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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-10592

DESTEC ENERGY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 38-2875546
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2500 CITYWEST BLVD., SUITE 150
HOUSTON, TEXAS 77042
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (713) 735-4000

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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value The New York Stock Exchange, Inc.

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants 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. [X]

The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 19, 1997 was approximately $227,100,969. As of March 19,
1997, there were 56,127,024 shares of common stock, $0.01 par value,
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

NONE.

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DESTEC ENERGY, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

TABLE OF CONTENTS

PAGE
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PART I

Items 1, 2 and 3. Business, Properties and Legal Proceedings................................................ 1

Item 4. Submission of Matters to a Vote of Security Holders............................................ 15

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters....................... 16

Item 6. Selected Financial Data........................................................................ 17

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 17

Item 8. Financial Statements and Supplementary Data.................................................... 27

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 61

PART III

Item 10. Directors and Executive Officers of the Registrant............................................. 61

Item 11. Executive Compensation......................................................................... 63

Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 67

Item 13. Certain Relationships and Related Transactions................................................. 68

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 70

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended December 31, 1996
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. Future events and actual results,
financial and otherwise, may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to those, discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

PART I

ITEMS 1, 2, AND 3. BUSINESS, PROPERTIES AND LEGAL PROCEEDINGS

BUSINESS

OVERVIEW

Destec Energy, Inc. (together with its subsidiaries, "Destec") is one of the
largest independent producers of electricity in the world. Destec is in the
business of (i) developing, operating and managing projects which produce
electricity, thermal energy and syngas; (ii) marketing and selling electricity,
thermal energy, natural gas and lignite; and (iii) investing in projects,
entities and natural resources which support its strategic objectives. As an
independent power company, Destec has interests in 24 operating facilities, the
majority of which Destec operates and manages. All of Destec's facilities,
except the Wabash Project (defined below), produce and sell electric power, and
the majority of these facilities produce thermal energy, principally steam, to
electric utilities and energy intensive industries. Four of Destec's 24
operating facilities are located outside the United States. The combined gross
capacity of these facilities is approximately 5,136 megawatts ("MW") of
electricity and over three million pounds per hour of steam. Destec currently
has two projects, representing approximately 850 MW of capacity in construction
or advanced development. See "Destec Energy's Projects -- Projects in Operation"
and "-- Projects in Advanced Development or Under Construction."

Destec is the successor to a portion of the energy businesses developed by
The Dow Chemical Company ("Dow"). Dow transferred to Destec certain assets,
technologies, personnel and expertise involved in the production and marketing
of electricity, steam and syngas. To complement these capabilities, in December
1989, Destec acquired PSE Inc., now known as Destec Holdings, Inc. ("DHI"), a
company with a 20-year history in the development, engineering, construction,
ownership and operation of gas-fired cogeneration facilities. Prior to its
initial public offering in March 1991, Destec was a wholly owned subsidiary of
Dow. Dow currently owns approximately 80.2% of Destec's outstanding common
stock. See "Recent Developments."

Destec's business strategy continues to be based on being the low-cost
producer of electric power by expanding and strengthening its position as a
developer, operator and marketer of electricity, thermal energy and syngas.
Assuming the Merger (defined below) is not consummated, Destec will continue to
utilize the cash flows from its existing business to invest in and develop power
and syngas projects in domestic and international markets. See "Recent
Developments."

Destec was incorporated in 1989 in Delaware. Its principal executive offices
are located at 2500 CityWest Boulevard, Suite 150, Houston, Texas 77042, and its
telephone number is (713) 735-4000.

RECENT DEVELOPMENTS

On January 17, 1997, Tiger Bay Limited Partnership, in which Destec holds an
equity interest of approximately 50%, executed an agreement for the sale of the
nominally rated 220 megawatt Tiger Bay cogeneration facility, located in Fort
Meade, Florida to a wholly owned subsidiary of Florida Power Corporation
("Florida Power") for approximately $445 million. Destec's estimated share of
the proceeds after repayment of partnership debt and the net settlement of other
partnership obligations is anticipated to be approximately $140 million. The
sale is subject to certain conditions, including, without limitation, regulatory
approvals and the sale of Destec.

On February 17, 1997, Destec executed an Agreement and Plan of Merger (the
"Merger Agreement"), by and among Destec, Dow, NGC Corporation ("NGC") and NGC
Aquisition Corporation II, a wholly owned subsidiary of NGC ("Purchaser"),
pursuant to which, among other things, Purchaser will merge with and into Destec
(the "Merger"). The surviving corporation after the Merger will be a wholly
owned subsidiary of NGC. Pursuant to the Merger Agreement, among other things,
each outstanding share of Destec's common stock, par value $0.01 per share (the
"Common Stock"), will be converted into

the right to receive $21.65 in cash (the "Merger Consideration"). The
consummation of the Merger is subject to certain conditions, including the
approval by the holders of at least 66 2/3% of the outstanding Common Stock, as
well as the approval by federal antitrust authorities and the Federal Energy
Regulatory Commission ("FERC").

DESTEC'S PRODUCTS AND SERVICES

POWER PRODUCTION

BACKGROUND. The projects which Destec develops, operates and manage produce
energy in the form of electricity and syngas in cogeneration plants, exempt
wholesale generators and a coal gasification plant. 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). The economic benefit from a cogeneration
project can be substantial, because the steam produced by a cogeneration plant
is sold to an industrial user. In contrast, exempt wholesale generators generate
electric power typically for a utility, but require no industrial user to
purchase any steam generated by the project. Destec's coal gasification plant
produces syngas, which serves as an alternative fuel in power generation
facilities.

Prior to 1992, regulatory constraints prevented Destec from developing
exempt wholesale generators and limited Destec's electric power production
operations to cogeneration facilities. See "-- Domestic Power Market."
Consequently, of the 23 electric power production facilities and one operating
coal gasification facility in which Destec has an interest, 17 are cogeneration
facilities. Since 1992, however, the power industry has emphasized exempt
wholesale generators. Destec management expects that, in the future, its
electric power production operations will also emphasize exempt wholesale
generators, in addition to cogeneration projects.

DOMESTIC POWER MARKET. Historically in the United States, regulated and
government-owned utilities have been the only significant producers of electric
power for sale to third parties. The energy crisis of the 1970s led to the
enactment of the federal Public Utility Regulatory Policies Act of 1978
("PURPA"), which encouraged companies other than utilities 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"). See "Regulatory Matters -- Energy Regulation." As a
result of PURPA, a significant market for electric power produced by independent
power producers such as Destec developed in the United States. In 1992, Congress
enacted the Energy Policy Act of 1992 ("Energy Act"), which amended 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. Implementation of
federal and state policies resulting in increased availability of transmission
access for wholesale and retail transactions could create additional markets and
competition for electricity power sales.

INTERNATIONAL POWER MARKET. As a result of the increased demand for power
generating capacity around the world, the fastest growing area of the power
industry today is the international sector. This has led to increased emphasis
by foreign governments toward privatization of state-owned utilities. Experts
estimate that the international market represents 85% of the world's new and
replacement power needs. At the same time, the national, provincial and local
laws of each host country, unique political and currency exchange requirements,
and the application of new worldwide environmental standards to international
projects, create new risks and obligations to be managed.

As the international market for power has continued to expand, Destec has
formed Destec Energy (Asia) Pte, Ltd., a Singapore corporation ("Destec Asia")
to provide business development services in Asia and the Far East, complementing
the business development services provided by Destec Europe, S.A. in Europe,
Africa and the Middle East. Destec's business development services in Central
and South America are provided by Destec's Houston office. Each of these offices
assist Destec in identifying opportunities for the development, acquisition or
investment in projects in their respective regions. Destec's management is
evaluating several international development and acquisition projects in areas
including Asia, Australia, the Far East, Europe, Africa, the Middle East and
Latin America.

COAL GASIFICATION -- SYNGAS

Syngas is produced through a coal gasification process and can be used as a
substitute fuel for natural gas in gas-fired generating facilities. Destec
produces syngas through a proprietary coal gasification process that removes
sulfur and results in lower sulfur dioxide, nitrogen oxide and carbon dioxide
emissions than alternative coal-based technologies such as pulverized coal and
circulating fluidized bed boilers. The Clean Air Act and recent amendments
thereto contain provisions that regulate the amount of sulfur dioxide and
nitrogen oxide that may be emitted by a generating project, as these emissions
may be a cause of acid rain. Compliance with these environmental emission
regulations under the Clean Air Act, especially for coal-burning facilities, may
be enhanced by use of such coal gasification technology.

Key factors influencing the market potential for syngas and syngas-based
power generation include end users' commitment to coal-based energy production,
the extent of restructuring and plant life extensions of utility plants, the
availability and cost of delivered coal, the difference between natural gas and
coal prices, the availability of natural gas, regulatory efforts to reduce acid
rain and other related emissions, regulatory, strategic and legislative
incentives to utilize coal-based energy sources and the reliability and cost
effectiveness of syngas technology relative to natural gas and other coal-based
technologies. In recent years, the price of natural gas has been low relative to
the price of coal, which resulted in a shift from coal to natural gas as the
primary fuel source for new energy-producing facilities. As a result, syngas
technology has become less attractive.

Destec currently has an interest in one operating facility for the
production of syngas using its proprietary technology: the Wabash River Coal
Gasification Project in West Terre Haute, Indiana ("Wabash Project"), which
commenced commercial operation in 1995. In addition, until June 1996, Destec had
an interest in a facility near Plaquemine, Louisiana (the "LGTI Facility"),
which was constructed by Dow in 1987 and which was decommissioned by Destec in
1995. Each of these facilities was designed to convert coal through a
gasification process into a refined grade of syngas suitable for use as a fuel
in gas turbines.

In September 1991, the Wabash Project, a joint venture between Destec and
PSI Energy, Inc. ("PSI") was selected by the U.S. Department of Energy ("DOE")
to participate in the DOE's Clean Coal IV Program. Under this program and a
related agreement among the DOE, Destec and PSI, the DOE shares up to $219
million of the cost of the Wabash Project. In June 1996, Destec refinanced the
operating lease for the gasification portion of the Wabash Project. Under the
operating lease, a wholly owned subsidiary of Destec is the lessee and Destec
guarantees the payments of such subsidiary thereunder. The lease expires in
April 2001. Construction of the Wabash Project was completed in the third
quarter of 1995, with commercial operation achieved in the fourth quarter of
1995. After an initial demonstration period, the project is expected to operate
commercially as part of PSI's electrical generating system. Destec is currently
making improvements at the plant at an estimated cost of $14 million, with
completion expected in 1997.

The LGTI Facility was constructed pursuant to an agreement with the U.S.
Department of Treasury ("Treasury Department") that required the Treasury
Department to make certain payments ("Guaranteed Payments") for the sale of
syngas when such payments were earned under the agreement, through the first
quarter of 1997. The LGTI Facility also received revenues from Dow for the sale
of syngas. Substantially all

of the Guaranteed Payments were earned by late 1995. In November 1995, the LGTI
Facility ceased operations and commenced decommissioning after a shutdown,
because it would not have been economical to restart and operate the plant given
that substantially all Guaranteed Payments had been earned. As a result,
approximately $0.1 million of the Guaranteed Payments will not be received. In
June 1996, Dow and Destec entered into a settlement agreement regarding the
decommissioning of the LGTI Facility under which Destec has agreed to reimburse
Dow for clean-up and disposal expenses up to a maximum of $250,000. Destec also
agreed to transfer the LGTI Facility and related equipment to Dow but retained
ownership of a slag (an inert, non-leaching ash by-product of gasification
process) pile on Dow property and will receive revenues from any Destec sale of
slag product to third parties. Destec has agreed to perform a clean closure of
the slag pile within five years.

POWER MARKETING

In August 1994, Destec designated a wholly owned subsidiary, Destec Power
Services, Inc. ("DPS"), to engage in the business of brokering and marketing
electric power at the wholesale level. In January 1995, Destec received approval
from the FERC to do business as a power marketer nationwide, and received the
necessary rate approvals and other regulatory exemptions for power marketing
activities. DPS has received an export permit from the Canadian National Energy
Board that authorizes the export of electricity from Canada into the United
States. DPS has also received an export license from the United States
Department of Energy that authorizes the export of electric energy from the
United States to Mexico. Formation of this subsidiary and receipt of regulatory
approval has enabled Destec to expand its range of products and enhance the
productivity and economic contribution of its existing generation assets. DPS
currently has significant power marketing activities in the States of California
and Texas. DPS is currently marketing power through its Western Operations and
Southern Operations located in Walnut Creek, California and Houston, Texas
respectively.

CALIFORNIA. Destec and Pacific Gas & Electric Company ("PG&E") have entered
into the first comprehensive control area and network transmission services
agreement between a utility and a power marketer. This agreement enables DPS to
purchase and aggregate power from a number of generating sources, including the
excess of firm contract capacity from Qualifying Facilities under contract with
PG&E. The network transmission services agreement also allows DPS to market
power directly to wholesale customers over PG&E's transmission lines. The FERC
accepted and approved this network transmission agreement in April 1995. See
"Regulatory Matters".

In September 1995, DPS entered into a contract with the Port of Oakland
Authority in Oakland, California, which provides that DPS will supply seven
megawatts of electricity to The Metropolitan Oakland International Airport for
five years which commenced January 1, 1996. Transmission services are provided
under the control area and network transmission agreement. The management of
Destec believes that the contract is a first between a power marketer and a full
requirements customer. In addition, DPS continues to pursue power marketing
agreements to enable DPS to secure low cost energy for marketing and to market
that energy to potential purchasers. PG&E has resisted DPS's attempt to
aggressively pursue various facets of such California wholesale opportunities.

TEXAS. Pursuant to an agreement between Destec and Dow, Destec provided
administrative, business management and marketing services with respect to
excess capacity and energy produced by Dow's Freeport, Texas cogeneration
facilities. Prior to expiration of a power sales agreement between Texas
Utilities Electric Company ("TUEC") and Dow in April 1995, Destec marketed 100
MW to TUEC. Since the expiration of this agreement, DPS has marketed, on behalf
of Dow, certain excess capacity and energy to purchasers from time to time and
has been compensated by Dow for such services.

For power marketing in Texas, Destec has focused on maximizing the value of
uncommitted capacity and energy from existing Texas operating projects and
through market opportunities. Through its Southern Operations, DPS is marketing
capacity, energy, and ancillary services to several utilities and power

marketers including Central and Southwest Services, Inc, ("CSW"), Houston
Lighting & Power Company ("HL&P"), The Lower Colorado River Authority ("LCRA"),
South Texas Electric Cooperative ("STEC"), Texas-New Mexico Power Co. ("TNP"),
Enron Power Marketing and LG&E Power Marketing. In addition to these spot sales
and short-term contracts, DPS has a long-term contract with LCRA for capacity
and associated energy (up to 230 MW) and is nearing approval of a long-term,
full-requirements contract with another utility. DPS' Southern Operations also
markets power from the CoGen Lyondell facility (the "CLI Facility") and other
non-utility facilities and coordinates with other generators within the Electric
Reliability Council of Texas ("ERCOT") to market ancillary services.

In February 1996, CoGen Lyondell, Inc., a wholly owned subsidiary of Destec
("CLI"), and Lyondell Petrochemical Company ("LYO") formed a partnership that
was to sublease a portion of the CLI Facility. It was anticipated that the power
generated at the CLI Facility would be distributed to CLI and LYO in proportion
to their partnership percentages, pursuant to the self-generation exception
under the Texas Public Utility Regulatory Act. HL&P challenged the partnership
on the basis that the distribution of electricity under the partnership
structure would constitute a retail sale of electricity. A decision in HL&P's
favor was rendered in Austin District Court in September 1996. Destec is
currently pursuing an appeal of this decision. All deliveries of power from the
CLI Facility to LYO through a private transmission line have been postponed
indefinitely pending appeal.

Destec and DPS are attempting to negotiate new contracts for the sale of
power to industrials, utilities, municipalities, cooperatives and other
wholesale customers. No assurances, however, can be made that new contracts will
be obtained. In addition, the revenues generated from any new contracts will
likely not replace the revenue and gross margin under the agreement with Dow
relating to Dow's Freeport facility. The final negotiated price and quantity for
electricity sold under any contracts that are entered into may differ from the
previous or existing contracts. Contracts having significantly different terms
than the previous contracts substantially reduced Destec's revenues and its
gross margin in 1995 and 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

In Texas, Destec is seeking legislative and regulatory changes which, if
enacted, would open additional Texas markets to independent power producers.
Certain regulatory proceedings at the PUCT may also affect future power sales in
Texas. See "Regulatory Matters -- State Regulation."

PROJECT SERVICES

Since its formation, Destec has utilized its expertise and significant
experience in the areas of development, engineering, environmental affairs,
operating services and management and fuel supply services of energy-producing
projects. These capabilities have also been used by Destec in evaluating
potential investment opportunities in both domestic and international markets.

DEVELOPMENT. The primary factors considered by management in evaluating
potential development, operation and investment opportunities continue to be the
anticipated rate of return on equity investment and cash flow of the project,
the existing and potential future relationship between Destec and the customer,
the availability and reliability of the fuel source and the existing and
potential competition for the proposed project. In particular, in the area of
international development, Destec seeks strategic international partners to
co-develop projects and share project risks. Destec continues to expect a
portion of its growth over the next few years to result from acquisitions of
industry-related operations, both in the United States and internationally.

ENGINEERING. Destec Engineering, Inc. ("Destec Engineering"), a wholly
owned subsidiary of Destec, historically provided expertise on engineering
processes, environmental permitting and conceptual and physical design to
enhance the construction and operation of Destec's cogeneration and independent
power projects and facilitate a smooth transition from the construction to the
operational stage of a project. As a result of Destec's new business strategy
adopted in 1994, Destec has changed the role of

Destec Engineering. Destec Engineering's current role is to manage the
outsourced engineering contractors for each Destec project. Such management also
includes the oversight of all conceptual planning, feasibility studies,
environmental studies and plant, engineering and construction design. As to
those projects currently under active development, Destec Engineering continues
to serve in a more comprehensive role for the engineering and construction of
these projects. See Note 18 of the Notes to Consolidated Financial Statements
for a description of the restructuring.

OPERATING SERVICES. Destec currently provides, through certain of its
wholly owned subsidiaries (collectively, the "Operating Companies"), operating
services for 17 of the 24 power producing facilities in which it has an
interest. The Operating Companies provides these facilities with specialized and
comprehensive operating, maintenance, testing and start-up services. The
employees of the Operating Companies have developed experience and knowledge
from working with gas turbines that allows them to quickly and cost-effectively
develop solutions to problems without relying on manufacturer's representatives.
This translates into high availability and high reliability, as well as
efficient plant operations. One of Destec's Operating Companies also provides
services for the Wabash Project in Indiana, applying its syngas experience from
the LGTI Facility in Louisiana.

MANAGEMENT AND FUEL SUPPLY SERVICES. Asset management services are being
provided on 19 of the 24 projects in which Destec holds an interest. The
objective of the asset management group is to maximize the near-term and
long-term value of a project and ensure that the project owners are well
informed on both the financial and operating results of the project. To ensure
the ongoing profitability of each project, the asset management group
coordinates project activities with, and maintains relationships among, all
project stakeholders, which include owners, customers, lenders, suppliers, and
operators. Various activities are performed to obtain the ongoing profitability,
including: (i) negotiating new contracts and/or amending existing contracts,
(ii) developing annual and long-term business plans and forecasts, (iii)
developing and implementing profit improvement opportunities, (i.e. fuel
hedging, refinancing of project debt, capital improvements, and maintenance
scheduling), (iv) monitoring regulatory, legislative, and environmental affairs,
and (v) providing various accounting and financial services.

ENERGY RESOURCES

Destec owns, manages and invests in certain natural resource assets in
support of its strategic objectives.

LIGNITE. Lignite is a low rank of coal containing 20-45% moisture as mined
and having heating values of 5,500-8,300 Btu per pound. Destec controls lignite
deposits and other lignite-related properties located in two Texas counties,
comprising an aggregate of approximately 77,500 acres. Approximately 9,900 acres
of the total are owned in fee, and approximately 67,600 acres are held under
lease. The total tonnage of lignite owned, managed or leased by Destec is
estimated by Destec to be approximately 640 million tons.

Destec has leased 54,000 acres of these lignite properties to Dow under a
capital lease which requires rental payments to be made to Destec and provides
an option to Dow to purchase such properties at their book value plus cumulative
royalties. In February 1997, Dow delivered notice to Destec that it is
exercising such option and that the exercise price will be paid immediately
prior to the effective time (the "Effective Time") of the Merger. In connection
with the exercise of the option, the parties have agreed to terminate the
capital lease effective as of the Effective Time.

Pursuant to an agreement between HL&P and Dow, Dow leased to HL&P certain of
its lignite properties and assigned to HL&P certain lignite leases held by Dow.
With respect to all of the properties covered by the agreement, Dow received an
initial down payment from HL&P and continues to receive quarterly installment
payments under the lease. The full amount of HL&P's down payment is being
recouped by HL&P through an offset of 25% of the quarterly installment payments
made to Dow by HL&P. The down payment is expected to be fully recouped in 1997.
Dow has assigned to Destec the right

to receive Dow's installment payments. The installment payments are based on a
specified rate, adjusted for inflation.

OIL AND GAS. In 1996, Destec continued to focus on maximizing the value of
its core producing areas, the San Juan Basin in New Mexico and, Colorado, and
the Antrim Shale formation in Michigan. In addition, in May 1996 Destec agreed
to acquire an interest in proved producing natural gas properties associated
with the Piceance Basin in western Colorado. Destec also owns oil and gas
mineral interests in the Cotton Valley Pinnacle Reef trend in East Texas.
Destec's portfolio of properties includes interests in 157,452 gross acres and
60,217 net acres and 457 gross producing natural gas wells. Destec has focused
its acquisition and development of gas reserves in areas that can benefit from
new technology. These include the improvements in the completion and production
technology of gas wells producing from coalbed methane reservoirs in the San
Juan Basin in New Mexico and the Antrim Shale in Michigan and tight gas sands in
the Piceance Basin of Colorado.

In all cases, Destec does not serve as the operator of the properties in
which it owns an interest. Destec continues to aggressively pursue large
conventional gas reserve acquisition opportunities that strategically fit within
Destec's business development strategy. In the natural resource area, Destec
competes with other companies which have interests in lignite, oil and gas.

DESTEC ENERGY'S PROJECTS

PROJECTS IN OPERATION

Destec has significant interests in 24 power projects, each listed below,
most of which utilize the technology and expertise developed by Destec. In July
1996, Destec completed the sale of its ownership interest in the 150 MW Blue
Mountain Power project and, therefore, this project is not included in the
following table. Sales revenues are recognized for the sale of electricity and
steam, but not for operating and management services, from the CoGen Lyondell
and CoGen Power facilities. Operating results, through December 31, 1996, for 20
projects were accounted for by Destec under the equity method of accounting.
Other than the Black Mountain, Commonwealth Atlantic, Crockett CoGen, Hartwell,
Indian Queens, Oyster Creek and Hazelwood projects, each of these projects was
designed, developed and is currently operated by Destec. Destec's share of
earnings from equity investments in these operating projects accounted for
approximately 33%, 27% and 6% of Destec's income before taxes for the years
ended December 31, 1996, 1995 and 1994. See "Management's Discussion and
Analysis -- Results of Operations."

DATE OF ORIGINAL AMOUNT
ELECTRICITY % INTEREST COMMERCIAL PRIMARY POWER PURCHASER AND OF DEBT FINANCING
PROJECT AND LOCATION (IN MWS) IN PROJECT OPERATION CONTRACT EXPIRATION DATE(1) ($MM)
- -------------------------- ----------- ----------- ------------ --------------------------------- -----------------

CoGen Power 5 100% 1983 Great Lakes 57
Port Arthur, Texas Carbon Corporation(2)

CoGen Lyondell 590 Lessee(3) 1985 ARCO Chemical 220(3)
Channelview, Texas Company (1997)

Corona 47 40% 1988 Southern California 33
Corona, California Edison Company (2018)

Kern Front 48 50% 1989 Pacific Gas & Electric 39
Kern County, California Company (2009)

High Sierra 48 50% 1989 Pacific Gas & Electric 40
Kern County, California Company(2009)

Double "C" 48 50% 1989 Pacific Gas & Electric 40
Kern County, California Company (2009)

San Joaquin, 48 25% 1990 Pacific Gas & Electric 60
Stockton, California Company (2020)

Badger Creek 46 50% 1991 Pacific Gas & Electric 58
Kern County, California Company (2011)

McKittrick 46 50% 1991 Pacific Gas and Electric 60
McKittrick, California Company (2011)

Live Oak 46 50% 1992 Pacific Gas & Electric 67
Kern County, California Company (2012)

Commonwealth Atlantic 340 50% 1992 Virginia Electric & 151
Chesapeake, Virginia Power Company (2017)

Black Mountain 85 50% 1993 Nevada Power 114
Las Vegas, Nevada Company (2023)

Hartwell Energy 300 50% 1994 Ogelthorpe Power 160
Hart County, Georgia Corporation (2019)

Oyster Creek 424 50% 1994 The Dow Chemical 410
Freeport, Texas Company (2014)

Tiger Bay(4) 212(5) 50.8% 1995 Florida Power 220
Polk County, Florida Corporation (2025)

Bear Mountain 46 50% 1995 Pacific Gas & Electric 57
Bakersfield, California Company (2015)

Michigan Power 123 50% 1995 Consumers Energy 189
Ludington, Michigan Company (2030)

Wabash 262(6) Lessee 1995 PSI Energy, Inc. (2020) 178
W. Terre Haute, Indiana

Crockett CoGen 240 8-12% 1996 Pacific Gas and Electric Company 260
Crockett, California (2026)

Los Mina 236 99% 1996 Corporacion Dominicana de 69(7)
Santo Domingo, Dominican Electricidad (2011)
Republic

Indian Queens 140 100% 1996 The National Grid Company 56(9)
Indian Queens, Cornwall, Electricity Pool of England and
England Wales(8)

Hazelwood 1,600 20% Various Victoria, Australia Transmission 1,051(10)
Victoria, Australia (1964-1971) Grid

Kingston 110 50% 1996 Ontario Hydro (2017) 143(11)
Ontario, Canada

- ------------------------------

(1) Represents the contractual power purchaser of the largest amount of
electrical power.

(2) Contract is a month-to-month obligation.

(3) The CoGen Lyondell facility includes a sixth turbine addition, which became
operational in 1995, the generating capacity of which is 125 MW. This
addition was 100% Destec financed and is not part of the lease structure.

(4) Tiger Bay Limited Partnership, in which Destec has an approximate 50% equity
interest, has entered an agreement for the sale of the Tiger Bay
cogeneration facility. See "Recent Developments."

(5) The facility's maximum output is 218 MW.

(6) In equivalent MWs.

(7) This amount was 100% Destec financed.

(8) The Indian Queens project has two primary sources of revenue. The project
sells real power (i.e., MW from the turbine) and capacity to the Electricity
Pool of England and Wales under a pooling and settlement agreement that has
no fixed termination date. The project also sells reactive power (i.e., MVAr
synchronous compensation from the generator) under an agreement with The
National Grid Company plc that expires in 2016.

