380 $7,260,202 $3,665,946 $3,237,843 $2,790,977 Operating margin 385,294 369,500 194,660 99,126 91,850 General and administrative expenses 149,344 100,032 68,057 47,817 36,585 Depreciation and amortization expense 104,391 71,676 44,913 8,378 7,594 Asset impairment, abandonment and other charges 275,000 --- --- --- --- Net income (loss) (4) $ (102,485) $ 113,322 $ 92,705 $ 42,101 $ 45,997 Earnings (loss) per share (5) $(0.68) $0.83 $0.82 n/a n/a Pro forma earnings per share (5) n/a n/a $0.40 $0.28 $0.30 Shares outstanding 150,653 136,099 113,176 97,804 97,804 Cash Flow Data: Cash flows from operating activities $ 278,589 $ (30,954) $ 90,648 $ 17,170 $ 20,292 Cash flows from investment activities (510,735) (111,140) (310,623) (38,376) (7,911) Cash flows from financing activities 204,984 176,037 221,022 18,959 (46,418) Other Financial Data: EBITDA (6) $ 291,899 $ 289,023 $ 142,538 $ 57,716 $ 57,553 Dividends or distributions to partners, net 7,925 6,740 9,253 14,041 14,118 Capital expenditures, acquisitions and investments (7) 1,034,026 859,047 979,603 47,014 16,464 December 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ----------- ----------- ---------- ---------- ($ in thousands) Balance Sheet Data (2): Current assets $ 2,018,780 $1,936,721 $ 762,939 $ 445,782 $ 402,602 Current liabilities 1,753,094 1,548,987 705,674 404,144 375,662 Property and equipment, net 1,521,576 1,691,379 948,511 114,062 84,539 Total assets 4,516,903 4,186,810 1,875,252 645,471 512,534 Long-term debt 1,002,054 988,597 522,764 33,000 --- Total equity 1,019,125 1,116,733 552,380 152,213 120,689
(1) The Destec acquisition was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective July 1, 1997. The Chevron Combination was accounted for as an acquisition of assets under the purchase method of accounting and the results of operations attributed to the acquired assets are included in the Company's financial statements and operating statistics effective September 1, 1996. The Trident Combination was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective March 1, 1995. 22 (2) The Destec acquisition and the Chevron and Trident Combinations were each 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 the effective dates of each transaction. The effective dates of the Destec acquisition, the Chevron Combination and the Trident Combination were June 30, 1997, September 1, 1996 and March 1, 1995, respectively. (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 (loss) 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 and 1993, respectively. (5) Earnings (loss) per share are computed in accordance with provisions of Statement of Financial Account Standard No. 128, "Earnings Per Share", for each of the years ended December 31, 1997, 1996 and 1995, respectively. Pro forma earnings per share for each of the years ended December 31, 1995, 1994 and 1993, respectively, are 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 prior to the Trident Combination. The pro forma earnings per share computation for the year ended December 31, 1995, eliminates the effect of a one-time $45.7 million income tax benefit associated with the Trident Combination. 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 and 1993, 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. (6) 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. It is not a measure of operating results and is not presented in the Consolidated Financial Statements. The 1997 amount includes the non-cash portion of items associated with the $275 million impairment and abandonment charge. (7) Includes value assigned the assets acquired in the Destec acquisition and the Chevron and Trident Combinations, respectively. The 1997 amount is before reduction for value received upon sale of Destec's foreign and non- strategic assets of approximately $735 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Company Profile NGC is a leading North American marketer of natural gas, natural gas liquids, electricity and crude oil and is engaged in natural gas gathering, processing and transportation through direct and indirect ownership and operation of natural gas processing plants, fractionators, storage facilities and pipelines and engages in electric power generation through direct and indirect ownership of cogeneration and other electric power producing facilities. Acting in the role of a large-scale aggregator, processor, marketer and reliable supplier of multiple energy products and services, NGC has evolved into a reliable energy commodity and service provider. From inception of operations in 1984 until 1990, Clearinghouse limited its activities primarily to natural gas marketing. Starting in 1990, Clearinghouse began expanding its core business operations through acquisitions and strategic alliances with certain of its shareholders resulting in the formation of a midstream energy asset business and establishing energy marketing operations in both Canada and the United Kingdom. Effective March 1, 1995, Clearinghouse and Holding, a fully integrated natural gas liquids company, merged and the combined entity was renamed NGC Corporation. On August 31, 1996, NGC completed a strategic combination with Chevron whereby substantially all of Chevron's midstream assets were merged with NGC. In June 1997, NGC acquired Destec, a leading independent power producer. By virtue of the growth of NGC's core businesses combined with the synergies derived from the aforementioned transactions, NGC has established itself as an industry leader providing quality, competitively priced energy products and services to customers throughout North America and in the United Kingdom. Recent Developments During the fourth quarter of 1997, the Company recognized a $275 million charge largely related to its plan to restructure the Company's natural gas liquids business, including rationalization and consolidation of assets acquired in both the Trident and Chevron Combinations, the reorganization of personnel to improve operational management of this segment and a reduction of employees involved in non-strategic operations. Execution of this comprehensive plan began in 1997 and will continue into 1998. Pursuant to this restructuring, the Company anticipates recording an additional severance charge of approximately $10 million during the first quarter of 1998. Management believes the planned restructuring and reorganization steps will position the Company for improved operating results and an enhanced competitive position for the future. 23 For a two-year period beginning January 1, 1998, the Company contracted for 1.3 billion cubic feet per day of firm transportation capacity to California on the El Paso Natural Gas pipeline system. The arrangement has been implemented but is subject to regulatory approval in a pending proceeding in which challenges have been filed. The firm capacity provides NGC with the ability to serve an expanded California customer base arising from the recent Chevron Combination and Destec acquisition, as well as to take advantage of opportunities associated with the deregulation of the electric power industry in California. Pursuant to this arrangement, NGC is obligated to pay a minimum of $70 million of reservation charges over the two-year term. In January 1998, the Company announced an agreement to sell the Ozark Gas Transmission System for $55 million, resulting in an estimated pre-tax gain of approximately $27 million. Closing of the transaction is expected in the third quarter of 1998, subject to certain conditions, including FERC and other governmental approvals. In November 1997, the Company together with NRG Energy, Inc. ("NRG"), was awarded the contract to acquire the El Segundo Station, a 1,020 megawatt gas- fired power generating facility located in Los Angeles, CA. The El Segundo facility will be acquired by an entity owned fifty percent by the Company and fifty percent by NRG. Additionally, in February 1998, NGC together with NRG, was awarded the contract to acquire a 560 megawatt gas-fired power facility located in Long Beach, CA. The Long Beach facility will also be acquired by an entity owned fifty percent by NGC and fifty percent by NRG. The El Segundo facility is partially a merchant plant while the Long Beach facility is a merchant plant. NGC's estimated share of the acquisition cost for these two facilities is $58.8 million. Both acquisitions are expected to close in the second quarter of 1998. With respect to both these acquisitions, NGC will be the lead party on fuel procurement, power marketing and asset management, while NRG will be operator of the facilities. Additionally, Destec and a partner were selected to build a 766 megawatt independent power station near Townsville, in Queensland, Australia. The Townsville project is expected to be partially operational in July 2001, and fully operational by July 2003. Destec will own fifty percent of this project. The VESCO members have entered into a definitive agreement with Koch pursuant to which Koch will contribute a cryogenic gas processing unit to VESCO on behalf of NGC in exchange for approximately 10 percent of NGC's interest in the limited liability company. The transaction, which is expected to close in the second quarter of 1998, will reduce NGC's interest in VESCO to approximately 23 percent. Business Segments NGC's operations are divided into three segments: the Natural Gas and Electric Power Marketing Segment ("Marketing"), the Power Generation Segment ("Power Generation") 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 throughout North America. Marketing also includes the operations of ECI, a provider of electric power products and services in the United States. Power Generation includes the operations of Destec, which primarily consist of the development, operation and management of projects which produce electricity, thermal energy and synthetic gas. Destec's operations also include engineering, project development, operating, management and fuel supply services provided to certain partnerships, which own power generation facilities. Liquids consists of subsidiaries engaged in natural gas gathering and processing, fractionation, natural gas liquids marketing, natural gas transmission and crude oil marketing. Liquids also includes the operations of NGC Global Energy, which includes marine transportation of natural gas liquids and energy marketing in the United Kingdom. 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 derived from the segment's risk-management activities. NGC generally attempts to balance its fixed-price physical and financial purchase and sales commitments in terms of contract 24 volumes, and the timing of performance and delivery obligations. However, to the extent a net open position exists, fluctuating market prices can impact NGC's 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, 1997, a $0.25 increase in the price of natural gas would have increased operating margin by approximately $3.5 million, and a $0.25 decrease in the price of natural gas would have decreased operating margin by approximately $2.2 million. The impact of the $0.25 price movements referred to above are before application of market reserves, which would likely reduce the after-tax earnings impact of these price movements. Fuel costs, principally natural gas, represent the primary variable cost impacting margins at the Company's power generating facilities. Historically, operating margins have been relatively insensitive to commodity price fluctuations since most of this business's purchase and sales contracts contain variable power sales contract features tied to a current spot or index natural gas price allowing revenues to adjust directionally with changes in natural gas prices. Operating margins associated with Liquids' natural gas gathering, processing and fractionation activities are very sensitive to changes in natural gas liquids prices principally as a result of contractual terms under which products are sold by these businesses. Based upon current operations, a one cent movement in the annual average price of natural gas liquids would impact annual operating margin by approximately $10 million. The operating margin in these businesses is relatively insensitive to fluctuations in natural gas prices as a result of the mitigating impact of fuel costs in the Company's fractionation operations and residue gas sales in its gathering and processing activities. Commodity price fluctuations also impact the operating margins derived from the Liquids segment's natural gas liquids and crude oil marketing businesses. In order to manage its exposure to price risks in these businesses, the Company, from time to time, will enter into financial instrument contracts to hedge purchase and sale commitments and inventories. SEASONALITY NGC's revenue and operating margin are subject to fluctuations during the year primarily due to the impact certain seasonal factors have on sales volumes and the prices of natural gas, electricity, natural gas liquids and crude oil. Marketing's sales volumes and operating margin are typically higher in the winter months than in the summer months, reflecting increased demand due to greater heating requirements and, typically, higher natural gas prices. Liquids is also subject to seasonal factors; however, such factors typically have a greater impact on sales prices than on sales volumes. Natural gas liquids prices typically increase during the winter season due to greater heating requirements. The Company's wholesale propane business is seasonally weighted in terms of volume and price consistent with the trend in Marketing's operations as a result of greater demand for crop-drying and space-heating requirements in the fall and winter months. The Company's electricity generating facilities generally experience peak demand during the summer cooling season. 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. LIQUIDITY AND CAPITAL RESOURCES The Company's business strategy has been to grow horizontally across all sectors of the midstream energy business segment through strategic acquisitions or construction of core operating facilities in order to capture the significant synergies which management believes exist among these types of assets and NGC's natural gas, electricity, and natural gas liquids marketing businesses. In addition, the Company is extensively involved in risk management activities, which complement its firm purchase and sales commitments, capacity, transportation and other similar obligations. NGC has historically relied upon operating cash flow and borrowings from a combination of money market lines of credit, sales of commercial paper and various long-term credit arrangements for its liquidity and capital resource requirements. The following briefly describes the terms of these arrangements. 25 Commercial Paper and Money Market Lines of Credit NGC initiated a commercial paper program in the fourth quarter of 1997 for amounts up to $600 million, supported by its existing bank Credit Agreement. Also in the fourth quarter, the Company established several uncommitted money market bank lines. The Company utilizes commercial paper proceeds and borrowings under uncommitted money market bank lines for general corporate purposes, including short-term working capital requirements. At December 31, 1997, commercial paper outstanding totaled $229.5 million at a weighted average interest rate of 6.8 percent. There were no amounts outstanding under the uncommitted money market bank lines at year end. Credit Agreement NGC has a $550 million revolving Credit Agreement, which matures on March 14, 2000, providing for letters of credit and borrowings for working capital, capital expenditures and general corporate purposes. The $550 million commitment under the Credit Agreement reduces by $22.5 million each quarter beginning in June 1998 and continuing through maturity. During 1997, the Credit Agreement was amended to provide, among other things, for the establishment of a new two-year $400 million term loan facility. Proceeds from the term loan facility were used to consummate the Destec acquisition. At December 31, 1997, letters of credit and borrowings under the Credit Agreement aggregated approximately $130.9 million (which included $50 million under the term loan facility). After consideration of the outstanding commercial paper, unused borrowing capacity under the revolving credit facility approximated $240 million. Senior Notes and Shelf Registration In October 1996, NGC sold $175 million of 7.625% 30-year Senior Notes due 2026 ("Senior Debentures"). Interest on the Senior Debentures is payable semiannually on April 15 and October 15 of each year. The Senior Debentures are redeemable, at the option of the Company, in whole or in part from time to time, at a formula based redemption price. On December 15, 1995, the Company sold $150 million of 6.75% Senior Notes due 2005 ("Senior Notes"). Interest on the Senior Notes is payable semiannually on June 15 and December 15 of each year. In February 1998, the Company completed an amendment to the Credit Agreement and the filing of supplemental indentures to each of the Senior Debentures and Senior Notes, the effect of which was to eliminate all clauses, provisions and terms in such documents requiring certain wholly owned subsidiaries of the Company to fully and unconditionally guarantee, on a joint and several basis, the obligations of the Company under such credit agreement, debentures and notes, respectively. Letter of Credit Agreement The Letter of Credit Agreement was a $300 million credit facility, which provided 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). In January 1998, the Company replaced the majority of its obligation under the Letter of Credit Agreement with a surety bond, applied the remaining obligation under the Letter of Credit Agreement to the letter of credit capacity under its Credit Agreement and canceled this arrangement. Chevron Note As part of the Chevron Combination, NGC assumed approximately $155.4 million payable to Chevron upon demand on or after August 31, 1998 (the "Chevron Note"). The Chevron Note bears interest at an effective rate of 6.4 percent per annum payable semiannually in arrears each February and August. Should Chevron choose not to demand payment of the Chevron Note then principal plus accrued interest is payable in full on August 14, 2004. NGC has the right, at any time on or after August 31, 1998, to prepay in whole or in part the principal and accrued interest outstanding under the Chevron Note. Warren NGL, Inc. ( Formerly Trident NGL, Inc.) Notes At December 31, 1997, Warren had outstanding $105 million principal amount of 10.25% Subordinated Notes due 2003 (interest payable semi-annually in arrears each April and October) and $65 million principal amount of 14% Senior Subordinated Notes due 2001 (interest payable semi-annually in arrears each February and August). 26 Unamortized premium balances associated with each of these notes are being amortized using the interest method, resulting in effective interest rates of 8.4 percent and 8.3 percent per annum, respectively. In February 1998, the Company delivered Notices of Redemption to the holders of the Warren NGL, Inc. Notes. The Company's intent is to retire the 14% Senior Subordinated Notes on March 31, 1998, and the 10.25% Subordinated Notes on April 15, 1998, pursuant to the redemption provisions contained in the respective indentures. NGC will fund these redemptions through a combination of cash on hand, borrowings under existing credit agreements and/or the issuance of new debt securities. NGC will not incur a financial statement charge related to these redemptions since the carrying values of the notes were adjusted at the time of the Trident Combination so that they would equal the redemption prices on the redemption dates. Company Obligated Preferred Securities of a Subsidiary Trust During May 1997, NGC Corporation Capital Trust I ("Trust") issued in a private transaction $200 million aggregate liquidation amount of 8.316% Subordinated Capital Income Securities ("Trust Securities") representing preferred undivided beneficial interests in the assets of the Trust. The Trust invested the proceeds from the issuance of the Trust Securities in an equivalent amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The sole assets of the Trust are the Subordinated Debentures. Proceeds from issuance of the Securities were used to reduce amounts outstanding under the Credit Agreement. During October 1997, the Trust completed an exchange offer through which all of the outstanding Securities were exchanged by the holders thereof for registered securities having substantially the same rights and obligations. Other Matters Acquisition and Construction Projects. Included in the 1998 budget is approximately $300 million committed to construction projects in progress, identified asset acquisitions, maintenance capital projects, environmental projects, technology infrastructure and software enhancements, contributions to equity investments and certain discretionary capital investment funds. The capital budget is subject to revision as unforeseen opportunities or circumstances arise. Funds committed in 1998 to announced acquisitions and significant construction projects and other capital investments are as follows:
Estimated Projected In Funding Project In-Service Date Commitment ------- --------------- ---------- ($ in thousands) Lake Charles Fractionator Fourth Quarter 1998 $36,710 Venice Energy Services Company, L.L.C. Various during 1998 15,169 El Segundo Power Generating Facility Second Quarter 1998 43,875 Long Beach Power Generating Facility Second Quarter 1998 14,900 Maintenance Capital Various 23,103 Environmental Capital Projects Various 8,872 Information Technology Infrastructure and Software Various 58,440
Dividend Requirements. Holders of the Company's 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. Currently, aggregate cash dividends of $0.05 per share on the outstanding Common Stock are expected to be declared by the Board of Directors and paid by the Company during 1998. The Company also anticipates payment of dividends during 1998 on the outstanding shares of its Series A Participating Preferred Stock of $0.05 per share on an annual basis. Stock Repurchase Plan. The Company has a stock repurchase program, approved by the Board of Directors, that allows it to repurchase, from time to time, up to 1.6 million shares of common stock in open market transactions. The timing and number of shares ultimately repurchased will depend upon market conditions and consideration of alternative investments. Pursuant to this program, the Company has acquired 654,900 shares at a total cost of $10.5 million, or $16.04 per share on a weighted average cost basis, through December 31, 1997. 27 Advance Payment For Future Deliveries. In October 1997, NGC received $103.5 million from a gas purchaser as an advance payment for future natural gas deliveries of 16,650 MMBtu per day over a ten-year period commencing November 1, 1997 ("Advance Agreement"). As a condition of the Advance Agreement, NGC entered into a natural gas swap with a third party under which NGC became a fixed price payor on identical volumes to those to be delivered under the Advance Agreement at prices based on then current market rates. The payment will be classified as an advance on the balance sheet and will be reduced ratably as gas is delivered to the purchaser under the terms of the Advance Agreement. In addition, the purchaser will pay a monthly fee to NGC associated with delivered volumes. The Advance Agreement contains certain non-performance penalties that impact both parties and as a condition precedent, NGC purchased a surety bond in support of its obligations under the Advance Agreement. Quantitative and Qualitative Market Risk Disclosures. The Company is exposed to certain market risks inherent in the Company's financial instruments which arise from transactions entered into in the normal course of business. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments and inventories in its natural gas, natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. NGC also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward- exchange contracts or other financial instruments to hedge and manage these exposures. The absolute notional contract amounts associated with commodity risk-management, interest rate and forward exchange contracts, respectively, were as follows:
December 31, --------------------------- 1997 1996 1995 --------------------------- Natural Gas (Trillion Cubic Feet) 2.558 1.535 0.881 Electricity (Megawatt Hours) 2.244 --- --- Natural Gas Liquids (Million Barrels) 4.355 3.270 2.523 Crude Oil (Million Barrels) 14.920 2.034 0.232 Interest Rate Swaps (in thousands of US Dollars) $180,000 $ --- $ --- Fixed Interest Rate Paid on Swaps 6.603 --- --- U.K. Pound Sterling (in thousands of US Dollars) $ 74,638 $ --- $ --- Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.5948 $ --- $ --- Canadian Dollar (in thousands of US Dollars) $ 37,041 $ --- $ --- Average Canadian Dollar Contract Rate (in US Dollars) $ 0.7240 $ --- $ --- ====================================================================================
Cash-flow requirements for these commodity risk-management, interest rate and foreign exchange contracts were estimated based upon market prices in effect at December 31, 1997. Cash-flow requirements were as follows:
1998 1999 2000 2001 2002 Beyond --------------------------------------------------- ($ in thousands) Future estimated net inflows based on year end market prices/rates $9,155 $5,902 $4,085 $1,185 $ 806 $559 ===================================================================================
Further discussion of quantitative and qualitative aspects of these exposures and the management thereof is contained in the accompanying notes to the consolidated financial statements. Year 2000 Issues. The Company is continuing its analysis of the "Year 2000" issue. The potential costs and uncertainties associated with this review are dependent upon a number of factors, including legacy software and hardware configurations and planned information technology infrastructure enhancements. Results of the review conducted to date indicate that the Company will not be burdened by a material event resulting from the Company's untimely resolution of Year 2000 issues. Further, management does not currently believe the cost of resolving such issues will be material to the Company's consolidated results of operations or financial position. 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 28 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. 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 approximated $9.4 million in 1997. Total environmental expenditures for both capital and operating maintenance and administrative costs are not expected to exceed $15 million in 1998. Conclusion The Company continues to believe that it will be able to meet all foreseeable cash requirements, including working capital, capital expenditures and debt service, from operating cash flow supplemented by borrowings under its various credit facilities, if required. 29 RESULTS OF OPERATIONS The following discussion of NGC's financial position, results of operations and cash flows as of and for each of the years ended December 31, 1997, 1996 and 1995, respectively, is impacted by the strategic combinations previously discussed. Both the continuity of operations and the resulting comparability of results between periods is materially impacted as a result of the Destec acquisition and both the Chevron and Trident Combinations (collectively "Strategic Combinations"). The Strategic Combinations were each accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the effective dates of each transaction. The results of operations and cash flows presented in the consolidated financial statements contained elsewhere herein include the results of the acquired operations as of the effective dates of each transaction. The following table reflects certain operating and financial data for the Company's business segments and subsegments for the years ended December 31, 1997, 1996 and 1995, respectively.
Years Ended December 31, --------------------------------- 1997 1996 1995 --------------------------------- ($ in thousands) Operating Margin (1)(2): Natural Gas and Power Marketing Segment - Natural Gas Marketing $ 99,375 $100,243 $ 64,685 Electric Power Marketing 4,526 3,379 (939) -------- -------- -------- 103,901 103,622 63,746 -------- -------- -------- Power Generation 18,987 --- --- -------- -------- -------- Natural Gas Liquids, Crude Oil and Gas Transmission Segment - Natural Gas Processing - Field Plants 159,609 122,754 48,856 Natural Gas Processing - Straddle Plants 30,098 42,198 26,934 Fractionation (8) 25,813 20,223 15,172 Natural Gas Liquids Marketing 22,639 48,355 21,706 Crude Oil Marketing 500 11,583 3,490 Natural Gas Gathering and Transmission 16,755 18,140 11,882 Other 102 1,300 2,874 -------- -------- -------- 255,516 264,553 130,914 -------- -------- -------- Global: LPG Sales 2,973 1,325 --- Other 3,917 --- --- -------- -------- -------- 6,890 1,325 --- -------- -------- -------- $385,294 $369,500 $194,660 ======== ======== ======== Operating Statistics (1)(3): Natural Gas Marketing (Bcf/d) - U.S. Sales Volumes (4) 6.1 4.3 3.5 Canadian Sales Volumes (5) 1.9 n/a n/a Electric Power Marketing - Million Megawatt Hours Sold 94.7 14.9 3.5 Power Generation (Million Megawatt Hours Generated) - Gross 7.2 --- --- Net 4.3 --- --- Natural Gas Liquids Processed (MBbls/d - Gross) - Field Plants 89.8 57.4 38.7 Straddle Plants 46.4 36.9 34.1 Fractionation - Barrels Received for Fractionation (MBbls/d)(8) 158.4 169.1 95.0 NGL Marketing - Sales Volumes (MBbls/d) 413.9 245.0 120.6 Natural Gas Gathering and Transmission (MMcf/d) 0.4 0.3 0.3 Crude Oil Marketing - Sales Volumes (MBbls/d) 168.3 106.0 60.9 Global Sales - LPG Sales Volumes (MMBbls) (6) 33.5 1.7 --- Gas Sales Volumes (Bcf/d) (7) 0.2 n/a n/a =========================================================================================================
30 (1) The Destec acquisition was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective July 1, 1997. The Chevron Combination was accounted for as an acquisition of assets under the purchase method of accounting and the results of operations attributed to the acquired assets are included in the Company's financial statements and operating statistics effective September 1, 1996. The Trident Combination was accounted for as an acquisition of a business in accordance with the purchase method of accounting and the results of operations attributed to the acquired business are included in the Company's financial statements and operating statistics effective March 1, 1995. (2) Information excludes the Company's proportionate share of margin associated with ventures accounted for under the equity method. In 1997, the most significant operations included equity investments in Accord, VESCO, Gulf Coast Fractionators ("GCF") and certain partnerships owning power generating assets. In 1996 and 1995, significant equity investments included the operations of Accord, Novagas Clearinghouse, Ltd. ("NCL") and GCF, respectively. (3) Information excludes the Company's proportionate share of operating statistics associated with ventures accounted for under the equity method. In 1997, the most significant operations included equity investments in Accord, VESCO and GCF. In 1996 and 1995, significant equity investments included the operations of Accord, NCL and GCF, respectively. (4) Includes immaterial amounts of inter-company gas sales for all periods. (5) Represents volumes sold by NGC Canada, Inc. for the period from April 1, 1997 through December 31, 1997. Volumes sold by NCL prior to the reorganization are not comparable. (6) Includes 5.8 MMBbls of inter-company sales for the year ended December 31, 1997. A material amount of volumes sold in 1996 are inter-company sales volumes. (7) Represents volumes sold by NGC UK Ltd. for the year ended December 31, 1997. Volumes sold by Accord prior to the reorganization are not comparable. (8) Effective January 1, 1997, the Company sold its interest in the Mont Belvieu I fractionator. The Company had acquired this facility as part of the Trident Combination. THREE YEARS ENDED DECEMBER 31, 1997 For the year ended December 31, 1997, the Company realized a net loss of $102.5 million, or $0.68 per share. This compares with net income of $113.3 million, or $0.83 per share, and $92.7 million, or $0.82 per share, in 1996 and 1995, respectively. The current period loss includes one-time charges totaling $218.5 million, on an after-tax basis, which were principally associated with the abandonment and impairment of certain operating and non-operating assets, inventory obsolescence and lower-of-cost-or-market writedowns, reserves for contingencies and other obligations, a charge for a hedging related loss and a charge associated with a change in the method of accounting for certain business process re-engineering and information technology transformation costs. The comparability of results period to period was also impaired by one-time gains totaling $7.3 million recognized during 1997, other charges of $2.5 million and $1.1 million recognized in 1996 and 1995, respectively, and a $45.7 million income tax benefit recognized in 1995 related to the Trident Combination. Revenues in each of the three years in the period ended December 31, 1997, totaled $13.4 billion, $7.3 billion and $3.7 billion, respectively. A significant portion of the 1997 charges was taken during the fourth quarter of 1997, reflecting the culmination of a year-long project intended to restructure the Company's natural gas liquids business, including rationalization and consolidation of assets acquired in the Strategic Combinations and the pursuit of a joint venture partner in order to achieve critical mass in the Company's crude oil marketing business. In addition, a company-wide reorganization of reporting responsibilities and improvements in business processes and computer information systems resulted in the identification of other obsolete assets and a reduction of employees involved in non-strategic operations. Pursuant to these restructuring efforts and in order to comply with required accounting methodology, the Company anticipates recording an additional severance charge of approximately $10 million during the first quarter of 1998. Management believes the restructuring and reorganization steps taken in 1997 and early 1998 have positioned the Company for improved operating results and an enhanced competitive position for the future. After consideration of the unusual items described above, NGC's normalized net income for the year ended December 31, 1997, approximated $108.7 million, or $0.65 per share, compared with normalized net income of $115.8 million, or $0.85 per share, in 1996, and $48.1 million, or $0.43 per share, in 1995. The lower normalized results in 1997 compared to 1996 generally resulted from lower margins reflecting a softening commodity price environment during 1997 as compared with significant commodity price volatility throughout 1996 and higher costs period to period resulting principally from the acquisitions and restructurings completed during 1997 and 1996. The business expansion resulting from the Strategic Combinations resulted in the significant revenue growth during the three year period. Operating cash flows totaled $278.6 million for the year ended December 31, 1997, compared with a use of cash from operations during the 1996 period of $31.0 million and a source of cash of $90.6 million in 1995. Such relationship principally resulted from an advance payment for future gas deliveries received in 1997, the increased size and scope of the required investment in operating assets resulting from the Strategic Combinations and improved working capital management in 1997. 31 Consolidated operating margin for each of the three years in the period ended December 31, 1997, totaled $385.3 million, $369.5 million and $194.7 million, respectively. For the year ended December 31, 1997, the Company reported an operating loss of $143.4 million compared with operating income of $197.8 million for the comparable 1996 period and $81.7 million in 1995. The 1997 operating loss includes a portion of the aforementioned charges totaling $275 million, on a pre-tax basis, as well as higher depreciation and amortization and general and administrative expenses as compared with both 1996 and 1995. The increase in depreciation and amortization expense results principally from depreciable assets acquired in the Trident and Chevron Combinations, which were effective March 1, 1995 and September 1, 1996, respectively, and the Destec acquisition, which was effective July 1, 1997, as well as the continued expansion of the Company's depreciable asset base through other asset acquisitions and capital projects completed during the three year period. The increase in general and administrative expenses period to period principally reflects the incremental costs associated with the operations acquired in the strategic acquisitions, the restructuring of the Company's businesses in Canada and the United Kingdom, the expansion of ECI's operations, the growth of Global Energy's operations and non-capitalizable consulting and other costs related to several information system and process improvement initiatives arising as a result of the Company's recent growth and reorganization. Incremental to NGC's consolidated operating income is the Company's equity share in the earnings of its unconsolidated affiliates which contributed an aggregate $59.0 million to 1997 pre-tax results compared to $28.1 million during the comparable 1996 period and $21.1 million in 1995. The increase in equity earnings over the three-year period generally reflects the addition of equity investments as part of the strategic acquisitions and the impact of the restructuring of the Company's investments in NCL and Accord during 1997. The following table provides a summary of equity earnings by investment for the comparable periods:
Years Ended December 31, ------------------------------------------ 1997 1996 1995 ------------------------------------------ ($ in thousands) Accord (1) $25,885 $17,131 $11,826 Gulf Coast Fractionators 6,624 3,360 1,896 West Texas LPG Pipeline Limited Partnership 7,162 1,661 --- Venice Energy Services Company, L.L.C. 8,052 2,429 --- Destec equity investments (aggregate) 12,780 --- --- NCL and other, net (1) (1,544) 3,494 7,338 $58,959 $28,075 $21,060
(1) For a discussion of the Accord and NCL restructurings, refer to Note 2 of the Consolidated Financial Statements. Interest expense totaled $63.5 million for the year ended December 31, 1997, compared with $46.2 million and $32.4 million for the comparable 1996 and 1995 periods. The higher interest expense period to period is attributed to higher average outstanding principal amounts resulting primarily from debt assumed in and resulting from the Chevron Combination and the Destec acquisition. Other income and expenses, net totaled $7.9 million in 1997, principally reflecting the aforementioned one-time gains. The net charge 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 non-recurring 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 pretax charge for tornado damage at a gas processing plant, $2.4 million in minority interests in certain majority owned subsidiaries and other miscellaneous non-recurring costs and expenses. During the second quarter of 1997, the Company sold $200 million of 8.316% Company Obligated Preferred Securities of a Subsidiary Trust ("Securities") and the accumulated distributions attributable to these Securities are reported as minority interest in income of a subsidiary in the consolidated statements of operations. Accumulated distributions associated with these Securities totaled $9.8 million for the year ended December 31, 1997. The Company reported an income tax benefit of $62.2 million for the year ended December 31, 1997, compared to an income tax provision of $56.3 million and a benefit of $27.5 million in 1996 and 1995, respectively, reflecting effective rates of (41) percent, 33 percent and (42) percent, respectively. 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 32 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. Other differences between the aforementioned effective rates and the statutory rate of 35 percent result primarily from refunds received related to foreign taxes paid on dividends received from Accord, permanent differences attributable to amortization of certain intangibles, permanent differences arising from the effect of certain foreign equity investments and state income taxes. Additionally, the effective tax rate in 1995 was impacted by pre- combination earnings of Clearinghouse that were predominantly taxed as partnership income. NATURAL GAS AND ELECTRIC POWER MARKETING Marketing's operating margin for the year ended December 31, 1997, totaled $103.9 million, consisting of $99.4 million related to gas marketing operations and $4.5 million related to electric power marketing operations. These amounts correspond to 1996 operating margins of $103.6 million, $100.2 million and $3.4 million, respectively. During 1995, the segment's operating margin totaled $63.7 million. Marketing's business strategy includes expansion of relationships with existing LDCs and industrial customers as a means for expanding its customer base. The segment continues to execute its strategy of not competing directly with LDCs and will initiate additional retail programs through alliances with strategic partners. In addition, the segment expects to continue to capitalize off the synergies provided by the Destec acquisition in expanding sales efforts to industrials and expanding its power generation asset base. The level operating margin in 1997 as compared to 1996 attributed to the gas marketing operations reflects higher sales volumes offset by lower unit margins period to period. The lower margin in 1995 is a result of significantly lower volumes. Total natural gas volumes sold in North America increased to 8.0 billion cubic feet per day in 1997 from 4.3 billion cubic feet per day during 1996 and 3.5 billion cubic feet per day in 1995, principally as a result of the Chevron Combination and the inclusion of volumes sold by NGC Canada, Inc. Average unit margins in North America approximated $0.04 per thousand cubic feet during 1997, reflecting higher unit margins on volumes sold in the U.S. offset by lower unit margins on volumes sold in Canada during the period. During the comparable 1996 and 1995 periods, unit margins approximated $0.06 and $0.05 per thousand cubic feet on volumes sold in the U.S. only. The lower 1997 unit margins as compared to margins realized in 1996 and 1995 reflect the mild winter weather during 1997 and the inclusion of lower unit margins derived from the Company's Canadian operations. ECI's 1997 operating margin increased $1.1 million over the same 1996 period principally as a result of increased volume offset by lower unit margins. The lower unit margins resulted principally from a higher quantity of low-margin trading volume in the 1997 period. Comparative sales volumes increased six times period to period, as incremental volumes derived from the Destec acquisition combined with the continued growth of ECI's operations resulted in sales volume of 94.7 million megawatt hours during 1997 compared to 14.9 million megawatt hours sold in 1996. ECI's operations in 1995 were immaterial to the segment's operating margin. POWER GENERATION The Company's power generation operations, managed through Destec, contributed $19.0 million of operating margin and $12.8 million of equity earnings during 1997. Destec's ownership of power generating assets is predominantly through varying interests held in partnerships that own and operate power generation facilities. During the period, the power generating assets in which Destec maintains an interest generated 7.2 million megawatt hours of electricity (4.3 million megawatt hours, net to Destec's interest). The business strategy employed by Destec is to be a low-cost producer of electric power and Destec will actively pursue expansion of its position as a developer, manager and operator of power generation facilities. NGC expects the expertise of Destec's personnel, displayed through proven knowledge of power technology and engineering and experience in development, construction and operation of power facilities, to provide a platform for expansion of its power generating business worldwide. NATURAL GAS LIQUIDS, CRUDE OIL AND GAS TRANSMISSION Liquids reported a 1997 operating margin of $262.4 million, representing a decrease of $3.5 million from the operating margin reported in the comparable 1996 period, and a $131.5 million increase over the segment's 1995 operating margin. Generally, operating margins from businesses in this segment were negatively impacted in 1997 by lower average commodity prices as compared with commodity prices in the 1996 period. The 1997 operating results were negatively impacted by high cost inventory purchased during the fourth quarter of 1996, which was recognized in 33 operating results during the first quarter of 1997 and culminated in a lower-of- cost-or-market writedown of $12.3 million at March 31, 1997. Additionally, included in the 1997 period are pre-tax charges related to a lower-of-cost-or- market writedown of crude oil inventory of $2.7 million and a hedge-related loss of $8.3 million. Operationally, the segment's businesses reflect significantly improved volumes period to period principally as a result of the Chevron Combination. Aggregate natural gas liquids processing volumes averaged 136.2 thousand gross barrels per day during the 1997 period as compared to 94.3 thousand gross barrels per day in 1996. Throughput in the gathering systems supplying the Company's field processing facilities increased 11 percent in 1997, partially reflecting the improved operating results occurring as the segment executes its aforementioned restructuring plan. Natural gas liquids marketing volumes increased from 245.0 thousand barrels per day in the 1996 period to 413.9 thousand barrels per day in 1997 and crude oil sales volumes increased 62.3 thousand barrels per day period to period. As a result of the January 1, 1997, sale of the Mont Belvieu fractionator, barrels received for fractionation decreased period to period by 10.7 thousand barrels per day. Natural gas gathering and transmission volumes increased slightly during the 1997 period. Global LPG sales volumes totaled 33.5 million barrels during the 1997 period. A comparison of the 1995 operating statistics with results in 1996 and 1997 are inconsequential principally as a result of the Chevron Combination. The segment's business strategy is predicated on being the low-cost producer of energy products. The integration of the assets acquired in the Chevron and Trident Combinations has resulted in improved capacity utilization and enhanced operating performance. Further, management believes that the asset rationalizations and restructuring occurring in the fourth quarter of 1997 and into 1998 positions NGC's Liquids segment for improved operating results and an enhanced competitive position for the future. The segment continues to actively address other cost containment initiatives at existing facilities and will pursue asset acquisitions and/or the construction of new assets when it is considered economically and strategically appropriate in order to align its operations with other commercial aspects of NGC's business. In addition, the segment is actively pursuing acquisitions, strategic alliances, joint ventures and construction projects in order to capitalize on new gas production in the Gulf of Mexico. Internationally, the Company, principally through its wholly owned subsidiary NGC Global Energy, is pursuing economically viable near-term strategic opportunities. The intent of the strategy is to expand the multi- commodity concept in selected international locations and it is likely the Company will leverage off foreign investments held by its major shareholders as a means for initiating most of these near-term projects. Operating Cash Flow Cash flow from operating activities totaled $278.6 million during the year ended December 31, 1997, an improvement of $309.6 million and $188.0 million over the amounts reported in the 1996 and 1995 periods, respectively. The improvement principally resulted from an advance payment for future gas deliveries received in 1997, the increased size and scope of the required investment in operating assets resulting from the strategic acquisitions and improved working capital management in 1997. Changes in other working capital accounts, which include prepayments, other current assets and accrued liabilities, reflect expenditures or recognition of liabilities for insurance costs, certain deposits, salaries, taxes other than on income, certain deferred revenue accounts and other similar items. Fluctuations in these accounts, period to period, reflect changes in the timing of payments or recognition of liabilities and are not directly impacted by seasonal factors. Capital Expenditures, Commitments and Dividend Requirements Destec Acquisition. NGC acquired Destec on June 27, 1997, in a transaction valued at $1.26 billion, or $21.65 per share of Destec common stock. Concurrent with this acquisition, NGC sold Destec's international facilities and operations to The AES Corporation for $439 million. In July and August 1997, the Company sold Destec's interest in a partnership that owned a power generation facility and certain oil, gas and lignite reserves, respectively, for aggregate proceeds of $296 million. Proceeds from the sales of these non-strategic assets were used to retire debt incurred in the acquisition. The Company is continuing to explore other opportunities to monetize its investment in certain assets acquired from Destec if, and when, it is determined that such divestitures are economically and strategically appropriate. 