<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED OCTOBER 11, 1996
5,630,000 SHARES
WESTERN GAS RESOURCES, INC.
COMMON STOCK
(PAR VALUE $0.10 PER SHARE)
----------------
[LOGO OF WESTERN GAS RESOURCES, INC. APPEARS HERE]
Of the 5,630,000 shares of Common Stock offered hereby, 5,500,000 are being
sold by the Company and 130,000 are being sold by the Selling Stockholder. The
Company will not receive any of the proceeds from the sale of the shares being
sold by the Selling Stockholder. See "Selling Stockholder."
The last reported sale price of the Common Stock, which is listed under the
symbol "WGR", on the New York Stock Exchange on November 21, 1996 was $16.25
per share. See "Price Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDER(2)
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $16.25 $0.89 $15.36 $15.36
Total(3)........... $91,487,500 $5,010,700 $84,480,000 $1,996,800
</TABLE>
- --------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $300,000 payable by the Company and
$20,000 payable by the Selling Stockholder.
(3) The Company and the Selling Stockholder have granted the Underwriters an
option for 30 days to purchase up to an additional 844,500 shares at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. If such option is exercised in full, the
total initial public offering price, underwriting discount, proceeds to
Company and proceeds to Selling Stockholder will be $105,210,625 ,
$5,762,305, $97,152,000 and $2,296,320 , respectively. See "Underwriting."
----------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
certificates for the shares will be ready for delivery in New York, New York
on or about November 27, 1996, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PETRIE PARKMAN & CO.
----------------
The date of this Prospectus Supplement is November 21, 1996.
<PAGE>
[Map of the United States depicting the location of the Company's facilities
and the basins in which it operates appears here.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following is qualified in its entirety by the more detailed information
and financial statements, including the notes thereto, appearing elsewhere in
this Prospectus Supplement and the accompanying Prospectus (collectively, the
"Prospectus") or incorporated by reference herein. Unless the context requires
otherwise, references to the "Company" refer to Western Gas Resources, Inc. and
its subsidiaries. Unless otherwise indicated herein, the information in this
Prospectus assumes that the Underwriters' over-allotment option is not
exercised.
THE COMPANY
Western Gas Resources, Inc. is an independent gas gatherer and processor and
energy marketer providing a full range of services to its customers from the
wellhead to the delivery point. The Company designs, constructs, owns and
operates natural gas gathering, processing, treating and storage facilities in
major gas-producing basins in the Rocky Mountain, Mid-Continent, Gulf Coast and
Southwestern regions of the United States. The Company connects producers'
wells to its gathering systems for delivery to its processing or treating
plants, processes the natural gas to extract natural gas liquids ("NGLs") and
treats the natural gas in order to meet pipeline specifications. The Company
markets natural gas, NGLs and wholesale electric power nationwide, providing
risk management, storage, transportation, scheduling, peaking and other
services to a variety of customers.
The Company has positioned itself in major gas-producing basins primarily
through acquisitions. Once established in these regions, the Company has
expanded its presence through internal project development and acquisition of
complementary systems. Concurrent with its growth as a gas gatherer and
processor, the Company has expanded its natural gas marketing operations
throughout the country. The firm supply of residue gas at the Company's
facilities and the peaking and pipeline transfer services provided by its Katy
Hub and Storage Facility ( the "Katy Facility") have enabled the Company to
expand its gas marketing services significantly and to reach a wider range of
customers. The table below illustrates the Company's growth from December 31,
1990 through the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
AVERAGE FOR THE PERIOD ENDED AS OF
------------------------------------------------------------------- --------------------
GAS
THROUGHPUT GAS GAS NGL RESIDUE NGL DEDICATED
CAPACITY THROUGHPUT PRODUCTION PRODUCTION GAS SALES SALES RESERVES GATHERING
(MMCF/D) (MMCF/D) (MMCF/D) (MGAL/D) (MMCF/D)(1) (MGAL/D)(1) (BCF) MILES
---------- ---------- ---------- ---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1990....... 481 217 164 680 220 630 620 3,844
September 30, 1996...... 1,943 1,173 909 2,251 1,755 3,562 2,748(2) 10,976
% increase.............. 304% 441% 454% 231% 698% 465% 343% 186%
</TABLE>
- --------
(1) Volumes include third-party sales.
(2) As of December 31, 1995.
