<PAGE> 1
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
---------------------
Date of Report: November 14, 1994
Date of Earliest Event Reported: October 9, 1994
PANHANDLE EASTERN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation)
1-8157
(Commission File
Number)
74-2150460
(I.R.S. Employer
Identification Number)
5400 WESTHEIMER COURT
P.O. BOX 1642
HOUSTON, TEXAS 77251-1642
(Address, including zip code, of principal executive offices)
---------------------
Registrant's telephone number, including area code:
(713) 627-5400
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<PAGE> 2
ITEM 5. OTHER EVENTS.
On October 9, 1994, Panhandle Eastern Corporation (Panhandle) and
a wholly-owned subsidiary of Panhandle entered into an Agreement and Plan of
Merger with Associated Natural Gas Corporation (ANGC) that provides for the
merger of the Panhandle subsidiary with and into ANGC. Under the terms
of the merger agreement, each outstanding share of ANGC common stock will be
converted into the right to receive between 1.5725 and 1.8750 shares of
Panhandle common stock, depending on the average daily price of Panhandle
common stock during a specified 15 day period prior to completion of the Merger.
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information reflects
adjustments to the historical consolidated balance sheets and statements of
income of Panhandle and ANGC to give effect to the merger, using the pooling of
interests method of accounting for a business combination.
ANGC's consolidated financial statements are based on a fiscal year end of
September 30 as compared with Panhandle's fiscal year end of December 31. As a
result, the unaudited pro forma financial information combines different
calendar periods. The unaudited pro forma condensed balance sheet as of
September 30, 1994 assumes that the merger occurred as of that date and reflects
the combination of the historical balance sheet of Panhandle as of September 30,
1994 with the historical balance sheet of ANGC as of June 30, 1994. The pro
forma adjustments reflected in the pro forma condensed financial information
give effect to the issuance of 25.8 million shares of Panhandle common stock as
of September 30, 1994, assuming an Exchange Ratio of 1.7105 (the Exchange Ratio
resulting from an average daily price of the Panhandle common stock of $22.80,
which is the midpoint of the price range of $20.80 and $24.80 for Panhandle
common stock used to determine the maximum and minimum Exchange Ratios of 1.8750
and 1.5725, respectively). The historical balance sheets of ANGC have been
restated to reflect ANGC's merger with Grand Valley Gas Company (Grand Valley)
that was effective July 1, 1994 and was accounted for as a pooling of interests.
The unaudited pro forma condensed statements of income for the nine months
ended September 30, 1994 and September 30, 1993, and for the years ended
December 31, 1993, 1992 and 1991 assume that the merger occurred as of
January 1, 1991, and combine the historical results of operations of
Panhandle for the nine months ended September 30, 1994 and
September 30, 1993, and the years ended December 31, 1993, 1992 and
1991 with the historical results of operations of ANGC for the nine
months ended June 30, 1994 and June 30, 1993, and the years ended
September 30, 1993, 1992 and 1991, respectively. The historical results
of operations for ANGC have been restated to reflect ANGC's merger
with Grand Valley.
The following unaudited pro forma condensed financial information has been
prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of Panhandle, included in
Panhandle's Annual Report on Form 10-K for the fiscal year ended December 31,
1993 and Quarterly Report on Form 10-Q for the quarter ended September 30, 1994,
and ANGC's historical consolidated financial statements and notes thereto,
included herein . The following unaudited pro forma condensed statements of
income are not necessarily indicative of the results of operations that would
have occurred had the merger occurred on January 1, 1991, nor are they
necessarily indicative of future operating results of the combined companies.
2
<PAGE> 3
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PANHANDLE
NINE MONTHS ANGC NINE
ENDED MONTHS
SEPTEMBER ENDED JUNE
30, 1994 30, 1994 PRO FORMA
----------- ----------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Sales of natural gas and liquids......................... $ 689.0 $1,583.4 $2,272.4
Transportation of natural gas............................ 950.5 19.1 969.6
Natural gas storage and other............................ 165.1 9.6 174.7
-------- -------- --------
Total............................................ 1,804.6 1,612.1 3,416.7
-------- -------- --------
COSTS AND EXPENSES
Gas purchased............................................ 615.7 1,496.2 2,111.9
Operating and maintenance................................ 379.7 33.0 412.7
General and administrative............................... 173.1 22.3 195.4
Depreciation and amortization............................ 167.3 22.8 190.1
Miscellaneous taxes...................................... 60.1 -- 60.1
-------- -------- --------
Total............................................ 1,395.9 1,574.3 2,970.2
-------- -------- --------
Operating Income........................................... 408.7 37.8 446.5
-------- -------- --------
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated affiliates.......... 24.2 -- 24.2
Other income, net of deductions.......................... (0.9) 0.9 --
-------- -------- --------
Total............................................ 23.3 0.9 24.2
-------- -------- --------
Gross Income............................................... 432.0 38.7 470.7
INTEREST EXPENSE........................................... 166.7 12.2 178.9
-------- -------- --------
Income before Income Tax................................... 265.3 26.5 291.8
INCOME TAX................................................. 108.1 11.7 119.8
-------- -------- --------
NET INCOME................................................. $ 157.2 $ 14.8 $ 172.0
======== ======== ========
Average Common Shares Outstanding.......................... 120.4 146.1
======== ========
Earnings per Common Share.................................. $ 1.31 $ 1.18
======== ========
</TABLE>
See accompanying notes to pro forma condensed financial information.
3
<PAGE> 4
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
PANHANDLE
NINE MONTHS ANGC NINE
ENDED MONTHS
SEPTEMBER ENDED JUNE
30, 1993 30, 1993 PRO FORMA
----------- ----------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Sales of natural gas and liquids......................... $1,059.3 $1,299.5 $2,358.8
Transportation of natural gas............................ 728.7 10.8 739.5
Natural gas storage and other............................ 137.9 6.1 144.0
-------- -------- --------
Total............................................ 1,925.9 1,316.4 3,242.3
-------- -------- --------
COSTS AND EXPENSES
Gas purchased............................................ 718.2 1,216.3 1,934.5
Operating and maintenance................................ 401.7 25.9 427.6
General and administrative............................... 167.6 16.5 184.1
Depreciation and amortization............................ 169.6 17.4 187.0
Miscellaneous taxes...................................... 61.6 -- 61.6
-------- -------- --------
Total............................................ 1,518.7 1,276.1 2,794.8
-------- -------- --------
Operating Income........................................... 407.2 40.3 447.5
-------- -------- --------
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated affiliates.......... 14.2 -- 14.2
Other income, net of deductions.......................... 13.9 0.8 14.7
-------- -------- --------
Total............................................ 28.1 0.8 28.9
-------- -------- --------
Gross Income............................................... 435.3 41.1 476.4
INTEREST EXPENSE........................................... 212.7 10.1 222.8
-------- -------- --------
Income before Income Tax................................... 222.6 31.0 253.6
INCOME TAX................................................. 93.1 12.3 105.4
-------- -------- --------
NET INCOME................................................. $ 129.5 $ 18.7 $ 148.2
======== ======== ========
Average Common Shares Outstanding.......................... 113.4 138.4
======== ========
Earnings per Common Share.................................. $ 1.14 $ 1.07
======== ========
</TABLE>
See accompanying notes to pro forma condensed financial information.
4
<PAGE> 5
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
PANHANDLE ANGC
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1993 PRO FORMA
------------ ------------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Sales of natural gas and liquids........................ $1,277.8 $1,768.9 $3,046.7
Transportation of natural gas........................... 1,045.3 12.1 1,057.4
Natural gas storage and other........................... 190.1 7.8 197.9
-------- -------- -------
Total........................................... 2,513.2 1,788.8 4,302.0
-------- -------- --------
COSTS AND EXPENSES
Gas purchased........................................... 918.6 1,657.0 2,575.6
Operating and maintenance............................... 621.2 34.2 655.4
General and administrative.............................. 227.7 22.1 249.8
Depreciation and amortization........................... 227.2 23.6 250.8
Miscellaneous taxes..................................... 78.6 -- 78.6
-------- -------- --------
Total........................................... 2,073.3 1,736.9 3,810.2
-------- -------- --------
Operating Income.......................................... 439.9 51.9 491.8
-------- -------- --------
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated affiliates......... 16.1 -- 16.1
Other income, net of deductions......................... 64.0 1.1 65.1
-------- -------- ---------
Total........................................... 80.1 1.1 81.2
-------- -------- ---------
Gross Income.............................................. 520.0 53.0 573.0
INTEREST EXPENSE.......................................... 269.3 13.2 282.5
-------- --------- ---------
Income before Income Tax.................................. 250.7 39.8 290.5
INCOME TAX................................................ 102.6 16.3 118.9
-------- -------- ---------
NET INCOME................................................ $ 148.1 $ 23.5 $ 171.6
======== ======== =========
Average Common Shares Outstanding......................... 115.0 140.0
======== =========
Earnings per Common Share................................. $ 1.29 $ 1.23
======== =========
</TABLE>
See accompanying notes to pro forma condensed financial information.
5
<PAGE> 6
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
PANHANDLE ANGC
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1992 1992 PRO FORMA
------------ ------------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Sales of natural gas and liquids........................ $1,729.6 $1,111.8 $2,841.4
Transportation of natural gas........................... 750.9 7.1 758.0
Natural gas storage and other........................... 275.8 6.1 281.9
-------- -------- --------
Total........................................... 2,756.3 1,125.0 3,881.3
-------- -------- --------
COSTS AND EXPENSES
Gas purchased........................................... 1,033.5 1,025.4 2,058.9
Operating and maintenance............................... 551.7 25.4 577.1
General and administrative.............................. 246.1 16.3 262.4
Depreciation and amortization........................... 237.0 21.9 258.9
Miscellaneous taxes..................................... 75.5 -- 75.5
-------- -------- --------
Total........................................... 2,143.8 1,089.0 3,232.8
-------- -------- --------
Operating Income.......................................... 612.5 36.0 648.5
-------- -------- --------
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated affiliates......... 5.8 -- 5.8
Other income, net of deductions......................... (11.0) 1.6 (9.4)
-------- -------- --------
Total........................................... (5.2) 1.6 (3.6)
-------- -------- --------
Gross Income.............................................. 607.3 37.6 644.9
INTEREST EXPENSE.......................................... 294.8 12.4 307.2
-------- -------- --------
Income before Income Tax.................................. 312.5 25.2 337.7
INCOME TAX................................................ 125.4 10.3 135.7
-------- -------- --------
NET INCOME................................................ $ 187.1 $ 14.9 $ 202.0
======== ======== ========
Average Common Shares Outstanding......................... 108.2 132.3
======== ========
Earnings per Common Share................................. $ 1.73 $ 1.53
======== ========
</TABLE>
See accompanying notes to pro forma condensed financial information.
