<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
-----------------------------------
For the quarter ended March 31, 1994 Commission file number 1-10008
ASSOCIATED NATURAL GAS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1006841
- - ---------------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
370 17TH STREET, SUITE 900
DENVER, COLORADO 80202
- - ---------------------------------------- ------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 595-3331
- - --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding at March 31, 1994
- - ---------------------------- -----------------------------
Common Stock, $.05 par value 13,450,191 shares
================================================================================
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
FORM 10-Q
INDEX
-----
PART ITEM PAGE
- - ---- ---- ----
I. FINANCIAL INFORMATION:
1. Financial Statements:
Consolidated Balance Sheets, March 31, 1994 and
September 30, 1993 (Unaudited).............................. 2
Consolidated Statements of Operations, Three and Six Months
Ended March 31, 1994 and 1993 (Unaudited)................... 4
Consolidated Statements of Cash Flows, Six Months Ended
March 31, 1994 and 1993 (Unaudited)......................... 5
Notes to Consolidated Financial Statements...................... 7
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 11
II. OTHER INFORMATION - Items 1 through 6.............................. 18
1
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
ASSETS 1994 1993
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 53,799,849 44,910,764
Accounts receivable, net of allowance 160,800,486 147,709,668
Natural gas, crude oil and petroleum product inventories 15,304,811 27,312,207
Notes receivable 3,403,193 3,728,258
Income taxes receivable 364,913 1,236,271
Other 714,637 270,108
------------ -----------
Total current assets 234,387,889 225,167,276
------------ -----------
Property, plant, and equipment, at cost:
Natural gas processing facilities 92,740,148 86,531,133
Natural gas and crude oil pipelines 403,971,872 317,771,823
Construction in progress 9,651,527 16,485,662
Other equipment 20,762,268 16,626,726
------------ -----------
527,125,815 437,415,344
Less accumulated depreciation 104,626,457 92,581,123
------------ -----------
Total property, plant and equipment, net 422,499,358 344,834,221
Other assets:
Goodwill, net of applicable amortization of
$6,254,134 and $5,199,878 respectively 25,373,537 26,427,793
Gas contracts and other intangibles, net of
applicable amortization of $369,949 at March 31, 1994 8,645,362 650,000
Other 2,590,122 1,568,241
------------ -----------
Total other assets 36,609,021 28,646,034
------------ -----------
$693,496,268 598,647,531
============ ===========
</TABLE>
2
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
- - ------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Accounts payable:
Trade $183,500,663 171,562,416
Other 3,224,305 3,253,915
------------ -----------
186,724,968 174,816,331
Outstanding checks in excess of bank balances 29,280,542 26,697,341
Accrued interest expense 4,599,779 4,427,292
Dividends payable 403,506 394,607
Current portion of long-term debt (note 5) 4,000,000 4,000,000
------------ -----------
Total current liabilities 225,008,795 210,335,571
------------ -----------
Deferred income taxes 41,382,000 37,956,000
Long-term debt (note 5) 209,000,000 153,000,000
------------ -----------
Total liabilities 475,390,795 401,291,571
------------ -----------
Stockholders' equity (note 4):
Common stock, $.05 par value. Authorized 40,000,000 shares;
issued and outstanding 13,450,191 and 13,153,555 shares,
respectively 672,510 1,315,355
Additional paid-in capital 163,488,177 151,578,087
Unamortized restricted stock compensation award (1,317,468) (548,668)
Retained earnings 55,262,254 45,011,186
------------ -----------
Total stockholders' equity 218,105,473 197,355,960
------------ -----------
$693,496,268 598,647,531
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------- -------------------------
1994 1993 1994 1993
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenue:
Natural gas and petroleum products sales $436,392,712 322,469,298 855,157,439 683,050,523
Transportation 4,358,753 2,716,996 7,816,941 5,103,352
Other 3,994,031 1,930,143 7,018,446 3,371,577
------------ ----------- ----------- -----------
444,745,496 327,116,437 869,992,826 691,525,452
------------ ----------- ----------- -----------
Operating expenses:
Natural gas and petroleum products purchases 407,998,256 297,054,057 799,786,999 631,124,009
Operations 10,453,101 8,491,254 20,715,546 16,349,359
General and administrative 5,423,470 3,694,738 9,961,803 7,632,693
Depreciation and amortization 7,093,902 5,422,971 13,558,868 10,613,123
------------ ----------- ----------- -----------
430,968,729 314,663,020 844,023,216 665,719,184
------------ ----------- ----------- -----------