(9) Converted to U.S. dollars at the assumed rate of U.S. $1.5540/L1.00.

(10) Converted to U.S. dollars at the assumed rate of A$0.7931/U.S. $1.00.

(11) Converted to U.S. dollars at the assumed rate of C$0.7289/U.S. $1.00.

PROJECTS IN ADVANCED DEVELOPMENT OR UNDER CONSTRUCTION

Destec is committed to pursuing opportunities to develop power projects in
the United States and internationally, and to seek new applications for its
power generation technology. Among the principal items involved in developing a
project are obtaining a commitment to purchase electric power and steam,
negotiating fuel supply and transportation contracts, selecting a site,
obtaining environmental and other governmental permits and approvals,
negotiating engineering contracts and arranging financing. These items are often
obtained independently of one another and success in obtaining one such item
does not necessarily result in success in obtaining any of the others. No
assurance can be given by Destec that all necessary items will be successfully
obtained for any of the projects currently in development or that any of the
projects discussed below will ultimately be completed. Management estimates that
a project requires from three to five years from opportunity identification to
the completion of financing.

The following table describes Destec's power projects currently under
construction or in advanced development and for which either an electric power
sales contract has been signed or a firm commitment for a substantial amount of
the project's output has been received. All information is provided based on the
status of such projects as of December 31, 1996, and is subject to change during
development and construction.

ELECTRICITY % INTEREST EXPECTED
PROJECT AND LOCATION (IN MWS) IN PROJECT PRIMARY POWER PURCHASER COMPLETION DATE
- ----------------------------------- ------------- ----------- ----------------------------------- -----------------

Chiahui Power 450 50%(1) Taiwan Power 2000
Taiwan
Elsta CoGen 405 50% Deltan and PNEM 1997
Terneuzen, The Netherlands

- ------------------------

(1) Destec owns a 50% interest in the Chiahui Project. Taiwan regulations
currently recognize foreign ownership of no more than 30% of such projects
at the present time. Destec is currently seeking legislation to permit such
ownership interests to exceed 30%.

COMPETITION

COMPETITION IN THE POWER MARKET

The independent power 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. Destec 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 and the marketing of electric power. In the United States, the Energy
Act reduces certain restrictions currently applicable to certain projects which
are not Qualifying Facilities (as further defined below) under PURPA and
provides for the removal of certain impediments to competition in the power
generation industry. Although the provisions of the Energy Act apply only to
wholesale transactions, actions by many state authorities are also increasing
competition for industrial, commercial and other

larger scale customers in the provision of services by Qualifying Facilities,
and independent power projects, as well as power marketers and other unregulated
suppliers. The development rights of Qualifying Facilities, which were
facilitated by certain provisions of PURPA, have not been affected, nor amended,
by the Energy Act. However, proposed legislation has been introduced in Congress
to repeal all or part of PURPA. These federal legislative proposals would not
abrogate or amend existing contracts with electric utilities and would only be
effective prospectively for new contracts.

Legislation to repeal PUHCA is also currently pending in Congress. Although
passage of stand alone legislation repealing PUHCA is not expected during the
current session, eventual repeal or modification of PUHCA is being considered.
Congressional repeal or modification of PUHCA will loosen the strictures
currently placed on utilities and others from acquiring generation and
transmission assets outside of their service territories. This will
significantly increase the competition Destec faces both domestically and
internationally.

The industry is presently characterized by rapid change in the regulatory
and commercial aspects of competition. Although the timing and ultimate effect
of these changes cannot be predicted, management of Destec believes that the
overall effect of the current changes will be to increase competition in the
generation, transmission and sale of electric power. See "Regulatory Matters --
Transmission and Wheeling."

COMPETITION IN THE COAL GASIFICATION-SYNGAS MARKET

In marketing the syngas produced by Destec's coal gasification technology,
Destec competes primarily with other major syngas producers, natural gas
suppliers and other coal technologies. Management believes that certain features
of Destec's proprietary coal gasification technology make it more energy
efficient and lower in capital costs than other coal gasification technologies.
Increased Clean Air requirements and market receptivity for clean coal
technologies may enhance the attractiveness of coal gasification technology for
the remainder of this decade. However, there are many other factors affecting
the development of syngas plants based on coal gasification technology,
including the price of competing fuels, such as natural gas, and the extent of
government participation in the development of alternative fuel technologies.
See "Destec's Products and Services -- Coal Gasification-Syngas" for a
discussion of these factors. At the present time, the cost of syngas relative to
competing fuels is adversely affecting the market for these plants. No assurance
may be given as to the likelihood or timing of any change in these factors.
Management of Destec believes that the largest market for coal gasification
technology may be outside North America, where coal is a more attractive fuel.

REGULATORY MATTERS

Destec is subject to various energy and environmental laws and regulations
at the federal, state and local levels in connection with the development,
ownership and operation of its projects and the sale of energy. Federal laws and
regulations developed by administrative agencies govern transactions with
utility companies, the types of fuel which may be utilized by a project, the
type of energy which may be produced by a project and the ownership and transfer
of interests in a project. State utility regulatory commissions must often
approve the rates and, in some instances, other terms and conditions on which
public utilities purchase electric power from Destec's projects. Under certain
circumstances where specific federal exemptions are otherwise unavailable, state
utility regulatory commissions may have broad jurisdiction over electric power
contracts. Energy-producing projects are also subject to federal, state and
local laws and administrative regulations which govern the emissions and other
substances produced by a project, as well as the geographical location, zoning,
land use and operation of a facility. Applicable federal environmental laws
typically have state and local enforcement monitoring and implementation
provisions. These environmental laws and regulations generally require that a
wide variety of permits and other approvals be obtained before the commencement
of construction or operation of an energy-producing facility and that the
facility then operate in compliance with such permits and approvals.

Development of projects in international markets also creates exposure and
obligations to the national, provincial and local laws of each host country,
unique political and currency exchange requirements, the application of PUHCA to
international projects, worldwide environmental standards and requirements
imposed by multi-lateral lending institutions. Destec identifies and manages
those issues early in the development process to ensure compliance with such
laws and regulations.

Destec believes it is possible that changes in PURPA, PUHCA and other
related federal statutes may occur in the next several years. The nature and
impact of such changes on Destec's projects, operations and contracts is unknown
at this time. Destec is actively monitoring these developments directly and
through industry trade groups to determine such impacts as well as to evaluate
new business opportunities created by restructuring of the electric power
industry. Depending on the outcome of these legislative matters, changes in
legislation could have an adverse effect on current contract prices.

ENERGY REGULATION

As described below, the exemptions from extensive federal and state
regulation afforded by PURPA to Qualifying Facilities are important to Destec
and its competitors. Many of the projects that Destec currently owns meet the
requirements under PURPA to be Qualifying Facilities and are maintained on that
basis. As to those projects which are independent power projects, Destec has
structured them to ensure the necessary exemptions from PUHCA and state
regulation. Additionally, regulatory impositions on power marketing operations
are expected to be minimal under existing regulatory standards.

PURPA. The enactment in 1978 of PURPA and the adoption of regulations
thereunder by the FERC 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 purpose other than power generation, (ii) meet 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% 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 Federal Power Act (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. Avoided costs are
defined by PURPA as the "incremental costs to the electric utility of electric
energy or capacity or both which, but for the purchase from the Qualifying
Facility or Qualifying Facilities, such utility would generate itself or
purchase from another source." 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. Although public
utilities are not required by PURPA to enter into long-term contracts, PURPA
helped to create a regulatory environment in which it has become more common for
such contracts to be negotiated or executed through selective procurement or
competitive bidding. 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 Destec's operations and financial position. See "Competition -- Competition
in the Power Market."

PUHCA. Under PUHCA, any person (defined by PUHCA to include corporations
and partnerships and other legal entities) which owns or controls ten percent or
more of the outstanding voting securities of a "public utility company" or a
company which is a "holding company" of a "public utility company" is

subject to registration with the Securities and Exchange Commission (the
"Commission") and regulation under PUHCA, unless such person is eligible for an
exemption, such as is available to Qualifying Facilities under PURPA, or as
established elsewhere under PUHCA. A registered holding company is required by
PUHCA to limit its operation to a single integrated utility system and to divest
any other operations not functionally related to the operation of that utility
system.

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 will be certified by the FERC as exempt wholesale generators ("EWGs"). The
owners or operators of these facilities 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.

A company engaged in the ownership or operation of electric power generation
and transmission facilities faces certain types of regulation for its
international activities. 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 even more beneficial for international
projects because, although EWGs are not permitted to make retail sales in the
United States, retail sales by EWGs are generally allowed 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 Commission. However, FUCO filings are less frequently used,
because unlike EWGs, no formal regulatory order is issued confirming the status
of a FUCO, and more rigorous state commission scrutiny is entailed.

Structuring Destec's activities to ensure that it is not a "holding company"
of a "public utility company" under PUHCA is also important in providing
financing and financial reporting flexibility to Destec. The cogeneration
facilities owned by Destec, or in which Destec has investments, are Qualifying
Facilities under PURPA. Destec has also pursued the development of independent
power projects which will not qualify for the benefits provided by PURPA, which
could subject these projects to PUHCA jurisdiction. To avoid such a consequence,
Destec has structured its participation in independent power projects in a
manner to qualify for exemptions under PUHCA provided by the Energy Act. Such
structures have permitted Destec to take ownership positions in a number of
independent power project projects. This strategy will protect the status of
Destec's existing cogeneration facilities as Qualifying Facilities under PURPA,
and not create adverse regulatory consequences.

The development of international power generation and transmission projects
also may entail other multi-national regulatory considerations arising under
United States law. Certain requirements exist for compliance with the Foreign
Corrupt Practices Act, and export/import controls and related trade laws may
apply to certain transactions. Free trade agreements may exist with certain
countries, such as Canada and Mexico, which can have important relevancy in the
structuring of business transactions in these markets. World Bank standards
exist for environmental regulations which also must be considered. Finally, tax
treaties may create certain requirements for project structuring to maximize the
tax planning and benefits to Destec. Destec seeks compliance with these
requirements in the project development and financing of its international
projects.

FPA. 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 Destec as
Qualifying Facilities under PURPA are exempt from the FPA. Destec's EWGs,
Commonwealth Atlantic and Hartwell, are subject to the FPA and the jurisdiction
of the FERC, as is DPS. FERC has significantly relaxed the rules under which
power marketers and independent power producers, such as DPS and Destec's EWGs,
can sell or market power. With approval from FERC, such entities, with certain
exceptions, are exempted from cost-based rates and can make all sales at
market-based rates set through negotiations. Independent power projects in which
Destec currently participates have been granted market based rate authority and
comply with the FPA requirements governing approval of wholesale rates and
subsequent transfers of ownership interest in such projects.

STATE REGULATION

State public utility commissions, pursuant to state legislative authority,
will have jurisdiction over how any new federal initiatives are implemented in
each state and have broad jurisdiction over regulated independent power projects
which are not Qualifying Facilities under PURPA, and which are considered public
utilities in many states. Such jurisdiction would include the issuance of
certificates of public convenience and necessity to construct a facility as well
as regulation of organizational, accounting, financial and other corporate
matters on an ongoing basis. Although the FERC generally has exclusive
jurisdiction over the rates charged by an independent power project to its
wholesale customers, state public utility commissions have the practical ability
to influence the establishment of such rates by asserting jurisdiction over the
purchasing utility's ability to pass through the resulting cost of purchased
power to its retail customers. In addition, states may assert jurisdiction over
the siting and construction of independent power projects and, among other
things, issuance of securities, related party transactions and sale and transfer
of assets. The actual scope of jurisdiction over independent power projects by
state public utility regulatory commissions varies from state to state.

In Texas, unless otherwise exempted, the terms of supply contracts with
electric utilities are subject to review each time the utility seeks an
adjustment in the rates charged to its customers. Accordingly, during the entire
term of any contracts Destec has with utilities in Texas, such contracts are
subject to review by the Public Utility Commission of Texas ("PUCT").

The Texas Legislature passed a revised Public Utility Regulatory Act
("PURA") in 1995. This legislation recognizes power marketers and EWGs as
entities entitled to conduct business in Texas. Destec, through DPS, has
registered and is doing business as a power marketer in Texas. The legislation
also mandates that wholesale transmission service(s) in Texas meet federal
standards for non-discrimination and comparability. The PUCT conducted
rulemakings and other proceedings to implement these requirements and, as a
result, rules have been promulgated and transmission rates and terms and
conditions established. Non-discriminatory transmission tariff provisions for
the purchase and sale of ancillary serves, and an Independent System Operator
("ISO") to coordinate transmission within ERCOT have also been approved. PURA
also required the PUCT to study and submit reports on industry structure
(Project 15000), stranded investment (Project 15001), and the status of
competition (Project 15002) the reports were submitted January 15, 1997. Destec
actively participated in such proceedings. The 1997 Texas legislative session is
addressing further changes to the electric industry. While the final outcome of
any such legislation is uncertain, bills have been introduced that call for
retail access and customer choice beginning in 1999.

In August 1996 the California State Legislature unanimously passed, and the
Governor signed, Assembly Bill 1890, the country's first comprehensive electric
industry restructuring legislation. The bill incorporates most of the California
Public Utilities Commission ("CPUC") December 1995 order regarding timing,
market structure, and transition issues. The law will enable California electric
consumers to have "direct access" to, and be able to choose among competing
suppliers of electricity. The bill codifies into law the January 1, 1998 start
date for the new market structure to be in place. It also calls for the creation
of a wholesale power pool ("Power Exchange"), the establishment of an ISO to
manage and control the transmission facilities, and the recovery by the
utilities of their "stranded cost" (i.e., incurred cost which can not be
recovered under market-pricing), including certain costs payable pursuant to
standard offer contracts, through a "competition transition charge."
Implementation of the restructuring called for by the new law will require
numerous state and federal regulatory filings and approvals, many of which are
currently in progress.

TRANSMISSION AND WHEELING

Energy-producing projects that sell power to customers which are not
geographically located near the project require that the project have the
capability of transmitting its power over utility power transmission grids to
the purchaser ("wheeling"). The FERC and state utility regulatory commissions
have jurisdiction over the wheeling of power to remote users; the prices and
related terms and conditions of wheeling in interstate commerce are regulated by
the FERC.

The PUCT has promulgated rules that require affected utilities to provide
wheeling service. These rules are in effect in the Electrical Reliability
Counsel of Texas system and the new transmission access provisions of the Energy
Act do not alter that federal and state jurisdictional balance.

Rules adopted at the FERC and a number of state utility regulatory
commissions require utilities to grant power producers increased access to
transmission and wheeling. The provisions of the Energy Act increase such
access. The Energy Act supports increased transmission access, and in April 1996
the FERC adopted rules (Order 888) to expand significantly transmission service
and access and provide alternative methods of pricing for transmission services.
Upon promulgation of the final rule by the FERC (and the PUCT 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. This provides Destec with increased
opportunities to sell and market the power produced by its independent power
projects. It also increases competition on a nationwide basis between
traditional and non-traditional power generators, such as Destec.

ENVIRONMENTAL REGULATION

The construction and operation of domestic and international energy and fuel
producing projects and the exploitation of natural resource properties are
subject to extensive federal, state and local laws and regulations adopted for
the protection of the environment and to regulate land use. The laws and
regulations applicable to Destec and projects in which it participates primarily
involve the discharge of emissions into the water and air, but can also include
wetlands preservation, noise regulation and a comprehensive Environmental Impact
Assessment which includes evaluation of the facility's impact on air, water,
ecology, human health and socioeconomic factors. These laws and regulations in
many cases require a lengthy and complex process of obtaining licenses, permits
and approvals from federal, state and local agencies. Obtaining necessary
approvals regarding the discharge of emissions into the air is critical to the
development of a project and can be time-consuming and difficult. Each
energy-producing project requires technology and facilities which comply with
federal, state and local requirements and sometimes extensive negotiations with
administrative agencies. Meeting the requirements of each jurisdiction with
authority

over a project can delay or sometimes prevent the completion of a proposed
project, as well as require extensive modifications to existing projects.

Destec monitors environmental standards and evaluates its selection of
technology to ensure that applicable standards are being met. Based on current
trends, Destec expects that environmental and land use regulation will become
more stringent. Accordingly, Destec plans to continue to place a strong emphasis
on the development and use of state-of-the-art technology to minimize potential
impacts on the environment. In addition, Destec has developed expertise and
experience in obtaining necessary licenses, permits and approvals.

In November 1990, comprehensive amendments to the Clean Air Act were enacted
(the "1990 Amendments"). The first major revisions to the Clean Air Act since
1977, the 1990 Amendments vastly expand the scope of federal regulations and
enforcement in several significant respects. In particular, provisions relating
to non-attainment, air toxics, permitting, enforcement and acid deposition may
affect Destec's domestic projects. The Clean Air Act and the 1990 Amendments
contain provisions that regulate the amount of sulfur dioxide and nitrogen
oxides that may be emitted by a project. These emissions may be a cause of "acid
rain." Most of the domestic projects Destec owns, operates and has investments
in are fueled by natural gas and are not expected to be significantly affected
by the acid rain provisions of the 1990 Amendments. Destec's coal gasification
technology for the production of syngas is drawing interest from parties
attempting to determine ways to meet the acid rain provisions of the 1990
Amendments because the sulfur dioxide and nitrogen oxides emissions associated
with this technology are relatively low. Destec currently leases one such coal
gasification plant which is in operation in Indiana. See "Destec's Products and
Services -- Coal Gasification -- Syngas." In addition, carbon dioxide emissions
from Destec's coal gasification technology are among the lowest of all
commercially available coal-based systems.

One of the key elements of the 1990 Amendments is the inclusion of an
operating permit program in Title V. This program is intended to establish a
central point in tracking all applicable air quality requirements for every
source required to obtain a permit under the Clean Air Act. Final regulations
implementing these provisions were issued by the EPA in 1992. These regulations
created minimum requirements for the operating permit program. Each state was
required to submit a program for its implementation of the regulations for
approval to the EPA. Destec is required to submit complete operating permit
applications to those states in which it has operating projects which meet the
applicability standards under the 1990 Amendments. These new requirements affect
all of Destec's domestic operating facilities, except for Cogen Power, which is
not a source of pollutant emissions.

LEGAL PROCEEDINGS

Destec experiences routine litigation in the normal course of its business.
None of its pending litigation is expected to have a material effect on the
financial condition of Destec.

EMPLOYEES AND OFFICES

As of March 10, 1997, Destec had 668 active employees. None of Destec's
employees are covered by a collective bargaining agreement.

Destec leases its corporate headquarters in Houston, Texas and its regional
offices in Las Vegas, Nevada; Walnut Creek, California; North York, Ontario,
Canada; Chapultepec, Mexico; Sevres, France; and Singapore. Destec owns a
building in Bakersfield, California that serves as a central support facility
for its California projects.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

No matter was submitted to a vote of security holders during the fourth
quarter of 1996.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

Destec's Common Stock is traded on the New York Stock Exchange, Inc.
("NYSE") under the symbol "ENG."

The following table shows the range of the low and high sales prices of
Destec's Common Stock during the last two fiscal years.

LOW HIGH
--------- ---------

1995
1st Quarter................................................................ $ 9.38 $ 11.00
2nd Quarter................................................................ 9.88 14.38
3rd Quarter................................................................ 12.88 16.13
4th Quarter................................................................ 13.00 15.38

LOW HIGH
--------- ---------

1996
1st Quarter................................................................ $ 11.50 $ 13.75
2nd Quarter................................................................ 11.50 13.88
3rd Quarter................................................................ 11.88 14.38
4th Quarter................................................................ 12.50 16.25

Since Destec's initial public offering in March 1991, Destec has paid no
dividends on its Common Stock. Destec currently intends to retain all earnings
for use in the operation and expansion of its business and, accordingly, does
not intend to pay cash dividends on its Common Stock in the near future. The
dividend policy of Destec will be reviewed from time to time by its Board of
Directors in light of Destec's earnings, financial condition, cash requirements
and such other business considerations as the Board of Directors deems relevant.

As of March 3, 1997, there were 771 record holders of Destec's Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth a five year summary of selected consolidated
financial data for Destec. The expiration of two Texas power purchase contracts
in 1994, and the expiration of the remaining power contract on April 30, 1995
substantially reduced Destec's revenues and operating income in 1995 from those
levels previously attained. The selected data for these years have been derived
from Destec's audited consolidated financial statements.

YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ---------- ---------- ----------

(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 577,912 $ 641,496 $ 726,693 $ 673,818 $ 507,561
Operating costs and expenses.......................... 556,577 651,411 613,021 541,469 397,105
Operating income (loss)............................... 21,335 (9,915) 113,672 132,349 110,456
Income before income taxes............................ 58,489 45,345 156,816 154,097 130,895
Income before cumulative effect of change in
accounting principle................................ 42,756 34,700 110,481 103,109 87,492
Cumulative effect of change in accounting principle
(2)................................................. -- -- -- -- 11,305
Net income............................................ $ 42,756 $ 34,700 $ 110,481 $ 103,109 $ 98,797
Per share amounts:
Income before cumulative effect of change in
accounting principle................................ $ 0.75 $ 0.59 $ 1.84 $ 1.67 $ 1.41
Cumulative effect of change in accounting principle
(2)................................................. -- -- -- -- 0.18
Net income per share (1).............................. $ 0.75 $ 0.59 $ 1.84 $ 1.67 $ 1.59
BALANCE SHEET DATA:
Total assets.......................................... $ 1,145,146 $ 1,047,812 $ 977,535 $ 858,425 $ 783,144
Long-term liabilities................................. $ 50,089 $ 46,172 $ 37,099 $ 32,809 $ 35,454
Project financing debt................................ $ 53,820 -- -- -- --
Total stockholders' equity............................ $ 787,742 $ 769,317 $ 745,135 $ 659,497 $ 572,591

- ------------------------

(1) The weighted average shares outstanding were 56,932,000 at December 31,
1996, 58,659,000 at December 31, 1995, 60,151,000 at December 31, 1994,
61,865,000 at December 31, 1993, and 62,248,000 at December 31, 1992.

(2) Destec implemented Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," effective January 1, 1992.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forwardlooking statements reflecting the Company's
expectations in the near future; however, many factors which may affect the
actual results, especially contract prices and changing regulations, are
difficult to predict. Accordingly, there is no assurance that the Company's
expectations will be realized.

The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the comparative summary of selected
financial data appearing elsewhere in this report. Historical results and trends
which might appear should not be taken as indicative of future operations.

OVERVIEW

Destec is an independent power producer and marketer of electricity, thermal
energy and syngas. In February 1997, Destec announced that its Board of
Directors (the "Board") had approved a Merger Agreement under which NGC
Corporation ("NGC") will acquire Destec in a merger ("Merger") for $21.65 in
cash for each outstanding share of Destec common stock, or approximately $1.27
billion in the aggregate. Following the Merger, Destec will become a wholly
owned subsidiary of NGC. The consummation of the Merger is subject to certain
conditions, including approval by holders of two-thirds of the outstanding
shares of common stock and by federal antitrust authorities and the Federal
Energy Regulatory Commission. The Dow Chemical Company ("Dow"), which owns over
80% of the outstanding common stock as of December 31, 1996, has agreed to vote
its shares of common stock for approval and adoption of the Merger. In January
1997, Tiger Bay Limited Partnership, in which Destec holds an equity interest of
approximately 50%, executed an agreement for the sale of the Tiger Bay
cogeneration facility, located in Fort Meade, Florida to a wholly owned
subsidiary of Florida Power Corporation for $445.0 million. Destec's estimated
share of the proceeds after repayment of partnership debt and the net settlement
of other partnership obligations is anticipated to be approximately $140.0
million. The sale is subject to certain conditions, including regulatory
approvals and the sale of Destec. See Note 22 of the Notes to Consolidated
Financial Statements for additional discussion. Destec's project portfolio
includes a total of twenty-four operating or substantially completed projects
consisting of nineteen power projects in the U.S., one syngas project in the
U.S. and four international power projects located in Australia, Canada, the
Dominican Republic and the United Kingdom. During 1996, Destec received revenues
from the sale of electricity, thermal energy and syngas from Destec's owned or
leased projects and from power marketing revenues earned by Destec Power
Services, Inc. ("DPS"). These revenues and revenues earned in 1995 from the sale
of syngas to Dow and from the sale of power from Dow's Freeport facility under
the Power Marketing Agreement ("PMA") are classified as "Power, steam and
syngas" in the "Summary of Statements of Consolidated Income" presented below.
Destec also received revenue from its oil and gas properties and lignite
properties (classified as "Energy resources"), from fees earned in connection
with its activities as an engineer and operator of various cogeneration projects
(classified as "Engineering and operations") and from fees earned as a developer
of power generation projects (classified as "Development"). The related costs
for each of these activities appears in the corresponding section of the summary
as "Operating Costs and Expenses." Gross margin for these activities represents
revenues less the related operating costs.

DOMESTIC POWER

Destec owns, leases or has an equity interest in nineteen operating power
projects in the U.S. Eleven of the nineteen projects are located in California
(17% based on invested capital at December 31, 1996), three are located in Texas
and the remainder are located in Virginia, Nevada, Georgia, Florida and
Michigan. In addition, DPS began selling excess power from Destec's facilities
as well as from other sources in June 1995.

These domestic projects, which represent 49% of Destec's invested capital in
equity investments, generally operate under energy sales contracts based upon
the purchasing utility's avoided costs. Competitive initiatives in several
states, as well as federal initiatives are designed to phase-in market based
pricing. The initiatives in California propose phasing in market based pricing
by the year 2002. These initiatives are generally not yet effective and will be
the subject of considerable debate and modification. Contract prices could
change as a result of the legislative process.

In February 1996, CoGen Lyondell ("CLI") and Lyondell Petrochemical Company
("LYO") formed Channelview CoGen General Partnership (the "Partnership") with
CLI as an 88% partner and LYO as a 12% partner. Houston Lighting and Power
Company ("HL&P") challenged the partnership on the basis that the structure is
actually a retail sale of electricity from CLI to LYO. A decision in HL&P's
favor was

rendered in Austin District Court in September 1996. Destec is pursuing an
appeal of this judgment. As a result, deliveries of power to LYO via a private
transmission line are postponed indefinitely.

In July 1996, Destec completed the sale of its ownership interest in the 150
MW Blue Mountain Power project to The AES Corporation (see Note 7 of the Notes
to Consolidated Financial Statements).

DPS began selling power in June 1995 and is currently marketing power
through its Western Operations and Southern Operations located in Walnut Creek,
California and Houston, Texas, respectively. DPS' Western Operations are
currently marketing power under contracts with the Port of Oakland and Pacific
Gas & Electric Company ("PG&E"). The Port of Oakland contract provides that DPS
will supply 7 MW of electricity to the Metropolitan Oakland International
Airport effective January 1, 1996 for five years. DPS' Southern Operations are
marketing capacity, energy and ancillary services to several utilities and power
marketers including Central and Southwest Services, Inc. ("CSW"), HL&P, The
Lower Colorado River Authority ("LCRA"), South Texas Electric Cooperative,
Texas-New Mexico Power Co. ("TNP"), Enron Power Marketing, Inc., National Gas &
Electric, and LG&E Power Marketing, Inc. In addition to these spot sales and
short-term contracts, DPS has a long-term contract with LCRA for capacity and
associated energy (up to 230 MW) and is nearing approval of a long-term,
full-requirements contract with another utility. DPS' Southern Operations also
markets power from the CLI and other non-utility facilities and coordinates with
other generators within the Electric Reliability Council of Texas to market
ancillary services.

