<PAGE>
UNITED STATES 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 (Date of earliest event reported):
July 1, 1994
ASSOCIATED NATURAL GAS CORPORATION
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-10381 84-1006841
- - ------------------------------ ------- ----------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File No.) Identification No.)
370 17th Street, Suite 900, Denver, CO 80202
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (303) 595-3331
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On July 1, 1994, Grand Valley Gas Company, a Utah corporation,
merged into Associated Natural Gas, Inc., a Colorado corporation that is a
wholly-owned subsidiary of Associated Natural Gas Corporation. Each share of
Grand Valley Gas Company common stock was converted into the right to receive
.25 shares of common stock of Associated Natural Gas Corporation. The
conversion ratio was negotiated between the two companies. Approximately
1,635,617 shares of common stock of Associated Natural Gas Corporation will be
issued to former shareholders of Grand Valley Gas Company.
As the result of the merger, Associated Natural Gas Corporation has
acquired the business of Grand Valley Gas Company which is primarily marketing
natural gas to industrial end-users and local distribution companies from the
West Coast of the United States and Canada through the Rocky Mountain and
Midwest regions of the United States. Associated Natural Gas Corporation also
acquired the natural gas gathering, processing and storage facilities of
Grand Valley Gas Company. The executive officers of Grand Valley Gas Company
will be employees of Associated Natural Gas Corporation following the merger.
Associated Natural Gas Corporation filed a Registration Statement on
Form S-4, Registration No. 33-53121, in connection with the merger.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements
1. Audited consolidated financial statements of Grand Valley Gas
Company and subsidiaries as of May 31, 1993 and 1992 and for each of the three
years in the period ended May 31, 1993. Incorporated by reference from Grand
Valley Gas Company's Annual Report on Form 10-K filed August 11, 1993,
Registration No. 0-17260, as amended by Form 10-K/A filed September 28, 1993,
which is Exhibit 99.1 hereto.
2. Consolidated financial statements of Grand Valley Gas Company
and subsidiaries for the quarter ended August 31, 1993 (unaudited).
Incorporated by reference from Grand Valley Gas Company's Quarterly Report on
Form 10-Q filed October 15, 1993, Registration No. 0-17260, which is Exhibit
99.2 hereto.
<PAGE>
3. Consolidated financial statements of Grand Valley Gas Company and
subsidiaries for the quarter ended November 30, 1993 (unaudited). Incorporated
by reference from Grand Valley Gas Company's Quarterly Report on Form 10-Q filed
January 14, 1994, Registration No. 0-17260, which is Exhibit 99.3 hereto.
4. Consolidated financial statements of Grand Valley Gas Company and
subsidiaries for the quarter ended February 28, 1994 (unaudited). Incorporated
by reference from Grand Valley Gas Company's Quarterly Report on Form 10-Q filed
April 14, 1994, Registration No. 0-17260, which is Exhibit 99.4 hereto.
5. Condensed Pro Forma Combined Financial Information of Associated
Natural Gas Corporation. Incorporated by reference from Associated Natural Gas
Corporation's Registration Statement on Form S-4, Registration No. 33-53121,
which is Exhibit 99.5 hereto.
(b) Exhibits
2. Restated Agreement and Plan of Merger. Incorporated by
reference from Associated Natural Gas Corporation's Registration Statement on
Form S-4, Registration No. 33-53121.
23. Consent of Arthur Andersen & Co.
99.1 Audited consolidated financial statements of Grand Valley Gas
Company and subsidiaries as of May 31, 1993 and 1992 and for each of the three
years in the period ended May 31, 1993.
99.2 Consolidated financial statements of Grand Valley Gas Company
and subsidiaries for the quarter ended August 31, 1993 (unaudited).
99.3 Consolidated financial statements of Grand Valley Gas Company
and subsidiaries for the quarter ended November 30, 1993 (unaudited).
99.4 Consolidated financial statements of Grand Valley Gas Company
and subsidiaries for the quarter ended February 28, 1994 (unaudited).
99.5 Condensed Pro Forma Combined Financial Information of
Associated Natural Gas Corporation.
<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 hereunto duly authorized.
ASSOCIATED NATURAL GAS CORPORATION
By: /s/ Harold R. Logan, Jr.
------------------------
Harold R. Logan, Jr.
Senior Vice President/Finance
Date: July 15, 1994
-----------------------
<PAGE>
CONSENT OF ARTHUR ANDERSEN & CO.
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 8-K of our reports dated July 30, 1993 included in
Registration Statement File No. 33-53121 on Form S-4. It should be noted
that we have not audited any financial statements of Grand Valley Gas Company
subsequent to May 31, 1993 or performed any audit procedures subsequent to the
date of our report.
ARTHUR ANDERSEN & CO.
Salt Lake City, Utah
July 14, 1994
<PAGE>
[LETTERHEAD OF ARTHUR ANDERSEN & CO. APPEARS HERE]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grand Valley Gas Company and Subsidiaries:
We have audited the accompanying 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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above 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.
Arthur Andersen & Co.
Salt Lake City, Utah
July 30, 1993
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF MAY 31, 1993 AND 1992
---------------------------
ASSETS
------
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $16,498,958 $ 4,931,763
Accounts receivable, net of
allowance for doubtful accounts
of $717,000 and $0, respectively 38,134,965 23,208,762
Other current assets 4,095,159 907,246
----------- -----------
Total current assets 58,729,082 29,047,771
----------- -----------
PROPERTY, PLANT AND EQUIPMENT,
at cost:
Gas gathering and compression
equipment 6,065,017 2,676,554
Developed oil and gas leaseholds 2,130,949 2,028,652
Gas processing plant 1,515,370 1,217,742
Furniture and equipment 1,165,163 777,837
Construction in process 849,652 307,091
----------- -----------
11,726,151 7,007,876
Less accumulated depreciation
and depletion (1,932,889) (741,908)
----------- -----------
Net property, plant and
equipment 9,793,262 6,265,968
----------- -----------
OTHER ASSETS:
Cost in excess of fair market
value of net assets acquired,
net of accumulated amortization
of $342,638 and $144,905,
respectively 3,358,633 3,556,366
Investments in joint venture
partnerships 4,050,834 1,229,148
Notes receivable from related
parties 499,000 -
Other long-term assets, net 1,387,278 1,196,471
----------- -----------
Total other assets 9,295,745 5,981,985
----------- -----------
Total assets $77,818,089 $41,295,724
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-2
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF MAY 31, 1993 AND 1992
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable -
Stockholders $ - $ 1,443,000
Other - 507,000
Accounts payable 49,196,862 23,639,030
Accrued liabilities 1,301,664 1,245,919
Accrued gas purchase costs 318,131 1,468,386
Unearned revenue - 1,074,223
----------- -----------
Total current liabilities 50,816,657 29,377,558
----------- -----------
CONVERTIBLE SENIOR SUBORDINATED
NOTES PAYABLE 10,000,000 -
----------- -----------
DEFERRED INCOME TAXES PAYABLE 551,486 180,370
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 4 and 6)
STOCKHOLDERS' EQUITY:
Common stock, $.0125 par value;
authorized 50,000,000 shares,
issued 6,514,502 and 6,424,371
shares, respectively 81,431 80,304
Additional paid-in capital 5,700,139 2,925,043
Retained earnings 13,431,577 10,252,737
Deferred compensation (644,481) (1,520,288)
----------- -----------
18,568,666 11,737,796
Less 235,098 shares of treasury
stock, at cost (2,118,720) -
----------- -----------
Total stockholders' equity 16,449,946 11,737,796
----------- -----------
Total liabilities and
stockholders' equity $77,818,089 $41,295,724
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED MAY 31, 1993, 1992 AND 1991
-----------------------------------------------
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Gas sales $310,453,764 $192,770,021 $103,923,873
Gathering and processing 10,809,397 1,951,813 195,721
Agency service fees 1,866,081 1,168,196 669,781
Oil and gas sales from
leaseholds 1,114,578 697,923 378,809
Interest and other income 427,490 495,738 311,272
------------ ------------ ------------
324,671,310 197,083,691 105,479,456
------------ ------------ ------------
EXPENSES:
Cost of purchased gas 300,689,741 185,147,848 96,133,658
Gathering and processing 8,891,747 1,249,944 24,292
Oil and gas leaseholds 411,887 365,096 198,517
Selling, general and
administrative 6,465,089 4,454,435 3,049,679
Depreciation, depletion
and amortization 1,659,851 525,581 249,407
Interest expense 484,993 128,095 169,000
Provision for doubtful
accounts receivable 717,000 - -
------------ ------------ ------------
319,320,308 191,870,999 99,824,553
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 5,351,002 5,212,692 5,654,903
PROVISION FOR INCOME TAXES 2,172,162 1,966,944 2,132,732
------------ ------------ ------------
NET INCOME $ 3,178,840 $ 3,245,748 $ 3,522,171
============ ============ ============
NET INCOME PER COMMON SHARE $ 0.50 $ 0.52 $ 0.56
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED MAY 31, 1993, 1992 AND 1991
-----------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-in Retained Deferred
Shares Amount Capital Earnings Compensation
------ ------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1990 5,162,751 $65,259 $ 531,060 $ 3,502,044 $ (31,668)
Treasury stock cancelled - (725) - (17,226) -
Amortization of deferred
compensation - - - - -
Restricted stock issued
for future services 31,400 392 148,608 - (149,000)
Grants of compensatory
stock options - - 241,550 - -
Compensatory stock options
exercised 281,000 3,513 53,488 - -
Net income - - - 3,522,171 -
--------- ------- ---------- ----------- -----------
Balance at May 31, 1991 5,475,151 $68,439 $ 974,706 $ 7,006,989 $ (164,836)
Amortization of deferred
compensation - - - - 319,738
Restricted stock issued
for future services 42,120 527 431,988 - (432,515)
Grants of compensatory stock 11,100 138 98,174 - -
Grants of compensatory stock
options for future services - - 1,242,675 - (1,242,675)
Compensatory stock options
exercised 896,000 11,200 177,500 - -
Net income - - - 3,245,748 -
--------- ------- ---------- ----------- -----------
Balance at May 31, 1992 6,424,371 80,304 2,925,043 10,252,737 (1,520,288)
Amortization of deferred
compensation - - - - 895,787
Restricted stock issued for
future services 2,160 27 19,953 - (19,980)
Grants of compensatory stock 1,846 23 17,052 - -
Compensatory stock options
exercised 86,125 1,077 26,077 - -
Purchase of treasury stock - - - - -
Tax benefit from exercise
of nonqualified stock options - - 2,712,014 - -
Net income - - - 3,178,840 -
--------- ------- ---------- ----------- -----------
Balance at May 31, 1993 6,514,502 $81,431 $5,700,139 $13,431,577 $ (644,481)
========= ======= ========== =========== ===========
<CAPTION>
Treasury
Stock
at Cost Total
--------- ----------
<S> <C> <C>
Balance at May 31, 1990 $ (17,951) $ 4,048,744
Treasury stock cancelled 17,951 -
Amortization of deferred
compensation - 15,832
Restricted stock issued
for future services - -
Grants of compensatory
stock options - 241,550
Compensatory stock options
exercised - 57,001
Net income - 3,522,171
----------- -----------
Balance at May 31, 1991 - 7,885,298
Amortization of deferred
compensation - 319,738
Restricted stock issued
for future services - -
Grants of compensatory stock - 98,312
Grants of compensatory stock
options for future services - -
Compensatory stock options
exercised - 188,700
Net income - 3,245,748
----------- -----------
Balance at May 31, 1992 - 11,737,796
Amortization of deferred
compensation - 895,787
Restricted stock issued for
future services - -
Grants of compensatory stock - 17,075
Compensatory stock options
exercised - 27,154
Purchase of treasury stock (2,118,720) (2,118,720)
Tax benefit from exercise
of nonqualified stock options - 2,712,014
Net income - 3,178,840
----------- -----------
Balance at May 31, 1993 $(2,118,720) $16,449,946
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MAY 31, 1993, 1992 AND 1991
-----------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,178,840 $ 3,245,748 $ 3,522,171
------------ ------------ ------------
Adjustments to reconcile net
income to net cash provided
by operating activities -
Depreciation, depletion and
amortization 1,689,851 525,581 249,407
Gain on sale of investment
and equipment - (174,308) -
Change in allowance for
doubtful accounts receivable 717,000 - -
Amortization of deferred
compensation 895,787 319,738 15,832
Grants of compensatory stock
and stock options 17,075 98,312 241,550
Net earnings (greater) less
than distributions from
investments in joint ventures (120,372) 12,110 -
Change in assets and
liabilities, net of effects
from purchase of Centennial
Natural Gas Corporation:
Accounts receivable (15,643,203) (13,035,144) 1,440,480
Other current assets (475,899) (451,792) (199,398)
Other long-term assets 55,407 (411,462) -
Accounts payable 25,557,832 14,078,642 (1,533,242)
Accrued liabilities 55,745 755,921 21,890
Accrued gas purchase costs (1,150,255) 1,468,386 -
Income taxes payable - - (327,990)
Unearned revenue (1,074,223) (27,373) 706,731
Deferred income taxes
payable 371,116 166,038 2,646
------------ ------------ ------------
Total adjustments 10,865,861 3,324,649 617,906
------------ ------------ ------------
Net cash provided by
operating activities 14,044,701 6,570,397 4,140,077
------------ ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MAY 31, 1993, 1992 and 1991
-----------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of gas gathering and
processing facilities $(4,228,652) $(4,747,936) $ -
Acquisition of developed oil and
gas leaseholds (102,297) (1,426,443) -
Acquisition of furniture and
equipment (387,326) (716,328) (386,543)
Acquisition of Centennial Natural
Gas Corporation, net of cash
acquired - (1,401,969) -
Increase in investments in joint
venture partnerships (2,701,314) (1,004,734) -
Proceeds from sale of investment and
equipment - 174,408 -
Increase in notes receivable from
related parties (499,000) - -
----------- ----------- -----------
Net cash used in
investing activities (7,918,589) (9,123,002) (386,543)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of
convertible senior subordinated
notes payable 9,482,649 - -
Principal payments on notes payable
to stockholders (1,443,000) - -
Principal payments on note payable (507,000) (246,500) -
Proceeds from exercise of stock
options 27,154 188,700 57,001
Purchase of treasury stock (2,118,720) - -
----------- ----------- -----------
Net cash provided by (used
in) financing activities 5,441,083 (57,800) 57,001
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 11,567,195 (2,610,405) 3,810,535
CASH AND CASH EQUIVALENTS, at
beginning of year 4,931,763 7,542,168 3,731,633
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, at
end of year $16,498,958 $ 4,931,763 $ 7,542,168
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for -
Interest $ 236,073 $ 60,099 $ 171,335
Income taxes 388,281 2,115,971 2,502,296
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-7
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
-----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) BUSINESS DESCRIPTION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------
The consolidated financial statements include the accounts of Grand Valley Gas
Company and its direct and indirect wholly-owned subsidiaries: Grand Valley
Gathering Company [formerly Centennial Natural Gas Corporation,
("Centennial")], Centennial Storage Corporation, GV Power Corporation and
Mesquite Pipeline Company (collectively, the "Company"). Mesquite Pipeline
Company was formed as a wholly-owned subsidiary of Grand Valley Gathering
Company during the year ended May 31, 1993. All significant intercompany
account balances and transactions have been eliminated in consolidation.