6
<PAGE> 7
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1991
<TABLE>
<CAPTION>
PANHANDLE ANGC
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1991 1991 PRO FORMA
------------ ------------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Sales of natural gas and liquids.................... $1,900.3 $725.9 $2,626.2
Transportation of natural gas....................... 601.8 5.0 606.8
Natural gas storage and other....................... 171.6 4.9 176.5
-------- ------ -------
Total....................................... 2,673.7 735.8 3,409.5
-------- ------ --------
COSTS AND EXPENSES
Gas purchased....................................... 1,116.1 657.0 1,773.1
Operating and maintenance........................... 540.7 21.2 561.9
General and administrative.......................... 258.1 12.1 270.2
Depreciation and amortization....................... 251.3 17.5 268.8
Miscellaneous taxes................................. 74.9 -- 74.9
-------- ------ --------
Total....................................... 2,241.1 707.8 2,948.9
-------- ------ --------
Operating Income...................................... 432.6 28.0 460.6
-------- ------ --------
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated affiliates..... 21.6 -- 21.6
Other income, net of deductions..................... 29.9 1.9 31.8
-------- ------ --------
Total....................................... 51.5 1.9 53.4
-------- ------ --------
Gross Income.......................................... 484.1 29.9 514.0
INTEREST EXPENSE...................................... 336.0 8.6 344.6
-------- ------ --------
Income before Income Tax.............................. 148.1 21.3 169.4
INCOME TAX............................................ 62.3 7.7 70.0
-------- ------ --------
NET INCOME............................................ $ 85.8 $ 13.6 $ 99.4
======== ======= ========
Average Common Shares Outstanding..................... 98.9 120.5
======== ========
Earnings per Common Share............................. $ 0.87 $ 0.82
======== ========
</TABLE>
See accompanying notes to pro forma condensed financial information.
7
<PAGE> 8
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1994
ASSETS
<TABLE>
<CAPTION>
PANHANDLE ANGC
SEPTEMBER 30, JUNE 30, PRO FORMA
1994 1994 ADJUSTMENTS PRO FORMA
------------- --------- ----------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................ $ 53.2 $ 70.1 $ $ 123.3
Accounts and notes receivable.................... 200.3 190.7 391.0
Inventory and supplies........................... 113.7 22.6 136.3
Other............................................ 296.3 3.8 300.1
--------- ------- ------- ---------
Total.................................... 663.5 287.2 -- 950.7
--------- ------- ------- ---------
INVESTMENTS
Affiliates....................................... 146.7 -- 146.7
Other............................................ 75.5 -- 75.5
--------- ------- ------- ---------
Total.................................... 222.2 -- -- 222.2
--------- ------- ------- ---------
PLANT, PROPERTY AND EQUIPMENT
Original cost.................................... 7,355.6 563.5 7,919.1
Accumulated depreciation and amortization........ (2,859.3) (114.5) (2,973.8)
--------- ------- ------- ---------
Net plant, property and equipment........ 4,496.3 449.0 -- 4,945.3
--------- ------- ------- ---------
DEFERRED CHARGES
Goodwill, net.................................... 317.8 28.0 345.8
Prepaid pension.................................. 235.5 -- 235.5
Other............................................ 841.5 15.4 856.9
-------- ------- ------- ---------
Total.................................... 1,394.8 43.4 -- 1,438.2
-------- ------- ------- ---------
TOTAL ASSETS....................................... $ 6,776.8 $ 779.6 $ -- $ 7,556.4
========= ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Long-term debt due within one year............... $ 125.0 $ 4.1 $ $ 129.1
Rate refund provisions........................... 194.5 -- 194.5
Accounts payable................................. 80.6 194.8 275.4
Accrued interest................................. 57.9 2.8 60.7
Taxes payable.................................... 57.3 -- 57.3
Other............................................ 458.2 55.3 513.5
--------- ------- ------- ---------
Total.................................... 973.5 257.0 -- 1,230.5
--------- ------- ------- ---------
DEFERRED LIABILITIES AND CREDITS
Deferred income tax.............................. 1,168.9 42.3 1,211.2
Deferred revenue -- liquefied natural gas
project....................................... 71.8 -- 71.8
Other............................................ 872.6 1.0 873.6
--------- ------- ------- ---------
Total.................................... 2,113.3 43.3 -- 2,156.6
--------- ------- ------- ---------
LONG-TERM DEBT..................................... 1,926.0 239.1 -- 2,165.1
--------- ------- ------- ---------
COMMON STOCKHOLDERS' EQUITY
Common stock..................................... 120.7 0.8 25.0 146.5
Paid-in capital.................................. 2,056.8 167.7 (25.0) 2,199.5
Retained earnings (deficit)...................... (413.5) 71.7 -- (341.8)
--------- ------- ------- ---------
Total.................................... 1,764.0 240.2 -- 2,004.2
--------- ------- ------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $ 6,776.8 $ 779.6 $ -- $ 7,556.4
========= ======= ======= =========
</TABLE>
See accompanying notes to pro forma condensed financial information.
8
<PAGE> 9
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
On October 9, 1994, Panhandle and a wholly-owned subsidiary
of Panhandle entered into an Agreement and Plan of Merger with ANGC that
provides for the merger of the Panhandle subsidiary with and into ANGC. Under
the terms of the merger agreement, each outstanding share of ANGC common stock
will be converted into the right to receive between 1.5725 and 1.8750 shares of
Panhandle common stock, depending on the average daily price of Panhandle common
stock during a specified 15 day period prior to completion of the merger. The
business combination is to be accounted for using the pooling of interests
method of accounting for business combinations. Panhandle's fiscal year ends
December 31 and ANGC's fiscal year ends September 30. As disclosed in ANGC's
audited consolidated financial statements and notes thereto contained in this
Form 8-K, ANGC's historical amounts have been restated to reflect ANGC's merger
with Grand Valley that was effective July 1, 1994 and was accounted for as a
pooling of interests. Certain historical amounts presented in Panhandle's and
ANGC's Form 10-K's for their 1993 fiscal years and ANGC's Quarterly Report on
Form 10-Q for the third fiscal quarter of 1994 have been reclassified to
conform to the current reporting presentation.
2. PRO FORMA ADJUSTMENTS
(a) The adjustments to stockholders' equity as of September 30, 1994 give
effect to the issuance of 25.8 million shares of Panhandle common stock in
exchange for 15.1 million shares of ANGC common stock outstanding as of June 30,
1994 and give effect to the retirement of the ANGC common stock, assuming an
Exchange Ratio of 1.7105 (the Exchange Ratio resulting from an average daily
price of the Panhandle common stock of $22.80, which is the midpoint of the
price range of $20.80 and $24.80 for Panhandle common stock used to determine
the maximum and minimum Exchange Ratios of 1.8750 and 1.5725, respectively).
(b) Certain reclassifications have been made to the historical financial
information of Panhandle to conform with ANGC's presentation.
3. PRO FORMA EARNINGS PER SHARE
The pro forma average common shares outstanding have been computed by
adjusting the historical average common shares outstanding for Panhandle by the
pro forma effect of the shares assumed to be issued in exchange for the
outstanding ANGC common stock.
4. MERGER EXPENSES
The unaudited pro forma condensed financial information excludes
nonrecurring expenses incurred as a direct result of the merger transaction.
These expenses, which primarily consist of financial advisory, legal, accounting
and other professional fees, are expected to total approximately $10 million and
will be included in the consolidated statements of income of Panhandle and ANGC,
as appropriate, in the periods incurred.
9
<PAGE> 10
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fiscal Years Ended September 30, 1993, 1992 and 1991
Independent Auditors' Report........................................................ 11
Consolidated Balance Sheets, September 30, 1993 and 1992............................ 12
Consolidated Statements of Operations, Years ended September 30, 1993, 1992 and
1991............................................................................. 13
Consolidated Statements of Stockholders' Equity, Years ended September 30, 1993,
1992 and 1991.................................................................... 14
Consolidated Statements of Cash Flows, Years ended September 30, 1993, 1992 and
1991............................................................................. 15
Notes to Consolidated Financial Statements.......................................... 16
Interim Periods Ended June 30, 1994 and 1993
Consolidated Balance Sheets, June 30, 1994 and September 30, 1993 (unaudited)....... 26
Consolidated Statements of Operations, Three and Nine Months ended
June 30, 1994 and 1993 (unaudited)............................................... 28
Consolidated Statements of Stockholders' Equity, Nine Months ended
June 30, 1994 and Twelve Months ended September 30, 1993 (unaudited)............. 29
Consolidated Statements of Cash Flows, Nine Months ended
June 30, 1994 and 1993 (unaudited)............................................... 30
Notes to Consolidated Financial Statements (unaudited).............................. 32
</TABLE>
10
<PAGE> 11
INDEPENDENT AUDITORS' REPORT
The Stockholders
Associated Natural Gas Corporation:
We have audited the accompanying supplemental consolidated balance sheets
of Associated Natural Gas Corporation (ANGC) and subsidiaries as of September
30, 1993 and 1992, and the related supplemental consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended September 30, 1993. These supplemental consolidated
financial statements are the responsibility of ANGC's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits. We did not audit the financial
statements of Grand Valley Gas Company (Grand Valley). Grand Valley was merged
into a subsidiary of ANGC effective July 1, 1994. As described in note 1 to the
supplemental consolidated financial statements, the merger has been accounted
for as a pooling of interests and the supplemental financial statements give
retroactive effect to the merger. Grand Valley's assets constitute 11.4 percent
in 1993 and 7.5 percent in 1992 and Grand Valley's revenues constitute 18.1
percent in 1993, 17.5 percent in 1992 and 14.3 percent in 1991 of the related
consolidated totals. The Grand Valley financial statements were audited by other
auditors whose report has been furnished to us, and our opinion insofar as it
relates to the amounts included for Grand Valley, is based solely on the report
of the other auditors.
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.