34 Capital Expenditures and Investing Activities. During the year ended December 31, 1997, the Company spent a net $510.7 million, principally on the Destec acquisition, the purchase of NCL's gas marketing operations and on acquisitions of additional interests in gas processing facilities, pipelines and other midstream assets. Expenditures were also made on capital improvements at existing facilities and on capital additions at the Company's new headquarters. The Company invested $27.7 million in its unconsolidated affiliates, principally for amounts committed to VESCO. During the period, the Company divested itself of the Mont Belvieu I fractionation facility pursuant to an agreement reached with the Federal Trade Commission related to the Chevron Combination. Further, NGC sold its 49.9 percent interest in NCL, as part of the restructuring of that investment and consummated the aforementioned sales of certain non-strategic Destec assets. Aggregate net proceeds from these dispositions, plus proceeds from other immaterial dispositions, approximated $453 million. During 1996, the Company spent a net $111 million in acquisition, capital project and asset maintenance activities. These funds were expended principally for maintenance of existing assets, the acquisition of processing plants, gathering lines, pipelines and on discrete capital assets. 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 VESCO. As reflected in the accompanying notes to the consolidated financial statements, the Chevron Combination was consummated principally through the assumption of debt and the issuance of capital stock. 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 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 spent an additional $145 million to acquire other assets, the most significant of which were the Ozark Gas Transmission System, the Kerr-McGee pipeline and Pan Alberta Gas, through a contribution to NCL, as well as capital improvements at existing facilities and investments in other unconsolidated affiliates. Dividend Requirements and Stock Repurchases. NGC declares quarterly dividends on its outstanding common stock at the discretion of its Board of Directors. The holders of the Series A Preferred Stock are entitled to receive dividends or distributions equal per share in amount and kind to any dividend or distribution payable on shares of the Company's common stock, when and as the same are declared by the Company's Board of Directors. 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. During the years ended December 31, 1997, 1996 and 1995, the Company paid approximately $7.9 million, $6.7 million and $9.3 million in cash dividends and distributions, respectively. In May 1997, the Board of Directors approved a stock repurchase program that allows the Company to repurchase, from time to time, up to 1.6 million shares of common stock in open market transactions. The timing and number of shares ultimately repurchased will depend upon market conditions and consideration of alternative investments. Pursuant to this program, the Company has acquired 654,900 shares at a total cost of $10.5 million, or $16.04 per share on a weighted average cost basis, through December 31, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and financial statement schedule of the Company are set forth at pages F-1 through F-33 inclusive, found at the end of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 35 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 1998 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, 1998. 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K The following documents, which have been filed by the Company with the Securities and Exchange Commission pursuant to the Securities and Exchange Act of 1934, as amended, are by this reference incorporated in and made a part of this statement: a. Financial Statements -- Consolidated financial statements of the Company and its subsidiaries are incorporated under Item 8. of this Form 10-K. b. Financial Statements -- Consolidated financial statements of the Company and its subsidiaries are incorporated Under Item 8. of this Form 10-K. c. Exhibits -- The following instruments and documents are included as exhibits to this Form 10-K. 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.(1014) 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.(811) 36 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. (11) 2.4 - Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated as of February 17, 1997. (11) 2.5 - First Amendment to Asset Purchase Agreement by and between NGC Corporation and The AES Corporation dated June 29, 1997.(12) 2.6 - Asset Purchase Agreement between Destec Energy, Inc. and ECT EOCENE Enterprises, Inc. dated July 1, 1997.(12) 3.1 - Restated Certificate of Incorporation of NGC Corporation. (11) 3.2 - Amended and Restated By-Laws of NGC Corporation. (11) 4.1 - Indenture, dated as of September 9, 1993, between Trident NGL, Inc. and Ameritrust Texas National Association, as Trustee.(5) 4.25 - Note Purchase Agreement, dated as of August 30, 1991, by and among Trident NGL, Inc. and the Purchasers named therein.(2) 4.36 - Indenture, dated as of April 15, 1993, between Trident NGL, Inc. and The First National Bank of Boston, as Trustee.(3) 4.4 - Indenture, dated as of September 9, 1993, between Trident NGL, Inc. and Ameritrust Texas National Association, as Trustee.(5) 4.5 - Warrant exercisable for 6,228 shares of Common Stock of NGC Corporation registered in the name of J. Otis Winters.(4) 4.5a - Indenture, dated as of December 11, 1995, by and between NGC Corporation, the Subsidiary Guarantors named therein and the First National Bank of Chicago, as Trustee.(7) 4.6 - First Supplemental Indenture, dated as of August 31, 1996, by and among NGC Corporation, 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. (8) 4.7 - Second Supplemental Indenture, dated as of October 11, 1996, by and among NGC Corporation, 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. (8) 4.8 - Amended and Restated Credit Agreement dated as of June 27, 1997, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents, and the Lenders Named therein.(12) +4.9 - First Amendment to Amended and Restated Credit Agreement dated November 24, 1997, among NGC Corporation and The First National Bank of Chigaco, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders named therein. +4.10 - Second Amendment to Amended and Restated Credit Agreement, dated as of February 20, 1998, among NGC Corporation and The First National Bank of Chicago, Individually and as Agent, The Chase Manhattan Bank and NationsBank of Texas, N.A., Individually and as Co-Agents for the Lenders named therein. 37 4.11 - Subordinated Debenture Indenture between NGC Corporation and The First National Bank of Chicago, as Debenture Trustee, dated as of May 28, 1997. (13)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 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated as of May 28, 1997. (13)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 - Amended and Restated Declaration of Trust among NGC Corporation, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, dated as of May 28, 1997. (13) 4.14 - Common Securities Guarantee of NGC Corporation dated as of May 28, 1997. (13) 4.15 - Registration Rights Agreement, dated as of May 28, 1997, among NGC Corporation, NGC Corporation Capital Trust I, Lehman Brothers, Salomon Brothers Inc. and Smith Barney Inc. (13) 4.16 - Second Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the Indenture dated as of June 30, 1997. (14) 4.17 - Fourth Supplemental Indenture among NGC Corporation, Destec Energy, Inc. and The First National Bank of Chicago, as Trustee, dated as of June 30, 1997, supplementing and amending the Indenture dated as of December 11, 1995. (14) +4.18 - Fifth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of September 30, 1997, supplementing and amending the Indenture dated as of December 11, 1995. +4.19 - Sixth Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of January 5, 1998, supplementing and amending the Indenture dated as of December 11, 1995. +4.20 - Seventh Supplemental Indenture among NGC Corporation, The Subsidiary Guarantors named therein and The First National Bank of Chicago, as Trustee, dated as of February 20, 1998, supplementing and amending the Indenture dated as of December 11, 1995. +4.21 - Indenture dated as of September 26, 1996, Restated as of March 23, 1998, to include amendments in the First through Fifth Supplemental Indentures, between NGC Corporation and The First National Bank of Chicago, as Trustee. 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 - NGC Corporation Amended and Restated 1991 Stock Option Plan.(11) 10.4 - Stock Purchase Agreement between Trident NGL Holding, Inc. and J. Otis Winters.(5) 10.5 - NGC Corporation Amended and Restated Employee Equity Option Plan.(67) (See Appendix III to the Proxy Statement/Prospectus). 10.6 - The Amended and Restated Natural Gas Clearinghouse Deferred Compensation Plan, dated February 28, 1992.(6) 10.7 - Employment Agreement dated April 2, 1996 by and between NGC Corporation and Stephen A. Furbacher.(9) 38 10.8 - Employment Agreement, dated as of November 15, 1996, between Thomas M. Matthews and NGC Corporation. (11) +10.9 - Employment Agreement, dated as of April 30, 1997, between Charles L. Watson and NGC Corporation. +10.10 - Employment Agreement, dated as of May 8, 1997, between Stephen W. Bergstrom and NGC Corporation. +10.11 _ Employment Agreement, dated as of April 14, 1997, between John U. Clarke and NGC Corporation. +10.12 _ Employment Agreement, dated as of May 21, 1997, between Kenneth E. Randolph and NGC Corporation. 10.13 - 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.(9) 10.14 - 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.(9) 10.15 - 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.(8) 10.16 - Scope of Business Agreement, dated May 22, 1996 between Chevron Corporation and NGC Corporation.(9) 10.17 - Stockholders Agreement dated, May 22, 1996, among BG Holdings, Inc., NOVA Gas Services (U.S.) Inc. and Chevron U.S.A. Inc.(9) 10.18 - 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.(8) 10.19 - 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.(8) *10.20 - Natural Gas Purchase and Sale Agreement, dated as of August 30, 1996, among Chevron U.S.A. Inc. and Natural Gas Clearinghouse.(8) *10.21 - Master Natural Gas Processing Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership.(8) *10.22 - Master Natural Gas Liquids Purchase Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron U.S.A. Inc.(8) *10.23 - Gas Supply and Service Agreement, dated as of September 1, 1996, among Chevron Products Company and Natural Gas Clearinghouse.(8) 10.24 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron U.S.A. Production Company.(9) 39 10.25 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Chemical Company.(9) 10.26 - Master Power Service Agreement, dated as of May 16, 1996, among Electric Clearinghouse, Inc. and Chevron Products Company.(9) *10.27 - Feedstock Sale and Refinery Product Purchase Agreements, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership.(8) *10.28 - Refinery Product Sale Agreement (Hawaii), dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Products Company.(8) *10.29 - Feedstock Sale and Refinery Product Master Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Warren Petroleum Company, Limited Partnership.(8) *10.30 - CCC Product Sale and Purchase Agreement dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Chemical Company.(8) *10.31 - CCC/WPC Services Agreement, dated as of September 1, 1996, among Chevron Chemical Company and Warren Petroleum Company, Limited Partnership.(8) *10.32 - Operating Agreement, dated as of September 1, 1996, among Warren Petroleum Company, Limited Partnership and Chevron Pipe Line Company.(8) 10.33 - Galena Park Services Agreement, dated as of September 1, 1996, among Chevron Products Company and Midstream Combination Corp.(8) *10.34 - Venice Complex Operating Agreement, dated as of September 1, 1996, among Chevron U.S.A. Inc. and Warren Petroleum Company, Limited Partnership.(9) *10.35 - 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.(9) 10.36 - Lone Star Swap Transaction Confirmation Term Sheet, dated as of September 1, 1996, among Chevron U.S.A. Inc. and NGC Corporation.(8) *10.37 - 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.(8) *10.38 - 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.(8) *10.39 - Time Charter, dated as of August 31, 1996, by and between Midstream Barge Company, L.L.C. and Warren Petroleum Company, Limited Partnership.(8) *10.40 - 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.(8) +12.1 - Computation of Ratio of Earnings to Fixed Charges. 40 +22.1 - Subsidiaries of the Registrant. +23.1 - Consent of Arthur Andersen LLP. +27.1 - Financial Data Schedule. - ---------------- + 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 Registration Statement of Trident NGL Holding, Inc. on Form S-4, Registration No. 33-88907. (7) Incorporated by reference to the Registration Statement of NGC Corporation on Form S-3, Registration No. 33-97368. (8) 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. (9) Incorporated by reference to exhibits to the Registration Statement of Midstream Combination Corp. on Form S-4, Registration No. 333-09419. (10) 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. (11) Incorporated by reference to exhibits to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 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, Commission File No. 1-11156, dated June 27, 1997. (13) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1997, Commission File No. 1-11156. (14) Incorporated by reference to exhibits to the Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1997, Commission File No. 1-11156 (b) Reports on Form 8-K of NGC Corporation. None. 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. NGC CORPORATION Date: March 30,1998 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 30, 1998 By: /s/ C. L. Watson ---------------------------------------- C. L. Watson, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: March 30, 1998 By: /s/ John U. Clarke ----------------------------------------- John U. Clarke, Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 30, 1998 By: /s/ Bradley P. Farnsworth ----------------------------------------- Bradley P. Farnsworth, Vice President and Controller (Principal Accounting Officer) Date: March 30, 1998 By: /s/ Thomas M. Matthews ----------------------------------------- Thomas M. Matthews, President and Director Date: March 30, 1998 By: /s/ Stephen J. Brandon ---------------------------------------- Stephen J. Brandon, Director Date: March 30, 1998 By: /s/ Frank J. Chapman ---------------------------------------- Frank J. Chapman, Director Date: March 30, 1998 By: /s/ P. Nicholas Woollacott ----------------------------------------- P. Nicholas Woollacott, Director Date: March 30, 1998 By: /s/ Jack S. Mustoe ---------------------------------------- Jack S. Mustoe, Director 42 Date: March 30, 1998 By: /s/ Jeffrey M. Lipton ---------------------------------------- Jeffrey M. Lipton, Director Date: March 30, 1998 By: /s/ Albert Terrance Poole ---------------------------------------- Albert Terence Poole, Director Date: March 30, 1998 By: /s/ Darald W. Callahan ----------------------------------------- Darald W. Callahan, Director Date: March 30, 1998 By: /s/ Patricia A. Woertz ---------------------------------------- Patricia A. Woertz, Director Date: March 30, 1998 By: /s/ Peter J. Robertson ---------------------------------------- Peter J. Robertson, Director Date: March 30, 1998 By: /s/ Daniel L. Dienstbier ---------------------------------------- Daniel L. Dienstbier, Director Date: March 30, 1998 By: /s/ J. Otis Winters ---------------------------------------- J. Otis Winters, Director 43 NGC CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Public Accountants...................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996.. F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995............................ F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................ F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995........ F-6 Notes to Consolidated Financial Statements.................... F-7 FINANCIAL STATEMENT SCHEDULE Condensed Financial Statements of the Registrant.............. F-30 F-1 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1997, 1996 and 1995. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NGC Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The information included in Schedule I is presented for the 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 20, 1998 F-2 NGC CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, DECEMBER 31, 1997 1996 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents $ 23,047 $ 50,209 Accounts receivable, net 1,536,451 1,373,560 Accounts receivable, affiliates 139,321 144,825 Inventories 136,485 257,005 Assets from risk management activities 127,929 98,433 Prepayments and other assets 55,547 12,689 ---------- ---------- 2,018,780 1,936,721 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT 1,958,250 1,819,811 Less: accumulated depreciation (436,674) (128,432) ---------- ---------- 1,521,576 1,691,379 ---------- ---------- OTHER ASSETS Investments in unconsolidated affiliates 470,477 181,688 Assets from risk management activities 111,341 171,528 Other assets 394,729 205,494 ---------- ---------- $4,516,903 $4,186,810 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $1,404,736 $1,305,726 Accounts payable, affiliates 24,187 39,070 Accrued liabilities 192,159 117,777 Liabilities from risk management activities 132,012 86,414 --------- ---------- 1,753,094 1,548,987 LONG-TERM DEBT 1,002,054 988,597 OTHER LIABILITIES Liabilities from risk management activities 42,679 127,725 Deferred income taxes 254,059 328,280 Other long-term liabilities 245,892 76,488 ---------- ---------- 3,297,778 3,070,077 ---------- ---------- COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 --- COMMITMENTS AND CONTINGENCIES (NOTE 11) STOCKHOLDERS' EQUITY 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, 1997 and 1996, respectively 75,418 75,418 Common stock, $.01 par value, 400,000,000 shares authorized; 151,796,622 shares issued at December 31, 1997 and 149,846,503 shares issued and outstanding at December 31, 1996 1,518 1,498 Additional paid-in capital 919,720 896,432 Retained earnings 32,975 143,385 Less: treasury stock, at cost: 654,900 shares at December 31, 1997 (10,506) --- ---------- ---------- 1,019,125 1,116,733 ---------- ---------- $4,516,903 $4,186,810 ========== ==========
See Notes to Consolidated Financial Statements. F-3 NGC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year Ended December 31, ------------------------------------- 1997 1996 1995 ----------- ---------- ---------- Revenues $13,378,380 $7,260,202 $3,665,946 Cost of sales 12,993,086 6,890,702 3,471,286 ----------- ---------- ---------- Operating margin 385,294 369,500 194,660 Depreciation and amortization 104,391 71,676 44,913 Impairment, abandonment and other charges 275,000 --- --- General and administrative expenses 149,344 100,032 68,057 ----------- ---------- ---------- Operating income (loss) (143,441) 197,792 81,690 Equity in earnings of unconsolidated affiliates 58,959 28,075 21,060 Other income 28,113 5,485 3,096 Relocation costs --- (4,000) --- Interest expense (63,455) (46,202) (32,391) Other expenses (20,230) (11,505) (8,221) Minority interest in income of a subsidiary (9,841) --- --- ----------- ---------- ---------- Income (loss) before income taxes (149,895) 169,645 65,234 Income tax provision (benefit) (62,210) 56,323 (27,471) ----------- ---------- ---------- Net income (loss) from continuing operations before cumulative effect of accounting change (87,685) 113,322 92,705 Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) (14,800) --- --- ----------- ---------- ---------- NET INCOME (LOSS) $ (102,485) $ 113,322 $ 92,705 =========== ========== ========== Net Income Per Share: PRO FORMA Income (loss) before income taxes $ (149,895) $ 169,645 $ 65,234 Income tax provision (benefit) (62,210) 56,323 20,438 ----------- ---------- ---------- Net income (loss) from continuing operations before cumulative effect of accounting change (87,685) 113,322 44,796 Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) (14,800) --- --- Less: preferred stock dividends (391) (132) --- ----------- ---------- ---------- Net income (loss) applicable to common stockholders $ (102,876) $ 113,190 $ 44,796 =========== ========== ========== Basic earnings (loss) per share $ (0.68) $ 0.99 $ 0.42 =========== ========== ========== Diluted earnings per share $ n/a $ 0.83 $ 0.40 =========== ========== ========== Basic shares outstanding 150,653 114,093 106,841 =========== ========== ========== Diluted shares outstanding 167,009 136,099 113,176 =========== ========== ==========
See Notes to Consolidated Financial Statements. F-4 NGC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, --------------------------------------- 1997 1996 1995 ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (102,485) $ 113,322 $ 92,705 Items not affecting cash flows from operating activities: Depreciation, amortization, impairment and abandonment 378,916 73,176 44,913 Equity in earnings of affiliates, net of cash distributions (4,073) (21,729) (9,169) Risk management activities (8,757) (11,220) (2,951) Deferred income taxes (86,424) 45,896 (28,281) Amortization of bond premium (6,768) (4,892) (3,214) Other 1,249 7,466 3,484 Change in assets and liabilities resulting from operating activities: Accounts receivable (35,845) (954,418) (152,557) Inventories 86,077 (116,353) (23,403) Prepayments and other assets (20,686) 7,726 (16,518) Accounts payable (22,601) 778,767 185,215 Accrued liabilities 14,064 47,148 11,611 Other, net 85,922 4,157 (11,187) ----------- ----------- ----------- Net cash provided by (used in) operating activities 278,589 (30,954) 90,648 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (220,003) (97,651) (128,871) Investment in unconsolidated affiliates (27,708) (30,875) (15,457) Business acquisitions, net of cash acquired (715,589) (714) (165,267) Proceeds from asset sales 452,565 3,600 --- Other, net --- 14,500 (1,028) ----------- ----------- ----------- Net cash used in investing activities (510,735) (111,140) (310,623) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 2,218,500 1,542,000 1,237,589 Repayments of long-term borrowings (2,198,275) (1,360,081) (1,143,039) Proceeds from sale of capital stock, options and warrants 5,147 858 725 Issuance of company obligated preferred securities of a subsidiary trust, net 198,043 --- --- Capital contributions --- --- 135,000 Treasury stock acquisitions (10,506) --- --- Dividends and other distributions, net (7,925) (6,740) (9,253) ----------- ----------- ----------- Net cash provided by financing activities 204,984 176,037 221,022 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (27,162) 33,943 1,047 Cash and cash equivalents, beginning of year 50,209 16,266 15,219 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 23,047 $ 50,209 $ 16,266 =========== =========== ===========
See Notes to Consolidated Financial Statements. F-5 NGC CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
NGC CORPORATION ------------------------------------------------------------------------------------------ SERIES A PREFERRED COMMON STOCK ADDITIONAL TREASURY STOCK PARTNERSHIP ------------------- ------------------- PAID-IN RETAINED -------------------- CAPITAL SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT ------------- -------- --------- ------- ---------- ----------- ---------- -------- -------- Balance at December 31, 1994 $ 152,213 --- $ --- --- $ --- $ --- $ --- --- $ --- Net income 52,930 --- --- --- --- --- 39,775 --- --- Capital contribution 135,000 --- --- --- --- --- --- --- --- Partnership distributions (5,227) --- --- --- --- --- --- --- --- Options granted 323 --- --- --- --- 1,692 --- --- --- Trident Combination (335,239) --- --- 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 --- --- Net loss --- --- --- --- --- --- (102,485) --- --- Options exercised --- --- --- 1,541 15 11,577 --- --- --- Dividends and other distributions --- --- --- --- --- --- (7,925) --- --- 401(k) plan and profit sharing stock issuances --- --- --- 385 5 7,401 --- --- --- Options granted --- --- --- --- --- 4,044 Treasury stock acquisitions --- --- --- --- --- --- --- (655) (10,506) Other --- --- --- 24 --- 266 --- --- --- ----------- ------ -------- ------- ------ -------- --------- ------ ------ Balance at December 31, 1997 $ --- 7,815 $75,418 151,797 $1,518 $919,720 $ 32,975 (655) $(10,506) =========== ====== ======== ======= ====== ======== ========= ====== =======
See Notes to Consolidated Financial Statements. F-6 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ACCOUNTING POLICIES NGC Corporation ("NGC" or the "Company") is a holding company that conducts substantially 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 and is an international transporter of natural gas liquids. 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 the consolidated financial statements in conformity with generally accepted accounting principles requires management to develop estimates and make assumptions that affect reported financial position and results of operations and that impact the nature and extent of disclosure, if any, of contingent assets and liabilities. Actual results could differ from those estimates. 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 $35.2 million and $30.6 million, natural gas liquids of $55.4 million and $194.5 million, and crude oil of $23.2 million and $16.6 million at December 31, 1997 and 1996, respectively, are valued at the lower of weighted average cost or market. Materials and supplies inventory of $19.8 million and $12.1 million at December 31, 1997 and 1996, respectively, is carried at the lower of cost or market using the specific identification method. RECOVERABLE PROJECT COSTS. The Company capitalizes certain project costs incurred to procure equipment, to connect utility transmission lines, and other similar costs related to construction activities, once management determines that it is probable such costs are recoverable. If the necessary contracts are not executed, and the capitalized costs are not considered recoverable through other means, the related costs are charged to expense at that time. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment consisting principally of gas gathering, processing, fractionation, terminaling and storage facilities, natural gas transmission lines, pipelines, power generating facilities and supporting infrastructure is recorded at cost. Expenditures for major replacements 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 to 30 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 F-7 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. INTANGIBLE ASSETS. Intangible assets are generally amortized by the straight-line method over an estimated useful life of up to 30 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. Revenues derived from power generation, including electricity, steam and synthetic gas sales and earned performance bonuses, are recognized upon output, product delivery or satisfaction of specific targets, all as specified by contractual terms. Revenues resulting from long-term engineering and project construction contracts are recognized using the percentage-of-completion method. Fees derived from engineering and construction contracts and development and other activities received from joint ventures in which NGC holds an equity interest are deferred to the extent of NGC's ownership interest and amortized on a straight-line basis over appropriate periods, which vary according to the nature of the service provided and the ventures' operations. The Company accounts for its North American fixed-price natural gas transactions 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 these 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. All other gas marketing activities are accounted for under the accrual method of accounting. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments and inventories in its natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. NGC also monitors its exposure to fluctuations in interest rates and foreign currency exchange rates and may execute swaps, forward-exchange contracts or other financial instruments to 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 for which the underlying commodity, interest rate or foreign currency transaction was hedged. If the necessary correlation to the commodity, interest rate or foreign currency transaction being hedged ceases to exist, the gain or loss associated with such contract(s) is no longer deferred and is recognized in the period correlation is lost. 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. Basic earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the period. Diluted earnings per share represents the amount of earnings for the period available to each share of common stock outstanding during the period plus each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. Differences between basic and diluted shares outstanding in all periods are attributed to options outstanding and a warrant. For the year ended December 31, 1997, Basic and Diluted earnings per share are the same as a result of antidilution resulting from the net loss in that period. F-8 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pro forma net income used to compute pro forma earnings per share for the year ended December 31, 1995, reflects incremental statutory federal and state income tax provisions applied to Clearinghouse's partnership income for the period 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 that accounting period. FOREIGN CURRENCY TRANSLATIONS. For subsidiaries whose functional currency is other than U.S. dollar, assets and liabilities are translated at year-end rates of exchange and revenues and expenses are translated at average exchange rates prevailing during the year. NOTE 2 -- BUSINESS COMBINATIONS AND SIGNIFICANT RESTRUCTURINGS THE DESTEC ACQUISITION. On June 27, 1997, NGC acquired Destec Energy, Inc. ("Destec"), an independent power producer, for $1.26 billion, or $21.65 per share of Destec common stock. Concurrent with this acquisition, NGC sold Destec's international facilities and operations to The AES Corporation for $439 million. NGC financed the transaction through cash on hand and advances on its credit facilities provided by its existing commercial banks. The acquisition related debt is to be retired from a combination of cash flows from operations, sales of non-strategic domestic Destec assets, proceeds from issuance of new corporate debt and proceeds from the issuance of preferred securities of a subsidiary trust. During July and August 1997, the Company sold certain non- strategic Destec assets for aggregate proceeds of $296 million. Such proceeds were used to retire outstanding indebtedness. The Destec acquisition was accounted for under the purchase method of accounting. Accordingly, the purchase price of approximately $718 million, inclusive of transaction costs and net of cash acquired, was allocated to the Destec assets acquired and liabilities assumed based on their estimated fair values as of June 30, 1997, the effective date of the acquisition for accounting purposes. The purchase price allocation as presented herein is considered preliminary and is dependent upon subsequent asset sales, if any, and the ultimate resolution of certain pending legal and other contingencies existing at the time of the acquisition. The results of operations of the acquired Destec assets are consolidated with NGC's existing operations beginning July 1, 1997. The following table reflects certain unaudited pro forma information for the periods presented as if the Destec acquisition had occurred on January 1, 1996 (in thousands, except per share data): YEARS ENDED DECEMBER 31, ------------------------------ 1997 1996 ------------------------------ Pro forma revenues $13,498,207 $7,529,928 Pro forma net income (loss) (101,175) 125,962 Pro forma earnings (loss) per share (0.67) 0.93 RESTRUCTURING OF NOVAGAS CLEARINGHOUSE, LTD. In June 1997, the Company and NOVA Corporation ("NOVA") completed the restructuring of the companies' Canadian natural gas operations formerly executed through Novagas Clearinghouse, Ltd., Novagas Clearinghouse Limited Partnership and Novagas Clearinghouse Pipelines Limited Partnership (collectively "NCL"), a joint venture between NGC and NOVA. Pursuant to the agreements, NGC Canada Inc. ("NGCCI"), a wholly owned indirect subsidiary of NGC, acquired NCL's natural gas marketing business, excluding the natural gas aggregation business of Pan-Alberta Gas Ltd. ("Pan-Alberta"), from NCL and sold its aggregate 49.9 percent interest in NCL to NOVA Gas International ("NGI"), a subsidiary of NOVA. NOVA assumed full ownership of NCL's gathering and processing business and the operations of Pan-Alberta. The restructuring included amendments to or termination of various agreements between NCL, NGC, NOVA and certain affiliates of both NGC and NOVA. NGC realized a pretax gain on the sale of its interest in NCL of $7.8 million, which is classified as other income in the accompanying consolidated statements of operations for the year ended December 31, 1997. The acquisition by NGC of NCL's marketing business was accounted for under the purchase method of accounting. Accordingly, the purchase price of $4.0 million, inclusive of transaction costs, was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of April 1, 1997, the effective date of F-9 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the acquisition for accounting purposes. NGC and NOVA are pursuing separate midstream asset businesses in Canada with NGC operating its Canadian marketing and midstream asset businesses through NGCCI. RESTRUCTURING OF ACCORD ENERGY LIMITED ("ACCORD"). In early 1997, British Gas completed a restructuring whereby Centrica plc ("Centrica") was demerged from British Gas and British Gas was renamed BG plc ("BG"). Centrica became the Company's joint venture partner in Accord. BG holds the approximate 26 percent stake in NGC's common stock formerly held by British Gas. On May 2, 1997, Centrica and the Company completed a restructuring of Accord by converting certain common stock interests in Accord to participating preferred stock interests as of an effective date of January 1, 1997. Centrica and the Company own 75 percent and 25 percent, respectively, of the outstanding participating preferred stock shares of Accord. The participating preferred stock has (a) the right to receive cumulative dividends on a priority basis to other corporate distributions by Accord, and (b) limited voting rights. In addition, Centrica has an option to purchase the Company's participating preferred stock interest at any time after July 1, 2000, at a formula based price, as defined in the agreement. As part of the reorganization, Centrica will operate Accord while NGC obtained the right to market natural gas, gas liquids and crude oil in the United Kingdom, which occurs through its wholly owned subsidiary NGC UK Limited ("NGC UK"). In addition, as part of the restructuring, NGC UK acquired Accord's existing crude oil marketing business effective July 1, 1997. No gain or loss was recognized as a result of this restructuring and NGC's investment in Accord continues to be accounted for under the equity method. 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 ("Chevron") pursuant to which Chevron contributed substantially all of its midstream assets (the "Contribution"), including substantially all of the assets comprising Warren Petroleum Company and Chevron's Natural Gas Business Unit and an undivided interest in those assets that constitute the West Texas LPG Pipeline, into Midstream Combination Corp. ("Midstream"), a Delaware corporation formed for purposes of the transaction. NGC was merged with and into Midstream immediately following the Contribution and Midstream was renamed NGC Corporation. In exchange for the Contribution, Chevron received approximately 38.6 million shares of NGC common stock and approximately 7.8 million shares of NGC Series A Participating Preferred Stock and NGC assumed approximately $283 million of indebtedness. Immediately following closing of the Chevron Combination, NGC paid approximately $128 million to Chevron and funded such payment under its Credit Agreement. The Chevron Combination was accounted for as an acquisition of assets under the purchase method of accounting. The purchase price of approximately $740 million, inclusive of assumed indebtedness and transaction costs, was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of an effective date of September 1, 1996. 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 period presented as if the Trident Combination had occurred on January 1, 1995 (in thousands, except per share amounts): YEAR ENDED December 31, 1995 --------------------- Pro forma revenues $3,744,870 Pro forma net income 46,067 Pro forma diluted earnings per share 0.39 F-10 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 -- IMPAIRMENT, ABANDONMENT AND OTHER CHARGES During the fourth quarter of 1997, the Company recognized a $275 million charge principally related to impairment of certain long-lived assets, abandonment of certain operating assets and reserves for obsolescence, contingencies and other obligations. The charge primarily resulted from the completion of a plan of restructuring of the Company's natural gas liquids and crude oil businesses, which includes rationalization and consolidation of assets acquired in both the Trident and Chevron Combinations, and the pursuit of a joint venture partner in order to achieve critical mass in its crude oil marketing business. In addition, a company-wide reorganization of reporting responsibilities and improvements in business processes and computer information systems resulted in the identification during the fourth quarter of 1997 of other obsolete assets and a reduction of employees involved in non-strategic operations. The charge, which was substantially non-cash in nature, consisted of the following (in thousands): Abandonment of long-lived operating assets $154,984 Impairment of operating assets and intangibles 79,550 Inventory obsolescence reserve and write-off 10,340 Write-off of other obsolete assets 12,011 Contingency and other obligation reserves 16,750 Severance charge 1,365 -------- $275,000 ======== The fair values of the assets impaired and to be abandoned were determined using a discounted cash flow methodology. Management anticipates that the abandoned assets will be disposed of during 1998 and the carrying value of these assets in the accompanying balance sheet is at estimated realizable value. Pursuant to these restructuring decisions and in order to comply with required accounting methodology, the Company anticipates recording an additional severance charge of approximately $10 million during the first quarter of 1998. Also during the fourth quarter of 1997, the Company changed its method for accounting for certain business process re-engineering and information technology transformation costs pursuant to a consensus reached in November 1997 by the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF"). The EITF concluded that all re-engineering costs, including those incurred in connection with a software installation, should be expensed as incurred. The Company had previously capitalized certain re-engineering costs and was amortizing such costs over the estimated useful lives of the projects. The cumulative effect of this change in accounting of $14.8 million, or $0.10 per share, represents the one-time charge for the aggregate unamortized re- engineering costs previously capitalized. Note 4 -- RISK MANAGEMENT AND FINANCIAL INSTRUMENTS NGC's operating results are impacted by commodity price, interest rate and foreign exchange rate fluctuations. The Company routinely enters into financial instrument contracts to hedge purchase and sale commitments and inventories in its natural gas, natural gas liquids, crude oil, electricity and coal businesses in order to minimize the risk of market fluctuations. The Company may, at times, have a bias in the market, within established guidelines, resulting from the management of its commodity portfolios. Further, as a result of marketplace liquidity and other factors, the Company may, at times, be unable to fully hedge its portfolio for certain market risks. 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. The Natural Gas and Electric Power Marketing segment'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. The Power Generation segment is relatively insensitive to commodity price fluctuations since most of this business's purchase and sales contracts contain variable power sales contract features tied to a current spot or index natural gas price allowing revenues to adjust directionally with changes in natural gas prices. The Natural Gas Liquids, Crude Oil and Gas Transmission segment is generally sensitive to F-11 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS changes in commodity prices principally as a result of contractual terms under which products are sold by these businesses. The segment's operating margin is particularly sensitive to natural gas liquids prices. However, operating margin in these businesses is relatively insensitive to fluctuations in natural gas prices as a result of the mitigating impact of fuel costs in the Company's fractionation operations and residue gas sales in its gathering and processing activities. The commercial groups of NGC manage, on a portfolio basis, the market risks inherent in their transactions, subject to parameters established by the NGC Board of Directors. Market risks are monitored by a risk control group that operates separately from the commercial units that create or actively manage these risk exposures to ensure compliance with NGC's risk management policies. Risk measurement is also practiced against the NGC portfolios with stress testing and scenario analysis. ACCOUNTING FOR PRICE RISK MANAGEMENT ACTIVITIES -- NATURAL GAS. The Company uses the mark-to-market method of accounting for its North American 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 upon 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. 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 its trading portfolio consist principally of financial institutions, major oil and gas companies and local distribution companies. The creditworthiness of these counterparties may impact 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 its financial position or results of operations as a result of counterparty nonperformance. The following table displays the mark-to-market results of NGC's natural gas fixed-price F-12 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS transactions at December 31, 1997 (amounts are net of the advance payment and related obligations for future natural gas deliveries discussed in Note 11):
BELOW INVESTMENT INVESTMENT GRADE CREDIT GRADE CREDIT QUALITY QUALITY TOTAL ------------------ ----------------- --------------- ($ IN THOUSANDS) Utilities and power generators $(4,157) $(11,174) $(15,331) Financial institutions 7,279 86 7,365 Oil and gas producers 15,746 (7,771) 7,975 Industrial companies 10,028 1,690 11,718 Other 5,414 (797) 4,617 ------- -------- -------- Value of fixed-price transactions before reserves $34,310 $(17,966) 16,344 ======= ======== Reserves (8,911) -------- Net fixed-price value $ 7,433 ========
At December 31, 1997, the term of NGC's natural gas portfolio extends to 2007, and the average remaining life of an individual transaction was 5 months. 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, ------------------------------------------------------------------------ 1997 1996 ----------------------------------- -------------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------------- ------------ ------------- -------------- ($ IN THOUSANDS) Credit Agreement $110,000 $110,000 $319,000 $319,000 6.75% Senior Notes, due 2005 150,000 152,000 150,000 148,000 7.625% Senior Notes, due 2026 175,000 188,000 175,000 180,000 Chevron Note 156,982 159,000 159,454 160,000 14% Senior Subordinated Notes, due 2001 70,063 71,000 73,405 75,000 10.25% Subordinated Notes, due 2003 110,234 111,000 111,733 114,000 Commercial Paper 229,500 229,500 --- --- Preferred Securities of a Subsidiary Trust 200,000 223,000 --- --- Interest rate risk-management contracts --- 3,470 --- --- Foreign currency risk-management contracts 892 (375) --- --- Commodity risk-management contracts (23,167) (25,047) --- 8,285