The Company is primarily engaged in natural gas marketing. The Company also
owns natural gas gathering and processing facilities and interests in
developed oil and gas leaseholds.
The Company participates in various joint venture partnerships with ownership
percentages ranging from 21 to 49 percent. The investments in these joint
venture partnerships are accounted for using the equity method.
Property, Plant and Equipment
- - -----------------------------
Expenditures that materially increase asset lives are capitalized at cost
while normal maintenance and repairs are expensed as incurred. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in income.
Property, plant and equipment (other than developed oil and gas leaseholds)
are depreciated using accelerated and straight-line methods over the following
estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Gas gathering and compression equipment 7 to 10
Gas processing plant 10
Furniture and equipment 2 to 7
</TABLE>
Depreciation and depletion of developed oil and gas leaseholds is based on the
units of production method using estimated proved oil and gas reserves.
Intangible Assets
- - -----------------
Cost in excess of fair market value of net assets acquired has been recorded
in connection with the acquisition of Centennial and Burton Flats (see Note
3). The amounts recorded are being amortized on a straight-line basis over
periods of 20 and 10 years, respectively. Amortization for fiscal years 1993
and 1992 was $197,733 and $156,060, respectively.
F-8
<PAGE>
- 2 -
Other long-term assets as of May 31, 1993 and 1992 include the following:
<TABLE>
<CAPTION>
Amortization
Description 1993 1992 Period
- - ------------------ ---------- ---------- ------------
<S> <C> <C> <C>
Convertible senior
subordinated notes
payable issuance
costs $ 517,351 $ 36,354 12 years
Noncompetition
agreement 375,000 375,000 5 years
Gas supply contracts 250,000 376,000 5 years
Rights-of-way 201,500 103,000 10 to 25 years
Other 225,292 333,611 -
---------- ----------
1,569,143 1,223,965
Less accumulated
amortization (181,865) (27,494)
---------- ----------
$1,387,278 $1,196,471
========== ==========
</TABLE>
Notes Receivable from Related Parties
- - -------------------------------------
During the year ended May 31, 1993 in connection with the exercise of certain
stock options, which provided the Company an income tax benefit (see Note 5)
and positive cash flow, the Company loaned $499,000 to three officers and one
key employee of the Company who are also stock-holders. 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 certain
shares of the Company's common stock.
Net Income Per Common Share
- - ---------------------------
Net income per common share is calculated using the weighted average number of
common and common equivalent shares outstanding during the years. Common
equivalent shares consist of certain stock options, which have a dilutive
effect when applying the treasury stock method. Total weighted average number
of shares were 6,383,803, 6,287,584 and 6,340,158 for fiscal years 1993, 1992
and 1991, respectively.
Primary and fully diluted net income per share are essentially equivalent.
Revenue Recognition
- - -------------------
The Company recognizes revenue on gas sales when the market takes possession
of gas delivered at the contracted point of delivery. Revenue for services is
recognized at the time the service is performed.
F-9
<PAGE>
- 3 -
Cash Equivalents and Supplemental Noncash Investing Activities
- - --------------------------------------------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents.
As discussed in Note 3, the Company acquired all of the common stock of
Centennial during the year ended May 31, 1992. In conjunction with this
acquisition, the Company paid $1,950,000 in cash, issued notes payable
totaling $1,950,000, acquired assets totaling $4,768,014 and assumed
liabilities totaling $4,316,285. During the year ended May 31, 1993, the
Company received $2,712,014 of income tax benefit from the exercise of
nonqualified stock options (see Note 5).
Income Taxes
- - ------------
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 supersedes SFAS No. 96 and is required to be adopted in
the first quarter of the Company's fiscal year 1994. The Company has
previously adopted SFAS No. 96, and, therefore, the impact of adopting SFAS
No. 109 is not expected to have a significant impact on the Company's
consolidated financial statements.
In accordance with SFAS No. 96, the Company recognizes a liability or asset
for the deferred tax consequences of all temporary differences between the tax
bases of assets and liabilities and their reported amounts in the consolidated
financial statements that will result in taxable or deductible amounts in
future years when the reported amounts of the assets and liabilities are
recovered or settled.
Postretirement Benefits
- - -----------------------
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions," was issued by the FASB in December 1990. The Company does not have
any obligation to pay postretirement benefits to its employees and therefore
SFAS No. 106 is not expected to have a material impact on the Company's
consolidated financial statements.
Reclassifications
- - -----------------
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year's presentation.
(2) INVESTMENTS IN JOINT VENTURE PARTNERSHIPS
-----------------------------------------
The Company accounts for its investments in joint venture partnerships using
the equity method. During the year ended May 31, 1993, the Company recorded
$120,372 of net earnings in excess of cash distributions received from these
investments. During the year ended May 31, 1992, the Company received $12,110
of cash distributions in excess of net earnings of the investments as
accounted for by the equity method.
F-10
<PAGE>
- 4 -
The following summarizes the recorded amounts for the Company's investments in
joint venture partnerships as of May 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Richfield Gas Storage System $3,683,110 $ 829,065
Tecumseh 213,490 228,367
GQ 100,935 60,962
Greenwood Gas Gathering System 50,544 107,999
Post Street Electric & Steam Company 2,755 2,755
---------- ----------
$4,050,834 $1,229,148
========== ==========
</TABLE>
Richfield Gas Storage System
- - ----------------------------
In December 1991, the Company entered into a partnership agreement with
two unrelated companies to construct and operate a gas storage facility in
Morton County, Kansas. The Company's initial capital contribution was
$231,590 and represents a 48.5 percent ownership interest in the partnership.
The Company made additional capital contributions of $2,701,314 and $647,475
during the years ended May 31, 1993 and 1992, respectively, and has guaranteed
to make further contributions as determined necessary by the partners to
complete the project. As of May 31, 1993, the partnership had a working
capital deficit of approximately $2,670,000. The Company and its partners
have funded their portions of this deficit subsequent to year-end.
Construction of the project is substantially complete and injection of storage
customer gas volumes is in progress. Commencement of full-scale operations is
scheduled for the 1993-94 winter heating season. The Company recorded its
portion of the net income (loss) of the partnership of $152,731 and $(50,000)
for the years ended May 31, 1993 and 1992, respectively.
Tecumseh
- - --------
Tecumseh consists of two processing facilities located in Pottawatomie County,
Oklahoma and was acquired in 1991 by a joint venture in which the Company
participates. The joint venture structure involves three agreements. The
Company currently has a 37 percent ownership interest in each agreement.
The Company is the operator of this joint venture. The Company's equity in
earnings of the joint venture partnership for fiscal years 1993 and 1992 was
$133,123 and $184,903, respectively. Fiscal years 1993 and 1992 distributions
received from the partnership totaled $148,000 and $135,048, respectively.
The Company has guaranteed a portion of the partnership's debt totaling
approximately $167,000.
GQ
- - --
GQ consists of two gathering and processing systems; one located in Campbell
County, Wyoming (the "Gillette System") and the other in Wood County, Texas
(the "Quitman System"). GQ was formed in November 1989 with initial total
capital contributions of $2.6 million. The Company currently has a 21.48
percent ownership interest in this joint venture.
F-11
<PAGE>
- 5 -
The Company is the operator of this joint venture. The Company's equity in
earnings of the partnership for fiscal years 1993 and 1992 was $61,453 and
$84,201, respectively. Fiscal years 1993 and 1992 distributions received from
the partnership totaled $21,480 and $78,497, respectively. The Company has
guaranteed a portion of the partnership's bank debt totaling approximately
$74,000.
Greenwood Gas Gathering System
- - ------------------------------
Effective December 1, 1991, the Company purchased a 25.7 percent interest in
the Greenwood Gas Gathering System Joint Venture for $125,669. The joint
venture operates a natural gas pipeline and gas gathering system located in
Morton County, Kansas. During the year ended May 31, 1993, the Company's
portion of the joint venture's net loss was $57,455. With the completion of
the Richfield Gas Storage System, this system will become an integral part of
the interconnect system with interstate pipelines.
Post Street Electric & Steam Company
- - ------------------------------------
In January 1992, the Company entered into a partnership agreement with two
unrelated companies to develop, construct and operate a natural gas-fired,
combined-cycle cogeneration power project to be located in Seattle,
Washington. The Company acquired a 45 percent interest in the partnership for
$2,755.
As of May 31, 1993, the project is in the development stage and has not
generated revenue since its inception. The Company has agreed to make cash
capital contributions up to a maximum of $3.3 million at such times and in
such amounts as determined by the partners. The Company has incurred certain
expenditures in connection with the development of the project and is entitled
to be reimbursed for the expenditures by the partnership. As of May 31, 1993,
the Company had advanced a total of approximately $290,000, exclusive of
interest, to fund its portion of the project. The Company has also
established a reserve of $200,000 against its advances due to uncertainties
related to the project. Accordingly, as of May 31, 1993 and 1992, the Company
has a net receivable of approximately $90,000 and $172,000, respectively, due
from this partnership.
C.K. Roberts
- - ------------
During the year ended May 31, 1992, the Company sold its investment in the
C.K. Roberts gathering system at a gain of approximately $174,000.
Condensed Unaudited Financial Information
- - -----------------------------------------
Condensed unaudited financial information for fiscal years 1993 and 1992 for
each joint venture partnership (100 percent of the entity's operations) is
summarized below. The information relating to net income or loss is for the
fiscal year ended May 31, 1993 and for the period from the date the Company's
interest was acquired through May 31, 1992.
F-12
<PAGE>
- 6 -
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Richfield Gas Storage System
- - ----------------------------
Current assets $1,591,356 $ 15,015
Noncurrent assets 9,661,031 1,877,546
Current liabilities 4,261,586 160,116
Noncurrent liabilities - -
Net income (loss) 212,091 (102,299)
Tecumseh
- - --------
Current assets $ 845,782 $1,113,166
Noncurrent assets 1,062,766 1,573,710
Current liabilities 499,923 836,330
Noncurrent liabilities 833,341 1,233,337
Net income 359,791 499,736
GQ
- - --
Current assets $ 407,953 $ 476,747
Noncurrent assets 957,916 1,312,013
Current liabilities 138,794 232,584
Noncurrent liabilities 763,003 1,272,367
Net income 286,092 391,997
Greenwood Gas Gathering System
- - ------------------------------
Current assets $ 40,122 $ 103,388
Noncurrent assets 774,505 904,573
Current liabilities 86,335 69,880
Noncurrent liabilities - -
Net income (188,719) (36,551)
Post Street Electric & Steam Company
- - ------------------------------------
Current assets $ 30,085 $ 30,671
Noncurrent assets 876,222 463,594
Current liabilities 903,306 491,264
Noncurrent liabilities - -
Net income - -
</TABLE>
(3) ACQUISITIONS
------------
Centennial
- - ----------
Effective August 12, 1991, the Company acquired all of the outstanding shares
of common stock of Centennial.
Centennial's business includes natural gas marketing, gathering and
processing. At the acquisition date, Centennial held interests in four natural
gas processing and/or gathering facilities with aggregate throughout capacity
of more than 35 million cubic feet per day.