Income from operations 13,776,767 12,453,417 25,969,610 25,806,268
Other income (expense):
Interest expense (3,706,159) (3,268,590) (7,217,930) (6,498,176)
Interest income 150,817 283,892 336,689 439,058
Other, net (481) (228,357) 18,764 (199,471)
------------ ----------- ----------- -----------
(3,555,823) (3,213,055) (6,862,477) (6,258,589)
------------ ----------- ----------- -----------
Earnings before income taxes 10,220,944 9,240,362 19,107,133 19,547,679
Provision for income taxes expense:
Current 2,608,000 2,365,000 4,493,000 4,914,000
Deferred 1,752,000 1,282,000 3,557,000 2,867,000
------------ ----------- ----------- -----------
4,360,000 3,647,000 8,050,000 7,781,000
------------ ----------- ----------- -----------
Net earnings $ 5,860,944 5,593,362 11,057,133 11,766,679
============ =========== =========== ===========
Net earnings per common share $.44 .43 .83 .91
============ =========== =========== ===========
Weighted average common shares
outstanding (Note 6) 13,434,048 12,996,743 13,379,647 12,989,642
============ =========== =========== ===========
Common stock dividends (note 4) $.03 .03 .06 .06
============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 11,057,133 11,766,679
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 13,558,868 10,613,123
Amortization of deferred financing costs 83,805 71,379
Deferred income tax expense 3,557,000 2,867,000
Amortization of restricted stock award 270,703 205,757
Loss (gain) on disposition of assets (18,764) 199,471
------------ -----------
28,508,745 25,723,409
Change in working capital items and other 11,424,531 1,799,838
------------ -----------
Net cash provided by operating activities 39,933,276 27,523,247
------------ -----------
Cash flows from investing activities:
Capital expenditures for property, plant and equipment (79,830,452) (36,578,626)
Capital expenditures for gas contracts and
other intangibles (8,365,311) --
Notes receivable, net 325,065 (592,044)
Proceeds from disposition of assets 63,531 226,860
Changes in other assets (1,105,810) 119,204
------------ -----------
Net cash used by investing activities (88,912,977) (36,824,606)
------------ -----------
Cash flows from financing activities:
Borrowings 74,000,000 17,000,000
Repayments of debt (18,000,000) (15,000,000)
Net proceeds from issuance of common stock 82,751 677,877
Dividends paid (797,166) (778,955)
Increase in outstanding checks in excess of bank balances 2,583,201 3,786,661
------------ -----------
Net cash provided by financing activities 57,868,786 5,685,583
------------ -----------
Net increase (decrease) in cash and cash equivalents 8,889,085 (3,615,776)
Cash and cash equivalents, beginning of period 44,910,764 40,026,549
------------ -----------
Cash and cash equivalents, end of period $ 53,799,849 36,410,773
============ ===========
</TABLE>
(continued on following page)
5
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1994 AND 1993
(UNAUDITED)
(continued from previous page)
<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
Change in working capital items and other:
Increase in accounts receivable $(13,090,818) (14,566,006)
Decrease in natural gas, crude oil and
petroleum product inventories 12,007,396 14,879,575
Decrease in income taxes receivable 871,358 --
Increase in other current assets (444,529) (183,316)
Increase (decrease) in accounts payable 11,908,637 (518,799)
Increase in accrued interest expense 172,487 56,425
Increase in current income tax payable -- 2,131,959
------------ -----------
$ 11,424,531 1,799,838
============ ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest, net of amount capitalized $ 7,045,443 6,441,751
============ ===========
Income taxes $ 3,621,642 2,784,500
============ ===========
Supplemental schedule of noncash investing and financing activities:
Accrued common stock dividends $ 403,506 390,935
============ ===========
Issuance of common stock pursuant to purchase of assets
from Endevco $ 10,013,991 --
============ ===========
Tax effect of stock option compensation $ 131,000 155,000
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(UNAUDITED)
(1) UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements reflect all
adjustments, in the opinion of management, necessary to a fair statement 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) 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 intrastate Mississippi Fuels gas
transportation system; the 63 mile Ada gas gathering system in Bienville and
Webster Parishes, Louisiana; the 7 mile Chalybeat Springs gas transportation
system in Claiborne Parish, Louisiana and Columbia County, Arkansas; the 12 mile
Leaf River gas transportation system in Perry and Forest Counties, 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 will be processing
Dynamic's gas, through the Company's Milfay and/or Glenpool natural gas
processing plants, pursuant to a percentage-of-proceeds contract.