The supplemental consolidated financial statements give retroactive effect
to the merger with Grand Valley effective July 1, 1994. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of ANGC and subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Associated Natural Gas Corporation and subsidiaries as of September 30, 1993 and
1992, and the results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 1993, in conformity with
generally accepted accounting principles applicable after financial statements
are issued for a period which includes the date of the business combination.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Denver, Colorado
July 1, 1994
11
<PAGE> 12
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1993 1992
----------- -----------
(RESTATED -- NOTE 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash in margin
accounts of $4,441,301 and $5,756,037, respectively............ $ 63,586,968 $ 44,958,311
Accounts receivable, net of allowance............................. 185,844,633 127,291,961
Natural gas, crude oil and petroleum product inventories.......... 26,994,076 13,947,954
Notes receivable.................................................. 4,227,258 2,909,052
Income taxes receivable........................................... 2,138,511 2,132,998
Other............................................................. 719,601 1,018,134
------------ ------------
Total current assets...................................... 283,511,047 192,258,410
------------ ------------
Property, plant and equipment, at cost (note 3):
Natural gas processing facilities................................. 88,046,503 79,271,807
Natural gas and crude oil pipelines............................... 324,031,220 275,019,938
Construction in progress.......................................... 17,335,314 8,950,224
Other equipment................................................... 17,791,890 13,190,131
------------ ------------
447,204,927 376,432,100
Less accumulated depreciation..................................... 93,772,409 73,688,768
------------ ------------
353,432,518 302,743,332
Other Assets:
Goodwill and other intangibles, net of applicable amortization of
$5,542,244 and $3,234,163, respectively........................ 29,786,426 32,094,778
Gas contracts and other intangibles, net of applicable
amortization of $156,250 and $12,500, respectively............. 1,118,750 610,342
Other, net........................................................ 7,732,568 5,336,816
----------- ------------
$675,581,309 $533,043,678
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.......................................................... $220,759,278 $143,822,426
Other.......................................................... 4,180,579 4,207,483
------------ ------------
224,939,857 148,029,909
Outstanding checks in excess of bank balances..................... 26,697,341 17,824,783
Notes payable to stockholders and others.......................... -- 1,950,000
Accrued interest expense.......................................... 4,802,292 4,621,497
Dividends payable................................................. 394,607 389,443
Current portion of long-term debt (note 4)........................ 4,000,000 4,830,001
------------ ------------
Total current liabilities................................. 260,834,097 177,645,633
------------ ------------
Deferred income taxes (note 5)...................................... 37,941,306 32,112,370
Long-term debt (note 4)............................................. 163,000,000 137,000,000
------------ ------------
Total liabilities......................................... 461,775,403 346,758,003
------------ ------------
Stockholders' equity (note 7):
Common stock, $.10 par value. Authorized 20,000,000 shares; issued
and outstanding 14,723,406 shares in 1993 and 14,587,534 shares
in 1992........................................................ 1,472,340 1,458,753
Additional paid-in capital........................................ 155,083,952 150,373,739
Unamortized restricted stock compensation award................... (1,193,149) (2,008,379)
Retained earnings................................................. 58,442,763 36,461,562
------------ ------------
Total stockholders' equity................................ 213,805,906 186,285,675
------------ ------------
Commitments (note 6)
$675,581,309 $533,043,678
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 13
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1993 1992 1991
------------- ------------- -----------
(RESTATED -- NOTE 1)
<S> <C> <C> <C>
Operating revenue:
Natural gas and petroleum products sales...... $1,768,887,178 $1,111,774,170 $725,914,238
Transportation................................ 12,136,943 7,087,775 5,027,524
Other......................................... 7,825,419 6,172,702 4,888,064
-------------- -------------- ------------
1,788,849,540 1,125,034,647 735,829,826
-------------- -------------- ------------
Operating expenses:
Natural gas and petroleum products
purchases.................................. 1,656,976,162 1,025,413,395 657,056,055
Operations.................................... 34,262,934 25,440,327 21,249,584
General and administrative.................... 22,125,288 16,310,739 12,066,183
Depreciation and amortization................. 23,585,156 21,844,221 17,495,849
-------------- -------------- ------------
1,736,949,540 1,089,008,682 707,867,671
-------------- -------------- ------------
Income from operations..................... 51,900,000 36,025,965 27,962,155
Other income (expense):
Interest expense.............................. (13,155,488) (12,460,459) (8,545,655)
Interest income............................... 1,119,969 1,605,812 1,771,068
Other, net.................................... (31,820) 21,624 109,192
-------------- -------------- ------------
(12,067,339) (10,833,023) (6,665,395)
-------------- -------------- ------------
Earnings before income taxes............... 39,832,661 25,192,942 21,296,760
Income tax expense (note 5)..................... (16,285,162) (10,296,944) (7,653,732)
-------------- -------------- ------------
Net earnings............................... $ 23,547,499 $ 14,895,998 $ 13,643,028
============== ============== ============
Earnings per common share....................... $ 1.61 $ 1.06 $ 1.08
============== ============== ============
Dividends per common share...................... $ .11 $ .11 $ .10
============== ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(RESTATED -- NOTE 1)
<TABLE>
<CAPTION>
UNAMORTIZED
RESTRICTED
ADDITIONAL STOCK TOTAL
COMMON PAID-IN RETAINED COMPENSATION STOCKHOLDERS'
STOCK CAPITAL EARNINGS AWARD EQUITY
--------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1990................ $1,149,122 $ 86,043,378 $10,754,087 $ (31,669) $ 97,914,918
Issuance of 1,186,354 shares of common
stock.............................. 118,635 25,981,153 -- -- 26,099,788
Grants of compensatory stock
options............................ -- 241,550 -- -- 241,550
Issuance of 48,311 shares of
restricted common stock............ 4,831 1,223,874 -- (1,228,705) --
Amortization of restricted stock
awards............................. -- -- -- 439,140 439,140
Purchase and retirement of 53,750
shares of common stock............. (5,375) (1,341,000) -- -- (1,346,375)
Exercise of stock options to purchase
291,950 shares of common stock..... 29,195 4,072,006 -- -- 4,101,201
Dividends declared on common stock.... -- -- (1,316,423) -- (1,316,423)
Net earnings.......................... -- -- 13,643,028 -- 13,643,028
---------- ------------ ----------- ----------- ------------
Balance, September 30, 1991............. 1,296,408 116,220,961 23,080,692 (821,234) 139,776,827
Issuance of 1,343,356 shares of common
stock.............................. 134,336 31,615,826 -- -- 31,750,162
Grant of 2,775 shares of compensatory
stock.............................. 277 98,034 -- -- 98,311
Grants of compensatory stock options
(Note 3)........................... -- 1,242,674 -- (1,242,674) --
Issuance of 26,544 shares of
restricted common stock, net of
forfeitures........................ 2,654 563,846 -- (566,500) --
Amortization of restricted stock
awards............................. -- -- -- 622,029 622,029
Exercise of stock options to purchase
250,775 shares of common stock..... 25,078 632,398 -- -- 657,476
Dividends declared on common stock.... -- -- (1,515,128) -- (1,515,128)
Net earnings.......................... -- -- 14,895,998 -- 14,895,998
---------- ------------ ----------- ----------- ------------
Balance, September 30, 1992............. 1,458,753 150,373,739 36,461,562 (2,008,379) 186,285,675
Grant of 462 shares of compensatory
stock.............................. 46 17,029 -- -- 17,075
Issuance of 16,980 shares of
restricted common stock, net of
forfeitures........................ 1,698 522,064 -- (523,762) --
Amortization of restricted stock
awards............................. -- -- -- 1,338,992 1,338,992
Exercise of stock options to purchase
177,205 shares of common stock..... 17,720 3,571,949 -- -- 3,589,669
Purchase and retirement of 58,775
shares of common stock............. (5,877) (2,112,843) -- -- (2,118,720)
Tax benefit from nonqualified stock
options (Note 5)................... -- 2,712,014 -- -- 2,712,014
Dividends declared on common stock.... -- -- (1,566,298) -- (1,566,298)
Net earnings.......................... -- -- 23,547,499 -- 23,547,499
---------- ------------ ----------- ----------- ------------
Balance, September 30, 1993............. $1,472,340 $155,083,952 $58,442,763 $(1,193,149) $213,805,906
========== ============ =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1993 1992 1991
----------- ----------- -----------
(RESTATED -- NOTE 1)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................... $ 23,547,499 $ 14,895,998 $ 13,643,028
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization............................... 23,585,156 21,844,221 17,495,849
Amortization of deferred financing costs.................... 144,180 131,893 67,807
Deferred income tax expense................................. 7,216,116 5,212,038 3,258,646
Amortization of restricted stock award...................... 1,338,992 622,029 439,140
Grants of compensatory stock and stock options.............. 17,075 98,312 241,550
Loss (gain) on disposition of assets........................ 112,851 (16,122) (906)
------------ ------------ ------------
55,961,869 42,788,369 35,145,114
Change in working capital items and other................... 5,654,218 6,896,095 1,101,599
------------ ------------ ------------
Net cash provided by operating activities................. 61,616,087 49,684,464 36,246,713
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures for property, plant and equipment......... (68,108,803) (92,740,831) (40,943,815)
Payments for acquisition of MEGA............................... -- -- (6,424,132)
Notes receivable, net.......................................... (2,818,206) (2,909,052) --
Proceeds from disposition of assets............................ 483,341 396,182 335,693
Increase in other assets, net.................................. (3,208,783) (1,008,454) (894,349)
------------ ------------ ------------
Net cash used by investing activities..................... (73,652,451) (96,262,155) (47,926,603)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings, including private placement........................ 44,482,649 67,500,000 112,000,000
Repayments of debt............................................. (21,780,001) (46,746,500) (87,431,056)
Repurchases of common stock.................................... (2,118,720) -- (1,346,375)
Net proceeds from issuance of common stock..................... 2,769,669 32,272,635 1,916,201
Dividends paid................................................. (1,561,134) (1,473,544) (1,274,580)
Increase in outstanding checks in excess of bank balances...... 8,872,558 3,304,121 6,078,134
------------ ------------ ------------
Net cash provided by financing activities................. 30,665,021 54,856,712 29,942,324
------------ ------------ ------------
Net increase in cash and cash equivalents.............. 18,628,657 8,279,021 18,262,434
Cash and cash equivalents, beginning of year........... 44,958,311 36,679,290 18,416,856
------------ ------------ ------------
Cash and cash equivalents, end of year................. $ 63,586,968 $ 44,958,311 $ 36,679,290
============ ============ ============
Changes in working capital items and other:
Increase in accounts receivable............................. $(58,552,671) $(44,805,732) $ (1,865,770)
(Increase) decrease in natural gas, crude oil and petroleum
product inventories....................................... (13,046,122) (7,010,477) 3,003,150
Increase in income taxes receivable......................... (5,513) (2,091,424) (41,574)
(Increase) decrease in other current assets................. 2,475,779 (447,288) 70,645
Increase (decrease) in accounts payable..................... 74,601,950 61,236,851 (2,958,383)
Increase in accrued interest expense........................ 180,795 273,297 3,533,246
Decrease in income taxes payable............................ -- (259,132) (540,376)
Other, net.................................................. -- -- (99,339)
------------ ------------ ------------
$ 5,654,218 $ 6,896,095 $ 1,101,599
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest, net of amount capitalized......................... $ 12,974,693 $ 12,245,246 $ 5,014,744
============ ============ ============
Income taxes................................................ $ 6,937,449 $ 7,590,654 $ 4,988,960
============ ============ ============
Supplemental schedule of noncash investing and financing
activities:
Accrued common stock dividends................................. $ 394,607 $ 389,443 $ 347,859
============ ============ ============
Tax effect of stock option compensation........................ $ 3,532,014 $ 135,000 $ 2,185,000
============ ============ ============
Conversion of note receivable into property, plant and
equipment................................................... $ 1,500,000 $ -- $ --
============ ============ ============
Issuance of common stock pursuant to merger with MEGA.......... $ -- $ -- $ 26,099,788
============ ============ ============
Assumption and issuance of debt associated with merger of
MEGA........................................................ $ -- $ -- $ 46,358,884
============ ============ ============
Assumption and issuance of notes payable associated with
purchase of Centennial Natural Gas Corporation.............. $ -- $ 6,266,285 $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1993, 1992 AND 1991
(1) ORGANIZATION AND BASIS OF PRESENTATION
Associated Natural Gas Corporation (the "Company") is engaged in the
business of purchasing, gathering, processing, transporting and marketing
natural gas, natural gas liquids ("NGLs") and crude oil to industrial end users,
local distribution companies, liquid petroleum gas wholesalers and retailers and
refiners. The Company currently owns and operates a significant complex of crude
oil, NGLs and natural gas gathering, processing/fractionation and transportation
facilities situated in major oil and natural gas-producing basins in the Rocky
Mountain, Mid Continent and Gulf Coast regions of the United States.