F-13
<PAGE>
- 7 -
These facilities are located in Oklahoma, Texas and Wyoming. Centennial is the
operator of three of the facilities and markets natural gas and natural gas
liquids produced from the processing facilities.
The Company paid $3,900,000 for the Centennial shares by delivering $1,950,000
in cash, and promissory notes in the amount of $1,950,000, which bore interest
at the rate of eight percent per annum until they were paid on August 12, 1992
and December 30, 1992.
In conjunction with the acquisition of Centennial, the Company entered into
employment agreements (subsequently amended) with existing employees and
consultants of Centennial, and issued 30,000 common shares and granted options
to acquire up to an additional 126,000 common shares at an exercise price of
$.0125 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 stock and as restrictions
lapse through fiscal year 1995. The right to fully exercise these options is
dependent upon continued service to the Company.
The acquisition has been accounted for as a purchase and, accordingly, the net
assets and liabilities of Centennial have been recorded at their estimated
fair market value at the date of acquisition. The cost in excess of fair market
value of the net assets acquired of approximately $3,448,000 is being amortized
on a straight-line basis over 20 years. Centennial's results of operations are
included in the consolidated financial statements since the date of
acquisition.
Unaudited pro forma consolidated revenues, net income and net income per common
share of Grand Valley Gas Company and Centennial for the fiscal year ended May
31, 1991 are approximately $131,201,000, $3,600,000 and $.55, respectively.
This information is presented as though the companies had combined their
operations at the beginning of fiscal year 1991, after giving effect to certain
adjustments, including amortization of cost in excess of fair market value of
net assets acquired, interest expense on acquisition debt, compensation expense
on stock grants, and the impact on net income per share related to the issuance
of stock options. The pro forma information does not necessarily represent the
results which would have occurred if the transaction had taken place on the date
assumed nor is it indicative of the results of future operations.
Acquisition of Assets of Burton Flats
- - -------------------------------------
Effective March 1, 1992, the Company acquired a gas gathering system, gas
processing plant and treating facility located in New Mexico, collectively
referred to as "Burton Flats." Burton Flats consists of 51 miles of pipeline
and a 15 million cubic feet per day natural gas gathering and processing
facility. The purchase price of these assets was $4,675,000. The cost in excess
of fair value of net assets acquired of approximately $253,000 is being
amortized on a straight-line basis over ten years.
F-14
<PAGE>
- 8 -
(4) CONVERTIBLE SENIOR SUBORDINATED NOTES PAYABLE
---------------------------------------------
On December 30, 1992, the Company sold $10 million of convertible senior
subordinated notes in a private placement transaction. The notes bear interest
at a rate of nine percent per annum with interest payments due semiannually in
arrears and with principal payable in $1,250,000 annual installments beginning
on December 15, 1997 and continuing through December 15, 2003. The entire
unpaid principal amount of the notes is due on December 15, 2004. The Company
may prepay the notes after December 15, 1997 by paying a premium approximately
equivalent to the difference in the present value of (1) the remaining cash
stream from the notes and (2) the cash stream from the then current equivalent
maturity treasury obligation plus 0.50 percent. In the event the average of
the bid and asked prices of the Company's common stock equals or exceeds
$16.08 per share for twenty consecutive trading days, the Company may, at its
option, prepay the notes with no premium.
The note agreements contain certain restrictive covenants with respect to the
operations of the Company, including the maintenance of minimum net worth and
debt service coverage. The Company is in compliance with all restrictive
covenants. The notes are convertible at the option of the purchasers into an
aggregate of 963,856 shares of the common stock of the Company (reflecting a
conversion price of $10.375 per share). 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. The Company has reserved and will keep
available the appropriate number of authorized shares of common stock for
purposes of this conversion.
(5) INCOME TAXES
------------
The provision for income taxes consists of the following for the years ended
May 31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Current tax provision
(benefit) -
Federal $ 1,960,367 $ 1,361,461 $ 1,843,545
State 468,029 279,679 286,541
Foreign (45,670) 159,766 -
------------ ------------ ------------
2,382,726 1,800,906 2,130,086
------------ ------------ ------------
</TABLE>
F-15
<PAGE>
- 9 -
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax provision
(benefit)-
Federal $ (177,309) $ 140,920 $ 2,229
State (33,255) 25,118 417
---------- ---------- ----------
(210,564) 166,038 2,646
---------- ---------- ----------
Provision for income taxes $2,172,162 $1,966,944 $2,132,732
========== ========== ==========
</TABLE>
The domestic and foreign components of income before provision for income
taxes are as follows for the fiscal years ended May 31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Domestic $5,456,984 $4,852,372 $5,778,640
Foreign (105,982) 360,320 (123,737)
---------- ---------- ----------
Total $5,351,002 $5,212,692 $5,654,903
========== ========== ==========
</TABLE>
The following reconciles the computed "expected" provision for income taxes at
the statutory federal income tax rate of 34 percent with the provision for
income taxes for fiscal years ended May 31, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected"
provision for income
taxes at the statu-
tory rate $1,819,341 $1,772,315 $1,922,667
State income taxes, net
of federal income tax
benefit 320,951 201,166 189,392
Amortization of cost in
excess of fair market
value of net assets
acquired 67,223 53,060 -
Tax exempt interest
income - (35,436) (8,292)
</TABLE>
F-16
<PAGE>
- 10 -
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Foreign taxes, net of
foreign tax credit $ (45,670) $ 37,257 $ -
Other, net 10,317 (61,418) 28,965
---------- ---------- ----------
Provision for income
taxes $2,172,162 $1,966,944 $2,132,732
========== ========== ==========
</TABLE>
During the year ended May 31, 1993, the Company received $2,712,014 of income
tax benefit from the exercise of nonqualified stock options. The benefit has
been recorded as a reduction in income taxes payable and an increase in
additional paid-in capital.
The deferred tax provision results from temporary differences in the
recognition of revenues and expenses for income tax and financial reporting
purposes. The source of significant temporary differences and the tax effects of
each for fiscal years 1993, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation and depletion $ 299,308 $ 208,800 $ 10,538
Allowance for doubtful
accounts (272,173) - -
Stock options (100,034) - -
Gas contract reserve (102,492) - -
Joint venture investments (30,659) (33,567) -
Other (4,514) (9,195) (7,892)
---------- ---------- ----------
Total deferred tax
provision $ (210,564) $ 166,038 $ 2,646
========== ========== ==========
</TABLE>
The Company has a foreign tax credit carryforward for tax and financial
reporting purposes of approximately $47,000 at May 31, 1993. This credit
carryforward will expire May 31, 1997.
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
On April 16, 1993, TransMarketing Houston, Inc., a natural gas sales customer
of the Company, filed for protection under Chapter 11 of the federal
bankruptcy code.
The balance owed by this customer for gas purchases totaled approximately
$889,000. The ultimate realization of this amount will be determined in the
bankruptcy proceedings. However, in recognition of the uncertainty of
collection and the Company's unsecured position as a creditor, the Company has
established an allowance for this doubtful account of $700,000.
F-17
<PAGE>
- 11 -
Revolving Credit Agreement
- - --------------------------
The Company has a revolving credit agreement with a bank which provides a
maximum total commitment of $15,000,000. The commitment includes working
capital and letter of credit borrowing capacity of $10,000,000, and a
borrowing capacity specifically designated for short-term financing of capital
expenditures of $5,000,000.
Loans under the $10,000,000 commitment bear interest at the bank's base rate
plus 3/4 percent. Loans under the $5,000,000 commitment bear interest at the
bank's base rate plus one percent. The bank's base rate was six percent at
May 31, 1993. These commitments expire March 1, 1994, but provide for an
additional two-year repayment schedule for amounts outstanding under the
$5,000,000 commitment at the bank's base rate plus 1-3/8 percent. These loans
are collateralized by personal and real property of the Company. The Company
is required to pay an annual fee of 1/2 percent on the unused commitment.
The revolving credit agreement contains certain affirmative and negative
covenants, including the maintenance of specific financial ratios. During
fiscal year 1993, the Company was not in compliance with covenants relating to
the issuance of the Convertible Senior Subordinated Notes Payable and the
purchase of treasury stock. However, the Company received timely waivers from
the bank related to these specific transactions.
During fiscal year 1993, the Company borrowed $2,500,000 under the credit
agreement over a period of 75 days. As of May 31, 1993, no borrowings were
outstanding under the credit agreement; however, there were 11 outstanding
letters of credit totaling $5,688,912 guaranteeing performance to certain
customers.
Gas Purchase and Sales Contracts
- - ---------------------------------
The Company attempts to minimize the commodity risk of natural gas prices by
obtaining matching commitments under its natural gas purchase contracts and
natural gas sales contracts with terms greater than one month or by using
natural gas futures and basis swaps to hedge what would otherwise be open
price risks. In addition to numerous index based natural gas purchase/sales
contracts, as of May 31, 1993 the Company has total fixed price purchase
contracts for 44,520,000 MMBtu which includes 40,290,000 MMBtu of purchase
contracts and 4,230,000 MMBtu under futures contracts. Total fixed price
sales contracts as of May 31, 1993 amounted to 42,376,000 MMBtu including
40,936,000 MMBtu of sales contracts and 1,440,000 MMBtu of futures contracts.
Federal and State Regulations
- - -----------------------------
The purchase and sale of natural gas and the fees received for gathering and
processing by the Company generally are not subject to regulation. Many
aspects of the production, transportation and marketing of natural gas,
however, are subject to regulations that can have a significant impact upon
the Company's overall operations.
F-18
<PAGE>
As a gatherer, processor and marketer of natural gas, the Company is dependent
on the transportation and storage services offered by various pipeline
companies. Both the performance of transportation and storage services by
these pipeline companies and the rates charged for their services are subject
to the jurisdiction of FERC under the Natural Gas Act of 1938, and the Natural
Gas Policy Act of 1978. The availability of interstate transportation and
storage services necessary to enable the Company to make deliveries or sales
of gas at times may be preempted by other system users in accordance with FERC-
approved methods for allocating the system capacity of "open-access"
pipelines. Moreover, the rates charged by pipeline companies for such services
are often subject to negotiation within FERC-established ranges and
periodically vary depending upon a variety of factors. Any inability to obtain
transportation or storage services at competitive rates could hinder the
Company's marketing operations.
Operating Leases
- - ----------------
The Company leases various facilities under long-term noncancellable operating
leases with minimum annual lease commitments as follows:
Year Ending May 31, Amount
------------------- ----------
1994 $244,592
1995 235,825
1996 232,315
1997 168,009
--------
$880,741
========
Rental expense from operating leases totaled approximately $219,000, $118,000
and $76,000 during fiscal years 1993, 1992 and 1991.
Employment Agreements
- - ---------------------
The Company has entered into employment agreements with the president, executive
vice president and vice presidents of the Company which expire at various dates
through August 1996. The agreements set forth base salaries and other benefits
for the period of employment.
The Company has also entered into employment agreements with key employees and
consultants of Centennial (see Note 3). These agreements have terms ranging
from four to six years. The agreements set forth base salaries and other
benefits, and contain noncompetition clauses for the period of employment as
well as two years subsequent thereto.
(7) STOCK OPTIONS AND INCENTIVE STOCK AWARDS
----------------------------------------
During fiscal year 1992, the Company established the 1992 Stock Option Plan
(the "Plan"). Options granted under the Plan may be either incentive or
nonincentive as designated by the Plan Committee.
F-19
<PAGE>
- 13 -
Incentive stock options must be granted at not less than 100 percent of the
market value of the common stock on the date of grant. Nonincentive stock
options are granted at prices determined by the Plan Committee.
The Plan provides for the issuance of options for a total of 200,000 shares of
common stock. Incentive stock options may not be exercised after ten years
from the date of grant. Nonincentive stock options are subject to exercise
terms as determined by the Plan Committee at the date granted. Previous to the
establishment of the Plan, the Company granted nonincentive stock options to
officers, directors, key employees and consultants. Stock option activity for
fiscal years 1993, 1992 and 1991 consisted of the following:
<TABLE>
<CAPTION>
Number of Price per
Shares Share Range
--------- ---------------
<S> <C> <C>
Options outstanding at May 31, 1990 1,068,000 $0.125 to $1.00
Granted 220,000 $0.125 to $1.12
Exercised (281,000) $0.125 to $1.00
Canceled (80,000) $0.20
---------
Options outstanding at May 31, 1991 927,000 $0.125 to $1.12
Granted 138,000 $0.013 to $8.63
Exercised (896,000) $0.125 to $1.12
---------
Options outstanding at May 31, 1992 169,000 $0.013 to $8.63
Granted 16,800 $8.50 to $8.63
Exercised (86,125) $0.013 to $6.88
Canceled (875) $6.88
---------
Options outstanding at May 31, 1993 98,800 $ 0.013 to $8.63
=========
</TABLE>
As of May 31, 1993, options to purchase 14,900 shares of common stock were
exercisable. The remaining options become exercisable at various dates and in
varying amounts through November 1996.
Compensation expense (the difference between the fair market value and the
exercise price at the date of grant) is deferred and amortized over the future
periods to be benefited. Certain of these option agreements include
restrictions which allow the Company to repurchase shares at the exercise
price if the employee terminates employment prior to a specified item period
ranging from 24 to 48 months from the exercise date.