7
<PAGE>
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
current throughput capacity of 21,000 barrels per day and interconnects with
underground storage and fractionation facilities in Mont Belvieu, Texas. Dean
has subsequently been merged with and into ATTCO NGL Pipeline Company, the
surviving entity.
Effective December 1, 1993, the Company purchased JN Exploration and
Production Limited Partnership's natural gas gathering/transportation system
located in Covington, Jefferson Davis, Lawrence and Marion Counties,
Mississippi. This system consisted of approximately 49 miles of natural gas
gathering pipeline connected to approximately 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 Exxon Pipeline. ATTCO Pipeline through this system is
currently moving approximately 9,000 barrels a day of crude oil at its published
tariff.
Effective March 1, 1994, the Company, through its wholly-owned subsidiary
Associated Louisiana Intrastate Pipeline Company (ALIP), purchased from Gulf
States Pipeline Corporation the other 50% interest, that it did not already own,
in the Minden/Terryville natural gas pipeline system located in Lincoln, Jackson
and Webster Parishes, 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.
On February 21, 1994, the Company announced that it had signed a definitive
agreement to merge with Grand Valley Gas Company ("Grand Valley"), an 11 year
old natural gas marketing company with principal sales regions in the Pacific
Northwest, Rocky Mountains, Western Canada and California. Consummation of the
merger is conditioned on completion of due diligence by both companies, the
approval of Grand Valley's shareholders and approval of all applicable
regulatory authorities. It is anticipated that the merger will be completed and
effective by July 1, 1994. Terms of the agreement call for the exchange of 0.25
shares of the Company's stock for each share of Grand Valley. Approximately 1.6
million shares of the Company's common stock will be issued.
(4) STOCK TRANSACTIONS
On November 1, 1993, the Company issued 264,089 shares of common stock (at
a price of $37.92) 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 restricted stock to key
employees. Such shares were granted at $36.25 per share and vest over a four
year period.
During the six months ended March 31, 1994 and 1993, the Company received
$82,751 and $677,877 respectively, under option agreements with employees for
the acquisition of 33,299 and 3,962 shares, respectively, of common stock at
various prices. On February 10, 1994, the Company declared a $.03 per share cash
dividend on its common stock payable on April 15, 1994 to the common
shareholders of record on March 31, 1994.
8
<PAGE>
At the Company's annual stockholders meeting, held February 10, 1994, the
stockholders approved a proposal 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.
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, 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) 105,000,000 45,000,000
------------ -----------
213,000,000 157,000,000
Less: current portion of long-term debt (4,000,000) (4,000,000)
------------ -----------
$209,000,000 153,000,000
============ ===========
</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) The Company has 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) 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 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 above the adjusted Eurodollar Rate or Base Rate
(4.3% at March 31, 1994). 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 December
31, 1993, the Company was in compliance with the terms of its debt agreements.
On February 10, 1994 the Company entered into a $20 million Line of Credit
("Line") with Continental Bank, N.A. which expires on December 30, 1994.
Interest on borrowings will be based on a quoted rate furnished by the bank for
daily periods of up to one week. The Company utilizes this Line to minimize
swings in its monthly cash cycle and on May 10, 1994, the outstanding balance on
this Line was $7.5 million.
9
<PAGE>
On April 5, 1994, the Company closed on the sale of $40,000,000 of its
senior notes to Connecticut General Life Insurance Company ("CIGNA"). 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 on April 15, 2003. The notes
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.
(6) 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.
Outstanding options to purchase common stock did not have a material dilutive
effect on the calculation of earnings per share for any period presented.