The carrying amounts of the Credit Agreement and commercial paper in the consolidated financial statements were assumed to approximate fair value. The fair values of the Senior Notes, Senior Subordinated Notes, Subordinated Notes and Preferred Securities of a Subsidiary Trust 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 comparison to publicly traded instruments having similar terms and conditions. The fair value of the Company's cost basis F-13 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS investments was not estimated as the investments were considered immaterial. The fair value of interest rate, foreign currency and commodity risk-management contracts were based upon the estimated consideration that would be received to terminate those contracts in a gain position and the estimated cost that would be incurred to terminate those contracts in a loss position. The interest rate swap contracts, foreign currency forward exchange contracts and commodity swap and option agreements extend for periods of up to 5, 3 and 9 years, respectively. The absolute notional contract amounts associated with the commodity risk-management, interest rate and forward exchange contracts, respectively, were as follows:
DECEMBER 31, ------------------------------------------------------------ 1997 1996 1995 ------------------ -------------------- ------------------ Natural Gas (Trillion Cubic Feet) 2.558 1.535 0.881 Electricity (Megawatt Hours) 2.244 --- --- Natural Gas Liquids (Million Barrels) 4.355 3.270 2.523 Crude Oil (Million Barrels) 14.920 2.034 0.232 Interest Rate Swaps (in thousands of US Dollars) $180,000 $ --- $ --- Fixed Interest Rate Paid on Swaps 6.603 --- --- U.K. Pound Sterling (in thousands of US Dollars) $ 74,638 $ --- $ --- Average U.K. Pound Sterling Contract Rate (in US Dollars) $ 1.5948 $ --- $ --- Canadian Dollar (in thousands of US Dollars) $ 37,041 $ --- $ --- Average Canadian Dollar Contract Rate (in US Dollars) $ 0.7240 $ --- $ ---
Cash-flow requirements for these commodity risk-management, interest rate and foreign exchange contracts were estimated based upon market prices in effect at December 31, 1997. Cash-flow requirements were as follows:
1998 1999 2000 2001 2002 Beyond --------- --------- --------- -------- -------- ------- ($ IN THOUSANDS) Future estimated net inflows based on year end market prices/rates $9,155 $5,902 $4,085 $1,185 $ 806 $559 ====== ====== ====== ====== ===== ====
NOTE 5 -- CASH FLOW INFORMATION Detail of supplemental disclosures of cash flow and non-cash investing and financing information was:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1997 1996 1995 ---------------------- --------------------- ------------------- ($ in thousands) Interest paid (net of amount capitalized) $ 60,323 $ 22,647 $ 32,909 ========= ========= ========= Taxes paid (net of refunds) $ 8,043 $ 1,467 $ (150) ========= ========= ========= Detail of businesses acquired: Current assets and other $ 547,505 $ 76,490 $ 87,416 Fair value of non-current assets 503,789 967,575 832,384 Liabilities assumed, including deferred taxes (268,092) (595,219) (572,680) Capital stock issued and options exercised --- (448,132) (180,220) Cash balance acquired (67,613) --- (1,633) --------- --------- --------- Cash paid, net of cash acquired $ 715,589 $ 714 $ 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 F-14 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $2.5 million related to the purchase of a crude oil pipeline. NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT Investments in property, plant and equipment by segment and sub-segment consisted of:
DECEMBER 31, ----------------------------------- 1997 1996 ---- ---- ($ IN THOUSANDS) Natural gas and power marketing $ 2,588 $ 204 Natural gas liquids, crude oil and gas transmission: Natural gas processing 1,211,727 1,105,637 Fractionation 152,501 218,158 Liquids marketing 178,820 237,102 Natural gas gathering and transmission 275,116 213,609 Crude oil 44,977 21,220 Power generation 48,866 --- Other 43,655 23,881 ---------- ---------- 1,958,250 1,819,811 Less: accumulated depreciation (436,674) (128,432) ---------- ---------- $1,521,576 $1,691,379 ========== ==========
Interest capitalized related to costs of projects in process of development totaled $8.8 million, $1.2 million and $1.0 million for each of the three years in the period ended December 31, 1997. NOTE 7 -- 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 between 20 percent and 50 percent. Such investments include: ACCORD ENERGY LIMITED. Accord was formed in 1994 to market energy resources in the United Kingdom and Europe. Prior to 1997, NGC owned a 49 percent limited partner interest in Accord. In January 1997, such interest was converted to a 25 percent participating preferred stock interest. POWER GENERATION PARTNERSHIPS. As part of the Destec acquisition, NGC acquired interests in sixteen partnerships, each formed to build, own and operate cogeneration facilities. The Company's interests in these partnerships range from eight to 50 percent. Each partnership interest is accounted for under the equity method. Construction of the cogeneration facilities owned by each of the partnerships was project financed and the obligations of the partnerships are non-recourse to the Company. At December 31, 1997, the unamortized excess of the Company's investment in these partnerships over its equity in the underlying net assets of the affiliates approximated $165.1 million. This amount is being amortized on the straight-line method over the estimated economic service lives of the underlying assets. GULF COAST FRACTIONATORS ("GCF"). GCF is a Texas limited partnership that owns and operates 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. At December 31, 1997, the unamortized excess of the Company's investment in GCF over its equity in the underlying net assets of the affiliate approximated $16.5 million. This amount is being amortized on the straight-line method over the estimated 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. At December 31, 1997, the unamortized excess of the Company's investment in the West Texas F-15 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Partnership over its equity in the underlying net assets of the affiliate approximated $45.2 million. This amount is being amortized on the straight-line method over the estimated economic service life of the underlying assets. Venice Energy Services Company, L.L.C. ("VESCO"). VESCO is a Delaware limited liability company which owns and operates a natural gas processing, extraction, fractionation and storage facility located in Plaquemines Parish, Louisiana. NGC is operator of the facility and originally acquired a 37 percent interest in Venice Gas Processing Company ("Venice") effective November 1, 1996. In 1997, Venice reorganized as a limited liability company and, in September 1997, the VESCO members announced they had agreed to expand ownership in VESCO to include an affiliate of Shell Midstream Enterprises, a subsidiary of Shell Oil Company ("Shell"), effective September 1, 1997, in exchange for Shell's commitment of certain offshore reserves to VESCO. The transaction reduced NGC's interest in VESCO from 37 percent to approximately 32 percent, as of the effective date. The VESCO members have entered into a definitive agreement with Koch Energy Services Company ("Koch") pursuant to which Koch will contribute a cryogenic gas processing unit to VESCO on NGC's behalf in exchange for approximately 10 percent of NGC's interest in the limited liability company. The transaction, which is expected to close in the second quarter of 1998, will reduce NGC's interest in VESCO to approximately 23 percent. NGC operates the facility and has commercial responsibility for product distribution and sales. NICOR ENERGY, L.L.C. ("NICOR"). NICOR is a retail energy alliance formed with NICOR Energy Management Services, a subsidiary of NICOR Inc., to provide energy services to industrial, commercial and residential customers in the midwest. NGC owns a 50 percent interest in this Delaware limited liability company. WASKOM GAS PROCESSING COMPANY ("WASKOM"). Waskom is a Texas general partnership that owns and operates a natural gas processing, extraction and fractionation facility located in Henderson County, Texas. NGC owns a 33.33 percent in Waskom. NGC operates the facility and has commercial responsibility for product distribution and sales. BARGE CO. Barge Co., a Delaware limited liability company, owns pressurized LPG barges used in transporting LPGS principally in the Gulf of Mexico. NGC owns a 25 percent interest in Barge Co. at December 31, 1997, the unamortized excess of the Company's investment in Barge Co. over its equity in the underlying net assets of the affiliate approximated $10.8 million. This amount is being amortized on the straight-line method over the estimated economic service lives of the underlying assets. QUICKTRADE L.L.C. ("QUICKTRADE"). Quicktrade, a Delaware limited liability company, was formed to develop, implement and operate an electronic trading system. During 1997, the Company owned varying interests in Quicktrade and at December 31, 1997, held a 65.5 percent interest. This limited liability company is consolidated in the accompanying financial statements at December 31, 1997. At December 31, 1996, the Company indirectly owned a 26 percent interest in Quicktrade. NOVAGAS CLEARINGHOUSE LTD. Pursuant to the April 1997 restructuring of NCL, NGC sold its partnership interest to NGI, realizing a pretax gain of $7.8 million. Prior to the restructuring, NGC indirectly owned an aggregate 49.9 percent interest in the partnership. Aggregate equity method investment at December 31, 1997, 1996 and 1995, was $466.4 million, $177.8 million and $58.7 million, respectively. Dividends received on these investments during each of the three years in the period ended December 31, 1997, totaled $63.6 million, $7.3 million and $11.9 million, respectively. Summarized aggregate financial information for these investments and NGC's equity share thereof was: F-16 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, ------------------------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------------------- ------------------------------- ------------------------------ TOTAL EQUITY SHARE TOTAL EQUITY SHARE TOTAL EQUITY SHARE ------------------ ----------------- ----------------- ----------------- ----------- ----------------- ($ IN THOUSANDS) Current assets (1)(2) $ 283,787 $112,895 $ 93,949 $ 35,321 $ 14,922 $ 5,360 Non-current assets (1)(2) 1,830,106 736,667 324,210 122,882 102,898 37,609 Current liabilities (1)(2) 202,754 86,476 30,459 11,893 25,011 8,714 Non-current liabilities (1)(2) 1,249,874 521,691 47,250 18,309 62,436 24,120 Operating margin (1)(2)(3) 209,877 86,154 37,296 14,500 14,293 5,539 Net income (1)(2)(3) 83,601 33,799 19,024 7,360 3,539 1,896
1. The financial data for all periods presented is exclusive of amounts attributable to the Company's investment in Accord as disclosure data was unavailable for the current period. NGC's share of Accord earnings for each of the three years in the period ended December 31, 1997, totaled $25.9 million, $18.0 million and $11.8 million, respectively. 2. The financial data for all periods presented is exclusive of amounts attributable to the Company's investment in NCL as such information was not comparable period-to-period, as a result of the NCL restructuring. NGC sold its interest in NCL effective April 1, 1997. NGC's share of NCL's loss for the three months ended March 31, 1997, totaled $892,000. NGC's share of NCL's earnings for the years ended December 31, 1996 and 1995, totaled $3.6 million and $7.3 million, respectively. 3. Equity earnings derived from investments acquired in the Destec acquisition accrue to NGC commencing July 1, 1997. The cost method of accounting is generally used to account for investment in partnerships or companies in which NGC has a voting interest of less than 20 percent. At December 31, 1997, 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 is engaged in the acquisition and operation of electric power generating facilities. NGC's aggregate investment in these entities totaled $4.0 million and $3.9 million at December 31, 1997 and 1996, respectively, and NGC received an aggregate $0.5 million, $0.6 million and $0.5 million of dividends from Indeck during each of the three years in the period ended December 31, 1997. NOTE 8 -- LONG-TERM DEBT Long-term debt consisted of:
DECEMBER 31, --------------------------------- 1997 1996 ------------- ---------- ($ IN THOUSANDS) Commercial paper $ 229,500 $ --- Money market lines of credit --- --- Credit Agreement 110,000 319,000 6.75% Senior Notes, due 2005 150,000 150,000 7.625% Senior Notes, due 2026 175,000 175,000 Chevron Note 155,373 155,373 14% Senior Subordinated Notes, due 2001 65,000 65,000 10.25% Subordinated Notes, due 2003 105,000 105,000 Other, non-interest bearing 550 825 Unamortized premium 11,906 18,674 ---------- -------- 1,002,329 988,872 Less: long-term debt due within one year 275 275 ---------- -------- $1,002,054 $988,597 ========== ========
COMMERCIAL PAPER AND MONEY MARKET LINES OF CREDIT. NGC initiated a commercial paper program in the fourth quarter of 1997 for amounts up to $600 million, supported by its existing bank credit agreement. Also in the fourth quarter, the Company established several uncommitted money market bank lines. The Company utilizes commercial paper proceeds and borrowings under uncommitted money market bank lines for general corporate purposes, including short-term working capital requirements. At December 31, 1997, commercial paper outstanding totaled $229.5 F-17 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS million, at a weighted average interest rate of 6.8 percent, and no amounts were outstanding under the uncommitted money market bank lines. Such borrowings were classified as long-term debt based upon availability under committed credit facilities and management's intent to maintain these obligations for longer than one year, subject to an overall reduction in corporate debt levels. CREDIT AGREEMENT. NGC has a $550 million revolving Credit Agreement, which matures on March 14, 2000, providing for letters of credit and borrowings for working capital, capital expenditures and general corporate purposes. The $550 million commitment under the Credit Agreement reduces by $22.5 million each quarter beginning in June 1998 and continuing through maturity. During 1997, the Credit Agreement was amended to provide, among other things, for the establishment of a new two-year $400 million term loan facility. Proceeds from the term loan facility were used to consummate the Destec acquisition. 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, 1997, such margin was 0.3 percent and the average interest rate applicable to borrowings under the Credit Agreement approximated 7.4 percent. The Credit Agreement contains certain financial covenants that require the Company to meet specified financial position and performance tests. At December 31, 1997, letters of credit and borrowings under the Credit Agreement aggregated approximately $130.9 million (which included $50 million under the term loan facility). After consideration of the outstanding commercial paper, the unused borrowing capacity under the revolving credit facility approximated $240 million. 6.75% SENIOR NOTES DUE 2005. On December 15, 1995, the Company sold $150 million of 6.75% Senior Notes due December 15, 2005 ("Senior Notes"). The Senior 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 Senior 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. Upon issuance, the Senior 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 Senior 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 Senior Notes. 7.625% SENIOR NOTES DUE 2026. In October 1996, NGC sold $175 million of 7.625 percent 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 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. 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. 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. In February 1998, the Company completed an amendment to the Credit Agreement and the filing of supplemental indentures to each of the Senior Debentures and Senior Notes, the effect of which was to eliminate all clauses, provisions and terms in such documents requiring certain wholly owned subsidiaries of the Company to fully and unconditionally guarantee, on a joint and several basis, the obligations of the Company under such credit agreement, debentures and notes, respectively. CHEVRON NOTE. The Chevron Note of approximately $155.4 was acquired in the Chevron Combination and is payable to Chevron upon demand on or after August 31, 1998. The Chevron Note bears interest at 7.95 percent per annum, payable semiannually in arrears each February and August. An unamortized premium balance of $1.6 million associated with the Chevron Note is being amortized using the interest method, resulting in an effective interest rate of 6.4 percent per annum. There are no financial covenants associated with this indebtedness. Should Chevron choose not to demand payment of the Chevron Note then principal plus accrued interest is payable in full on F-18 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Chevron Note was classified as long-term debt at December 31, 1997, based upon availability under committed credit facilities and management's current intent to call this note on August 31, 1998 and re-finance the obligation on a long-term basis. SUBORDINATED DEBT. At December 31, 1997, outstanding indebtedness included $105 million principal amount of 10.25% Subordinated Notes due 2003 and $65 million principal amount of 14% Senior Subordinated Notes due 2001. Unamortized premium balances associated with each of these notes are being amortized using the interest method, resulting in effective interest rates of 8.4 percent and 8.3 percent per annum, respectively. In February 1998, the Company delivered Notices of Redemption to the holders of the Subordinated Notes and Senior Subordinated Notes. The Company's intent is to retire the Senior Subordinated Notes on March 31, 1998, and the Subordinated Notes on April 15, 1998, pursuant to the redemption provisions contained in the respective indentures. NGC will fund these redemptions through a combination of cash on hand, borrowings under existing credit agreements and/or a public debt issuance. NGC will not incur a financial statement charge related to these redemptions since the carrying values of the notes were adjusted at the time of the Trident Combination so that they would equal the redemption prices on the redemption dates. LETTER OF CREDIT AGREEMENT. The Letter of Credit Agreement was a $300 million credit facility, which provided 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). Immediately after year-end, the Company replaced the majority of its obligation under the Letter of Credit Agreement with a surety bond, applied the remaining obligation under the Letter of Credit Agreement to the letter of credit capacity under its Credit Agreement and canceled this arrangement. Prior to termination of this agreement, the Company incurred fees associated with the available credit capacity and issued and outstanding letters of credit under the credit facility, respectively. At December 31, 1997, letters of credit outstanding under the Letter of Credit Agreement totaled $246.0 million. Aggregate maturities of all long-term indebtedness are: 1998 - $0.3 million; 1999 - $59.5 million; 2000 - $442.5 million; 2001 - $0.0 million; 2002 and beyond - $500.0 million. NOTE 9 -- INCOME TAXES The Company is subject to U.S. federal, foreign and state income taxes on its operations. Components of income tax expense (benefit) were:
Year Ended December 31, ----------------------------------------------------------------- 1997 1996 1995 ------------------- ----------------------- ------------------ ($ in thousands) Current tax expense: Domestic $ 13,230 $10,427 $ --- Foreign 3,071 --- --- Deferred tax expense (benefit): Domestic (81,306) 45,510 (27,471) Foreign 2,795 386 --- -------- ------- -------- Income tax provision (benefit) $(62,210) $56,323 $(27,471) ======== ======= ========
Included in the above table is a $45.7 million deferred tax benefit in 1995, resulting from book and tax bases differences associated with the technical termination of the Clearinghouse partnership resulting from the Trident Combination. Components of earnings (loss) before income taxes were: F-19 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 ---------------- -------------------- -------------- ($ in thousands) Earnings (loss) before income taxes: Domestic $(180,127) $150,705 $65,234 Foreign 30,232 18,940 --- --------- -------- ------- $(149,895) $169,645 $65,234 ========= ======== =======
Deferred income taxes are provided for the temporary differences between the tax basis of NGC's assets and liabilities and their reported financial statement amounts. Significant components of deferred tax liabilities and assets were:
DECEMBER 31, ------------------------------ 1997 1996 ------------- ------------- ($ IN THOUSANDS) Deferred tax assets: Clearinghouse partnership basis differential $ 19,211 $ 9,700 Loss carryforward 76,885 78,456 Tax credits 23,162 13,627 Other 8,499 9,383 -------- -------- 127,757 111,166 Valuation allowance --- --- -------- -------- 127,757 111,166 -------- -------- Deferred tax liabilities: Items associated with capitalized costs 381,816 439,446 -------- -------- Net deferred tax liability $254,059 $328,280 ======== ========
Realization of the aggregate deferred tax asset is dependent on the Company's ability to generate taxable earnings in the future. No valuation allowance has been established at December 31, 1997 or 1996, as management believes the aggregate deferred asset will be fully realized in the future. Income tax provision (benefit) for the years ended December 31, 1997, 1996 and 1995, was equivalent to effective rates of (41) percent, 33 percent and (42) percent, respectively. Differences between taxes computed at the U.S. federal statutory rate and the Company's reported income tax provision (benefit) were:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1997 1996 1995 --------------------- ----------------------- ------------------- ($ in thousands) Expected tax at U.S. statutory rate $(52,463) $59,376 $ 22,832 State taxes (3,676) 3,393 1,305 Foreign tax benefit (5,415) (6,621) (3,846) Clearinghouse partnership basis differential --- --- (45,736) Partnership income --- --- (2,174) Other (656) 175 148 -------- ------- -------- Income tax provision (benefit) $(62,210) $56,323 $(27,471) ======== ======= ========
At December 31, 1997, the Company had approximately $208 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 Combination. Management believes such carryforwards will be fully realized prior to expiration. F-20 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 -- COMPANY OBLIGATED PREFERRED SECURITIES OF A SUBSIDIARY TRUST In May 1997, NGC Corporation Capital Trust I ("Trust") issued, in a private transaction, $200 million aggregate liquidation amount of 8.316% Subordinated Capital Income Securities ("Trust Securities") representing preferred undivided beneficial interests in the assets of the Trust. The Trust invested the proceeds from the issuance of the Trust Securities in an equivalent amount of 8.316% Subordinated Debentures ("Subordinated Debentures") of the Company. The sole assets of the Trust are the Subordinated Debentures. The Trust Securities are subject to mandatory redemption in whole but not in part on June 1, 2027, upon payment of the Subordinated Debentures at maturity, or in whole but not in part at any time, contemporaneously with the optional prepayment of the Subordinated Debentures, as allowed by the associated indenture. The Subordinated Debentures are redeemable, at the option of the Company, in whole at any time or in part from time to time, at formula-based redemption prices, as defined in the indenture. The Subordinated Debentures represent unsecured obligations of the Company and rank subordinate and junior in right of payment to all Senior Indebtedness to the extent and in the manner set forth in the associated indenture. The Company has irrevocably and unconditionally guaranteed, on a subordinated basis, payment for the benefit of the holders of the Trust Securities the obligations of the Trust to the extent the Trust has funds legally available for distribution to the holders of the Trust Securities, as described in the indenture ("Guarantee"). Distributions on the Trust Securities are payable each June 1 and December 1, coinciding with the interest payment due dates on the Subordinated Debentures, and are classified in the accompanying Statement of Operations as "minority interest in income of a subsidiary." The periodic distributions accruing at an annual rate of 8.316 percent of the aggregate liquidation amount are recorded as minority interest in income of a subsidiary in the Company's consolidated statement of operations. So long as no Debenture Event of Default, as defined, has occurred and continues, the Company has the right to defer the payment of interest on the Subordinated Debentures for any Extension Period elected by the Company, which period cannot extend beyond 10 consecutive semi-annual periods, end on a date other than an Interest Payment Date or extend beyond the Stated Maturity Date. During October 1997, the Trust completed an exchange offer through which all of the outstanding Trust Securities were exchanged by the holders thereof for registered securities having substantially the same rights and obligations. NOTE 11 -- COMMITMENTS AND CONTINGENCIES LITIGATION. On April 17, 1997, Pacific Gas and Electric Company ("PG&E") filed a lawsuit in the Superior Court of the State of California, City and County of San Francisco, against Destec, Destec Holdings, Inc. ("Holdings"), Destec Operating Company and San Joaquin CoGen, Inc., wholly owned direct and indirect subsidiaries of the Company as well as against San Joaquin CoGen Limited ("San Joaquin" or the "Partnership"), a limited partnership in which the Company has an indirect twenty-five percent general partner ownership interest. In the lawsuit, PG&E asserts claims and alleges unspecified damages for fraud, negligent misrepresentation, unfair business practices, breach of contract and breach of the implied covenant of good faith and fair dealing. PG&E alleges that due to the insufficient use of steam by San Joaquin's steam host, the Partnership did not qualify as a cogenerator pursuant to the California Public Utilities Code ("CPUC") Section 218.5, and thus was not entitled under CPUC Section 454.4 to the discount the Partnership received under gas transportation agreements entered into between PG&E and San Joaquin in 1989, 1991, 1993 and 1995. All of PG&E's claims in this suit arise out of the Partnership's alleged failure to comply with CPUC Section 218.5. The defendants filed a response to the suit on May 15, 1997. The parties are actively engaged in discovery, and a trial has been set by the Court for September 28, 1998. On October 20, 1997, PG&E named Libbey-Owens-Ford, the Partnership's steam host, as an additional defendant in the action. On February 23, 1998, PG&E served by mail its Second Amended Complaint on all defendants. On March 30, 1998, the defendants filed their response to PG&E's Second Amended Complaint, denying PG&E's allegations and alleging certain counterclaims against PG&E. The Company's subsidiaries intend to vigorously defend this action. In the opinion of management, the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's financial position or results of operations. On March 24, 1995, Southern California Gas Company ("SOCAL") filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles, against Destec, Destec Holdings and Destec Gas Services, Inc., wholly- owned direct and indirect subsidiaries of the Company (collectively, the "Destec Defendants"), as well as against Chalk Cliff Limited and McKittrick Limited (collectively, the "Partnerships"), limited partnerships in which the Company has an indirect twenty-five percent general partner interest together with an indirect 20 percent F-21 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS limited partner interest and an indirect fifty percent limited partner interest, respectively. All general partners of the Partnerships are also named defendants. The lawsuit alleges breach of contract against the Partnerships and their respective general partners, and interference and conspiracy to interfere with contracts against the Destec Defendants. The breach of contract claims arise out of the "transport-or-pay" provisions of the gas transportation service agreements between the Partnerships and SOCAL. SOCAL has sought damages from the Partnerships for past damages and anticipatory breach damages in an amount equal to approximately $31,000,000. On October 24, 1997, the Court granted SOCAL's Motion for Summary Judgment relating to the breach of contract causes of action against the Partnerships and their respective general partners, and requested that SOCAL submit a proposed order consistent with that ruling for the Court's signature. On November 21, 1997, the Partnerships filed for voluntary Chapter 11 bankruptcy protection in the Eastern District of California. Normal business operations by the Partnerships will continue throughout the course of these reorganization proceedings. On January 12, 1998, the Court entered a Final Order that (a) severs out the Partnerships due to their Chapter 11 bankruptcy filings, (b) includes a finding of contract liability against the Destec Defendants, (c) dismisses the tortious interference claims against the Destec Defendants, and (d) assesses damages in an aggregate amount of approximately $31,000,000. The liability of the Destec Defendants under the judgment will be limited to that portion of the damage award not paid to SOCAL by the partnerships through the Chapter 11 bankruptcy proceedings. On January 12, 1998, the Destec Defendants filed their Notice of Appeal, and posted a security bond, with the Second Appellate District in Los Angeles based on the lack of allegations made or proven by SOCAL which support holding those entities liable in contract. On March 11, 1998, the Partnerships and their respective general partners filed Notices of Appeal with respect to those findings in the Court's January 12, 1998, Final Order that were adverse to those defendants. The appeal process is anticipated to take approximately eighteen months. The PG&E and SOCAL litigations represent pre-acquisition contingencies acquired by NGC in the Destec acquisition. Resolution of these lawsuits could impact the purchase price allocation contained in the accompanying balance sheet as described in Note 2. In a related matter, Chalk Cliff and San Joaquin have each guaranteed the obligations of the other partnership, represented by the project financing loans used to construct the power generation facilities owned by the respective partnerships. Chalk Cliff and San Joaquin believe there is little incentive for their lenders to call on this cross-guarantee at this time. In the opinion of management, the Company's financial position or results of operations would not be materially adversely affected if the lenders chose to exercise their option under the terms of such arrangements. In March 1998, NGC settled all outstanding issues arising under a gas marketing contract between Apache Corporation and Clearinghouse. A previously recognized contingency reserve was sufficient to offset the confidential cash settlement. The Company assumed liability for various claims and litigation in connection with the Chevron Combination, the Trident Combination, the Destec acquisition and in connection with the acquisition of certain gas processing and gathering facilities from Mesa Operating Limited Partnership. NGC believes, based on its review of these matters and consultation with outside legal counsel, that the ultimate resolution of such items will not have a material adverse effect on the Company's financial position or results of operations. Further, the Company is subject to various legal proceedings and claims, which arise in the normal course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse affect on the financial position or results of operations of the Company. Changes in federal and state regulatory statutes will likely occur over the foreseeable future that will impact the Company's businesses. The nature and impact of such changes on the Company's projects, operations and contracts is unknown at this time. NGC actively monitors these developments directly and through industry trade groups to determine such impacts as well as to evaluate new business opportunities created by restructuring of the electric power industry. Depending on the outcome of these legislative matters, changes in legislation could have an adverse effect on current operations or contract terms. COMMITMENTS. In October 1997, NGC received $103.5 million from a gas purchaser as an advance payment for future natural gas deliveries of 16,650 MMBtu per day over a ten-year period commencing November 1, 1997 ("Advance Agreement"). As a condition of the Advance Agreement, NGC entered into a natural gas swap with a F-22 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS third party under which NGC became a fixed-price payor on identical volumes to those to be delivered under the Advance Agreement at prices based on then current market rates. The payment will be classified as an advance on the balance sheet and will be reduced ratably as gas is delivered to the purchaser under the terms of the Advance Agreement. In addition, the purchaser will pay a monthly fee to NGC associated with delivered volumes. The Advance Agreement contains certain non-performance penalties that impact both parties and as a condition precedent, NGC purchased a surety bond in support of its obligations under the Advance Agreement. For a two-year period beginning January 1, 1998, the Company contracted for 1.3 billion cubic feet per day of firm transportation capacity to California on the El Paso Natural Gas pipeline system. The arrangement has been implemented but is subject to regulatory approval in a pending proceeding in which challenges have been filed. Pursuant to this arrangement, NGC is obligated to pay a minimum of $70 million of reservation charges over the two-year term. A wholly owned subsidiary of the Company leases certain power generating assets under agreements that are classified as operating leases. These agreements have aggregate future minimum lease payments of approximately $435 million at December 31, 1997. Minimum commitments in connection with office space, equipment, reservation charges under gas purchase and firm transportation contracts, power generating and other leased assets were: 1998 - $127.2 million; 1999 - $108.5 million; 2000 - - $218.9 million; 2001 - $224.3 million; and 2002 and beyond - $87.0 million. Rental payments made under the terms of these arrangements totaled $85.2 million in 1997, $45.2 million in 1996 and $24.9 million in 1995. NOTE 12 -- CAPITAL STOCK The Company has authorized capital stock consisting of 450,000,000 shares, of which 50,000,000 shares, par value $0.01 per share, are designated preferred stock and 400,000,000 shares, par value $0.01 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 NGC Series A Participating Preferred Stock ("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 holders option, each share of the Series A Preferred may be converted, subject to certain adjustments and certain defined conditions precedent, into one share of NGC 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 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, 1997, there were 151,796,622 shares of common stock issued. NGC pays quarterly cash dividends on common stock of $0.0125 per share, or $0.05 per share on an annual basis. In May 1997, the Board of Directors approved a stock repurchase program that allows the Company to repurchase, from time to time, up to 1.6 million shares of common stock in open market transactions. The timing and number of shares ultimately repurchased will depend upon market conditions and consideration of alternative F-23 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS investments. Pursuant to this program, the Company has acquired 654,900 shares at a total cost of $10.5 million, or $16.04 per share on a weighted average cost basis, through December 31, 1997. STOCK WARRANTS. At December 31, 1997, 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 which 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 do not become exercisable until the fifth anniversary date of the grant, at which time they become fully exercisable. Options granted at market value vest and become exercisable ratably over a three-year period. The average exercise price of vested options at December 31, 1997 was $4.43. Compensation expense related to options granted totaled $4.0 million, $2.8 million and $1.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, employee stock options aggregating 2.9 million shares were exercisable at prices ranging from $2.03 to $18.75 per share. Employee stock option grants made from 1993 to 1997 will become exercisable during 1998 and 1999, respectively, resulting in the potential exercise of approximately 7.7 million options during that two-year period, at exercise prices ranging from $2.03 to $21.63. Other options currently granted under the Company's option plans will fully vest periodically and become exercisable through the year 2000 at prices ranging from $2.03 to $21.63. Grants made under the Company's option plans may be canceled under certain circumstances as provided in the plans. While the Company cannot predict the timing or the number of shares which may be issued upon the exercise of option grants by individual employees, the Company is pursuing a variety of alternatives to help assure an orderly distribution of shares which may become available to the market. Stock option transactions for 1997, 1996 and 1995 were (shares in thousands):
DECEMBER 31, --------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------- ---------------------------- ---------------------------- SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE ---------- ---------------- ---------- ----------------- ---------- ----------------- Outstanding at beginning of period 13,920 $2.03 - 18.75 12,615 $2.03 - $ 9.38 11,918 $2.03 - $ 8.44 Options arising from Trident Combination --- --- --- --- 1,468 6.40 - 8.64 Granted 2,284 2.03 - 21.63 1,842 2.03 - 18.75 1,645 5.95 - 9.38 Exercised (1,469) 2.03 - 9.38 (737) 2.03 - 9.38 (1,452) 2.13 - 8.64 Canceled or expired (629) 2.03 - 18.75 (313) 2.03 - 9.38 (964) 2.13 - 5.95 Other, contingent share issuance (91) 2.03 - 5.66 513 2.03 - 8.13 --- --- ------ ------------- ------ -------------- ------ -------------- Outstanding at end of period 14,015 $2.03 - 21.63 13,920 $2.03 - $18.75 12,615 $ 2.03 - $9.38 ====== ============= ====== ============== ====== ============== Exercisable at end of period 2,861 $2.03 - 18.75 469 $2.03 - $9.38 272 $ 6.40 - $8.81 ====== ============= ====== ============== ====== ============== Weighted average fair value of options granted during the period at market $ 11.14 $ 15.30 $ 18.00 ============= ============== ============== Weighted average fair value of options granted during the period at below market $ 14.63 $ 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 1997, 1996 and 1995: dividends per year of $0.05 per annum for all years; expected volatility of 42.0 percent, 43.3 percent and 43.3 percent, respectively; risk-free interest rate of 6.28 percent, 5.9 percent and 5.9 percent, respectively; and an expected life of 10 years for all periods. The Company accounts for its stock option plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had compensation cost been determined consistent with SFAS F-24 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company's net income (loss) and per share amounts would have approximated the following pro forma amounts for the years ended December 31, 1997, 1996 and 1995, respectively.
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1997 1996 1995 --------------------------- ------------------------ ---------------------- LOSS DILUTED DILUTED NET LOSS PER SHARE NET INCOME EPS NET INCOME EPS ------------ ------------- ------------- --------- -------------- ------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma amounts (a) $(108,007) $(0.72) $107,580 $0.79 $43,570 $0.39 ========= ====== ======== ======= ========== =======
(a) 1995 pro forma net income excludes the effect of one-time tax benefit with the Trident Combination. of $45.7 million which occurred in conjunction with 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 compensation cost included in the pro forma net income amounts for each of the three years in the period ended December 31, 1997, may not be indicative of amounts to be expected in future periods. NOTE 13 -- EMPLOYEE COMPENSATION, SAVINGS AND PENSION PLANS CORPORATE INCENTIVE PLAN. NGC maintains a discretionary incentive plan to provide employees competitive and meaningful rewards for reaching corporate and individual objectives. Specific rewards are at the discretion of the Compensation Committee of the Board of Directors ("Compensation Committee"). PROFIT SHARING/SAVINGS PLAN. The Company established the NGC Profit Sharing/401(k) Savings Plan ("Plan"), which meets the requirements of Section 401(k) of the Internal Revenue Code, and is a defined 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 in the United States and certain expatriates. Similar plans are available to other employees resident in foreign countries subject to the laws of each country. All eligible employees may participate in the plans and employee contributions are generally matched dollar-for-dollar for the first 5 percent of compensation, subject to Company performance. Employees vest in the Company's contributions over various periods. The Company also makes profit sharing contributions to employees' accounts regardless of their participation in the Profit Sharing/Savings Plans. Matching contributions to the Plan and certain discretionary profit sharing contributions are made in Company common stock, other contributions are made in cash. During the years ended December 31, 1997, 1996 and 1995, NGC recognized aggregate costs related to these employee compensation plans of $9.7 million, $5.3 million and $4.4 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, 1997. 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 Holding 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 1997 and 1996 totaled $497,000 and $1.1 million, respectively, representing the minimum amount required by federal law and regulation. The Retirement Plan's funded status and amount recognized in NGC's balance sheet at December 31, 1997 and 1996, were: F-25 NCG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, ----------------------------------- 1997 1996 -------- ------------- ($ in thousands) Accumulated benefit obligation, including vested benefits of $5.6 million in 1997 and $4.8 million in 1996 $ 6,043 $ 5,320 ======= ======= Projected benefit obligation $ 9,378 $ 8,908 Plan assets (8,480) (6,031) ------- ------- Projected benefit obligation in excess of plan assets 898 2,877 Unrecognized net gain from past experience different from that assumed 5,025 3,090 ------- ------- Pension liability $ 5,923 $ 5,967 ======= =======
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, 1997, 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, -------------------------------- 1997 1996 ------------------------------- ($ IN THOUSANDS) Service cost benefits earned during period $ 712 $ 660 Interest cost on projected benefit obligation 686 602 Expected return on plan assets (502) (376) Amortization of unrecognized gain (115) (110) ----- ----- Net periodic pension cost $ 781 $ 776 ===== =====
Note 14 -- 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, fractionation and transportation and electric power generating activities. The Company has operations in Canada and the United Kingdom and transports liquid petroleum gas through its international deepwater LPG business. The Company routinely transacts business directly or indirectly with three of its significant shareholders, Chevron, NOVA and BG, each of which owns 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 entered into as part of the Chevron Combination. Transactions between NGC, NOVA and BG result from purchases and sales of natural gas, natural gas liquids and crude oil between subsidiaries of NGC and these companies. It is management's opinion that these transactions are executed at prevailing market rates. During the years ended December 31, 1997, 1996 and 1995, the Company recognized in its statement of operations aggregate sales to, and aggregate costs from, these significant shareholders of $788.9 million and $2.4 billion; $286.7 million and $1.1 billion; and $2.3 million and $152.6 million, respectively. 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 shared 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 pretax earnings related to services rendered NCL by NGCF. F-26 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15 -- SEGMENT INFORMATION Operating segment information for 1997, 1996 and 1995 is presented below.
NATURAL GAS NATURAL GAS AND LIQUIDS, CRUDE ELECTRIC POWER POWER OIL AND GAS CORPORATE MARKETING GENERATION TRANSMISSION AND ELIMINATION TOTAL --------------- ------------- -------------- ---------------- -------------- 1997 Summary Data: Unaffiliated revenues $8,586,130 $116,973 $4,675,277 $ --- $13,378,380 Intersegment revenues 114,524 --- 438,881 (553,405) --- ---------- -------- ---------- --------- ----------- Total revenues 8,700,654 116,973 5,114,158 (553,405) 13,378,380 ---------- -------- ---------- --------- ----------- Operating margin 103,901 18,987 262,406 --- 385,294 Depreciation and amortization 9,014 5,833 88,252 1,292 Equity in earnings of unconsolidated affiliates (2,425) 12,780 48,604 --- Identifiable assets 1,630,655 589,658 2,270,910 25,680 4,516,903 Capital expenditures (1) 31,813 780,897 186,828 5,121 1,004,659
(1) Amounts include the value assigned assets acquired in the Destec acquisition, before disposition of non-strategic assets acquired in the transaction.
NATURAL NATURAL GAS AND GAS LIQUIDS, ELECTRIC CRUDE OIL CORPORATE POWER AND GAS AND MARKETING TRANSMISSION ELIMINATION TOTAL ------------------ -------------------- -------------------- ------------------ ($ in thousands) 1996 SUMMARY DATA: Unaffiliated revenues $4,422,838 $2,837,353 $ 11 $7,260,202 Intersegment revenues 80,954 242,297 (323,251) --- ---------- ---------- --------- ---------- Total revenues 4,503,792 3,079,650 (323,240) 7,260,202 ---------- ---------- --------- ---------- Operating margin 103,624 265,876 --- 369,500 Depreciation and amortization 3,667 67,513 496 71,676 Equity in earnings of 28,075 unconsolidated affiliates 20,696 7,379 --- Identifiable assets 1,512,923 2,656,509 17,378 4,186,810 Capital expenditures (1) 2,860 818,384 6,928 828,172
(1) Amounts include the value assigned assets acquired in the Chevron Combination. F-27 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURAL NATURAL GAS AND GAS LIQUIDS, ELECTRIC CRUDE OIL CORPORATE POWER AND GAS AND MARKETING TRANSMISSION ELIMINATION TOTAL ------------------- -------------------- -------------------- ----------------- ($ in thousands) 1995 SUMMARY DATA: Unaffiliated revenues $2,423,136 $1,242,810 $ --- $3,665,946 Intersegment revenues 36,629 81,472 (118,101) --- ---------- ---------- --------- ---------- Total revenues 2,459,765 1,324,282 (118,101) 3,665,946 ---------- ---------- --------- ---------- Operating margin 63,746 130,914 --- 194,660 Depreciation and amortization 2,092 42,625 196 44,913 Equity in earnings of unconsolidated affiliates 19,164 1,896 --- 21,060 Identifiable assets 663,440 1,197,702 14,110 1,875,252 Capital expenditures (1) 5,070 956,110 2,966 964,146
(1) Amounts include the value assigned assets acquired in the Trident Combination. NOTE 16 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the Company's unaudited quarterly financial information for the years ended December 31, 1997 and 1996.