At May 31, 1993, 180,100 common shares are subject to such restrictions. These
restrictions lapse at various dates and in varying amounts through October
1996. Options to purchase 71,000 common shares at May 31, 1993 are subject to
similar restrictions once exercised.
The Company has agreed to issue up to 45,000 shares of common stock as
incentive stock awards to its employees in connection with certain
F-20
<PAGE>
- 14 -
asset acquisitions. The shares are issued in part upon acquisition of assets
and the remaining shares are to be issued when the assets acquired achieve
payout. In connection with the above agreements, as of May 31, 1993, the
Company has issued 6,446 shares as incentive stock awards.
(8) SIGNIFICANT CUSTOMERS AND FOREIGN REVENUES
------------------------------------------
During fiscal years 1993, 1992 and 1991, sales to a single customer accounted
for approximately 11 percent, 11 percent and 15 percent of total revenues,
respectively. No other single customer accounted for more than ten percent of
total revenues during any of the three fiscal years presented.
During fiscal years 1993, 1992 and 1991, revenues from foreign sources
(Canada) were approximately $23,889,000, $23,023,000 and $24,050,000,
respectively.
(9) PENSION PLAN
------------
The Company sponsors a Simplified Employee Pension Plan (the "Plan").
Employees who have completed nine months of service are eligible to
participate in the Plan. As approved by the Board of Directors, the Plan
provides for contributions equal to three percent of income before taxes and
bonuses. During fiscal years 1993, 1992 and 1991, the Company made
contributions of $187,013, $178,094 and $141,614.
(10) BUSINESS SEGMENT INFORMATION
----------------------------
The Company's operations have been classified into two business segments:
natural gas marketing and natural gas gathering and processing. Summarized
financial information by business segment for fiscal years 1993, 1992 and 1991
is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
Marketing $313,434,423 $194,636,140 $104,972,463
Gathering and processing 10,809,397 1,951,813 195,721
------------ ------------ ------------
$324,243,820 $196,587,953 $105,168,184
============ ============ ============
Operating income (loss):
Marketing $ 6,351,123 $ 5,793,777 $ 5,688,166
Gathering and processing (515,128) (452,990) 135,737
------------ ------------ ------------
$ 5,835,994 $ 5,340,787 $ 5,823,903
============ ============ ============
</TABLE>
F-21
<PAGE>
-15-
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Total assets:
Marketing $ 64,352,881 $ 32,456,195 $ 14,709,273
Gathering and processing 13,465,207 8,839,529 272,554
------------ ------------ ------------
$ 77,918,088 $ 41,295,724 $ 14,981,827
============ ============ ============
Depreciation, depletion
and amortization:
Marketing $ 696,633 $ 244,650 $ 213,715
Gathering and
processing 963,218 280,931 35,692
------------ ------------ ------------
$ 1,659,851 $ 525,581 $ 249,407
============ ============ ============
Capital expenditures:
Marketing $ 1,310,859 $ 2,799,061 $ 386,543
Gathering and processing 3,407,416 4,091,646 -
------------ ------------ ------------
$ 4,718,275 $ 6,890,707 $ 386,543
============ ============ ============
</TABLE>
F-22
<PAGE>
[LETTERHEAD OF ARTHUR ANDERSEN APPEARS HERE]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENTS SCHEDULE
To Grand Valley Gas Company and Subsidiaries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Grand Valley Gas Company and subsidiaries
included in this Annual Report on Form 10-K and have issued our report thereon
dated July 30, 1993. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. Schedule II included under
Item 14(a) 2 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
Salt Lake City, Utah
July 30, 1993
<PAGE>
SCHEDULE II
Amounts Receivable From Related Parties and Underwriters, Promoters,
and Employees Other Than Related Parties
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- - ------------------------------------------------------------------------------------------------------------------------
Deductions Balance at end of period
--------------------------------------------------------
Balance at
beginning Amounts Amounts Not
Name of debtor of period Additions collected written off Current Current
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jeff F. Fishman $0 $200,000 $0 $0 $200,000
Steven D. Bench $0 $225,000 $0 $0 $225,000
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
Interest shall accrue on the outstanding unpaid principal balances hereof at the
rate of 9% per annum from January 14, 1993. Accrued Interest shall be due and
payable annually, in arrears, on or before the last day of each calendar year
during the term of the Notes. The outstanding principal balance of these Notes
together with all unpaid accrued interest and other amounts outstanding
hereunder, shall be paid in full on or before the first to occur of: (i)January
15, 1995, or (ii)the 90th day after the date upon which Maker's employment
terminates, whether such termination is voluntary or involuntary. The Makers
have entered into a Security Agreement and have pledged company owned stock as
collatoral against the Notes.
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES Page 1 of 2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
As of As of
August 31, 1993 May 31, 1993
----------------- -----------------
<S> <C> <C>
ASSETS
Current Assets
- - --------------
Cash and cash equivalents $8,489,613 $16,498,958
Accounts receivable, net of allowance for
doubtful accounts of $717,000 at
both period ends 36,364,298 38,134,965
Other current assets 4,121,718 4,095,159
----------------- -----------------
Total Current Assets 48,975,629 58,729,082
----------------- -----------------
Property, Plant and Equipment, at cost
- - --------------------------------------
Gas gathering and compression equipment 9,226,473 6,065,017
Developed oil and gas leaseholds 2,136,949 2,130,949
Gas processing plant 1,527,241 1,515,370
Storage well surface equipment 714,559 -
Furniture and equipment 1,186,877 1,165,163
Construction in progress 9,309,282 849,652
----------------- -----------------
24,101,381 11,726,151
Less accumulated depreciation, amortization,
and depletion (3,121,647) (1,932,889)
----------------- -----------------
Net Property, Plant and Equipment 20,979,734 9,793,262
----------------- -----------------
Other Assets
- - ------------
Cost in excess of fair market value of
net assets acquired, net of accumulated
amortization of $392,067
and $342,638, respectively 3,309,204 3,358,633
Investments in joint venture partnerships 315,783 4,050,834
Notes receivable from related parties 299,000 499,000
Base gas for storage facility 1,272,692 -
Other long-term assets 1,758,174 1,387,278
----------------- -----------------
Total Other Assets 6,954,853 9,295,745
----------------- -----------------
TOTAL ASSETS $76,910,216 $77,818,089
================= =================
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
3
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES Page 2 of 2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
As of As of
August 31, 1993 May 31, 1993
----------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- - -------------------
Accounts payable $39,984,659 $49,196,862
Accrued liabilities 927,271 1,301,664
Accrued gas purchase costs 1,839,208 318,131
Unearned revenue 646,200 -
----------------- --------------
Total Current Liabilities 43,397,338 50,816,657
----------------- --------------
Convertible Senior Subordinated Notes Payable 10,000,000 10,000,000
----------------- --------------
Deferred Income Taxes Payable 597,829 551,486
----------------- --------------
Minority Interest 6,044,922 -
----------------- --------------
Contingency (Note 8)
Stockholders' Equity
- - --------------------
Common Stock 81,431 81,431
Additional paid-in capital 5,700,139 5,700,139
Retained earnings 13,742,680 13,431,577
Deferred compensation (535,403) (644,481)
----------------- --------------
18,988,847 18,568,666
Less treasury stock (2,118,720) (2,118,720)
Total Stockholders' Equity 16,870,127 16,449,946
----------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $76,910,216 $77,818,089
================= ==============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
4
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
August 31, 1993 August 31, 1992
--------------- ---------------
<S> <C> <C>
Revenues
- - --------
Gas sales $67,350,996 $64,793,709
Gathering and processing 2,933,760 2,177,351
Storage services 551,310 -
Agency service fees 211,253 486,642
Oil and gas sales from leaseholds 144,274 303,076
Interest and other income 108,582 60,813
----------- -----------
Total Revenues 71,300,175 67,821,591
----------- -----------
Expenses
- - --------
Cost of purchased gas 65,837,158 62,555,387
Gathering and processing 2,464,599 1,907,491
Storage operations 209,846 -
Oil and gas leaseholds 103,136 91,358
Selling, general and administrative 1,337,563 1,512,434
Depreciation, amortization,
and depletion 527,878 383,693
Interest expense 225,000 39,778
----------- ----------
Total Expenses 70,705,180 66,490,141
----------- ----------
Income before income taxes and
minority interest 594,995 1,331,450
Provision for income taxes 240,354 552,351
Minority interest in earnings 43,538 -
----------- ----------
Net income $311,103 $779,099
=========== ===========
Net income per common share $0.05 $0.12
=========== ===========
Weighted average common shares
outstanding 6,300,039 6,466,330
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
5
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
August 31, 1993 August 31,1992
--------------- --------------
<S> <C> <C>
Net cash used in operating activities ($5,795,653) ($1,292,806)
--------------- --------------
Purchase of additional interest in Richfield Gas Storage
System (Richfield), net of cash acquired (99,522) -
Acquisition of gathering and processing facilities (123,260) (1,806,485)
Increase in investments in joint venture partnerships (2,165,196) (172,128)
Other 174,286 (159,737)
--------------- --------------
Net cash used in investing activities (2,213,692) (2,138,350)
--------------- --------------
--------------- --------------
Net cash used in financing activities - (720,715)
--------------- --------------
Net decrease in cash and cash equivalents (8,009,345) (4,151,871)
Cash and cash equivalents at beginning of period 16,498,958 4,931,763
--------------- --------------
Cash and cash equivalents at end of period $8,489,613 $779,892
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest $412,500 $59,473
Income taxes 44,451 206,349
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During the three months ended August 31, 1993, the Company assumed an obligation
to Richfield $209,096 in connection with the acquisition of an additional three
percent interest in Richfield from a minority interest owner.
The accompanying notes are an integral part
of these condensed consolidated statements.
6
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business and Operations
--------------------------------------
The consolidated financial statements include the accounts of Grand Valley Gas
Company and its direct and indirect wholly-owned subsidiaries (Grand Valley
Gathering Company, Centennial Storage Corporation, GV Power Corporation and
Mesquite Pipeline Company) and an indirect majority-owned joint venture
(Richfield Gas Storage System). Collectively, these entities are referred to
as the "Company". On July 1, 1993, Centennial Storage Corporation acquired an
additional interest in Richfield Gas Storage System ("Richfield") bringing
total ownership to 51.5 percent. As a result, Richfield has been consolidated
with the Company's financial statements as of July 1, 1993.
The Company is primarily engaged in natural gas marketing. The Company also
owns natural gas gathering, processing, and storage facilities and interests
in developed oil and gas leaseholds.
The Company participates in various joint venture partnerships with ownership
percentages ranging from 21 percent to 37 percent. The investments in these
joint venture partnerships are accounted for using the equity method.
2. Financial Statements
--------------------
The accompanying condensed consolidated balance sheet as of August 31, 1993,
and the condensed consolidated statements of income and cash flows for the
three months ended August 31, 1993 and 1992 have been prepared by the Company,
and are not audited. In the opinion of management, all adjustments necessary
for fair presentation have been included. These financial statements are
condensed and therefore, do not include all disclosures normally required by
generally accepted accounting principles.
These statements should be read in conjunction with the Company's annual
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended May 31, 1993. The accompanying
consolidated financial statements are not necessarily indicative of the
results to be generated for the remainder of fiscal year 1994.
7
<PAGE>
3. Net Income Per Common Share
---------------------------
Net income per common share is calculated based on the weighted average number
of common shares and common equivalent shares outstanding during the periods.
Common equivalent shares consist of certain stock options which have a
dilutive effect when applying the treasury stock method.
Primary and fully diluted net income per common share are essentially the
same.
4. Stock Options and Incentive Stock Awards
----------------------------------------
During the three months ended August 31, 1993, the Company issued to certain
employees qualified stock options to purchase a total of 125,000 common
shares. These options are exercisable at prices ranging from $5.25 to $6.00
per share.
During the three months ended August 31, 1992, the Company issued to an
employee qualified stock options to purchase a total of 3,000 common shares.
These options are exercisable at $8.50 per share.
During the three months ended August 31, 1992, options to purchase 42,800
common shares were exercised at prices ranging from $.0125 to $1.00 per share.
No options were exercised during the three months ended August 31, 1993.
5. Reclassifications
-----------------
Certain reclassifications have been made to the prior period's condensed
consolidated financial statements to conform with the current period's
presentation. These reclassifications had no effect on net income, total
assets, total liabilities or stockholders' equity.
6. Income Taxes
------------
For the three months ended August 31, 1993 and 1992, the Company provided for
income taxes based upon the estimated annualized effective tax rate.
Effective June 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). The
adoption of SFAS No. 109 had no effect on pretax income or net income for the
three months ended August 31, 1993. The Company has classified the net
current and noncurrent deferred tax assets and liabilities in accordance with
SFAS No. 109 which at August 31, 1993 included a current deferred tax asset of
$458,127 and a deferred tax liability of $597,829.