(7) SEASONALITY
The Company experiences significant seasonal changes in volumes, prices and
certain expenses; therefore, the results of operations for the six month periods
ended March 31, 1994 and 1993 are not necessarily indicative of the results to
be expected for the full year.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS & RESULTS
OF OPERATIONS
The following is a discussion of the Company's consolidated financial
condition, results of operations and capital resources. This discussion and
analysis should be read in conjunction with the Company's consolidated financial
statements and the notes thereto included elsewhere in this filing.
RESULTS OF OPERATIONS
Three months ended March 31, 1994 and 1993:
The following tables reflect operating data and average daily natural gas
volumes for the Company for the three months ended March 31, 1994 and 1993:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------- Percent
1994 1993 Increase
---- ---- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Operating revenue $ 444,745 327,116 36.0%
Net operating margin (1) 36,747 30,062 22.2
Earnings before income taxes 10,221 9,240 10.6
Net earnings 5,861 5,593 4.8
Income from operations plus
depreciation and amortization 20,871 17,876 16.8
Earnings per common share $ .44 .43 2.3
</TABLE>
<TABLE>
<CAPTION>
System
Supply Off-System Crude Oil Total
---------- ---------- --------- -------
<S> <C> <C> <C> <C>
1994
Operating revenue $ 130,663 201,709 112,373 444,745
Net operating margin(1) 28,189 4,955 3,603 36,747
Percent 21.6% 2.5% 3.2% 8.3%
1993
Operating revenue $ 102,352 93,225 131,539 327,116
Net operating margin(1) 27,182 808 2,072 30,062
Percent 26.6% 0.9% 1.6% 9.2%
</TABLE>
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------- Percent
1994 1993 Increase
---- ---- ---------
<S> <C> <C> <C>
Natural Gas Volumes (MCF Per Day):
System Supply:
Rocky Mountain Region 141,000 133,000 6.0%
Mid-Continent Region 239,000 225,000 6.2
Gulf Coast Region 447,000 310,000 44.2
--------- ---------
827,000 668,000 23.8
Off-System: 897,000 471,000 90.4
--------- ---------
1,724,000 1,139,000 51.4
========= =========
</TABLE>
(1) Net operating margin is equal to operating revenue, less natural gas and
petroleum products purchases.
11
<PAGE>
For the three months ended March 31, 1994, the Company earned $5.9 million
on total revenue of $445 million, as compared to $5.6 million on total revenue
of $327 million for the three months ended March 31, 1993. Earnings per common
share was $.44 per share for the three months ended March 31, 1994 as compared
to $.43 per share for the three months ended March 31, 1993.
The increase in operating revenue is primarily attributable to higher off-
system natural gas volumes marketed, higher crude oil volumes marketed, higher
natural gas prices and the Company's continued growth in volumes through its
system supply facilities. The average price per MCF received by the Company for
natural gas sold from all of its system supply facilities was $2.31 and $2.03
for the three months ended March 31, 1994 and 1993, respectively. For the three
months ended March 31, 1994, the Company expended approximately $10 million on
new acquisitions and $13 million on new construction, thereby further expanding
its system supply facilities. The increase in operating revenue attributable to
the increase in gas prices and volumes company-wide were offset somewhat by
lower NGLs values which mirrored the worldwide decline in crude oil prices
during the quarter.
The Company's overall net operating margin (as a percentage of operating
revenue) decreased from 9.2% in 1993 to 8.3% in 1994. This decline is
attributable to increases in both the volumes of off-system natural gas and
crude oil being marketed/transported, which generated substantially lower unit
margins. In addition, the growth in system supply volumes (and as a result the
decline in the system supply unit margin from 26.6% to 21.6%) has come from
systems that historically generate lower unit margins than the Company's overall
average. System supply volumes increased approximately 24% in 1994, due to the
acquisition in November 1993 from the Endevco noteholders of the Ada (increase
of 78,000 MCF/D) and AIM Pipeline (69,000 MCF/D) systems and higher natural gas
volumes being processed/transported through the Company's Texas Wilcox (33,000
MCF/D) and Oklahoma Cyril/Hillsboro (18,000 MCF/D) systems.