On June 30, 1994, the Company filed Articles of Merger, to be effective
July 1, 1994, in connection with the Merger between its wholly-owned subsidiary,
Associated Natural Gas, Inc. (ANGI) and Grand Valley Gas Company (Grand Valley),
with ANGI as the surviving entity. Grand Valley is a natural gas marketing
company with sales principally in the Pacific Northwest, Rocky Mountains,
Western Canada and California regions. Under the terms of the merger, the
Company exchanged 1,637,467 shares of its common stock for 100% of Grand
Valley's outstanding common stock. The acquisition has been accounted for under
the pooling of interests method and, accordingly, the Company's consolidated
financial statements have been restated to include the accounts of Grand Valley
for all periods presented. Grand Valley's consolidated financial statements
reported prior to the merger reflected a year end of May 31 as compared to the
Company's fiscal year end of September 30. As a result, the restated
consolidated balance sheets reflect the combination of the historical balance
sheets of the Company as of September 30 and the historical balance sheets of
Grand Valley as of May 31. The restated consolidated statements of operations
reflect the combination of Grand Valley's annual results of operations through
May 31 and the Company's annual results of operations through September 30.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months or
less to be cash equivalents.
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Cash............................................... $21,277,579 $ 9,272,274
Commodity futures margin accounts.................. 4,689,389 5,756,037
Corporate demand notes............................. 37,620,000 29,930,000
----------- -----------
$63,586,968 $44,958,311
=========== ===========
</TABLE>
The portion of the cash balances in commodity futures margin accounts that
represents the minimum margin requirements for open futures positions is
reported as restricted cash.
(c) Natural Gas, Crude Oil and Petroleum Product Inventories
Inventories, consisting principally of natural gas (including pipeline
imbalances), crude oil and NGLs in pipeline and storage facilities, are recorded
at the lower of cost or market using the average cost method.
16
<PAGE> 17
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Property, Plant and Equipment
Natural gas and crude oil pipelines and natural gas processing facilities
are being depreciated using the straight-line method over a period between
fifteen and twenty-five years. Beginning in April 1992, the Company revised its
estimate of the useful lives of its natural gas processing facilities and its
larger diameter natural gas and crude oil pipelines. This revision resulted in
an increase in net income of approximately $2,000,000 ($.16 per share) for the
fiscal year ended September 30, 1992. Other equipment is depreciated using a
straight-line method over an estimated useful life of three to five years.
Included in the cost of the facilities are the direct salaries and related
overhead for the construction of natural gas and crude oil pipelines and natural
gas processing/fractionation facilities. The amounts capitalized are
approximately $4,316,000, $5,487,000 and $3,897,000 in 1993, 1992 and 1991
respectively.
(e) Goodwill and Other Intangibles
Goodwill and other intangibles include the difference between the cost of
acquiring natural gas gathering, transmission and processing facilities and
amounts assigned to their tangible assets. Such amounts are generally being
amortized on a straight-line basis over fifteen years.
(f) Notes Receivable from Related Parties
During the year ended September 30, 1993, Grand Valley loaned $499,000 to
three officers and one key employee of Grand Valley in connection with the
exercise of certain stock options. The notes bear interest at an annual rate of
nine percent, are due at the earlier of 90 days after termination of employment
or January 15, 1995 and are secured by shares of the Company's common stock
owned by the officers and employee. The notes receivable are included in other
current assets on the accompanying balance sheet at September 30, 1993.
(g) Interest Costs
Interest cost is capitalized during the construction period of the
facilities. The Company incurred interest cost of approximately $13,713,000,
$12,770,000 and $8,961,000 in 1993, 1992 and 1991, respectively, of which
approximately $558,000, $330,000 and $415,000 was capitalized in 1993, 1992 and
1991, respectively.
(h) Earnings Per Common Share
Earnings per common share is computed by dividing net earnings available to
common shares by the weighted average number of common shares outstanding
(14,627,681, 14,111,316 and 12,595,415 for the years ended September 30, 1993,
1992 and 1991, respectively). Outstanding options to purchase common stock did
not have a material dilutive effect on the calculation of earnings per share for
any period presented.
(i) Revenue Recognition
The Company recognizes revenue on the accrual basis for the sale of natural
gas and petroleum products and transportation revenue as natural gas and
petroleum products are delivered.
(j) Hedging Arrangements
The Company manages the risk associated with fluctuations in the price of
natural gas, NGLs and crude oil primarily through futures contracts and energy
swaps. Gains and losses from futures hedging transactions and energy swaps are
recognized in the period the corresponding sales or purchases are recorded.
17
<PAGE> 18
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a Hedge Committee that reviews the Company's hedged
positions on a monthly basis to ensure compliance with the Company's hedging
policies, including the maximum amount of risk to be assumed in conjunction with
such hedging activity. The Company has adopted hedging policies whereby its net
futures positions subject to price risk are not to exceed a net of 100 (1 BCF),
100 (100,000 barrels) and 50 (50,000 barrels) contracts or positions for natural
gas, crude oil and propane, respectively, without the prior approval of the
Hedge Committee.
At September 30, 1993, the Company had 710 natural gas, 627 crude oil and
87 propane futures contracts outstanding, and when offset against long-term
commitments and physical inventory of crude oil, the Company's exposure to the
risk of price fluctuations is reduced to 36, 0 and 0 contracts or positions,
respectively. In addition, the Company is also exposed to credit risk in the
unlikely event the counterparty in all third party agreements were not able to
perform their contractual obligations.
(k) Reclassification
Certain amounts have been reclassified for comparability with the 1993
presentation.
(3) ACQUISITIONS
Centennial
Effective August 12, 1991 Grand Valley acquired all of the outstanding
shares of common stock of Centennial Natural Gas Corporation (Centennial) for
cash and notes totalling approximately $3.9 million. At the acquisition date,
Centennial held interests in four natural gas processing and/or gathering
facilities with aggregate throughput capacity of approximately 35 million cubic
feet per day. In conjunction with the acquisition, Grand Valley entered into
employment agreements with existing employees and consultants of Centennial, and
issued 7,500 shares and granted options to acquire up to an additional 31,500
common shares at an exercise price of $.05 per share to these individuals.
Deferred compensation expense of approximately $1,242,000 was recorded in
connection with the granting of these options. The expense related to the
deferred compensation is being recognized ratably as the employees and
consultants vest in the options and as restrictions lapse through 1995.
Burton Flats
Effective March 1, 1992 Grand Valley acquired for approximately $4.7
million the Burton Flats gas processing plant and associated gathering system
located in New Mexico. This system consists of 51 miles of pipeline and a 15,000
MCF per day natural gas processing facility.
Glenpool
Effective October 1, 1992, the Company purchased for approximately $8.0
million GPM Gas Corporation's Creek natural gas processing plant and associated
low pressure natural gas gathering system (the "Glenpool" system) located in
Creek, Muskogee, Okfuskee, Okmulgee, McIntosh, Tulsa and Wagoner Counties,
Oklahoma. This system consisted of a 25,000 MCF per day natural gas processing
plant and approximately 985 miles of natural gas gathering pipeline connected to
approximately 528 wells.
Osage
Effective December 1, 1992, the Company purchased for approximately $4.0
million, GPM Gas Corporation's Osage natural gas processing plant and associated
low pressure natural gas gathering plant and approximately 905 miles of natural
gas gathering pipeline connected to approximately 290 wells.
18
<PAGE> 19
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Evergreen
In June, 1993, the Company acquired for approximately $2.8 million a
natural gas gathering system located in the San Juan Basin in Rio Arriba County,
New Mexico from Evergreen Resources, Inc. This natural gas gathering system,
which was completed by the Company, consists of approximately 26 miles of
natural gas gathering pipeline delivering coal seam natural gas production into
an interstate pipeline.