8
<PAGE>
The components of and the changes in the net deferred tax assets and
liabilities for the period ended August 31, 1993 are as follows:
<TABLE>
<CAPTION>
Deferred
June 1, (Expense) August 31,
Deferred tax assets: 1993 Benefit 1993
-------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts $ 272,460 $ -- $ 272,460
Stock options 346,505 (127,633) 218,872
Gas contract reserve 102,600 (37,389) 65,211
Joint venture investments 62,359 37,272 99,631
Other asset 29,961 (5,700) 24,261
------ ------ ------
Total deferred tax assets 813,885 (133,450) 680,435
------- -------- -------
Deferred tax liabilities:
Depreciation and depletion (591,269) (51,781) (643,050)
Other (177,087) -- (177,087)
-------- ----- --------
Total deferred tax liabilities (768,356) (51,781) (820,137)
-------- ------- --------
Net deferred tax asset (liability) $ 45,529 $(185,231) $(139,702)
======== ======== ========
</TABLE>
7. Acquisitions
------------
On July 1, 1993, the Company increased its ownership in Richfield from 48.5
percent to 51.5 percent. The Company paid $100,000 in cash and assumed an
obligation to Richfield for $209,096. The accounts of Richfield have been
consolidated with those of the Company since July 1, 1993. Prior to that
time, the investment in Richfield was accounted for under the equity method.
Pro forma financial information assuming Richfield had been consolidated are
as follows:
<TABLE>
<CAPTION>
As of
May 31, 1993
------------
<S> <C>
Current assets $60,360,559
Noncurrent assets 25,838,281
Current liabilities 55,164,579
Noncurrent liabilities 14,584,315
</TABLE>
For the three month period ended August 31, 1992, Richfield was under
construction and did not generate income or expense and thus, there is no
change in revenues or expenses on a pro forma basis.
9
<PAGE>
8. Contingency
-----------
The Company has contracted for firm transportation capacity of 12,560 MMBtu
per day on the interstate pipeline operated by Northwest Pipeline Corporation
("Northwest"). This transportation commitment was obtained in conjunction
with an expansion of Northwest's existing facilities.
In a June 1992 order authorizing the Northwest expansion, the Federal Energy
Regulatory Commission ("FERC") stipulated that the mechanism for establishing
transportation rates on the expansion capacity would be based on "rolled-in"
rate base treatment. This treatment would require the cost of the expansion
and additional operating costs to be accumulated with those of the
pre-existing facilities to establish a blended cost of service for all
shippers. The FERC further stipulated that Northwest must provide a showing in
its next general rate case that would substantiate the applicability of
"rolled-in" rate treatment to Northwest's specific circumstance.
Northwest established transportation rates, subject to refund, pursuant to
its general rate case filed on October 1, 1992, that became effective on April
1, 1993. Several parties, primarily natural gas producers with production in
the San Juan Basin of New Mexico, intervened in the rate case proceedings
opposing the "rolled-in" rate treatment on the bases that (1) Northwest had
failed to make a proper showing as to the applicability of this treatment, and
(2)"rolled-in" treatment provides a subsidy by traditional shippers to those
shippers obtaining the newer expansion capacity. Additionally, the staff of
the FERC took the position that Northwest failed to substantiate the
applicability of "rolled-in" rate treatment to its specific circumstance.
Settlement conferences were convened in the months of May, July, August and
September of 1993 in an attempt to settle the rate case. The staff of the
FERC stated during these settlement conferences that it would not oppose a
settlement that included rolled-in rates as long as no intervening party
objected. Additionally, the intervening San Juan Basin natural gas producers
withdrew their entire testimony opposing "rolled-in" treatment.
Nonetheless, the parties in the rate case failed to reach a settlement and the
case went to hearing on September 28, 1993. The FERC will make a decision as
to the appropriate rate design for the Northwest system expansion based on the
outcome of this hearing and will determine whether the rate treatment will be
applied retroactively or prospectively.
Management believes that it is probable that a "rolled-in" rate design will
ultimately be approved with no adverse impact to the Company. The financial
impact of an unfavorable rate determination by the FERC would depend on
whether the resulting rates are applied retroactively or prospectively. In
the event that the FERC were to rule against "rolled-in" rate treatment and
take what appears to be unprecedented action to apply this type of ruling
retroactively, management estimates that additional expense would total
approximately $50,000 to $80,000 per month for the period April 1, 1993
through August 31, 1993.
10
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES Page 1 of 2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
As of As of
November 30, 1993 May 31, 1993
----------------- ----------------
ASSETS
<S> <C> <C>
Current Assets
- - --------------
Cash and cash equivalents $10,070,072 $16,498,958
Accounts receivable, net of allowance for
doubtful accounts of $917,000
and $717,000, respectively 40,577,293 38,134,965
Other current assets 7,743,984 4,095,159
---------------- ----------------
Total Current Assets 58,391,349 58,729,082
---------------- ----------------
Property, Plant and Equipment, at cost
- - --------------------------------------
Gas gathering and compression equipment 18,172,678 6,065,017
Developed oil and gas leaseholds 2,131,266 2,130,949
Gas processing plant 2,869,853 1,515,370
Storage well surface equipment 2,630,559 -
Furniture and equipment 1,353,716 1,165,163
Construction in progress 523,548 849,652
---------------- ----------------
27,681,620 11,726,151
Less accumulated depreciation and
depletion (4,108,952) (1,932,889)
---------------- ----------------
Net Property, Plant and
Equipment 23,572,668 9,793,262
---------------- ----------------
Other Assets
- - ------------
Cost in excess of fair market value of
net assets acquired, net of accumulated
amortization of $441,495
and $342,638, respectively 3,259,776 3,358,633
Investments in joint venture partnerships 206,396 4,050,834
Notes receivable from related parties 267,000 499,000
Base gas for storage facility 2,148,057 -
Other long-term assets 1,649,780 1,387,278
---------------- ----------------
Total Other Assets 7,531,009 9,295,745
---------------- ----------------
TOTAL ASSETS $89,495,026 $77,818,089
================ ================
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
3
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
As of As of
November 30, 1993 May 31, 1993
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
- - -------------------
Accounts payable $48,635,204 $49,196,862
Accrued liabilities 1,238,690 1,301,664
Accrued gas purchase costs 2,015,951 318,131
Current portion of unearned revenue 972,668 -
---------------- -----------------
Total Current Liabilities 52,862,513 50,816,657
---------------- -----------------
Convertible Senior Subordinated Notes
Payable 10,000,000 10,000,000
---------------- -----------------
Notes Payable 103,000 -
---------------- -----------------
Unearned Revenue, net of current
portion 1,077,373 -
---------------- -----------------
Deferred Income Taxes Payable 628,124 551,486
---------------- -----------------
Minority Interest 6,875,791 -
---------------- -----------------
Contingency (Note 8)
Stockholders' Equity
- - --------------------
Common stock 82,038 81,431
Additional paid-in capital 5,798,928 5,700,139
Retained earnings 14,606,870 13,431,577
Deferred compensation (420,891) (644,481)
---------------- -----------------
20,066,945 18,568,666
Less treasury stock (2,118,720) (2,118,720)
---------------- -----------------
Total Stockholders'
Equity 17,948,225 16,449,946
---------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $89,495,026 $77,818,089
================ =================
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
4
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- --------------------------
November 30, November 30, November 30, November 30,
1993 1992 1993 1992
------------ ------------ ------------ -------------
Revenues
- - --------
<S> <C> <C> <C> <C>
Gas sales $84,610,990 $90,289,549 $151,926,871 $155,083,258
Gathering and processing 3,956,109 2,614,123 6,889,869 4,791,474
Storage services 672,842 - 1,224,152 -
Agency service fees 340,475 651,421 586,843 1,138,063
Oil and gas sales from leaseholds 177,335 349,613 321,609 652,689
Interest and other income 90,256 47,282 198,838 108,095
------------ ------------ ------------ -------------
Total Revenues 89,848,007 93,951,988 161,148,182 161,773,579
------------ ------------ ------------ -------------
Expenses
- - --------
Cost of purchased gas 81,692,806 87,404,993 147,529,964 149,960,380
Gathering and processing 3,285,594 2,183,936 5,733,732 4,091,427
Storage operations 172,830 - 382,676 -
Oil and gas leaseholds 90,910 107,453 194,046 198,811
Selling, general and administrative 1,826,050 1,889,417 3,180,074 3,401,851
Depreciation, depletion and amortization 727,476 374,667 1,255,354 758,360
Interest 244,155 71,224 469,155 111,002
Provision for doubtful accounts 200,000 - 200,000 -
------------ ------------ ------------ -------------
Total Expenses 88,239,821 92,031,690 158,945,001 158,521,831
------------ ------------ ------------ -------------
Income before income taxes and
minority interest 1,608,186 1,920,298 2,203,181 3,251,748
Provision for income taxes 609,102 802,691 849,456 1,355,042
Minority interest in earnings 134,894 - 178,432 -
------------ ------------ ------------ -------------
Net income $864,190 $1,117,607 $1,175,293 $1,896,706
============ ============ ============ =============
Net income per common share $0.14 $0.17 $0.19 $0.29
============ ============ ============ =============
Weighted average common
shares outstanding 6,345,066 6,453,570 6,343,100 6,468,714
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
5
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
November 30, 1993 November 30, 1992
----------------- -----------------
<S> <C> <C>
Net cash (used in) provided by operating activities ($1,381,116) $5,189,815
----------------- -----------------
Purchase of additional interest in GQ Joint Venture,
net of cash acquired (1,117,000) --
Purchase of additional interest in Richfield Gas Storage
System, net of cash acquired (99,522) --
Acquisition of property, plant and equipment (3,668,558) (2,908,011)
Principal payments received on notes from related parties 232,000 (748,991)
----------------- -----------------
Net cash used in investing activities (4,653,080) (3,657,002)
----------------- -----------------
Principal payments on notes payable (394,690) --
Net borrowings under line of credit -- 2,000,000
Purchase of treasury stock -- (1,912,276)
Other financing activities -- (720,715)
----------------- -----------------
Net cash used in financing activities (394,690) (632,991)
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (6,428,886) 899,822
Cash and cash equivalents at beginning of period 16,498,958 4,931,763
----------------- -----------------
Cash and cash equivalents at end of period $10,070,072 $5,831,585
================= =================
Supplemental disclosures of cash flow information:
Cash paid during the period for --
Interest $431,655 $104,682
Income taxes $684,926 $1,647,387
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During the six months ended November 30, 1993, the Company assumed an
obligation to Richfield for $209,096 in connection with the acquisition of an
additional three percent interest in Richfield from a minority interest owner.
During the six months ended November 30, 1993, the Company assumed $685,000 of
liabilities in connection with the acquisition of the remaining interest in GQ.
The accompanying notes are an integral part
of these condensed consolidated statements.
6
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business and Operations
--------------------------------------
The consolidated financial statements include the accounts of Grand Valley Gas
Company and its direct and indirect wholly-owned subsidiaries (Grand Valley
Gathering Company, Centennial Storage Corporation, GV Power Corporation and
Mesquite Pipeline Company) and an indirect majority-owned joint venture
(Richfield Gas Storage System)("Richfield"). Collectively, these entities are
referred to as the "Company". On July 1, 1993, Centennial Storage Corporation
acquired an additional interest in Richfield bringing total ownership to 51.5
percent. On October 21, 1993, Grand Valley Gathering Company acquired all
remaining interests in GQ Joint Venture ("GQ") retroactively effective to July
1, 1993. As a result, the accounts of Richfield and GQ have been consolidated
with the Company's financial statements as of July 1, 1993.
The Company is primarily engaged in natural gas marketing. The Company also
owns natural gas gathering, processing, and storage facilities and interests
in developed oil and gas leaseholds.
The Company has a 37 percent ownership interest in the Tecumseh joint venture
partnership. The investment in this joint venture partnership is accounted
for using the equity method.
2. Financial Statements
--------------------
The accompanying condensed consolidated balance sheet as of November 30, 1993,
and the condensed consolidated statements of income and cash flows for the
three and six months ended November 30, 1993 and 1992 have been prepared by
the Company, and are not audited. In the opinion of management, all
adjustments necessary for fair presentation have been included. These
financial statements are condensed and therefore, do not include all
disclosures normally required by generally accepted accounting principles.
7
<PAGE>
These statements should be read in conjunction with the Company's annual
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended May 31, 1993. The accompanying
consolidated financial statements are not necessarily indicative of the
results to be generated for the remainder of fiscal year 1994.
3. Net Income Per Common Share
---------------------------
Net income per common share is calculated based on the weighted average
number of common shares and common equivalent shares outstanding during the
periods. Common equivalent shares consist of certain stock options which have
a dilutive effect when applying the treasury stock method.
Primary and fully diluted net income per common share are essentially the
same.
4. Stock Options and Incentive Stock Awards
----------------------------------------
During the six months ended November 30, 1993, the Company granted to certain
employees qualified stock options to purchase a total of 125,000 common
shares. These options are exercisable at prices ranging from $5.25 to $6.00
per share, which prices were equivalent to the quoted market price of the
Company's stock on the grant dates.
During the six months ended November 30, 1993, the Company granted 16,840
shares of common stock to directors and employees which resulted in $107,000
of compensation to be expensed over the applicable service period.
During the six months ended November 30, 1993, options to purchase 31,681
shares were exercised at a price of $.0125.
During the six months ended November 30, 1992, the Company issued to certain
employees qualified stock options to purchase a total of 16,800 common shares
exercisable at prices ranging from $8.50 to $8.625 per share, which prices
were equivalent to the quoted market price of the Company's stock on the grant
dates.