During 1996, Destec did not earn any revenue under the PMA for the sale of
capacity from Dow's Freeport facility due to the expiration of the two
underlying contracts in April and December 1994. The final PMA contract between
CLI and Texas Utilities Electric Company ("TUEC") expired in April 1995. In
February 1997, Dow and Destec formally terminated the PMA. Currently power
marketing activities are contracted by DPS as discussed above.

INTERNATIONAL POWER

Three of the international projects which were under construction at the
beginning of 1996 reached substantial completion or commercial operations during
1996. The Los Mina facility (Santo Domingo, Dominican Republic) commenced
commercial operations in May 1996, and the Indian Queens (Cornwall, United
Kingdom) and Kingston (Ontario, Canada) projects both reached substantial
completion in December 1996 and made a limited number of sales to outside
parties. In September 1996, Destec acquired an interest in the Hazelwood project
(Victoria, Australia) which was operational at the time it was purchased.
Currently, Destec is constructing the Elsta facility (Terneuzen, The
Netherlands) with completion expected in 1997. The Chiahui Power project
(Taiwan, Republic of China) is in active development, and Destec is currently in
negotiations with the Taiwan Power Company regarding development of the project.

In September 1996, an indirect wholly owned subsidiary of Destec, as part of
an international consortium, purchased for $1.9 billion the 1,600 MW Hazelwood
Power Station and the adjacent Hazelwood Mine in Victoria, Australia. The
consortium formed a partnership (the "Hazelwood partnership") to own and operate
the facility. Destec holds a 20% limited partnership interest in the Hazelwood
partnership and made an original equity contribution of $176.1 million in
September 1996 (see Note 8 of the Notes to Consolidated Financial Statements).
The remainder of Destec's investment is included in the

project financing at the partnership level. The Hazelwood partnership is
planning a major capital expenditure program during the first three years of
ownership which may be funded from future capital contributions to refurbish two
of the eight operating units in order to maximize operating efficiencies and
upgrade environmental performance. The consortium will also seek further
investment opportunities in the Australian power industry.

SYNGAS

The Wabash River Coal Gasification facility ("Wabash"), a joint venture of
Destec and PSI Energy, Inc. ("PSI"), with cost-sharing supplied by the U.S.
Department of Energy ("DOE"), began commercial operations in November 1995 and
is constructed to process 2,700 tons of coal per day for the net production of
262 MW of electricity. The Wabash project has an agreement with PSI which
subjects Wabash to either an operating bonus or penalty depending on the
operating rate of the facility. The maximum bonus or penalty is $7.0 million per
operating year and is calculated based on the annual syngas production and is
settled at the end of 1999. As of December 31, 1996, Destec's accrual for the
potential penalty is $2.7 million. During 1996 Destec began making significant
equipment and process improvements in order to improve the reliability and
profitability of the Wabash facility. The total cost of the improvements, which
were financed through the new operating lease in August 1996, is estimated at
$14.0 million and completion is expected in 1997.

Destec's coal gasification facility (the "LGTI facility"), located near
Plaquemine, Louisiana, ceased operations in November 1995. Destec and Dow signed
an agreement in 1996 whereby the LGTI equipment and all related facilities,
except the slag pile, would be transferred to Dow. Destec has agreed to
reimburse Dow for clean-up and disposal expenses up to a maximum of
approximately $0.2 million. Destec has agreed to remove the slag pile at the
site in compliance with applicable federal, state and local legal requirements.
The cost of removal is expected to be offset by proceeds from the sale of the
slag.

ENERGY RESOURCES

Destec is engaged in the production and development of natural gas and oil.
Total proved gas reserves have increased to over 132 billion cubic feet
equivalents ("Bcfe") as of December 31, 1996. Current daily production averages
approximately 25 million cubic feet delivered per day ("Mmcfd") from interests
in three core producing areas: 1) the Antrim Shale in the Michigan Basin, 2) the
San Juan Basin in New Mexico, and 3) the Piceance Basin in western Colorado. The
Company also owns oil and gas mineral interests in the Cotton Valley Pinnacle
Reef trend in east Texas. Destec's portfolio of properties includes interests in
157,452 gross acres and 60,217 net acres and 457 gross producing natural gas
wells. Destec has focused its acquisition and development of gas reserves in
areas that can benefit from new technology. These include the improvements in
the completion and production technology of gas wells producing from coalbed
methane reservoirs in the San Juan Basin and the Antrim Shale in Michigan and
tight gas sands in the Piceance Basin of Colorado. Destec has chosen a strategy
of being a non-operator and elects to form alliances with successful operators
in each area of interest.

Destec controls, through the ownership of lignite leases or fee lands, five
lignite deposits and lignite-related properties in Freestone and Leon Counties,
Texas, comprising a total of 77,579 acres. Of the total, 9,896 acres are owned
in fee, and approximately 67,683 acres are held under lignite leases. The total
tonnage of these reserves is estimated to be approximately 640 million tons of
lignite as of December 31, 1996. See Note 22 of the Notes to Consolidated
Financial Statements for discussion of the effects the potential sale of
Destec's stock would have on Destec's lignite properties which are leased to
Dow.

In November 1996, Sonat Exploration Company ("Sonat"), a wholly owned
subsidiary of Sonat, Inc., announced the completion of a Cotton Valley Pinnacle
Reef well, the Blanton #1. This well is located on an 80-acre tract (the
"Sarandos tract"), which is owned by Destec and was leased to Sonat in May 1996.
Destec believes that it owns 100% of the minerals in the Sarandos tract and that
it has a 25% royalty interest in the Blanton #1 well. In January 1997 Destec
commenced an action to quiet title to the minerals

and to resolve certain issues under the lease. Although Destec believes that it
will prevail in such action, there can be no assurance that this will be the
case.

See Note 5 of the Notes to Consolidated Financial Statements for discussion
of purchase/sale of oil and gas properties for 1994-1996.

RESULTS OF OPERATIONS

The following table sets forth a three year summary of Destec's statements
of consolidated income. This information has been derived from Destec's audited
Consolidated Financial Statements.

SUMMARY OF STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS OF DOLLARS)

YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------

Revenues:
Power, steam and syngas.................................................... $ 232,625 $ 170,425 $ 317,595
Engineering and operations................................................. 301,147 436,051 358,398
Energy resources........................................................... 21,171 15,554 23,245
Development................................................................ 22,969 19,466 27,455
---------- ---------- ----------
Total Revenues........................................................... 577,912 641,496 726,693
---------- ---------- ----------
Operating Costs and Expenses:
Power, steam and syngas.................................................... 221,271 164,367 182,446
Engineering and operations................................................. 276,286 419,268 350,565
Energy resources........................................................... 12,025 12,660 14,740
Development................................................................ 12,546 20,456 19,702
Amortization of intangibles................................................ 2,471 2,469 2,471
Selling, general & administrative expenses................................. 31,978 32,191 33,137
Restructuring charges...................................................... -- -- 9,960
---------- ---------- ----------
Total Operating Costs and Expenses....................................... 556,577 651,411 613,021
---------- ---------- ----------
Earnings from equity investments............................................. 19,389 12,385 9,259
Gain on sale of oil and gas properties....................................... -- 11,890 17,196
Other income................................................................. 17,765 30,985 16,689
---------- ---------- ----------
Income before provision for taxes on income.................................. 58,489 45,345 156,816
Provision for taxes on income................................................ 15,733 10,645 46,335
---------- ---------- ----------
Net Income................................................................... $ 42,756 $ 34,700 $ 110,481
---------- ---------- ----------
---------- ---------- ----------

- ------------------------

Certain amounts from previous years have been reclassified to conform to the
1996 presentation.

1996 COMPARED WITH 1995

REVENUES

Destec's revenue decreased $63.6 million or 10% for 1996 as compared to
1995. This decrease resulted from a $134.9 million decrease in engineering and
operations revenue, partially offset by a $62.2 million increase in power, steam
and syngas revenue, a $5.6 million increase in energy resources revenue and a
$3.5 million increase in development revenue.

The $134.9 million decrease in engineering and operations revenue resulted
primarily from lower engineering revenue recognition on the construction cost
related to the Elsta and Kingston projects in 1996, as compared to revenue
recognition on the Elsta, Kingston, Bear Mountain, Michigan Power and

Wabash projects in the same period of 1995. The decrease was partially offset by
engineering revenue earned in 1996 from the Hazelwood partnership under the
Engineering Services Agreement (see Note 14 of the Notes to Consolidated
Financial Statements). Operations revenue also increased in 1996 due to fees
earned prior to start-up of the Kingston project which achieved substantial
completion in December 1996, to a full year of revenue earned on the Michigan
Power project which began operations in October 1995 and to fees earned prior to
start-up of the Elsta project. In addition, Destec earned performance bonuses in
1996 from the High Sierra and Double "C" facilities.

The $62.2 million increase in power, steam and syngas revenue was primarily
a result of higher power revenue due to the commencement of commercial
operations at the Los Mina facility in May 1996 and higher power and steam
revenue from the CLI and CoGen Power facilities as a result of higher gas prices
in 1996 as compared to the same period in 1995. CLI revenue was also favorably
affected by the full year of production from the sixth gas turbine which was
added in June 1995. In addition, revenue from DPS, which began selling power in
June 1995, was higher in 1996 as a result of increased sales from Southern
Operations under a contract with TNP and to various other customers through spot
sales. DPS sales from Western Operations also increased under contracts with
PG&E and the Port of Oakland in 1996. The net decrease in syngas revenue was due
to the decommissioning of the LGTI facility in November 1995, offset by
including a full year of revenues from the Wabash facility, which commenced
commercial operations in November 1995.

The $5.6 million increase in energy resources revenue was due to higher gas
prices in 1996 and higher production revenue as a result of the purchase of the
Southeast Piceance gas properties in April 1996. This increase was partially
offset by receiving no production revenue in 1996 from the gas properties which
were sold in September 1995.

The $3.5 million increase in development revenue resulted from the sale of
the Blue Mountain project in July 1996 (see Note 7 of the Notes to Consolidated
Financial Statements), partially offset by lower development fees earned from
the Elsta project in 1996, as compared to the development fees from the Bear
Mountain, Elsta, Kingston and Michigan Power projects earned in 1995.

OPERATING COSTS AND EXPENSES

Destec's total operating costs and expenses decreased $94.8 million or 15%
for 1996 as compared to 1995. This decrease resulted from a $143.0 million
decrease in engineering and operations cost, a $0.6 million decrease in energy
resources cost, a $7.9 million decrease in development cost and a $0.2 million
decrease in selling, general and administrative cost. These decreases were
partially offset by a $56.9 million increase in power, steam and syngas cost.

The $143.0 million decrease in engineering and operations cost resulted
primarily from lower construction costs related to the Elsta and Kingston
projects in 1996, as compared to construction costs on the Elsta, Kingston, Bear
Mountain, Michigan Power and Wabash projects in the same period of 1995.

The $0.6 million decrease in energy resources cost is a result of lower
production costs associated with the gas properties which were sold in September
1995, partially offset by increased production costs from the Southeast Piceance
gas properties purchased in April 1996.

The $7.9 million decrease in development cost was due to expensing costs
associated with the Bear Mountain project in 1995 which were previously
capitalized. No such expenses were incurred in 1996.

The $56.9 million increase in power, steam and syngas cost was primarily a
result of higher power costs due to the commencement of commercial operations at
the Los Mina facility in May 1996. Costs at the CLI facility increased in 1996
as compared to the same period in 1995 as a result of higher gas prices and
consumption (due to addition of a sixth gas turbine in June 1995). In addition,
DPS costs were higher in 1996 as a result of increased power marketing
activities in 1996 as compared to the same period in 1995.

The net decrease in syngas cost was due to the decommissioning of the LGTI
facility, partially offset by including a full year of costs from the Wabash
facility; both events occurred in November 1995.

EQUITY INVESTMENTS, OTHER INCOME AND TAXES

Earnings from equity investments increased $7.0 million for 1996 as compared
to 1995. The increase was due primarily to contract capacity payment escalators
and to lower interest expense on the Oyster Creek project resulting from the
conversion of the term loan in July 1995 and on the California projects due to
lower interest rates and principal. Equity investments also included earnings in
1996 from the Bear Mountain and Crockett projects which became operational in
May 1995 and June 1996, respectively, and the acquisition of the operational
Hazelwood project in September 1996.

The sale of gas properties in the San Juan Basin, Colorado resulted in a
before tax gain of $11.9 million in 1995. There was no such event in 1996.

Other income decreased $13.2 million due primarily to a reduction in
interest income as a result of a lower average cash balance throughout 1996
compared to 1995.

The effective tax rate for the year ended December 31, 1996 was 26.9% as
compared to 23.5% for the year ended December 31, 1995. The 1996 tax rate was
higher than in 1995 primarily as a result of lower non-conventional fuels source
credits in 1996.

1995 COMPARED WITH 1994

REVENUES

Destec's revenue decreased $85.2 million or 12% for 1995 as compared to
1994. This decrease resulted primarily from a $147.2 million decrease in power,
steam and syngas revenue, a $7.7 million decrease in energy resources revenue
and a $8.0 million decrease in development revenue, partially offset by a $77.7
million increase in engineering and operations revenue. The decrease in power,
steam and syngas revenue resulted primarily from a decrease in PMA revenue due
to the expiration of the underlying power contracts, a decrease in syngas
revenue due to lower operating capacity at the LGTI facility in 1995 compared to
1994 and a decrease in revenue from the CLI facility as a result of the
reduction of firm capacity payments due to the expiration of the power contract
between CLI and TUEC on April 30, 1994. These decreases were partially offset by
revenue earned at the Wabash facility which commenced commercial operations in
November 1995 and by higher production at the CLI facility with the addition, in
1995, of a sixth gas turbine which provides additional capacity of approximately
120 MW. The decrease in energy resource revenue was due to lower natural gas
prices during 1995, as compared to the same period in 1994. In addition, the
1995 production revenue was lower as a result of the sale of oil and gas
properties in the third quarters ended September 30, 1995 and 1994. The decrease
in development revenue resulted from development activities on the Bear
Mountain, Elsta and Kingston projects earning less revenue than the development
activities on the Michigan Power project and settlements on the Northway and
Kingston projects during 1994. The increase in engineering and operations
revenue resulted primarily from increased engineering revenues resulting from
revenue recognition on the construction cost related to the Kingston, Elsta,
Bear Mountain, Michigan Power and Wabash projects in 1995, as compared to
revenue recognition on the Oyster Creek, Tiger Bay and Wabash projects in same
period of 1994 and increased operations revenue due to the start-up of
commercial operations in 1995 of the Tiger Bay, Bear Mountain and Michigan Power
projects on which Destec serves as operator and to fees earned prior to the
start-up of the Kingston project which achieved substantial completion in
December 1996.

OPERATING COSTS AND EXPENSES

Destec's total operating costs and expenses increased $38.4 million or 6%
for 1995 as compared to 1994. This increase resulted primarily from a $68.7
million increase in engineering and operations cost and a $0.8 million increase
in development cost, partially offset by a $18.1 million decrease in power,
steam and

syngas cost, a $2.1 million decrease in energy resources cost, a $0.9 million
decrease in selling, general and administrative costs and a $10.0 million
decrease in charges related to the restructuring which occurred in 1994. The
increase in engineering and operations costs was primarily due to increased
construction activity for the Elsta, Bear Mountain, Michigan Power, Wabash and
Kingston projects in 1995, as compared to construction activity on only the
Oyster Creek, Tiger Bay and Wabash projects for the same period in 1994. The
increase in development costs was due to increased international development
activities in 1995 as compared to 1994. The decrease in power, steam and syngas
costs is primarily a result of decreased operating costs at the LGTI facility
due to a lower operating capacity in 1995, as compared to the same period in
1994. In addition, CLI refinanced and amended the operating lease at the CLI
facility which resulted in a reduction of operating costs. These decreases were
partially offset by higher costs resulting from the commencement of operations
at the Wabash facility and the recording of a decommissioning charge related to
the LGTI facility in 1995. The decrease in energy resources costs was a result
of lower production cost in 1995 compared to 1994 resulting from the sale of oil
and gas properties in the third quarters ended September 30, 1995 and 1994. The
decrease in selling, general and administrative costs resulted from the
restructuring in 1994 which reduced salary and lease costs.

Earnings from equity investments increased for 1995 as compared to 1994 due
to including a full year of activity for the Hartwell and Oyster Creek projects
which began operations in April and October 1994, respectively, as well as the
start-up of commercial operations for the Tiger Bay, Bear Mountain and Michigan
Power projects in January, April and October 1995, respectively. Other income
increased due primarily to increased interest income from a higher rate of
return as a result of a shift in investment strategy from tax-exempt to taxable
investments for the year ended December 31, 1995, as compared to the same period
of 1994. The effective tax rate was 23.5% and 29.5% in the years ended December
31, 1995 and 1994, respectively. The decrease in the effective tax rate was due
primarily to the positive results of an Internal Revenue Service ("IRS") audit
concluded in 1995.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1996, cash and cash equivalents totaled $111.4 million
and working capital totaled $210.3 million. For the year ended December 31,
1996, cash and cash equivalents increased $100.0 million. Working capital
decreased $193.3 million primarily as a result of Destec's investment in the
Hazelwood partnership (see Note 8 of the Notes to Consolidated Financial
Statements). The increase in cash and cash equivalents resulted mainly from
$56.1 million provided by Destec's operating activities, $19.7 million provided
by Destec's investing activities, which includes converting $325.8 million of
marketable securities to cash and cash equivalents, and $24.2 million provided
by Destec's financing activities. See Destec's "Statements of Consolidated Cash
Flows" for additional detail.

In August 1995, CLI refinanced and amended the terms of its operating lease
agreement which resulted in a reduction to operating costs for the facility. The
financing underlying the lease expires in August 2000. The lease is an operating
lease with an initial non-cancelable term of five years ending in 2000 and an
extended term of an additional 13 years ending in 2013. The lease allows for
termination after the initial term, subject to a penalty clause. CLI is required
to remit to the lessor, in addition to basic rentals as defined, variable
rentals associated with the leveraged portion of the lease. As of December 31,
1996, the future estimated minimum lease payments under the operating lease are
approximately $212.0 million.

Effective June 7, 1996, Gasification Services, Inc. ("GSI") refinanced its
operating lease agreement associated with the Wabash facility resulting in a
reduction in interest spreads and elimination of several financial covenants
associated with the original financing. The lease is backed by a Destec
guarantee which expires on April 30, 2001. At that time, Destec can refinance,
abandon and pay termination costs or purchase the facility. The future minimum
lease payments associated with the lease as of December 31, 1996 are
approximately $224.0 million. Under the Wabash lease agreement, the occurrence
of certain events ("Termination Events"), such as a change in control of Destec
(see Note 22 of the Notes to

Consolidated Financial Statements), will automatically terminate the lease.
According to the Wabash lease agreement, if Dow shall fail to own a majority of
outstanding shares of Destec, the Guarantor, a Termination Event will occur.
Upon the date of the occurrence of any Termination Event, the lessee shall, on
the payment date relating to the payment of partnership rent next succeeding the
Termination Event date, purchase the lessor's interest in the property from the
lessor for a purchase price equal to the lease termination payment in accordance
with purchase provisions set forth in the agreement. The lease termination
payment is $193.3 million plus accrued interest from the date of last lease
payment.

At December 31, 1996 and 1995, respectively, Destec had outstanding
irrevocable letters of credit from banks totaling $35.4 million and $31.0
million. These letters of credit are pledged to support certain Destec equity
commitments and other development activities. As of December 31, 1996 Destec has
a corporate guarantee associated with an equity contribution to the Elsta
project of approximately $39.6 million which is expected to be made in 1998. The
Hazelwood partnership is planning a major capital expenditure program during the
first three years of ownership which may be funded from future capital
contributions to refurbish two of the eight operating units in order to maximize
operating efficiencies and upgrade environmental performance.

Destec contracted in 1993 to design, engineer, build and operate a
cogeneration facility in Polk County, Florida to be owned by a Delaware limited
partnership (the "Tiger Bay project") in which Destec has an approximate 50%
non-controlling equity interest. Destec has a commitment to loan up to an
additional $10.0 million (subordinated to the partnership's senior lenders) to
the Tiger Bay project based on the project steam host's ability to contractually
perform. In December 1993, Destec entered into a twenty year firm transportation
agreement with Florida Gas Transmission to maintain firm gas transportation
capacity which became effective in March 1995. Destec is required to pay
approximately $3.5 million per year over the contract life to maintain
transportation capacity. During 1996, Destec sold the excess capacity which the
Tiger Bay project was unable to utilize. Because the current market rate for
natural gas transportation capacity was less than Destec's contracted cost, a
resulting net fuel expense of $2.9 million was incurred in 1996.

In January 1997, Tiger Bay Limited Partnership, in which Destec holds an
equity interest of approximately 50%, executed an agreement for the sale of the
Tiger Bay cogeneration facility, located in Fort Meade, Florida to a wholly
owned subsidiary of Florida Power Corporation for $445.0 million. Destec's
estimated share of the proceeds after repayment of partnership debt and the net
settlement of other partnership obligations is anticipated to be approximately
$140.0 million. The sale is subject to certain conditions, including regulatory
approvals and the sale of Destec. See Note 22 of the Notes to Consolidated
Financial Statements for additional discussion.

As a result of operational defects in the administration of the Destec
Energy, Inc. Retirement and Savings Plan since 1991, Destec filed a Voluntary
Compliance Report ("VCR") with the IRS. If the VCR application is approved by
the IRS, Destec will make a contribution to the Plan of approximately $4.7
million (before tax effect) including accrued interest. Destec's management
believes that adequate reserves are provided as of December 31, 1996 for this
potential liability.

Since 1992, the Board of Directors authorized the repurchase of up to $95.0
million of Destec's common stock through 1999. As of December 31, 1996, Destec
had repurchased 6,816,549 and reissued 645,809 shares of common stock
repurchased under these programs.

period of 17 years. Interest costs of approximately $1.0 million incurred during
the construction of the facility were capitalized as of December 31, 1996. The
interest rates in effect as of December 31, 1996 were 6.52% on $24.0 million and
7.27% on $29.8 million. Under the terms of the credit agreement, the
unconsolidated financial statements of the Indian Queens project are subject to
various coverage ratios; however, because these are at the project level,
management does not believe they will affect Destec's ability to conduct
business.

Destec and Dow have extended credit to each other up to $350.0 million from
time to time under the Destec/Dow Credit Agreements. The agreements expired on
December 31, 1996, and management does not expect renewal at this time. At
December 31, 1995, cash equivalents included $4.4 million of cash advances to
Dow. Due to the expiration of the credit agreements no amounts were included in
cash equivalents at December 31, 1996. There were no outstanding borrowings from
Dow at December 31, 1996 and 1995.

Covenants contained in various agreements relating to certain of Dow's
indebtedness prohibit Dow from allowing Destec, subject to certain exceptions,
to encumber or otherwise pledge as security any of its properties or assets or
the capital stock of any of Destec's subsidiaries. In addition, Dow may not
permit Destec to incur indebtedness to the extent such occurrence would cause
Dow indebtedness on a consolidated basis to exceed 60% of Dow's consolidated
capitalization. As of December 31, 1996 Dow's indebtedness on a consolidated
basis was approximately 29% of consolidated capitalization. Dow's debt
instruments also restrict the ability of Dow and its subsidiaries to engage in
certain sale and lease-back transactions involving facilities which are material
to the business conducted by Dow and its subsidiaries located in the United
States taken as a whole. Destec's management believes that neither these
restrictions nor the expiration of the credit agreements discussed above will
significantly affect Destec's ability to conduct its business.

Management believes that current cash and cash equivalents and operating
cash flows will be sufficient to fund Destec's working capital, additions to
fixed assets and investments in projects.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To the Stockholders of
Destec Energy, Inc.:

We have audited the consolidated balance sheets of Destec Energy, Inc. and
subsidiaries ("Destec") as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of Destec's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Destec at December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

Houston, Texas
February 18, 1997

DESTEC ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)

ASSETS

DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------

Current Assets:
Cash and cash equivalents............................................................ $ 111,446 $ 7,044
Cash equivalents--Dow................................................................ -- 4,422
------------ ------------
Total cash and cash equivalents.................................................. 111,446 11,466
------------ ------------
Marketable Securities................................................................ 2,999 328,799
Accounts Receivable:
Trade.............................................................................. 72,674 64,029
Dow................................................................................ 1,889 1,144
Affiliates......................................................................... 44,385 23,832
Other.............................................................................. 930 4,085
Notes receivable--affiliates......................................................... 6,328 2,983
Income taxes receivable.............................................................. 24,830 1,934
Deferred taxes--net.................................................................. 5,370 5,680
Costs and estimated earnings in excess of billings on uncompleted
contracts--affiliates.............................................................. 44,841 37,063
Recoverable project costs............................................................ 884 58,398
Prepaid expenses and other assets.................................................... 23,482 14,076
------------ ------------
Total current assets............................................................. 340,058 553,489
------------ ------------
Property--at cost.................................................................... 407,263 271,067
Accumulated depreciation, depletion and amortization............................... (71,590) (60,878)
------------ ------------
Property, net.................................................................... 335,673 210,189
------------ ------------
Lease receivable from Dow............................................................ 44,159 44,159
Equity investments................................................................... 323,250 139,784
Long-term notes receivable--affiliates............................................... 8,444 --
Goodwill (Net of accumulated amortization of $17,498 and $15,027 at December 31, 1996
and 1995, respectively)............................................................ 80,402 83,781
Other assets......................................................................... 13,160 16,410
------------ ------------
Total................................................................................ $1,145,146 $1,047,812
------------ ------------
------------ ------------

The accompanying notes are an integral part of the consolidated financial
statements.

DESTEC ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)

LIABILITIES AND STOCKHOLDERS' EQUITY

DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------

Current Liabilities:
Accounts payable:
Trade.............................................................................. $ 64,635 $ 45,169
Dow................................................................................ 12,661 13,249
Accrued liabilities.................................................................. 48,792 49,951
Billings in excess of costs and estimated earnings on uncompleted
contracts--affiliates.............................................................. 3,646 41,309
Income taxes payable................................................................. -- 249
------------ ------------
Total current liabilities........................................................ 129,734 149,927
------------ ------------
Long-term liabilities................................................................ 50,089 46,172
Project financing debt............................................................... 53,820 --
Deferred taxes--net.................................................................. 71,844 34,720
Deferred income...................................................................... 51,917 47,676

Commitments and contingencies

Stockholders' equity:
Preferred stock, $1.00 par value; 50,000,000 shares authorized, none issued
Common stock, $.01 par value; 150,000,000 shares authorized, 62,250,000 issued..... 623 623
Additional paid-in capital......................................................... 394,296 394,296
Retained earnings.................................................................. 470,305 427,757
Unearned compensation--related to outstanding deferred stock....................... (543) --
Unrealized gains on investments.................................................... -- 651
Cumulative translation adjustments................................................. 3,726 --
Less 6,170,740 and 4,159,464 shares of treasury stock at cost at December 31, 1996
and 1995, respectively........................................................... (80,665) (54,010)
------------ ------------
Total stockholders' equity....................................................... 787,742 769,317
------------ ------------
Total................................................................................ $1,145,146 $1,047,812
------------ ------------
------------ ------------

The accompanying notes are an integral part of the consolidated financial
statements.