Bayou South
In July 1993, the Company completed the purchase for approximately $3.0
million, Bayou South Gas Gathering Company's Haynesville/Dykesville natural gas
gathering assets and related facilities in Arkansas and Louisiana. This system
consisted of approximately 60 miles of natural gas gathering pipeline connected
to approximately 16 wells.
All of the Company's acquisitions have been accounted for using the
purchase method of accounting. Accordingly, the results of operations for each
acquisition have been included with those of the Company since the effective
date of the acquisition.
(4) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1993 1992
----------- -----------
<S> <C> <C>
9.55% Senior notes(a)............................ $ 55,000,000 $ 55,000,000
9.90% Senior notes(a)............................ 45,000,000 45,000,000
12.75% Senior notes(b)........................... 12,000,000 12,000,000
Revolving Credit Agreement(c).................... 45,000,000 25,000,000
Convertible senior subordinated notes(d)......... 10,000,000 --
10% supplemental unsecured promissory notes to
MEGA shareholders.............................. -- 4,830,001
------------ ------------
167,000,000 141,830,001
Less: current portion of long-term debt.......... (4,000,000) (4,830,001)
------------ -----------
$163,000,000 $137,000,000
============ ============
</TABLE>
(a) On May 8, 1991, the Company completed a private placement of $100 million of
senior unsecured notes with institutional investors. The 9.55% notes are payable
in four annual installments of $13,750,000 commencing April 30, 1996. The 9.90%
notes are payable in four annual installments of $11,250,000 commencing April
30, 2000. Interest is payable semi-annually on April 30 and October 31 of each
year.
(b) On December 31, 1985, the Company issued to The Prudential Insurance
Company of America senior notes in the aggregate principal amount of $12,000,000
bearing interest at 12.75% payable semiannually. The principal of the senior
notes is payable in three annual installments of $4,000,000 commencing December
31, 1993.
(c) Effective June 1, 1992, the Company entered into a $100 million Revolving
Credit Agreement ("Agreement") with certain commercial lending institutions and
Continental Bank N.A., as agent. The Agreement is a three-year unsecured
revolving credit facility which converts into a four-year senior unsecured term
loan. Upon conversion to a term loan, the loan is amortized in 16 equal
quarterly payments beginning August 1, 1995 with a maturity date of May 1, 1999.
The outstanding principal under the Agreement bears interest at an applicable
margin above the adjusted Eurodollar Rate or Base Rate (3.87% at September 30,
19
<PAGE> 20
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1993). A non-use fee, currently 3/8 of one percent per annum, is charged on the
unused portion of the Facility. At September 30, 1993, the unused committed
amount under the Agreement was approximately $54.3 million. Subsequent to
September 30, 1993, the Company borrowed $50 million under the Agreement to
finance certain acquisitions. The outstanding balance under the Agreement at
December 7, 1993 was $95 million. The Company's ability to borrow under the
Agreement is subject to certain covenants including covenants regarding tangible
net worth; ratio of consolidated current assets to consolidated current
liabilities; consolidated historical operating cash flow (as defined);
restricted payments (including dividends); permitted indebtedness and liens;
environmental provisions and information requirements. At September 30, 1993,
the Company was in compliance with the terms of its debt agreements.
(d) In December 1992, Grand Valley sold $10 million of convertible senior
subordinated notes in a private placement transaction. The notes bear interest
at a rate of 9% with interest payments due semiannually. Annual principal
payments of $1,250,000 begin on December 15, 1997 and continue through December
15, 2004. The notes are convertible at the option of the purchasers into an
aggregate of 240,964 shares of the Company's common stock. This conversion right
also contains various antidilution provisions, including an adjustment to the
conversion price of the Company's common stock if the Company issues shares at
less than the then current market price.
Grand Valley has a revolving credit agreement with First National Bank of
Boston that provides for a maximum commitment of $15 million. The line of credit
provides working capital funding capacity of $15 million and interim funding
capacity for capital expenditures of $10 million. Loans under the $10 million
commitment bear interest at the bank's base rate plus 3/4 percent. Loans under
the $5 million commitment bear interest at the bank's base rate plus one
percent. The bank's base rate at May 31, 1993 was 6%.
On November 15, 1993, the Company entered into a $20 million Line of Credit
("Line") with Continental Bank, N.A. that is due on March 31, 1994. The Line
bears interest at the Eurodollar Rate plus seven eighths of one percent or the
reference rate. At December 7, 1993, there were no outstanding borrowings under
the Line.
Annual principal payments under the debt agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30:
- -------------------------
<S> <C>
1994......................................................... $ 4,000,000
1995......................................................... 6,812,500
1996......................................................... 29,000,000
1997......................................................... 25,000,000
1998......................................................... 26,250,000
Thereafter................................................... 75,937,500
------------
$167,000,000
============
</TABLE>
(5) INCOME TAXES
Effective October 1, 1992 the Company adopted Financial Accounting Standard
No. 109, "Accounting for Income Taxes" which prescribes the asset and liability
method of accounting for income taxes. Prior to that date, the Company accounted
for income taxes using Financial Accounting Standard No. 96, "Accounting for
Income Taxes." The change from Statement No. 96 to Statement No. 109 had no
income statement impact. Under the asset and liability method, deferred income
taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Under
20
<PAGE> 21
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. The Revenue
Reconciliation Act of 1993, as signed into law on August 10, 1993, increased to
35% the corporate tax rate on income in excess of $10 million. The effect of
this tax increase is included in the reconciliation below.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------------
1993 1992 1991
---------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal...................................... $ 8,882,697 $ 4,675,227 $3,908,545
State........................................ 768,029 409,679 486,541
----------- ----------- ----------
Total current........................ 9,650,726 5,084,906 4,395,086
----------- ----------- ----------
Deferred:
Federal...................................... 4,699,691 3,850,920 3,539,229
State........................................ 1,934,745 1,361,118 (280,583)
----------- ----------- ----------
Total deferred....................... 6,634,436 5,212,038 3,258,646
----------- ----------- ----------
Total income tax expense............. $16,285,162 $10,296,944 $7,653,732
=========== =========== ==========
</TABLE>
Actual tax expense differs from the "expected" tax expense (computed by
applying the U.S. Federal corporate income tax rate of 34% to earnings before
income taxes) as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense................ $13,543,106 $ 8,565,600 $7,240,898
Increase (reduction) in income taxes resulting
from:
State income taxes, net of Federal income tax
benefit................................... 1,493,327 1,168,726 135,932
Increase in corporate tax rate............... 287,045 -- --
Amortization of goodwill and other
intangibles............................... 788,583 703,574 345,997
Other, net................................... 173,101 (140,956) (69,095)
----------- ----------- ----------
$16,285,162 $10,296,944 $7,653,732
=========== =========== ==========
</TABLE>
21
<PAGE> 22
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences between the financial statement carrying amounts and
the tax basis of assets and liabilities that give rise to significant portions
of the deferred tax liability at September 30, 1993 and 1992 relate to the
following:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit carryforward............ $ 13,785,000 $ 6,747,552
Net operating loss carryforward........................ 1,908,042 6,137,581
------------ ------------
Total gross deferred tax assets................ 15,693,042 12,885,133
------------ ------------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation methods................................ (51,779,042) (42,016,133)
Other.................................................. (1,855,306) (2,981,370)
------------ ------------
Total gross deferred tax liabilities........... (53,634,348) (44,997,503)
------------ ------------
Net deferred tax liability..................... $(37,941,306) $(32,112,370)
============ ============
</TABLE>
At September 30, 1993 the Company has a net operating loss carryforward of
approximately $5,006,000 for income tax purposes which is available to offset
future income taxes, if any, through September 30, 2005. The Company also has an
alternative minimum tax credit carryforward of approximately $13,785,000, which
may be carried forward indefinitely.
During the year ended May 31, 1993, Grand Valley realized an income tax
benefit of approximately $2.7 million upon the lapsing of repurchase
restrictions on shares of common stock issued upon the exercise of certain
nonqualified stock options. The benefit has been recorded as a reduction in
income taxes payable and an increase in additional paid-in capital.
(6) LEASES
The Company leases office space, trucks and trailers under non-cancelable
operating leases expiring at various dates through 2003. Future minimum lease
payments under non-cancelable operating leases as of September 30, 1993 are
approximately:
<TABLE>
<S> <C>
1994............................................................. $3,159,592
1995............................................................. 2,625,825
1996............................................................. 2,167,315
1997............................................................. 1,800,009
1998............................................................. 1,424,000
Thereafter....................................................... 2,014,000
</TABLE>
Total rental expense for operating leases in 1993, 1992, and 1991 was
approximately $3,518,000, $3,447,000 and $3,566,000 respectively.
(7) EQUITY INCENTIVE PLAN
On February 14, 1991 the Company adopted the Equity Incentive Plan
("Incentive Plan"). The Incentive Plan empowers the Company from time-to-time
during a period of ten years to grant to officers and other managerial,
administrative or professional employees of the Company awards of restricted
stock, stock options, stock appreciation rights, performance shares and
performance units or any combination thereof.
22
<PAGE> 23
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Incentive Plan provides for an initial authorization of 925,000 shares
of common stock for issuance thereunder, plus an additional authorization of
one-half percent of the outstanding shares of common stock as of each succeeding
annual anniversary of the effective date of the Incentive Plan, to be divided
among the various Incentive Plan components as the Company shall determine,
except that a maximum of 500,000 shares shall be cumulatively available for
grant as incentive stock options (tax qualified options) during the life of the
Incentive Plan. Any unused portion of the shares added each anniversary date
shall be carried forward for grant and issuance in subsequent plan years and up
to one hundred percent of the subsequent year's added shares (based upon the
current plan year's allocation) may be borrowed for use in the current plan
year. Such maximum numbers as applied to the various components of the Incentive
Plan are subject to appropriate adjustment in the event of a reorganization,
stock split, stock dividend, combination of shares, merger, consolidation, or
other recapitalization of the Company.
The Company also has a non-qualified stock option plan for directors that
authorizes the issuance of up to 50,000 shares of common stock.