During the six months ended November 30, 1992, options to purchase 42,800
common shares were exercised at prices ranging from $.0125 to $1.00 per share.
During the six months ended November 30, 1992, the Company granted 4,006
shares of common stock to directors, officers and employees, which resulted in
$37,000 of compensation to be expensed over the applicable service period.
8
<PAGE>
5. Reclassifications
-----------------
Certain reclassifications have been made to the prior period's condensed
consolidated financial statements to conform with the current period's
presentation. These reclassifications had no effect on net income, total
assets, total liabilities or stockholders' equity.
6. Income Taxes
------------
For the six months ended November 30, 1993 and 1992,the Company provided for
income taxes based upon the estimated annualized effective tax rate.
Effective June 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for income Taxes" ("SFAS NO. 109"}. The
adoption of SFAS NO. 109 had no effect on pretax income or net for the six
months ended November 30, 1993. The Company has classified the net current and
noncurrent deferred tax assets and liabilities in accordance with SFAS No. 109
which at November 30, 1993 included a current deferred tax asset of $408,643
and a defferred tax liability of $628,124.
The components of and the changes in the net deferred tax assets and
liabilities for the six months ended November 30, 1993 are as follows:
<TABLE>
<CAPTION>
Deferred
June 1, (Expense) November 30,
Deferred tax assets: 1993 Benefit 1993
-------- --------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts $272,460 $ 76,000 $348,460
Stock options 346,505 (253,021) 93,484
Gas contract reserve 102,600 (76,177) 26,423
Joint venture investments 62,359 107,229 169,588
Other asset 29,961 3,800 33,761
-------- --------- --------
Total deferred tax assets 813,885 (142,169) 671,716
-------- --------- --------
Deferred tax liabilities:
Deprecition and depletion (591,269) (122,841) (741,110)
Other (177,088) -- (177,087)
-------- --------- --------
Total deferred tax liabilities (768,356) (122,841) (891,197)
-------- --------- --------
Net deferred tax asset (liability) $ 45,529 $(265,010) $(219,481)
======== ========= ========
</TABLE>
9
<PAGE>
7. Acquisitions
------------
On July 1, 1993, the Company increased its ownership in Richfield from 48.5
percent to 51.5 percent. The Company paid $100,000 in cash and assumed an
obligation to Richfield for $209,096. The accounts of Richfield have been
consolidated with those of the Company since July 1, 1993. Prior to that time,
the investment in Richfield was accounted for under the equity method.
On October 21, 1993, the Company acquired all remaining interests (78.52%) in
GQ retroactively effective to July 1, 1993. The Company paid $1,117,000 in
cash and assumed $685,000 of liabilities. The purchase price of $1,802,000 was
allocated to the assets acquired based on their relative fair market values.
As a result of this acquisition, the partnership was terminated and the
operations of GQ have been consolidated with those of the Company since July
1, 1993. In consolidation, the investment in GQ of $104,000 was eliminated
with gross assets and liabilities recorded as follows:
<TABLE>
<S> <C>
Current Assets $ 423,000
Net Fixed Assets 1,671,000
Current Liabilities 143,000
Non-current Liabilities 730,000
</TABLE>
8. Contingency
-----------
The Company has contracted for firm transportation capacity of 12,560 MMBtu
per day on the interstate pipeline operated by Northwest Pipeline Corporation
("Northwest"). This transportation commitment was obtained in conjuction with
an expansion of Northwest's existing facilities.
In a June 1992 order authorizing the Northwest expansion, the Federal Energy
Regulatory Commission ("FERC") stipulated that the mechanism for establishing
transportation rates on the expansion capacity would be based on "rolled-in"
rate base treatment. This treatment would require the cost of the expansion
and additional operating costs to be accumulated with those of the preexisting
facilities to establish a blended cost of service for all shippers. The FERC
further stipulated that Northwest must provide a showing in its next general
rate case that would substantiate the applicability of "rolled-in" rate
treatment to Northwest's specific circumstance.
10
<PAGE>
Northwest established transportation rates, subject to refund, pursuant to its
general rate case filed on October 1, 1992, that became effective on April 1,
1993. Several parties, primarily natural gas producers with production in the
San Juan Basin of New Mexico, intervened in the rate case proceedings opposing
the "rolled-in" rate treatment on the bases that (1) Northwest had failed to
make a proper showing as to the applicability of this treatment, and (2)
"rolled-in" treatment provides a subsidy by traditional shippers to those
shippers obtaining the newer expansion capacity. Additionally, the staff of
the FERC took the position that Northwest failed to substantiate the
applicability of "rolled-in" rate treatment to its specific circumstance.
Settlement conferences were convened in the months of May, July, August and
September of 1993 in an attempt to settle the rate case. The staff of the
FERC stated during these settlement conferences that the FERC would not oppose
a settlement that included rolled-in rates as long as no intervening party
objected. Additionally, the intervening San Juan Basin natural gas producers
withdrew their entire testimony opposing "rolled-in" treatment.
Nonetheless, the parties in the rate case failed to reach a settlement and the
case went to hearing on September 28, 1993 and concluded November 10, 1993.
The FERC will make a decision as to the appropriate rate design for the
Northwest system expansion based on the outcome of this hearing and will
determine whether the rate treatment will be applied retroactively or
prospectively. It is expected this decision will be made in late calendar
1994 or early calendar 1995.
Management believes that it is probable that a "rolled-in" rate design will
ultimately be approved with no adverse impact to the Company. The financial
impact of an unfavorable rate determination by the FERC would depend on
whether the resulting rates are applied retroactively or prospectively. In
the event that the FERC were to rule against "rolled-in" rate treatment and
take what appears to be unprecedented action to apply this type of ruling
retroactively, management estimates that additional expense would approximate
$50,000 to $80,000 per month for the period April 1, 1993 (inception of the
contract) through November 30, 1993.
9. Line of Credit
--------------
On September 24, 1993, the Company increased its line of credit facility with
the First National Bank of Boston from $15 to $20 million. The line of credit
provides working capital funding capacity of $15 million and interim funding
capacity for capital expenditures of $5 million.
11
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES Page 1 of 2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
As of As of
February 28, 1994 May 31, 1993
----------------- ------------------
ASSETS
<S> <C> <C>
Current Assets
- - --------------
Cash and cash equivalents $8,645,376 $16,498,958
Hedging deposits held on account 4,259,850 2,177,247
Accounts receivable, net of allowance for
doubtful accounts of $917,000
and $717,000, respectively 51,005,972 38,134,965
Other current assets 2,230,738 1,917,912
----------------- ----------------
Total Current Assets 66,141,936 58,729,082
----------------- ----------------
Property, Plant and Equipment, at cost
- - --------------------------------------
Gas gathering and compression equipment 17,940,907 6,065,017
Developed oil and gas leaseholds 2,134,232 2,130,949
Gas processing plant 2,664,587 1,515,370
Storage well surface equipment 2,630,559 --
Furniture and equipment 1,405,042 1,165,163
Construction in progress 1,053,123 849,652
----------------- ----------------
27,828,450 11,726,151
Less accumulated depreciation and depletion (4,355,313) (1,932,889)
----------------- ----------------
Net Property, Plant and Equipment 23,473,137 9,793,262
----------------- ----------------
Other Assets
- - ------------
Costs in excess of fair market value of
net assets acquired, net of accumulated
amortization of $490,923
and $342,638, respectively 3,210,348 3,358,633
Investments in joint venture partnerships 322,104 4,050,834
Notes receivable from related parties 268,938 499,000
Base gas for storage facility 3,835,429 --
Other long-term assets, net 1,569,406 1,387,278
----------------- ----------------
Total Other Assets 9,206,225 9,295,745
----------------- ----------------
TOTAL ASSETS $98,821,298 $77,818,089
================= ================
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
3
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES Page 2 of 2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
As of As of
February 28, 1994 May 31, 1993
----------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- - -------------------
Accounts payable $56,618,204 $49,196,862
Accrued liabilities 1,006,332 1,301,664
Accrued gas purchase costs 1,845,408 318,131
Current portion of unearned revenue 497,148 -
---------------- -------------
Total Current Liabilities 59,967,092 50,816,657
---------------- -------------
Convertible Senior Subordinated Notes Payable 10,000,000 10,000,000
---------------- -------------
Unearned Revenue, net of current portion 1,109,472 -
---------------- -------------
Deferred Income Taxes Payable 711,974 551,486
---------------- -------------
Minority Interest 7,573,377 -
---------------- -------------
Contingencies (Notes 8 and 10)
Stockholders' Equity
- - --------------------
Common stock 82,144 81,431
Additional paid-in capital 5,860,684 5,700,139
Retained earnings 15,933,263 13,431,577
Deferred compensation (297,988) (644,481)
---------------- -------------
21,578,103 18,568,666
Less treasury stock (2,118,720) (2,118,720)
---------------- -------------
Total Stockholders' Equity 19,459,383 16,449,946
---------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $98,821,298 $77,818,089
============== =============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
4
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------------- ---------------------------------
February 28, February 28, February 28, February 28,
1994 1993 1994 1993
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues
- - --------
Gas sales $104,167,823 $80,302,928 $256,094,694 $235,381,937
Gathering and processing 3,664,444 2,792,223 10,554,313 7,484,334
Storage services 660,622 - 1,884,774 -
Agency service fees 1,053,379 491,163 1,640,222 1,629,226
Oil and gas sales from leaseholds 118,314 227,057 439,923 879,746
Interest and other income 99,762 80,512 298,600 287,931
-------------- -------------- -------------- --------------
Total Revenues 109,764,344 83,893,883 270,912,526 245,663,174
-------------- -------------- -------------- --------------
Expenses
- - --------
Cost of purchased gas 100,837,202 77,131,562 248,367,166 227,087,691
Gathering and processing 3,312,260 2,260,818 9,045,992 6,352,245
Storage operations 146,982 - 529,658 -
Oil and gas leaseholds 137,750 106,358 331,796 305,169
Selling, general and administrative 2,128,738 1,486,131 5,308,812 4,917,420
Depreciation, depletion and amortization 728,144 441,717 1,983,498 1,200,077
Interest 230,324 166,301 699,479 247,828
Provisions for doubtful accounts - 444,000 200,000 444,000
-------------- -------------- -------------- --------------
Total Expenses 107,521,400 82,036,887 266,466,401 240,554,430
-------------- -------------- -------------- --------------
Income before income taxes and
minority interest 2,242,944 1,856,996 4,446,125 5,108,744
Provision for income taxes 800,980 747,770 1,650,422 2,102,812
Minority interest in earnings 115,585 - 294,017 -
-------------- -------------- -------------- --------------
Net income $1,326,379 $1,109,226 $2,501,686 $3,005,932
============== ============== ============== ==============
Net income per common share:
Primary $0.21 $0.18 $0.39 $0.47
============== ============== ============== ==============
Fully Diluted $0.20 N/A N/A N/A
============== ============== ============== ==============
Weighted average common
shares outstanding:
Primary 6,401,319 6,311,908 6,348,563 6,421,291
============== ============== ============== ==============
Fully Diluted 7,395,260 N/A N/A N/A
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
5
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
February 28, 1994 February 28, 1993
----------------- -----------------
<S> <C> <C>
Net cash (used in) provided by operating activities ($1,386,991) $8,396,345
---------------- -----------------
Purchase of additional interest in GQ Joint Venture,
net of cash acquired (1,117,000) -
Purchase of additional interest in Richfield Gas Storage
System, net of cash acquired (99,522) -
Purchase of investments in joint venture partnerships (250,025) (644,130)
Acquisition of property, plant and equipment (4,520,944) (4,114,195)
Principal payments received on (increase in) notes from
related parties 230,062 (982,180)
---------------- -----------------
Net cash used in investing activities (5,757,429) (5,740,505)
---------------- -----------------
Net proceeds from convertible senior subordinated notes - 9,482,649
Principal payments on notes payable (729,574) (1,950,000)
Purchase of treasury stock - (1,912,276)
Other financing activities 20,413 21,609
---------------- -----------------
Net cash used in financing activities (709,162) 5,641,982
---------------- -----------------
Net (decrease) increase in cash and cash equivalents (7,853,582) 8,297,822
Cash and cash equivalents at beginning of period 16,498,958 4,931,763
---------------- -----------------
Cash and cash equivalents at end of period $8,645,376 $13,229,585
================ =================
Supplemental disclosures of cash flow information:
Cash paid during the period for -
Interest $886,979 $236,022
Income taxes $980,323 $362,441
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During the nine months ended February 28, 1994, the Company assumed an
obligation to Richfield for $209,096 in connection with the acquisition of an
additional three percent interest in Richfield from a minority interest owner.
During the nine months ended February 28, 1994, the Company assumed $685,000 of
liabilities in connection with the acquisition of the remaining interest in GQ.
The accompanying notes are an integral part
of these condensed consolidated statements.