DESTEC ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED INCOME

(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------

Revenues:
Power, steam, syngas and energy resources
affiliates...................................................... $ -- $ 10,887 $ 138,870
guaranteed payments............................................. -- 63,014 82,878
nonaffiliates................................................... 253,796 112,078 119,092
------------- ------------- -------------
Total power, steam, syngas, and energy resources.............. 253,796 185,979 340,840
Development, engineering and operations--affiliates............... 324,116 455,517 385,853
------------- ------------- -------------
Total Revenues...................................................... 577,912 641,496 726,693
------------- ------------- -------------
Operating Costs:
Power, steam, syngas and energy resources
affiliates...................................................... 1,891 61,693 80,856
nonaffiliates................................................... 231,405 113,208 116,330
------------- ------------- -------------
Total power, steam, syngas, and energy resources.............. 233,296 174,901 197,186
Development, engineering and operations--affiliates............... 288,832 441,850 370,267
------------- ------------- -------------
Total Operating Costs............................................... 522,128 616,751 567,453
------------- ------------- -------------
Amortization of intangibles......................................... 2,471 2,469 2,471
------------- ------------- -------------
Selling, General and Administrative Expenses:
Dow............................................................... 438 938 511
Direct............................................................ 31,540 31,253 32,626
------------- ------------- -------------
Total selling, general and administrative..................... 31,978 32,191 33,137
------------- ------------- -------------
Restructuring Charges............................................... -- -- 9,960
------------- ------------- -------------
Total operating costs and expenses............................ 556,577 651,411 613,021
------------- ------------- -------------
Operating Income (Loss)............................................. 21,335 (9,915) 113,672
------------- ------------- -------------
Earnings from equity investments.................................... 19,389 12,385 9,259
------------- ------------- -------------
Other Income:
Dow............................................................... 5,023 11,212 3,961
Other--Net........................................................ 11,944 18,767 12,361
Gain on sale of oil and gas properties............................ -- 11,890 17,196
Sundry income--Net................................................ 798 1,006 367
------------- ------------- -------------
Total Other Income.................................................. 17,765 42,875 33,885
------------- ------------- -------------
Income before provision for taxes................................... 58,489 45,345 156,816
Provision for taxes................................................. 15,733 10,645 46,335
------------- ------------- -------------
Net Income.......................................................... $ 42,756 $ 34,700 $ 110,481
------------- ------------- -------------
------------- ------------- -------------
Per Share Amounts:
Net Income Per Share................................................ $ 0.75 $ 0.59 $ 1.84
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding................................. 56,931,645 58,658,966 60,151,000
------------- ------------- -------------
------------- ------------- -------------

The accompanying notes are an integral part of the consolidated financial
statements.

DESTEC ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(IN THOUSANDS OF DOLLARS)

FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995
------------ ------------

Cash Flows From Operating Activities:
Net Income...................................................................................... $ 42,756 $ 34,700
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings from equity investments.............................................................. (19,389) (12,385)
Gain on sale of oil and gas properties........................................................ -- (11,890)
Deferred income, net.......................................................................... 4,241 8,097
Depreciation, depletion and amortization...................................................... 13,183 24,727
Cumulative translation adjustments............................................................ 3,726 --
Compensation recognized under Variable Pay Plan............................................... 779 --
Increase in deferred income taxes, net........................................................ 38,342 (1,793)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable......................................................................... (26,788) (19,786)
Notes receivable--affiliates................................................................ (3,345) (917)
Income taxes receivable..................................................................... (22,896) (1,934)
Costs and estimated earnings in excess of billings on uncompleted contracts--affiliates....... (7,778) (5,636)
Recoverable project costs..................................................................... 57,514 (12,739)
Prepaid expenses and other assets............................................................. (9,406) 1,246
Accounts payable............................................................................ 18,878 (5,181)
Accrued liabilities......................................................................... (1,159) (621)
Billings in excess of costs and estimated earnings on uncompleted contracts--affiliates..... (37,663) 38,437
Income taxes payable........................................................................ (249) (5,042)
Long-term liabilities....................................................................... 5,342 9,073
------------ ------------
Net Cash Provided by Operating Activities....................................................... 56,088 38,356
------------ ------------
Cash Flows From Investing Activities:
Investments in marketable securities.......................................................... (1,238,741) (1,965,288)
Proceeds from sale of marketable securities................................................... 1,563,890 1,637,140
Proceeds from sale of oil and gas properties.................................................. -- 34,052
Purchases of property, net.................................................................... (136,196) (33,103)
Long-term notes receivable--affiliates........................................................ (8,444) 1,976
Equity investments--contributions............................................................. (191,528) (62,449)
Equity investments--distributions............................................................. 27,451 15,914
Other assets.................................................................................. 3,250 1,900
------------ ------------
Net Cash Provided by (Used in) Investing Activities............................................. 19,682 (369,858)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from borrowings--Dow................................................................. -- --
Repayment of borrowings--Dow.................................................................. -- --
Proceeds from project financing debt.......................................................... 53,820 --
Proceeds from issuance of treasury stock...................................................... 1,352 1,856
Treasury stock purchases...................................................................... (30,962) (13,025)
------------ ------------
Net Cash Provided by (Used in) Financing Activities............................................. 24,210 (11,169)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents............................................ 99,980 (342,671)
Cash and Cash Equivalents at Beginning of Year.................................................. 11,466 354,137
------------ ------------
Cash and Cash Equivalents at End of Year........................................................ $ 111,446 $ 11,466
------------ ------------
------------ ------------
Supplemental Disclosures of Cash Flow Information:
Schedule of Noncash Operating, Investing and Financing Activities:
Loss on sale of treasury stock................................................................ $ 208 $ 882
Unrealized loss on marketable securities...................................................... -- $ 651
Treasury stock issued under Variable Pay Plan................................................. $ 2,747 --
Unearned compensation......................................................................... $ 543 --
Hartwell note receivable conversion........................................................... -- --
Goodwill adjustment for ITC................................................................... $ 908 --
Cumulative translation adjustments............................................................ $ 3,726 --
Cash paid for:
Interest...................................................................................... -- $ 1,141
Income taxes.................................................................................. $ 1,180 $ 14,248

1994
----------

Cash Flows From Operating Activities:
Net Income...................................................................................... $ 110,481
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings from equity investments.............................................................. (9,259)
Gain on sale of oil and gas properties........................................................ (17,196)
Deferred income, net.......................................................................... 7,214
Depreciation, depletion and amortization...................................................... 32,738
Cumulative translation adjustments............................................................ --
Compensation recognized under Variable Pay Plan............................................... --
Increase in deferred income taxes, net........................................................ (8,736)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable......................................................................... (2,001)
Notes receivable--affiliates................................................................ (134)
Income taxes receivable..................................................................... --
Costs and estimated earnings in excess of billings on uncompleted contracts--affiliates....... (9,458)
Recoverable project costs..................................................................... (38,139)
Prepaid expenses and other assets............................................................. (4,060)
Accounts payable............................................................................ 23,162
Accrued liabilities......................................................................... 7,949
Billings in excess of costs and estimated earnings on uncompleted contracts--affiliates..... (3,542)
Income taxes payable........................................................................ 1,283
Long-term liabilities....................................................................... 4,290
----------
Net Cash Provided by Operating Activities....................................................... 94,592
----------
Cash Flows From Investing Activities:
Investments in marketable securities.......................................................... --
Proceeds from sale of marketable securities................................................... --
Proceeds from sale of oil and gas properties.................................................. 21,525
Purchases of property, net.................................................................... (39,075)
Long-term notes receivable--affiliates........................................................ 1,634
Equity investments--contributions............................................................. (4,857)
Equity investments--distributions............................................................. 8,185
Other assets.................................................................................. 2,016
----------
Net Cash Provided by (Used in) Investing Activities............................................. (10,572)
----------
Cash Flows from Financing Activities:
Proceeds from borrowings--Dow................................................................. 108,163
Repayment of borrowings--Dow.................................................................. (108,163)
Proceeds from project financing debt.......................................................... --
Proceeds from issuance of treasury stock...................................................... 350
Treasury stock purchases...................................................................... (25,193)
----------
Net Cash Provided by (Used in) Financing Activities............................................. (24,843)
----------
Net Increase (Decrease) in Cash and Cash Equivalents............................................ 59,177
Cash and Cash Equivalents at Beginning of Year.................................................. 294,960
----------
Cash and Cash Equivalents at End of Year........................................................ $ 354,137
----------
----------
Supplemental Disclosures of Cash Flow Information:
Schedule of Noncash Operating, Investing and Financing Activities:
Loss on sale of treasury stock................................................................ --
Unrealized loss on marketable securities...................................................... --
Treasury stock issued under Variable Pay Plan................................................. --
Unearned compensation......................................................................... --
Hartwell note receivable conversion........................................................... $ 15,500
Goodwill adjustment for ITC................................................................... --
Cumulative translation adjustments............................................................ --
Cash paid for:
Interest...................................................................................... $ 898
Income taxes.................................................................................. $ 48,500

The accompanying notes are an integral part of the consolidated financial
statements.

DESTEC ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)

COMMON STOCK TREASURY STOCK ADDITIONAL CUMULATIVE
---------------------- -------------------- PAID-IN TRANSLATION RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS
--------- ----------- --------- --------- ----------- ------------- -----------

Balance at January 1, 1994................... 62,250,000 $ 623 (1,240,831) $ (18,880) $ 394,296 $ -- $ 283,458
Net Income................................... -- -- -- -- -- -- 110,481
Cumulative translation adjustments........... -- -- -- -- -- -- --
Treasury stock acquired...................... -- -- (2,161,200) (25,193) -- -- --
Treasury stock reissued...................... -- -- 38,470 350 -- -- --
--------- ----- --------- --------- ----------- ------ -----------
Balance at December 31, 1994................. 62,250,000 623 (3,363,561) (43,723) 394,296 -- 393,939
Net Income................................... -- -- -- -- -- -- 34,700
Cumulative translation adjustments........... -- -- -- -- -- --
Treasury stock acquired...................... -- -- (986,749) (13,025) -- -- --
Treasury stock reissued...................... -- -- 190,846 2,738 -- -- (882)
--------- ----- --------- --------- ----------- ------ -----------
Balance at December 31, 1995................. 62,250,000 623 (4,159,464) (54,010) 394,296 -- 427,757
Net Income................................... -- -- -- -- -- -- 42,756
Cumulative translation adjustments........... -- -- -- -- -- 3,726 --
Treasury stock acquired...................... -- -- (2,345,500) (30,962) -- -- --
Treasury stock reissued...................... -- -- 334,224 4,307 -- -- (208)
--------- ----- --------- --------- ----------- ------ -----------
Balance at December 31, 1996................. 62,250,000 $ 623 (6,170,740) $ (80,665) $ 394,296 $ 3,726 $ 470,305
--------- ----- --------- --------- ----------- ------ -----------
--------- ----- --------- --------- ----------- ------ -----------

The accompanying notes are in integral part of the consolidated financial
statements.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Destec Energy, Inc. and its wholly owned subsidiaries ("Destec"), a Delaware
corporation and a majority owned subsidiary of The Dow Chemical Company ("Dow"),
was incorporated in May 1989. Prior to Destec's initial public offering (the
"Offering") in 1991, Dow transferred to Destec certain energy related operations
and associated assets and liabilities in exchange for all Destec's issued and
outstanding Common Stock.

Since 1992, the Destec Board of Directors (the "Board") has authorized the
repurchase of up to $95,000 of Destec's common stock through 1999. As of
December 31, 1996, Destec had repurchased 6,816,549 shares and reissued 645,809
shares of common stock repurchased under these programs.

In connection with the execution of the Tax Sharing Agreement (the "Tax
Agreement") discussed in Note 2, Dow will have a continuous, cumulative option
to purchase from Destec at current market prices such number of shares of common
stock of Destec as Dow determines necessary to allow Dow to continue to include
Destec in Dow's consolidated federal income tax return.

Destec is an independent power producer and marketer of electricity, thermal
energy and syngas for sale to electric utilities, Dow and other energy-intensive
industries. Revenues and costs associated with the sale of power, thermal
energy, syngas, energy resources (oil, gas and lignite) and associated with the
marketing of power through Destec Power Services, Inc. ("DPS"), a wholly owned
subsidiary of Destec, and the Power Marketing Agreement ("PMA") (through the
final contract expiration on April 30, 1995) are included as "Power, steam,
syngas and energy resources" revenues and operating costs in the accompanying
statements of consolidated income. Destec also designs, develops, operates, and
performs business management services for its cogeneration and syngas facilities
in the U.S. and abroad. Revenue and costs associated with the fees earned in
connection with these activities are included as "Development, engineering and
operations" revenues and operating costs in the accompanying statements of
consolidated income.

See Note 22 for discussion of the proposed merger of Destec with a wholly
owned subsidiary of NGC Corporation ("NGC").

2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the assets, liabilities, revenue and expenses of all majority
owned subsidiaries. Investments in partnerships with ownership interests of 50%
or less and which Destec does not control are accounted for using the equity
method. All significant balances and transactions within the consolidated group
have been eliminated in consolidation.

REVENUE RECOGNITION--Revenues for the sale or marketing of electricity,
steam and syngas are recorded based upon output or product delivered as
specified under contract terms. Revenues from performance bonuses are recognized
when specified contractual targets are achieved. Energy resources revenues (oil,
gas and lignite) are recognized as production from these resources occurs or as
earned under contract.

Revenues resulting from long-term engineering and project construction
contracts are recognized using the percentage-of-completion accounting method.
The percentage of revenue recognized on each

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
contract is based on the most recent cost estimate available. Revisions of
estimates are reflected in the year in which the facts necessitating the
revision become known. When the current contract estimate indicates a loss, a
provision is made for the total anticipated loss.

Profits from engineering and construction contracts and development fees
received from partnerships in which Destec holds an equity interest are deferred
to the extent of Destec's ownership interest in the partnership. The deferred
income is amortized on a straight-line basis over the partnership debt term used
to finance the facility, except where the equity method of accounting permits
earlier recognition.

USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION--The preparation of
financial statements in conformity with generally accepted accounting principles
requires estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Destec's financial statements include amounts that
are based on management's best estimates and judgments. Actual results could
differ from those estimates.

CASH AND CASH EQUIVALENTS--Cash and cash equivalents include time deposits
and readily marketable securities with an original maturity of three months or
less. Until the expiration of the Destec Credit Agreement on December 31, 1996,
Destec periodically loaned excess cash to Dow. This agreement required Dow, upon
60 days written notice from Destec, to repay all or any portion of the then
outstanding loan balance.

MARKETABLE SECURITIES--Effective January 1, 1995 the Company adopted SFAS
No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES." All
of Destec's marketable securities are classified as "available for sale," and
accordingly, are reflected in the Consolidated Balance Sheets at fair market
value, with the aggregate unrealized gains or losses included as a component of
stockholders' equity. Adoption of SFAS No. 115 had no effect on reported
earnings. Cost for determining gains and losses on sales of marketable
securities is determined on the FIFO method.

RECOVERABLE PROJECT COSTS--Destec capitalizes certain project costs incurred
to procure equipment, to connect with utility transmission lines, and certain
other costs, once management determines it is probable these costs are
recoverable, until contracts for financing and sale are executed. If the
necessary contracts are not obtained and the costs incurred are not recoverable
through other projects or sale, the related costs are charged to expense. These
costs are classified as current if they are expected to be recovered in the next
12 months.

PROPERTY, GOODWILL AND DEPRECIATION, DEPLETION AND AMORTIZATION --Buildings
and equipment are carried at cost less accumulated depreciation. Depreciation is
based on the estimated service lives for depreciable assets and is generally
provided using the double declining balance method for all subsidiaries except
for Destec Holdings, Inc. and its subsidiaries which use the straight line
depreciation method. Estimated service lives range from three to thirty-two
years.

Cost associated with acquiring and developing lignite properties are
capitalized as incurred. Depletion and amortization of lignite properties are
recorded using the units-of-production method based on an estimate of proved
reserve quantities to be mined in the future.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
The excess of the cost of investments in subsidiaries over the fair value of
assets acquired and liabilities assumed is shown as goodwill, which is amortized
over the estimated useful life of 40 years.

The Company evaluates long-lived assets, including goodwill, for impairment
based on the recoverability of the asset's carrying amount. When it is probable
that the undiscounted future cash flows will not be sufficient to recover the
asset's carrying amount, the asset is written down to its fair value. Destec
adopted SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" on January 1, 1996. The adoption of this
standard had no material impact on Destec's financial position or results from
operations.

Costs incurred to acquire or retain oil and gas properties, owned in fee or
under lease, are capitalized. Destec grants leases to exploration and production
companies, generally retaining royalty interests. Costs to acquire mineral
interests in oil and gas properties and to drill and equip developmental wells
are capitalized. Costs associated with oil and gas properties are amortized
using the units-of-production method based upon estimates of proved reserves.
The Company evaluates the recoverability of its oil and gas properties by
determining that the undiscounted future cash flows on an aggregated basis are
sufficient to recover the net carrying value.

Fully depreciated assets are retained in property and accumulated
depreciation accounts until they are removed from service. In the case of
disposals, assets and related depreciation are removed from the accounts and the
net amount, less proceeds from disposal, is charged or credited to income.

MAJOR MAINTENANCE--A major maintenance and repair reserve is recorded based
on Destec's scheduled maintenance plans for cogeneration and syngas facilities
operated or owned by Destec. This liability is classified as current if the
maintenance is expected to be incurred in the next 12 month period. Other
maintenance and repairs are charged to expense as incurred (see Notes 9 and 10).

RESEARCH EXPENSE--All expenses associated with research and development are
expensed in the year incurred. Research expenses were $213, $808 and $864 in
1996, 1995 and 1994, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company calculates the fair value
of financial instruments and includes this additional information in Note 3.

TAXES ON INCOME--Destec recognizes deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the book
carrying amounts and the tax basis of all balance sheet assets and liabilities.
These temporary differences are calculated using tax rates currently in effect.

Effective June 6, 1996, Destec is included in the consolidated federal
income tax return of Dow, as Dow's ownership increased above 80%. Destec and Dow
executed the Tax Agreement which requires Destec to calculate federal and state
income taxes on a stand-alone basis. The Tax Agreement allows Destec to reduce
its federal stand-alone tax liability by certain non-conventional fuels tax
credits which have been utilized in Dow's consolidated return, even where such
credits would not be otherwise currently usable by Destec. See Note 22 for
discussion of the effects the proposed merger of Destec with a wholly owned
subsidiary of NGC would have on the Tax Agreement.

NET INCOME PER SHARE--Net income per share is computed by dividing net
income by the weighted average number of shares outstanding during the year. The
shares described in Note 17 relating to the

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Destec Stock Plans are not considered in the net income per share calculation.
If these shares were to be included, they would not have had a material effect
on net income per share for the years ended December 31, 1996, 1995 and 1994,
respectively.

ACCOUNTING FOR STOCK BASED COMPENSATION--The Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," in October
1995. Destec adopted SFAS No. 123, effective January 1, 1996, and continues to
apply its current accounting policy under Accounting Principles Board ("APB")
Opinion No. 25 and has included additional footnote disclosures for the
pro-forma impact on net income and earnings per share of the application of the
fair value based method of accounting (see Note 17).

FOREIGN CURRENCY TRANSLATION--Assets and liabilities of certain foreign
subsidiaries are translated into U.S. dollars at current exchange rates in
effect at the end of the fiscal period, and related revenues and expenses are
translated at average exchange rates that prevailed during the period. Resulting
translation adjustments, as well as adjustments for intercompany transactions
which are long-term in nature are shown in stockholder's equity in CUMULATIVE
TRANSLATION ADJUSTMENTS. The foreign currency gain/loss on the remeasurement of
short-term foreign currency transactions of certain U.S. subsidiaries are
included in net income. The net CUMULATIVE TRANSLATION ADJUSTMENTS includes a
foreign currency gain of $3,917 and a loss of $191 for the year ended December
31, 1996. Foreign currency transaction gains of $3,841 were related to the
remeasurement of long-term intercompany loans. No adjustments were recorded for
the year ended December 31, 1995.

RECLASSIFICATIONS--Certain amounts from previous years have been
reclassified to conform to the 1996 presentation.

3. FINANCIAL INSTRUMENTS

The fair value of Destec's financial instruments such as cash, cash
equivalents, marketable securities, accounts and notes receivable, accounts and
notes payable, and other accrued liabilities, approximate carrying values at
December 31, 1996 and 1995.

Marketable securities consisted of the following:

DECEMBER 31, 1995
DECEMBER 31, 1996 -------------------------------------
------------------------------------------------ GROSS
GROSS UNREALIZED
FAIR UNREALIZED HOLDING FAIR HOLDING
AMORTIZED MARKET ------------------------ AMORTIZED MARKET -------------
COST VALUE GAINS LOSSES COST VALUE GAINS
----------- --------- ----------- ----------- ---------- ---------- -------------

Government bonds................... $ -- $ -- $ -- $ -- $ 180,380 $ 180,597 $ 259
Corporate bonds.................... 2,999 2,999 -- -- 99,768 100,200 465
Other.............................. -- -- -- -- 48,000 48,002 2
----------- --------- ----------- ----------- ---------- ---------- -----
Total.............................. $ 2,999 $ 2,999 $ -- $ -- $ 328,148 $ 328,799 $ 726
----------- --------- ----------- ----------- ---------- ---------- -----
----------- --------- ----------- ----------- ---------- ---------- -----

LOSSES
-----------

Government bonds................... $ (42)
Corporate bonds.................... (33)
Other.............................. --
-----
Total.............................. $ (75)
-----
-----

The corporate bond held at December 31, 1996 has a maturity date of May
1997.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

3. FINANCIAL INSTRUMENTS (CONTINUED)
In February 1994, Destec purchased a series of Dutch Guilder put options in
order to hedge its projected foreign currency risk associated with the
engineering contract for the Elsta project. The total premium cost for this
program was $6,450. The Dutch Guilder put options were purchased from Dow,
acting as an intermediary who in turn purchased the options from a bank. As of
December 31, 1996, no options have been exercised as put option prices have been
above Dutch Guilder exchange rates. These options have varying expiration dates
through August 1997; however, due to changes in foreign currency markets, the
options have no market value. As a result, the entire cost of this program was
expensed in 1994 as part of the project cost.

4. ENGINEERING AND CONSTRUCTION CONTRACTS

The following table reflects the amounts related to uncompleted engineering
and construction contracts:

DECEMBER 31,
---------------------------
1996 1995
------------ -------------

Costs and estimated earnings..................................... $ 1,012,943 $ 1,071,352
Billings to date................................................. (971,748) (1,075,598)
------------ -------------
Net.............................................................. $ 41,195 $ (4,246)
------------ -------------
------------ -------------

Amounts related to uncompleted engineering and construction contracts, all
of which are expected to be realized within one year, are included in the
accompanying consolidated balance sheets as follows:

DECEMBER 31,
---------------------
1996 1995
--------- ----------

Costs and estimated earnings in excess of billings on uncompleted
contracts--affiliates................................................ $ 44,841 $ 37,063
Billings in excess of costs and estimated earnings on uncompleted
contracts--affiliates................................................ (3,646) (41,309)
--------- ----------
Total.................................................................. $ 41,195 $ (4,246)
--------- ----------
--------- ----------

COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS--AFFILIATES includes
$38,768 and $7,749 related to foreign projects as of December 31, 1996 and 1995,
respectively. Billings in excess of costs and estimated earnings--affiliates
includes $41,014 related to the Elsta project as of December 31, 1995.

Certain amounts are due, but not paid by Destec until the related outside
vendors have completed their obligations pursuant to contract retainage
provisions. The amounts retained under such contract provisions were $14,234 and
$11,291 at December 31, 1996 and 1995, respectively, and are expected to be paid
within one year.

In February 1996, CoGen Lyondell, Inc. ("CLI") and Lyondell Petrochemical
Company ("LYO") formed Channelview CoGen General Partnership (the "Partnership")
with CLI as an 88% partner and LYO as a 12% partner. Under the partnership
agreement, power generated at the CLI facility would be

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

4. ENGINEERING AND CONSTRUCTION CONTRACTS (CONTINUED)
distributed to the partners, in proportion to their partnership percentages,
under the self generation exception of the Texas Public Utility Regulatory Act.
Included in COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS--AFFILIATES at
December 31, 1996 is $3,873 related to the construction of a transmission line
between the CLI facility and the LYO facility. LYO entered into a note
receivable agreement with Destec to finance the construction. Note payments are
to begin once the construction is completed and accepted by LYO. Houston
Lighting and Power Company ("HL&P") challenged the partnership on the basis that
the structure is actually a retail sale of electricity from CLI to LYO. A
decision in HL&P's favor was rendered in Austin District Court in September
1996. Destec is pursuing an appeal of this judgement. As a result, deliveries of
power to LYO via the private transmission line are postponed indefinitely. If
delivery of the power is not approved by the courts and the line cannot be
utilized, LYO would be obligated to pay 50% of the note receivable, although
once accepted by LYO, title to the transmission line would remain with LYO.

5. PROPERTY

Property consisted of the following:

DECEMBER 31,
----------------------
1996 1995
---------- ----------

Land.................................................................. $ 3,655 $ 3,655
Buildings............................................................. 5,466 7,133
Construction in Progress.............................................. 57,385 24,051
Machinery and Equipment............................................... 183,345 107,465
Mineral Properties:
Lignite............................................................. 74,077 72,420
Oil and Gas......................................................... 83,335 56,343
---------- ----------
Total................................................................. $ 407,263 $ 271,067
---------- ----------
---------- ----------

During 1995 and 1996, Destec constructed the Los Mina facility, located in
the Dominican Republic, which became operational in May 1996, and the Indian
Queens facility, located in the United Kingdom, which reached substantial
completion in December 1996. Total construction cost for the Los Mina and Indian
Queens facilities, which are wholly owned by Destec, was $130,720 through
December 31, 1996 (see Note 11).

In 1996, Destec acquired an undivided 45% interest in proved producing
natural gas properties and related undeveloped leasehold acreage and gas
pipeline system in northwest Colorado from Snyder Oil Corporation ("SOCO") for
approximately $22,000. The total proved reserves for Destec's interest in the
properties are estimated to be approximately 42 billion cubic feet. SOCO will
retain a majority working interest in the properties and will continue to
operate the wells. Destec has entered into a joint venture agreement with SOCO
covering the long-term development of the underlying properties and associated
gas pipeline.

