Back to GetFilings.com
================================================================================
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
fa