6
<PAGE>
GRAND VALLEY GAS COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business and Operations
--------------------------------------
The consolidated financial statements include the accounts of Grand Valley Gas
Company and its direct and indirect wholly-owned subsidiaries (Grand Valley
Gathering Company, Centennial Storage Corporation, GV Power Corporation, GV
Power Corporation II and Mesquite Pipeline Company) and a majority-owned joint
venture (Richfield Gas Storage System ("Richfield")). Collectively, these
entities are referred to as the "Company". On July 1, 1993, Centennial Storage
Corporation acquired an additional interest in Richfield bringing total
ownership to 51.5 percent. On October 21, 1993, Grand Valley Gathering Company
acquired all remaining interests in GQ Joint Venture ("GQ") retroactively
effective to July 1, 1993. As a result, the accounts of Richfield and GQ have
been consolidated with the Company's financial statements as of July 1, 1993.
The Company is primarily engaged in natural gas marketing. The Company also
owns natural gas gathering, processing, and storage facilities and interests in
developed oil and gas leaseholds.
The Company participates in various joint venture partnerships with ownership
percentages ranging form 24.5 percent to 45 percent. Investments in these
joint venture partnerships are accounted for using the equity method.
2. Financial Statements
--------------------
The accompanying condensed consolidated balance sheet as of February 28, 1994,
and the condensed consolidated statements of income and cash flows for the
three and nine months ended February 28, 1994 and 1993 have been prepared by
the Company, and are not audited. In the opinion of management, all
adjustments necessary for fair presentation have been included. These
financial statements are condensed and therefore, do not include all
disclosures normally required by generally accepted accounting principles.
7
<PAGE>
These statements should be read in conjunction with the Company's annual
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended May 31, 1993. The accompanying
consolidated financial results are not necessarily indicative of the results
to be generated for the remainder of fiscal year 1994.
3. Net Income Per Common Share
---------------------------
Net income per common share is calculated based on the weighted average number
of common shares and common equivalent shares outstanding during the periods.
Common equivalent shares consist of certain stock options which have a
dilutive effect when applying the treasury stock method.
The fully diluted per share computation, for the three months ended February
28, 1994, reflects the effect of common shares contingently issuable upon the
conversion of the convertible senior subordinated notes payable. For all other
periods, primary and fully diluted net income per common share are essentially
the same.
4. Stock Options and Incentive Stock Awards
----------------------------------------
On December 9, 1993 the stockholders of the Company approved the adoption of
the 1993 Stock Option Plan and the reservation of 400,000 shares of the
Company's common stock for issuance thereunder.
During the nine months ended February 28, 1994, in accordance with the new
1993 Stock Option Plan, the Company granted to certain officers qualified
stock options to purchase a total of 201,900 common shares. These options are
exercisable at a price $5.50 per share, which price was equivalent to the
closing sales price of the Company's stock on the grant date.
In addition, the Company granted to certain officers and employees qualified
stock options pursuant to the 1992 Stock Option Plan, options to purchase a
total of 155,000 common shares. These options are exercisable at prices
ranging from $5.125 to $7.125 per share, which prices were equivalent to the
closing sales price of the Company's stock on the grant dates.
During the nine months ended February 28, 1994, the Company granted 26,390
shares of common stock to directors and employees which resulted in $107,000 of
compensation to be expensed over the applicable service period and $51,000 of
compensation expensed in the current period.
8
<PAGE>
During the nine months ended February 28, 1994, options to purchases 33,000
shares of common stock were exercised at a price of $.0125.
During the nine months ended February 28, 1993, the Company granted 4,006
shares of common stock to directors, officers, and employees, which resulted
in $37,000 of compensation to be expensed over the applicable service period.
During the same period, options to purchase 80,125 common shares were
exercised at prices ranging form $.0125 to $6.875 per share.
5. Reclassifications
-----------------
Certain reclassifications have been made to the prior periods, condensed
consolidated financial statements to conform with the current periods'
presentation. These reclassifications had no effect on net income, total
assets, total liabilities or stockholders' equity.
6. Income Taxes
------------
For the nine months ended February 28, 1994 and 1993, the Company provided for
income taxes based upon the estimated annualized effective tax rate.
Effective June 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). The
adoption of SFAS No. 109 had no effect on pretax income or net income for the
nine months ended February 28, 1994. The Company has classified the net
current and noncurrent deferred tax assets and liabilities in accordance with
SFAS No. 109 which at February 28, 1994 included a current deferred tax asset
of $408,871 and a deferred tax liability of $711,974.
The components of and the changes in the net deferred tax assets and
liabilities for the nine months ended February 28, 1994 are a follows:
<TABLE>
<CAPTION>
Deferred
June 1, (Expense) February 28,
Deferred tax assets: 1993 Benefit 1994
------- ------- -------
<S> <C> <C> <C>
Allowance for doubtful accounts $272,460 $ 76,000 $348,460
Stock options 346,505 (196,751) 149,754
Gas contract reserve 102,600 (72,149) 30,451
Joint venture investments 62,359 46,508 108,867
Other assets 29,961 - 29,961
------- ------- -------
Total deferred tax assets 813,885 (146,392) 667,493
------- ------- -------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deferred tax liabilities
Depreciation and depletion (591,269) (202,239) (793,508)
Other (177,088) - (177,088)
--------- --------- ---------
Total deferred tax liabilities (768,357) (202,239) (970,596)
--------- --------- ---------
Net deferred tax asset (liability) $45,528 $(348,631) $(303,103)
</TABLE>
7. Acquisitions
On July 1, 1993, the Company increased its ownership in Richfield from 48.5
percent to 51.5 percent. The Company paid $100,000 in cash and assumed an
obligation to Richfield for $209,096. The accounts of Richfield have been
consolidated with those of the Company since July 1, 1993. Prior to that time,
the investment in Richfield was accounted for under the equity method.
On October 21, 1993, the Company acquired all remaining interests (78.52%) in
GQ retroactively effective to July 1, 1993. The Company paid $1,117,000 in
cash and assumed $685,000 of liabilities. The purchase price of $1,802,000 was
allocated to the assets acquired based on their relative fair market values. As
a result of this acquisition, the partnership was terminated and the operations
of GQ have been consolidated with those of the Company since July 1, 1993. In
consolidation, the investment in GQ of $104,000 was eliminated with gross
assets and liabilities recorded as follows:
Current Assets $ 423,000
Net Property and Equipment 1,671,000
Current Liabilities 143,000
Non current Liabilities 730,000
In January 1994, the Company purchased a 24.5 percent interest in the
Klickitat Energy Project Partnership. This 42.5 megawatt gas turbine
co-generation project is scheduled for commercial operation in August 1995.
The project has an estimated total cost of $42 million with eighty percent
expected to be funded with non-recourse debt financing. As of February 28,
1994, the Company has invested approximately $250,000.
10
<PAGE>
8. Contingencies
-------------
Rolled-in Versus Incremental Rate Case
- - --------------------------------------
The Company has contracted for firm transportation capacity of 12,560 MMBtu
per day on the interstate pipeline operated by Northwest Pipeline Corporation
("Northwest"). This transportation commitment was obtained in conjunction
with an expansion of Northwest's existing facilities.
In a June 1992 order authorizing the Northwest expansion, the Federal Energy
Regulatory Commission ("FERC") stipulated that the mechanism for establishing
transportation rates on the expansion capacity would be based on "rolled-in"
rate base treatment. This treatment would require the cost of the expansion
and additional operating costs to be accumulated with those of the
pre-existing facilities to establish a blended cost of service for all
shippers. The FERC further stipulated that Northwest must provide a showing
in its next general rate case that would substantiate the applicability of
"rolled-in" rate treatment to Northwest's specific circumstance.
Management believes that it is probable that a "rolled-in" rate design will
ultimately be approved with no adverse impact to the Company. However
management estimates that the monthly impact due to an adverse determination
relative to incremental rate treatment would result in additional expense of
approximately $85,000 per month on a prospective basis. Management believes
that, under this adverse determination scenario, it is unlikely the FERC would
apply incremental rate treatment retroactively to April 1, 1993 (inception of
the contract).
Environmental Remediation Costs
- - -------------------------------
In an effort to adhere to evolving environmental regulations, costs incurred to
investigate and remediate sites, caused primarily by normal operations of
natural gas processing facilities, are expensed or capitalized in accordance
with generally accepted accounting principles. Liabilities for these types of
costs are recorded when it is probable that obligations have been incurred and
the amounts can be reasonably estimated. Generally, the timing of these
accruals coincides with the completion of a site assessment or the Company's
determination, on another basis, that expenditures are necessary in order to
remain in compliance with applicable environmental standards. An environmental
site assessment conducted during the fiscal quarter ended February 28, 1994,
indicates that the Company is subject to probable remediation costs at a gas
processing facility, for which $100,000 has been accrued and charged to
income.
11
<PAGE>
In the opinion of management, after taking into consideration the accrued
amount, the ultimate amount to be paid for environmental remediation costs
will not have a material impact on the financial position or results of
operations of the Company.
9. Line of Credit
--------------
On September 24, 1993, the Company increased its line of credit facility with
the First National Bank of Boston from $15 to $20 million. The line of credit
provides working capital funding capacity of $15 million and interim funding
capacity for capital expenditures of $5 million.
10. Proposed Merger
---------------
On February 21, 1994, the Company signed a definitive agreement to merge with a
wholly-owned subsidiary of Associated Natural Gas Corporation (ANGC).
Consummation of the transaction is conditioned on, among other things, the
approval of the Company's shareholders and approval of certain regulatory
authorities. Terms of the agreement call for the exchange of .25 shares of
ANGC common stock for each share of the Company.
12
<PAGE>
CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION
On February 21, 1994, ANGC and Grand Valley entered into an agreement that
provides for the merger of Grand Valley with a subsidiary of ANGC. Under the
terms of the Merger Agreement, Grand Valley shareholders will receive 0.25
shares of ANGC Common Stock in exchange for each of their shares of Grand
Valley Common Stock. The business combination is to be accounted for as a
pooling of interests. ANGC's fiscal year ends September 30 and Grand Valley's
fiscal year ends May 31.
The following unaudited condensed pro forma combined balance sheet as of
March 31, 1994 assumes that the Merger occurred as of that date and reflects
the combination of the historical balance sheet of ANGC as of March 31, 1994
with the historical balance sheet of Grand Valley as of February 28, 1994, with
pro forma adjustments to give effect to the issuance of 1,584,106 ANGC shares
in exchange for 6,336,422 shares of Grand Valley Common Stock outstanding as of
that date and the subsequent retirement of the Grand Valley Common Stock and
235,098 shares held in treasury.
The following unaudited condensed pro forma combined statements of operations
for the six months ended March 31, 1994 and for the years ended September 30,
1993, 1992 and 1991 assume that the Merger occurred as of the respective dates
presented, and combines the historical results of ANGC for the six months ended
March 31, 1994 and the years ended September 30, 1993, 1992 and 1991 with the
historical results of operations of Grand Valley for the six months ended
February 28, 1994 and the years ended May 31, 1993, 1992 and 1991,
respectively. Grand Valley's historical statement of income has not been
brought up to August 31, 1993, 1992 and 1991 as the effect on the condensed pro
forma combined statement of operations for the years ended September 30, 1993,
1992 and 1991 would not be material. In addition, this presentation of the pro
forma balance sheet as of March 31, 1994 and the pro forma results of
operations for the six months ended March 31, 1994 and for the years ended
September 30, 1993, 1992 and 1991 conforms to the presentation that will be
reported subsequent to the Merger.
The pro forma results of operations are not necessarily indicative of the
results of operations that would have been obtained if the Merger had occurred
as of the beginning of the periods presented nor are they indicative of future
operating results of the combined companies. These unaudited condensed pro
forma combined financial statements should be read in conjunction with the
historical financial statements and related notes of ANGC and Grand Valley.