In 1995 and 1994, Destec sold a group of non-conventional gas properties in
the San Juan Basin, Colorado, and a group of non-strategic oil and gas
properties in the Texas and Louisiana Gulf Coast areas,

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

5. PROPERTY (CONTINUED)
respectively. The sale of these properties resulted in pre-tax gains of $11,890
and $17,196 in 1995 and 1994, respectively. Included in Destec's lignite
properties are $6,526 of costs for each of 1996 and 1995, representing
properties currently being mined for which Destec is receiving royalty payments.

6. LEASE RECEIVABLE FROM DOW

Destec leases certain lignite properties to Dow under a lease which requires
annual rental payments through the year 2025. Dow pays an annual amount equal to
ten percent of the sum of (a) Destec's book value of the properties as of
December 29, 1989 plus (b) the cumulative advance royalties attributable to such
properties as of December 29, 1989 or approximately $4,400 per year. All
properties under this lease agreement not previously purchased by Dow will be
purchased on December 31, 2025 in exchange for a payment equal to the
properties' then book value. In addition, Dow has an option to purchase all of
Destec's interest in any one or more of the properties at a price equal to
Destec's book value of the properties as of the year end preceding the year in
which such option is exercised.

Destec has an agreement with Dow to manage, market and maintain certain
lignite-containing properties, including the above described leased properties.
Dow pays Destec a fee of $250 per year (adjusted annually for inflation) and all
out-of-pocket expenses. The term of this agreement is the same as the above
described lease agreement and may be terminated by either party upon one year's
notice. The amounts under this agreement, which are included as a reduction of
selling, general and administrative costs, related to Dow were $302, $295, and
$287 for 1996, 1995 and 1994, respectively.

See Note 22 for discussion of the effects the proposed merger of Destec with
a wholly owned subsidiary of NGC would have on Destec's lignite properties lease
and related management agreement with Dow.

7. SALE OF BLUE MOUNTAIN

In July 1996, Destec agreed to sell its ownership interest in the 150 MW
Blue Mountain Power Project to The AES Corporation. The sale of this project,
which was included in development revenue, had a positive after tax effect of
approximately $6,900 (considering an effective tax rate of 26.9%) or $0.12 per
share for the year ended December 31, 1996.

8. EQUITY INVESTMENTS

Destec holds non-controlling general and limited equity interests in twenty
partnerships which were formed to build, own and operate cogeneration
facilities. The lenders to these partnerships have recourse only against the
projects and the income and revenues therefrom and thus, the partnerships' debt
obligations are non-recourse to Destec. Destec's effective equity interest in
these partnerships ranges from 8% to 50%.

Seventeen of Destec's twenty projects accounted for under the equity method
are concentrated in the U.S. (49% based on invested capital at December 31,
1996). Additionally, eleven projects are located in California (17% based on
invested capital at December 31, 1996). These domestic projects generally
operate under energy sales contracts based upon the purchasing utility's avoided
cost. Competitive initiatives in several states, as well as federal initiatives
are designed to phase-in market based pricing. The

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

8. EQUITY INVESTMENTS (CONTINUED)
initiatives in California propose phasing in market based pricing by the year
2002. These initiatives are generally not yet effective and will be the subject
of considerable debate and modification; however, changes in contract prices
could result from the legislative process.

Destec has been engaged to perform project development, engineering,
construction, operations and maintenance and business management services
related to certain of these partnerships and has recognized revenues of
$324,116, $455,517, and $385,853 in 1996, 1995 and 1994, respectively. Assets
and liabilities associated with the performance of these services and the
advancement of funds are included in the balance sheet captions labeled
"Affiliates."

In September 1996, an indirect wholly owned subsidiary of Destec, as part of
an international consortium, purchased for $1,900,000 the 1,600 MW Hazelwood
Power Station and the adjacent Hazelwood Mine in Victoria, Australia. The
consortium formed a partnership (the "Hazelwood partnership") to own and operate
the Hazelwood facility. Destec holds a 20% limited partnership interest in the
Hazelwood partnership and made an original equity contribution of $176,104 in
September 1996. A wholly owned subsidiary of Destec entered into a separate
agreement with National Power PLC, another member of the international
consortium, in September 1996, which entitles Destec to receive approximately
$4,000 for each of the years ended December 31, 1997, 1998 and 1999. The total
amount of approximately $12,000 is recorded in NOTE RECEIVABLE--AFFILIATES,
LONG-TERM/SHORT-TERM as of December 31, 1996 and reduces Destec's original
equity contribution to $164,104. The remainder of Destec's investment is
included in the project financing at the partnership level. The Hazelwood
partnership is planning a major capital expenditure program which may be funded
from future capital contributions to refurbish two of the eight operating units
in order to maximize operating efficiencies and upgrade environmental
performance.

Unaudited pro forma net income and net income per share of Destec, as if the
acquisition had occurred at the beginning of the years and after giving effect
to certain pro forma adjustments related to the acquisition, were approximately
$38,990 and $0.68 and $29,492 and $0.50 for 1996 and 1995, respectively. Pro
forma revenue was $574,146 and $636,288 in 1996 and 1995, respectively. Such pro
forma amounts are not necessarily indicative of what the actual consolidated
results of operations might have been if the acquisition had been effective at
the beginning of 1996 or 1995.

See Note 14 for discussion of the engineering services agreement with the
Hazelwood partnership.

Equity investments include Destec's equity contributions during the years
ended December 31, 1996 and 1995 as follows:

DECEMBER 31,
---------------------
1996 1995
---------- ---------

Bear Mountain................................................ $ 6,000 --
Crockett..................................................... $ 8,605 --
Hazelwood.................................................... $ 164,819 --
Michigan Power............................................... $ 11,489 --
Oyster Creek................................................. -- $ 29,432
Tiger Bay.................................................... -- $ 33,000

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

8. EQUITY INVESTMENTS (CONTINUED)
The following is a summary of aggregated financial information for all
investments owned by Destec which are accounted for under the equity method:

DECEMBER 31,
----------------------------------------
HAZELWOOD
1996 TOTAL 1996 1995
------------ ------------ ------------

BALANCE SHEETS
Current assets...................................... $ 88,145 $ 433,687 $ 179,562
Construction in progress............................ -- 453,686 388,934
Property and equipment, net......................... 1,880,588 3,620,862 1,365,927
Other assets........................................ 34,312 94,369 43,363
------------ ------------ ------------
Total assets...................................... $ 2,003,045 $ 4,602,604 $ 1,977,786
------------ ------------ ------------
------------ ------------ ------------

Current liabilities................................. $ 25,649 229,226 $ 278,754
Construction related obligations.................... -- 107,224 14,297
Long-term debt and other liabilities................ 1,080,641 2,974,032 1,409,158
Equity.............................................. 896,755 1,292,122 275,577
------------ ------------ ------------
Total liabilities and equity...................... $ 2,003,045 $ 4,602,604 $ 1,977,786
------------ ------------ ------------
------------ ------------ ------------
Destec's share of equity............................ $ 165,462 $ 323,250 $ 139,784
------------ ------------ ------------
------------ ------------ ------------

FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
HAZELWOOD
1996 TOTAL 1996 1995 1994
----------- ---------- ---------- ----------

STATEMENTS OF OPERATIONS
Sales........................................ $ 68,690 $ 640,091 $ 432,889 $ 274,549
Operating Income............................. 26,421 213,132 130,341 82,942
Net Income................................... 217 52,419 28,048 20,695
Destec's share of earnings from equity
investments................................ $ 43 $ 19,389 $ 12,385 $ 9,259

See Note 22 for discussion of the potential sale of the Tiger Bay
cogeneration facility.

As of December 31, 1996, Destec has a corporate guarantee associated with an
equity contribution to the Elsta project of approximately $39,634. Destec
expects to make this equity contribution in 1998.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

DECEMBER 31,
--------------------
1996 1995
--------- ---------

Accrued maintenance and repair reserve.................................. $ 15,018 $ 21,460
Accrued employee benefits, payroll and other related costs.............. 16,067 11,419
Ad valorem taxes........................................................ 3,522 4,235
Accrued operating costs................................................. 9,965 6,866
Accrued obligation under purchase commitments........................... 1,562 1,216
Accrued restructuring charges........................................... 463 1,602
Other................................................................... 2,195 3,153
--------- ---------
Total................................................................. $ 48,792 $ 49,951
--------- ---------
--------- ---------

Accrued employee benefits include vacations, deferred savings plan
contributions, deferred defined benefit contracts, incentive compensation and
awards under stock plans (see Notes 16 and 17). Accrued restructuring charges
are the remaining liabilities associated with Destec's 1994 plan to realign its
strategic objectives (see Note 18).

10. LONG-TERM LIABILITIES

Long-term liabilities consisted of the following:

DECEMBER 31,
--------------------
1996 1995
--------- ---------

Accrued maintenance and repair reserve.................................. $ 36,595 $ 30,112
Accrued energy resource obligations..................................... -- 756
Accrued restructuring charges........................................... 1,349 1,798
Long-term lease liability............................................... 3,677 3,633
Deferred stock liability................................................ 853 2,548
Long-term commitments................................................... 2,722 2,741
Other................................................................... 4,893 4,584
--------- ---------
Total................................................................. $ 50,089 $ 46,172
--------- ---------
--------- ---------

Accrued restructuring charges are the remaining costs associated with
Destec's 1994 plan to realign its strategic objectives (see Note 18). Long-term
lease liability includes the long-term lease arrangement for office space at
corporate headquarters in Houston (see Note 15). Deferred stock liability
includes the value of the stock granted under the Destec stock compensation plan
(see Note 17). Long-term commitments include the accrued operating efficiency
penalty for the Wabash facility (see Note 12).

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

11. PROJECT FINANCING DEBT

In August 1996, Destec arranged non-recourse financing for the 140 MW Indian
Queens facility located in Cornwall, United Kingdom. The project financing,
which consists of a $56,562 construction facility and $39,850 in term facility
and other debt instruments, was arranged and underwritten by Barclays Bank PLC.
Through December 31, 1996 Destec has recorded advances under the construction
facility of $53,820 in PROJECT FINANCING DEBT. The credit agreement divides the
facility into two tranches which carry interest at LIBOR plus variable margins.
The conversion of the construction loan to term is expected to occur in early
1997. The term loan is collateralized by the project's assets and matures over a
period of 17 years. Under the terms of the credit agreement, the unconsolidated
financial statements of the Indian Queens project are subject to various
coverage ratios. Interest costs of approximately $1,000 incurred during the
construction of the facility were capitalized as of December 31, 1996. The
interest rates in effect as of December 31, 1996 were 6.52% on $23,996 and 7.27%
on $29,824.

12. SYNGAS

In 1992, Destec entered into an agreement with the U.S. Department of Energy
("DOE") and PSI Energy, Inc. ("PSI") for the design, construction and operation
of a syngas facility, the Wabash River Coal Gasification Repowering project
("Wabash facility"). The Wabash facility, located in Indiana, began commercial
operations in November 1995. The capacity of the facility is approximately 262
MW. Destec will provide coal gasification services for PSI under a 25 year
contract. Effective June 1996, Destec refinanced its operating lease agreement
associated with the Wabash facility to include certain improvements made to the
facility. Under the terms of the gasification services agreement with PSI,
Wabash is subject to either an operating bonus or penalty depending on the
operating rate of the facility. The maximum bonus or penalty is $7,000 per
operating year and is calculated based on the annual average syngas production.
Destec's accrual for this potential penalty was $2,722 and $1,741 as of December
31, 1996 and 1995, respectively. During 1996, Destec began making significant
equipment and process improvements in order to improve the reliability and
profitability of the Wabash facility. The total cost of the improvements is
estimated at $14,000 and completion is expected in 1997.

Under the terms of the DOE Agreement, the DOE paid $161,000 of the
construction costs and will pay 50% of certain operating costs during the first
three years of operation. These reimbursements, which are netted in operating
costs were $13,719 and $3,230 in 1996 and 1995, respectively.

Pursuant to a 1985 settlement agreement between Dow and a competitor, Dow
made a payment of $2,250 for the future use of coal gasification technology by
Dow and or its successors. In order for Destec, as Dow's successor, to receive
the benefit of this payment in connection with Wabash, Dow transferred the
benefit of this $2,250 payment to Destec. Thus, Destec received a $2,250 asset
from Dow and recorded it as additional-paid-in-capital. An additional $1,250
obligation related to the foregoing was accrued in 1995 and capitalized as part
of the project by Destec as the successor to the coal gasification business of
Dow after completion and start-up of this facility in November 1995.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

12. SYNGAS (CONTINUED)

In connection with an agreement with the U.S. Department of Treasury, Destec
received certain guaranteed payments ("Guaranteed Payments") for the sale of
syngas to Dow that was produced at Destec's coal gasification facility (the
"LGTI facility"), located near Plaquemine, Louisiana. During 1995, Destec earned
$63,014, leaving a balance of $59 from the cumulative Guaranteed Payments of
$584,500. The remaining balance will not be earned because it was not economical
to restart the plant after the outage in November 1995. The LGTI facility was
fully depreciated as of September 1995. Destec and Dow signed an agreement in
1996 whereby the LGTI equipment and all related facilities, except the slag
pile, would be transferred to Dow. Destec has agreed to reimburse Dow for
clean-up and disposal expenses up to a maximum of approximately $250. Destec has
agreed to remove the slag pile at the site in compliance with applicable
federal, state and local legal requirements. The cost of removal is expected to
be offset by proceeds from the sale of the slag.

13. INCOME TAXES

The provision for income taxes consisted of the following:

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------

CURRENT:
Federal..................................................... $ (28,691) $ 8,249 $ 50,630
State and local............................................. 4,004 4,016 3,554
Foreign..................................................... 672 259 117
---------- --------- ---------
Total................................................... (24,015) 12,524 54,301
DEFERRED:
Federal..................................................... 40,517 (1,793) (8,736)
Foreign..................................................... (769) (86) 770
---------- --------- ---------
Total income tax provision.............................. $ 15,733 $ 10,645 $ 46,335
---------- --------- ---------
---------- --------- ---------

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

13. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences:

DECEMBER 31,
-----------------------
1996 1995
----------- ----------

Assets:
Accrued liabilities................................................ $ 2,487 $ 2,851
Billings in excess of costs........................................ (884) 438
Property........................................................... 1,054 1,988
Other assets....................................................... 2,124 2,124
Investment tax credit carryforward................................. 1,692 2,600
Alternative minimum tax credit carryforward........................ 7,390 7,245
Foreign net operating loss carryforward............................ 3,054 2,610
Long-term liabilities.............................................. 21,987 20,450
Deferred income.................................................... 14,776 13,094
----------- ----------
Total deferred tax assets........................................ 53,680 53,400
Valuation allowance.............................................. (4,661) (5,210)
----------- ----------
Deferred tax assets--net......................................... 49,019 48,190
----------- ----------
Liabilities:
Depreciation, depletion and amortization........................... (36,012) (8,951)
Mineral reserves................................................... (23,431) (22,272)
Equity investments................................................. (49,206) (39,737)
Other.............................................................. (6,844) (6,270)
----------- ----------
Deferred tax liabilities......................................... (115,493) (77,230)
----------- ----------
Total deferred taxes--net........................................ $ (66,474) $ (29,040)
----------- ----------
----------- ----------

Amounts related to the above deferred tax assets and liabilities are
included in the accompanying consolidated balance sheets as follows:

DECEMBER 31,
----------------------
1996 1995
---------- ----------

Current assets:
Deferred taxes--net................................................. $ 5,370 $ 5,680
Long-term liability:
Deferred taxes--net................................................. (71,844) (34,720)
---------- ----------
Total deferred taxes--net......................................... $ (66,474) $ (29,040)
---------- ----------
---------- ----------

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

13. INCOME TAXES (CONTINUED)
Major differences in taxes on income between amounts based on the statutory
tax rate and the combined tax provision are as follows:

FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1995 1994
--------- --------- ---------

Taxes at U.S. statutory rate................................ $ 20,498 $ 15,871 $ 54,886
State and local taxes, net of federal benefits.............. 2,603 2,610 2,924
Goodwill amortization....................................... 865 865 865
Energy resources tax credits................................ (2,093) (6,766) (6,953)
Tax exempt interest......................................... -- (163) (3,587)
Valuation allowance......................................... (549) 2,421 --
FSC benefit................................................. (1,811) (366) --
Foreign net operating loss carryforwards.................... (436) (2,351) --
Settlement of tax audit items............................... (3,000) (1,226) --
Other--net.................................................. (344) (250) (1,800)
--------- --------- ---------
Total tax provision..................................... $ 15,733 $ 10,645 $ 46,335
--------- --------- ---------
--------- --------- ---------
Effective tax rate...................................... 27% 23% 30%

The change in valuation allowance during 1995 was a net increase of $2,421
due primarily to foreign tax losses which were not likely to be realizable at
that time. The change in valuation allowance during 1996 was a net decrease of
$549 due to investment tax credits utilized of $908 and foreign tax losses of
$359 which do no appear realizable at this time. During 1996, $908 of investment
tax credit carryforwards were utilized to reduce taxes payable and were
reflected as a reduction of goodwill. The valuation allowance includes
approximately $1,700 of investment tax credit carryforwards expiring in 2003
which may not be realized. These carryforwards are limited to use by the
subsidiary in which they were generated. See Note 22 for discussion of the
effects the proposed merger of Destec with a wholly owned subsidiary of NGC
would have on the Tax Agreement between Dow and Destec.

14. RELATED PARTY TRANSACTIONS

Destec engaged in several transactions with Dow which resulted in the
following balances:

DECEMBER 31,
----------------------
1996 1995
---------- ----------

Cash and cash equivalents--Dow........................................ $ -- $ 4,422
Accounts receivable--Dow.............................................. $ 1,889 $ 1,144
Lease receivable from Dow............................................. $ 44,159 $ 44,159
Accounts payable--Dow................................................. $ (12,661) $ (13,249)

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

14. RELATED PARTY TRANSACTIONS (CONTINUED)
The transactions which resulted in these balances are described as follows:

Destec had entered into a PMA with Dow whereby Destec provided
administrative, business management and marketing services with respect to a
portion of the electricity generated at Dow's Freeport, Texas cogeneration
facilities and sold under contracts to the local utilities. The final contract
related to this agreement expired on April 30, 1995. For such services, Dow paid
Destec an amount based on a formula specified in the PMA. The resulting revenue
recorded and collected was $3,276 and $125,209 for the years ended December 31,
1995 and 1994, respectively.

The LGTI facility, which ceased operations in November 1995, provided fuel
to a Dow plant pursuant to a long-term fuel supply contract. Revenues from such
sales aggregated $7,611 and $13,661 for the years ended December 31, 1995 and
1994, respectively. No revenues for such sales were earned for the year ended
December 31, 1996. Destec and Dow signed an agreement in 1996 under which the
LGTI equipment and all related facilities, except the slag pile, were
transferred to Dow. Destec has agreed to reimburse Dow for clean-up and disposal
expenses up to a maximum of $250. Destec has agreed to remove the slag pile at
the site in compliance with applicable federal, state and local legal
requirements. The cost of removal is expected to be offset by proceeds from the
sale of the slag (see Note 12).

LGTI purchased from Dow certain materials and services (including research
and development) necessary for the operation of its facility pursuant to service
agreements. In addition, Dow performed the purchasing of all operating
activities of the LGTI facility. Costs incurred related to these services
aggregated $13,509 and $19,271 for the years ended December 31, 1995 and 1994,
respectively. During 1996, costs of $1,176 were incurred during the site
clean-up of the LGTI facility. Amounts of $523 and $3,274 relating to these
services were included in ACCOUNTS PAYABLE--DOW at December 31, 1996 and 1995,
respectively.

Destec and Dow have entered into an amended service agreement whereby
certain administrative services are provided to Destec at a fee of $122 per
calendar quarter. In the opinion of management, the service agreement is based
on reasonable estimates of the costs of such services.

Destec and Dow have extended credit to each other up to $350,000 from time
to time under the Destec/Dow Credit Agreements. The agreements expired on
December 31, 1996, and management does not expect renewal at this time. At
December 31, 1995, cash equivalents included $4,422 of cash advances to Dow. Due
to the expiration of the agreements no amounts were included in cash equivalents
at December 31, 1996. Interest due on Destec advances to Dow of $122 and $566 is
included in ACCOUNTS RECEIVABLE--DOW at December 31, 1996 and 1995,
respectively. There were no outstanding borrowings from Dow at December 31, 1996
and 1995.

Certain personnel, occupancy and engineering services are performed by both
Dow and Destec. The net amounts of $10,372 and $9,395 related to such services
were included in ACCOUNTS RECEIVABLE/ACCOUNTS PAYABLE--DOW at December 31, 1996
and 1995, respectively.

See Note 6 for discussion of lease receivable from Dow.

In 1993, Destec signed an agreement to develop the 405 MW Elsta facility in
the Netherlands to provide steam and electricity to Dow's Terneuzen facility as
well as electricity to the local distribution network. The project is expected
to commence commercial operations in 1997.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

14. RELATED PARTY TRANSACTIONS (CONTINUED)
The Oyster Creek facility, in which Destec owns a 50% non-controlling
interest, commenced commercial operations in October 1994. The 424 MW facility
provides 369 MW of electricity and 1.1 million pounds per hour of process steam
to Dow who also operates and maintains the facility. See Note 22 for discussion
of the effects the proposed merger of Destec with a wholly owned subsidiary of
NGC would have on the Oyster Creek facility.

In October 1995, the Michigan Power project, in which Destec owns a 50%
non-controlling interest, commenced commercial operations. The 123 MW facility,
located in Ludington, Michigan, provides Dow with 320,000 pounds per hour of
process steam.

Dow and Destec entered into a registration rights agreement pursuant to the
Offering in which Dow has been granted certain demand and piggyback registration
rights with respect to the common stock of Destec owned by Dow as of such date
or acquired thereafter. Destec agrees to indemnify Dow for certain liabilities,
including liabilities under the Securities Act of 1933, in connection with such
registration.

Dow assigned to Destec certain patents, pending patent applications,
inventions, discoveries and information pertaining to coal gasification and
lignite beneficiation pursuant to the Offering. Dow retained a royalty-free
world-wide license to use this technology in Dow facilities for chemical
production. Dow and Destec have entered into (i) a First Amendment to Research
and Development Agreement, effective December 31, 1996 and (ii) a First
Amendment to Assignment Agreement, effective as of December 15, 1996. Pursuant
to the Research and Development Agreement, as amended, Destec engaged Dow to
provide certain research and development services with respect to intellectual
property relating to the gasification of carbonaceous materials and to lignite
beneficiation.

Covenants contained in various agreements relating to certain of Dow's
indebtedness prohibit Dow from allowing Destec, subject to certain exceptions,
to encumber or otherwise pledge as security any of its properties or assets or
the capital stock of any of Destec's subsidiaries. In addition, Dow may not
permit Destec to incur indebtedness to the extent such occurrence would cause
Dow indebtedness on a consolidated basis to exceed 60% of Dow's consolidated
capitalization. As of December 31, 1996, Dow's indebtedness on a consolidated
basis was approximately 29% of consolidated capitalization. Dow's debt
instruments also restrict the ability of Dow and its subsidiaries to engage in
certain sale and lease-back transactions involving facilities which are material
to the business conducted by Dow and its subsidiaries located in the United
States taken as a whole. Destec's management believes that these restrictions
will not significantly affect Destec's ability to conduct its business.

In September 1996, in conjunction with Destec's acquisition of a 20%
interest in the Hazelwood partnership (see Note 8), Destec entered into an
engineering services agreement with the Hazelwood partnership. This agreement
encompasses engineering consultation related to the capital improvement program
at the Hazelwood facility.

15. LEASE COMMITMENTS

Effective June 7, 1996, Gasification Services, Inc. ("GSI") refinanced its
operating lease agreement associated with the Wabash facility for a term of 5
years resulting in a reduction in interest spreads and elimination of several
financial covenants associated with the original financing. The future minimum
lease payments associated with the lease as of December 31, 1996 are
approximately $224,000. Destec has

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

15. LEASE COMMITMENTS (CONTINUED)
guaranteed GSI's performance pursuant to this new lease agreement. Under the
Wabash lease agreement, the occurrence of certain events ("Termination Events"),
such as a change in control of Destec (see Note 22), will automatically
terminate the lease. According to the Wabash lease agreement, if Dow shall fail
to own a majority of outstanding shares of Destec, the Guarantor, a Termination
Event will occur. Upon the date of the occurrence of any Termination Event, the
lessee shall, on the payment date relating to the payment of partnership rent
next succeeding the Termination Event date, purchase the lessor's interest in
the property from the lessor for a purchase price equal to the lease termination
payment in accordance with purchase provisions set forth in the agreement. The
lease termination payment is $193,300 plus accrued interest from the date of
last lease payment.

Destec also has an operating lease for the CLI facility with future
estimated minimum lease payments as of December 31, 1996 of approximately
$212,000. The lease agreement is an operating lease with an initial
non-cancelable term of 5 years ending in 2000 and an extended term of an
additional 13 years ending in 2013. The lease allows for termination after the
initial term, subject to a penalty clause. CLI is required to remit to the
lessor, in addition to basic rentals as defined, variable rentals associated
with the leveraged portion of the lease. Dow has guaranteed Destec's performance
pursuant to this lease agreement. See Note 22 for discussion of the effects the
potential sale of Destec's stock would have on the CLI lease guarantee by Dow.

In addition to the aforementioned lease agreement, Destec also leases
certain office space under operating leases.

Future minimum rentals under noncancelable operating leases in effect at
December 31, 1996 are as follows:

RENTAL SUBLEASE NET
EXPENSE REVENUE RENTAL
---------- --------- ----------

1997................................................................. $ 29,078 $ (903) $ 28,175
1998................................................................. 29,889 (903) 28,986
1999................................................................. 31,007 (903) 30,104
2000................................................................. 195,570 (903) 194,667
2001 and thereafter.................................................. 174,581 (827) 173,754
---------- --------- ----------
Total minimum lease payments....................................... $ 460,125 $ (4,439) $ 455,686
---------- --------- ----------
---------- --------- ----------

The years 2000 and 2001 include lease termination payments.

Total rental expense on operating leases was $25,716, $20,168 and $24,996 in
1996, 1995 and 1994, respectively.

16. BENEFIT PLANS

Certain of Destec's officers and employees formerly participated in benefit
plans sponsored by Dow during their employment with Dow. All amounts contributed
or paid by Dow on behalf of Destec's employees pursuant to the Dow plans have
been charged to Destec and are reflected in Destec's

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

16. BENEFIT PLANS (CONTINUED)
consolidated financial statements. Dow satisfied all pension obligations related
to these employees and officers prior to the implementation of Destec's own
benefit plans and, accordingly, no accrued benefit obligation was transferred to
Destec. Deferred defined compensation contracts (the "Agreements") were extended
to former Dow employees in order to replace the future value of their then
vested interest in the Dow benefit plans. These contracts provide for certain
future payments which accrue over various terms of future employment to be made
to these employees upon retirement, termination, or in certain cases, a change
in the control of Destec, to supplement the Destec deferred tax savings plan
which was implemented at the same date and which is outlined below. Should
Destec be unable to perform under the Agreements, Dow has guaranteed these
payments which were $2,689 and $2,833 as of December 31, 1996 and 1995,
respectively. See Note 22 for discussion of the effects the proposed merger of
Destec with a wholly owned subsidiary of NGC would have on Dow's guaranty
related to these payments.