QUARTER ENDED ------------------------------------------------------------------------------ MARCH JUNE SEPTEMBER DECEMBER 1997 1997 1997 1997 ------------------ ------------------ ------------------ ------------------ ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $3,272,080 $2,684,339 $3,657,456 $3,764,505 Operating margin 67,347 97,767 110,848 109,332 Income (loss) before income taxes 4,429 43,575 37,326 (235,225) Net income (loss) (1) 4,614 32,128 25,028 (164,255) Net income (loss) per share (2) 0.03 0.19 0.15 (1.09)
F-28 NGC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED ------------------------------------------------------------------------------ MARCH JUNE SEPTEMBER DECEMBER 1996 1996 1996 1996 ------------------- ------------------ ------------------ ----------------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) 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 (2) 0.26 0.12 0.16 0.28
_______________________ 1. Fourth quarter results include the impairment, abandonment and other charges of $275 million, on a pre-tax basis, and the $14.8 million effect of the change in accounting principle. 2. Net income (loss) per share amounts have been restated to conform to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Note 17 -- SUBSEQUENT EVENTS In January 1998, the Company announced an agreement to sell the Ozark Gas Transmission System for $55 million, resulting in an estimated pre-tax gain of approximately $27 million. Closing of the transaction is expected in the third quarter of 1998, subject to certain conditions, including FERC and other governmental approvals. F-29 Schedule I NGC CORPORATION CONDENSED BALANCE SHEETS OF REGISTRANT (in thousands, except share data) December 31, December 31, 1997 1996 ------------ ----------- CURRENT ASSETS Cash $ 375 $ --- Accounts receivable 32 108 Intercompany accounts receivable 177,479 337,876 Prepayments and other assets 4,992 2,793 ---------- ---------- 182,878 340,777 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT 9,590 8,216 Less: accumulated depreciation (3,755) (2,193) ---------- ---------- 5,835 6,023 ---------- ---------- OTHER ASSETS Investments in affiliates 1,483,092 1,219,027 Intercompany note receivable 160,000 237,000 Deferred taxes and other assets 77,366 13,262 ---------- ---------- $1,909,171 $1,816,089 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Intercompany accounts payable $ 8,289 $ 16,295 Accrued liabilities 16,764 18,914 ---------- ---------- 25,053 35,209 LONG-TERM DEBT 664,500 644,000 OTHER LIABILITIES 493 20,147 ---------- ---------- 690,046 699,356 ---------- ---------- COMPANY OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUST 200,000 --- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 50,000,000 shares authorized: 8,000,000 shares designated as Series A Participating Preferred Stock, 7,815,363 shares issued and outstanding at December 31, 1997 and 1996 75,418 75,418 Common stock, $0.01 par value, 400,000,000 shares authorized: 151,796,622 shares issued at December 31, 1997, and 149,846,503 shares issued and outstanding at December 31, 1996 1,518 1,498 Additional paid-in capital 919,720 896,432 Retained earnings 32,975 143,385 Less: treasury stock, at cost: 654,900 shares at December 31, 1997 (10,506) --- ---------- ---------- 1,019,125 1,116,733 ---------- ---------- $1,909,171 $1,816,089 ========== ==========
See Note to Registrant's Financial Statements. F-30 SCHEDULE I NGC CORPORATION STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR THE TEN MONTH PERIOD FROM INCEPTION (MARCH 1, 1995) THROUGH DECEMBER 31, 1995 (IN THOUSANDS)
1997 1996 1995 ----------- ---------- ---------- Depreciation and amortization $ (1,292) $ (496) $ (196) Impairment, abandonment and other charges (3,886) --- --- General and administrative expenses --- --- --- --------- -------- -------- Operating loss (5,178) (496) (196) Equity in earnings of affiliates (115,108) 182,159 60,744 Intercompany interest and other income 16,928 17,968 13,570 Interest expense (35,949) (28,071) (18,152) Minority interest in income of a subsidiary (9,841) --- --- Other expenses (747) (1,915) (135) --------- -------- -------- Income (loss) before income taxes (149,895) 169,645 55,831 Income tax provision (benefit) (62,210) 56,323 16,056 --------- -------- -------- Net income (loss) from continuing operations before cumulative effect of change in accounting (87,685) 113,322 39,775 Cumulative effect of change in accounting principle (net of income tax benefit of $7,913) (14,800) --- --- --------- -------- -------- NET INCOME (LOSS) $(102,485) $113,322 $ 39,775 ========= ======== ========
See Note to Registrant's Financial Statements. F-31 Schedule I NGC CORPORATION STATEMENTS OF CASH FLOWS OF THE REGISTRANT FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND FOR THE TEN MONTH PERIOD FROM INCEPTION (MARCH 1, 1995) THROUGH DECEMBER 31, 1995 (IN THOUSANDS)
1997 1996 1995 -------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (102,485) $ 113,322 $ 39,775 Items not affecting cash flows from operating activities: Depreciation and amortization 9,631 1,996 196 Equity in earnings of affiliates, net of cash distributions 115,108 (182,159) (60,744) Deferred taxes (86,424) 45,896 17,303 Other 12,344 7,466 1,475 Change in assets and liabilities resulting from operating activities: Accounts receivable 76 (108) --- Intercompany transactions 636,063 (298,592) (60,398) Prepayments and other assets (2,749) 2,260 (5,053) Accrued liabilities 1,529 8,487 2,427 Other, net 2,493 (1,193) 4,150 ----------- ----------- ---------- Net cash used in operating activities 585,586 (302,625) (60,869) ----------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (5,121) (2,055) --- Acquisitions (785,349) --- (166,900) Other --- --- (1,333) ----------- ----------- ---------- Net cash used in investing activities (790,470) (2,055) (168,233) ----------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings 2,218,500 1,542,000 1,224,039 Repayments of long-term borrowings (2,198,000) (1,231,000) (891,039) Intercompany advances --- --- (237,000) Proceeds from sale of capital stock, options and warrants 203,190 858 725 Treasury stock acquisitions (10,506) --- --- Capital contributions --- --- 135,000 Dividends and other distributions (7,925) (7,184) (2,617) ----------- ----------- ---------- Net cash provided by financing activities 205,259 304,674 229,108 ----------- ----------- ---------- Net (decrease) increase in cash and cash equivalents 375 (6) 6 Cash and cash equivalents, beginning of period --- 6 --- ----------- ----------- ---------- Cash and cash equivalents, end of period $ 375 $ --- $ 6 =========== =========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid (net of amount capitalized) $ 60,323 $ 22,341 $ 16,339 =========== =========== ========== Taxes paid (net of refunds) $ 8,043 $ 1,444 $ --- =========== =========== ========== Cash dividends paid to parent by consolidated or unconsolidated subsidiaries $ --- $ --- $ --- =========== =========== ==========
See Note to Registrant's Financial Statements. F-32 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, 1997 and 1996, and for the years then ended, and for the ten month period from the effective date of the Trident Combination through December 31, 1995, respectively. 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-33 EX-4.9 2 FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 4.9 - -------------------------------------------------------------------------------- FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT among NGC CORPORATION, as the Borrower, and THE FIRST NATIONAL BANK OF CHICAGO, as the Agent for the Lenders, and THE CHASE MANHATTAN BANK and NATIONSBANK OF TEXAS, N.A., Individually and as Co-Agents for the Lenders, and THE LENDERS PARTY THERETO Dated as of November 24, 1997 - -------------------------------------------------------------------------------- FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of November 24, 1997, is among NGC Corporation, a Delaware corporation, as Borrower (the "Borrower"), the Lenders parties thereto, The First National Bank of Chicago, as Agent, and The Chase Manhattan Bank and NationsBank of Texas, N.A., as Co-Agents (the "Co-Agents"). Capitalized terms used herein, unless otherwise defined, have the meanings assigned to them in the Credit Agreement. The parties hereto agree as follows: W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, the Lenders, the Issuers, the Agent and the Co- Agents have heretofore entered into a certain Amended and Restated Credit Agreement, dated as of June 27, 1997 (herein called the "Credit Agreement"); and WHEREAS, the Borrower, the Lenders, the Issuers, the Agent and the Co- Agents now intend to amend the Credit Agreement in certain respects as hereinafter provided; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Borrower, the Lenders, the Issuers, the Agent and the Co- Agents hereby agree as follows: SECTION 1. Amendment to Credit Agreement. (a) Section 2.8 of the Credit Agreement is hereby amended and restated in its entirety as follows: "2.8 Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium (other than amounts payable as provided in Section 3.4, if any, as a result of such prepayment being made other than on the last day of a Eurodollar Interest Period with respect to any Eurodollar Advance as provided in Section 3.4), all outstanding Advances, or, in a minimum aggregate amount of $5,000,000 or any integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Advances upon three Business Days' prior notice (or in the case of outstanding Advances bearing interest at a Floating Rate, upon notice by 11:00 a.m. on the same Business Day) to the Agent; provided that a Competitive Bid Advance which the Borrower indicated was not prepayable in the related Competitive Bid Quote Request may not be prepaid prior to such last day unless agreed by the relevant Tranche A Lender." (b) Section 2.9 of the Credit Agreement is hereby amended by (i) deleting the time "10:00 a.m." in the eighth line thereof and by inserting the time "11:00 a.m." in lieu thereof, (ii) by deleting the phrase "at least one Business Day before" appearing immediately after the term "(Chicago time)" in the eighth line thereof and by inserting the word "on" in lieu thereof, and (iii) by deleting the time "noon" in the second to last sentence thereof and inserting the time "2:00 p.m." in lieu thereof. (c) Section 2.10 of the Credit Agreement is hereby amended by deleting the last sentence and inserting the following sentence in lieu thereof: "The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Tranche A Advance, a Tranche B Advance or continuation of a Eurodollar Committed Advance not later than 11:00 a.m. (Chicago time) on the date of the requested conversion, in the case of a conversion into a Floating Rate Advance, or not later than 11:00 a.m. (Chicago time) three Business Days prior to the date of the requested conversion or continuation, in the case of a conversion into or continuation of a Eurodollar Advance, in each case specifying: (i) the requested date which shall be a Business Day, of such conversion or continuation; (ii the aggregate amount, whether a Tranche A Advance or a Tranche B Advance and Type of the Advance which is to be converted or continued; and (ii the amount and Type(s) of Advance(s) into which such Advance is to be converted or continued and, in the case of a conversion into or continuation of a Eurodollar Committed Advance, the duration of the Interest Period applicable thereto." SECTION 2. This Amendment (or the portions thereof) shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Credit Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as amended hereby. SECTION 3. THIS AMENDMENT SHALL BE A CONTRACT GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. SECTION 4. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing one or more counterparts. 2 IN WITNESS WHEREOF, the Borrower, the Lenders, the Issuers, the Agent and the Co-Agents have executed this Agreement as of the date first above written. NGC CORPORATION By: --------------------------------- Print Name: Title: THE FIRST NATIONAL BANK OF CHICAGO, individually and as agent By: --------------------------------- Print Name: Title: THE CHASE MANHATTAN BANK individually and as co-agent By: --------------------------------- Print Name: Title: NATIONSBANK OF TEXAS, N.A. individually and as co-agent By: --------------------------------- Print Name: Title: ABN AMRO BANK, N.V. By: --------------------------------- Print Name: Title: By: --------------------------------- Print Name: Title: BANKBOSTON, N.A. By: --------------------------------- Print Name: Title: BANK OF MONTREAL By: --------------------------------- Print Name: Title: THE BANK OF NEW YORK By: --------------------------------- Print Name: Title: THE BANK OF NOVA SCOTIA By: --------------------------------- Print Name: Title: BANK OF SCOTLAND By: --------------------------------- Print Name: Title: THE BANK OF TOKYO-MITSUBISHI, LTD., HOUSTON AGENCY By: --------------------------------- Print Name: Title: CHRISTIANIA BANK, NEW YORK BRANCH By: --------------------------------- Print Name: Title: By: --------------------------------- Print Name: Title: CIBC INC. By: --------------------------------- Print Name: Title: CREDIT AGRICOLE INDOSUEZ By: --------------------------------- Print Name: Title: By: --------------------------------- Print Name: Title: CITIBANK, N.A. By: --------------------------------- Print Name: Title: CREDIT LYONNAIS NEW YORK BRANCH By: --------------------------------- Print Name: Title: THE FUJI BANK, LIMITED, HOUSTON AGENCY By: --------------------------------- Print Name: Title: THE INDUSTRIAL BANK OF JAPAN, LTD. By: --------------------------------- Print Name: Title: LTCB TRUST COMPANY By: --------------------------------- Print Name: Title: MELLON BANK, N.A. (WEST) By: --------------------------------- Print Name: Title: ROYAL BANK OF CANADA By: --------------------------------- Print Name: Title: SOCIETE GENERALE, SOUTHWEST AGENCY By: --------------------------------- Print Name: Title: SOUTHWEST BANK OF TEXAS, N.A. By: --------------------------------- Print Name: Title: THE TORONTO-DOMINION BANK By: --------------------------------- Print Name: Title: WESTDEUTSCHE LANDESBANK By: --------------------------------- Print Name: Title: By: --------------------------------- Print Name: Title: EX-4.10 3 CREDIT AGREEMENT EXHIBIT 4.10 - -------------------------------------------------------------------------------- SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT among NGC CORPORATION, as the Borrower, and THE FIRST NATIONAL BANK OF CHICAGO, as the Agent for the Lenders, and THE CHASE MANHATTAN BANK and NATIONSBANK OF TEXAS, N.A., Individually and as Co-Agents for the Lenders, and THE LENDERS PARTY THERETO Dated as of February 20, 1998 - -------------------------------------------------------------------------------- SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of February 20, 1998, is among NGC Corporation, a Delaware corporation, as Borrower (the "Borrower"), the Lenders parties thereto, The First National Bank of Chicago, as Agent, and The Chase Manhattan Bank and NationsBank of Texas, N.A., as Co-Agents (the "Co-Agents"). Capitalized terms used herein, unless otherwise defined, have the meanings assigned to them in the Credit Agreement. The parties hereto agree as follows: W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, the Lenders, the Issuers, the Agent and the Co- Agents have heretofore entered into a certain Amended and Restated Credit Agreement, dated as of June 27, 1997 as amended by that certain First Amendment to Amended and Restated Credit Agreement, dated as of November 24, 1997 (herein, as so amended, called the "Credit Agreement"); and WHEREAS, the Borrower, the Lenders, the Issuers, the Agent and the Co- Agents now intend to amend the Credit Agreement in certain respects as hereinafter provided; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Borrower, the Lenders, the Issuers, the Agent and the Co- Agents hereby agree as follows: SECTION 1. Amendment of Credit Agreement A. Amendment of Section 1.1. (i) The term "Additional Guaranty", its definition and all references to such term are hereby deleted in their entirety. (ii) The term "Guarantor", its definition and all references to such term are hereby deleted in their entirety. (iii) The term "Guarantor Discontinuance Test", its definition and all references to such term are hereby deleted in their entirety. (iv) The term "Subsidiary Guaranty", its definition and all references to such term are hereby deleted in their entirety. B. Amendment of Section 6.1.3. Section 6.1.3 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: [INTENTIONALLY OMITTED] C. Amendment of Section 7.10. Section 7.10 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: [INTENTIONALLY OMITTED] D. Amendment of Section 7.11. Section 7.11 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: [INTENTIONALLY OMITTED] E. Amendment of Section 8.2 (v). Section 8.2 (v) is hereby amended and restated in its entirety to read as follows: [INTENTIONALLY OMITTED] F. Amendment of Section 12.2.2. Section 12.2.2 is hereby amended by deleting the words "any Guarantor of any such Loan or Letter of Credit or releases" appearing in the penultimate line of Section 12.2.2. G. Amendment of Exhibit "J-1". Exhibit "J-1" to the Credit Agreement and all references to Exhibit "J-1" in the Credit Agreement are hereby deleted in their entirety. SECTION 2. The Borrower, the Administrative Agent and the Lenders each acknowledge and agree that each of Natural Gas Clearinghouse's, NGC Oil Trading and Transportation, Inc.'s, NGC Futures, Inc.'s, Electric Clearinghouse, Inc.'s, Kansas Gas Supply Corporation's, NGC Great Britain, Ltd.'s, NGC Canada Inc.'s, Warren Energy Resources, Limited Partnership's, Warren Gas Liquids, Inc.'s, Warren Gas Marketing, Inc.'s, Warren Intrastate Gas Supply, Inc.'s, Warren NGL, Inc.'s, Warren NGL Pipeline Company's, Warren Petroleum Company, Limited Partnership's, WPC LP, Inc.'s, WTLPS, Inc.'s and Destec Energy, Inc.'s Subsidiary Guaranties are hereby released and terminated. SECTION 3. This Amendment (or the portions thereof) shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Credit Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as amended hereby. 2 SECTION 4. THIS AMENDMENT SHALL BE A CONTRACT GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. SECTION 5. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing one or more counterparts. IN WITNESS WHEREOF, the Borrower, the Lenders, the Issuers, the Agent and the Co-Agents have executed this Agreement as of the date first above written. NGC CORPORATION By: ---------------------------- Print Name: Title: THE FIRST NATIONAL BANK OF CHICAGO, individually and as agent By: -------------------------- Print Name: Title: THE CHASE MANHATTAN BANK individually and as co-agent By: -------------------------- Print Name: Title: NATIONSBANK OF TEXAS, N.A. individually and as co-agent By: -------------------------- Print Name: Title: ABN AMRO BANK, N.V. By: -------------------------- Print Name: Title: By: -------------------------- Print Name: Title: BANKBOSTON, N.A. By: -------------------------- Print Name: Title: BANK OF MONTREAL By: -------------------------- Print Name: Title: THE BANK OF NEW YORK By: -------------------------- Print Name: Title: THE BANK OF NOVA SCOTIA By: -------------------------- Print Name: Title: BANK OF SCOTLAND By: -------------------------- Print Name: Title: THE BANK OF TOKYO-MITSUBISHI, LTD., HOUSTON AGENCY By: -------------------------- Print Name: Title: CHRISTIANIA BANK, NEW YORK BRANCH By: -------------------------- Print Name: Title: By: -------------------------- Print Name: Title: CIBC INC. By: -------------------------- Print Name: Title: CREDIT AGRICOLE INDOSUEZ By: -------------------------- Print Name: Title: By: -------------------------- Print Name: Title: CITIBANK, N.A. By: -------------------------- Print Name: Title: CREDIT LYONNAIS NEW YORK BRANCH By: -------------------------- Print Name: Title: THE FUJI BANK, LIMITED, HOUSTON AGENCY By: -------------------------- Print Name: Title: THE INDUSTRIAL BANK OF JAPAN, LTD. By: -------------------------- Print Name: Title: LTCB TRUST COMPANY By: -------------------------- Print Name: Title: MELLON BANK, N.A. (WEST) By: -------------------------- Print Name: Title: ROYAL BANK OF CANADA By: -------------------------- Print Name: Title: SOCIETE GENERALE, SOUTHWEST AGENCY By: -------------------------- Print Name: Title: SOUTHWEST BANK OF TEXAS, N.A. By: -------------------------- Print Name: Title: THE TORONTO-DOMINION BANK By: -------------------------- Print Name: Title: WESTDEUTSCHE LANDESBANK By: -------------------------- Print Name: Title: By: -------------------------- Print Name: Title: EX-4.18 4 FIFTH SUPPLEMENTAL INDENTURE NGC CORPORATION, THE SUBSIDIARY GUARANTORS NAMED HEREIN AND THE FIRST NATIONAL BANK OF CHICAGO, TRUSTEE _______________ FIFTH SUPPLEMENTAL INDENTURE Dated as of September 30, 1997 ________________ Supplementing and Amending the Indenture dated as of December 11, 1995 THIS FIFTH SUPPLEMENTAL INDENTURE, dated as of September 30, 1997, is among NGC Corporation, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, the Subsidiary Guarantors parties hereto (the "Subsidiary Guarantors") and The First National Bank of Chicago, a national banking association, as Trustee (herein called the "Trustee"). Any capitalized term used in this Third Supplemental Indenture and not defined herein shall have the meaning specified in the Original Indenture (as defined below). RECITALS OF THE COMPANY The Company and each of the Initial Subsidiary Guarantors heretofore have made, executed and delivered to the Trustee an Indenture dated as of December 11, 1995 (the "Original Indenture") to provide for the issuance from time to time of unsecured debentures, notes or other evidences of indebtedness of the Company (herein called the "Securities"), to be issued in one or more series as provided in the Original Indenture. The Company's obligations under the Original Indenture and the Securities are guaranteed by the Subsidiary Guarantors. The Company has duly authorized and issued a series of $150,000,000 aggregate principal amount of its 6 3/4% Senior Notes due December 15, 2005 (the "Notes") as Securities pursuant to the Original Indenture. Pursuant to a First Supplemental Indenture dated as of August 31, 1996 (the "First Supplemental Indenture"), (i) Warren Petroleum Company, Limited Partnership, a Delaware limited partnership ("Warren Petroleum"), (ii) WPC LP, Inc., a Delaware corporation ("WPC"), and (iii) WTLPS, Inc., a Delaware corporation ("WTLPS"), each became an Additional Subsidiary Guarantor. Pursuant to a Second Supplemental Indenture dated as of October 11, 1996 (the "Second Supplemental Indenture"), Electric Clearinghouse, Inc. ("ECI") became an Additional Subsidiary Guarantor. Pursuant to a Third Supplemental Indenture dated as of April 23, 1997 (the "Third Supplemental Indenture"), (i) Warren Petroleum was reclassified as an Initial Subsidiary Guarantor rather than an Additional Subsidiary Guarantor, (ii) Warren Energy Resources, Limited Partnership, Warren Gas Marketing, Inc., Warren NGL Pipeline Company, Kansas Gas Supply Corporation, Warren Intrastate Gas Supply, Inc., NGC Great Britain Ltd., NGC Canada, Inc. and NGC Futures, Inc. were each reclassified as Additional Subsidiary Guarantors rather than Initial Subsidiary Guarantors and (iii) NGC Storage, Inc., HUB Services, Inc. and NGC Anadarko Gathering Systems, Inc. were permanently released as guarantors of the Securities. In addition, the names of certain Subsidiary Guarantors were changed in the Third Supplemental Indenture. 1 Pursuant to a Fourth Supplemental Indenture dated as of June 30, 1997 (the "Fourth Supplemental Indenture"), Destec Energy, Inc. ("Destec") became an Additional Subsidiary Guarantor. Section 901(11) of the Original Indenture provides that under certain conditions, the Company, the Subsidiary Guarantors and the Trustee may, without the consent of any Holders of Securities, from time to time and at any time, enter into an indenture or indentures supplemental thereto, for the purpose of releasing an Additional Subsidiary Guarantor from its Subsidiary Guarantee pursuant to Section 1506 of the Original Indenture, as supplemented and amended. The Original Indenture, as so supplemented and amended by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fourth Supplemental Indenture, and this Fifth Supplemental Indenture, being sometimes referred to herein as the "Indenture". It is deemed necessary and desirable to supplement and amend the Original Indenture in accordance with Section 901 of the Indenture to permanently release NGC Futures, Inc.; Electric Clearinghouse, Inc.; Kansas Gas Supply Corporation; NGC Great Britain Ltd.; NGC Canada, Inc.; Warren Gas Marketing, Inc.; Warren Intrastate Gas Supply, Inc.; Warren NGL Pipeline Company; WPC LP, Inc.; and WTLPS, Inc. as guarantors of the Securities. The Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, stating that this Fifth Supplemental Indenture has been duly authorized and executed by the Company and the Subsidiary Guarantors. All things necessary to make this Fifth Supplemental Indenture and the Original Indenture a valid agreement of the Company and each of the Subsidiary Guarantors, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities (together with the related Subsidiary Guarantees) by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of a series thereof (together with the related Subsidiary Guarantees), as follows: ARTICLE ONE MODIFICATION OF THE INDENTURE Section 1.1. Amendment to Section 205 of the Indenture. The signature block containing the names of the Subsidiary Guarantors at the end of Section 205 is hereby amended in its entirety to read as follows: 2 NATURAL GAS CLEARINGHOUSE By: Clearinghouse Holdings, Inc., its general partner WARREN NGL, INC. WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP By: Warren Energy, Inc., its general partner WARREN GAS LIQUIDS, INC. NGC OIL TRADING AND TRANSPORTATION, INC. WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP By: Warren Petroleum GP, Inc., its general partner DESTEC ENERGY, INC. By _____________________________ ARTICLE TWO ADDITIONAL REPRESENTATIONS AND COVENANTS OF THE COMPANY AND THE SUBSIDIARY GUARANTORS SECTION 2.1 AUTHORITY OF THE COMPANY. The Company represents and warrants that it is duly authorized by a resolution of the Board of Directors to execute and deliver this Fifth Supplemental Indenture, and all corporate action on its part required for the execution and delivery of this Fifth Supplemental Indenture has been duly and effectively taken. SECTION 2.2 AUTHORITY OF SUBSIDIARY GUARANTORS. Each of the Subsidiary Guarantors represents and warrants that it is duly authorized by a resolution of its respective Board of Directors to execute and deliver this Fifth Supplemental Indenture, and all corporate action on the part of each required for the execution and delivery of this Fifth Supplemental Indenture has been duly and effectively taken. SECTION 2.3 RECITALS AND STATEMENTS. The Company warrants that the recitals of fact and statements contained in this Fifth Supplemental Indenture are true and correct, and that the recitals of fact and statements contained in all certificates and other documents furnished hereunder will be true and correct. ARTICLE THREE CONCERNING THE TRUSTEE SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trust hereunder and agrees to perform the same, but only upon the terms and conditions set forth in the Indenture, to all of which the Company, Subsidiary Guarantors and the respective Holders of Securities at any time hereafter outstanding agree by their acceptance thereof. 3 SECTION 3.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals and statements contained in this Fifth Supplemental Indenture shall be taken as the recitals and statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Fifth Supplemental Indenture, except that the Trustee is duly authorized to execute and deliver this Fifth Supplemental Indenture. ARTICLE FOUR MISCELLANEOUS PROVISIONS SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this Fifth Supplemental Indenture shall be deemed to be effective immediately upon the execution and delivery hereof. This Fifth Supplemental Indenture and all the terms and provisions herein contained shall form a part of the Indenture as fully and with the same effect as if all such terms and provisions had been set forth in the Original Indenture. The Original Indenture is hereby ratified and confirmed and shall remain and continue in full force and effect in accordance with the terms and provision thereof, as supplemented and amended by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fourth Supplemental Indenture and this Fifth Supplemental Indenture. The Original Indenture as so supplemented shall be read, taken and construed together as one instrument. SECTION 4.2 COUNTERPARTS OF FIFTH SUPPLEMENTAL INDENTURE. This Fifth Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 4.3 GOVERNING LAW. This Fifth Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. 4 IN WITNESS WHEREOF, the parties hereto have caused this Fifth Supplemental Indenture to be duly executed, all as of the day and year first above written. COMPANY NGC CORPORATION By: Robert D. Doty, Jr. Vice President and Treasurer SUBSIDIARY GUARANTORS NATURAL GAS CLEARINGHOUSE By: Clearinghouse Holdings, Inc., its general partner WARREN NGL, INC. WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP By: Warren Energy, Inc., its general partner WARREN GAS LIQUIDS, INC. NGC OIL TRADING AND TRANSPORTATION, INC. WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP By: Warren Petroleum G.P., Inc., its general partner DESTEC ENERGY, INC. By: _____________________________ Robert D. Doty, Jr. Vice President and Treasurer 5 TRUSTEE THE FIRST NATIONAL BANK OF CHICAGO By Name: Title: 6 EX-4.19 5 SIXTH SUPPLEMENTAL INDENTURE EXHIBIT 4.19 - -------------------------------------------------------------------------------- NGC CORPORATION, THE SUBSIDIARY GUARANTORS NAMED HEREIN AND THE FIRST NATIONAL BANK OF CHICAGO, TRUSTEE _______________ SIXTH SUPPLEMENTAL INDENTURE Dated as of January 5, 1998 ________________ Supplementing and Amending the Indenture dated as of December 11, 1995 THIS SIXTH SUPPLEMENTAL INDENTURE, dated as of January 5, 1998, is among NGC Corporation, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, the Subsidiary Guarantors parties hereto (the "Subsidiary Guarantors") and The First National Bank of Chicago, a national banking association, as Trustee (herein called the "Trustee"). Any capitalized term used in this Sixth Supplemental Indenture and not defined herein shall have the meaning specified in the Original Indenture (as defined below). RECITALS OF THE COMPANY The Company and each of the Initial Subsidiary Guarantors heretofore have made, executed and delivered to the Trustee an Indenture dated as of December 11, 1995 (the "Original Indenture") to provide for the issuance from time to time of unsecured debentures, notes or other evidences of indebtedness of the Company (herein called the "Securities"), to be issued in one or more series as provided in the Original Indenture. The Company's obligations under the Original Indenture and the Securities are guaranteed by the Subsidiary Guarantors. The Company has duly authorized and issued a series of $150,000,000 aggregate principal amount of its 6 3/4% Senior Notes due December 15, 2005 (the "Notes") as Securities pursuant to the Original Indenture. Pursuant to a First Supplemental Indenture dated as of August 31, 1996 (the "First Supplemental Indenture"), (i) Warren Petroleum Company, Limited Partnership, a Delaware limited partnership ("Warren Petroleum"), (ii) WPC LP, Inc., a Delaware corporation ("WPC"), and (iii) WTLPS, Inc., a Delaware corporation ("WTLPS"), each became an Additional Subsidiary Guarantor. Pursuant to a Second Supplemental Indenture dated as of October 11, 1996 (the "Second Supplemental Indenture"), Electric Clearinghouse, Inc. ("ECI") became an Additional Subsidiary Guarantor. Pursuant to a Third Supplemental Indenture dated as of April 23, 1997 (the "Third Supplemental Indenture"), (i) Warren Petroleum was reclassified as an Initial Subsidiary Guarantor rather than an Additional Subsidiary Guarantor, (ii) Warren Energy Resources, Limited Partnership, Warren Gas Marketing, Inc., Warren NGL Pipeline Company, Kansas Gas Supply Corporation, Warren Intrastate Gas Supply, Inc., NGC Great Britain Ltd., NGC Canada, Inc. and NGC Futures, Inc. were each reclassified as Additional Subsidiary Guarantors rather than Initial Subsidiary Guarantors and (iii) NGC Storage, Inc., HUB Services, Inc. and NGC Anadarko Gathering Systems, Inc. were permanently released as Subsidiary Guarantors of the Securities. In addition, the names of certain Subsidiary Guarantors were changed in the Third Supplemental Indenture. Pursuant to a Fourth Supplemental Indenture dated as of June 30, 1997 (the "Fourth Supplemental Indenture"), Destec Energy, Inc. ("Destec") became an Additional Subsidiary Guarantor. 1 Pursuant to a Fifth Supplemental Indenture dated as of September 30, 1997 (the "Fifth Supplemental Indenture"), NGC Futures, Inc.; Electric Clearinghouse, Inc.; Kansas Gas Supply Corporation; NGC Great Britain Ltd.; NGC Canada, Inc.; Warren Gas Marketing, Inc.; Warren Intrastate Gas Supply, Inc.; Warren NGL Pipeline Company; WPC LP, Inc.; and WTLPS, Inc. were permanently released as Subsidiary Guarantors of the Securities. Section 902 of the Original Indenture provides that under certain conditions, the Company, the Subsidiary Guarantors and the Trustee, may, with the consent of the Holders of a majority in principal amount of the Outstanding Securities, by Act of said Holders, from time to time enter into an indenture supplemental thereto, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Original Indenture or of modifying in any manner the rights of the Holders of Securities. It is deemed necessary and desirable to supplement and amend the Original Indenture in accordance with Section 902 of the Original Indenture to (i) reclassify all of the Initial Subsidiary Guarantors as Additional Subsidiary Guarantors, (ii) delete all references and provisions relating to Initial Subsidiary Guarantors and (iii) permit the deletion of all references and provisions relating to Subsidiary Guarantees and Subsidiary Guarantors in the event that all Additional Subsidiary Guarantors are permanently released under the Indenture. The approval of the substance of this Sixth Supplemental Indenture by the Holders of at least a majority in principal amount of the Outstanding Notes has been embodied in and evidenced by that certain Consent Letter relating to the Consent Solicitation Statement dated December 4, 1997 issued by the Company relating to the Notes. The Original Indenture, as so supplemented and amended by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fourth Supplemental Indenture, the Fifth Supplemental Indenture and this Sixth Supplemental Indenture, being sometimes referred to herein as the "Indenture". The Company has delivered to the Trustee an Opinion of Counsel stating that the execution by the Company and the Subsidiary Guarantors of this Sixth Supplemental Indenture is authorized and permitted by the Indenture and that this Sixth Supplemental Indenture has been duly authorized and executed by the Company and the Subsidiary Guarantors. All things necessary to make this Sixth Supplemental Indenture and the Original Indenture a valid agreement of the Company and each of the Subsidiary Guarantors, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities (together with the related Subsidiary Guarantees) by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of a series thereof (together with the related Subsidiary Guarantees), as follows: 2 ARTICLE ONE MODIFICATION OF THE INDENTURE SECTION 1.1. AMENDMENTS TO SECTION 101 OF THE INDENTURE. (a) The definition of "Additional Subsidiary Guarantors" is hereby amended to read in its entirety as follows: "Additional Subsidiary Guarantors" means (i) Clearinghouse, Warren NGL, Warren Energy Resources, Warren Liquids, NGC Oil Trading, Warren Petroleum and Destec and (ii) any Subsidiary (direct or indirect) of the Company that delivers a Subsidiary Guarantee pursuant to Section 1505 hereof, and each of their respective successors and assigns. (b) The definition of "Destec" is hereby added to Section 101 to read in its entirety as follows: "Destec" means Destec Energy, Inc., a Delaware corporation. (c) The definition of "Initial Subsidiary Guarantors" is hereby deleted in its entirety from Section 101 of the Indenture. (d) The definition of "Subsidiary Guarantor" is hereby amended to read in its entirety as follows: "Subsidiary Guarantor" means each Additional Subsidiary Guarantor, if any, but excluding any Subsidiary of the Company released from its Subsidiary Guarantee pursuant to Section 805 or Section 1505 (unless such Subsidiary becomes an Additional Subsidiary Guarantor pursuant to Section 1505 subsequent to such release). SECTION 1.2. AMENDMENTS TO SECTION 901 OF THE INDENTURE. A new clause (13) is hereby added to Section 901 of the Indenture. The word "or" at the end of clause (11) of Section 901 of the Indenture is hereby deleted. The period at the end of clause (12) of Section 901 of the Indenture is hereby deleted and replaced with a semi-colon and the word "or." The new clause (13) shall read in its entirety as follows: (13) to permanently remove any definitions, references, provisions or sections relating to Subsidiary Guarantors or Subsidiary Guarantees at any time that all Additional Subsidiary Guarantors are or have been released pursuant to Section 1506 hereof. 3 ARTICLE TWO ADDITIONAL REPRESENTATIONS AND COVENANTS OF THE COMPANY AND THE SUBSIDIARY GUARANTORS SECTION 2.1 AUTHORITY OF THE COMPANY. The Company represents and warrants that it is duly authorized by a resolution of the Board of Directors to execute and deliver this Sixth Supplemental Indenture, and all corporate action on its part required for the execution and delivery of this Sixth Supplemental Indenture has been duly and effectively taken. SECTION 2.2 AUTHORITY OF SUBSIDIARY GUARANTORS. Each of the Subsidiary Guarantors represents and warrants that it is duly authorized by a resolution of its respective Board of Directors to execute and deliver this Sixth Supplemental Indenture, and all corporate action on the part of each required for the execution and delivery of this Sixth Supplemental Indenture has been duly and effectively taken. SECTION 2.3 RECITALS AND STATEMENTS. The Company warrants that the recitals of fact and statements contained in this Sixth Supplemental Indenture are true and correct, and that the recitals of fact and statements contained in all certificates and other documents furnished hereunder will be true and correct. ARTICLE THREE CONCERNING THE TRUSTEE SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trust hereunder and agrees to perform the same, but only upon the terms and conditions set forth in the Indenture, to all of which the Company, the Subsidiary Guarantors and the respective Holders of Securities at any time hereafter outstanding agree by their acceptance thereof. SECTION 3.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals and statements contained in this Sixth Supplemental Indenture shall be taken as the recitals and statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Sixth Supplemental Indenture, except that the Trustee is duly authorized to execute and deliver this Sixth Supplemental Indenture. ARTICLE FOUR MISCELLANEOUS PROVISIONS SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this Sixth Supplemental Indenture shall become effective immediately upon the execution and delivery hereof. This Sixth Supplemental Indenture and all the terms and provisions herein contained shall form a part of the 4 Indenture as fully and with the same effect as if all such terms and provisions had been set forth in the Original Indenture. The Original Indenture is hereby ratified and confirmed and shall remain and continue in full force and effect in accordance with the terms and provision thereof, as supplemented and amended by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fourth Supplemental Indenture, the Fifth Supplemental Indenture and this Sixth Supplemental Indenture. The Original Indenture as so supplemented shall be read, taken and construed together as one instrument. SECTION 4.2 COUNTERPARTS OF SIXTH SUPPLEMENTAL INDENTURE. This Sixth Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 4.3 GOVERNING LAW. This Sixth Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. 5 IN WITNESS WHEREOF, the parties hereto have caused this Sixth Supplemental Indenture to be duly executed, all as of the day and year first above written. COMPANY NGC CORPORATION By: ---------------------------------- Robert D. Doty, Jr. Vice President and Treasurer SUBSIDIARY GUARANTORS NATURAL GAS CLEARINGHOUSE By: Clearinghouse Holdings, Inc., its general partner WARREN NGL, INC. WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP By: Warren Energy, Inc., its general partner WARREN GAS LIQUIDS, INC. NGC OIL TRADING AND TRANSPORTATION, INC. WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP By: Warren Petroleum G.P., Inc., its general partner DESTEC ENERGY, INC. By: ----------------------------------- Robert D. Doty, Jr. Vice President and Treasurer 6 TRUSTEE THE FIRST NATIONAL BANK OF CHICAGO By -------------------------------- Name: Title: 7 EX-4.20 6 SEVENTH SUPPLEMENTAL INDENTURE Exhibit 4.20 ______________________________________________________________________ NGC CORPORATION, AND THE FIRST NATIONAL BANK OF CHICAGO, TRUSTEE _______________ SEVENTH SUPPLEMENTAL INDENTURE Dated as of February 20, 1998 ________________ Supplementing and Amending the Indenture dated as of December 11, 1995 ______________________________________________________________________ THIS SEVENTH SUPPLEMENTAL INDENTURE (the "Seventh Supplemental Indenture"), dated as of February 20, 1998, is among NGC Corporation, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, and The First National Bank of Chicago, a national banking association, as Trustee (herein called the "Trustee"). Any capitalized term used in this Seventh Supplemental Indenture and not defined herein shall have the meaning specified in the Indenture (as defined below). RECITALS OF THE COMPANY The Company and each of the initial Subsidiary Guarantors heretofore have made, executed and delivered to the Trustee an Indenture dated as of December 11, 1995 (the "Original Indenture") to provide for the issuance from time to time of unsecured debentures, notes or other evidences of indebtedness of the Company (herein called the "Securities"), to be issued in one or more series as provided in the Original Indenture. The Company's obligations under the Original Indenture and the Securities have been guaranteed by the Subsidiary Guarantors. The Company has duly authorized and issued a series of $150,000,000 aggregate principal amount of its 6 3/4% Senior Notes due December 15, 2005 as Securities pursuant to the Original Indenture. The Original Indenture, as supplemented and amended by the First Supplemental Indenture dated as of August 31, 1996 (the "First Supplemental Indenture"), the Second Supplemental Indenture dated as of October 11, 1996 (the "Second Supplemental Indenture"), the Third Supplemental Indenture dated as of April 23, 1997 (the "Third Supplemental Indenture"), the Fourth Supplemental Indenture dated as of June 30, 1997 (the "Fourth Supplemental Indenture"), the Fifth Supplemental Indenture dated as of September 30, 1997 (the "Fifth Supplemental Indenture"), the Sixth Supplemental Indenture dated as of January 5, 1998 (the "Sixth Supplemental Indenture") and this Seventh Supplemental Indenture, being sometimes referred to herein as the "Indenture". Section 901(13) of the Indenture provides that under certain conditions the Company and the Trustee may, without the consent of any Holders of Securities, from time to time and at any time, enter into an indenture or indentures supplemental thereto, for the purpose of permanently removing any definitions, references, provisions or sections relating to Subsidiary Guarantors or Subsidiary Guarantees at any time that all Additional Subsidiary Guarantors have been released pursuant to Section 1506 of the Indenture. The Company has determined that each of the Additional Subsidiary Guarantors has satisfied the conditions to release set forth in Section 1506 of the Indenture. Therefor, the Company has deemed it necessary and desirable to supplement and amend the Indenture in accordance with Section 901(13) of the Indenture to (i) permanently release all of the Subsidiary Guarantors and (ii) permanently delete all definitions, references, provisions and sections of the Indenture relating to Subsidiary Guarantors and Subsidiary Guarantees. 1 In addition, Section 901(9) of the Indenture provides that under certain conditions the Company and the Trustee may, without the consent of any Holders of Securities, from time to time and at any time, enter into an indenture or indentures supplemental thereto, for the purpose, inter alia, of making certain provisions with respect to matters arising under the Indenture; provided that such action shall not adversely affect the interests of the Holders in any material respect. The Company has deemed it necessary and desirable to supplement and amend the Indenture in accordance with Section 901(9) to amend the definition of "Indenture" set forth in the Indenture to include restatements of the Indenture that cumulate the terms of supplemental indentures entered into pursuant to the Indenture. The Company has delivered to the Trustee (i) an Opinion of Counsel stating that the execution by the Company of this Seventh Supplemental Indenture is authorized and permitted by the Indenture and that this Seventh Supplemental Indenture has been duly authorized and executed by the Company and (ii) an Officers' Certificate to the effect that each Additional Subsidiary Guarantor has satisfied the conditions to release set forth in Section 1506 of the Indenture. All things necessary to make this Seventh Supplemental Indenture and the Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of a series thereof, as follows: ARTICLE ONE MODIFICATION OF THE INDENTURE SECTION 1.1. AMENDMENTS TO SECTION 101 OF THE INDENTURE. (a) The following definitions are hereby deleted in their entirety from Section 101 of the Indenture: "Additional Subsidiary Guarantors" "Adjusted Net Assets" "Clearinghouse" "Destec" "ECI" "HUB Services, Inc." "Kansas Gas" "NGC Anadarko Gathering Systems, Inc." "NGC Canada" "NGC Futures" "NGC GB" "NGC Oil Trading" 2 "NGC Storage, Inc." "Subsidiary Guarantee" "Subsidiary Guarantor" "Warren Energy Resources" "Warren Liquids" "Warren Marketing" "Warren NGL" "Warren Petroleum" "Warren Pipeline" "WIGS" "WPC" "WTLPS" (b) The definition of "Indenture" is hereby amended to read in its entirety as follows: "Indenture" means this instrument as originally executed or as it may from time to time be (i) supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof or (ii) restated to cumulate the terms of such supplemental indentures, and shall include the terms of a particular series of Securities established as contemplated by Section 301 and the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument. (c) The definition of "Officers' Certificate" is hereby amended by deleting the phrase "or a Subsidiary Guarantor, as the case may be,". (d) The definition of "Outstanding" is hereby amended by deleting the phrase ", any Subsidiary Guarantor" in each place where it appears. SECTION 1.2. AMENDMENTS TO SECTION 102 OF THE INDENTURE. The first paragraph of Section 102 of the Indenture is hereby amended in its entirety to read as follows: "Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture." SECTION 1.3. AMENDMENTS TO SECTION 110 OF THE INDENTURE. Section 110 of the Indenture is hereby amended in its entirety to read as follows: 3 "All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not." SECTION 1.4. AMENDMENTS TO SECTION 113 OF THE INDENTURE. Section 113 of the Indenture is hereby amended by deleting the phrase ", the Subsidiary Guarantees". SECTION 1.5. AMENDMENTS TO SECTION 201 OF THE INDENTURE. The first paragraph of Section 201 of the Indenture is hereby amended by deleting the phrase "(including the notations thereon relating to the Subsidiary Guarantees contemplated by Section 205)". The third paragraph of Section 201 of the Indenture is hereby amended in its entirety to read as follows: "The definitive Securities and coupons, if any, shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities as evidenced by their execution of such Securities or coupons." SECTION 1.6. AMENDMENTS TO SECTION 205 OF THE INDENTURE. Section 205 of the Indenture is hereby deleted in its entirety. SECTION 1.7. AMENDMENTS TO SECTION 303 OF THE INDENTURE. The third paragraph of Section 303 of the Indenture is hereby amended by deleting the phrase "and having the notation of Subsidiary Guarantees thereon executed by the Subsidiary Guarantors,". Clause (a) of Section 303 of the Indenture is hereby amended by deleting the phrase ", including its requirements for notations thereon relating to the Subsidiary Guarantees". Clause (c) of Section 303 of the Indenture is hereby amended by deleting the phrase "and the Subsidiary Guarantors". SECTION 1.8. AMENDMENTS TO SECTION 304 OF THE INDENTURE. The first paragraph and the second paragraph of Section 304 of the Indenture are hereby amended by deleting the phrase "and having the notations of Subsidiary Guarantees thereon" and by deleting the phrase "and notations of Subsidiary Guarantees" in each place where such phrases appear. The fourth paragraph of Section 304 of the Indenture is hereby amended by deleting the phrase "(including the notations thereon relating to the Subsidiary Guarantees contemplated by section 205)". SECTION 1.9. AMENDMENTS TO SECTION 305 OF THE INDENTURE. The second paragraph of Section 305 of the Indenture is hereby amended by deleting the phrase ", each such Security having a notation of Subsidiary Guarantees thereon". The third, fifth and sixth paragraphs of Section 305 of the Indenture are hereby amended by deleting the phrase "(including the notations thereon relating to the Subsidiary Guaranties contemplated by Section 205)" and the phrase "(including the notations thereon relating to the Subsidiary Guarantees contemplated by Section 205)". The seventh paragraph of Section 305 of the Indenture is hereby amended (i) by deleting the phrase "and the Subsidiary Guarantees noted thereon" and (ii) by deleting the phrase "and the Subsidiary Guarantors, respectively,". SECTION 1.10. AMENDMENTS TO SECTION 306 OF THE INDENTURE. The first paragraph of Section 306 of the Indenture is hereby amended by deleting the phrase "(including the notations 4 thereon relating to the Subsidiary Guarantees contemplated by Section 205)". The fifth paragraph of Section 306 of the Indenture is hereby amended by deleting the phrase "and the respective Subsidiary Guarantors". SECTION 1.11. AMENDMENTS TO SECTION 308 OF THE INDENTURE. The first paragraph of Section 308 of the Indenture is hereby amended by deleting the phrase ", the Subsidiary Guarantors" in each place where such phrase appears. SECTION 1.12. AMENDMENTS TO SECTION 501 OF THE INDENTURE. Clause (4) of Section 501 of the Indenture is hereby amended in its entirety to read as follows: "(4) INTENTIONALLY OMITTED;" Clauses (5), (6) and (7) of Section 501 of the Indenture are hereby amended by deleting the phrase "or any Subsidiary Guarantor" in each place where such phrase appears. SECTION 1.13. AMENDMENTS TO SECTION 502 OF THE INDENTURE. Clause (1) of Section 502 of the Indenture is hereby amended by deleting the phrase "or any Subsidiary Guarantor". SECTION 1.14. AMENDMENTS TO SECTION 503 OF THE INDENTURE. Section 503 of the Indenture is hereby amended by deleting the phrase ", any Subsidiary Guarantor" in each place where such phrase appears. SECTION 1.15. AMENDMENTS TO SECTION 504 OF THE INDENTURE. The first paragraph of Section 504 of the Indenture is hereby amended by deleting the phrase "or the Subsidiary Guarantors" and by deleting the phrase "or any of the Subsidiary Guarantors". The second paragraph of Section 504 of the Indenture is hereby amended by deleting the phrase "or the Subsidiary Guarantees". SECTION 1.16. AMENDMENTS TO SECTION 505 OF THE INDENTURE. Section 505 of the Indenture is hereby amended by deleting the phrase "or Subsidiary Guarantees". SECTION 1.17. AMENDMENTS TO SECTION 509 OF THE INDENTURE. Section 509 of the Indenture is hereby amended by deleting the phrase "the Subsidiary Guarantors,". SECTION 1.18. AMENDMENTS TO SECTION 514 OF THE INDENTURE. Section 514 of the Indenture is hereby amended by deleting the phrase "or the Subsidiary Guarantors". SECTION 1.19. AMENDMENTS TO SECTION 515 OF THE INDENTURE. Section 515 of the Indenture is hereby amended in its entirety to read as follows: "The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim to take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) 5 hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted." SECTION 1.20. AMENDMENTS TO SECTION 604 OF THE INDENTURE. Section 604 of the Indenture is hereby amended (i) by deleting the phrase "and the notations of Subsidiary Guarantees thereon", (ii) by deleting the phrase "or the Subsidiary Guarantors, as the case may be" and (iii) by deleting the phrase "(including the notation of Subsidiary Guarantees thereon)". SECTION 1.20. AMENDMENTS TO SECTION 605 OF THE INDENTURE. Section 605 of the Indenture is hereby amended by deleting the phrase "or any Subsidiary Guarantor" and by deleting the phrase "and the Subsidiary Guarantors". SECTION 1.21. AMENDMENTS TO SECTION 606 OF THE INDENTURE. Section 606 of the Indenture is hereby amended by deleting the phrase "or any Subsidiary Guarantor". SECTION 1.22. AMENDMENTS TO SECTION 613 OF THE INDENTURE. Section 613 of the Indenture is hereby amended by deleting the phrase "or any Subsidiary Guarantor" in each place where such phrase appears. SECTION 1.23. AMENDMENTS TO SECTION 702 OF THE INDENTURE. Clause (c) of Section 702 of the Indenture is hereby amended by deleting the phrase ", the Subsidiary Guarantors" and by deleting the phrase "nor the Subsidiary Guarantors". SECTION 1.24. AMENDMENTS TO SECTION 704 OF THE INDENTURE. Section 704 of the Indenture is hereby amended by deleting the phrase "(and the Subsidiary Guarantors, if applicable)". SECTION 1.25. AMENDMENTS TO SECTION 803 OF THE INDENTURE. Section 803 of the Indenture is hereby deleted in its entirety. SECTION 1.26. AMENDMENTS TO SECTION 804 OF THE INDENTURE. Section 804 of the Indenture is hereby deleted in its entirety. SECTION 1.27. AMENDMENTS TO SECTION 805 OF THE INDENTURE. Section 805 of the Indenture is hereby deleted in its entirety. SECTION 1.28. AMENDMENTS TO SECTION 901 OF THE INDENTURE. The first paragraph of Section 901 of the Indenture is hereby amended by deleting the phrase "the Subsidiary Guarantors, when authorized by a Board Resolution,". Clause (1) of Section 901 of the Indenture is hereby amended in its entirety to read as follows: "(1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities pursuant to Article Eight; or". 