The following is a summary of activity under the Company's previous
non-qualified stock option plan, the directors plan, and the current Equity
Incentive Plan for the year ended September 30, 1993:
<TABLE>
<CAPTION>
OPTION BEGINNING FORFEITED/ END
GRANT DATE PRICE OF YEAR GRANTED EXERCISED OF YEAR EXERCISABLE
------------------------- ------- --------- ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Various dates in 1987.... $11.00 3,000 -- (3,000) -- --
February 17, 1989........ 9.75 4,050 -- (3,750) 300 300
July 5, 1989............. 16.00 104,300 -- (98,800) 5,500 5,500
March 9, 1990............ 19.125 25,000 -- -- 25,000 25,000
February 15, 1991........ 21.00 10,000 -- -- 10,000 10,000
March 22, 1991........... 23.00 300,750 -- (34,949) 265,801 114,176
March 9, 1992............ 19.00 308,700 -- (23,175) 285,525 45,225
May 1, 1993.............. 33.875 -- 10,000 -- 10,000 --
June 15, 1993............ 32.875 -- 249,900 -- 249,900 --
------- ------- -------- ------- -------
755,800 259,900 (163,674) 852,026 200,201
======= ======= ======== ======= =======
</TABLE>
All options, except for the March 22, 1991, March 9, 1992, May 1, 1993 and
June 15, 1993 options, vest at the date of grant and are exercisable over a
five-year period. The March 22, 1991, March 9, 1992, May 1, 1993 and June 15,
1993 options vest 25% per year and are exercisable over a 10 year period. Any
options which remain unexercised at the end of the option period expire. During
the years ended September 30, 1993, 1992 and 1991, options for 155,674, 26,775
and 221,700 shares, respectively, were exercised at prices from $5.53 to $23.00.
Proceeds from the exercise of stock options and related income tax benefits have
been credited to stockholders' equity.
23
<PAGE> 24
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1992, Grand Valley adopted its 1992 Stock Option Plan and granted
certain options under the plan. Prior to 1992, Grand Valley had granted
nonincentive stock options to officers, directors, key employees and
consultants. A summary of stock options granted by Grand Valley is as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE RANGE
--------- ----------------
<S> <C> <C>
Options outstanding at May 31, 1990...................... 267,000 $.05 to $4.00
Granted................................................ 55,000 $.05 to $4.48
Exercised.............................................. (70,250) $.05 to $4.00
Cancelled.............................................. (20,000) $0.80
-------
Options outstanding at May 31, 1991...................... 231,750 $.05 to $4.48
Granted................................................ 34,500 $.052 to $34.52
Exercised.............................................. (224,000) $.05 to $4.48
--------
Options outstanding at May 31, 1992...................... 42,250 $.052 to $34.52
Granted................................................ 4,200 $34.00 to $34.52
Exercised.............................................. (21,531) $.052 to $27.52
Cancelled.............................................. (219) $27.52
-------
Options outstanding at May 31, 1993...................... 24,700 $.052 to $34.52
=======
</TABLE>
As of May 31, 1993 options granted by Grand Valley to purchase 3,725 shares
were exercisable. During the years ended May 31, 1993, 1992 and 1991, options
for 21,531, 224,000 and 70,250 shares, respectively, were exercised at prices
ranging from $.05 to $27.52.
Grand Valley agreed to issue up to 11,250 shares of common stock as
incentive stock awards to certain employees in connection with certain asset
acquisitions. The shares were issued in part upon acquisition of the assets and
the remaining shares were to be issued when the assets acquired achieved payout.
As of May 31, 1993, 1,611 shares had been issued.
(8) EMPLOYEE RETIREMENT PLAN
Effective January 1986, the Company established an employee retirement plan
(the Plan) covering substantially all of its employees. The Plan is a defined
contribution plan intended to qualify under Internal Revenue Code Section
401(k), and has been approved by the Internal Revenue Service. Under the Plan,
the Company may match employee contributions with such matching being reviewed
and determined annually by the Company's Benefits Committee of the Board of
Directors. Total retirement plan expense for 1993, 1992, and 1991 was $439,000,
$368,000 and $295,000, respectively.
Grand Valley sponsored a Simplified Employee Pension Plan (the "SEP").
Employees of Grand Valley who have completed nine months of service were
eligible to participate in the SEP. The SEP provided for contributions equal to
three percent of income before taxes and bonuses. During the years ended May 31,
1993, 1992 and 1991, Grand Valley made contributions of $187,013, $178,094 and
$141,614, respectively, to the SEP.
24
<PAGE> 25
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
1993
Operating revenue................ $458,314 $410,486 $447,527 $472,523
Income from operations........... 15,297 14,396 10,468 11,739
Net earnings..................... 7,291 6,703 4,678 4,876
Earnings per common share........ $ .50 $ .46 $ .32 $ .33
1992:
Operating revenue................ $283,490 $275,041 $286,617 $279,887
Income from operations........... 9,799 9,464 8,538 8,225
Net earnings..................... 4,013 3,928 3,644 3,311
Earnings per common share........ $ .30 $ .27 $ .25 $ .24
</TABLE>
25
<PAGE> 26
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1994 1993
------------ -------------
ASSETS (Restated Note 3)
<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted
cash in margin accounts of $12,492,308 and $4,441,301 $ 70,106,396 63,586,968
Accounts receivable, net of allowance 187,531,730 185,844,633
Natural gas, crude oil and petroleum product inventories 22,638,414 26,994,076
Notes receivable 1,667,491 4,227,258
Income taxes receivable 1,515,774 2,138,511
Other 3,721,229 719,601
------------ -----------
Total current assets 287,181,034 283,511,047
------------ -----------
Property, plant, and equipment, at cost:
Natural gas processing facilities 103,347,025 88,046,503
Natural gas and crude oil pipelines 423,056,305 324,031,220
Construction in progress 13,889,665 17,335,314
Other equipment 23,264,523 17,791,890
------------ -----------
563,557,518 447,204,927
Less accumulated depreciation 114,529,213 93,772,409
------------ -----------
Total property, plant and equipment, net 449,028,305 353,432,518
Other assets:
Goodwill, net of applicable amortization of
$7,337,818 and $5,542,244, respectively 27,990,852 29,786,426
Gas contracts and other intangibles, net of applicable
amortization of $882,002 and $156,250, respectively 8,758,309 1,118,750
Other 6,662,613 7,732,568
------------ -----------
Total other assets 43,411,774 38,637,744
------------ -----------
$779,621,113 675,581,309
============ ===========
</TABLE>
(Continued)
26
<PAGE> 27
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION> June 30, September 30,
Liabilities and Stockholders' Equity 1994 1993
------------------------------------ ---- ----
(Restated Note 3)
<S> <C> <S>
Current liabilities:
Accounts payable:
Trade $194,808,864 220,759,278
Other 4,534,129 4,180,579
------------ -----------
199,342,993 224,939,857
Outstanding checks in excess of bank balances 50,310,188 26,697,341
Accrued interest expense 2,774,767 4,802,292
Dividends payable 404,219 394,607
Current portion of long-term debt (note 6) 4,133,000 4,000,000
------------ -----------
Total current liabilities 256,965,167 260,834,097
------------ -----------
Deferred income taxes 42,292,327 37,941,306
Long-term debt (note 6) 239,130,000 163,000,000
Other long-term liabilities 1,022,724 --
------------ -----------
Total liabilities 539,410,218 461,775,403
------------ -----------
Stockholders' equity (note 5):
Common stock, $.05 par value. Authorized 40,000,000 shares;
issued and outstanding 15,111,425 and 14,723,406 shares,
respectively 755,572 1,472,340
Additional paid-in capital 168,896,463 155,083,952
Unamortized restricted stock compensation award (1,186,740) (1,193,149)
Retained earnings 71,745,600 58,442,763
------------ -----------
Total stockholders' equity 240,210,895 213,805,906
------------ -----------
$779,621,113 675,581,309
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ----------------------------
1994 1993 1994 1993
---- ---- ---- ----
(Restated Note 3) (Restated Note 3)
<S> <C> <C> <C> <C>
Operating revenue:
Natural gas and petroleum
products sales $535,563,717 442,212,379 1,583,378,746 1,299,505,262
Transportation 7,165,354 3,303,727 19,117,090 10,747,921
Other 2,210,288 2,074,287 9,586,210 6,128,735
------------ ----------- ------------- -------------
544,939,359 447,590,393 1,612,082,046 1,316,381,918
------------ ----------- ------------- -------------
Operating expenses:
Natural gas and
petroleum products
purchases 509,667,541 416,465,748 1,496,154,971 1,216,251,018
Operations 11,160,758 8,943,297 33,030,125 25,925,693
General and administrative 8,355,648 5,504,737 22,345,456 16,516,768
Depreciation and
amortization 7,973,911 6,018,215 22,792,937 17,424,918
------------ ----------- ------------- -------------
537,157,858 436,931,997 1,574,323,489 1,276,118,397
------------ ----------- ------------- -------------
Income from operations 7,781,501 10,658,396 37,758,557 40,263,521
Other income (expense):
Interest expense (4,390,352) (3,314,165) (12,212,522) (10,061,019)
Interest income 361,983 344,543 887,442 909,034
Other, net 41,164 (43,964) 59,903 (141,750)
------------ ---------- ------------- -------------
(3,987,205) (3,013,586) (11,265,177) (9,293,735)
------------ ---------- ------------- -------------
Earnings before income
taxes 3,794,296 7,644,810 26,493,380 30,969,786
Provision for income taxes
expense:
Current 1,392,682 1,959,073 7,143,365 8,573,831
Deferred 828,226 1,007,277 4,537,611 3,723,980
------------ ---------- ------------- -------------
2,220,908 2,966,350 11,680,976 12,297,811
------------ ---------- ------------- -------------
Net earnings $ 1,573,388 4,678,460 14,812,404 18,671,975
============ ========== ============= =============
Net earnings per common
share $.10 .32 .99 1.28
==== === === ====
Weighted average common
shares outstanding
(note 7) 15,079,857 14,615,658 15,014,860 14,594,943
============ ========== ============= =============
Common stock dividends
(note 5) $.03 .03 .08 .08
==== === === ====
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Restated Note 3)
(Unaudited)
<TABLE>
<CAPTION>
Unamortized
Additional restricted stock Total
Common paid-in Retained compensation stockholders'
stock capital earnings award equity
------ ---------- -------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1992 $1,458,753 150,373,739 36,461,562 (2,008,379) 186,285,675
Grant of 462 shares of compensatory
stock 46 17,029 -- -- 17,075
Issuance of 16,980 shares of restricted
common stock, net of forfeitures 1,698 522,064 -- (523,762) --
Amortization of restricted stock awards -- -- -- 1,338,992 1,338,992
Exercise of stock options to purchase
177,205 shares of common stock 17,720 3,571,949 -- -- 3,589,669
Purchase and retirement of 58,775
shares of common stock (5,877) (2,112,843) -- -- (2,118,720)