The Company's crude oil net operating margin (as a percentage of operating
revenue) increased from 1.6% in 1993 to 3.2% in 1994 due to additional
transportation volumes as a result of the Company's acquisition of Shell's south
Texas crude oil system and inventory gains recognized during the quarter.
The Company's off-system net operating margin (as a percentage of operating
revenue) increased from 0.9% in 1993 to 2.5% in 1994 due to the Company's
continued effort to expand its downstream marketing business with an emphasis on
demand premiums being paid by customers for the Company providing firm service
to such customers.
Average daily system supply NGLs processed, fractionated, transported or
marketed increased 67.3% from 22,600 barrels per day for the previous year's
period to 37,800 barrels per day. This increase is attributable to the Company's
Oklahoma Hillsboro plant coming on line in May 1993, the acquisition of Dean
Pipeline and higher NGLs recovered through the Company's Colorado D-J Basin and
Texas Wilcox plants due to higher gas volumes being processed.
12
<PAGE>
NGLs prices were substantially lower for the Company during this period in
relation to the corresponding period in 1993. The following reflects the
Company's weighted average NGLs price per gallon received by the Company at all
its system supply facilities.
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1994 1993
----- -----
<S> <C> <C>
Ethane $.138 .170
Propane .272 .353
Butanes .284 .365
Gasoline .318 .434
Overall weighted average price/gal. .250 .326
</TABLE>
The Company's operations and general and administrative expenses increased
23.1% and 46.8% respectively, due to the Company's continued growth through
construction and acquisitions. Operations and general and administrative
expenses as a percentage of net operating margin increased from 40.5% in 1993 to
43.2% in 1994 as the increase in expenses associated with its expanding
operations more than offset the resulting increase in net operating margin.
Depreciation and amortization expense increased 30.8% due to the Company's
acquisitions and new construction.
The Company's interest expense increased 13.4% due to higher borrowings
under its Revolving Credit Agreement to finance the Endevco and Dean Pipeline
acquisitions, but were offset somewhat by lower interest rates on variable rate
borrowings. For the three months ended March 31, 1994 and 1993, the Company's
effective cost of funds was 7.2% and 8.4%, respectively.
Interest income represents interest earned on the Company's cash and cash
equivalents. The Company endeavors to maximize interest income by utilizing
controlled disbursement checking accounts which allow the Company to temporarily
invest funds relating to outstanding checks in highly rated liquid corporate
demand notes.
The increase in the provision for income taxes as a percentage of earnings
before income taxes is due to the increase in the corporate tax rate to 35%
under the Revenue Reconciliation Act of 1993.
13
<PAGE>
Six months ended March 31, 1994 versus 1993:
The following tables reflect operating data, net operating margin
percentage and average daily natural gas volumes for the Company for the six
months ended March 31, 1994 and 1993:
<TABLE>
<CAPTION>
Six months ended
March 31, Percent
---------------------- Increase
1994 1993 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Operating revenue $869,993 691,525 25.8%
Net operating margin(1) 70,206 60,401 16.2
Earnings before income taxes 19,107 19,548 (2.3)
Net earnings 11,057 11,767 (6.0)
Income from operations plus
depreciation and amortization 39,528 36,419 8.5
Earnings per common share $.83 .91 (8.8)
</TABLE>
<TABLE>
<CAPTION>
System
Supply Off-System Crude Oil Total
---------- ---------- --------- -------
<S> <C> <C> <C> <C>
1994
Operating revenue $243,659 392,216 234,118 869,993
Net operating margin(1) 55,449 8,788 5,969 70,206
Percent 22.8% 2.2% 2.5% 8.1%
1993
Operating revenue $214,410 197,963 279,152 691,525
Net operating margin(1) 53,295 3,259 3,847 60,401
Percent 24.9% 1.6% 1.4% 8.7%
</TABLE>
<TABLE>
<CAPTION>
March 31,
---------------------- Percent
1994 1993 Increase
---- ---- ---------
<S> <C> <C> <C>
Natural Gas Volumes (MCF Per Day):
System Supply:
Rocky Mountain Region 141,000 132,000 6.8%
Mid-Continent Region 242,000 224,000 8.0
Gulf Coast Region 410,000 300,000 36.7
--------- ---------
793,000 656,000 20.9
Off-System: 873,000 439,000 98.9
--------- ---------
1,666,000 1,095,000 52.1
========= =========
</TABLE>
14
<PAGE>
For the six months ended March 31, 1994, the Company earned $11.1 million
on total revenue of $870 million, as compared to $11.8 million on total revenue
of $692 million for the six months ended March 31, 1993. Earnings per common
share was $.83 per share for the six months ended March 31, 1994 as compared to
$.91 per share for the six months ended March 31, 1993.