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
CONDENSED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
ANGC GRAND VALLEY PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
MARCH 31, FEBRUARY 28, ------------------- COMBINED
1994 1994 DEBIT CREDIT ANGC
------------ ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 53,799,849 12,905,226 66,705,075
Accounts receivable,
net of allowance..... 160,800,486 51,005,972 211,806,458
Natural gas, crude oil
and petroleum product
inventories.......... 15,304,811 31,167 15,335,978
Notes receivable...... 3,403,193 268,938 3,672,131
Income taxes
receivable........... 364,913 470,716 835,629
Other................. 714,637 1,271,269 1,985,906
------------ ---------- --------- --------- -----------
Total current
assets............. 234,387,889 65,953,288 300,341,177
------------ ---------- --------- --------- -----------
Property, plant and
equipment:
Natural gas processing
and storage
facilities........... 92,740,148 5,295,146 98,035,294
Natural gas and crude
oil pipelines........ 403,971,872 18,129,242 422,101,114
Construction in
progress............. 9,651,527 1,053,123 10,704,650
Other equipment....... 20,762,268 1,405,042 22,167,310
Developed oil and gas
properties........... -- 2,134,232 2,134,232
------------ ---------- --------- --------- -----------
527,125,815 28,016,785 555,142,600
Less accumulated
Depreciation,
depletion and
amortization......... 104,626,457 4,355,313 108,981,770
------------ ---------- --------- --------- -----------
Net property, plant
and equipment...... 422,499,358 23,661,472 446,160,830
------------ ---------- --------- --------- -----------
Other assets:
Goodwill, net......... 25,373,537 3,210,348 28,583,885
Gas contracts and
other intangibles.... 8,645,362 375,000 9,020,362
Base gas for storage.. -- 3,835,429 3,835,429
Other................. 2,590,122 1,328,176 3,918,298
------------ ---------- --------- --------- -----------
Total other assets.. 36,609,021 8,748,953 45,357,974
------------ ---------- --------- --------- -----------
$693,496,268 98,363,713 791,859,981
============ ========== ========= ========= ===========
</TABLE>
Continued
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
CONDENSED PRO FORMA COMBINED BALANCE SHEET--CONTINUED
<TABLE>
<CAPTION>
ANGC GRAND VALLEY PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
MARCH 31, FEBRUARY 28, ------------------- COMBINED
1994 1994 DEBIT CREDIT ANGC
------------ ------------ --------- --------- -----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade................. $183,500,663 56,618,204 240,118,867
Other................. 3,224,305 3,161,388 6,385,693
------------ ---------- -----------
186,724,968 59,779,592 246,504,560
Outstanding checks in
excess of bank
balances.............. 29,280,542 -- 29,280,542
Accrued interest
expense............... 4,599,779 187,500 4,787,279
Dividends payable...... 403,506 -- 403,506
Current portion of
long-term debt........ 4,000,000 -- 4,000,000
------------ ---------- -----------
Total current
liabilities........ 225,008,795 59,967,092 284,975,887
------------ ---------- -----------
Long-term debt.......... 209,000,000 10,000,000 219,000,000
------------ ---------- -----------
Deferred income taxes... 41,382,000 254,389 41,636,389
------------ ---------- -----------
Unearned revenue........ -- 1,109,472 1,109,472
------------ ---------- -----------
Minority interest....... -- 7,573,377 7,573,377
------------ ---------- -----------
Stockholders' equity:
Common stock.......... 672,510 82,144 82,144 79,205 751,715
Additional paid-in
capital.............. 163,488,177 5,860,684 2,115,781 167,233,080
Unamortized restricted
stock compensation... (1,317,468) (297,988) (1,615,456)
Retained earnings..... 55,262,254 15,933,263 71,195,517
Treasury stock........ -- (2,118,720) 2,118,720 --
------------ ---------- --------- --------- -----------
Total stockholders'
equity............. 218,105,473 19,459,383 2,197,925 2,197,925 237,564,856
------------ ---------- --------- --------- -----------
$693,496,268 98,363,713 2,197,925 2,197,925 791,859,981
============ ========== ========= ========= ===========
</TABLE>
See Accompanying Notes to the Condensed Pro Forma Combined Financial Statements
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
ANGC GRAND VALLEY
HISTORICAL HISTORICAL
SIX MONTHS SIX MONTHS
ENDED ENDED PRO FORMA
MARCH 31, FEBRUARY 28, COMBINED
1994 1994 ANGC
------------ ------------ -------------
<S> <C> <C> <C>
Operating revenue:
Natural gas and petroleum product
sales............................. $855,157,439 197,532,830 1,052,690,269
Transportation and agency fees..... 7,816,941 1,393,854 9,210,795
Other.............................. 7,018,446 295,649 7,314,095
------------ ----------- -------------
869,992,826 199,222,333 1,069,215,159
------------ ----------- -------------
Operating expenses:
Natural gas and petroleum products
purchases......................... 799,786,999 188,386,196 988,173,195
Operations......................... 20,715,546 1,371,252 22,086,798
General and administrative......... 9,961,803 3,873,674 13,835,477
Depreciation, depletion and
amortization...................... 13,558,868 1,455,620 15,014,488
------------ ----------- -------------
844,023,216 195,086,742 1,039,109,958
------------ ----------- -------------
Income from operations........... 25,969,610 4,135,591 30,105,201
Other income (expense):
Interest expense................... (7,217,930) (474,479) (7,692,409)
Interest income.................... 336,689 188,770 525,459
Other, net......................... 18,764 1,248 20,012
------------ ----------- -------------
(6,862,477) (284,461) (7,146,938)
------------ ----------- -------------
Earnings before income taxes and
minority interest............... 19,107,133 3,851,130 22,958,263
Income tax expense:
Current............................ 4,493,000 1,246,682 5,739,682
Deferred........................... 3,557,000 163,400 3,720,400
------------ ----------- -------------
8,050,000 1,410,082 9,460,082
------------ ----------- -------------
Earnings before minority interest.... 11,057,133 2,441,048 13,498,181
Minority interest................... -- 250,479 250,479
------------ ----------- -------------
Net earnings..................... $ 11,057,133 2,190,569 13,247,702
============ =========== =============
Earnings per common share............ $0.83 0.34 0.88
===== ==== ====
Weighted average common shares
outstanding......................... 13,379,647 6,373,693 14,973,070
============ =========== =============
</TABLE>
See Accompanying Notes to the Condensed Pro Forma Combined Financial Statements
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
GRAND
ANGC VALLEY
HISTORICAL HISTORICAL
YEAR ENDED YEAR ENDED PRO FORMA
SEPTEMBER 30, MAY 31, COMBINED
1993 1993 ANGC
-------------- ----------- -------------
<S> <C> <C> <C>
Operating revenue:
Natural gas and petroleum product
sales........................... $1,448,341,017 320,546,161 1,768,887,178
Transportation and agency fees... 10,270,862 1,866,081 12,136,943
Other............................ 6,710,841 1,114,578 7,825,419
-------------- ----------- -------------
1,465,322,720 323,526,820 1,788,849,540
-------------- ----------- -------------
Operating expenses:
Natural gas and petroleum
products purchases.............. 1,347,819,948 309,156,214 1,656,976,162
Operations....................... 33,424,262 838,672 34,262,934
General and administrative....... 15,661,710 6,463,578 22,125,288
Depreciation, depletion and
amortization.................... 21,925,305 1,659,851 23,585,156
-------------- ----------- -------------
1,418,831,225 318,118,315 1,736,949,540
-------------- ----------- -------------
Income from operations......... 46,491,495 5,408,505 51,900,000
Other income (expense):
Interest expense................. (12,670,495) (484,993) (13,155,488)
Interest income.................. 773,510 346,459 1,119,969
Other, net....................... (112,851) 81,031 (31,820)
-------------- ----------- -------------
(12,009,836) (57,503) (12,067,339)
-------------- ----------- -------------
Earnings before income taxes... 34,481,659 5,351,002 39,832,661
Income tax expense (benefit):
Current.......................... 7,268,000 2,382,726 9,650,726
Deferred......................... 6,845,000 (210,564) 6,634,436
-------------- ----------- -------------
14,113,000 2,172,162 16,285,162
-------------- ----------- -------------
Net earnings................... $ 20,368,659 3,178,840 23,547,499
============== =========== =============
Earnings per common share.......... $1.56 0.50 1.61
===== ==== ====
Weighted average common shares
outstanding....................... 13,031,730 6,383,803 14,627,681
============== =========== =============
</TABLE>
See Accompanying Notes to the Condensed Pro Forma Combined Financial Statements
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1992
(UNAUDITED)
<TABLE>
<CAPTION>
GRAND
ANGC VALLEY
HISTORICAL HISTORICAL
YEAR ENDED YEAR ENDED PRO FORMA
SEPTEMBER 30, MAY 31, COMBINED
1992 1992 ANGC
------------- ----------- -------------
<S> <C> <C> <C>
Operating revenue:
Natural gas and petroleum product
sales............................. $917,052,336 194,721,834 1,111,774,170
Transportation and agency fees..... 5,919,579 1,168,196 7,087,775
Other.............................. 5,474,779 697,923 6,172,702
------------ ----------- -------------
928,446,694 196,587,953 1,125,034,647
------------ ----------- -------------
Operating expenses:
Natural gas and petroleum products
purchases......................... 838,913,008 186,500,387 1,025,413,395
Operations......................... 25,177,826 262,501 25,440,327
General and administrative......... 11,856,304 4,454,435 16,310,739
Depreciation, depletion and
amortization...................... 21,318,640 525,581 21,844,221
------------ ----------- -------------
897,265,778 191,742,904 1,089,008,682
------------ ----------- -------------
Income from operations........... 31,180,916 4,845,049 36,025,965
Other income (expense):
Interest expense................... (12,332,364) (128,095) (12,460,459)
Interest income.................... 1,289,884 315,928 1,605,812
Other, net......................... (158,186) 179,810 21,624
------------ ----------- -------------
(11,200,666) 367,643 (10,833,023)
------------ ----------- -------------
Earnings before income taxes..... 19,980,250 5,212,692 25,192,942
Income tax expense:
Current............................ 3,284,000 1,800,906 5,084,906
Deferred........................... 5,046,000 166,038 5,212,038
------------ ----------- -------------
8,330,000 1,966,944 10,296,944
------------ ----------- -------------
Net earnings..................... $ 11,650,250 3,245,748 14,895,998
============ =========== =============
Earnings per common share............ $ .93 0.52 1.06
============ =========== =============
Weighted average common shares
outstanding......................... 12,539,420 6,287,584 14,111,316
============ =========== =============
</TABLE>
See Accompanying Notes to the Condensed Pro Forma Combined Financial Statements
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS--(CONTINUED)
YEAR ENDED SEPTEMBER 30, 1991
(UNAUDITED)
<TABLE>
<CAPTION>
GRAND
ANGC VALLEY
HISTORICAL HISTORICAL
YEAR ENDED YEAR ENDED PRO FORMA
SEPTEMBER 30, MAY 31, COMBINED
1991 1991 ANGC
------------- ----------- -----------
<S> <C> <C> <C>
Operating Revenue:
Natural gas and petroleum product
sales............................... $621,794,644 104,119,594 725,914,238
Transportation and agency fees....... 4,357,743 669,781 5,027,524
Other................................ 4,509,255 378,809 4,888,064
------------ ----------- -----------
630,661,642 105,168,184 735,829,826
------------ ----------- -----------
Operating expenses:
Natural gas and petroleum products
purchases........................... 560,699,588 96,356,467 657,056,055
Operations........................... 21,249,584 -- 21,249,584
General and administrative........... 9,016,504 3,049,679 12,066,183
Depreciation, depletion and
amortization........................ 17,246,442 249,407 17,495,849
------------ ----------- -----------
608,212,118 99,655,553 707,867,671
------------ ----------- -----------
Income from operations............. 22,449,524 5,512,631 27,962,155
Other income (expense):
Interest expense..................... (8,376,655) (169,000) (8,545,655)
Interest income...................... 1,491,598 279,470 1,771,068
Other, net........................... 77,390 31,802 109,192
------------ ----------- -----------
(6,807,667) 142,272 (6,665,395)
------------ ----------- -----------
Earnings before income taxes....... 15,641,857 5,654,903 21,296,760
Income tax expense:
Current.............................. 2,265,000 2,130,086 4,395,086
Deferred............................. 3,256,000 2,646 3,258,646
------------ ----------- -----------
5,521,000 2,132,732 7,653,732
------------ ----------- -----------
Net earnings....................... $ 10,120,857 3,522,171 13,643,028
============ =========== ===========
Earnings per common share.............. $.92 0.56 1.08
============ =========== ===========
Weighted average common shares
outstanding........................... 11,010,375 6,340,158 12,595,415
============ =========== ===========
</TABLE>
See Accompanying Notes to the Condensed Pro Forma Combined Financial Statements
<PAGE>
ASSOCIATED NATURAL GAS CORPORATION
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) On February 21, 1994, ANGC and Grand Valley entered into an agreement that
provides for the merger of Grand Valley with a subsidiary of ANGC. Under the
terms of the Merger Agreement, Grand Valley shareholders will receive 0.25
shares of ANGC Common Stock in exchange for each of their shares of Grand
Valley Common Stock. The business combination is to be accounted for as a
pooling of interests. The condensed pro forma combined balance sheet as of
March 31, 1994 includes pro forma adjustments to give effect to the issuance of
1,584,106 shares of ANGC Common Stock in exchange for 6,336,422 shares of Grand
Valley Common Stock outstanding as of that date and the subsequent retirement
of the Grand Valley Common Stock and 235,098 shares held in treasury. Upon
consummation of the Merger, ANGC expects to issue approximately 58,500
additional shares of ANGC Common Stock in exchange for Grand Valley Common
Stock to be issued upon the exercise of certain stock options that are expected
to be exercised upon consummation of the Merger.
(2) Certain reclassifications have been made to the historical financial
statements of Grand Valley to conform with ANGC's presentation.
(3) Pro forma earnings per share have been computed based on the pro forma net
earnings and the pro forma weighted average common shares outstanding for the
periods presented. The pro forma weighted average common shares outstanding
have been computed by adjusting the historical weighted average common shares
outstanding for ANGC by the effect of the shares to be issued in exchange for
the Grand Valley Common Stock. The dilutive effect of options outstanding on
the calculation of pro forma earnings per share was not material.
(4) The pro forma unaudited condensed consolidated financial statements do not
include estimated merger expenses, which are not expected to exceed $1.5
million. These expenses, which primarily consist of financial advisory fees,
outside legal, accounting and professional fees and one-time costs of
consolidating certain operational and administrative functions of the
companies, will be expensed in 1994. The pro forma statements also do not
include any cost savings expected to occur as a result of the Merger, as well
as the deferral of a portion of Grand Valley's current income taxes.