Tax benefit from nonqualified stock
options (Note 5) -- 2,712,014 -- -- 2,712,014
Dividends declared on common stock -- -- (1,566,298) -- (1,566,298)
Net earnings -- -- 23,547,499 -- 23,547,499
---------- ----------- ---------- ---------- -----------
Balance, September 30, 1993 $1,472,340 155,083,952 58,442,763 (1,193,149) 213,805,906
Issuance of 264,089 shares of common
stock related to acquisition 26,409 9,987,582 -- -- 10,013,991
Issuance of 38,506 shares of restricted
common stock, net of forfeitures 1,926 1,322,867 -- (1,324,793) --
Amortization of restricted stock awards -- -- -- 1,331,202 1,331,202
Exercise of stock options to purchase
85,424 shares of common stock 4,337 1,752,622 -- -- 1,756,959
Adjustment of par value (note 5) (749,440) 749,440 -- -- --
Adjustment for Grand Valley
Merger (Note 3) -- -- (299,283) -- (299,283)
Dividends declared on common stock -- -- (1,210,284) -- (1,210,284)
Net earnings -- -- 14,812,404 -- 14,812,404
---------- ----------- ---------- ---------- -----------
Balance, June 30, 1994 $ 755,572 168,896,463 71,745,600 (1,186,740) 240,210,895
========== =========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1994 and 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
------------ ------------
(Restated Note 3)
<S> <C> <C>
Net cash provided by operating activities $ 16,639,123 53,305,488
------------- ------------
Cash flows from investing activities:
Capital expenditures for property, plant and equipment (100,057,673) (52,793,281)
Capital expenditures for gas contracts and
other intangibles (8,365,311) --
Notes receivable, net 1,059,766 10,214
Proceeds from disposition of assets 167,025 273,358
Increases in other assets, net (2,962,799) (2,529,396)
------------- ------------
Net cash used by investing activities (110,158,992) (55,039,105)
------------- ------------
Cash flows from financing activities:
Borrowings 130,000,000 36,482,649
Repayments of debt (54,000,000) (16,209,000)
Deferred financing costs (251,734) --
Net proceeds from issuance of common stock 1,878,856 919,656
Purchase of treasury stock -- (2,118,720)
Dividends paid (1,200,672) (1,169,890)
Increase in outstanding checks in excess of bank balances 23,612,847 12,869,689
------------- ------------
Net cash provided by financing activities 100,039,297 30,774,384
------------- ------------
Net increase in cash and cash equivalents 6,519,428 29,040,767
Cash and cash equivalents, beginning of period 63,586,968 40,806,440
------------- ------------
Cash and cash equivalents, end of period $ 70,106,396 69,847,207
============= ============
</TABLE>
(continued on following page)
30
<PAGE> 31
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1994 and 1993
(Unaudited)
(continued from previous page)
<TABLE>
<CAPTION>
1994 1993
---- ----
(Restated Note 3)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for:
Interest, net of amount capitalized $14,240,047 12,465,405
=========== ==========
Income taxes $ 6,377,725 4,955,932
=========== ==========
Supplemental schedule of noncash investing and financing activities:
Accrued common stock dividends $ 404,219 391,244
=========== ==========
Issuance of common stock pursuant to purchase of assets
from Endevco $10,013,991 --
=========== ==========
Tax effect of stock option compensation $ 174,000 210,000
=========== ==========
Assumed obligations for purchases of joint venture interests $ 894,076 --
=========== ==========
Note payable issued for acquisition of assets $ 263,000 --
=========== ==========
Conversion of note receivable into property, plant and
equipment $ 1,500,000 --
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1994
(Unaudited)
(1) Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary to reflect a
fair presentation of the financial position and results of operations of
Associated Natural Gas Corporation and Subsidiaries (the Company) for the
interim periods presented. All adjustments, in the opinion of management, are
of a normal recurring nature.
Certain amounts have been reclassified for comparability with the 1994
presentation.
(2) Nature of Business
The Company is engaged in the business of purchasing, gathering,
transporting, processing and marketing natural gas, natural gas liquids (NGLs)
and crude oil to industrial end users, local distribution companies, liquid
petroleum gas wholesalers and retailers and refiners. The Company currently
owns and operates a significant complex of crude oil, NGLs and natural gas
gathering, processing/fractionation and transportation facilities situated in
major oil and natural gas-producing basins in the Rocky Mountain, Mid Continent
and Gulf Coast Regions of the United States.
(3) Merger with Grand Valley Gas Company
On June 30, 1994, the Company filed Articles of Merger, to be effective
July 1, 1994, in connection with the Merger between its wholly-owned subidiary,
Associated Natural Gas, Inc. (ANGI) and Grand Valley Gas Company (Grand
Valley), with ANGI as the surviving entity. The acquisition has been accounted
for under the pooling of interests method and, accordingly, the Company's
consolidated financial statements have been restated to include the accounts of
Grand Valley for all periods presented. Grand Valley is a natural gas marketing
company with sales principally in the Pacific Northwest, Rocky Mountains,
Western Canada and California regions. Under the terms of the merger, the
Company exchanged 1,637,467 shares of its common stock for 100% of Grand
Valley's outstanding common stock.
Grand Valley's consolidated financial statements reported prior to the
merger reflected a year end of May 31 as compared to the Company's fiscal year
end of September 30. As a result, the consolidated statements of operations
reflect the combination of Grand Valley's and the Company's quarterly results
through May 31, and June 30, 1994 and 1993, respectively. Consequently, Grand
Valley's separate results of operations for the month of June 1994 and for the
three months ended August 31, 1993 are not reflected in the consolidated
statements of operations and have been charged directly to retained earnings as
of June 30, 1994. Grand Valley's net revenues, operating loss, and net loss
were approximately $104,683,000, ($264,000) and ($299,000), respectively, for
these four months.
32
<PAGE> 33
The table below sets forth the composition of unaudited combined net
revenues and net earnings (loss) for the pre-merger periods and combines the
Company's results of operations for the quarters ended December, March and June
with Grand Valley's results of operations for the quarters ended November,
February and May for the fiscal periods presented.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
December 31, March 31, June 30,
<S> <C> <C> <C>
Fiscal 1994:
Net revenues:
ANGC $425,247,330 444,745,496 439,133,167
Grand Valley 87,856,182 109,293,679 105,806,192
------------ ----------- -----------
$513,103,512 554,039,175 544,939,359
============ =========== ===========
Net earnings (loss):
ANGC $ 5,196,189 5,860,944 2,139,333
Grand Valley 855,504 1,326,379 (565,945)
------------ ----------- -----------
$ 6,051,693 7,187,323 1,573,388
============ =========== ===========
Fiscal 1993:
Net revenues:
ANGC $364,409,016 327,116,437 369,035,354
Grand Valley 93,706,427 83,559,645 78,555,039
------------ ----------- -----------
$458,115,443 410,676,082 447,590,393
============ =========== ===========
Net earnings:
ANGC $ 6,173,320 5,593,362 4,505,552
Grand Valley 1,117,607 1,109,226 172,908
------------ ----------- -----------
$ 7,290,927 6,702,588 4,678,460
============ =========== ===========
</TABLE>
(4) Acquisitions
Effective November 1, 1993, the Company purchased four natural gas
gathering/transportation pipeline systems and certain contractual gas storage
rights from the former noteholders of Endevco, Inc. (Endevco) pursuant to
Endevco's Plan of Reorganization. The total purchase price consisted of
approximately $20.5 million in cash and 264,089 shares of the Company's common
stock. The acquisition included the 465 mile Mississippi Fuels intrastate gas
transportation system; the 63 mile Ada gas gathering system in Louisiana; the 7
mile Chalybeat Springs gas transportation system in Louisiana and Arkansas; the
12 mile Leaf River gas transportation system in Mississippi and storage rights
for up to 300,000 MMBTU in the Hattiesburg gas storage facility in Mississippi.
The Company transferred the assets of the Mississippi Fuels gas transportation
system to AIM Pipeline Company, a wholly-owned subsidiary of Associated Natural
Gas Corporation.
On November 9, 1993, the Company acquired from Dynamic Energy Resources,
Inc. (Dynamic) the right, title and interest in a Gas Sale and Purchase
Agreement and related transportation rights by and between Dynamic and Oklahoma
Natural Gas Company. In addition, the Company and Dynamic entered into a gas
purchase and processing agreement whereby the Company processes Dynamic's gas,
through the Company's Milfay and/or Glenpool natural gas processing plants,
pursuant to a percentage-of-proceeds contract.
33
<PAGE> 34
On November 12, 1993, the Company, through its wholly-owned subsidiary
ATTCO NGL Pipeline Company, purchased for $22.5 million cash all of the
outstanding common stock of Dean Pipeline Company (Dean), an indirect wholly
owned subsidiary of Tenneco, Inc. The assets of Dean consist of approximately
264 miles of mainline NGLs transportation pipeline with approximately 54 miles
of supply laterals traversing the Gulf Coast of Texas. The pipeline has a
throughput capacity of 21,000 barrels per day and interconnects with
underground storage and fractionation facilities in Mont Belvieu, Texas. Dean
has been merged into ATTCO NGL Pipeline Company.
Effective December 1, 1993, the Company purchased JN Exploration and
Production Limited Partnership's natural gas gathering/transportation system
located in Mississippi. This system consists of approximately 49 miles of
natural gas gathering pipeline connected to approximatley 19 wells and is
interconnected with the Company's AIM Pipeline gas transportation system
acquired from Endevco.
Effective February 1, 1994, the Company, through its wholly-owned
subsidiary ATTCO Pipeline Company, purchased Shell Pipeline Corporation's
Hope-Houston crude oil pipeline system in south Texas. This system consists of
approximately 165 miles of crude oil gathering and trunkline pipeline with an
interconnection to an Exxon pipeline. This pipeline moves approximately 9,000
barrels a day of crude oil through this system at its published tariff.
Effective March 1, 1994, the Company, through its wholly-owned subsidiary
Associated Louisiana Intrastate Pipeline Company, purchased from Gulf States
Pipeline Corporation the remaining outside owned 50% interest in the
Minden/Terryville natural gas pipeline system located in Louisiana. This system
is a 42 mile transmission pipeline with a throughput capacity of approximately
75,000 MCF per day that delivers residue gas from the tailgate of the Company's
Minden, Louisiana natural gas processing plant to two interstate and one
intrastate natural gas pipelines.