The Destec Energy, Inc. Retirement and Savings Plan ("Retirement and Savings
Plan") is a deferred tax savings plan which covers all of its full-time
employees. Amounts owed to the Retirement and Savings Plan (including amounts
withheld from employees and not yet paid to the plan) and included in ACCRUED
LIABILITIES for 1996 and 1995, were $6,416 and $3,765, respectively. Destec
recorded expenses of $3,204, $3,274 and $2,776 for the years ended 1996, 1995
and 1994, respectively, related to this plan. Additionally, Destec has a
non-qualified deferred compensation plan and an executive salary continuation
plan pursuant to which certain key officers and/or former employees of Destec
participate.

As a result of operational defects in the administration of the Retirement
and Savings Plan since 1991, Destec filed a Voluntary Compliance Report ("VCR")
with the Internal Revenue Service ("IRS"). If the VCR application is approved by
the IRS, Destec will make a contribution to the Plan of approximately $4,689
(before tax effect) including accrued interest (included in ACCRUED LIABILITIES
as discussed above). Destec's management believes that adequate reserves are
provided as of December 31, 1996 for this potential liability.

Effective January 1, 1994, Destec adopted an unfunded defined benefit
postretirement plan for continuation of group medical benefits which is
accounted for under SFAS No. 106 "Employers' Accounting for Postretirement
Benefits other than Pensions." Upon eligible retirement, Destec contributes
(with certain caps) 50% of group medical premium cost for employees and
dependents. The accumulated postretirement benefit obligation is $1,091 which
will be amortized over approximately 10 years. The significant assumptions used
in the valuation of this obligation were a 1996 discount rate of 7.5%, an
average retirement age of 65 and the 1983 Group Annuity Mortality Table. Destec
recorded expenses of $238 and $320 for the years ended December 31, 1996 and
1995, respectively, for service costs and amortization of the accumulated
postretirement benefit obligation related to this plan.

Between May 1994 and September 1996, Destec entered into severance and
services agreements (the "Agreements") with certain employees, fourteen of which
are remaining as of December 31, 1996. Each Agreement provides that in the event
of a change in control of Destec, and the termination of the employee, under
certain circumstances the employee is entitled to receive (i) certain severance
and/or advisory service payments equal in the aggregate to two times the sum of
(a) annual salary plus (b) average annual bonus over the preceding three years
(payment would include a pro rata portion of an employee's current year target
bonus if termination occurs during the year), (ii) the continuation of certain
benefits for two years, and (iii) reimbursement of certain legal fees that may
be incurred (generally not to exceed $25

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

16. BENEFIT PLANS (CONTINUED)
per employee). The terms of the Agreements continue through December 31, 1997,
with automatic one-year extensions beginning on January 1, 1997, unless the
Company gives notice of non-extension by September 30 of the preceding year.
Under the Agreements, a change in control of Destec includes: (i) any change
required to be reported under Regulation 14A of the Securities Exchange Act of
1934, (ii) with the exception of The Dow Chemical Company, any entity acquiring
20% or more of the combined voting power of Destec's common stock, (iii) any
change in the current Board of Directors during any subsequent two year period
which would result in the current Board being less than a majority, or (iv) if
all or substantially all of the assets of Destec are sold, liquidated or
distributed. Under certain of these Agreements, employees may be required to
provide advisory services to the Company for up to one year after termination of
employment in the event of a change of control. The Company's maximum contingent
liability for these severance and advisory service payments is estimated to be
approximately $12,000 at December 31, 1996. The proposed merger of Destec with a
wholly owned subsidiary of NGC (see Note 22) constitutes a change in control
under the Agreements.

17. STOCK COMPENSATION PLANS

At December 31, 1996, Destec has stock-based compensation plans under which
shares or options could be granted to employees. Destec measures compensation
cost for those plans using the intrinsic value method of accounting prescribed
by APB Opinion No. 25 "Accounting for Stock Issued to Employees." Given the
terms of the plans, no compensation cost has been recognized for the fixed stock
option plans or the stock purchase plan.

Destec's reported net income and earnings per share would have been reduced
had compensation cost for Destec's stock-based compensation plans been
determined using the fair value method of accounting as set forth in SFAS No.
123 "Accounting for Stock-Based Compensation." For purposes of estimating the
fair value disclosures below, the fair value of each stock option has been
estimated on the grant date with a Black-Scholes option-pricing model using the
following weighted-average assumptions: dividend yield of 0%; expected
volatility of 29.69%; risk-free interest rate of 6.35%; and expected lives of 10
years for fixed stock option plans and 0.83 years for the Stock Purchase Plan.
The effects of using the fair value method of accounting on net income and
earnings per share are indicated in the pro forma amounts below:

1996 1995 1994
--------- --------- ----------

Net Income As Reported......................... $ 42,756 $ 34,700 $ 110,481
Pro Forma........................... $ 39,123 $ 32,758 $ 106,208
Net Income per Share As Reported......................... $ 0.75 $ 0.59 $ 1.84
Pro Forma........................... $ 0.69 $ 0.56 $ 1.77

FIXED STOCK OPTION PLAN

Under the Amended and Restated 1990 Award and Option Plan (the "1990 Plan"),
Destec may grant up to 1% of the total outstanding shares of common stock on the
first day of such year, increased in any year by 25% of the shares available. As
of December 31, 1996, there were 56,079,260 shares outstanding. The option price
per share may not be less than the fair market value on the date the option is
granted and

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

17. STOCK COMPENSATION PLANS (CONTINUED)
each option is exercisable into one share of common stock. The options under the
1990 Plan are exercisable from one to three years after the grant date according
to individual agreements set forth at the time of the award. All options expire
between the sixth and thirteenth anniversary of their respective vesting dates
according to individual agreements.

The following tables summarize information about fixed stock options
outstanding at December 31, 1996:

1995 1994
----------------------- -----------------------
WEIGHTED WEIGHTED
1996 AVERAGE AVERAGE
----------------------- EXERCISE EXERCISE
FIXED OPTIONS SHARES SHARES PRICE SHARES PRICE
- ------------------------------------------- ---------- ---------- ----------- ---------- -----------
WEIGHTED
AVERAGE
EXERCISE
PRICE
-----------

Outstanding at beginning of the year....... 2,131,408 $ 14.06 1,968,067 $ 14.89 1,134,325 $ 17.77
Granted.................................... 683,350 $ 12.44 411,264 $ 9.63 895,112 $ 11.31
Exercised.................................. (17,659) $ 10.46 (12,846) $ 12.03 -- --
Forfeited.................................. (12,103) $ 14.44 (235,077) $ 13.36 (61,370) $ 16.10
---------- ----------- ---------- ----------- ---------- -----------
Outstanding at end of year................. 2,784,996 $ 13.68 2,131,408 $ 14.06 1,968,067 $ 14.89
---------- ----------- ---------- ----------- ---------- -----------
Options exercisable at end of year......... 1,789,763 $ 14.56 1,277,314 $ 16.22 1,005,525 $ 18.03
Weighted-average fair value of options
granted during the year.................. $ 6.96 $ 5.39 $ 6.33

OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISABLE EXERCISABLE AT EXERCISABLE
EXERCISABLE PRICES DECEMBER 31, 1996 LIFE PRICE DECEMBER 31, 1996 PRICE
- ------------------ ----------------- --------------- ----------- ----------------- -----------

$ 9.63 to $14.94 1,806,271 7.22 years $ 11.41 811,038 $ 10.57
$ 15.00 to $18.69 769,600 6.01 years $ 16.12 769,600 $ 16.12
$ 19.56 to $24.44 209,125 6.34 years $ 24.35 209,125 $ 24.35

STOCK PURCHASE PLANS

Destec has an Employees' Stock Purchase Plan (the "Purchase Plan") which
offers employees of Destec the right to purchase shares of the Company's common
stock. The employees are eligible to subscribe for shares at a price set by the
Company's Stock Award Committee up to 10% of each employee's gross annual salary
as of the beginning of the plan year. The purchase price of the stock is 85% of
the market price at the measurement date. Approximately 36% to 57% of the
eligible employees have participated in the Purchase Plan in the last three
years.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

17. STOCK COMPENSATION PLANS (CONTINUED)
A summary of the status of Destec's stock purchase plan as of December 31,
1996, 1995 and 1994 and changes during the years then ended is presented below:

1995 1994
----------------------- ----------------------
WEIGHTED WEIGHTED
1996 AVERAGE AVERAGE
---------------------- EXERCISE EXERCISE
STOCK PURCHASE PLAN SHARES SHARES PRICE SHARES PRICE
- ----------------------------------------------- --------- ---------- ----------- --------- -----------
WEIGHTED
AVERAGE
EXERCISE
PRICE
-----------

Outstanding at beginning of the year........... 100,529 $ 11.85 186,925 $ 8.15 64,041 $ 15.00
Granted........................................ 72,503 $ 11.25 103,422 $ 11.85 187,051 $ 8.15
Exercised...................................... (83,505) $ 11.84 (178,651) $ 8.18 (37,647) $ 14.99
Forfeited...................................... (17,804) $ 11.85 (11,167) $ 8.63 (26,520) $ 14.99
--------- ----------- ---------- ----------- --------- -----------
Outstanding at end of year..................... 71,723 $ 11.25 100,529 $ 11.85 186,925 $ 8.15
--------- ----------- ---------- ----------- --------- -----------
Options exercisable at end of year............. -- -- -- -- -- --
Weighted-average fair value of options granted
during the year.............................. $ 2.94 $ 3.10 $ 2.13

DEFERRED STOCK PLANS

Under the 1990 Plan, Destec grants deferred stock to certain employees. The
vesting period for such grants is generally 5 years. After the vesting period,
the shares are issued to the employee. The number of deferred stock awards
granted prior to 1993, in February 1993 and in February 1996 were 71,600, 38,900
and 16,100, respectively. Total awards exercised and forfeited as of December
31, 1996 were 17,600 and 37,850, respectively. Compensation expense equal to the
fair market value of the shares on the date of the grant is recognized in the
period of the grant and amounted to $207, $369 and $310 for 1996, 1995 and 1994,
respectively. The number of deferred shares outstanding were 71,150, 77,300 and
90,800 as of December 31, 1996, 1995 and 1994, respectively.

1995 VARIABLE PAY PLAN

In 1995, as part of Destec's variable pay plan, Destec offered all full-time
employees the opportunity to take a portion of their individual cash awards in
restricted stock. The restricted stock would vest at the end of each of the next
three years. In addition, if Destec achieved certain thresholds, as defined by
the Compensation Committee, the Company would match each restricted share with a
deferred share. Destec expensed $779 and $1,425 in 1996 and 1995, respectively.
During 1996, 219,556 shares were issued; of this amount, 92,183 shares were
vested and 4,195 shares were canceled, leaving 123,178 shares outstanding as of
December 31, 1996.

See Note 22 for discussion of the effects the proposed merger of Destec with
a wholly owned subsidiary of NGC would have on the stock-based compensation
plans.

18. RESTRUCTURING CHARGES

In September 1994, Destec's management finalized a study to refocus its
business development efforts from domestic to international markets and to
de-emphasize vertical integration. In order to implement

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

18. RESTRUCTURING CHARGES (CONTINUED)
this shift in focus, management developed a restructuring plan to reduce and
realign the current work force and reduce overhead. In order to fully implement
this plan, Destec recorded a restructuring charge of $10,000 in 1994 as a
component of operating costs. Components of the charge were approximately $5,500
for termination pay and benefits, $3,100 for vacated lease space (net of
revenues from potential sublease) and $1,400 related to the write-off of
leasehold improvements and office equipment. Destec's remaining accruals
relating to this charge were $1,812 and $3,400 as of December 31, 1996 and 1995,
respectively. Destec's charges against the restructuring accrual were $1,588 and
$4,520 for 1996 and 1995, respectively. The balance remaining at the end of 1996
is for vacated lease space net of sublease revenues.

19. COMMITMENTS AND CONTINGENCIES

Destec is a defendant in certain lawsuits in which legal and financial
responsibility cannot be determined at this time. Management believes that
resolution of these matters will not materially affect Destec's Consolidated
Financial Statements.

At December 31, 1996 and 1995, respectively, Destec had outstanding
irrevocable letters of credit from banks totaling $35,401 and $30,996. These
letters of credit are pledged to support certain Destec equity commitments and
other development activities.

See Note 4 for discussion of the LYO Partnership Agreement.

See Note 12 for discussion of the Wabash operating penalty.

See Note 15 for discussion of lease commitments related to the Wabash and
CLI facilities.

Destec contracted in 1993 to design, engineer, build and operate a
cogeneration facility in Polk County, Florida to be owned by a Delaware limited
partnership ("Tiger Bay") in which Destec has an approximate 50% non-controlling
equity interest. Destec has a commitment to loan up to an additional $10,000
(subordinated to the partnership's senior lenders) to the Tiger Bay project
based on the project steam host's ability to contractually perform. In December
1993, Destec entered into a 20 year firm transportation agreement, effective in
March 1995, with Florida Gas Transmission to maintain firm gas transportation
capacity. Destec is required to pay approximately $3,500 per year over the
contract life to maintain transportation capacity. During 1996, Destec sold the
excess capacity which the Tiger Bay project was unable to utilize. Because the
current market rate for natural gas transportation capacity was less than
Destec's contracted cost, a resulting net fuel expense of $2,867 and $2,124 was
incurred in 1996 and 1995, respectively.

Pursuant to an agreement dated September 6, 1996, Destec has agreed to pay
the investment banking firm of Morgan Stanley & Co. Incorporated ("Morgan
Stanley") to assist Destec in exploring strategic alternatives to maximize
shareholder value. If the Merger discussed in Note 22 is consummated, Destec
will pay a total fee of approximately $5,100 (against which any previously paid
fees would be credited) for services performed. If the Merger is not consummated
the fee would be between $200 and $450. In addition to the foregoing
compensation, Destec has agreed to reimburse Morgan Stanley for its expenses,
including reasonable fees and expenses of its counsel, and to indemnify Morgan
Stanley for liabilities and expenses arising out of the engagement and the
transactions in connection therewith, including liabilities under federal
securities laws.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

19. COMMITTMENTS AND CONTINGENCIES (CONTINUED)

In January 1997, Tiger Bay Limited Partnership, in which Destec holds an
equity interest of approximately 50%, executed an agreement for the sale of the
Tiger Bay cogeneration facility, located in Fort Meade, Florida to a wholly
owned subsidiary of Florida Power Corporation for $445,000. Destec's estimated
share of the proceeds after repayment of partnership debt and the net settlement
of other partnership obligations is anticipated to be approximately $140,000.
The sale is subject to certain conditions, including regulatory approvals and
the closing of the proposed merger of Destec and NGC (see Note 22).

Destec has entered into a long-term gas supply agreement for approximately
30 Mmcf per day of natural gas to be supplied at market prices to seven of the
California cogeneration facilities in which Destec owns an equity interest. The
term of this agreement is for a 10-year period, expiring in 2002, with
provisions for a 5-year renegotiated extension.

20. MAJOR CUSTOMERS

The following represents the percentages of revenue from individual sources
which exceed 10% of Destec's total revenue:

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------

Electric Utilities(1)..................................... 21% 10% --
Foreign Governments(2).................................... 10% -- --
Guaranteed Payments....................................... -- 10% 11%
Dow....................................................... -- -- 19%
Elsta project(3).......................................... 37% 16% --
Kingston project(3)....................................... -- 11% --
Michigan Power project(3)................................. -- 10% --
Tiger Bay project(3)...................................... -- -- 11%
Wabash River project(3)................................... -- 18% 17%

- ------------------------

(1) Destec's sales to electric utilities increased significantly in 1996. The
CLI facility, which contributed approximately 16% of Destec's total revenue,
is currently operating slightly above a break-even point. The majority of
the CLI facility's sales are to HL&P at tariff prices approved by the Public
Utilities Commission of Texas for cogenerators. During 1996, DPS sold power
on behalf of CLI to various utility customers. The Wabash facility began
operating in November 1995 and contributed approximately 5% of Destec's
total revenue through sales to PSI (see Note 12). The remainder of sales to
Electric Utilities resulted from DPS marketing power from various sources to
a number of different electric utilities.

(2) The Los Mina facility, located in the Dominican Republic, commenced
commercial operations in the second quarter of 1996 and sells power to
Corporacion Dominicana de Electricidad which is a government owned utility
in the Dominican Republic.

(3) Revenues related to the Elsta, Kingston, Michigan Power, Tiger Bay and
Wabash projects result from development, engineering and operating
activities necessary to construct and operate these facilities.

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

21. FOREIGN OPERATIONS

UNITED FOREIGN
STATES OPERATIONS TOTAL
---------- ----------- ----------

1996
Total revenue--affiliates.......................................... $ 324,116 $ -- $ 324,116
Total revenue--nonaffiliates....................................... 196,468 57,328 253,796
Operating income................................................... 15,111 6,224 21,335
Investments in and advances to unconsolidated subsidiaries......... 157,747 165,503 323,250
Other identifiable assets.......................................... 600,184 87,681 687,865
Gross plant properties............................................. 107,050 76,295 183,345
Plant depreciation................................................. (45,465) (3,849) (49,314)
Capital expenditures............................................... $ 25,123 $ 111,073 $ 136,196
- --------------------------------------------------------------------------------------------------------
1995
Total revenue--affiliates.......................................... $ 466,404 -- $ 466,404
Total revenue--nonaffiliates....................................... 175,092 -- 175,092
Operating income................................................... (9,915) -- (9,915)
Investments in and advances to unconsolidated subsidiaries......... 139,758 26 139,784
Other identifiable assets.......................................... 821,516 20,924 842,440
Gross plant properties............................................. 104,491 -- 104,491
Plant depreciation................................................. (38,903) -- (38,903)
Capital expenditures............................................... $ 13,456 $ 19,647 $ 33,103
- --------------------------------------------------------------------------------------------------------
1994
Total revenue--affiliates.......................................... $ 524,723 -- $ 524,723
Total revenue--nonaffiliates....................................... 201,970 -- 201,970
Operating income................................................... 113,672 -- 113,672
Investments in and advances to unconsolidated subsidiaries......... 80,864 -- 80,864
Other identifiable assets.......................................... 862,653 -- 862,653
Gross plant properties............................................. 68,868 -- 68,868
Plant depreciation................................................. (34,850) -- (34,850)
Capital expenditures............................................... $ 39,075 $ -- $ 39,075
- --------------------------------------------------------------------------------------------------------

Destec currently has interest in the following foreign projects:

PROJECT NAME MW LOCATION % OWNERSHIP
- ------------------------------------- --------- ----------------------------------------- ---------------

Los Mina............................. 236 Santo Domingo, Dominican Republic 100
Indian Queens........................ 140 Cornwall, United Kingdom 100
Kingston............................. 110 Ontario, Canada 50
Hazelwood............................ 1,600 Victoria, Australia 20
Elsta (start-up est. 1997)........... 405 Terneuzen, The Netherlands 50

The Los Mina facility commenced commercial operations in May 1996, and the
Indian Queens and Kingston projects both reached substantial completion in
December 1996 and made a limited number of sales to outside parties. In
September 1996, Destec acquired a 20% interest in the Hazelwood project

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

21. FOREIGN OPERATIONS (CONTINUED)
which was operational at the time it was purchased. Because the Los Mina
facility began operating in May 1996, it is the only foreign project which
contributed significant operating revenue during 1996 (see Note 20).

22. EVENTS SUBSEQUENT TO DECEMBER 31, 1996

On January 17, 1997, Tiger Bay Limited Partnership, in which Destec holds an
equity interest of approximately 50%, executed an agreement for the sale of the
nominally rated 220 MW Tiger Bay cogeneration facility, located in Fort Meade,
Florida to a wholly owned subsidiary of Florida Power Corporation for
approximately $445,000. Destec's estimated share of the proceeds after repayment
of partnership debt and the net settlement of other partnership obligations is
anticipated to be approximately $140,000. The sale is subject to certain
conditions, including, without limitation, regulatory approvals and the sale of
Destec.

On February 17, 1997, Destec executed an Agreement and Plan of Merger (the
"Merger Agreement"), by and among Destec, Dow, NGC Corporation ("NGC") and NGC
Acquisition Corporation II, a wholly owned subsidiary of NGC ("Purchaser"),
pursuant to which, among other things, Purchaser will merge with and into Destec
(the "Merger"). The surviving corporation after the Merger will be a wholly
owned subsidiary of NGC. Pursuant to the Merger Agreement, among other things,
each outstanding share of common stock of Destec will be converted into the
right to receive $21.65 in cash (the "Merger Consideration"), or approximately
$1,270,000 in the aggregate. The consummation of the Merger is subject to
certain conditions, including the approval by the affirmative vote of at least
66 2/3% of the outstanding shares of Destec common stock entitled to vote, as
well as the approval by federal antitrust authorities and the Federal Energy
Regulatory Commission. Dow, which owns 80% of the outstanding common stock, has
agreed to vote its shares of common stock for approval and adoption of the
Merger Agreement.

Destec has various agreements with its principal stockholder, Dow and its
subsidiaries and affiliates (the "Dow Agreements"). Certain of the Dow
Agreements and certain agreements among Destec, Dow and NGC entered into on
February 17, 1997, will be affected by the consummation of the Merger Agreement
and the transactions contemplated thereby, as described below.

The Merger Agreement provides that, upon the consummation of the Merger, NGC
and Purchaser will cause Dow to be released as an obligor under the following
agreements: (i) Guaranty, dated as of August 11, 1995, by Dow for the benefit of
CoGen Funding, Limited Partnership relating to Dow's guarantee of the payment of
the lease obligations of CLI (the "CLI Guaranty"); and (ii) Guaranty, dated as
of December 18, 1991, by Dow in favor of Destec and certain identified
individuals, relating to Dow's guarantee of the performance of Destec of its
obligations under certain compensation adjustment agreements with Destec
employees formerly employed by Dow (the "Compensation Guaranty").

In connection with the release of Dow as obligor under the CLI Guaranty, NGC
and Dow have entered into an Indemnity Agreement, dated as of February 17, 1997,
whereby NGC has agreed to use its reasonable best efforts to terminate the CLI
Guaranty or substitute NGC in Dow's stead under the CLI Guaranty; and in any
event, indemnify Dow against any losses arising out of the CLI Guaranty. In
connection with the release of Dow as obligor under the Compensation Guaranty,
Destec, Dow, and NGC have entered into a Waiver, Release and Substitution
agreement, dated as of February 17, 1997, whereby

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

22. EVENTS SUBSEQUENT TO DECEMBER 31, 1996 (CONTINUED)
(i) NGC has agreed to be substituted in Dow's stead and to assume all of Dow's
rights and obligations under or in connection with the Compensation Guaranty,
(ii) NGC has agreed to indemnify Dow for any and all liability which may arise
under or in connection with Compensation Guaranty, (iii) Destec has consented to
such substitution, and (iv) Destec and NGC have released and discharged Dow from
any and all claims or liabilities based upon any duty or obligation to Destec or
the individuals covered by the compensation adjustment agreements in connection
with the Compensation Guaranty.

Destec and Dow have entered into a First Amendment to the Tax Sharing
Agreement, dated February 17, 1997 pursuant to which the most recent tax sharing
agreement between Dow and Destec was amended to provide, among other things, (i)
the provisions of such tax sharing agreement apply to this deconsolidation of
Destec from the consolidated group of corporations for which Dow files tax
returns for U.S. Federal income tax purposes; (ii) on the Closing Date of the
Merger Agreement, Dow will pay to Destec $10,000 as an advance payment of
amounts expected to be paid to Destec under such tax sharing agreement with
respect to the 1997 tax year; (iii) Dow will be treated as having actually
utilized all deduction, losses, credits and other tax attributes of Destec prior
to Destec's deconsolidation, with the effect that Destec will be entitled to
payments for such items by Dow pursuant to such tax sharing agreement; and (iv)
Destec will not be liable to Dow for taxes with respect to certain transactions.
The First Amendment to the Tax Sharing Agreement will be effective as of the
Effective Time of the Merger Agreement.

Pursuant to the First Amended Lease Agreement, dated as of January 1, 1990,
as amended between Destec Properties Limited Partnership, a wholly owned
subsidiary of Destec ("Destec Properties"), and Dow, Dow has given notice that
it is exercising its option to purchase all of Destec's interest in certain
specific lignite reserves. The exercise price of approximately $44,000 will be
paid to Destec immediately prior to the effective time of the Merger.
Consequently, Destec Properties and Dow have entered into (i) a Termination
Agreement Concerning the First Amended Lease Agreement, entered into February
17, 1997, to become effective as of the effective time of the Merger and (ii) a
Termination Agreement concerning the First Amended Lignite Properties
Maintenance Agreement, entered into February 17, 1997, to become effective at
the effective time of the Merger, pursuant to which Destec will provide limited
consulting and training with respect to the management and maintenance of the
lignite reserves to Dow at no additional cost.

Pursuant to the Oyster Creek Agreement, dated February 17, 1997, by and
among Destec, Dow and NGC, Dow has obtained a right of first refusal with
respect to the stock of certain Destec subsidiaries related to the Oyster Creek
cogeneration facility and waived its right to exercise an option to purchase the
partnership interests of such company subsidiaries in Oyster Creek Limited that
would become exercisable in the event Dow no longer holds a majority interest of
the common stock of Destec.

Pursuant to a Site Development Agreement, dated February 17, 1997, by and
between Dow and Destec, for five years, Dow will include Destec in the Dow
notification to potential third party (power company) bidders with respect to
energy generation facility projects at certain Dow sites put to bid and invite
the Company to participate in the bid process. In the event that Dow does not
provide such notification and an invitation to bid, Dow will pay the Company the
amount of damages which the Company shows it suffered up to a cap of $25 per
project.

Dow and Destec have entered into a First Amendment to Research & Development
Agreement, effective December 31, 1996. Pursuant to the Research & Development
Agreement, dated March 1, 1990,

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

22. EVENTS SUBSEQUENT TO DECEMBER 31, 1996 (CONTINUED)
Destec engaged Dow to provide certain research and development services with
respect to intellectual property relating to gasification of carbonaceous
materials and to lignite beneficiation, which intellectual property was assigned
to Destec by Dow pursuant to an Assignment Agreement, dated March 1, 1990. The
First Amendment to Research & Development Agreement provides, in pertinent part,
the term of the Research & Development Agreement will continue through December
31, 1997, unless the parties otherwise agree to in writing, and further
identifies three individual Dow employees that will continue to provide research
and development support services pursuant to such agreement, with Dow receiving
$125 per man year of effort (for a total of 2 1/2 man years) as compensation for
such services. In addition, the amendment deleted the parties' undertaking
relative to further joint technology development made in the Research &
Development Agreement. Pursuant to the Assignment Agreement, Dow assigned to
Destec certain patents and technology. The First Amendment to Assignment
Agreement modifies the license granted to Dow and its subsidiaries to practice
the technology pertaining to gasification of carbonaceous materials and to
lignite beneficiation and any improvements to such technology so as to apply
only to improvements made prior to December 31, 1997 (or prior to any extension
of the term of such agreement). In addition, the First Amendment to Assignment
Agreement terminates Dow's license to Destec to use certain hardware and
software and also terminated Destec's right of refusal to perform design,
engineering and construction services to any coal gasification facility Dow
desired to construct and operate.