6 The phrase "; or" at the end of clause (9) of Section 901 of the Indenture is hereby deleted and replaced with a period. Clauses (10), (11), (12) and (13) of Section 901 of the Indenture are hereby deleted in their entirety. SECTION 1.29. AMENDMENTS TO SECTION 902 OF THE INDENTURE. The first paragraph of Section 902 of the Indenture is hereby amended by deleting the phrase "the Subsidiary Guarantors, when authorized by Board Resolutions,". SECTION 1.30. AMENDMENTS TO SECTION 906 OF THE INDENTURE. Section 906 of the Indenture is hereby amended by deleting the phrase "with the notations of Subsidiary Guarantees thereon executed by the Subsidiary Guarantors,". SECTION 1.31. AMENDMENTS TO SECTION 1002 OF THE INDENTURE. The first paragraph of Section 1002 of the Indenture is hereby amended by deleting the phrase "and each of the Subsidiary Guarantors". The second paragraph of Section 1002 of the Indenture is hereby amended (i) by deleting the phrase ", the related Subsidiary Guarantees"in each place where such phrase appears, (ii) by deleting the phrase "and the Subsidiary Guarantors", and (iii) by deleting the phrase ", the Subsidiary Guarantees thereof". SECTION 1.32. AMENDMENTS TO SECTION 1007 OF THE INDENTURE. Clause (b) of Section 1007 of the Indenture is hereby amended by deleting the phrase "and the Subsidiary Guarantors" and by deleting the phrase "or any Subsidiary Guarantor". SECTION 1.33. AMENDMENTS TO SECTION 1302 OF THE INDENTURE. Section 1302 of the Indenture is hereby amended by deleting the phrase "and the Subsidiary Guarantors" and by deleting the phrase "and the Subsidiary Guarantors' respective". In addition, the first sentence of Section 1302 is hereby amended by deleting the phrase "their respective" and replacing such phrase with "its". SECTION 1.34. AMENDMENTS TO SECTION 1303 OF THE INDENTURE. Section 1303 of the Indenture is hereby amended by deleting clause (ii) in its entirety and by deleting the number "(iii)" and replacing it with the number "(ii)". SECTION 1.35. AMENDMENTS TO SECTION 1306 OF THE INDENTURE. Section 1306 of the Indenture is hereby amended (i) by deleting the phrase "and the Subsidiary Guarantors' respective", (ii) by deleting the phrase "(and the related Subsidiary Guarantees)", (iii) by deleting the phrase "or any Subsidiary Guarantor", and (iv) by deleting the phrase "or the Subsidiary Guarantor, as the case may be". SECTION 1.36. AMENDMENTS TO ARTICLE FIFTEEN OF THE INDENTURE. Article Fifteen of the Indenture is hereby deleted in its entirety. SECTION 1.37. AMENDMENTS TO SIGNATURE BLOCKS OF THE INDENTURE. The signature blocks for each of the Subsidiary Guarantors are hereby deleted in their entirety. 7 SECTION 1.38. AMENDMENTS TO EXHIBIT B OF THE INDENTURE. The first paragraph of Exhibit B to the Indenture is hereby amended by deleting the phrase "the Subsidiary Guarantors named therein" and by inserting the following on the sixth line after the word "hereof": "as supplemented, amended or restated". SECTION 1.39. AMENDMENTS TO RECITALS OF THE INDENTURE. The second paragraph of the Recitals to the Original Indenture is hereby deleted in its entirety. The fourth paragraph of the Recitals to the Original Indenture is hereby amended by deleting the phrase "and each of the Initial Subsidiary Guarantors,". The last paragraph of the Recitals to the Original Indenture is hereby amended by deleting the phrase "(together with the related Subsidiary Guarantees)" in each place where such phrase appears. ARTICLE TWO ADDITIONAL REPRESENTATIONS AND COVENANTS OF THE COMPANY SECTION 2.1 AUTHORITY OF THE COMPANY. The Company represents and warrants that it is duly authorized by a resolution of the Board of Directors to execute and deliver this Seventh Supplemental Indenture, and all corporate action on its part required for the execution and delivery of this Seventh Supplemental Indenture has been duly and effectively taken. SECTION 2.2 RECITALS AND STATEMENTS. The Company warrants that the recitals of fact and statements contained in this Seventh Supplemental Indenture are true and correct, and that the recitals of fact and statements contained in all certificates and other documents furnished hereunder will be true and correct. ARTICLE THREE CONCERNING THE TRUSTEE SECTION 3.1 ACCEPTANCE OF TRUSTS. The Trustee accepts the trust hereunder and agrees to perform the same, but only upon the terms and conditions set forth in the Indenture, to all of which the Company and the respective Holders of Securities at any time hereafter outstanding agree by their acceptance thereof. SECTION 3.2 RESPONSIBILITY OF TRUSTEE FOR RECITALS, ETC. The recitals and statements contained in this Seventh Supplemental Indenture shall be taken as the recitals and statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Seventh Supplemental Indenture, except that the Trustee is duly authorized to execute and deliver this Seventh Supplemental Indenture. 8 ARTICLE FOUR MISCELLANEOUS PROVISIONS SECTION 4.1 RELATION TO THE INDENTURE. The provisions of this Seventh Supplemental Indenture shall become effective immediately upon the execution and delivery hereof. This Seventh Supplemental Indenture and all the terms and provisions herein contained shall form a part of the Indenture as fully and with the same effect as if all such terms and provisions had been set forth in the Original Indenture. The Original Indenture is hereby ratified and confirmed and shall remain and continue in full force and effect in accordance with the terms and provision thereof, as supplemented and amended by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fourth Supplemental Indenture, the Fifth Supplemental Indenture, the Sixth Supplemental Indenture and this Seventh Supplemental Indenture. The Original Indenture as so supplemented shall be read, taken and construed together as one instrument. SECTION 4.2 COUNTERPARTS OF SEVENTH SUPPLEMENTAL INDENTURE. This Seventh Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 4.3 GOVERNING LAW. This Seventh Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. 9 IN WITNESS WHEREOF, the parties hereto have caused this Seventh Supplemental Indenture to be duly executed, all as of the day and year first above written. COMPANY NGC CORPORATION By: ----------------------------- Robert D. Doty, Jr. Vice President and Treasurer S-1 TRUSTEE THE FIRST NATIONAL BANK OF CHICAGO By: -------------------------------- Name Title: S-2 The provisions of this Seventh Supplemental Indenture have been agreed to and acknowledged this 20th day of February, 1998 by: NATURAL GAS CLEARINGHOUSE By: Clearinghouse Holdings, Inc., its general partner WARREN NGL, INC. WARREN ENERGY RESOURCES, LIMITED PARTNERSHIP By: Warren Energy, Inc., its general partner WARREN GAS LIQUIDS, INC. NGC OIL TRADING AND TRANSPORTATION, INC. WARREN PETROLEUM COMPANY, LIMITED PARTNERSHIP By: Warren Petroleum G.P., Inc., its general partner DESTEC ENERGY, INC. By: _____________________________ Robert D. Doty, Jr. Vice President and Treasurer S-3 EX-4.21 7 INDENTURE EXHIBIT 4.21 NGC CORPORATION, AND THE FIRST NATIONAL BANK OF CHICAGO TRUSTEE _______________ INDENTURE _______________ DATED AS OF SEPTEMBER 26, 1996 RESTATED AS OF MARCH 23, 1998 TO INCLUDE AMENDMENTS IN THE FIRST THROUGH FIFTH SUPPLEMENTAL INDENTURES NGC CORPORATION RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939 AND INDENTURE DATED AS OF SEPTEMBER 26, 1996, AS AMENDED AND RESTATED ON MARCH 23, 1998 Trust Indenture Act Section Indenture Section ----------------- ----------------- (S) 310(a)(1).................................. 609 (a)(2)...................................... 609 (a)(3)...................................... Not Applicable (a)(4)...................................... Not Applicable (a)(5)...................................... 609 (b)......................................... 608 (c)......................................... Not Applicable 610 (S) 311(a)..................................... 613 (b)......................................... 613 (c)......................................... Not Applicable (S) 312(a)..................................... 701 702 (b)......................................... 702 (c)......................................... 702 (S) 313(a)..................................... 703 (b)......................................... 703 (c)......................................... 703 (d)......................................... 703 (S) 314(a)(1)-(3).............................. 704 (a)(4)...................................... 101 1004 (b)......................................... Not Applicable (c)(1)...................................... 102 (c)(2)...................................... 102 (c)(3)...................................... Not Applicable (d)......................................... Not Applicable (e)......................................... 102 (S) 315(a)..................................... 601 (b)......................................... 602 (c)......................................... 601 (d)......................................... 601 (e)......................................... 514 (f)......................................... Not Applicable (S) 316(a)..................................... 101 (a)(1)(A)................................... 502 512 (a)(1)(B)................................... 513 (a)(2)...................................... Not Applicable (b)......................................... 508 (c)......................................... 104 (S) 317(a)(1).................................. 503 (a)(2)...................................... 504 (b)......................................... 1003 (S) 318(a)..................................... 108 - -------------- NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be part of the Indenture. TABLE OF CONTENTS RECITALS OF THE COMPANY......................................................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION..................................... 1 SECTION 101. Definitions............................................................. 1 SECTION 102. Compliance Certificates and Opinions.................................... 7 SECTION 103. Form of Documents Delivered to Trustee.................................. 7 SECTION 104. Acts of Holders......................................................... 8 SECTION 105. Notices, Etc., to Trustee and Company................................... 9 SECTION 106. Notice to Holders of Securities; Waiver................................. 10 SECTION 107. Language of Notices, Etc................................................ 10 SECTION 108. Conflict with Trust Indenture Act....................................... 10 SECTION 109. Effect of Headings and Table of Contents................................ 11 SECTION 110. Successors and Assigns.................................................. 11 SECTION 111. Separability Clause..................................................... 11 SECTION 112. Benefits of Indenture................................................... 11 SECTION 113. Governing Law........................................................... 11 SECTION 114. Legal Holidays.......................................................... 11 ARTICLE TWO SECURITY FORMS......................................................................... 11 SECTION 201. Forms Generally......................................................... 11 SECTION 202. Form of Trustee's Certificate of Authentication......................... 12 SECTION 203. Securities in Global Form............................................... 12 SECTION 204. Form of Legend for Book-Entry Securities................................ 13 ARTICLE THREE THE SECURITIES......................................................................... 13 SECTION 301. Amount Unlimited; Issuable in Series.................................... 13 SECTION 302. Denominations........................................................... 15 SECTION 303. Execution, Authentication, Delivery and Dating.......................... 15 SECTION 304. Temporary Securities.................................................... 17 SECTION 305. Registration, Registration of Transfer and Exchange..................... 19 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities and Coupons............ 21 SECTION 307. Payment of Interest; Interest Rights Preserved.......................... 22 SECTION 308. Persons Deemed Owners................................................... 23 SECTION 309. Cancellation............................................................ 23 SECTION 310. Computation of Interest................................................. 24 ARTICLE FOUR SATISFACTION AND DISCHARGE............................................................. 24 SECTION 401. Satisfaction and Discharge of Indenture................................. 24 SECTION 402. Application of Trust Money.............................................. 25
i ARTICLE FIVE REMEDIES............................................................................... 25 SECTION 501. Events of Default....................................................... 25 SECTION 502. Acceleration of Maturity; Rescission and Annulment...................... 26 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee......... 27 SECTION 504. Trustee May File Proofs of Claim........................................ 28 SECTION 505. Trustee May Enforce Claims Without Possession of Securities or Coupons.. 28 SECTION 506. Application of Money Collected.......................................... 28 SECTION 507. Limitation on Suits..................................................... 29 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. 30 SECTION 509. Restoration of Rights and Remedies...................................... 30 SECTION 510. Rights and Remedies Cumulative.......................................... 30 SECTION 511. Delay or Omission Not Waiver............................................ 30 SECTION 512. Control by Holders of Securities........................................ 30 SECTION 513. Waiver of Past Defaults................................................. 31 SECTION 514. Undertaking for Costs................................................... 31 SECTION 515. Waiver of Stay or Extension Laws........................................ 31 ARTICLE SIX THE TRUSTEE............................................................................ 31 SECTION 601. Certain Duties and Responsibilities..................................... 31 SECTION 602. Notice of Defaults...................................................... 32 SECTION 603. Certain Rights of Trustee............................................... 32 SECTION 604. Not Responsible for Recitals or Issuance of Securities.................. 33 SECTION 605. May Hold Securities..................................................... 33 SECTION 606. Money Held in Trust..................................................... 33 SECTION 607. Compensation and Reimbursement.......................................... 33 SECTION 608. Disqualification; Conflicting Interests................................. 34 SECTION 609. Corporate Trustee Required; Eligibility................................. 34 SECTION 610. Resignation and Removal; Appointment of Successor....................... 34 SECTION 611. Acceptance of Appointment by Successor.................................. 35 SECTION 612. Merger, Conversion, Consolidation or Succession to Business............. 36 SECTION 613. Preferential Collection of Claims Against Company....................... 36 SECTION 614. Appointment of Authenticating Agent..................................... 36 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY...................................... 38 SECTION 701. Company to Furnish Trustee Names and Addresses of Holders............... 38 SECTION 702. Preservation of Information; Communications to Holders.................. 38 SECTION 703. Reports by Trustee...................................................... 38 SECTION 704. Reports by Company...................................................... 39 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE................................... 39 SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.................... 39 SECTION 802. Successor Substituted................................................... 39
ii ARTICLE NINE SUPPLEMENTAL INDENTURES................................................................ 40 SECTION 901. Supplemental Indentures without Consent of Holders...................... 40 SECTION 902. Supplemental Indentures with Consent of Holders......................... 41 SECTION 903. Execution of Supplemental Indentures.................................... 42 SECTION 904. Effect of Supplemental Indentures....................................... 42 SECTION 905. Conformity with Trust Indenture Act..................................... 42 SECTION 906. Reference in Securities to Supplemental Indentures...................... 42 ARTICLE TEN COVENANTS.............................................................................. 42 SECTION 1001. Payment of Principal, Premium and Interest.............................. 42 SECTION 1002. Corporate Existence and Maintenance of Office or Agency................. 43 SECTION 1003. Money for Securities Payments to Be Held in Trust....................... 44 SECTION 1004. Additional Amounts...................................................... 45 SECTION 1005. Purchase of Securities by Company or Subsidiary......................... 45 SECTION 1006. Limitation on Liens..................................................... 45 SECTION 1007. Statement by Officer as to Default...................................... 46 SECTION 1008. Waiver of Certain Covenants............................................. 47 ARTICLE ELEVEN REDEMPTION OF SECURITIES............................................................... 47 SECTION 1101. Applicability of Article................................................ 47 SECTION 1102. Election to Redeem; Notice to Trustee................................... 47 SECTION 1103. Selection of Securities to Be Redeemed.................................. 47 SECTION 1104. Notice of Redemption.................................................... 48 SECTION 1105. Deposit of Redemption Price............................................. 48 SECTION 1106. Securities Payable on Redemption Date................................... 49 SECTION 1107. Securities Redeemed in Part............................................. 49 ARTICLE TWELVE SINKING FUNDS.......................................................................... 50 SECTION 1201. Applicability of Article................................................ 50 SECTION 1202. Satisfaction of Sinking Fund Payments with Securities................... 50 SECTION 1203. Redemption of Securities for Sinking Fund............................... 50 ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE..................................................... 50 SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance............ 50 SECTION 1302. Defeasance and Discharge................................................ 51 SECTION 1303. Covenant Defeasance..................................................... 51 SECTION 1304. Conditions to Defeasance or Covenant Defeasance......................... 51 SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.......................................... 53 SECTION 1306. Reinstatement........................................................... 53
iii ARTICLE FOURTEEN MEETINGS OF HOLDERS OF BEARER SECURITIES............................................... 53 SECTION 1401. Purposes for Which Meetings May Be Called............................... 53 SECTION 1402. Call, Notice and Place of Meetings...................................... 53 SECTION 1403. Persons Entitled to Vote at Meetings.................................... 54 SECTION 1404. Quorum; Action.......................................................... 54 SECTION 1405. Determination of Voting Rights; Conduct and Adjournment of Meetings..... 55 SECTION 1406. Counting Votes and Recording Action of Meetings......................... 55
iv INDENTURE, originally made and entered into as of September 26, 1996, among NGC Corporation, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 1000 Louisiana Street, Suite 5800, Houston, Texas 77002, and The First National Bank of Chicago, a national banking association, as Trustee (herein called the "Trustee"), as amended by the First Supplemental Indenture dated as of April 23, 1997 (the "First Supplemental Indenture"), the Second Supplemental Indenture dated as of June 30, 1997 (the "Second Supplemental Indenture"), the Third Supplemental Indenture dated as of September 30, 1997 (the "Third Supplemental Indenture"), the Fourth Supplemental Indenture dated as of January 5, 1998(the "Fourth Supplemental Indenture"), and the Fifth Supplemental Indenture dated as of February 20, 1998 (the "Fifth Supplemental Indenture"), is hereby restated as of March 23, 1998. RECITALS OF THE COMPANY The Company and the Trustee originally entered into this Indenture on September 26, 1996. Thereafter, the Indenture was amended by the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fourth Supplemental Indenture and the Fifth Supplemental Indenture. The Company wishes to restate the Indenture to cumulate the amendments set forth in the First through Fifth Supplemental Indentures. The Company has duly authorized the execution and delivery of this restated Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the "Securities"), to be issued in one or more series as in this Indenture provided. This Indenture is subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of a series thereof, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles in the United States of America, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" 1 with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted in the United States of America at the date of this Indenture; and (4) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision, and the words "date of this Indenture" and "date hereof" and other words of similar import refer to the effective date of the original execution and delivery of this Indenture, viz. September 26, 1996. "Act," when used with respect to any Holder of a Security, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate Securities of one or more series. "Authorized Newspaper" means a newspaper, in the English language or in an official language of the country of publication, customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays, and of general circulation in the place in connection with which the term is used or in the financial community of such place. Where successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different newspapers in the same city meeting the foregoing requirements and in each case on any Business Day. "Bearer Security" means any Security in the form established pursuant to Section 201 which is payable to bearer, including, without limitation, a Security in temporary or permanent global form. "Board of Directors" means, with respect to the Company, either the board of directors of the Company or any duly authorized committee of that board, and, with respect to any Subsidiary of the Company, either the board of directors of such Subsidiary or any duly authorized committee of that board or, if the Subsidiary is not a corporation, the group of Persons having authority to manage the Subsidiary or any duly authorized committee of that group. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company or a Subsidiary of the Company to have been duly adopted by the Board of Directors of the Company or such Subsidiary, as the case may be, and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Book-Entry Security" means a Security bearing the legend specified in Section 204, evidencing all or part of a series of Securities, issued to the Depository for such series or its nominee, and registered in the name of such Depository or nominee. Book-Entry Securities shall not be deemed to be Securities in global form for purposes of Sections 201 and 203 and Article Three of this Indenture. "Business Day," when used with respect to any Place of Payment or any other particular location referred to in this Indenture or in the Securities, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment or other location are authorized or obligated by law or executive order to close. 2 "Certification Date" means with respect to Securities of any series (i), if Bearer Securities of such series are not to be initially represented by a temporary global Security, the date of delivery of the definitive Bearer Security and (ii), if Bearer Securities of such series are initially represented by a temporary global Security, the earlier of (A) the Exchange Date with respect to Securities of such series and (B), if the first Interest Payment Date with respect to Securities of such series is prior to such Exchange Date, such Interest Payment Date. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Depositary" has the meaning specified in Section 304. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the principal office of the Trustee in Chicago, Illinois, at which at any particular time its corporate trust business shall be administered. The term "corporation" means a corporation, association, limited liability company, joint-stock company, business trust or similar organization. The term "coupon" means any interest coupon appertaining to a Bearer Security. "Defaulted Interest" has the meaning specified in Section 307. "Depository" means, with respect to the Securities of any series issuable or issued in whole or in part in the form of one or more Book-Entry Securities, the clearing agency registered under the Securities Exchange Act of 1934, as amended, specified for that purpose as contemplated by Section 301. "Dollar" or "$" means a dollar or other equivalent unit in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts. "Euro-clear" means the operator of the Euro-clear System. "Event of Default" has the meaning specified in Section 501. "Exchange Date" has the meaning specified in Section 304. "Funded Indebtedness" means all outstanding indebtedness (including indebtedness incurred under any revolving credit, letter of credit or working capital facility) that matures by its terms, or that is renewable at the option of any obligor thereon to a date, more than one year after the date on which such indebtedness is originally incurred. 3 "Holder," when used with respect to any Security, means in the case of a Registered Security the Person in whose name the Security is registered in the Security Register and in the case of a Bearer Security the bearer thereof and, when used with respect to any coupon, means the bearer thereof. "Indenture" means this instrument as originally executed or as it may from time to time be (i) supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof or (ii) restated to cumulate the terms of such supplemental indentures, and shall include the terms of a particular series of Securities established as contemplated by Section 301 and the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument. The term "interest," when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity. "Interest Payment Date," when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security. "Issue Date" means the Date on which Securities are originally issued under this Indenture. "Maturity," when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Net Tangible Assets" means the total amount of assets appearing on a consolidated balance sheet of the Company and its Subsidiaries less, without duplication: (a) total current liabilities (excluding current maturities of long-term debt and preferred stock); (b) all reserves for depreciation and other asset valuation reserves but excluding reserves for deferred federal and state income taxes; (c) all intangible assets such as goodwill, trademarks, trade names, patents and unamortized debt discount and expense carried as an asset; and (d) all appropriate adjustments on account of minority interests of other Persons holding common stock in any Subsidiary. "Officers' Certificate" means a certificate complying with the provisions of Section 102 signed by the Chairman of the Board, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be an employee of or counsel for the Company, and who shall be reasonably acceptable to the Trustee. "Original Issue Discount Security" means any Security which is issued at a price lower than the principal amount payable upon the Stated Maturity thereof and which provides for an amount less than the principal amount thereof to be due and payable upon redemption thereof or upon a declaration of acceleration of the Maturity thereof pursuant to Section 502. "Outstanding," when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for 4 the Holders of such Securities and any coupons appertaining thereto, provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder or whether a quorum is present at a meeting of Holders of Securities (a) the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon acceleration of the Maturity thereof pursuant to Section 502, (b) the principal amount of a Security denominated in a foreign currency or currencies, including composite currencies, shall be the Dollar equivalent, determined on the date of original issuance of such Security in the manner provided as contemplated by Section 301, of the principal amount (or, in the case of an Original Issue Discount Security, the Dollar equivalent on the date of original issuance of such Security of the amount determined as provided in (i) above) of such Security, and (c) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company, or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, or upon any such determination as to the presence of a quorum, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company, or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of or any premium or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment," when used with respect to the Securities of any series, means the place or places as specified in accordance with Section 301 where, subject to the provisions of Section 1002, the principal of and any premium and interest on the Securities of that series are payable. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security or a Security to which a mutilated, destroyed, lost or stolen coupon appertains shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security or the Security to which the mutilated, destroyed, lost or stolen coupon appertains, as the case may be. "Principal Property" means any natural gas, natural gas liquids or crude oil pipeline, distribution system, gathering system, storage facility or processing plant, except any such property that in the good faith opinion of the Board of Directors of the Company is not of material importance to the business conducted by the Company and its consolidated Subsidiaries taken as a whole. 5 "Principal Subsidiary" means any Subsidiary of the Company which owns a Principal Property. "Redemption Date," when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price," when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Registered Security" means any Security in the form established pursuant to Section 201 which is registered in the Security Register. "Regular Record Date" for the interest payable on any Interest Payment Date on the Registered Securities of any series means the date specified for that purpose as contemplated by Section 301. "Responsible Officer," when used with respect to the Trustee, shall mean any officer in the corporate trust department (or any successor group) of the Trustee, including any Vice President, any Trust Officer, or any other officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred at the Corporate Trust Office because of his or her knowledge of and familiarity with the particular subject. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Special Record Date" for the payment of any Defaulted Interest on the Registered Securities of any series means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity," when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security or a coupon representing such installment of interest as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, or (ii) any partnership or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned. For the purposes of this definition, "securities having ordinary voting power" means securities or other equity interests which ordinarily have voting power for the election of directors, or persons having management power with respect to the Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 905; provided, however, that in the event the Trust 6 Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. "United States Alien" means any Person who, for United States Federal income tax purposes, is a foreign corporation, a non-resident alien individual, a non-resident alien fiduciary of a foreign estate or trust, or a foreign partnership one or more of the members of which is, for United States Federal income tax purposes, a foreign corporation, a non-resident alien individual or a non-resident alien fiduciary of a foreign estate or trust. "U.S. Government Obligations" has the meaning specified in Section 1304. "Vice President," when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that each Person signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such Person, such Person has made such examination or investigation as is necessary to enable such Person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such Person, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. 7 Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing. If Securities of a series are issuable as Bearer Securities, any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of such series may, alternatively, be embodied in and evidenced by the record of Holders of Securities of such series voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities of such series duly called and held in accordance with the provisions of Article Fourteen, or a combination of such instruments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments and any such record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments and so voting at any such meeting. Proof of execution of any such instrument or of a writing appointing any such agent or proxy or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 1406. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any day as the record date for the purpose of determining the Holders of Registered Securities of any series entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders of Securities of such series. If not set by the Company prior to the first solicitation of a Holder of Securities of such series made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 701) prior to such first solicitation or vote, as the case may be. With regard to any record date for action to be taken by the Holders of one or more series of Securities, only the Holders of Securities 8 of such series on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. (d) The principal amount and serial numbers of Registered Securities held by any Person, and the date of holding the same, shall be proved by the Security Register. (e) The principal amount and serial numbers of Bearer Securities held by any Person, and the date of holding the same, may be proved by the production of such Bearer Securities or by a certificate executed, as depositary, by any trust company, bank, banker or other depositary, wherever situated, if such certificate shall be deemed by the Trustee to be satisfactory, showing that at the date therein mentioned such Person had on deposit with such depositary, or exhibited to it, the Bearer Securities therein described; or such facts may be proved by the certificate or affidavit of the Person holding such Bearer Securities, if such certificate or affidavit is deemed by the Trustee to be satisfactory. The Trustee and the Company may assume that such ownership of any Bearer Security continues until (1) another certificate or affidavit bearing a later date issued in respect of the same Bearer Security is produced, or (2) such Bearer Security is produced to the Trustee by some other Person, or (3) such Bearer Security is surrendered in exchange for a Registered Security, or (4) such Bearer Security is no longer Outstanding. The principal amount and serial numbers of Bearer Securities held by any Person, and the date of holding the same, may also be proved in any other manner which the Trustee deems sufficient. (f) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. Any Holder or subsequent Holder may revoke the request, demand, authorization, direction, notice, consent, waiver or other Act as to his Security or portion of his Security; provided, however, that such revocation shall be effective only if the Trustee receives notice of such revocation before the date the Act becomes effective. (g) Without limiting the foregoing, a Holder entitled hereunder to give or take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any different part of such principal amount. SECTION 105. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this Indenture, to the attention of its Treasurer, or at any other address previously furnished in writing to the Trustee by the Company; and in the case of Bearer Securities, at the address of an office or agency located outside the United States maintained by the Company in accordance with Section 1002. 9 SECTION 106. Notice to Holders of Securities; Waiver. Except as otherwise expressly provided herein, where this Indenture provides for notice to Holders of Securities of any event, (1) such notice shall be sufficiently given to Holders of Registered Securities if in writing and mailed, first-class postage prepaid, to each Holder of a Registered Security affected by such event, at the address of such Holder as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice; and (2) such notice shall be sufficiently given to Holders of Bearer Securities if published in an Authorized Newspaper in The City of New York and in such other city or cities as may be specified in such Securities on a Business Day at least twice, the first such publication to be not earlier than the earliest date, and not later than the latest date, prescribed for the giving of such notice. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice to Holders of Registered Securities by mail, then such notification as shall be made with the approval of the Trustee shall constitute sufficient notice to such Holders for every purpose hereunder. In any case where notice to Holders of Registered Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder of a Registered Security shall affect the sufficiency of such notice with respect to other Holders of Registered Securities or the sufficiency of any notice to Holders of Bearer Securities given as provided herein. In case by the reason of the suspension of publication of any Authorized Newspaper or Authorized Newspapers or by reason of any other cause it shall be impracticable to publish any notice to Holders of Bearer Securities as provided above, then such notification to Holders of Bearer Securities as shall be given with the approval of the Trustee shall constitute sufficient notice to such Holders for every purpose hereunder. Neither the failure to give notice by publication to Holders of Bearer Securities as provided above, nor any defect in any notice so published, shall affect the sufficiency of any notice to Holders of Registered Securities given as provided herein. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders of Securities shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. SECTION 107. Language of Notices, Etc. Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language, except that any published notice may be in an official language of the country of publication. SECTION 108. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under the Trust Indenture Act to be a part of and govern this Indenture or any other provision of this Indenture that is required to be in this Indenture by the Trust Indenture Act, such required provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. 10 SECTION 109. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 110. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 111. Separability Clause. In case any provision in this Indenture or the Securities or coupons shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 112. Benefits of Indenture. Nothing in this Indenture or the Securities or coupons, express or implied, shall give to any Person, other than the parties hereto, their successors hereunder and the Holders of Securities and coupons, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 113. Governing Law. This Indenture and the Securities and coupons shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. SECTION 114. Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities or coupons other than a provision in the Securities of any series which specifically states that such provision shall apply in lieu of this Section) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, provided that no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be. ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally. The Registered Securities, if any, of each series and the Bearer Securities, if any, of each series and related coupons shall be in substantially the form (including temporary or permanent global form) as shall be established by or pursuant to a Board Resolution of the Company or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with law, or with the rules of any securities exchange or to conform to general usage, all as may, consistently herewith, be determined by the officers executing such Securities or coupons, as evidenced by their execution of the Securities or coupons. If temporary Securities of any series are issued in global form as permitted by Section 304, the form thereof 11 shall be established as provided in the preceding sentence. A copy of the Board Resolution of the Company establishing the forms of Securities or coupons of any series (or any such temporary global Security) shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities (or any such temporary global Security) or coupons. Unless otherwise specified as contemplated by Section 301, Securities in bearer form shall have interest coupons attached. The definitive Securities and coupons, if any, shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities as evidenced by their execution of such Securities or coupons. SECTION 202. Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication shall be in substantially the following form: "This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. THE FIRST NATIONAL BANK OF CHICAGO, as Trustee By ___________________________ Authorized Officer." SECTION 203. Securities in Global Form. If Securities of a series are issuable in global form, as contemplated by Section 301, then, notwithstanding clause (10) of Section 301 and the provisions of Section 302, any such Security shall represent such of the Outstanding Securities of such series as shall be specified therein and may provide that it shall represent the aggregate amount of Outstanding Securities from time to time endorsed thereon and that the aggregate amount of Outstanding Securities represented thereby may be reduced to reflect exchanges. Any endorsement of a Security in global form to reflect the amount, or any increase or decrease in the amount, of Outstanding Securities represented thereby shall be made by the Trustee in such manner and upon instructions given by such Person or Persons as shall be specified therein or in the Company Order to be delivered to the Trustee pursuant to Section 303 or Section 304. Subject to the provisions of Section 303 and, if applicable, Section 304, the Trustee shall deliver and redeliver any Security in permanent global form in the manner and upon instructions given by the Person or Persons specified therein or in the applicable Company Order. If a Company Order pursuant to Section 303 or 304 has been, or simultaneously is, delivered, any instructions by the Company with respect to endorsement or delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 102 and need not be accompanied by an Opinion of Counsel. The provisions of the last sentence of Section 303 shall apply to any Security represented by a Security in global form if such Security was never issued and sold by the Company and the Company delivers to the Trustee the Security in global form together with written instructions (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) with regard to the reduction in the principal amount of Securities represented thereby, together with the written statement contemplated by the last sentence of Section 303. 12 Notwithstanding the provisions of Sections 201 and 307, unless otherwise specified as contemplated by Section 301, payment of principal of and any premium and interest on any Security in permanent global form shall be made to the Person or Persons specified therein. SECTION 204. Form of Legend for Book-Entry Securities. Any Book-Entry Security authenticated and delivered hereunder shall bear a legend in substantially the following form: "This Security is a Book-Entry Security within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depository or a nominee of a Depository. This Security is exchangeable for Securities registered in the name of a Person other than the Depository or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Security (other than a transfer of this Security as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository) may be registered except in such limited circumstances." ARTICLE THREE THE SECURITIES SECTION 301. Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series, and each such series shall rank equally and pari passu with each other series. There shall be established in or pursuant to a Board Resolution of the Company and, subject to Section 303, set forth, or determined in the manner provided, in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series: (1) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906 or 1107 and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder); (3) whether Securities of the series are to be issuable as Registered Securities, Bearer Securities or both, whether any Securities of the series are to be issuable initially in temporary global form and whether any Securities of the series are to be issuable in permanent global form, as Book Entry Securities, or otherwise, with or without coupons and, if so, whether beneficial owners of interests in any such permanent global Security may exchange such interests for Securities of such series and of like tenor of any authorized form and denomination and the circumstances under which any such exchanges may occur, if other than in the manner provided in Section 305; (4) the Person to whom any interest on any Registered Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, the manner in which, or the Person to whom, any interest on any Bearer Security of the series shall be payable, if otherwise 13 than upon presentation and surrender of the coupons appertaining thereto as they severally mature and the extent to which, or the manner in which, any interest payable on a temporary global Security on an Interest Payment Date will be paid if other than in the manner provided in Section 304; (5) the date or dates on which the principal of (and premium, if any, on) the Securities of the series is payable or the method of determination thereof; (6) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate shall be determined, the date or dates from which any such interest shall accrue, the Interest Payment Dates on which any such interest shall be payable, the Regular Record Date for any interest payable on any Registered Securities on any Interest Payment Date and whether, and under what circumstances, additional amounts with respect to such Securities shall be payable as set forth in Section 1004; (7) the place or places where, subject to the provisions of Section 1002, the principal of and any premium and interest on Securities of the series shall be payable, any Registered Securities of the series may be surrendered for registration of transfer, Securities of the series may be surrendered for exchange and notices and demands to or upon the Company in respect of the Securities of the series and this Indenture may be served; (8) the right, if any, of the Company to redeem Securities of the series, in whole or in part, at its option and the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series may be so redeemed; (9) the obligation, if any, of the Company to redeem, purchase, or repay Securities of the series pursuant to any mandatory redemption, sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; (10) the denominations in which any Registered Securities of the series shall be issuable, if other than denominations of $1,000 and any integral multiple thereof, and the denomination or denominations in which any Bearer Securities of the series shall be issuable, if other than the denomination of $5,000; (11) the currency or currencies, including composite currencies, in which payment of the principal of and any premium and interest on any Securities of the series shall be payable if other than the currency of the United States and the manner of determining the equivalent thereof in the currency of the United States for purposes of the definition of "Outstanding" in Section 101; (12) if the amount of payments of principal of and any premium or interest on any Securities of the series may be determined with reference to an index, the manner in which such amounts shall be determined; (13) if other than the principal amount thereof, the portion of the principal amount of any Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502; (14) if the principal of and any premium or interest on the Securities of the series are to be payable, at the election of the Company or a Holder thereof, in a currency or currencies, including composite currencies, other than that or those in which the Securities are stated to be payable, the currency or currencies in which payment of the principal of and any premium and interest on Securities 14 of such series as to which such election is made shall be payable, and the periods within which and the terms and conditions upon which such election is to be made; (15) whether the Securities of the series shall be issued upon original issuance in whole or in part in the form of one or more Book-Entry Securities and, in such case, (a) the Depository with respect to such Book- Entry Security or Securities and (b) the circumstances under which any such Book-Entry Security may be exchanged for Securities registered in the name of, and any transfer of such Book-Entry Security may be registered to, a Person other than such Depository or its nominee, if other than as set forth in Section 305; (16) if either or both of the provisions of Section 1302 or 1303 are applicable to the Securities of such series and any additional means of discharge pursuant to Section 1302 or 1303 and any additional conditions to the provisions of Section 1302 or 1303; (17) any other Events of Default or covenants with respect to the Securities of such series; and (18) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture except as permitted by Section 901(5)). All Securities of any one series and the coupons appertaining to any Bearer Securities of such series shall be substantially identical except, in the case of Registered Securities, as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 303) set forth, or determined in the manner provided, in the Officers' Certificate referred to above or in any such indenture supplemental hereto. If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series. SECTION 302. Denominations. Unless otherwise provided as contemplated by Section 301 with respect to any series of Securities, any Registered Securities of a series shall be issuable in denominations of $1,000 and any integral multiple thereof and any Bearer Securities of a series shall be issuable in the denomination of $5,000. SECTION 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its President, its Treasurer or its Chief Financial Officer, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Coupons shall bear the facsimile signature of the Treasurer or any Assistant Treasurer of the Company. Securities and coupons bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities or coupons. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series, together with any coupons appertaining thereto, executed by the Company to 15 the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities; provided, however, that, unless otherwise provided with respect to such series, in connection with its original issuance, during the "restricted period" (as defined in Section 1.163-5(c)(2)(i)(D)(7) of the United States Treasury Regulations) (the "restricted period") no Bearer Security shall be mailed or otherwise delivered to any location in the United States; and provided, further, that, unless otherwise provided with respect to such series, a Bearer Security may be delivered in connection with its original issuance only if the Person entitled to receive such Bearer Security shall have furnished a certificate in the form set forth in Exhibit A to this Indenture, dated no earlier than the Certification Date. If any Security shall be represented by a permanent global Bearer Security, then, for purposes of this Section and Section 304, the notation of a beneficial owner's interest therein upon original issuance of such Security or upon exchange of a portion of a temporary global Security shall be deemed to be delivery in connection with its original issuance during the restricted period of such beneficial owner's interest in such permanent global Security. Except as permitted by Section 306, the Trustee shall not authenticate and deliver any Bearer Security unless all appurtenant coupons for interest then matured have been detached and cancelled. In authenticating Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating: (a) that the forms of such Securities and coupons established by or pursuant to a Board Resolution of the Company as contemplated by Section 201 have been established in conformity with the provisions of this Indenture; (b) if the terms of such Securities and any coupons have been established by or pursuant to a Board Resolution of the Company as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; and (c) that such Securities, together with any coupons appertaining thereto, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. Such Opinion of Counsel shall also cover such other matters as the Trustee may reasonably request. The Trustee shall not be required to authenticate such Securities the forms or terms of which have been established by or pursuant to a Board Resolution of the Company if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Notwithstanding the provisions of Section 301 and of the two preceding paragraphs, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officers' Certificate otherwise required pursuant to Section 301 or the Company Order and Opinion of Counsel otherwise required pursuant to such preceding paragraphs at or prior to the time of authentication of each Security of such series if such documents are delivered at or prior to the authentication upon issuance of the first Security of such series to be issued. After the original issuance of the first Security of such series to be issued, any separate request by the Company that the Trustee authenticate Securities of such series for original issuance will be deemed to be a certification by the Company (which, subject to Section 601, the Trustee shall be fully protected in relying on) 16 that it is in compliance with all conditions precedent provided for in this Indenture relating to the authentication and delivery of such Securities. Each Registered Security shall be dated the date of its authentication; and each Bearer Security shall be dated as of the date of original issuance of the first Security of such series to be issued. No Security or coupon shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security, or the Security to which such coupon appertains, a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309 together with a written statement (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. SECTION 304. Temporary Securities. Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued, in registered form or, if authorized, in bearer form with one or more coupons or without coupons, and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. In the case of any series issuable as Bearer Securities, such temporary Securities may be in global form. A temporary Bearer Security shall be delivered only in compliance with the conditions set forth in Section 303. Except in the case of temporary Securities in global form (which shall be exchanged in accordance with the provisions of the following paragraphs), if temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company maintained pursuant to Section 1002 in a Place of Payment for such series for the purpose of exchanges of Securities of such series without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series (accompanied by any unmatured coupons appertaining thereto) the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like aggregate principal amount of definitive Securities of the same series and of like tenor of authorized denominations; provided, however, that no definitive Bearer Security shall be issued in exchange for a temporary Registered Security. If temporary Securities of any series are issued in global form, any such temporary global Security shall, unless otherwise provided therein, be delivered to the London office of a depositary or common depositary (the "Common Depositary"), for the benefit of Euro-clear and CEDEL S.A., for credit to the respective accounts of the beneficial owners of such Securities (or to such other accounts as they may direct). Without unnecessary delay but in any event not later than the date specified in, or determined pursuant to the terms of, any such temporary global Security of a series (the "Exchange Date"), the Company shall deliver to the Trustee definitive Securities of that series in aggregate principal amount equal to the principal amount of such temporary global Security, executed by the Company. On or after the Exchange Date such temporary global Security shall be surrendered by the Common Depositary to the Trustee, as the Company's 17 agent for such purpose, to be exchanged, in whole or from time to time in part, for definitive Securities of that series without charge and the Trustee shall authenticate and deliver, in exchange for each portion of such temporary global Security, a like aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such temporary global Security to be exchanged; provided, however, that, unless otherwise specified in such temporary global Security, upon such presentation by the Common Depositary, such temporary global Security is accompanied by a certificate dated the Exchange Date or a subsequent date and signed by Euro- clear as to the portion of such temporary global Security held for its account then to be exchanged and a certificate dated the Exchange Date or a subsequent date and signed by CEDEL S.A. as to the portion of such temporary global Security held for its account then to be exchanged, each in the form set forth in Exhibit B to this Indenture. The definitive Securities to be delivered in exchange for any such temporary global Security shall be in bearer form, registered form, permanent global bearer form or permanent global registered form, or any combination thereof, as specified as contemplated by Section 301, and if any combination thereof is so specified, as requested by the beneficial owner thereof; provided, however, that no definitive Bearer Security or permanent global Security shall be delivered in exchange for a temporary Bearer Security except in compliance with the conditions set forth in Section 303. Unless otherwise specified in the temporary global Security, the interest of a beneficial owner of Securities of a series in a temporary global Security shall be exchanged on the Exchange Date for definitive Securities (and where the form of the definitive Securities is not specified by the Holder for an interest in a permanent global Security) of the same series and of like tenor unless, on or prior to the Exchange Date, such beneficial owner has not delivered to Euro- clear or CEDEL S.A., as the case may be, a certificate in the form set forth in Exhibit A to this Indenture dated no earlier than the Certification Date, copies of which certificate shall be available from the offices of Euro-clear and CEDEL S.A., the Trustee, any Authenticating Agent appointed for such series of Securities and each Paying Agent and after the Exchange Date, the interest of a beneficial owner of Securities of a series in a temporary global Security shall be exchanged for definitive Securities (and where the form of the definitive Securities is not specified by the Holder for an interest in a permanent global Security) of the same series and of like tenor following such beneficial owner's delivery to Euro-clear or CEDEL S.A., as the case may be, of a certificate in the form set forth in Exhibit A to this Indenture dated no earlier than the Certification Date. Unless otherwise specified in such temporary global Security, any exchange shall be made free of charge to the beneficial owners of such temporary global Security, except that a Person receiving definitive Securities must bear the cost of insurance, postage, transportation and the like in the event that such Person does not take delivery of such definitive Securities in person at the offices of Euro-clear or CEDEL S.A. Definitive Securities in bearer form to be delivered in exchange for any portion of a temporary global Security shall be delivered only outside the United States. Until exchanged in full as hereinabove provided, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series and of like tenor authenticated and delivered hereunder, except that, unless otherwise specified as contemplated by Section 301, interest payable on a temporary global Security on an Interest Payment Date for Securities of such series shall be payable to Euro-clear and CEDEL S.A. on such Interest Payment Date upon delivery by Euro- clear and CEDEL S.A. to the Trustee of a certificate or certificates in the form set forth in Exhibit B to this Indenture, for credit without further interest on or after such Interest Payment Date to the respective accounts of the Persons who are the beneficial owners of such temporary global Security on such Interest Payment Date and who have each delivered to Euro-clear or CEDEL S.A., as the case may be, a certificate in the form set forth in Exhibit A to this Indenture. Any interest so received by Euro-clear and CEDEL S.A. and not paid as herein provided shall be returned to the Trustee immediately prior to the expiration of two years after such Interest Payment Date in order to be repaid to the Company in accordance with Section 1003. 18 SECTION 305. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at an office or agency to be maintained by the Company in accordance with Section 1002 a register (being the combined register of the Security Registrar and all transfer agents designated pursuant to Section 1002 for the purpose of registration of transfer of Securities and sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of each series of Registered Securities and the registration of transfers of such Registered Securities. The Company shall serve initially as "Security Registrar" for the purpose of registering Registered Securities and transfers of Registered Securities as herein provided. Upon surrender for registration of transfer of any Registered Security of any series at the office or agency of the Company maintained pursuant to Section 1002 for such purpose in a Place of Payment for such series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor. At the option of the Holder, Registered Securities of any series may be exchanged for other Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor, upon surrender of the Securities to be exchanged at any such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. Unless otherwise provided with respect to any series of Securities, Bearer Securities may not be issued in exchange for Registered Securities. At the option of the Holder, Bearer Securities of any series may be exchanged for Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor, upon surrender of the Bearer Securities to be exchanged at any such office or agency, with all unmatured coupons and all matured coupons in default thereto appertaining. If the Holder of a Bearer Security is unable to produce any such unmatured coupon or coupons or matured coupon or coupons in default, such exchange may be effected if the Bearer Securities are accompanied by payment in funds acceptable to the Company in an amount equal to the face amount of such missing coupon or coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Trustee if there is furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to any Paying Agent any such missing coupon in respect of which such a payment shall have been made, such Holder shall be entitled to receive the amount of such payment; provided, however, that, except as otherwise provided in Section 1002, interest represented by coupons shall be payable only upon presentation and surrender of those coupons at an office or agency located outside the United States. Notwithstanding the foregoing, in case a Bearer Security of any series is surrendered at any such office or agency in exchange for a Registered Security of the same series and like tenor after the close of business at such office or agency on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the coupon relating to such Interest Payment Date or proposed date for payment, as the case may be, and interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of the Registered Security issued in exchange for such Bearer Security but will be payable only to the Holder of such coupon when due in accordance with the provisions of this Indenture. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. 19 Notwithstanding the foregoing, except as otherwise specified as contemplated by Section 301, any permanent global Security shall be exchangeable only as provided in this paragraph. If the beneficial owners of interests in a permanent global Security are entitled to exchange such interests for Securities of such series and of like tenor and principal amount of another authorized form and denomination, as specified as contemplated by Section 301, then without unnecessary delay but in any event not later than the earliest date on which such interests may be so exchanged, the Company shall deliver to the Trustee definitive Securities of that series in an aggregate principal amount equal to the principal amount of such permanent global Security, executed by the Company. On or after the earliest date on which such interests may be so exchanged, such permanent global Security shall be surrendered from time to time in accordance with instructions given to the Trustee and the Common Depositary (which instructions shall be in writing but need not comply with Section 102 or be accompanied by an Opinion of Counsel) by the Common Depositary or such other depositary or Common Depositary as shall be specified in the Company Order with respect thereto to the Trustee, as the Company's agent for such purpose, to be exchanged, in whole or in part, for definitive Securities of the same series without charge and the Trustee shall authenticate and deliver, in exchange for each portion of such permanent global Security, a like aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such permanent global Security to be exchanged which, unless the Securities of the series are not issuable both as Bearer Securities and as Registered Securities, as specified as contemplated by Section 301, shall be in the form of Bearer Securities or Registered Securities, or any combination thereof, as shall be specified by the beneficial owner thereof; provided, however, that no such exchanges may occur during a period beginning at the opening of business 15 days before any selection of Securities of that series is to be redeemed and ending on the relevant Redemption Date; and provided, further, that no Bearer Security delivered in exchange for a portion of a permanent global Security shall be mailed or otherwise delivered to any location in the United States. Promptly following any such exchange in part, such permanent global Security shall be returned by the Trustee to the Common Depositary or such other depositary or Common Depositary referred to above in accordance with the instructions of the Company referred to above. If a Registered Security is issued in exchange for any portion of a permanent global Security after the close of business at the office or agency where such exchange occurs on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of such Registered Security, but will be payable on such Interest Payment Date or proposed date for payment, as the case may be, only to the Person to whom interest in respect of such portion of such permanent global Security is payable in accordance with provisions of this Indenture. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Registered Security presented or surrendered for registration of transfer or exchange shall (if so required by the Company or the Trustee or any transfer agent) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar or any transfer agent duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before any selection of Securities of that series to be redeemed and ending at the close of business on (A) if Securities of the series are issuable only as 20 Registered Securities, the day of the mailing of the relevant notice of redemption and (B) if Securities of the series are issuable as Bearer Securities, the day of the first publication of the relevant notice of redemption, or if Securities of the series are also issuable as Registered Securities and there is no publication, the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Registered Security so selected for redemption, in whole or in part, except the unredeemed portion of any Registered Security being redeemed in part, or (iii) to exchange any Bearer Security so selected for redemption except that such a Bearer Security may be exchanged for a Registered Security of that series and like tenor, provided that such Registered Security shall be simultaneously surrendered for redemption. Notwithstanding the foregoing and except as otherwise specified or contemplated by Section 301, any Book-Entry Security shall be exchangeable pursuant to this Section 305 or Sections 304, 906 and 1107 for Securities registered in the name of, and a transfer of a Book-Entry Security of any series may be registered to, any Person other than the Depository for such Security or its nominee only if (i) such Depository notifies the Company that it is unwilling or unable to continue as Depository for such Book-Entry Security or if at any time such Depository ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, (ii) the Company executes and delivers to the Trustee a Company Order that such Book-Entry Security shall be so exchangeable and the transfer thereof so registrable or (iii) there shall have occurred and be continuing an Event of Default, with respect to the Securities of such series. Upon the occurrence in respect of any Book-Entry Security of any series of any one or more of the conditions specified in clause (i), (ii) or (iii) of the preceding sentence or such other conditions as may be specified, such Book-Entry Security may be exchanged for Securities registered in the names of, and the transfer of such Book-Entry Security may be registered to, such Persons (including Persons other than the Depository with respect to such series and its nominees) as such Depository shall direct. Notwithstanding any other provision of this Indenture, any Security authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, any Book- Entry Security shall also be a Book-Entry Security and shall bear the legend specified in Section 204 except for any Security authenticated and delivered in exchange for, or upon registration of transfer of, a Book-Entry Security pursuant to the preceding sentence. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities and Coupons. If any mutilated Security or a Security with a mutilated coupon appertaining thereto is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to the surrendered Security. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security or coupon and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security or coupon has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security or in exchange for the Security to which a destroyed, lost or stolen coupon appertains (with all appurtenant coupons not destroyed, lost or stolen), a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to such destroyed, lost or stolen Security or to the Security to which such destroyed, lost or stolen coupon appertains. In case any such mutilated, destroyed, lost or stolen Security or coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security or coupon; provided, however, that the principal of and any premium and interest on Bearer Securities shall, except as otherwise provided in Section 1002, be payable only at an office or agency located outside the United States. 21 Upon the issuance of any new Security under this Section, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security of any series with its coupons, if any, issued pursuant to this Section in lieu of any destroyed, lost or stolen Security or in exchange for a Security to which a destroyed, lost or stolen coupon appertains, shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security and its coupons, if any, or the destroyed, lost or stolen coupon shall be at any time enforceable by anyone, and any such new Security and coupons, if any, shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series and their coupons, if any, duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or coupons. SECTION 307. Payment of Interest; Interest Rights Preserved. Unless otherwise provided as contemplated by Section 301 with respect to any series of Securities, interest on any Registered Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Unless otherwise so provided, at the option of the Company, payment of interest on any Registered Security may be made by check mailed on or before the due date to the address of the Person entitled thereto as such address shall appear in the Security Register. Any interest on any Registered Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Registered Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Registered Securities of such series at the address of such Holder as it appears in the Security Register, not less than 10 days prior to such Special Record Date. The Trustee may, in its discretion, in the name and at the expense of the Company, cause a similar notice to be published at least once in an Authorized Newspaper, provided such publication shall not be a condition precedent to the establishment of such Special Record Date. Notice of the proposed 22 payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest on the Registered Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be then listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section and Section 305, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 308. Persons Deemed Owners. Prior to due presentment of a Registered Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Registered Security is registered as the owner of such Registered Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 305 and 307) any interest on such Registered Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Title to any Bearer Security and any coupons appertaining thereto shall pass by delivery. The Company, the Trustee and any agent of the Company or the Trustee may treat the bearer of any Bearer Security and the bearer of any coupon as the owner of such Bearer Security or coupon for the purpose of receiving payment thereof or on account thereof and for all other purposes whatsoever, whether or not such Security or coupon be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Notwithstanding the foregoing, with respect to any Book-Entry Security, nothing herein shall prevent the Company, the Trustee, or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by a Depository or impair, as between a Depository and holders of beneficial interests in any Book-Entry Security, the operation of customary practices governing the exercise of the rights of the Depository (or its nominee) as Holder of such Book-Entry Security. SECTION 309. Cancellation. All Securities and coupons surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee. All Registered Securities and matured coupons so delivered shall be promptly cancelled by the Trustee. All Bearer Securities and unmatured coupons so delivered shall be held by the Trustee and, upon instruction by a Company Order, shall be cancelled or held for reissuance. Bearer Securities and unmatured coupons held for reissuance may be reissued only in replacement of mutilated, lost, stolen or destroyed Bearer Securities of the same series and like tenor or the related coupons pursuant to Section 306. All Bearer Securities and unmatured coupons held by the Trustee pending such cancellation or reissuance shall be deemed to be delivered for all purposes of this Indenture and the Securities. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by the Trustee. 23 No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities and coupons held by the Trustee shall be disposed of in accordance with its customary practice. SECTION 310. Computation of Interest. Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect with respect to Securities of a Series (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for, and any right to receive additional amounts, as provided in Section 1004), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to Securities of a Series, when (1) either (A) all Securities of such Series theretofore authenticated and delivered and all coupons, if any, appertaining thereto (other than (i) coupons appertaining to Bearer Securities surrendered for exchange for Registered Securities and maturing after such exchange, whose surrender is not required or has been waived as provided in Section 305, (ii) Securities and coupons which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306, (iii) coupons appertaining to Securities called for redemption and maturing after the relevant Redemption Date, whose surrender has been waived as provided in Section 1106, and (iv) Securities and coupons for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) with respect to all such Securities and, in the case of (i) or (ii) below, any coupons appertaining thereto not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company; and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities and coupons not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and any interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; 24 (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee to any Authenticating Agent under Section 614 and, if money shall have been deposited with the Trustee pursuant to clause (1)(B) of this Section, the obligations of the Company under Sections 306, 610(e) and 701 and the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities, the coupons and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest for whose payment such money has been deposited. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default," wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order, rule or regulation of any administrative or governmental body), unless it is either inapplicable to a particular series of Securities or it is specifically deleted or modified in or pursuant to the terms of such series or in the form of Security of such series: (1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of (or premium, if any, on) any Security of that series at its Maturity; or (3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or (4) INTENTIONALLY OMITTED; (5) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in 25 principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company as bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of the property of the Company, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or (7) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or of any other 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 in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or the commencement of any bankruptcy or insolvency case or proceeding against the Company, or the filing by the Company of a petition or answer or consent seeking reorganization or relief under any applicable Federal or state law, or the consent by the Company 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 the Company or of any substantial part of the property of the Company, or the making by the Company of an assignment for the benefit of creditors, or the admission by the Company in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or (8) any other Event of Default provided with respect to Securities of that series. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount (or, if any of the Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified in the terms thereof) of all of the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable. At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on, and any additional amounts payable as set forth in Section 1004 on, all Securities of that series and any coupons appertaining thereto, 26 (B) the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest, and any additional amounts payable as set forth in Section 1004 on, at the rate or rates prescribed therefor in such Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities and coupons, the whole amount then due and payable on such Securities and coupons for principal and any premium and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium and on any overdue interest, at the rate or rates prescribed therefor in such Securities (or, in the case of Original Issue Discount Securities, the Securities' yield to maturity) and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated. If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series and any related coupons by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 27 SECTION 504. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), or the property or the creditors of the Company, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of Holders, vote for the election of a trustee of bankruptcy or similar official and be a member of a creditors' or other similar committee. SECTION 505. Trustee May Enforce Claims Without Possession of Securities or Coupons. All rights of action and claims under this Indenture or the Securities or coupons may be prosecuted and enforced by the Trustee without the possession of any of the Securities or coupons or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities and coupons in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or any premium or interest, upon presentation of the Securities or coupons, or both as the case may be, and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; and SECOND: To the payment of the amounts then due and unpaid for principal of and any premium and interest on the Securities and coupons in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities and coupons for principal and any premium and interest, respectively. THIRD: The balance, if any, to the Person or Persons entitled thereto. In any case in which Securities are Outstanding that are denominated in more than one currency and the Trustee is directed to make ratable payments under this Section to Holders of such Securities, unless otherwise provided with respect to any series of Securities, the Trustee shall calculate the amount of such payments as follows: (i) as of the day the Trustee collects an amount under this Article, the Trustee shall, as to each Holder of a Security to whom an amount is due and payable under this Section that is denominated in 28 a foreign currency, determine that amount in Dollars that would be obtained for the amount owing such Holder, using the rate of exchange at which in accordance with normal banking procedures the Trustee could purchase in The City of New York Dollars with such amount owing; (ii) calculate the sum of all Dollar amounts determined under (i) and add thereto any amounts due and payable in Dollars; and (iii) using the individual amounts determined in (i) or any individual amounts due and payable in Dollars, as the case may be, as a numerator, and the sum calculated in (ii) as a denominator, calculate as to each Holder of a Security to whom an amount is owed under this Section the fraction of the amount collected under this Article payable to such Holder. Any expenses incurred by the Trustee in actually converting amounts owing Holders of Securities denominated in a currency other than that in which any amount is collected under this Article shall be likewise (in accordance with this paragraph) borne ratably by all Holders of Securities to whom amounts are payable under this Section. To the fullest extent allowed under applicable law, if for the purpose of obtaining judgment against the Company in any court it is necessary to convert the sum due in respect of the principal of, or premium, if any, or interest on, the Securities of any series (the "Required Currency") into a currency in which a judgment will be rendered (the "Judgment Currency"), the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the Required Currency with the Judgment Currency on the Business Day in the City of New York next preceding that on which final judgment is given. Neither the Company nor the Trustee shall be liable for any shortfall nor shall it benefit from any windfall in payments to Holders of Securities under this Section caused by a change in exchange rates between the time the amount of a judgment against the Company is calculated as above and the time the Trustee converts the Judgment Currency into the Required Currency to make payments under this Section to Holders of Securities, but payment of such judgment shall discharge all amounts owed by the Company on the claim or claims underlying such judgment. SECTION 507. Limitation on Suits. No Holder of any Security of any series or any related coupons shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such 29 Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security or coupon shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium and (subject to Sections 305 and 307) any interest on such Security or payment of such coupon on the Stated Maturity or Maturities expressed in such Security or coupon (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder of a Security or coupon has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders of Securities and coupons shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or coupons in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders of Securities or coupons is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security or coupon to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders of Securities or coupons may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders of Securities or coupons, as the case may be. SECTION 512. Control by Holders of Securities. The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture; (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; and 30 (3) the Trustee shall not be obligated to take any action unduly prejudicial to Holders not joining in such direction or involving the Trustee in personal liability. SECTION 513. Waiver of Past Defaults. The Holders of a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to the Securities of such series and its consequences, except a default (1) in the payment of the principal of or any premium or interest on any Security of such series, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Company. SECTION 515. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim to take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. 31 SECTION 602. Notice of Defaults. If a default occurs hereunder with respect to Securities of any series, the Trustee shall give the Holders of Securities of such series notice of such default as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character specified in Section 501(5) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series. SECTION 603. Certain Rights of Trustee. Subject to the provisions of Section 601: (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors of the Company shall be sufficiently evidenced by a Board Resolution of the Company; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (4) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; and (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. 32 SECTION 604. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities (except the Trustee's certificates of authentication) and in any coupons shall be taken as the statements of the Company and the Trustee or any Authenticating Agent assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities or coupons. The Trustee or any Authenticating Agent shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. May Hold Securities. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and coupons and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 607. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. As security for the performance of the obligations of the Company under this Section the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of particular Securities. Any expenses and compensation for any services rendered by the Trustee after the occurrence of an Event of Default specified in clause (6) or (7) of Section 501 shall constitute expenses and compensation for services of administration under all applicable federal or state bankruptcy, insolvency, reorganization or other similar laws. 33 The provisions of this Section shall survive the termination of this Indenture. SECTION 608. Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 609. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or State authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. No obligor upon any Security issued under this Indenture or a person directly or indirectly controlling, controlled by or under common control with such obligor shall serve as Trustee under this Indenture. SECTION 610. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. (b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. (c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 608 after written request therefor by the Company or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or a public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, 34 then, in any case, (i) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (ii) subject to Section 514, any Holder of a Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders of Securities of such series and accepted appointment in the manner required by Section 611, any Holder of a Security who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. Such court may thereupon, after such notice, if any, as it may deem proper, appoint a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series in the manner provided in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. (a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee, with like effect as if originally named Trustee hereunder; but on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Any Trustee ceasing to act shall, nevertheless, retain a prior lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 607. (b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, 35 powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees as co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. (c) Upon request of any successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be. (d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 613. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 614. Appointment of Authenticating Agent. The Trustee may, by an instrument in writing, appoint an Authenticating Agent or Agents with respect to one or more series of Securities which may be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon original issue or upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States, any State thereof or the District of Columbia (or, if Bearer Securities, organized and doing business 36 under the laws of the country in which the Bearer Securities are eligible), authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority (or, if Bearer Securities, an authority of the country in which the Bearer Securities are eligible). If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of such Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or such Authenticating Agent. An Authenticating Agent may, and if it shall cease to be eligible shall, resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such notice of resignation or upon such termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders of Registered Securities, if any, of the series with respect to which such Authenticating Agent will serve, as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers, and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payment, subject to the provisions of Section 607. If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have been endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: "This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. THE FIRST NATIONAL BANK OF CHICAGO, As Trustee By: _______________________________ As Authenticating Agent By: ________________________________ Authorized Officer" 37 If all the Securities of a series may not be originally issued at one time, and if the Company has an Affiliate eligible to be appointed as an Authenticating Agent hereunder or the Trustee does not have an office capable of authenticating Securities upon original issuance located in a Place of Payment where the Company wishes to have Securities of such series authenticated upon original issuance, the Trustee, if so requested by the Company in writing (which writing need not comply with Section 102 and need not be accompanied by an Opinion of Counsel), shall appoint in accordance with this Section an Authenticating Agent (which, if so requested by the Company, shall be such Affiliate of the Company) having an office in a Place of Payment designated by the Company with respect to such series of Securities. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. With respect to each series of Securities, the Company will furnish or cause to be furnished to the Trustee: (a) semi-annually, not later than 15 days after a Regular Record Date, a list, in such form as the Trustee may reasonably require, containing all the information in the possession or control of the Company, or any of its Paying Agents other than the Trustee, as to the names and addresses of the Holders of Securities as of the immediately preceding Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. SECTION 702. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701, and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) The rights of the Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities or coupons, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of any of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 702(b). SECTION 703. Reports by Trustee. (a) on or before July 15 in each year following the date hereof, the Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. 38 (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed (or delisted) on any stock exchange. SECTION 704. Reports by Company. In addition to the certificates delivered to the Trustee pursuant to Section 1007, the Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any other Person, unless: (1) the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States, any state thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest (including all additional amounts, if any, payable pursuant to Section 1004) on all the Securities and the performance or observance of every other covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the 39 predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities and coupons and may liquidate and dissolve. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures without Consent of Holders. Without the consent of any Holders of Securities or coupons, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities pursuant to Article Eight; or (2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities and any coupons appertaining thereto (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series), to convey, transfer, assign, mortgage or pledge any property to or with the Trustee or otherwise secure any series of the Securities or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default with respect to all or any series of the Securities (and, if such Event of Default is applicable to less than all series of Securities, specifying the series to which such Event of Default is applicable); or (4) to add to or change any of the provisions of this Indenture to provide that Bearer Securities may be registrable as to principal, to change or eliminate any restrictions on the payment of principal of or any premium or interest on Bearer Securities, to permit Bearer Securities to be issued in exchange for Registered Securities, to permit Bearer Securities to be issued in exchange for Bearer Securities of other authorized denominations or to permit or facilitate the issuance of Securities in uncertificated form, provided that any such action shall not adversely affect the interests of the Holders of Securities of any series or any related coupons in any material respect; or (5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or elimination (A) shall neither (i) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the Holder of any such Security with respect to such provision or (B) shall become effective only when there is no such Security Outstanding; or (6) to secure the Securities pursuant to the requirements of Section 1006 or otherwise; or (7) to establish the form or terms of Securities of any series and any related coupons as permitted by Sections 201 and 301; or (8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 611(b); or 40 (9) to cure any ambiguity, to correct or supplement any provision herein or in any supplemental indenture which may be defective or inconsistent with any other provision herein or in any supplemental indenture, or to make any other provisions with respect to matters or questions arising under this Indenture; provided, that such action shall not adversely affect the interests of the Holders of Securities of any series or any related coupons in any material respect. SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of a majority in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities of such series and any related coupons under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the Redemption Date thereof, or change any obligation of the Company to pay additional amounts pursuant to Section 1004 (except as contemplated by Section 801(1) and permitted by Section 901(1)), or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502 or change the coin or currency in which any Security or any premium or interest thereon is payable, or change any right of redemption, purchase or repayment by the Company at the option of the Holder, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or (2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or reduce the requirements of Section 1404 for quorum or voting, or (3) change any obligation of the Company to maintain an office or agency in the places and for the purposes specified in Section 1002, or (4) modify any of the provisions of this Section, Section 513 or Section 1008 except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder of a Security or coupon with respect to changes in the references to "the Trustee" and concomitant changes in this Section and Section 1008 or the deletion of this provision, in accordance with the requirements of Sections 611(b) and 901(8). A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. 41 It shall not be necessary for any Act of Holders of Securities under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder and of any coupons appertaining thereto shall be bound thereby. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Securities to Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company, and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series and of like tenor. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest. The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of and any premium and interest on the Securities of that series in accordance with the terms of the Securities, any coupons appertaining thereto and this Indenture. Unless otherwise specified as contemplated by Section 301 with respect to any series of Securities, any interest due on Bearer Securities on or before Maturity shall be payable only upon presentation and surrender of the several coupons for such interest installments as are evidenced thereby as they severally mature. 42 SECTION 1002. Corporate Existence and Maintenance of Office or Agency. Except as expressly permitted by this Indenture, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence of the Company. If Securities of a series are issuable only as Registered Securities, the Company will maintain in each Place of Payment for such series an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. If Securities of a series are issuable as Bearer Securities, the Company will maintain (A) in the Borough of Manhattan, The City of New York, an office or agency where any Registered Securities of that series may be presented or surrendered for payment, where any Registered Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange, where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served and where Bearer Securities of that series and related coupons may be presented or surrendered for payment in the circumstances described in the following paragraph (and not otherwise), (B) subject to any laws or regulations applicable thereto, in a Place of Payment for that series which is located outside the United States, an office or agency where Securities of that series and related coupons may be presented and surrendered for payment (including payment of any additional amounts payable on Securities of that series pursuant to Section 1004); provided, however, that if the Securities of that series are listed on The International Stock Exchange of the United Kingdom and the Republic of Ireland Limited, the Luxembourg Stock Exchange or any other stock exchange located outside the United States and such stock exchange shall so require, the Company will maintain a Paying Agent for the Securities of that series in London, Luxembourg or any other required city located outside the United States, as the case may be, so long as the Securities of that series are listed on such exchange, and (C) subject to any laws or regulations applicable thereto, in a Place of Payment for that series which is located outside the United States an office or agency where any Registered Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange and where notices and demands to or upon the Company in respect of the Securities of that series, and this Indenture may be served. The Company will give prompt written notice to the Trustee and prompt notices to the Holders as provided in Section 106 of the location, and any change in the location, of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency in respect of any series of Securities or shall fail to furnish the Trustee with the address thereof, such presentations and surrenders of Securities of that series may be made and notices and demands may be made or served at the Corporate Trust Office of the Trustee, except that Bearer Securities of that series and the related coupons may be presented and surrendered for payment (including payment of any additional amounts payable on Bearer Securities of that series pursuant to Section 1004) at any Paying Agent for such series located outside the United States, and the Company hereby appoints the same as its agents to receive such respective presentations, surrenders, notices and demands. No payment of principal, premium or interest on Bearer Securities shall be made at any office or agency of the Company in the United States or by check mailed to any address in the United States or by transfer to an account maintained with a bank located in the United States; provided, however, that, if the Securities of a series are denominated and payable in Dollars, payment of principal of and any premium and interest on any Bearer Security (including any additional amounts payable on Securities of such series pursuant to Section 1004) shall be made at the office of the Company's Paying Agent in the Borough of Manhattan, The City of New York, if (but only if) payment in Dollars of the full amount of such principal, premium, interest or additional amounts, as the case may be, at all offices or agencies outside the United States maintained for the purpose by the Company in accordance with this Indenture is illegal or effectively precluded by exchange controls or other similar restrictions. The Company may also from time to time designate one or more other offices or agencies where Securities of one or more series may be presented or surrendered for any or all such purposes and may from 43 time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in accordance with the requirements set forth above for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee and the Holders of any such designation or rescission and of any other change in the location of any such other office or agency. SECTION 1003. Money for Securities Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent with respect to any series of Securities and any coupons appertaining thereto, it will, on or before each due date of the principal of and any premium or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure to so act. Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, on or prior to each due date of the principal of and any premium or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay the principal and any premium or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure to so act. The Company will cause each Paying Agent for any series of Securities (other than the Company or the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, and upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of and any premium or interest on any Security of any series and remaining unclaimed for two years after such principal and any premium or interest has become due and payable shall be paid to the Company on Company Request (unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law), or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security or any coupon appertaining thereto shall (unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law) thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper in each Place of Payment, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. 44 SECTION 1004. Additional Amounts. If the Securities of a series provide for the payment of additional amounts, the Company will pay to the Holder of any Security of such series or any coupon appertaining thereto additional amounts as provided therein. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of or any premium or interest on, or in respect of, any Security of any series or payment of any related coupon or the net proceeds received on the sale or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of additional amounts provided for in this Section to the extent that, in such context, additional amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section and express mention of the payment of additional amounts (if applicable) in any provisions hereof shall not be construed as excluding additional amounts in those provisions hereof where such express mention is not made. If the Securities of a series provide for the payment of additional amounts, at least 10 days prior to the first Interest Payment Date with respect to that series of Securities (or if the Securities of that series will not bear interest prior to Maturity, the first day on which a payment of principal and any premium is made), and at least 10 days prior to each date of payment of principal and any premium or interest if there has been any change with respect to the matters set forth in the below-mentioned Officers' Certificate, the Company will furnish the Trustee and the Company's principal Paying Agent or Paying Agents, if other than the Trustee, with an Officers' Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal of and any premium or interest on the Securities of that series shall be made to Holders of Securities of that series or any related coupons who are United States Aliens without withholding for or on account of any tax, assessment or other governmental charge described in the Securities of that series. If any such withholding shall be required, then such Officers' Certificate shall specify by country the amount, if any, required to be withheld on such payments to such Holders of Securities or coupons and the Company will pay to the Trustee or such Paying Agent the additional amounts required by this Section. The Company covenants to indemnify the Trustee and any Paying Agent for, and to hold them harmless against, any loss, liability or expense reasonably incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any Officers' Certificate furnished pursuant to this Section. SECTION 1005. Purchase of Securities by Company or Subsidiary. If and so long as the Securities of a series are listed on The International Stock Exchange of the United Kingdom and the Republic of Ireland Limited and such stock exchange shall so require, the Company will not, and will not permit any of its Subsidiaries to, purchase any Securities of that series by private treaty at a price (exclusive of expenses and accrued interest) which exceeds 120% of the mean of the nominal quotations of the Securities of that series as shown in The Stock Exchange Daily Official List for the last trading day preceding the date of purchase. SECTION 1006. Limitation on Liens. (a) The Company will not, nor will it permit any Principal Subsidiary to, issue, assume or guarantee any indebtedness for money borrowed (hereinafter in this Article Ten referred to as "Debt"), if such Debt is secured by a mortgage, pledge, security interest or lien (any mortgage, pledge, security interest or lien being hereinafter in this Article Ten referred to as a "mortgage" or "mortgages") upon any Principal Property of the Company or any Principal Subsidiary or upon any shares of stock or other equity interest or indebtedness of any Principal Subsidiary (whether such Principal Property, shares of stock or other equity interest or indebtedness is now owned or hereafter acquired), without in any such case effectively providing, concurrently with the issuance, assumption or guarantee of such Debt, that the Securities (together with, if the Company shall so determine, any other indebtedness of or guaranteed by the Company or such Principal Subsidiary ranking equally with the Securities then outstanding and existing or thereafter created) shall be secured equally and ratably with (or prior to) such Debt; provided, however, that the foregoing restriction shall not apply to: 45 (1) mortgages on property acquired, constructed or improved by the Company or any Principal Subsidiary after the date of this Indenture which are created or assumed contemporaneously with, or within 180 days after, such acquisition (or in the case of property constructed or improved, after the completion and commencement of commercial operation of such property, whichever is later) to secure or provide for the payment of any part of the purchase price of such property or the cost of such construction or improvement, it being understood that if a commitment for such a financing is obtained prior to or within such 180-day period, the applicable mortgage shall be deemed to be included in this clause (1) whether or not such mortgage is created within such 180-day period; provided that in the case of any such construction or improvement the mortgage shall not apply to any property theretofore owned by the Company or any Principal Subsidiary, other than any theretofore unimproved real property on which the property so constructed, or the improvement, is located; (2) mortgages on any property existing at the time of acquisition thereof (including mortgages on any property acquired from a Person which is consolidated with or merged with or into the Company or a Subsidiary of the Company) and mortgages outstanding at the time any Person becomes a Subsidiary of the Company that are not incurred in connection with such entity becoming a Subsidiary of the Company; (3) mortgages in favor of the Company or any Principal Subsidiary; (4) mortgages in favor of the United States, any State, any foreign country or any department, agency or instrumentality or political subdivision of any such jurisdiction, to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any indebtedness incurred for the purpose of financing all or any part of the purchase price or the cost of constructing or improving the property subject to such mortgages, including, without limitation, mortgages to secure Debt of the pollution control or industrial revenue bond type; (5) mortgages on any Principal Property held, leased or used by the Company or any Principal Subsidiary in connection with the exploration for, development of, or production of (but not the gathering, processing, transportation or marketing of) natural gas, oil or other minerals; and (6) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any mortgage referred to in any of the foregoing clauses (1), (2), (3), (4) and (5); provided, however, that the principal amount of Debt secured thereby shall not exceed the principal amount of Debt so secured at the time of such extension, renewal or replacement, and that such extension, renewal or replacement shall be limited to all or a part of the property which secured the mortgage so extended, renewed or replaced (plus improvements on such property). (b) Notwithstanding the provisions of subsection (a) of this Section 1006, the Company and any Principal Subsidiary may issue, assume or guarantee secured Debt, which would otherwise be subject to the foregoing restrictions, in an aggregate amount which, together with all other such Debt does not exceed 15% of Net Tangible Assets, as shown on a consolidated balance sheet, as of a date not more than 90 days prior to the proposed transaction, prepared by the Company in accordance with generally accepted accounting principles. SECTION 1007. Statement by Officer as to Default. (a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this Section 1007, such compliance shall 46 be determined without regard to any period of grace or requirement of notice under this Indenture. Such certificate shall comply with Section 314(a)(4) of the Trust Indenture Act. (b) The Company shall, so long as any of the Securities are outstanding, deliver to the Trustee forthwith upon any Officer becoming aware of any Event of Default or event which, after notice or lapse of time or both, would become an Event of Default, an Officers' Certificate specifying such Event of Default or event and what action the Company proposes to take with respect thereto. SECTION 1008. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 1005, 1006 or Article Fifteen with respect to the Securities of any series if before the time for such compliance the Holders of a majority in principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Applicability of Article. Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for Securities of any series) in accordance with this Article. SECTION 1102. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities shall be evidenced by a Board Resolution. In the case of any redemption at the election of the Company of less than all the Securities of any series, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date, of the principal amount of Securities of such series to be redeemed and, if applicable, of the tenor of the Securities of such series to be redeemed. In the case of any redemption of Securities (i) prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, or (ii) pursuant to an election of the Company which is subject to a condition specified in the terms of such Securities, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction or condition. SECTION 1103. Selection of Securities to Be Redeemed. If less than all the Securities of any series are to be redeemed (unless all of the Securities of such series of a specified tenor are to be redeemed) the particular Securities to be redeemed shall be selected not more than 45 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Registered Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series or of the principal amount of global Securities of such series. If less than all of the Securities of such series and of 47 a specified tenor are to be redeemed, the particular Securities to be redeemed shall be selected not more than 45 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series and specified tenor not previously called for redemption in accordance with the preceding sentence. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 1104. Notice of Redemption. Notice of redemption shall be given in the manner provided in Section 106 to the Holders of Securities to be redeemed not less than 30 nor more than 60 days prior to the Redemption Date. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption of any Securities, the principal amounts) of the particular Securities to be redeemed, and that on and after the Redemption Date, upon surrender of the Securities, new Securities of such series in principal amount equal to the unredeemed part thereof will be issued, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date, (5) the place or places where such Securities, together in the case of Bearer Securities with all coupons appertaining thereto, if any, maturing after the Redemption Date, are to be surrendered for payment of the Redemption Price, and (6) that the redemption is for a sinking fund, if such is the case. A notice of redemption published as contemplated by Section 106 need not identify particular Registered Securities to be redeemed. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1105. Deposit of Redemption Price. On or prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date. 48 SECTION 1106. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest and the coupons for such interest appertaining to any Bearer Securities so to be redeemed, except to the extent provided below, shall be void. Upon surrender of any such Security for redemption in accordance with said notice, together with all coupons, if any, appertaining thereto maturing after the Redemption Date, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest on Bearer Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified as contemplated by Section 301, only upon presentation and surrender of coupons for such interest, and provided, further, that, unless otherwise specified as contemplated by Section 301, installments of interest on Registered Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Bearer Security surrendered for redemption shall not be accompanied by all appurtenant coupons maturing after the Redemption Date, such Security may be paid after deducting from the Redemption Price an amount equal to the face amount of all such missing coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Trustee if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to the Trustee or any Paying Agent any such missing coupon in respect of which a deduction shall have been made from the Redemption Price, such Holder shall be entitled to receive the amount so deducted; provided, however, that interest represented by coupons shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified as contemplated by Section 301, only upon presentation and surrender of those coupons. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security or, in the case of Original Issue Discount Securities, the Securities' yield to maturity. SECTION 1107. Securities Redeemed in Part. Any Registered Security which is to be redeemed only in part shall be surrendered at a Place of Payment thereof (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Registered Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. 49 ARTICLE TWELVE SINKING FUNDS SECTION 1201. Applicability of Article. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 301 for Securities of such series. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment," and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an "optional sinking fund payment." If provided for by the terms of Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series. SECTION 1202. Satisfaction of Sinking Fund Payments with Securities. The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption), together in the case of any Bearer Securities of such series with all unmatured coupons appertaining thereto, and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Securities of such series required to be made pursuant to the terms of such Securities as provided for by the terms of such series; provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. SECTION 1203. Redemption of Securities for Sinking Fund. Not less than 60 days prior to each sinking fund payment date for any series of Securities, the Company will deliver to the Trustee a Company Order specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 1202 and will also deliver to the Trustee any Securities to be so credited. Not less than 45 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107. ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may at its option by Board Resolution, at any time, elect to have either Section 1302 or Section 1303 applied to the Outstanding Securities of any series upon compliance with the conditions set forth below in this Article Thirteen. 50 SECTION 1302. Defeasance and Discharge. Upon the Company's exercise of the option provided in Section 1301 applicable to this Section, the Company shall be deemed to have been discharged from its obligations with respect to the Outstanding Securities of any series on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities of such series and to have satisfied all its other obligations under the Securities of such series and this Indenture insofar as the Securities of such series are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of the Securities of such series to receive, solely from the trust fund described in Section 1304 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on the Securities of such series when such payments are due, (B) the Company's obligations with respect to such Securities under Sections 304, 305, 306, 1002, 1003 and 1004, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Thirteen. Subject to compliance with this Article Thirteen, the Company may exercise its option under this Section 1302 notwithstanding the prior exercise of its option under Section 1303. SECTION 1303. Covenant Defeasance. Upon the Company's exercise of the option provided in Section 1301 applicable to this Section, (i) the Company shall be released from its obligations with respect to the Securities of such series under Sections 801, 1005 and 1006 and (ii) the occurrence of an event specified in Sections 501(3) or (5) shall not be deemed to be an Event of Default on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), but the remainder of this Indenture and such Securities shall be unaffected thereby. For this purpose, such covenant defeasance means that the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or clause whether directly or indirectly by reason of any reference elsewhere herein to any such Section or clause or by reason of any reference in any such Section or clause to any other provision herein or in any such Section or clause to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 1304. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 1302 or Section 1303 to the then Outstanding Securities of any series: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 609 who shall agree to comply with the provisions of this Article Thirteen applicable to it) as trust funds in trust for the purpose of making the following payments specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of such series, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of (and premium, if any) and each installment of interest on the Securities and any coupons pertaining thereto on the Stated Maturity of such principal (and premium, if any) or installment of interest in accordance with the terms of this Indenture and of the Securities of such series. For this purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States for the payment of which its full faith and credit is pledged or (y) 51 obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. (2) In the case of an election under Section 1302, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable United States Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities of such series will not recognize income, gain or loss for United States Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to United States Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred. (3) In the case of an election under Section 1303, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities of such series will not recognize gain or loss for United States Federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to United States Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred. (4) No Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to the Securities of such series shall have occurred and be continuing on the date of such deposit or, insofar as subsections 501(6) and (7) are concerned, at any time during the period ending on the 121st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (5) Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act with respect to any securities of the Company. (6) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound. (7) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 1302 or the covenant defeasance under Section 1303 (as the case may be) have been complied with. (8) Such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company as defined in the Investment Company Act of 1940, as amended, or such trust shall be qualified under such Act or exempt from regulation thereunder. 52 SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee -- collectively, for purposes of this Section 1305, the "Trustee") pursuant to Section 1304 in respect of the Securities of such series shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities of such series and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of the Securities of such series, of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 1304 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Anything in this Article Thirteen to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1304 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. SECTION 1306. Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with Section 1302 or 1303 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities of such series shall be revived and reinstated as though no deposit had occurred pursuant to this Article Thirteen until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1302 or 1303; provided, however, that if the Company makes any payment of principal of or any premium or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of the Securities of such series to receive such payment from the money held by the Trustee or the Paying Agent. ARTICLE FOURTEEN MEETINGS OF HOLDERS OF BEARER SECURITIES SECTION 1401. Purposes for Which Meetings May Be Called. If Securities of a series are issuable as Bearer Securities, a meeting of Holders of Securities of such series may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities of such series. SECTION 1402. Call, Notice and Place of Meetings. (a) The Trustee may at any time call a meeting of Holders of Bearer Securities of any series for any purpose specified in Section 1401, to be held at such time and at such place in the Borough of Manhattan, The City of New York, or in London or such other location as the Trustee shall determine. Notice of every 53 meeting of Holders of Bearer Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 106, not less than 21 nor more than 120 days prior to the date fixed for the meeting. (b) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% in aggregate principal amount of the Outstanding Bearer Securities of any series shall have requested the Trustee to call a meeting of the Holders of Securities of such series for any purpose specified in Section 1401, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication of the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York, or in London or such other location as the Trustee shall determine for such meeting and may call such meeting for such purposes by giving notice thereof as provided in subsection (a) of this Section. SECTION 1403. Persons Entitled to Vote at Meetings. To be entitled to vote at any meeting of Holders of Bearer Securities a Person shall (a) be a Holder of one or more Bearer Securities or (b) be a Person appointed by an instrument in writing as proxy by a Holder of one or more Bearer Securities. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Bearer Securities shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 1404. Quorum; Action. The Persons entitled to vote a majority in aggregate principal amount of the Outstanding Bearer Securities of a series shall constitute a quorum for a meeting of Holders of Securities of such series. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of such series, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 1402(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the aggregate principal amount of the Outstanding Securities of such series which shall constitute a quorum. Except as limited by Section 512 or the proviso to the first paragraph of Section 902, any resolution presented to a meeting (or adjourned meeting duly reconvened at which a quorum is present as aforesaid) may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Bearer Securities of that series; provided, however, that any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in aggregate principal amount of the Outstanding Bearer Securities of a series may be adopted at a meeting (or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid) by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Bearer Securities of that series. To the extent consistent with the terms of this Indenture, any resolution passed or decision taken at any meeting of Holders of Bearer Securities of any series duly held in accordance with this Section shall be binding on all the Holders of Securities of such series and the related coupons, whether or not present or represented at the meeting. 54 SECTION 1405. Determination of Voting Rights; Conduct and Adjournment of Meetings. (a) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Bearer Securities of a series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Bearer Securities shall be proved in the manner specified in Section 104 and the appointment of any proxy shall be proved in the manner specified in Section 104 or by having the signature of the Person executing the proxy witnessed or guaranteed by any trust company, bank or banker authorized by Section 104 to certify to the holding of Bearer Securities. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 104 or other proof. (b) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Bearer Securities as provided in Section 1402(b), in which case the Company or the Holders of Bearer Securities of the series calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in aggregate principal amount of the Outstanding Securities of such series represented at the meeting. (c) At any meeting each Holder of a Security of such series or proxy shall be entitled to one vote for each $1,000 principal amount of the Outstanding Securities of such series held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Bearer Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or proxy. (d) Any meeting of Holders of Bearer Securities of any series duly called pursuant to Section 1402 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting; and the meeting may be held as so adjourned without further notice. SECTION 1406. Counting Votes and Recording Action of Meetings. The vote upon any resolution submitted to any meeting of Holders of Bearer Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Bearer Securities of any series shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 1402 and, if applicable, Section 1404. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company, and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ____________________________ This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 55 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. COMPANY NGC CORPORATION By _____________________________ John U. Clarke Senior Vice President [Signature Page - 1] TRUSTEE THE FIRST NATIONAL BANK OF CHICAGO By _____________________________________ Name: Title: [Signature Page - 2] EXHIBIT A FORM OF CERTIFICATE TO BE GIVEN BY BENEFICIAL OWNER OF INTEREST IN A TEMPORARY GLOBAL SECURITY NGC CORPORATION [Title of Securities] (the "Securities") This is to certify that as of the date hereof, and except as set forth below, the above-captioned Securities held by you for our account (i) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source ("United States persons"), (ii) are owned by United States person(s) that are (A) foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v)) ("financial institutions") purchasing for their own account or for resale, or (B) United States person(s) who acquired Securities through the foreign branches of the United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (A) or (B), each such United States financial institution hereby agrees, on its own behalf or through its agent, to comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986 as amended, and the regulations thereunder), or (iii) are owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and in addition if the owner of the Securities is a United States or foreign financial institution described in clause (iii) above (whether or not also described in clause (i) or (ii)), this is to further certify that such financial institution has not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions. If the Securities are of the category contemplated in Section 230.903(c)(3) of Regulation S under the Securities Act of 1933, as amended (the "Act"), then this is also to certify that, except as set forth below, the Securities are beneficially owned by (a) non-U.S. person(s) or (b) U.S. person(s) who purchased the Securities in transactions which did not require registration under the Act. As used herein, "United States" or "U.S." means the United States (including the States and District of Columbia); and its "possessions" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands. We undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Securities held by you for our account in accordance with your Operating Procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date. This certification excepts and does not relate to $________ of such interest in the above Securities in respect of which we are not able to certify and as to which we understand exchange and delivery of definitive Securities (or, if relevant, exercise of any rights or collection of any interest) cannot be made until we do so certify. We understand that this certification is required in connection with certain tax laws and, if applicable, certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are A-1 commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification to any interested party in such proceedings. *Dated: ______________, 199__. NAME OF PERSON MAKING CERTIFICATION By: _____________________________________ _______________________________ * To be dated no earlier than the Certification Date. A-2 EXHIBIT B FORM OF CERTIFICATION TO BE GIVEN BY THE EURO-CLEAR OPERATOR OR CEDEL S.A. NGC CORPORATION [Title of Securities] (the "Securities") This is to certify that, based solely on certifications we have received in writing, by tested telex or by electronic transmission from member organizations appearing in our records as persons being entitled to a portion of the principal amount set forth below (our "Member Organizations") substantially to the effect set forth in the Indenture, dated as of September 26, 1996, among NGC Corporation, and The First National Bank of Chicago as of the date hereof, as supplemented, amended or restated, [ ] principal amount of the above- captioned Securities (i) is owned by persons that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source ("United States persons"), (ii) is owned by United States persons that are (A) foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v)) ("financial institutions") purchasing for their own account or for resale, or (B) United States persons who acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (A) or (B), each such United States financial institution has agreed, on its own behalf or through its agent, that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) is owned by United States or foreign financial institutions for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and to the further effect that the United States or foreign financial institutions described in clause (iii) above (whether or not also described in clause (i) or (ii)) have certified that they have not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions. If the Securities are of the category contemplated in Section 230.903(c)(3) of Regulation S under the Securities Act of 1933, as amended, then this is also to certify with respect to such principal amount of Securities set forth above that, except as set forth below, we have received in writing, by tested telex or by electronic transmission, from our Member Organizations entitled to a portion of such principal amount, certifications with respect to such portion, substantially to the effect set forth in the Indenture. We further certify (i) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of the temporary global Security excepted in such certifications and (ii) that as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as of the date hereof. B-1 We understand that this certification is required in connection with certain tax laws and, if applicable, certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to produce this certification or a copy hereof to any interested party in such proceedings. Dated: _______________, 199__. (dated the Exchange Date or the Interest Payment Date) [Morgan Guaranty Trust Company of New York, as operator of the Euro-clear System] or [CEDEL S.A.] By: ____________________________________ B-2 EX-10.9 8 EMPLOYMENT AGREEMENT FOR WATSON Exhibit 10.9 April 30, 1997 Mr. Charles Watson 11766 Quail Creek Drive Houston, Texas 77070 Dear Chuck: 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 as "NGC" or the "Company"). 1. Title and Duties Your title will be Chairman and Chief Executive Officer of the Company. Your duties and responsibilities will be as described in the Company's Bylaws and as delegated by the Board of Directors of the Company from time to time during the Term of the Agreement, to the extent such duties and responsibilities are consistent with your duties and responsibilities as of January 31, 1997, or as otherwise agreed by you. On May 15, 2000, you may, should you elect to do so, serve only as Chairman of the Company, and your duties will be correspondingly adjusted in a manner consistent with the Company's Bylaws and as mutually agreed by you and the Board of Directors of the Company. 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. You shall at all times report directly to the Board of Directors of the Company. 2. Term (a) Unless earlier terminated as provided for herein, the term of this Agreement will be for five years, beginning on May 15, 1997, and ending on May 14, 2002 (the "Term"). (b) If your employment with NGC is terminated by you due to your voluntary resignation or by NGC for "cause", this Agreement shall terminate immediately (except for the confidentiality, non-competition and non- solicitation provisions of Paragraph 4, and the provisions of Paragraphs 5 and 6), and the Company shall have no further obligation to you except for the payment of amounts due before the date of such termination and except that you will be fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) previously granted to you in lieu of incentive compensation payable in cash, to which you were otherwise entitled under the Incentive Compensation Plan, as provided in Paragraph 3(b) below, and you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the Mr. Charles Watson Page 2 April 30, 1997 employment of the Company until the end of the Term, and the Company shall take such actions as permitted by applicable law to cause such vesting and option retention. However, nothing in this Paragraph 2(b) shall require accelerated vesting or accelerated exercisability of any other stock options that you may have been granted. 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 of such termination and except for you being full vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) previously granted to you in lieu of incentive compensation payable in cash, to which you were otherwise entitled under the Incentive Compensation Plan, as provided in Paragraph 3(b) below, and you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as are permitted by applicable law to cause such vesting and option retention. For purposes of this Agreement, you may be terminated for "cause" by majority vote of (excluding yourself) the Board of Directors of NGC as a result of (1) the occurrence of one of the following: (i) 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; (ii) 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; (iii) drug or alcohol abuse, but only to the extent that such abuse has an obvious and material effect on the Company's reputation and/or on the performance of your duties and responsibilities under this Agreement; (iv) willful and continued failure to perform your duties under this Agreement; or (v) any other material breach of this Agreement by you, and (2) such event, conduct or condition that may result in termination for cause is not cured within thirty days after written notice 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. In the event corrective action is not satisfactorily taken by you, in each case as determined by the Board, as described above, a final written notice of termination shall be provided to you by 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, this Agreement shall terminate immediately (except for the confidentiality and non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6) and you shall receive: (i) your Base Salary as described in Paragraph 3(a) through the date of termination; (ii) in lieu of further payments to you pursuant to Paragraph 3, the Company shall pay you within thirty days of the date of your termination, a lump sum Mr. Charles Watson Page 3 April 30, 1997 amount equal to the product of (A) the average annual Base Salary and incentive compensation, whether payable in cash or stock options, you were paid by the Company during the three calendar years preceding the calendar year in which your employment terminated, multiplied by (B) 2.99; (iii) a lump sum (without any present value discount) of all deferred compensation payable to you pursuant to the Company's Deferred Compensation Plan and Trust Agreement; (iv) a lump sum amount equal to the present value, as determined by the Board of Directors in its sole discretion, of the benefits you would have received or accrued under the provisions (as in effect on the date of termination) of the Company's employee benefit plans had your employment continued for the Term of this Agreement, at the rate of compensation then in effect on the date of termination (including specifically, but without limitation, the benefits which you would have been entitled to receive (directly or indirectly) pursuant to all Split Dollar Agreements between the Company and you (or any irrevocable trust created by you), and the Charitable Donation Plan approved by the Company's Compensation Committee at its March 14, 1996 Meeting; (v) full vesting in all stock options previously granted to you (irrespective of the date of the grant of such stock options and irrespective of the vesting schedule otherwise applicable to such stock options); you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as are permitted by applicable law to cause such vesting and option retention; (vi) additionally, the provisions of Paragraphs 3(f), 8(h) and 8(i) shall remain in effect as though this Agreement expired at the end of its Term described in Paragraph 2(a), irrespective of its earlier termination; and (vii) a lump sum amount (without any present value discount) of the benefits to be provided to you under Paragraph 3(i) of this Agreement, such perquisites set forth on Schedule I attached hereto (other than the vacations and holidays identified as number 4 and the use of the Company aircraft identified as number 7 on Schedule I) and such other perquisites (if any) being provided to you on the date of your termination, as if you were still employed for the remainder of the Term of this Agreement, with regard to those benefits to be provided to you during the Term of this Agreement, and as if you had completed the Term of this Agreement, with regard to those benefits to be provided to you upon completion 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) a significant diminution in your responsibilities, authority or Mr. Charles Watson Page 4 April 30, 1997 scope of duties is effected by the Board of Directors and such diminution is made without your written consent (without regard to whether or not any change is made to your title); (iii) the Company materially breaches this Agreement or (iv) a change in control of the Company occurs. 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 50% or more 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 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 50% or more 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); (d) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (e) 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 of 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, this Agreement shall terminate immediately and you (or your estate) shall be entitled to the Base Salary (as defined in Paragraph 3 (a)) payable to you hereunder for twelve 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 Mr. Charles Watson Page 5 April 30, 1997 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). In addition, you or your estate shall be entitled to the benefits of Paragraph 5 below, and the Company will maintain (i) for a period of twenty-four months from the date of your death or disability, all health insurance that the Company was maintaining for you and/or your estate and for your family as of the date of your death or disability and (ii) at all times following the date of your death or disability, all Directors and Officers Liability Insurance that the Company was maintaining for you and/or your estate as of the date of your death or disability. Finally, if your death or the date of your disability occurs on or after May 15, 2000, then you or your estate (whichever situation is applicable) shall be fully vested with regard to all stock options previously granted to you (irrespective of the date of the grant of such stock options and irrespective of the vesting schedule otherwise applicable to such options); however, if your death or the date of your disability occurs before May 15, 2000, then you or your estate will nevertheless be fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) previously granted to you in lieu of incentive compensation payable in cash, to which you were otherwise entitled under the Incentive Compensation Plan, as provided in Paragraph 3(b) below; in either event, you or your estate shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as are permitted by applicable law to cause such vesting and option retention. 3. Compensation (a) Each year during the Term hereof, you will be paid a base salary of $999,000 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. (b) You shall be a participant in the Company's Incentive Compensation Plan. You shall receive a guaranteed Incentive Compensation Plan bonus of at least $500,000 per annum during the five year Term, which guaranteed amount shall be prorated for any calendar year during the Term hereof that is less than twelve (12) full months. As part of NGC's incentive compensation program, you will have the opportunity to earn up to 200% of your Base Salary, dependent upon certain financial or performance objectives, determined in accordance with such program, and by the Board. At your election, in lieu of paying you all or part of such incentive compensation bonus, the Company will allow you to direct that all or part of such incentive compensation shall be allocated by the Company to, or expended directly for, charitable contributions of your selection and/or payments of insurance premiums pursuant to any Split Dollar Agreement between the Company and the Watson 1996 Family Trust (an irrevocable trust created on March 22, 1996, by you and Kim R. Watson, as the Grantors, and David C. Feldman, as the Trustee). To the extent any incentive compensation in excess of the minimum guaranteed amount referenced above is payable under the Incentive Compensation Plan in any year to you, at your election, in lieu of paying such amount, the Company will provide you with stock options of equal value. "Equal value", for such purpose, will be determined by an independent consultant selected by the Board. You will be responsible for the Mr. Charles Watson Page 6 April 30, 1997 tax consequences to you of any such election. Notwithstanding anything in this Paragraph 3(b) to the contrary, on and after May 15, 2000, should you elect to serve solely as Chairman of the Company, you shall be entitled under the Company's Incentive Compensation Plan to only the minimum guaranteed bonus described in this Paragraph 3(b) for years in which you do not serve as Chief Executive Officer, except as otherwise determined by the Company's Board of Directors. (c) You shall be designated as a participant in the NGC Corporation Equity Option Plan (the "Option Plan"), the NGC Amended and Restated 1991 Stock Option Plan (the "Stock Option Plan") and any other option or warrant plans established by the Company, and shall be entitled to purchase shares of common stock of the Company provided thereunder. At a minimum, each year (meaning for each twelve (12) month period commencing with the most recent May 15 date) during the Term of this Agreement, commencing May 15, 1997, you will receive stock option grants, with an exercise price equal to market price on date of grant, under the Stock Option Plan, with a five year projected value of $1,500,000. 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 projected value of such options will achieve that actual 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 $1,500,000 in excess of the exercise price. These options are subject to the vesting, forfeiture and other terms and conditions of the Stock Option Plan, except as specifically provided to the contrary in this Agreement. (d) 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. (e) You shall be entitled to participate in, and shall be entitled to receive all benefits available to a participant under, such other plans as the Board in its discretion determines, which shall include, but not be limited to, all Split Dollar Agreements between the Company and the Watson 1996 Family Trust (an irrevocable trust created on March 22, 1996 by you and the Kim R. Watson, as the Grantors, and David C. Feldman, as the Trustee), and the Charitable Donation Plan approved by the Company's Compensation Committee at its March 14, 1996 meeting. (f) During the Term of this Agreement, or until termination of this Agreement if this Agreement terminates prior to expiration of the Term (except as provided in Paragraph Mr. Charles Watson Page 7 April 30, 1997 2(c)(vi)), the Company will pay all premiums on a policy of insurance providing term protection only and no cash values, with a death benefit payable upon your death in the amount of $1,000,000. You shall at all times own the policy and have the right to designate the beneficiary of any death proceeds. You will be responsible for policy selection, coverage and effectiveness of the policy and any income taxes arising in connection therewith; the Company's only obligation being to pay such premiums. (g) You shall be entitled to participate in such other plans and receive such other perquisites as the Board of Directors of the Company in its sole discretion determines. You shall also receive the perquisites set forth on Schedule I attached hereto and by this reference incorporated herein. (h) If you complete the Term of this Agreement prior to your separation from employment for any reason, then in addition to being entitled to all compensation, awards, grants or benefits made by the Company to you or otherwise earned by you pursuant to this Agreement or any employee benefit plans of which you are a participant, to the extent permitted by applicable law and the terms of the applicable plan document, you will be fully vested with regard to all stock options previously granted to you (irrespective of the date of the grant of such stock options and irrespective of the vesting schedule otherwise applicable to such stock options), including, but not limited to, such stock options granted to you under the Option Plan and/or the Stock Option Plan. The grant instruments awarding you such options shall be written consistently with this Paragraph 3(h), to the extent permitted by applicable law. If you do not complete the Term of this Agreement prior to your separation from employment due to termination in accordance with Paragraph 2(c) or 2(d), then you shall also be fully vested with regard to all stock options previously granted to you to the extent provided in Paragraph 2(c) or 2(d); furthermore, if you do not complete the Term of this Agreement prior to your separation from employment due to termination other than in accordance with Paragraph 2(c) or 2(d), then you shall only be fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) previously granted to you in lieu of incentive compensation payable in cash, to which you were otherwise entitled under the Incentive Compensation Plan, as provided in Paragraph 3(b) above; in either event, you shall be entitled to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as are permitted by applicable law to cause such vesting and option retention. (i) In the event that you remain continuously employed through May 15, 2002 or your separation from employment prior to completion of the Term of the Agreement is due to termination pursuant to Paragraph 2(c), then the Company shall provide to you at its expense for a period of five years thereafter an office separately located from the offices of the Company that is comparable in size and facilities to that provided by the Company during the Term of this Agreement. The Company shall also pay for maintenance of such office space. You shall also be entitled to equip the office with (and retain as your own following completion of the five year period) the furniture, cabinets, pictures, equipment and office furnishings (but not any intrinsically valuable art works or collectibles) used by you in your office at the end of the Term or at the time of Mr. Charles Watson Page 8 April 30, 1997 termination. You shall be responsible for the tax consequences to you of the provisions of this Paragraph 3(i). 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 energy commodities, 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 other than pursuant to Paragraph 2(c) above, 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. The preceding sentence shall not apply, if your employment is terminated pursuant to Paragraph 2(c) above. For purposes of this Agreement, a "competitor of the Mr. Charles Watson Page 9 April 30, 1997 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 foregoing, which, during such period or the immediately preceding fiscal year of such entity, derived twenty percent (20%) or more of its gross revenues, or twenty percent (20%) or more of its gross profits, or Fifty Million Dollars ($50,000,000) or more in gross revenues, from 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 and notwithstanding anything to the contrary contained in the preceding sentence, 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 affiliate's own production as described in clause (ii) of this Paragraph 4(c)). The terms of this Paragraph 4(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 five percent of the total outstanding shares of any such company. (d) For a period of twenty-four months after the expiration or termination of your employment for whatever reason other than pursuant to Paragraph 2(c) above or for a period of twelve months following the termination of your employment pursuant to Paragraph 2(c) above, 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, provided that you shall always have the right to induce or otherwise entice your personal secretary to leave the Company to work for you. (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 Mr. Charles Watson Page 10 April 30, 1997 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 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 adjudged 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. Subject to the limitations set forth below, 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; however, notwithstanding the above, in the event you are the prevailing party, then the Company agrees to reimburse you for all such costs of arbitration, including but not limited to attorneys' fees and arbitrators' fees and expenses reasonably incurred by you; further provided, however, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses, that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). 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. Mr. Charles Watson Page 11 April 30, 1997 7. Physical Examination You agree, during each fiscal year of the Company, to undergo a complete physical examination at Company expense, and you further agree that the finding or diagnosis of a terminal illness or physical or mental condition that will materially impair your ability to perform your duties and responsibilities under this Agreement, which is the result of such examination, will be disclosed to the Executive Committee of the Board. You agree to direct such disclosure to the Executive Committee of the Board by an instrument in writing, if necessary, but no disclosure shall be made to any other party without your written consent. 8. 