(5) Stock Transactions
On November 1, 1993, the Company issued 264,089 shares of common stock (at
a price of $37.919) as partial consideration for the acquisition of four
natural gas gathering/transportation systems from the former noteholders of
Endevco. On February 15, 1994, the Company granted 28,895 shares of four-year
vesting restricted common stock to key employees. Such shares on the date of
grant had a value of $36.25 per share.
During the nine months ended June 30, 1994 and 1993, the Company received
$540,304 and $892,505 respectively, under option agreements with employees for
the acquisition of 28,024 and 43,574 shares, respectively, of common stock at
various prices. On June 7, 1994, the Company declared a $.03 per share cash
dividend on its common stock payable on July 15, 1994 to the common
shareholders of record on June 30, 1994.
At the Company's annual stockholders' meeting, held February 10, 1994, the
stockholders approved a proposal for the Company to increase the number of
authorized shares of common stock from 20 to 40 million and to reduce the par
value from $.10 to $.05 per share.
34
<PAGE> 35
(6) Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1994 1993
------ ------
<S> <C> <C>
9.55% senior notes (a) $ 55,000,000 55,000,000
9.90% senior notes (a) 45,000,000 45,000,000
12.75% senior notes (b) 8,000,000 12,000,000
Revolving Credit Agreement (c) 85,000,000 45,000,000
6.30% senior unsecured notes (d) 40,000,000 --
Convertible senior subordinated notes (e) 10,000,000 10,000,000
Other 263,000 --
------------ -----------
243,263,000 167,000,000
Less: current portion of long-term debt (4,133,000) (4,000,000)
------------ -----------
$239,130,000 163,000,000
============ ===========
</TABLE>
(a) On May 8, 1991, the Company completed a private placement of $100
million of senior unsecured notes with institutional investors. The 9.55% notes
are payable in four annual installments of $13,750,000 commencing April 30,
1996. The 9.90% notes are payable in four annual installments of $11,250,000
commencing April 30, 2000. Interest is payable semi-annually on April 30 and
October 31 of each year.
(b) On December 31, 1985, the Company issued to The Prudential Insurance
Company of America senior notes in the aggregate principal amount of $12,000,000
bearing interest at 12.75% payable semiannually. The senior notes are unsecured
and are payable in three annual installments of $4,000,000 which commenced
December 31, 1993.
(c) On January 13, 1994 the Company closed on an amendment effective
December 31, 1993 to its Revolving Credit Agreement (Revolver) dated June 1,
1992 with certain commercial lending institutions and Continental Bank N.A., as
agent. The amendment expanded the committed amount of the Revolver from $100
million to $150 million subject to certain limitations based upon the total
debt of the Company. The Revolver will become a three-year unsecured term loan,
with quarterly principal payments equal to one twelfth of the balance
outstanding on May 1, 1996, due commencing on August 1, 1996 with a maturity
date of May 1, 1999. The outstanding principal under the facility and term loan
bears interest at the Revolver's applicable margin, currently .625%, above the
adjusted Eurodollar (LIBOR) Rate or at Base (Prime) Rate. The 30 day LIBOR rate
and Prime rate were 4.5625% and 7.25% at June 30, 1994, respectively. A non-use
fee, currently 1/4 of one percent per annum, is charged on the unused portion of
the facility. The Revolver contains certain covenants, including covenants
regarding net worth; current ratio; fixed charge coverage ratio; dividends;
loans, advances and investments; permitted indebtedness; environmental
provisions and information requirements. At June 30, 1994, the Company was in
compliance with the terms of its debt agreements.
(d) On April 5, 1994, the Company closed on the sale of $40,000,000 of its
senior unsecured notes to Connecticut General Life Insurance Company. The notes
were sold at par, bear interest at the rate of 6.30% per annum and mature at
various dates beginning April 15, 1999 and ending April 15, 2003. The notes are
unsecured and contain certain terms and conditions which are substantially
equivalent to those in the Company's existing long-term indebtedness. Proceeds
from these notes were used by the Company to reduce its outstanding indebtedness
under its Revolver.
(e) In December 1992, ANGI's wholly-owned subsidiary, Grand Valley,
sold $10 million of convertible senior subordinated notes in a private placement
transaction. The notes as amended and assumed as part of the
35
<PAGE> 36
merger bear interest at a rate of 9% with interest payments due semiannually.
Annual principal payments of $1,250,000 begin on December 15, 1997 and continue
through December 15, 2004. The notes are convertible at the option of the
purchasers into an aggregate of 240,964 shares of the Company's common stock.
This conversion right also contains various antidilution provisions, including
an adjustment to the conversion price of the Company's common stock if the
Company issues shares at less than the then current market price.
On February 10, 1994 the Company entered into a $20 million Line of Credit
with Continental Bank, N.A. which expires on December 30, 1994. Interest on
borrowings is based on a quoted rate furnished by the bank for daily periods of
up to one week. The Company utilizes this facility for its intra-month working
capital needs.
The Company through its wholly-owned subsidiary, Grand Valley, has a
revolving credit agreement with First National Bank of Boston that provides for
a maximum commitment of $20 million. The line of credit provides working
capital funding capacity of $15 million and interim funding capacity for capital
expenditures of $5 million. Loans under the $15 million commitment bear
interest at the bank's base rate plus 3/4 percent. Loans under the $5 million
commitment bear interest at the bank's base rate plus one percent. The bank's
base rate at June 30, 1994 was 7.25% percent.
(7) Earnings Per Common Share
Earnings per common share is computed by dividing net earnings available
to common shares by the weighted average number of common shares outstanding.
The outstanding options to purchase common stock and the convertible senior
subordinated notes did not have a material dilutive effect on the calculation
of earnings per share for any period presented.
(8) Seasonality
The Company experiences significant seasonal changes in volumes, prices
and certain expenses; therefore, the results of operations for the three and
nine month periods ended June 30, 1994 and 1993 are not necessarily indicative
of the results to be expected for the full year.
36
<PAGE> 37
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Exhibits --
<TABLE>
<S> <C>
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Arthur Andersen LLP
99 Report of Arthur Andersen LLP
</TABLE>
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements 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.
PANHANDLE EASTERN CORPORATION
By: /s/ PAUL F. FERGUSON, JR.
------------------------------------
Paul F. Ferguson, Jr.
Vice President, Finance and
Accounting, and Treasurer
Date: November 14, 1994
38
<PAGE> 39
Index to Exhibits
<TABLE>
<S> <C>
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Arthur Andersen LLP
99 Report of Arthur Andersen LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Associated Natural Gas Corporation:
We consent to incorporation by reference in the registration statements
listed below of Panhandle Eastern Corporation of our report dated July 1, 1994
on the supplemental consolidated balance sheets of Associated Natural Gas
Corporation as of September 30, 1993 and 1992, and the related supplemental
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended September 30, 1993, which
report appears in Panhandle Eastern Corporation's Current Report on Form 8-K
dated November 14, 1994. The supplemental consolidated financial statements
give retroactive effect to the merger with Grand Valley Gas Company effective
July 1, 1994. Our opinion on the supplemental consolidated financial statements
is based in part on the report of other auditors. We also consent to the
reference to our firm under the heading "Experts" in the prospectus for the
Form S-3 Registration Statement (No. 33-56337).
1. Form S-8 Registration Statements for the following:
(A) 1989 Nonemployee Directors Stock Option Plan (No. 33-28912)
(B) 1977 Non-Qualified Stock Option Plan (No. 2-61225)
(C) 1982 Key Employee Stock Option Plan (No. 2-79180)
(D) Special Recognition Bonus Plan (No. 33-35253)
(E) 1990 Long Term Incentive Plan (No. 33-35251)
(F) Employees' Savings Plan (No. 33-36698)
(G) Employees' Savings Plan (No. 33-41079)
(H) 1994 Long Term Incentive Plan (No. 33-55119)
2. Form S-3 Registration Statements for the following:
(A) Dividend Reinvestment and Stock Purchase Plan (No. 33-28914)
(B) Debt Securities (No. 33-56337)
3. Form S-4 Registration Statement (No. 33-56113)
/s/ KPMG PEAT MARWICK LLP
--------------------------
KPMG Peat Marwick LLP
Denver, Colorado
November 11, 1994
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in the registration statements listed below of Panhandle Eastern
Corporation of our report dated July 30, 1993 with respect to the consolidated
balance sheets of Grand Valley Gas Company and Subsidiaries as of May 31, 1993
and 1992, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended May 31,
1993, which report appears in Panhandle Eastern Corporation's Current Report on
Form 8-K dated November 14, 1994. The financial statements are not presented
separately in Panhandle Eastern Corporation's Current Report on Form 8-K. We
also consent to all references to our Firm included in the Registration
Statement on Form S-3 (No. 33-56337).
Form S-8 Registration Statements for the following:
(1) 1989 Nonemployee Directors Stock Option Plan (No. 33-28912)
(2) 1977 Non-Qualified Stock Option Plan (No. 2-61225)
(3) 1982 Key Employee Stock Option Plan (No. 2-79180)
(4) Special Recognition Bonus Plan (No. 33-35253)
(5) 1990 Long Term Incentive Plan (No. 33-35251)
(6) Employees' Savings Plan (No. 33-36698)
(7) Employees' Savings Plan (No. 33-41079)
(8) 1994 Long Term Incentive Plan (No. 33-55119)
Form S-3 Registration Statements for the following:
(1) Dividend Reinvestment and Stock Purchase Plan (No. 33-28914)
(2) Debt Securities (No. 33-56337)
Form S-4 Registration Statement (No. 33-56113)
/s/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Salt Lake City, Utah
November 11, 1994
<PAGE> 1
EXHIBIT 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grand Valley Gas Company and Subsidiaries:
We have audited the consolidated balance sheets of Grand Valley Gas Company
(a Utah corporation) and subsidiaries as of May 31, 1993 and 1992, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended May 31, 1993 (not presented
separately herein). These financial statements are the responsibility of Grand
Valley Gas Company and subsidiaries' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (not presented
separately herein) present fairly, in all material respects, the financial
position of Grand Valley Gas Company and subsidiaries as of May 31, 1993 and
1992, and the results of their operations and their cash flows for each of the
three years in the period ended May 31, 1993 in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Salt Lake City, Utah
July 30, 1993