Certain of Destec's stock compensation plans discussed in Note 17 will be
affected by the consummation of the Merger Agreement and the transaction
contemplated thereby, as described below:

Pursuant to the Destec Energy, Inc. Amended and Restated 1990 Award and
Option Plan, as amended on February 14, 1997, and related stock option
agreements, immediately prior to a change in control, (i) all options
outstanding (whether or not then exercisable) shall be cashed-out and each
grantee shall be entitled to receive (in lieu of shares of Destec's Common Stock
otherwise deliverable in respect of such option) cash in an amount (subject to
applicable withholding) equal to the spread between the exercise price of the
options and the Merger Consideration and (ii) each outstanding award of Deferred
Stock and Restricted Stock (whether or not then vested) will be cashed-out and
each awardee will be entitled to receive (in lieu of shares of Destec's Common
Stock otherwise deliverable in respect of such awards) an amount (subject to
applicable withholding) equal to the Merger Consideration multiplied by the
aggregate number of shares of Deferred Stock or Restricted Stock awarded to such
awardee.

Pursuant to the Destec Energy, Inc. Employees' Stock Purchase Plan, as
amended February 14, 1997 (the "Stock Purchase Plan"), upon the occurrence of a
change in control (i) all payroll deductions under the Stock Purchase Plan will
cease and each subscriber will receive a cash payment in an amount equal to the
cash amounts previously deducted from such subscriber's pay in respect to the
Plan Year during which such change in control occurs and (ii) each subscriber
who is employed by Destec on the date of such change in control will be entitled
to receive, in respect of such Plan Year, a cash payment (subject to applicable
withholding) for each share of Destec's Common Stock subscribed to equal to the
spread between the Merger Consideration and the lower of the subscription price
or the Market Price.

Under the terms of the Destec Energy, Inc. 1995 Variable Pay Plan, as
amended November 14, 1995 and as further amended February 14, 1997 (the
"Variable Pay Plan"), and related award agreements, each outstanding share of
Restricted Stock or Deferred Stock awarded under the Variable Pay Plan will be
cashed-out and each awardee will be entitled to receive, in cancellation of all
then outstanding awards of Restricted Stock or Deferred Stock (whether or not
vested) and in lieu of shares of Destec Common Stock

DESTEC ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS, UNLESS OTHERWISE INDICATED)

22. EVENTS SUBSEQUENT TO DECEMBER 31, 1996 (CONTINUED)
otherwise deliverable in respect of such awards, an amount in cash (subject to
applicable withholding) equal to the Merger Consideration multiplied by the
aggregate number of shares of Restricted Stock and Deferred Stock subject to
such award.

Effective February 17, 1997, the date all stock plans were frozen pending
the consummation of the Merger, the total amount to be paid related to the
cash-out of the stock plans discussed above was approximately $27,300.

23. QUARTERLY STATISTICS (UNAUDITED)

The following table summarizes the unaudited quarterly statistics for the
years ended December 31, 1996 and 1995. In the opinion of management, all
adjustments necessary for a fair presentation of the unaudited results for the
periods are included.

1ST 2ND 3RD(1) 4TH YEAR
---------- ---------- ---------- ---------- ----------

(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1996
Revenues............................................. $ 157,761 $ 127,982 $ 147,338 $ 144,831 $ 577,912
Operating income..................................... 5,599 2,067 11,469 2,200 21,335
Income before provision for taxes.................... 13,886 11,214 22,122 11,267 58,489
Net Income........................................... $ 9,433 $ 7,639 $ 18,263 $ 7,421 $ 42,756
Net Income Per Share................................. $ 0.16 $ 0 .13 $ 0.33 $ 0.13 $ 0.75
Market Price Range of common stock(4):
High................................................. $ 13.75 $ 13.88 $ 14.38 $ 16.25
Low.................................................. $ 11.50 $ 11.50 $ 11.88 $ 12.50

1ST 2ND(2) 3RD(3) 4TH YEAR
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

1995
Revenues............................................. $ 164,925 $ 207,594 $ 100,545 $ 168,432 $ 641,496
Operating income (loss).............................. 2,462 (673) (6,050) (5,654) (9,915)
Income before provision for taxes.................... 10,335 11,085 18,402 5,523 45,345
Net Income........................................... $ 7,234 $ 7,759 $ 14,684 $ 5,023 $ 34,700
Net Income Per Share................................. $ 0.12 $ 0 .13 $ 0.25 $ 0.09 $ 0.59
Market Price Range of common stock(4):
High................................................. $ 11.00 $ 14.38 $ 16.13 $ 15.38
Low.................................................. $ 9.38 $ 9.88 $ 12.88 $ 13.00

- ------------------------

(1) The net income for the third quarter of 1996 increased as a result of the
sale of the 150 MW Blue Mountain Power Project (See Note 7).

(2) The second quarter of 1995 revenue increase resulted primarily from the
commencement of engineering revenue recognition on the Elsta project.

(3) The net income increased in the 3rd quarter of 1995 due to the sale of oil
and gas properties.

(4) As reported by the New York Stock Exchange.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There was no reported disagreement on any matter of accounting principles or
procedures of financial statement disclosure in 1996 with Destec's independent
public accountants.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is a list of Destec's directors and executive officers and
their business experience during the past five years. All executive officers are
expected to hold their offices until the next annual meeting of the Board of
Directors.

NAME AGE POSITION(S) WITH DESTEC
- ---------------------------- --- ----------------------------------------------------

Charles F. Goff 56 Chairman of the Board and
Chief Executive Officer

Keys A. Curry, Jr. 61 President and Chief Operating Officer; Director

Enrique M. Larroucau 54 Senior Vice President, Chief Financial
Officer and Treasurer

L. Edward Jackowski, Jr. 55 Senior Vice President -- Engineering,
Project Development

Rodney M. Webb 56 Senior Vice President -- Gasification
Business Unit

Craig E. Hess 53 Vice President and Controller

Marian M. Davenport 43 Vice President, General Counsel
and Secretary

Rick A. Bowen 42 Vice President -- Business Development
The Americas

Gareth J. Mann 41 Vice President-Business Development
Europe, Africa, Middle East, Asia
and the Far East

Cassandra C. Carr 52 Director

Jack E. Earnest 68 Director

Robert W. Gallant 61 Director

Jack G. Helfenstein 61 Director

Michael D. Parker 50 Director

J. Pedro Reinhard 52 Director

Joel V. Staff 53 Director

CHARLES F. GOFF joined Destec in May 1989 as a Director and was elected
Chairman of the Board in December 1995. In June 1989, Mr. Goff was elected
President and Chief Executive Officer. Mr. Goff served as Chief Executive
Officer until February 1990 when he was elected Chief Operating Officer. In
September 1992, Mr. Goff was again elected Chief Executive Officer of Destec.
Mr. Goff's current term as a Director of Destec will expire at the 1997 Annual
Meeting of Stockholders.

KEYS A. CURRY, JR. joined Destec in February 1990. In December 1995, Mr.
Curry was elected President of Destec and has also served as Chief Operating
Officer of Destec since his election in February 1993.

Mr. Curry was elected as a Director in November 1990. Mr. Curry's current term
as a Director of Destec will expire at the 1998 Annual Meeting of Stockholders.

ENRIQUE M. LARROUCAU joined Destec in June 1993 as Vice President, Treasurer
and Chief Financial Officer. In May 1994, Mr. Larroucau was elected Senior Vice
President. Prior to joining Destec, Mr. Larroucau was Treasurer for Dow Latin
America from March 1981 to May 1993.

L. EDWARD JACKOWSKI, JR. joined Destec in June 1990 as Vice
President-Engineering and was elected Senior Vice President Engineering in
September 1991. In November 1994, Mr. Jackowski was named Senior Vice President,
Engineering, Project Development.

RODNEY M. WEBB joined Destec in May 1989 as Vice President-Operations and
Technology and was elected Senior Vice President-Operations and Technology in
February 1990. In November 1994, Mr. Webb was named Senior Vice
President-Gasification Business Unit.

CRAIG E. HESS joined Destec in June 1992 as Controller. In May 1996, Mr.
Hess was elected Vice President. Prior to joining Destec, Mr. Hess was
Controller of Dow's Texas Operations from October 1988 to June 1992.

MARIAN M. DAVENPORT held the position of Assistant General Counsel and
Assistant Secretary of PSE Inc. from August 1986 to December 1989. Following the
Destec-PSE merger, Ms. Davenport held various positions in the Legal Department
of Destec. She was serving as Staff Counsel in February 1994, when she was named
Director-Project Development. In January 1996, Ms. Davenport was elected Vice
President, General Counsel and Secretary of Destec.

RICK A. BOWEN joined Destec in February, 1990 as Manager-Mergers and
Acquisitions. In January, 1993, Mr. Bowen was named Director, Business
Development-North America and was elected Vice President, Business
Development-The Americas in February 1995. Prior to joining Destec, Mr. Bowen
was Manager-Project Administration for PSE, Inc.

GARETH J. MANN joined Destec in April 1991 as Project Development
Manager-Central United States. In December 1992 Mr. Mann was named Commercial
Development Manager for Europe and in December 1993 he was named Director,
Commercial Development-Europe. In November 1994, Mr. Mann was elected Vice
President, Business Development-Europe, Africa, Middle East, Asia and the Far
East. Prior to joining Destec, Mr. Mann had his own company, Power Systems
Australia, which provided development services for cogeneration and independent
power projects in Australia and New Zealand.

CASSANDRA C. CARR has been a Director of Destec since August 1992 and Senior
Vice President-Human Resources for SBC Communications Inc. since May 1994. From
July 1993 until April 1994, Ms. Carr was President-Texas, Southwestern Bell
Telephone Company. From 1991 until July 1993, Ms. Carr was Vice President of
Southwestern Bell Telephone of Texas. Ms. Carr's current term as a Director of
Destec will expire at the 1999 Annual Meeting of Stockholders.

JACK E. EARNEST has been a Director of Destec since March 1991. Mr. Earnest
has been engaged in the private practice of law in oil and gas matters since
1983. Prior to that time, Mr. Earnest served as General Counsel for Texas
Eastern Corporation, President of Transcontinental Gas Pipeline Corporation and
Vice President-Natural Gas of Mobil Oil Corporation. Mr. Earnest's current term
as a Director of Destec will expire at the 1999 Annual Meeting of Stockholders.

ROBERT W. GALLANT has been a Director of Destec since May 1989. Mr. Gallant
retired from Dow effective December 31, 1995. From December 1992 until that
time, Mr. Gallant served as Vice President and Director of Operations of Dow
North America. From August 1990 to December 1992. Mr. Gallant was Vice
President-Texas Operations of Dow U.S.A. Mr. Gallant's current term as a
Director of Destec will expire at the 1997 Annual Meeting of Stockholders.

JACK G. HELFENSTEIN has been a Director of Destec since February 1993. From
February 1993 until his retirement in September 1994, Mr. Helfenstein served as
Global Vice President-Hydrocarbons and Energy of Dow. From October 1987 until
September 1994, Mr. Helfenstein was Executive Vice President-Chemicals &
Performance Products and Hydrocarbons for Dow Europe. Mr. Helfenstein's current
term as a Director of Destec will expire at the 1999 Annual Meeting of
Stockholders.

MICHAEL D. PARKER has been a Director of Destec since February 1995. Mr.
Parker has served as Dow Group Vice President, Vice President for Chemicals and
Metals and President of Dow North America since October 1995. Mr. Parker became
a director of Dow in July 1995. From 1993 until October 1995, Mr. Parker served
as Group Vice President of Dow's Chemicals & Performance Products and
Hydrocarbons & Energy Business. From 1988 until 1993, Mr. Parker was President
of Dow Chemical Pacific Limited in Hong Kong. Mr. Parker's current term as a
Director of the Company will expire at the 1998 Annual Meeting of Stockholders.

J. PEDRO REINHARD has been a Director of Destec since February 1996. Mr.
Reinhard has been Chief Financial Officer of Dow since October 1995 as well as
Chairman of Dow's Finance Committee. In 1995, Mr. Reinhard was elected to the
Board of Directors of Dow. Mr. Reinhard has served as the Treasurer of Dow since
1988 and was named Vice President of Dow in 1990. In February 1995, Mr. Reinhard
was named Financial Vice President for Dow. Mr. Reinhard's current term as a
Director of Destec will expire at the 1998 Annual Meeting of Stockholders.

JOEL V. STAFF has been a Director of Destec since February 1993. Mr. Staff
has been President and Chief Executive Officer of National-Oilwell, L.P. since
July 1993. From 1984 until May 1993, Mr. Staff was Senior Vice President of
Baker Hughes, Incorporated and its predecessor, Baker International Corporation.
Mr. Staff's current term as a Director of Destec will expire at the 1997 Annual
Meeting of Stockholders.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), requires Destec's directors and executive officers, and persons who own
more than ten percent of a registered class of Destec's equity securities, to
file with the Securities and Exchange Commission ("Commission") and the NYSE
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of Destec. Officers, directors and greater than ten
percent stockholders are required by the Commission's regulations to furnish
Destec with copies of all Section 16(a) forms they file.

Based solely on its review of the forms received by it and written
representations from certain reporting persons that they were not required to
file Forms 5 for the fiscal year ended December 31, 1996, Destec believes that
during the year ended December 31, 1996, all filing requirements applicable to
Destec's officers, directors and greater than 10% stockholders were met.

ITEM 11. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

Directors of Destec who are also employees are not paid any fees or
compensation for their services as members of Destec's Board of Directors or any
committee thereof.

Each director of Destec who is not an employee of Destec receives an annual
retainer of $15,000 for his or her service as a member of the Board of Directors
and an attendance fee of $1,000, plus reasonable expenses for each Board of
Directors' meeting he or she attends. Such outside directors also receive an
attendance fee of $1,000 for each committee meeting attended, if such meeting is
not held on the same day as a Board of Directors' meeting. Directors who are not
employees of Destec are not eligible to participate in Destec's benefit plans.

EXECUTIVE OFFICER COMPENSATION

The following Summary Compensation Table sets forth the cash compensation
and certain other components of the compensation of (i) Charles F. Goff,
Destec's Chairman of the Board of Directors and Chief Executive Officer, and
(ii) each of the other four most highly compensated executive officers of Destec
serving as such through December 31, 1996 ("Named Executive Officers").

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION AWARDS
----------------------------
ANNUAL COMPENSATION SECURITIES
------------------------------------------------- RESTRICTED UNDERLYING
NAME AND OTHER ANNUAL STOCK OPTIONS/
PRINCIPAL POSITIONS(1) YEAR SALARY BONUS(2) COMPENSATION(3) AWARDS(4) SARS
- --------------------------------- --------- --------- --------- ---------------- --------------- -----------

Charles F. Goff.................. 1996 $ 324,240 $1,001,408 $ 0 $ 0 148,300
Chairman of the Board 1995 311,770 571,112 0 0 70,000
and Chief Executive Officer 1994 299,058 324,000 0 0 151,575

Keys A. Curry, Jr................ 1996 270,200 833,102 0 0 123,550
President, and Chief 1995 259,808 475,926 0 0 47,600
Operating Officer 1994 249,439 270,000 0 0 126,375

Enrique M. Larroucau............. 1996 216,160 623,218 0 0 87,850
Senior Vice President, 1995 207,846 317,289 0 0 33,500
Chief Financial Officer 1994 199,388 180,000 50,600 0 86,050
and Treasurer

Rodney M. Webb................... 1996 171,305 130,242 0 0 0
Senior Vice President-- 1995 167,906 170,816 0 0 22,250
Gasification Business Unit 1994 162,864 117,360 0 0 56,275

Gareth J. Mann................... 1996 159,954 128,228 257,548 0 32,500
Vice President, Business 1995 142,948 140,754 174,081 0 11,650
Development--Europe 1994 114,377 36,808 116,187 0 5,000
Africa, Middle East, Asia
and the Far East

NAME AND ALL OTHER
PRINCIPAL POSITIONS(1) COMPENSATIONS(5)
- --------------------------------- -----------------

Charles F. Goff.................. $ 12,000
Chairman of the Board 12,000
and Chief Executive Officer 19,471
Keys A. Curry, Jr................ 12,000
President, and Chief 12,000
Operating Officer 19,620
Enrique M. Larroucau............. 12,000
Senior Vice President, 12,120
Chief Financial Officer 82,577
and Treasurer
Rodney M. Webb................... 12,000
Senior Vice President-- 12,120
Gasification Business Unit 19,620
Gareth J. Mann................... 12,000
Vice President, Business 8,577
Development--Europe 6,570
Africa, Middle East, Asia
and the Far East

- ------------------------

(1) The positions shown represent the offices held by such persons as of
December 31, 1996.

(2) Bonuses earned during 1995 were paid under Destec's 1995 Variable Pay Plan
and include (i) cash amounts paid and (ii) the value, as of the date of
grant, of awards of restricted stock and deferred stock. Shares of
restricted stock and deferred stock were paid to each of the Named Executive
Officers in the following amounts: Mr. Goff, 18,300 shares of restricted
stock and 18,300 shares of deferred stock; Mr. Curry, 15,250 shares of
restricted stock and 15,250 shares of deferred stock; Mr. Larroucau, 10,167
shares of restricted stock and 10,167 shares of deferred stock; Mr. Webb,
4,933 shares of restricted stock and 4,933 shares of deferred stock; and Mr.
Mann, 2,914 shares of restricted stock and 2,914 shares of deferred stock.
Thirty-three percent of such shares of restricted stock will vest on
December 31 of each of 1996, 1997 and 1998. Thirty-three percent of such
shares of deferred stock will vest on December 31 of each of 1996, 1997 and
1998 if the fair market value of the Common Stock achieves certain targets
during the 30-day period preceding such date. Under the terms of the 1995
Variable Pay Plan, immediately prior to a change in control, each awardee
will be entitled to receive, in cancellation of all then outstanding awards
of restricted or deferred stock and in lieu of shares of Common Stock
otherwise deliverable in respect of such awards, an amount in cash (subject
to applicable withholding) equal to the per share consideration received in
connection with such change in control multiplied by the aggregate number of
shares of restricted stock and deferred stock subject to such award. Holders
of restricted stock have the right to receive dividends during the
restriction period.

(3) With the exception of Messrs. Larroucau and Mann, the amounts ascribed to
personal benefits for each Named Executive Officer were below the required
disclosure threshold amounts. When Mr. Larroucau joined Destec in June 1993,
Destec agreed to pay for his temporary housing and moving expenses incurred
in 1993 and 1994. Amounts shown for Mr. Mann represent foreign service
premiums, rental subsidies, foreign tax advances and foreign fringe
benefits.

(4) The payment of shares of restricted stock and deferred stock earned during
1995 under Destec's 1995 Variable Pay Plan is reported in the 1995 "Bonus"
column of this table. The number and aggregate value (each as of December
31, 1996) of each of the Named Executive Officers' aggregate restricted
stock and deferred stock holdings are as follows: Mr. Goff, 24,400 shares
with a value of $381,250; Mr. Curry, 20,334 shares with a value of $317,719;
Mr. Larroucau, 13,556 shares with a value of $211,813; Mr. Webb, 6,578
shares with a value of $102,781; and Mr. Mann, 3,886 shares with a value of
$60,719. On December 31, 1996, thirty-three percent of the shares of
restricted stock and thirty-three percent of the shares of deferred stock
paid under the 1995 Variable Pay Plan vested.

(5) With the exception of Mr. Larroucau, the amounts shown in this column
represent Destec contributions to Destec's Retirement and Savings Plan for
each Named Executive Officer. The amounts shown for Mr. Larroucau include
payments made on Mr. Larroucau's behalf in connection with his pension
account with Dow's International Employee Pension Plan during 1994. Mr.
Larroucau's pension account with Dow became dormant effective January 1,
1995.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information concerning options to
purchase Common Stock granted in 1996 to the Named Executive Officers:

NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/ GRANTED TO PER SHARE GRANT DATE
SARS(1) EMPLOYEES IN EXERCISE EXPIRATION PRESENT
NAME GRANTED 1996(2) PRICE(3) DATE VALUE(4)
- ------------------------------------------- ----------- ---------------- ---------- ----------- ---------------

Charles F. Goff............................ 148,300 21.70% 12.3125 2/20/06 $ 1,014,372
Keys A. Curry, Jr.......................... 123,550 18.08% 12.3125 2/20/06 845,082
Enrique M. Larroucau....................... 87,850 12.86% 12.3125 2/20/06 600,894
Rodney M. Webb............................. 0 -- -- -- --
Gareth J. Mann............................. 32,500 4.76% 12.3125 2/20/06 222,300

- ------------------------

(1) Destec made no SAR grants in 1996. All options granted to Named Executive
Officers in 1996 will vest ratably over a three-year period that began
February 21, 1996.

(2) In 1996, a total of 649,850 options to purchase Common Stock were granted to
Destec employees at a per share exercise price of $12.3125 and 33,500 at a
per share exercise price of $14.9375.

(3) The exercise price is the average of the high and low trading price of the
Common Stock on the date of grant, as reported on the consolidated
transaction reporting system for the NYSE issues on such date.

(4) The values assigned to each reported option are shown using the
Black-Scholes option pricing model. In assessing these values it should be
kept in mind that no matter what theoretical value is placed on an option on
the date of grant, its ultimate value will be dependent on the market value
of the Common Stock at a future date, and that value will depend on the
efforts of such executives to foster the future success of Destec for the
benefit of not only the executives, but all of Destec's stockholders.

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

The following table sets forth certain information concerning the
unexercised options to purchase Common Stock held by the Named Executive
Officers at December 31, 1996. Also reported are the values for "in-the-money"
options which represent the positive spread between the exercise price of any
such existing stock options and the year-end price of the Common Stock. None of
the Named Executive Officers exercised options for Common Stock in 1996.

VALUE OF UNEXERCISED
NUMBER OF IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT 12/31/96
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------

Charles F. Goff........................................... 246,394 237,881 $ 730,724 $ 877,562
Keys A. Curry, Jr......................................... 191,062 198,238 540,000 731,351
Enrique M. Larroucau...................................... 69,170 138,230 354,827 508,267
Rodney M. Webb............................................ 75,153 32,872 243,613 141,761
Gareth J. Mann............................................ 26,950 32,500 95,588 107,656

SEVERANCE AND SERVICES AGREEMENTS

Destec has entered into severance and services agreements (the "Services
Agreements") with certain of its employees, of which 14 are remaining as of
December 31, 1996. The Named Executive Officers currently covered by such
Services Agreements include Messrs. Goff, Curry, Larroucau, Webb and Mann. In
addition, Messrs. Bowen, Hess and Jackowski and Ms. Davenport, who serve as
executive officers of Destec, are also covered by such Services Agreements. Each
Services Agreement provides that in the event of a change of control of Destec,
and the termination of the employee under certain circumstances, the employee is
entitled to receive (i) certain severance and/or advisory service payments equal
in the aggregate to two times the sum of (a) annual salary plus (b) average
annual bonus over the preceding three years, (ii) a pro rata target bonus in
respect of the year in which termination occurs , (iii) the continuation of
certain benefits for two years, and (iv) reimbursement of certain legal fees and
expenses incurred as a result of such termination (not to exceed $25,000 per
employee). Under Mr. Goff's Services Agreement, Destec would also be required to
make an additional payment to the extent that any excise tax is imposed under
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"). Each
of the remaining Services Agreements provides that no payment shall be made to
an individual that would not be deductible by virtue of Section 280G of the
Code. The terms of the Services Agreements continue through December 31, 1997,
with automatic one-year extensions beginning on January 1, 1997, unless Destec
gives a notice of non-extension by September 30 of the preceding year. Under the
Services Agreements, a Change of Control of Destec includes: (i) any change
required to be reported under Regulation 14A of the Securities Exchange Act of
1934, (ii) with the exception of Dow, any entity acquiring 20% or more of the
combined voting power of Destec's common stock, (iii) any change in the current
Board of Directors during any subsequent two year period which would result in
the current Board being less than a majority, or (iv) a circumstance where all
or substantially all of the assets of Destec are sold, liquidated or
distributed. Under certain of these agreements, employees may be required to
provide advisory services to Destec for up to one year after termination of
employment in the event of a Change of Control. Destec's maximum contingent
liability for these severance and advisory service payments is estimated to be
approximately $12 million at December 31, 1996. The consummation of the Merger
will constitute a Change of Control under the Services Agreements. See Note 22
of the Notes to Consolidated Financial Statements.

COMPENSATION ADJUSTMENT AGREEMENTS

Beginning in November 1991, Destec entered into Compensation Adjustment
Agreements ("Compensation Agreements") with former Dow employees in order to
induce these employees to leave the Dow benefit plans and join Destec. These
Compensation Agreements provide for certain future payments to be made to these
employees upon retirement, termination, and in certain cases, a change in the
control of Destec. These Compensation Agreements supplement Destec's deferred
tax savings plan to ensure that these employees would receive the pension
benefits they would have accrued had they remained employed by Dow.

Messrs. Charles F. Goff and Rodney M. Webb, each a Named Executive Officer,
will receive payments under Compensations Agreement when they each retire from
Destec. The amount to be received by each officer was calculated by (i)
projecting his Dow pension at the earliest date it is unreduced ("Projection
Date"), (ii) subtracting both the projected Destec contribution to him under
Destec's deferred tax savings plan and any pension amounts the individual would
receive from Dow from his projected Dow pension, and (iii) annuitizing the
short-fall. In the event any of these employees remain employed by Destec beyond
the Projection Date, he will continue to accrue benefits under his Compensation
Agreement. Assuming a retirement age of 65, Messrs. Goff and Webb would be
eligible to receive a lump sum payment of $763,152 and $612,321, respectively.

SALARY CONTINUATION PLAN

In 1986, PSE Inc., which is now known as Destec Holdings, Inc. ("DHI"),
established the PSE Executive Salary Continuation Plan (the "Salary Continuation
Plan") for certain of its executives. The Salary Continuation Plan will pay the
beneficiary of a deceased participant on a monthly basis over a period not to
exceed 180 months following his/her death while employed or after total and
permanent disability or retirement an amount not to exceed one-half of the
participant's salary at the time of death (or time of disability or retirement).
The Salary Continuation Plan is an unfunded, nonqualified death benefit plan.
DHI financed the Salary Continuation Plan through the use of corporate-owned
life insurance on the lives of participants. Mr. Keys A. Curry, Jr. is the only
remaining executive officer of the Company who is a participant in the Salary
Continuation Plan and is thereby eligible for payments under the plan, as
described above, based upon Mr. Curry's salary.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of Destec's Compensation Committee are Messrs. Jack E.
Earnest, Robert W. Gallant and Michael D. Parker. Mr. Enrique J. Sosa, who
served on the Compensation Committee during 1996, resigned from the Board of
Directors, and thereby the committee, effective February 22, 1996. Mr. Parker
was elected to fill this position on May 1, 1996. The service of these
individuals on the Compensation Committee does not create any corporate
interlocks or insider participation between Destec's Compensation Committee and
another entity.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL STOCKHOLDER

The following table sets forth, as of March 19, 1997, the name of each
person who, to the knowledge of Destec, owned beneficially more than five
percent of the shares of Common Stock outstanding at such date, the number of
shares owned by such person and the percentage of outstanding shares represented
thereby:

NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OWNED CLASS
- --------------------------------------------------------------------------- ----------------- -----------

The Dow Chemical Company................................................... 45,000,000 80.2%
2030 Willard H. Dow Center
Midland, Michigan 48640

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information regarding beneficial ownership of
Destec's Common Stock as of March 19, 1997, by all directors, each Named
Executive Officer and the directors and all of Destec's executive officers as a
group. The Common Stock is the only class of voting securities of Destec.