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 combination. In the event of any such transfer or assignment by the Company, the rights and privileges of the Board hereunder shall be vested in the Board of Directors or other governing body of the transferee or successor entity, and the protection afforded to the Company's affiliates hereunder shall extend to the affiliates of such transferee or successor entity. However, notwithstanding anything to the contrary contained herein, this Agreement will be binding upon any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, and the Company will require any such successor by agreement, in form and substance satisfactory to you, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. In addition to your rights above, if a change in control of the Company occurs as described in Paragraph 2(c) above, the failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you resigned your employment due to a constructive termination as described in Paragraph 2(c) above, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Paragraph 8(b) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. This Agreement and all rights of the parties hereto shall inure to the benefit of and be enforceable by the parties hereto, their assigns, personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. Mr. Charles Watson Page 12 April 30, 1997 (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 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. You hereby represent and warrant to the Company that, as of January 31, 1997, you have been paid in full all compensation currently payable or owing from the Company, except for amounts owing to you under the Company's Deferred Compensation Plan and Trust Agreement and/or any other employee benefit plans with respect to which benefits are not yet currently payable to you. The Company represents and warrants that until May 15, 1997, you will be paid in full all compensation currently payable or owing from the Company under the provisions of that certain Employment Agreement dated May 19, 1992 between you and Natural Gas Clearinghouse, the predecessor to the Company (which provisions shall continue to apply until May 15, 1997, at which time the provisions of this Agreement shall apply), except for amounts owing to you under the Company's Deferred Compensation Plan and Trust Agreement and/or any other employee benefit plans with respect to which benefits are not yet currently payable to you. You further hereby represent and warrant that, if the Company satisfies all of its obligations to you in accordance with the preceding sentence, then as of May 15, 1997, you will have been paid in full all compensation currently payable or owing from the Company, except for amounts owing to you under the Company's Deferred Compensation Plan and Trust Agreement and/or any other employee benefit plans with respect to which benefits are not yet currently payable to you. This Agreement may be amended only by written amendment duly executed by both parties hereto 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 --------- ----------------- Charles Watson NGC Corporation 11766 Quail Creek Drive 1000 Louisiana, Suite 5800 Houston, Texas 77070 Houston, Texas 77002-5050 (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 Mr. Charles Watson Page 13 April 30, 1997 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 compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. (h) In the event that the Incentive Compensation Plan, the Deferred Compensation Plan and Trust Agreement, the Option Plan or the Stock Option Plan are amended to reduce, modify limit or restrict any of your accrued or vested rights thereunder, no such amendment shall apply to you without your written consent. (i) The Company shall maintain during the Term of this Agreement and for all times thereafter Directors and Officers Liability Insurance covering you (or your estate, if you are deceased or incompetent), which provides coverage at least as favorable to you (or your estate, if you are deceased or incompetent), as coverage under the Company's policy in effect on December 31, 1996, and which coverage shall be increased from time to time in such amounts as the Board may determine to be appropriate in light of the Company's operations. (j) The Company will not amend the provisions of its governing documents which pertain to your indemnification in your capacity as an officer and/or member of the Board of the Company except to substitute therefor provisions which are more favorable to you, except as otherwise required by law or the rules of any securities exchange or similar entity, or by applicable law. Mr. Charles Watson Page 14 April 30, 1997 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/ Michael B. Barton ------------------------------ Its: Vice President-Human Resources ----------------------- AGREED AND ACCEPTED this 30th day of April, 1997, and effective as of May 15, 1997 /s/ Charles Watson - ---------------------------------- Charles Watson Watson Employment Agreement - Schedule I EXECUTIVE PERQUISITES Except as provided below, as long as you remain in the employment of the Company during the Term of this Agreement, you will be entitled to the following: 1. At your option, the use of an automobile of a type equivalent to that presently provided by the Company for use by you, your spouse and members of your immediate family, or a cash automobile allowance of $2,000 per month. 2. Personal membership in the Petroleum Club in Houston, Texas and two (2) other downtown Houston luncheon clubs of your choice, including dues and all business-related expenses reimbursed. These memberships shall be assigned to you in the event of termination of the Agreement for any reason, and you shall pay dues from the date of termination but you shall not be obligated to reimburse the Company for any amounts paid by the Company prior to termination. 3. Personal country club membership in two (2) country clubs of your choice, including dues and all business-related expenses reimbursed. These memberships shall be assigned to you in the event of termination of the Agreement for any reason, and you shall pay dues from the date of termination but you shall not be obligated to reimburse the Company for any amounts paid by the Company prior to termination. Notwithstanding anything to the contrary in this Agreement or this Schedule, in no case shall the Company be obligated to pay any amount of dues, fees or reimbursement for or to any country club or luncheon club that, in the determination of the Board, in its sole discretion, restricts membership or the performance of services or the use of facilities on the basis of race, religion, gender or national origin. 4. Vacations and holidays in accordance with the Company's policies in effect from time to time for its senior executive officers, but not less than eight (8) weeks of vacation during each fiscal year. 5. A benefit package including medical, hospital, dental, disability and life insurance plans and coverage for you and your spouse and children at least as favorable to you (and your spouse and children) as that provided to you immediately prior to the commencement of the Term of this Agreement unless, with respect to any particular plan or coverage, the continuation of such existing plan or coverage would have material adverse financial or regulatory consequences to the Company. 6. Reimbursement of fees for financial planning and income tax preparation (and reasonable accounting and legal fees associated therewith), which fees shall not in the aggregate exceed One Hundred Thousand Dollars ($100,000). 7. Use of any aircraft owned or leased by the Company for Company business in accordance with the policies adopted by the Board, which policy is subject to the approval of the Board after May 15, 1997. You may also, in accordance with such policies, which shall not be amended as they apply to you without your prior consent, use any aircraft owned or leased by the Company for your own personal business; provided, however, that (i) such use does not adversely interfere with the use of such aircraft for Company business, (ii) you shall maintain any records reasonably requested by the Board, (iii) you shall compensate the company for such use at the Company's actual after-tax costs for the use of such aircraft and (iv) such personal use by you does not exceed fifty (50) hours of flight time usage of such aircraft on a calendar year basis. You shall be responsible for paying any income taxes attributable to taxable income arising from such aircraft use. EX-10.10 9 EMPLOYMENT AGREEMENT FOR BERGSTROM EXHIBIT 10.10 May 8, 1997 Mr. Stephen Bergstrom 1715 Chestnut Grove Kingwood, Texas 77345 Dear Steve: 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 as "NGC" or the "Company"). 1. Title and Duties Your title shall be Senior Vice President of NGC Corporation and President and Chief Operating Officer of Natural Gas Clearinghouse. You will at all times report directly to the Company's Chief Executive Officer. 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 three years, beginning on May 15, 1997, and ending on May 14, 2000 (the "Term"). (b) If your employment with NGC is terminated by you due to your voluntary resignation or by NGC for "cause", this Agreement shall terminate immediately (except for the confidentiality, non-competition and non- solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6), and the Company shall have no further obligation to you except for the payment of amounts due before the date of such termination and except that you will be fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) previously granted to you in lieu of incentive compensation payable in cash, to which you were otherwise entitled under the Incentive Compensation Plan, as provided in Paragraph 3(b) below, and you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as permitted by applicable law to cause such vesting and option retention. However, nothing in this Paragraph 2(b) shall require accelerated vesting or accelerated exercisability of any other stock options that you may have been granted. You further agree that the benefits which you have received from the execution of this Agreement through the date of such termination constitute sufficient Mr. Stephen Bergstrom Page 2 May 8, 1997 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 of such termination and except for you being fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) previously granted to you in lieu of incentive compensation payable in cash, to which you were otherwise entitled under the Incentive Compensation Plan, as provided in Paragraph 3(b) below, and you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as are permitted by applicable law to cause such vesting and option retention. For purposes of this Agreement, you may be terminated for "cause" by majority vote, excluding yourself, of the Board of Directors of NGC as a result of (i) 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; (ii) 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; (iii) drug or alcohol abuse, but only to the extent that such abuse has an obvious and material effect on the Company's reputation and/or on the performance of your duties and responsibilities under this Agreement; (iv) willful and continued failure to perform your duties under this Agreement; or (v) any other material breach of this Agreement by you; and such event, conduct or condition causing termination for cause is not cured within thirty days after written notice 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. In the event corrective action is not satisfactorily taken by you or cannot be satisfactorily taken by you, in each case as determined by the Board, as described above, a final written notice of termination shall be provided to you by 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, this Agreement shall terminate immediately (except for the confidentiality, non-competition and non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6) and you shall receive: (i) your Base Salary as described in Paragraph 3(a) through the date of termination; (ii) in lieu of further payments to you pursuant to Paragraph 3, the Company shall pay you within thirty days of the date of your termination, a lump sum amount equal to the product of (A) the average annual Base Salary and incentive compensation, whether payable in cash or stock options, you were paid by the Company Mr. Stephen Bergstrom Page 3 May 8, 1997 during the three calendar years preceding the calendar year in which your employment termination occurred, multiplied by (B) 2.99; (iii) a lump sum of all (without any present value discount) deferred compensation payable to you pursuant to the Company's Deferred Compensation Plan and Trust Agreement; (iv) a lump sum amount equal to the present value, as determined by the Board of Directors in its sole discretion, of the benefits you would have received or accrued under the provisions (as in effect on the date of termination) of the Company's employee benefit plans had your employment continued for the Term of this Agreement, at the rate of compensation then in effect on the date of termination (including specifically, but without limitation, the benefits which you would have been entitled to receive (directly or indirectly) pursuant to all Split Dollar Agreements between the Company and you (or any irrevocable trust created by you), and the Charitable Donation Plan approved by the Company's Compensation Committee at its March 14, 1996 Meeting; (v) full vesting in all stock options previously granted to you (irrespective of the date of the grant of such stock options and irrespective of the vesting schedule otherwise applicable to such stock options); you shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as are permitted by applicable law to cause such vesting and option retention; (vi) additionally, the provisions of Paragraphs 3(f), 7(h) and 7(i) shall remain in effect as though this Agreement expired at the end of its Term described in Paragraph 2(a), irrespective of its earlier termination; and (vii) a lump sum amount (without any present value discount) of such perquisites set forth on Schedule I attached hereto (other than the vacations and holidays identified as number 3 and the use of the Company aircraft identified as number 6 on Schedule I) and such other perquisites (if any) being provided to you on the date of your termination, as if you were still employed for the remainder of the Term of this Agreement, with regard to those benefits to be provided to you during the Term of this Agreement, and as if you had completed the Term of this Agreement, with regard to those benefits to be provided to you upon completion 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) a significant diminution in your responsibilities, authority or scope of duties is effected by the Board of Directors and such diminution is made without your Mr. Stephen Bergstrom Page 4 May 8, 1997 written consent (without regard to whether or not any change is made to your title); (iii) the Company materially breaches this Agreement; (iv) you cease to directly report to the Chief Executive Officer of the Company; (v) you are serving neither as a member of the Board of Directors of the Company nor in a Board Advisory position for the Company, which Advisory role entitles you to have all of the rights of a member of the Board of Directors of the Company with the exception of the right to vote; or (vi) a change in control of the Company occurs. 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 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); (d) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (e) 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 of 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, this Agreement shall terminate immediately (except for the confidentiality, non- competition and non-solicitation provisions of Paragraph 4 and the provisions of Paragraphs 5 and 6) and you (or your estate) shall Mr. Stephen Bergstrom Page 5 May 8, 1997 be entitled to the Base Salary (as defined in Paragraph 3 (a)) payable to you hereunder for twelve months following the month in which you die or become disabled, plus the amount of any guaranteed bonus as described in 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). In addition, you or your estate shall be entitled to the benefits of Paragraph 5 below, and the Company will maintain (i) for a period of twenty-four months from the date of your death or disability, all health insurance that the Company was maintaining for you and/or your estate and for your family as of the date of your death or disability and (ii) at all times following the date of your death or disability, until such time that you and/or your estate can no longer, due to expiration of all applicable statutes of limitation, be subject to any civil, criminal or administrative action, suit or proceeding by reason of the fact that you were a director or officer of the Company, all Directors and Officers Liability Insurance that the Company was maintaining for you and/or your estate as of the date of your death or disability. Finally, if your death or the date of your disability occurs before May 14, 2000, then you or your estate will nevertheless be fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) previously granted to you in lieu of incentive compensation payable in cash, to which you were otherwise entitled under the Incentive Compensation Plan, as provided in Paragraph 3(b) below; in such event, you or your estate shall be permitted to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as are permitted by applicable law to cause such vesting and option retention. 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. (b) You shall be a participant in the Company's Incentive Compensation Plan. You shall receive a guaranteed bonus of at least $350,000 per annum during the three year Term, which guaranteed amount shall be prorated for any calendar year during the Term hereof that is less than twelve (12) full months. As part of NGC's incentive compensation program, you will have the opportunity to earn up to 200% of your Base Salary, dependent upon certain financial or performance objectives, determined in accordance with such program, and by the Board. At your election, in lieu of paying you the minimum guaranteed incentive compensation bonus annually, the Company will provide you annually with stock options of equal value. "Equal value," for such purpose, will be determined by an independent consultant selected by the Board. Mr. Stephen Bergstrom Page 6 May 8, 1997 (c) You shall be designated as a participant in the NGC Corporation Equity Option Plan (the "Option Plan"), the NGC Amended and Restated 1991 Stock Option Plan (the "Stock Option Plan") and any other option or warrant plans established by the Company, and shall be entitled to purchase shares of common stock of the Company provided thereunder. At a minimum, each year (meaning for each twelve (12) month period commencing with the most recent May 15 date) during the Term of this Agreement, commencing May 15, 1997, you will receive stock option grants, with an exercise price equal to market price on date of grant, under the Stock Option Plan, with a five year projected value of $900,000. 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 projected value of such options will achieve that actual 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 $900,000 in excess of the exercise price. These options are subject to the vesting, forfeiture and other terms and conditions of the Stock Option Plan, except as specifically provided to the contrary in this Agreement. (d) 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. (e) You shall be entitled to participate in, and shall be entitled to receive al benefits available to a participant under, such other plans as the Board in its discretion determines, which shall include, but not be limited to, all Split Dollar agreements between the Company and you (or any irrevocable trust created by you), and the Charitable Donation Plan approved by the Company's Compensation Committee at its March 14, 1996 meeting. (f) During the Term of this Agreement, or until termination of this Agreement if this Agreement terminates prior to expiration of the Term (except as provided in Paragraph 2(c)(vi)), the Company will pay all premiums on a policy of insurance providing term protection only and no cash values, with a death benefit payable upon your death in the amount of $1,000,000. You shall at all times own the policy and have the right to designate the beneficiary of any death proceeds. You will be responsible for policy selection, coverage and effectiveness of the policy and any income taxes arising in connection therewith; the Company's only obligation being to pay such premiums. (g) You shall be entitled to participate in such other plans and receive such other perquisites as the Board of Directors of the Company in its sole discretion determines. You shall also receive the perquisites set forth on Schedule I attached hereto and by this reference incorporated herein. (h) If you complete the Term of this Agreement prior to your separation from employment for any reason, then, in addition to being entitled to all compensation, awards, grants or benefits made by the Company to you or otherwise earned by you pursuant to this Agreement or any employee benefit plans of which you are a participant, to the extent permitted by applicable law Mr. Stephen Bergstrom Page 7 May 8, 1997 and the terms of the applicable plan document, you will be fully vested with regard to all stock options previously granted to you (irrespective of the date of the grant of such stock options and irrespective of the vesting schedule otherwise applicable to such stock options), including, but not limited to, such stock options granted to you under the Option Plan and/or the Stock Option Plan. The grant instruments awarding you such options shall be written consistently with this Paragraph 3(h), to the extent permitted by applicable law. If you do not complete the Term of this Agreement prior to your separation from employment due to termination in accordance with Paragraph 2(c) or 2(d), then you shall also be fully vested with regard to all stock options previously granted to you to the extent provided in Paragraph 2(c) or 2(d); furthermore, if you do not complete the Term of this Agreement prior to your separation from employment due to termination other than in accordance with Paragraph 2(c) or 2(d), then you shall only be fully vested with regard to all stock options (irrespective of the date of the grant of such options and irrespective of the vesting schedule otherwise applicable to such options) previously granted to you in lieu of incentive compensation payable in cash, to which you were otherwise entitled under the Incentive Compensation Plan, as provided in Paragraph 3(b) above; in either event, you shall be entitled to retain such options for future exercise or sell such stock received on exercise as though you had remained in the employment of the Company until the end of the Term, and the Company shall take such actions as are permitted by applicable law to cause such vesting and option retention. 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 energy commodities, 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. Mr. Stephen Bergstrom Page 8 May 8, 1997 (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 other than your voluntary resignation pursuant to Paragraph 2(b) above or for a period of twelve months following the termination of your employment due to your voluntary resignation pursuant to Paragraph 2(b) above, 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 foregoing, which, during such period or the immediately preceding fiscal year of such entity, derived twenty percent (20%) or more of its gross revenues, or twenty percent (20%) or more of its gross profits, or Fifty Million Dollars ($50,000,000) or more in gross revenues, from 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 and notwithstanding anything to the contrary contained in the preceding sentence, 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 affiliate's own production as described in clause (ii) of this Paragraph 4(c)). The terms of this Paragraph 4(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 five percent of the total outstanding shares of any such 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, provided that you shall always have the right to induce or otherwise entice your personal secretary to leave the Company to work for you. Mr. Stephen Bergstrom Page 9 May 8, 1997 (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 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 adjudged 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 Mr. Stephen Bergstrom Page 10 May 8, 1997 the arbitration. Subject to the limitations set forth below, 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; however, notwithstanding the above, in the event you are the prevailing party, then the Company agrees to reimburse you for all such costs of arbitration, including but not limited to attorneys' fees and arbitrators' fees and expenses reasonably incurred by you; further provided, however, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses, that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). 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 combination. In the event of any such transfer or assignment by the Company, the rights and privileges of the Board hereunder shall be vested in the Board of Directors or other governing body of the transferee or successor entity, and the protection afforded to the Company's affiliates hereunder shall extend to the affiliates of such transferee or successor entity. However, notwithstanding anything to the contrary contained herein, this Agreement will be binding upon any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, and the Company will require any such successor by agreement, in form and substance satisfactory to you, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. In addition to your rights above, if a change in control of the Company occurs as described in Paragraph 2(c) above, the failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you resigned your employment due to a constructive termination as described in Paragraph 2(c) above, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Paragraph 7(b) or which otherwise becomes bound by all the terms and Mr. Stephen Bergstrom Page 11 May 8, 1997 provisions of this Agreement by operation of law. This Agreement and all rights of the parties hereto shall inure to the benefit of and be enforceable by the parties hereto, their assigns, personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 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. You hereby represent and warrant to the Company that, as of January 31, 1997, you have been paid in full all compensation currently payable or owing from the Company, except for amounts owing to you under the Company's Deferred Compensation Plan and Trust Agreement and/or any other employee benefit plans with respect to which benefits are not yet currently payable to you. The Company represents and warrants that until May 15, 1997, you will be paid in full all compensation currently payable or owing from the Company under the provisions of that certain Employment Agreement dated May 19, 1992 between you and Natural Gas Clearinghouse, the predecessor to the Company (which provisions shall continue to apply until May 15, 1997, at which time the provisions of this Agreement shall apply), except for amounts owing to you under the Company's Deferred Compensation Plan and Trust Agreement and/or any other employee benefit plans with respect to which benefits are not yet currently payable to you. You further hereby represent and warrant that, if the Company satisfies all of its obligations to you in accordance with the preceding sentence, then as of May 15, 1997, you will have been paid in full all compensation currently payable or owing from the Company, except for amounts owing to you under the Company's Deferred Compensation Plan and Trust Agreement and/or any other employee benefit plans with respect to which benefits are not yet currently payable to you. This Agreement may be amended only by written amendment duly executed by both parties hereto 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 Mr. Stephen Bergstrom Page 12 May 8, 1997 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 --------- ----------------- Stephen Bergstrom NGC Corporation 1715 Chestnut Grove 1000 Louisiana, Suite 5800 Kingwood, Texas 77345 Houston, Texas 77002-5050 (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 compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. (h) In the event that the Incentive Compensation Plan, the Deferred Compensation Plan and Trust Agreement, the Option Plan or the Stock Option Plan are amended to reduce, modify limit or restrict any of your accrued or vested rights thereunder, no such amendment shall apply to you without your written consent. (i) The Company, during the Term of this Agreement and for all times thereafter, until such time that you and/or your estate can no longer, due to expiration of all applicable statutes of limitation, be subject to any civil, criminal or administrative action, suit or proceeding by reason of the fact that you were a director or officer of the Company, shall maintain Directors and Officers Liability Insurance covering you (or your estate, if you are deceased or incompetent), which provides coverage at least as favorable to you (or your estate, if you are deceased or incompetent), as coverage under the Company's policy in effect on December 31, 1996, and which coverage shall be increased from time to time in such amounts as the Board may determine to be appropriate in light of the Company's operations. (j) The Company will not amend the provisions of its governing documents which pertain to your indemnification in your capacity as an officer and/or member of the Board of the Company except to substitute therefor provisions which are more favorable to you, except as otherwise required by law or the rules of any securities exchange or similar entity, or by applicable law. Mr. Stephen Bergstrom Page 13 May 8, 1997 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/ Michael B. Barton ------------------------------------ Its: Vice President-Human Resources ----------------------------- AGREED AND ACCEPTED this 8th day of May, 1997, and effective as of May 15, 1997 /s/ Stephen W. Bergstrom - ---------------------------------- Stephen W. Bergstrom Bergstrom Employment Agreement - Schedule I EXECUTIVE PERQUISITES Except as provided below, as long as you remain in the employment of the Company during the Term of this Agreement, you will be entitled to the following: 1. Personal country club membership in Kingwood Country Club, including dues and all business-related expenses reimbursed. This membership shall be assigned to you in the event of termination of the Agreement for any reason, and you shall pay dues from the date of termination but you shall not be obligated to reimburse the Company for any amounts paid by the Company prior to termination. Notwithstanding anything to the contrary in this Agreement or this Schedule, in no case shall the Company be obligated to pay any amount of dues, fees or reimbursement for or to any country club or luncheon club that, in the determination of the Board in its sole discretion, restricts membership or the performance of services or the use of facilities on the basis of race, religion, gender or national origin. 2. Personal membership in two (2) Houston luncheon clubs of your choice, including dues and all business-related expenses reimbursed. These memberships shall be assigned to you in the event of termination of the Agreement for any reason, and you shall pay dues from the date of termination but you will not be obligated to reimburse the Company for any amounts paid by the Company prior to termination. 3. Vacations and holidays in accordance with the Company's policies in effect from time to time for its senior executive officers, but not less than six (6) weeks of vacation during each fiscal year. 4. A benefit package including medical, hospital, dental, disability and life insurance plans and coverage for you and your spouse and children at least as favorable to you (and your spouse and children) as that provided to you immediately prior to the commencement of the Term of this Agreement unless, with respect to any particular plan or coverage, the continuation of such existing plan or coverage would have material adverse financial or regulatory consequences to the Company. 5. Reimbursement of fees for annual medical physical examinations and for financial planning and income tax preparation (and reasonable accounting and legal fees associated therewith), which fees shall not in the aggregate exceed Twenty-Five Thousand Dollars ($25,000) annually. 6. Use of any aircraft owned or leased by the Company for Company business in accordance with the policies adopted by the Board, which policy is subject to the approval of the Board after May 15, 1997. You may also, in accordance with such policies, which shall not be amended as they apply to you without your prior consent, use any aircraft owned or leased by the Company for your own personal business; provided, however, that (i) such use does not adversely interfere with the use of such aircraft for Company business, (ii) you shall maintain any records reasonably requested by the Board, (iii) you shall compensate the Company for such use at the Company's actual after-tax costs for the use of such aircraft, and (iv) such personal use by you does not exceed twenty-five (25) hours of flight time usage of such aircraft on a calendar year basis. You shall be responsible for paying any income taxes attributable to taxable income arising from such aircraft use. EX-10.11 10 EMPLOYMENT AGREEMENT FOR CLARKE Exhibit 10.11 April 8, 1997 Mr. John U. Clarke 6540 Rutgers Houston, Texas 77005 Dear John: 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 Senior Vice President and Chief Financial Officer. You will be responsible for the duties typical to such position and shall have such other duties as may be delegated from time to time by your immediate supervisor. 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. For the Term of this Agreement you shall report to the Company's Chief Executive Officer and be a member of the Company's Corporate Strategy and Policy Committee. In addition, you will be permitted to continue as Director of Allwaste, Inc. and such other business, professional or charitable affiliations with the prior written approval of the Company's Chief Executive Officer. 2. TERM (a) Unless earlier terminated as provided for herein, the Term of this Agreement will be for five years, beginning no later than April 22, 1997. (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 shall have received Mr. John U. Clarke April 8, 1997 Page 2 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 of such termination. For purposes of this Agreement, you may be terminated for "cause" 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 is likely to be 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 a cash payment within 30 days of termination of $5,000,000 less any compensation received prior to termination and less the value of any already exercised or vested options exercisable, provided however, that such payment shall not be greater than 2.99 times the sum of your base salary plus guaranteed annual bonus at the time of your termination. In addition, any employee stock options granted to you during the term of your employment shall become fully vested as of the date of termination and shall be exercisable for a period of one year thereafter. Also at your option, you will receive medical and life insurance coverage for the remainder of the Term at the same cost as provided to employees. 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 Paragraphs 3(c) and 3(d) or other compensation as described in Paragraphs 3(e), Mr. John U. Clarke April 8, 1997 Page 3 3(f), 3(g) and 3(h) is reduced; (ii) 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 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. Mr. John U. Clarke April 8, 1997 Page 4 (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 $250,000 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. (b) You shall be a participant in the Company's Incentive Compensation Plan. You shall receive a guaranteed bonus of at least $100,000 per annum during the five year Term with the first such payment to be made on or before March 31, 1998. As part of NGC's incentive compensation program, you will have the opportunity to earn Additional Compensation, dependent upon NGC's financial performance and other personal strategic objectives, determined in accordance with such program. (c) Upon your start date, 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 $250,000. The options are subject to the vesting, forfeiture and other terms and conditions of the EEOP. In addition, you will receive a cash payment within 5 days of hire of $250,000 (the sign-on bonus). (d) Each year during the Term of this Agreement, commencing with the date of hire and continuing thereafter in December of 1997, 1998, 1999 and 2000, 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 $250,000. You recognize that the projected value is subject to the future market performance of the Company Mr. John U. Clarke April 8, 1997 Page 5 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 an 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 $250,000 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) In the event you remain employed by the Company at the end of the Term of this Agreement, and if your total compensation (i.e. sign-on bonus, base salary, incentive compensation, and the value at time of termination of any EEOP and market options granted pursuant to Paragraphs 3(a), 3(b), 3(c) and 3(d)) during the Term of this Agreement is less than $5 million, then NGC will either (i) make a cash payment to you for the difference or (ii) grant you additional options which shall be fully vested with an in-the-money value equal to the difference. (f) 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. Pursuant to the terms of NGC's vacation policy you will be entitled to four weeks per year of paid vacation. (g) The Company will pay an additional $5,000 per year 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. (h) You shall be entitled to participate in such other plans and receive such other perquisites as the Board of Directors of the Company in its sole discretion determines, including but not limited to reserved parking, annual physical examination and federal income tax planning and return preparation not to exceed $25,000 annually. Mr. John U. Clarke April 8, 1997 Page 6 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 twelve 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 Mr. John U. Clarke April 8, 1997 Page 7 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 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 Paragraph 4(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 such 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 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 Mr. John U. Clarke April 8, 1997 Page 8 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 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 adjudged 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. Subject to the limitations set forth below, 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 Mr. John U. Clarke April 8, 1997 Page 9 as the arbitrators' fees and expenses, in such proportions as the arbitrator(s) deem just; provided however, notwithstanding the above, in the event you are the prevailing party, then the Company agrees to reimburse you for all such costs of arbitration, including but not limited to attorneys' fees and arbitrators' fees and expenses reasonably incurred by you; provided further, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses, that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). 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 combination. (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 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 Mr. John U. Clarke April 8, 1997 Page 10 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: John U. Clarke NGC Corporation 6540 Rutgers 1000 Louisiana, Suite 5800 Houston, TX 77005 Houston, TX 77002-5050 (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 compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. Mr. John U. Clarke April 8, 1997 Page 11 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 14th day of April, 1997, and effective as of April 22, 1997 /s/ John U. Clarke - ---------------------------- John U. Clarke EX-10.12 11 EMPLOYMENT AGREEMENT FOR RANDOLPH Exhibit 10.12 January 1, 1997 Mr. Kenneth E. Randolph 9537 Bayou Brook Houston, Texas 77063 Dear Ken: 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 Senior Vice President and General Counsel. You will be responsible for the management of the Company's Legal & Regulatory Department and shall have such other duties as may be delegated from time to time by your immediate supervisor. You will be located at NGC's headquarters in Houston, Texas. 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 three years, beginning on January 1, 1997 (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 provisions of Paragraphs 5 and 6), 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 Mr. Kenneth E. Randolph January 1, 1997 Page 2 date of such termination. For purposes of this Agreement, you may be terminated for "cause" as a result of (i) refusal to implement or adhere to lawful 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 is likely to be 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 which is not cured within 10 days after written notice of such failure is provided to you by NGC; 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 prior to or 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(c) or other compensation as described in Paragraphs 3(d), 3(e) and 3(f) is reduced; (ii) 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) Mr. Kenneth E. Randolph January 1, 1997 Page 3 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 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 Mr. Kenneth E. Randolph January 1, 1997 Page 4 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 $250,000 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. (b) You shall be a participant in the Company's Incentive Compensation Plan. You shall receive a guaranteed bonus of at least $100,000 per annum during the three year Term. Such guaranteed bonus shall be in addition to the payment during the Term of this Agreement of any bonus which was granted to you prior to the date of this Agreement. As part of NGC's incentive compensation program, you will have the opportunity to earn Additional Compensation, dependent upon NGC's financial performance and other personal strategic objectives, determined in accordance with such program. (c) Each year during the Term of this Agreement, commencing December 1, 1997 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 present value of the five year projected gain of $375,000 ("Projected Value"). 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 an 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 with a present value of $375,000 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. (d) 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. Pursuant to the terms of NGC's vacation policy you will be entitled to four weeks per year of paid vacation. Mr. Kenneth E. Randolph January 1, 1997 Page 5 (e) The Company will pay an additional $5,000 per year 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. (f) You shall be entitled to participate in such other plans and receive such other perquisites as the Board of Directors of the Company in its sole discretion determines, including but not limited to, reserved parking, downtown luncheon club monthly dues, health club monthly dues, annual physical examination, financial and/or federal income tax planning and return preparation not to exceed $25,000 annually. 4. CONFIDENTIALITY You recognize and acknowledge that: Mr. Kenneth E. Randolph January 1, 1997 Page 6 (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 twelve months following the termination of your employment for any reason other than pursuant to Paragraph 2(c) above, 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, Mr. Kenneth E. Randolph January 1, 1997 Page 7 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 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 Paragraph 4(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 such company. (d) For a period of twenty-four months after the expiration or termination of your employment for whatever reason other than pursuant to Paragraph 2(c) above or for a period of twelve months following the termination of your employment pursuant to Paragraph 2(c) above, 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 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. Mr. Kenneth E. Randolph January 1, 1997 Page 8 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 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. The foregoing indemnification provisions shall be in addition to any other rights to indemnification to which you may be entitled. 6. ARBITRATION The parties hereto may attempt to resolve any dispute hereunder informally via mediation or other means. Otherwise, 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; provided however, notwithstanding the above, in the event you are the prevailing party, Mr. Kenneth E. Randolph January 1, 1997 Page 9 then the Company agrees to reimburse you for all such costs of arbitration, including, but not limited to attorneys' fees and expenses reasonably incurred by you; provided further, notwithstanding the above, in the event the Company is the prevailing party, then the total costs of arbitration, including but not limited to attorneys' fees reasonably incurred by the Company and arbitrators' fees and expenses that may be allocated to you by the arbitrator(s) shall not in any event exceed Twenty-Five Thousand Dollars ($25,000). 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 combination. (c) Except as otherwise provided herein, the provisions of Paragraphs 4, 5 and 6 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. Mr. Kenneth E. Randolph January 1, 1997 Page 10 (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: Kenneth E. Randolph NGC Corporation 9537 Bayou Brook 1000 Louisiana, Suite 5800 Houston, TX 77063 Houston, TX 77002-5050 (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 compensation provided under this Agreement to be paid) following your termination of employment, by seeking employment or otherwise. Mr. Kenneth E. Randolph January 1, 1997 Page 11 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 21st day of May, 1997, and effective as of January 1, 1997 /s/ Kenneth E. Randolph - ----------------------------- Kenneth E. Randolph EX-12.1 12 RATIO OF EARNINGS EXHIBIT 12.1 NGC CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ IN 000'S) - --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- -------- ------- ------- ------- Computation of Earnings: Pre-tax income (loss) from continuing operations $(149,895) $169,645 $65,234 $44,105 $46,776 Undistributed income from equity investees 4,073 21,729 9,169 3,803 -- --------- -------- ------- ------- ------- Computed Earnings (Loss) (153,968) 147,916 56,065 40,302 46,776 --------- -------- ------- ------- ------- Fixed Charges: Interest costs: Expensed 63,455 46,202 34,475 1,114 642 Capitalized 8,800 1,200 1,028 -- -- Minority interest in income of a subsidiary 9,841 -- -- -- -- Amortization of financing costs 943 772 1,132 1,267 1,130 Amortization of Premium (6,768) (4,892) (3,216) -- -- Rental expense representative of interest factor 13,572 4,171 3,719 955 801 --------- -------- ------- ------- ------- Total Fixed Charges 89,843 47,453 37,138 3,336 2,573 --------- -------- ------- ------- ------- Earnings Before Income Taxes and Fixed Charges $ (72,925) $194,169 $92,175 $43,638 $49,349 ========= ======== ======= ======= ======= Ratio of Earnings to Fixed Charges (a) 4.09 2.48 13.08 19.18 ========= ======== ======= ======= =======
(a) Earnings are inadequate to cover fixed charges for the year ended December 31, 1997, by approximately $72.9 million. EX-22.1 13 SUBSIDIARIES Exhibit 22.1 NGC SUBSIDIARIES
STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------- 701289 Alberta Ltd. Alberta Accord Energy Limited England Avoca Natural Gas Storage New York BPC Gas Processors, L.L.C. Delaware Bradshaw Gathering System Texas Cedar Bayou Fractionators, L.P. Delaware Clearinghouse Holdings, Inc. Delaware Destec Energy, Inc. Delaware Downstream Energy Ventures Co., L.L.C. Delaware ECI Capital Corporation Texas Electric Clearinghouse, Inc. Texas Ellisburg Leidy N.E. Hub Company Pennsylvania Enerchange, L.L.C. Delaware Gulf Coast Fractionators Texas GWE Marketing, Inc. Alberta Hub Services, Inc. Delaware Kansas Gas Supply Corporation Delaware LPG Services Group, Inc. Missouri Midstream Barge Company L.L.C. Delaware Natural Gas Clearinghouse Colorado Natural Gas Clearinghouse, Inc. Delaware Natural Gas Clearinghouse of Argentina, Inc. Delaware Natural Gas Clearinghouse of Mexico, Inc. Delaware
STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------- NFI, Inc. Texas NGC Avoca, Inc. Delaware NGC Canada Inc. Alberta NGC Cayman Colombia, Ltd. Cayman Island NGC Cayman Holdings, Ltd. Cayman Island NGC Cayuta, Inc. Delaware NGC Colombia, Inc. Delaware NGC Colombia, S.A. Colombia NGC Europe Limited England NGC Global Energy, Inc. Delaware NGC Global Liquids, Inc. Delaware NGC GP Inc. Delaware NGC Great Britain Limited England NGC Holding Company, Inc. Delaware NGC I.T., Inc. Delaware NGC Mexico, S.A. de C.V. Mexico NGC Oil Trading and Transportation, Inc. Texas NGC Regulated Holdings, Inc. Delaware NGC Storage, Inc. Delaware NGC Steuben, Inc. Delaware NGC Transportation, Inc. Delaware NGC UK Limited England NGCC Ltd. Alberta
STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------- NICOR Energy, L.L.C. Delaware NIPC, Inc. Texas NOTTI Gathering Company, Inc. Delaware NOTTI Pipeline Company Delaware Novagas Clearinghouse Core Ltd. Ontario O'Keene Gas Gathering Company Oklahoma Ozark Pipeline, Inc. Delaware Phantex Pipeline Company Delaware QuickTrade Canada Inc. Alberta QuickTrade Canada, Limited Partnership Alberta QuickTrade, L.L.C. Delaware Tabbie Energy Ltd. Alberta Tekas Pipeline, L.L.C. Delaware Trinity River Intrastate Pipeline Company Texas Venice Energy Services Company, L.L.C. Delaware Venice Gathering System, L.L.C. Delaware Warren Arkansas Gathering, Inc. Arkansas Warren Energy, Inc. Texas Warren Energy Resources, Limited Partnership Delaware Warren Gas Liquids, Inc. Delaware Warren Gas Marketing, Inc. Delaware Warren Intrastate Gas Supply, Inc. Delaware Warren NGL, Inc. Delaware
STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------- Warren NGL Pipeline Company Delaware Warren Petroleum Company, Delaware Limited Partnership Warren Petroleum G.P., Inc. Delaware Warren Transportation, Inc. Delaware Waskom Gas Processing Company Texas West Texas LPG Pipeline Limited Partnership Delaware WPC LP, Inc. Delaware WTLPS, Inc. Delaware BCC CoGen, Inc. Texas BBC Power, Inc. Delaware Bear Claw CoGen, Inc. Delaware Bear Mountain CoGen, Inc. Texas Black Mountain CoGen, Inc. Delaware Brea Canyon CoGen, Inc. Texas CC CoGen, Inc. Texas CC Cogeneration Company Delaware CEC Prime, Inc. California Central Florida DGE, Inc. Delaware Chalk Cliff CoGen, Inc. Texas Chesapeake Power, Inc. New York CoGen Lyondell, Inc. Texas CoGen Poso Creek, Inc. Texas CoGen Power, Inc. Texas Corona Energy Corporation California Delta CoGen, Inc. Delaware Destec Australian Investments, Inc. Delaware Destec Australian Trustee, Ltd. Cayman Island Destec do Brasil Ltda Brazil Destec Brazil, Inc. Delaware Destec Engineering, Inc. Texas Destec Fuel Resources, Inc. Texas Destec Gas Properties, Inc. Delaware
STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------- Destec Gas Services, Inc. Delaware Destec Holdings, Inc. Delaware Destec Latin America, Inc. Delaware Destec Management Services, Inc. Texas Destec North American Ventures, Inc. Delaware Destec Operating Company Texas Destec Parts and Technical Services, Inc. Texas Destec Philippines Development, Inc. Delaware Destec Power Services, Inc. Delaware Destec Properties, Inc. Delaware Destec South America Development, Inc. Delaware Destec Ventures, Inc. Delaware Destec-Crockett, Inc. Delaware Double "C" CoGen, Inc. Texas El Segundo, Inc. Delaware El Segundo Power, LLC Delaware Florida CoGen Development, Inc. Delaware Gasification Services, Inc. Delaware HEP CoGen, Inc. Texas Hart County IPP, Inc. Delaware Hartwell Independent Power Partners, Inc. Delaware Hartwell Power Company Delaware James River Energy Corp. Virginia Kern Front CoGen, Inc. Texas
STATE OR JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION - ------------------ --------------- Live Oak CoGen, Inc. Texas Long Beach Power, Inc. Delaware Long Beach Generation LLC Delaware Louisiana Gasification Technology, Inc. Delaware Michigan CoGen, Inc. Delaware Michigan Power Holdings, Inc. Delaware Michigan Power, Inc. Delaware Northway CoGen, Inc. Texas OCG CoGen, Inc. Delaware Oyster Creek CoGen, Inc. Delaware Polk County CoGen, Inc. Delaware Port Arthur CoGen, Inc. Delaware SJC CoGen, Inc. Texas San Joaquin CoGen, Inc. Texas Sierra CoGen, Inc. Texas
EX-23.1 14 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated March 20, 1998, included 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 Form S-3 (File No. 333-12987). ARTHUR ANDERSEN LLP Houston, Texas March 30, 1998 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 23,047 50,209 0 0 1,675,772 1,518,385 0 0 136,485 257,005 2,018,780 1,936,721 1,958,250 1,819,811 (436,674) (128,432) 4,516,903 4,186,810 (1,753,094) (1,548,987) 0 0 (200,000) 0 (75,418) (75,418) (1,518) (1,498) (942,189) (1,039,817) (4,516,903) (4,186,810) (13,378,380) (7,260,202) (13,378,380) (7,260,202) 12,993,086 6,890,702 12,993,086 6,890,702 20,230 11,505 0 0 63,455 46,202 (149,895) 169,645 62,210 (56,323) (87,685) 113,322 0 0 0 0 (14,800) 0 (102,485) 113,322 (0.68) 0.99 0 0.83
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