The increase in operating revenue is primarily attributable to higher off-
system natural gas volumes marketed, higher crude oil volumes marketed, higher
natural gas prices and the Company's continued growth in volumes through its
system supply facilities. The average price per MCF received by the Company for
natural gas sold from all of its system supply facilities was $2.26 and $2.16
for the six months ended March 31, 1994 and 1993, respectively. For the six
months ended March 31, 1994, the Company expended approximately $65 million on
new acquisitions and $25 million on new construction, thereby further expanding
its system supply facilities. The increase in operating revenue attributable to
the increase in gas prices and volumes company-wide were offset somewhat by
lower NGLs values which mirrored the worldwide decline in crude oil prices
during the first two quarters.
The Company's overall net operating margin (as a percentage of operating
revenue) decreased from 8.7% in 1993 to 8.1% in 1994. This decline is
attributable to increases in both the volumes of off-system natural gas and
crude oil being marketed/transported, which generated substantially lower unit
margins. In addition, the growth in system supply volumes (and as a result the
decline in the system supply unit margin from 24.9% to 22.8%) has come from
systems that historically generate lower unit margins than the Company's overall
average. System supply volumes increased approximately 21% in 1994, due to the
acquisition in November 1993 from the Endevco noteholders of the Ada (increase
of 63,000 MCF/D) and AIM Pipeline (54,000 MCF/D) systems and higher natural gas
volumes being processed/transported through the Company's Texas Wilcox (27,000
MCF/D) and Oklahoma Cyril/Hillsboro (25,000 MCF/D) systems.
The Company's crude oil net operating margin (as a percentage of operating
revenue) increased from 1.4% in 1993 to 2.5% in 1994 due to additional
transportation volumes handled as a result of the Company's acquisition of
Shell's south Texas crude oil system and trading inventory gains recognized
during the six month period.
The Company's off-system net operating margin (as a percentage of operating
revenue) increased from 1.6% in 1993 to 2.2% in 1994 due to the Company's
continued effort to expand its downstream marketing business with an emphasis on
demand premiums being paid by customers for the Company providing firm service
to such customers.
Average daily system supply NGLs processed, fractionated, transported or
marketed increased 55.7% from 23,000 barrels per day for the previous year's
period to 35,800 barrels per day. This increase is attributable to the Company's
Oklahoma Hillsboro plant coming on line in May 1993, the acquisition of Dean
Pipeline and higher NGLs recovered through the Company's Colorado D-J Basin and
Texas Wilcox plants due to higher gas volumes being processed.
15
<PAGE>
NGLs prices were substantially lower for the Company during this period in
relation to the corresponding period in 1993. The following reflects the
Company's weighted average NGLs price per gallon received by the Company at all
its system supply facilities.
<TABLE>
<CAPTION>
Six months ended
March 31,
------------------
1994 1993
----- -----
<S> <C> <C>
Ethane $.133 .172
Propane .288 .342
Butanes .295 .368
Gasoline .325 .439
Overall weighted average price/gal. .259 .328
</TABLE>
The Company's operations and general and administrative expenses increased
26.7% and 30.5% respectively, due to the Company's continued growth through
construction and acquisitions. Operations and general and administrative
expenses as a percentage of net operating margin increased from 39.7% in 1993 to
43.7% in 1994 as the increase in expenses associated with its expanding
operations more than offset the resulting increase in net operating margin.
Depreciation and amortization expense increased 27.8% due to the Company's
acquisitions and new construction.
The Company's interest expense increased 11.1% due to higher borrowings
under its Revolving Credit Agreement to finance the Endevco and Dean Pipeline
acquisitions, but were offset somewhat by lower interest rates on variable rate
borrowings. For the six months ended March 31, 1994 and 1993, the Company's
effective cost of funds was 7.4% and 8.7%, respectively.