AMOUNT AND NATURE OF
BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP(1)
- ----------------------------------------------------------------------------- ----------------------

Charles F. Goff.............................................................. 297,240(2)
Keys A. Curry, Jr. .......................................................... 237,746(3)
Cassandra C. Carr............................................................ 1,500
Jack E. Earnest.............................................................. 1,000
Jack G. Helfenstein.......................................................... 1,000
Robert W. Gallant............................................................ 2,000
Michael D. Parker............................................................ 0
J. Pedro Reinhard............................................................ 0
Joel V. Staff................................................................ 2,000
Enrique M. Larroucau ........................................................ 94,830(4)
Rodney M. Webb .............................................................. 88,319(5)
Gareth J. Mann .............................................................. 33,778(6)
Directors and Executive Officers as a group (16 persons) .................... 928,039(7)

- ------------------------

(1) Includes deferred and restricted stock awarded under Destec's Variable Pay
Plan.

(2) Includes 246,394 shares of Common Stock that Mr. Goff has the right to
acquire upon exercise of options in the next sixty days.

(3) Includes 191,062 shares of Common Stock that Mr. Curry has the right to
acquire upon exercise of options in the next sixty days.

(4) Includes 69,170 shares of Common Stock that Mr. Larroucau has the right to
acquire upon exercise of options in the next sixty days.

(5) Includes 75,153 shares of Common Stock that Mr. Webb has the right to
acquire upon exercise of options in the next sixty days.

(6) Includes 26,950 shares of Common Stock that Mr. Mann has the right to
acquire upon exercise of options in the next sixty days.

(7) Includes an aggregate of 745,640 shares of Common Stock that the Executive
Officers as a group have the right to acquire upon the exercise of options
in the next sixty days.

As of March 19, 1997, the percentage of Common Stock owned by all of
Destec's directors and executive officers as a group was approximately 1.6%. As
of March 19, 1997, the percentage of each class of Dow's equity securities
beneficially owned by all of Destec's directors and executive officers as a
group did not equal one percent of any class of Dow's equity securities.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

THE DOW AGREEMENTS

Destec has various agreements with Dow, its principal stockholder (the "Dow
Agreements"), some of which were entered into when Destec was a wholly owned
subsidiary of Dow and, therefore, are not the result of arm's length
negotiations between two independent parties. Since the date of Destec's initial
public offering, Destec's Audit Committee has adopted policies and procedures to
deal with any conflicts of interest between Destec and Dow, including any
conflict of interest under the Dow Agreements. Any modifications to existing
agreements and the execution of new agreements between Destec and Dow are
negotiated in accordance with the Audit Committee's policies. All agreements,
including the agreements set forth below, comport with such policies. The
paragraph below describes agreements involving amounts exceeding $60,000 entered
into between Destec and Dow since December 31, 1995.

Destec and Dow have entered into a Tax Sharing Agreement, effective May 15,
1996 (the "Tax Sharing Agreement"), which provides for payments between Destec
and Dow with respect to certain taxes. The Tax Sharing Agreement applies to
taxes paid by Dow with respect to its consolidated U.S. federal income tax
return and state and local combined tax returns that include Destec. With
respect to federal income taxes, the amount of Destec's payment to Dow is based
on the amount of tax Destec would pay if it filed its returns on a stand-alone
basis. With respect to state and local taxes, Destec generally bears its pro
rata share of combined tax liability. Pursuant to the Tax Sharing Agreement, Dow
is required to make payments to Destec for certain tax attributes of Destec used
by Dow to reduce its tax liability.

Destec and Dow have entered into a First Amendment to the Tax Sharing
Agreement, dated February 17, 1997, pursuant to which the Tax Sharing Agreement
was amended to provide, among other things, that (i) the provisions of such tax
sharing agreement apply to the deconsolidation of Destec from the consolidated
group of corporations for which Dow files tax returns for U.S. Federal income
tax purposes; (ii) on the closing date of the Merger, Dow will pay to Destec $10
million as an advance payment of amounts expected to be paid to Destec under
such tax sharing agreement with respect to the 1997 tax year; (iii) Dow will be
treated as having actually utilized all deductions, losses, credits and other
tax attributes of Destec and its subsidiaries prior to Destec's deconsolidation,
with the effect that Destec will be entitled to payment for such items by Dow
pursuant to such tax sharing agreement; and (iv) Destec will not be liable to
Dow for taxes with respect to certain transactions. The First Amendment to the
Tax Sharing Agreement will be effective as of the Effective Time under the
Merger Agreement.

In June 1996, Destec and Dow entered into a settlement agreement regarding
the decommissioning of a facility near Plaquemine, Louisiana, constructed by Dow
in 1987 and in which Destec had an interest (the "LGTI Facility"), pursuant to
which the LGTI equipment and all related facilities (except the slag pile) would
be transferred to Dow. Destec has agreed to reimburse Dow for clean-up and
disposal expenses up to a maximum of $250,000. Destec has agreed to remove the
slag pile at the site in compliance with applicable federal, state and local
requirements. The cost of removal is expected to be offset by proceeds from the
sale of the slag.

See Note 22 of the Notes to Consolidated Financial Statements for a
description of certain agreements between Destec and Dow entered into in
connection with the Merger Agreement.

SEVERANCE AND SERVICES AGREEMENTS

Since January 1, 1996, Destec has entered into a Service Agreement with one
executive officer. See "Executive Compensation--Severance and Services
Agreements."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. FINANCIAL STATEMENTS

PAGE
-----

Independent Auditors Report.................................................................... 27
Consolidated Balance Sheets.................................................................... 28
Statements of Consolidated Income.............................................................. 30
Statements of Consolidated Cash Flows.......................................................... 31
Statements of Consolidated Stockholders' Equity................................................ 32
Notes to Consolidated Financial Statements..................................................... 33

2. FINANCIAL STATEMENT SCHEDULES

No schedules are included because they are not applicable or the
required information is shown in the financial statements or notes
thereto.

3. EXHIBITS

3.1 Amended and Restated Certificate of Incorporation of Destec Energy, Inc.
(incorporated by reference to Exhibit 3.1 to Destec's Registration
Statement on Form S-1, Registration No. 33-36086).

3.2* By-Laws of Destec Energy, Inc., as amended on December 6, 1996.

10.1 Power Marketing Agreement dated as of July 1, 1989, as amended as of July
1, 1990, and as further amended as of September 1, 1990 between The Dow
Chemical Company and Destec Ventures, Inc. (incorporated by reference to
Exhibit 10.1 to Destec's Registration Statement on Form S-1, Registration
No. 33-36086).

10.2** Agreement for Purchase and Sale of Electric Energy and Capacity dated as of
January 1, 1985 between Houston Lighting and Power Company and The Dow
Chemical Company (incorporated by reference to Exhibit 10.2 to Destec's
Registration Statement on Form S-1, Registration No. 33-36086).

10.3 Master Services Agreement dated as of October 1, 1989, as amended as of
July 1, 1990, among The Dow Chemical Company, Destec Energy, Inc. and
Destec Ventures, Inc. (incorporated by reference to Exhibit 10.4 to
Destec's Registration Statement on Form S-1, Registration No. 33-36086).

10.4 Letter amendment dated October 25, 1990 to Master Services Agreement dated
as of October 1, 1989, as amended as of July 1, 1990, among The Dow
Chemical Company, Destec Energy, Inc. and Destec Ventures, Inc.
(incorporated by reference to Exhibit 10.4 to Destec's Registration
Statement on Form S-1, Registration No. 33-36086).

10.5 Agreement for the Exchange of Property for Stock dated June 29, 1989, as
amended as of June 30, 1990, between The Dow Chemical Company and Destec
Energy, Inc. (incorporated by reference to Exhibit 10.5 to Destec's
Registration Statement on Form S-1, Registration No. 33-36086).

10.6 First Amended Lease Agreement dated as of January 1, 1990 between Destec
Ventures, Inc. and The Dow Chemical Company (incorporated by reference to
Exhibit 10.6 to Destec's Registration Statement on Form S-1, Registration
No. 33-36086).

10.7 First Amended Lignite Properties Maintenance Agreement dated as of January
1, 1990 between Destec Ventures, Inc. and The Dow Chemical Company
(incorporated by reference to Exhibit 10.7 to Destec's Registration
Statement on Form S-1, Registration No. 33-36086).

10.8 Site Development Agreement dated as of May 1, 1990 between The Dow Chemical
Company and Destec Energy, Inc. (incorporated by reference to Exhibit 10.8
to Destec's Registration Statement on Form S-1, Registration No. 33-36086).

10.9** Assignment Agreement dated as of March 1, 1990 between The Dow Chemical
Company and Destec Energy, Inc. (incorporated by reference to Exhibit 10.9
to Destec's Registration Statement on Form S-1, Registration No. 33-36086).

10.10 Research & Development Agreement dated as of March 1, 1990 between The Dow
Chemical Company and Destec Energy, Inc. (incorporated by reference to
Exhibit 10.10 to Destec's Registration Statement on Form S-1, Registration
No. 33-36086).

10.11 Engineering Services Agreement dated as of November 1, 1989 between Dow
Engineering Company and Destec Energy, Inc. (incorporated by reference to
Exhibit 10.11 to Destec's Registration Statement on Form S-1, Registration
No. 33-36086).

10.12 Registration Rights Agreement dated as of July 1, 1990 between The Dow
Chemical Company and Destec Energy, Inc. (incorporated by reference to
Exhibit 10.12 to Destec's Registration Statement on Form S-1, Registration
No. 33-36086).

10.13 Lease Agreement dated as of January 24, 1985 between CoGen Lyondell, Inc.
(Lessee) and United States Trust Company (Lessor) and supplement thereto
dated as of December 30, 1985 (incorporated by reference to Exhibit 10.1 to
PSE Inc.'s Registration Statement on Form S-1, Registration No. 33-4370,
filed March 27, 1986).

10.14 Restated Lease Guaranty Agreement dated as of April 30, 1986, by and among
PSE Inc. (Guarantor), General Electric Capital Corporation (Owner
Participant) and United States Trust Company (Owner Trustee) (incorporated
by reference to Exhibit 10.26 to PSE Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1986, File No. 1-9124).

10.15 Price Guaranty Commitment dated as of April 26, 1984 among The Dow Chemical
Company, Louisiana Gasification Technology, Inc. and the United States
Synthetic Fuels Corporation (incorporated by reference to Exhibit 10.17 to
Destec's Registration Statement on Form S-1, Registration No. 33-36086).

10.16 Memorandum of Intent dated July 1, 1990 between The Dow Chemical Company
and Destec Energy, Inc. (incorporated by reference to Exhibit 10.18 to
Destec's Registration Statement on Form S-1, Registration No. 33-36086).

10.17 Power Supply Option dated as of July 1, 1990 between The Dow Chemical
Company and Destec Energy, Inc. (incorporated by reference to Exhibit 10.19
to Destec's Registration Statement on Form S-1, Registration No. 33-36086).

10.18 Option Agreement dated as of June 30, 1990 between Rofan Energy, Inc. and
Destec Energy, Inc. (incorporated by reference to Exhibit 10.20 to Destec's
Registration Statement on Form S-1, Registration No. 33-36086).

10.19 Gas Purchase Agreement dated as of April 26, 1984 between The Dow Chemical
Company and Louisiana Gasification Technology, Inc. (incorporated by
reference to Exhibit 10.24 to Destec's Registration Statement on Form S-1,
Registration No. 33-36086).

10.20 Land Lease Agreement dated as of April 26, 1984 between The Dow Chemical
Company and Louisiana Gasification Technology, Inc. (incorporated by
reference to Exhibit 10.25 to Destec's Registration Statement on Form S-1,
Registration No. 33-36086).

10.21 Operating Agreement dated April 26, 1984 between Louisiana Gasification
Technology, Inc. and The Dow Chemical Company (incorporated by reference to
Exhibit 10.26 to Destec's Registration Statement on Form S-1, Registration
No. 33-36086).

10.22 Services Agreement dated April 26, 1984, as amended January 1, 1987,
between Louisiana Gasification Technology, Inc. and The Dow Chemical
Company (incorporated by reference to Exhibit 10.27 to Destec's
Registration Statement on Form S-1, Registration No. 33-36086).

10.23 Technology License Agreement dated April 26, 1984 between The Dow Chemical
Company and Louisiana Gasification Technology, Inc. (incorporated by
reference to Exhibit 10.28 to Destec's Registration Statement on Form S-1,
Registration No. 33-36086).

10.24 A written description of The Dow Chemical Company's Executive Award Plan
(incorporated by reference to Exhibit 10.29 to Destec's Registration
Statement on Form S-1, Registration No. 33-36086).

10.25 A written description of The Dow Chemical Company Executives' Supplemental
Plan, as amended through December 31, 1981, for certain employees of The
Dow Chemical Company (incorporated by reference to Exhibit 10(b) to The Dow
Chemical Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1981, File No. 1-3433).

10.26 Amendment adopted December 14, 1982 to The Dow Chemical Company Executives'
Supplemental Plan (incorporated by reference to Exhibit 10(b) to The Dow
Chemical Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1982, File No. 1-3433).

10.27 The Dow Chemical Company 1979 Award and Option Plan, as amended through
December 31, 1982 (included as a part of and incorporated by reference to
the prospectus contained in Post-Effective Amendment No. 4 to The Dow
Chemical Company's Registration Statement on Form S-8, Registration No.
2-64560, filed June 23, 1983).

10.28 Amendment adopted April 12, 1984 to The Dow Chemical Company 1979 Award and
Option Plan, amending the provisions of Section 8(c) of that Plan
(incorporated by reference to Exhibit 10(ff) to The Dow Chemical Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1984,
File No. 1-3433).

10.29 Amendment adopted April 18, 1985 to The Dow Chemical Company 1979 Award and
Option Plan, amending the provisions of Section 2(o) of that Plan
(incorporated by reference to Exhibit 10(fff) to The Dow Chemical Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1985,
File No. 1-3433).

10.30 A written description of The Dow Chemical Company's Executive Post
Retirement Life Insurance Program, adopted effective December 1, 1983
(incorporated by reference to Exhibit 10(h) to The Dow Chemical Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1985,
File No. 1-3433).

10.31 Amendments adopted October 3, 1987 to The Dow Chemical Company 1979 Award
and Option Plan and The Dow Chemical Company Executives' Supplemental Plan
(incorporated by reference to Exhibit 10(j) to The Dow Chemical Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989,
File No. 1-3433).

10.32 A written description of The Dow Chemical Company's Management Achievement
Recognition System adopted on April 8, 1987 (incorporated by reference to
Exhibit 10(k) to The Dow Chemical Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989, File No. 1-3433).

10.33 A copy of The Dow Chemical Company 1988 Dividend Unit Plan adopted on
February 10, 1988 (incorporated by reference to Exhibit 10(l) to The Dow
Chemical Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 1-3433).

10.34 Summary of amendment effective January 1, 1989 to The Dow Chemical Company
Executives' Supplemental Plan (incorporated by reference to Exhibit 10(m)
to The Dow Chemical Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989, File No. 1-3433).

10.35 The Dow Chemical Company 1988 Award and Option Plan adopted by the
stockholders at the 1988 Annual Meeting (included as a part of and
incorporated by reference to the prospectus contained in The Dow Chemical
Company's Registration Statement on Form S-8, Registration No. 33-21748,
filed May 16, 1988).

10.36** Amended and Restated Cogenerated Electricity Agreement dated as of
September 17, 1990 by and between The Dow Chemical Company and Texas
Utilities Electric Company (incorporated by reference to Exhibit 10.48 of
Destec's Registration Statement on Form S-1, Registration No. 33-36086).

10.37** Amended and Restated Cogenerated Electricity Agreement dated as of
September 17, 1990 by and between CoGen Lyondell, Inc. and Texas Utilities
Electric Company (incorporated by reference to Exhibit 10.49 to Destec's
Registration Statement on Form S-1, Registration No. 33-36086).

10.38** Surety Agreement dated as of September 17, 1990 by and between Destec
Energy, Inc. and Texas Utilities Electric Company (incorporated by
reference to Exhibit 10.50 to Destec's Registration Statement on Form S-1,
Registration No. 33-36086).

10.39 Destec Energy, Inc. Amended and Restated 1990 Award and Option Plan
(incorporated by reference to Exhibit 10.39 to Destec's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, File Number
1-10592).

10.40 Form of Destec Energy, Inc. Retirement and Savings Plan (incorporated by
reference to Exhibit 10.52 to Destec's Registration Statement on Form S-1,
Registration No. 33-36086).

10.41 Loan Agreement dated as of November 5, 1990 between Destec Energy, Inc., as
borrower, and The Dow Chemical Company, as lender (incorporated by
reference to Exhibit 10.53 to Destec's Registration Statement on Form S-1,
Registration No. 33-36086).

10.42 Loan Agreement dated as of January 1, 1991 between Destec Energy, Inc., as
lender, and The Dow Chemical Company, as borrower (incorporated by
reference to Exhibit 10.54 to Destec's Registration Statement on Form S-1,
Registration No. 33-36086).

10.43 A written description of The Dow Chemical Company Corporate Performance
Award Plan (incorporated by reference to Exhibit 10.55 to Destec's
Registration Statement on Form S-1, Registration No. 33-36086).

10.44 A written summary of The Dow Chemical Company Area Performance Award Plan
(incorporated by reference to Exhibit 10.56 to Destec's Registration
Statement on Form S-1, Registration No. 33-36086).

10.45 Deferred Defined Compensation Contract between Destec Energy, Inc. and
Charles F. Goff, dated November 1, 1991 (incorporated by reference to
Exhibit 10.45 to Destec's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File Number 1-10592).

10.46 Deferred Defined Compensation Contract between Destec Energy, Inc. and
Rodney M. Webb, dated November 1, 1991 (incorporated by reference to
Exhibit 10.46 to Destec's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File Number 1-10592).

10.47 Deferred Defined Compensation Contract between Destec Energy, Inc. and
Richard H. Davis, dated November 1, 1991 (incorporated by reference to
Exhibit 10.47 to Destec's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File Number 1-10592).

10.48 Severance and Services Agreement between Destec Energy, Inc. and Charles F.
Goff, dated May 3, 1994 (incorporated by reference to Exhibit 10.48 to
Destec's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File Number 1-10592).

10.49 Severance and Services Agreement between Destec Energy, Inc. and Keys A.
Curry, Jr., dated May 3, 1994 (incorporated by reference to Exhibit 10.49
to Destec's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, File Number 1-10592).

10.50 Severance and Services Agreement between Destec Energy, Inc. and Enrique M.
Larroucau, dated May 3, 1994 (incorporated by reference to Exhibit 10.50 to
Destec's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File Number 1-10592).

10.51 Severance and Services Agreement between Destec Energy, Inc. and Rodney M.
Webb, dated May 3, 1994 (incorporated by reference to Exhibit 10.51 to
Destec's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File Number 1-10592).

10.52 Severance and Services Agreement between Destec Energy, Inc. and Rick A.
Bowen, dated July 17, 1995 (incorporated by reference to Exhibit 10.52 to
Destec's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File Number 1-10592).

10.53 Severance and Services Agreement between Destec Energy, Inc. and Craig E.
Hess, dated May 3, 1994 (incorporated by reference to Exhibit 10.53 to
Destec's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File Number 1-10592).

10.54 Severance and Services Agreement between Destec Energy, Inc. and Lige E.
Jackowski, Jr., dated May 3, 1994 (incorporated by reference to Exhibit
10.54 to Destec's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File Number 1-10592).

10.55 Severance and Services Agreement between Destec Energy, Inc. and Gareth J.
Mann, dated July 17, 1995 (incorporated by reference to Exhibit 10.55 to
Destec's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, File Number 1-10592).

10.56* Severance and Services Agreement between Destec Energy, Inc. and Marian M.
Davenport dated May 21, 1996.

10.57* First Amendment to Severance and Services Agreement between Destec Energy,
Inc. and Enrique M. Larroucau dated February 14, 1997.

10.58 Form of Salary Continuation Plan between Power Systems Engineering, Inc.
and Keys A. Curry, Jr. dated March 6, 1986 (incorporated by reference to
Exhibit 10.56 to Destec's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File Number 1-10592).

10.59** Release and Waiver Agreement between Destec Energy, Inc. and Stephen R.
Wright dated December 20, 1995.

10.60** Consulting Agreement between Destec Energy, Inc. and Stephen R. Wright
dated December 20, 1995.

10.61* Tax Sharing Agreement effective as of May 15, 1996 between Destec Energy,
Inc. and The Dow Chemical Company.

10.62* First Amendment to the Tax Sharing Agreement dated as of February 17, 1997
between Destec Energy, Inc. and The Dow Chemical Company.

10.63* Oyster Creek Agreement effective as of February 17, 1997 between Destec
Energy, Inc., The Dow Chemical Company and NGC Corporation.

10.64* Site Development Agreement dated as of February 17, 1997 between Destec
Energy, Inc. and The Dow Chemical Company.

10.65* First Amendment to Research and Development Agreement effective as of
December 31, 1996 between Destec Energy, Inc. and The Dow Chemical Company.

10.66* First Amendment to Assignment Agreement effective as of December 15, 1996
between Destec Energy, Inc. and The Dow Chemical Company.

10.67* Computerized Process Control Agreement executed by the last party on August
2, 1993 between Destec Energy, Inc. and Rofan Services Inc.

10.68* First Amendment to Computerized Process Control Agreement effective as of
January 1, 1997 between Destec Energy, Inc. and Rofan Services Inc.

10.69* Termination Agreement Concerning the First Amendment Lease Agreement dated
February 17, 1997 between Destec Properties Limited Partnership and The Dow
Chemical Company.

10.70* Termination Agreement Concerning the First Amended Lignite Properties
Maintenance Agreement dated February 17, 1997 between Destec Properties
Limited Partnership and The Dow Chemical Company.

10.71* Waiver, Release and Substitution made as of February 17, 1997 regarding
guaranty of certain Compensation Adjustment Agreements among Destec Energy,
Inc., The Dow Chemical Company and NGC Corporation.

10.72* Purchase Agreement dated as of January 17, 1997 among Tiger Bay Limited
Partnership, FPC Acquisition L.L.C. and Florida Power Corporation.

10.73* Destec Energy, Inc. Employees Stock Purchase Plan, as amended February 14,
1997.

10.74* Destec Energy, Inc. 1995 Variable Pay Plan, as amended November 14, 1995
and as further amended February 14, 1997.

10.75* Amendment, adopted February 14, 1997, to Destec Energy, Inc. Amended and
Restated 1990 Award and Option Plan.

10.76+ Share Sale Agreement dated August 4, 1996, among State Electricity
Commission of Victoria, the State of Victoria, the Buyers (as defined) and
the Guarantors (as defined) (incorporated by reference to Exhibit 2.1 to
Destec's Current Report on Form 8-K dated September 13, 1996).

10.77+ Asset Sale Agreement dated August 4, 1996, between Hazelwood Power
Corporation Ltd. and Hazelwood Power Partnership (incorporated by reference
to Exhibit 2.2 to Destec's Current Report on Form 8-K dated September 13,
1996).

11* Statement regarding computation of per share earnings.

22* List of subsidiaries of Destec Energy, Inc.

25* Powers of Attorney from certain of the directors of Destec Energy, Inc.
whose signatures are to be affixed to this Form 10-K for the year ended
December 31, 1996.

99 Agreement and Plan of Merger dated as of February 17, 1997 by and among
Destec Energy, Inc., The Dow Chemical Company, NGC Corporation and NGC
Acquisition Corporation II (incorporated by reference to Exhibit 99.1 to
Destec's Current Report on Form 8-K dated February 17, 1997, File Number
1-10592).

- ------------------------

* Filed herewith.

** Confidential Treatment has been requested and granted with respect to
portions of this Exhibit.

+ Confidential Treatment has been requested with respect to portions of this
Exhibit.

(b) REPORTS ON FORM 8-K.

Destec filed the following current reports on Form 8-K during the quarter
ended December 31, 1996:

DATE OF REPORT EVENT REPORTED
- ------------------------------ -----------------------------------------------------------------------

September 13, 1996 Announcement that a consortium which includes an indirect wholly owned
(Amendment on Form 8-K/A subsidiary of Destec completed the acquisition of the Hazelwood Power
filed November 26, 1996) Station and adjacent coal mine.

Announcement that the Board of Directors had retained the investment
banking firm of Morgan Stanley & Co. Incorporated to assist Destec in
exploring strategic alternatives to maximize shareholder value,
October 1, 1996 including a possible sale of Destec.

October 23, 1996 Announcement of Destec's net income for third quarter 1996.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 1997.

DESTEC ENERGY, INC.

(Registrant)

By: /s/ CHARLES F. GOFF

--------------------------------------

Charles F. Goff

CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange of 1934, this report
has been signed by the following persons in the capacities indicated, on the
26th day of March 1997:

SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------

/s/ CHARLES F. GOFF Chairman of the Board and Chief Executive
------------------------------------------- Officer (Principal Executive Officer)
Charles F. Goff

/s/ KEYS A. CURRY, JR. President and Chief Operating Officer
------------------------------------------- and Director
Keys A. Curry, Jr.

/s/ ENRIQUE M. LARROUCAU Senior Vice President, Chief Financial Officer
------------------------------------------- and Treasurer (Principal Financial Officer)
Enrique M. Larroucau

/s/ CRAIG E. HESS Vice President and Controller
------------------------------------------- (Principal Accounting Officer)
Craig E. Hess

/s/ CASSANDRA C. CARR* Director
-------------------------------------------
Cassandra C. Carr

/s/ JACK E. EARNEST* Director
-------------------------------------------
Jack E. Earnest

/s/ JACK G. HELFENSTEIN* Director
-------------------------------------------
Jack G. Helfenstein

/s/ ROBERT W. GALLANT* Director
-------------------------------------------
Robert W. Gallant

/s/ MICHAEL D. PARKER* Director
-------------------------------------------
Michael D. Parker

/s/ J. PEDRO REINHARD* Director
-------------------------------------------
J. Pedro Reinhard

/s/ JOEL V. STAFF* Director
-------------------------------------------
Joel V. Staff

*By: /s/ CHARLES F. GOFF
--------------------------------------
Charles F. Goff
ATTORNEY-IN-FACT

Document No. 619-00123