Interest income represents interest earned on the Company's cash and cash
equivalents. The Company endeavors to maximize interest income by utilizing
controlled disbursement checking accounts which allow the Company to temporarily
invest funds relating to outstanding checks in highly rated liquid corporate
demand notes.
The increase in the provision for income taxes as a percentage of earnings
before income taxes is due to the increase in the corporate tax rate to 35%
under the Revenue Reconciliation Act of 1993.
CAPITAL RESOURCES AND LIQUIDITY
The Company's sources of capital resources and liquidity historically have
been net cash provided by operating activities, proceeds from the offerings of
equity securities, proceeds from debt securities and funds available under its
financing facilities. In the past, these sources have been sufficient to meet
the needs and finance the growth of the Company's business. Net cash provided by
operating activities has been primarily affected by natural gas and NGLs prices,
the Company's success in increasing "system supply" volumes and the margin on
crude oil and "off-system" natural gas purchased for resale. The Company's
continued growth will be dependent upon success in the areas of additions to
dedicated plant reserves, acquisitions, new project development and marketing.
Additional sources of liquidity to the Company are volumes of natural gas,
crude oil and NGLs held in inventory. The Company stores volumes of natural gas,
crude oil and NGLs primarily to assure an adequate
16
<PAGE>
supply for term sales contracts and for resale during periods when prices are
favorable. At March 31, 1994, the Company held in inventory approximately $3.4,
$9.7 and $1.3 million of natural gas, crude oil and NGLs, respectively.
On January 13, 1994 the Company closed on an amendment effective December
31, 1993 to its Revolving Credit Agreement 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 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 Revolver and term loan bears interest at the
Revolver's applicable margin above the adjusted Eurodollar Rate or Base Rate. 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; charge coverage ratio; dividends;
loans, advances and investments; permitted indebtedness; environmental
provisions and information requirements. At March 31, 1994, the Company was in
compliance with the terms of its debt agreements.
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 will be based on a quoted rate furnished by the bank for daily
periods of up to one week. The Company utilizes this Line to minimize swings in
its monthly cash cycle.
On April 5, 1994, the Company closed on the sale of $40 million of its
senior notes to Connecticut General Life Insurance Company ("CIGNA"). 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 on April 15, 2003. The notes
contain certain terms and conditions which are substantially equivalent to those
in the Company's existing long-term indebtedness.
It has been the Company's practice (which it expects to continue) to secure
sources of long-term capital prior to committing to new projects. The Company
intends to borrow additional amounts under its debt agreements, as required, to
fund operations and to construct or acquire new facilities in accordance with
its asset-based business plan. The Company has negotiated its debt financings in
a manner which defers and staggers principal repayments through fiscal 2003.
Management believes the Company's current cash position, future cash provided by
operating activities, borrowing capacity under its debt agreements and its
relations with its institutional lenders and equity investors should enable it
to meet its future capital requirements, although there can be no assurance
regarding the Company's ability to obtain additional capital when needed on
acceptable terms.
17
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See Proxy for Annual Stockholder's Meeting, held February 10, 1994. At the
meeting a proposal to amend Article IV of the Restated Certificate of
Incorporation 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 was voted upon. Of a total of 10,738,561 shares voted, 10,080,023
shares were voted for, 644,769 shares against, and 13,769 shares abstained
in such proposal.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. None.
B. A Form 8-K was filed by the Registrant on January 13, 1994 for an
amendment effective December 31, 1993 to the Revolving Credit Agreement
dated June 1, 1992 with certain commercial lending institutions and
Continental Bank N.A., as agent.
A Form 8-K was filed by the Registrant on February 23, 1994 for the
Company announcing its definitive agreement to merge with Grand Valley
Gas Company.
A Form 8-K was filed by the Registrant on May 6, 1994 for the Company
closing on the sale of $40 million of its senior notes to Connecticut
General Life Insurance Company.
18
<PAGE>
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.
ASSOCIATED NATURAL GAS CORPORATION
----------------------------------
(Registrant)
Date May 12, 1994 By /s/ J. Roger Grace
--------------------------- ________________________________
J. Roger Grace
Treasurer
(Principal Accounting Officer)
19