Natural gas and NGL consumption have grown in the United States by
approximately 16% and 19%, respectively, since 1990. This growth in
consumption, together with higher residue gas and NGL prices experienced since
the beginning of 1996 and improved technology (e.g., 3-D seismic and horizontal
drilling), have stimulated drilling in several of the basins in which the
Company operates. Increased drilling has led to increased production, well
connections and opportunities for expansion. The Company is currently
developing a gathering and treating facility to gather gas from the Cotton
Valley Pinnacle Reef trend in East Texas (the "Bethel Facility") and expects to
expand significantly its
S-3
<PAGE>
existing coal seam gas gathering facilities in the Powder River basin of
Wyoming. See "Business and Properties--Business Strategy--Expansion of Core
Business." The Company believes its competitive strengths, including the
strategic location of its facilities, the availability of capacity in several
very active basins in the United States, its focus on developing and expanding
its core businesses and its commitment to tight cost controls, will allow the
Company to continue to increase its gas gathering, marketing and processing
volumes and to compete effectively against companies with greater resources.
BUSINESS STRATEGY
The Company's business strategy is to: (i) invest in projects that complement
and extend its core gas gathering, processing and marketing business; (ii)
expand its energy marketing services and sales volumes; and (iii) continue to
optimize the profitability of existing operations. As a part of this strategy,
the Company is completing its 1996 capital expenditure plan of $82 million. The
plan includes capital projects consisting of: (i) $58 million for new well
connections, compression and modifications of existing systems; (ii) $10
million (out of a projected total of $62 million) for construction of the
Bethel facility; and (iii) $14 million for maintenance of existing equipment.
EXPANSION OF CORE BUSINESS
The Company continually evaluates investments in projects that meet its
objectives of complementing existing operations, expanding into new areas or
providing enhanced marketing opportunities. These projects typically include
gas gathering, treating, processing, transportation or storage assets, NGL
product upgrade equipment or peaking power generation facilities. The following
projects are two of the more significant projects currently being undertaken by
the Company.
COTTON VALLEY PINNACLE REEF (BETHEL FACILITY). The Company is currently
constructing the Bethel facility, a 350 MMcf/D gathering and treating facility
in East Texas, that will gather gas from the Cotton Valley Pinnacle Reef trend.
Long-term gathering and treating agreements have been signed with several
producers, including Sonat Exploration Company, Broughton Associates Joint
Venture and UMC Petroleum Corporation, relating to their interests in this
trend. These agreements cover specified areas of dedication in eight counties
in East Texas, aggregating approximately 500,000 acres of previously
undedicated interests. Producers have reserved 225 MMcf/D of firm capacity at
the facility under these fee-based contracts. The Bethel facility has been
designed to accommodate incremental expansions, depending upon the success of
continued development in the trend. Advancements in 3-D seismic technology have
been instrumental in providing exploration companies active in the Cotton
Valley Pinnacle Reef trend with the capability to identify pinnacle reefs which
are located at depths of 13,000 to 17,000 feet. Reef features have been
identified in clusters within a ten-mile band stretching 120 miles through
several East Texas counties. Reefs can reach 600 feet in height and range up to
100 acres in area, with estimated reserves and production of up to one Bcf per
acre. As of January 1996, four new fields in the Cotton Valley Pinnacle Reef
trend had been discovered, with individual well rates of 9 to 30 MMcf/D and per
well reserves estimated at up to 80 Bcf of gas. Typical reef wells are capable
of producing gas at 2 to 4 Bcf per year (5.5 to 11 MMcf/D) for as long as a
decade. Construction of the Bethel facility began in September 1996, and the
facility is expected to commence operations in the second quarter of 1997. The
facility is expected to cost approximately $62 million. However, due to
uncertainties related to construction costs, possible delays in permitting and
other conditions outside the Company's control, there can be no assurance that
this project will develop as currently anticipated. In addition, the production
that is anticipated to be gathered and treated at the Bethel facility is
primarily expected to be produced from prospects that have not yet been
drilled, and there can be no assurance of successful completion of wells in
these prospects.
S-4
<PAGE>
COAL SEAM GATHERING SYSTEM EXPANSION. The Company plans to expand its Powder
River basin (Wyoming) coal seam gas gathering system and develop its own coal
seam gas reserves. The Company has acquired the drilling rights in the vicinity
of known coal seam production of approximately 120,000 gross acres. The Company
and other operators in the area have established production from wells drilled
to depths of 200 to 700 feet, with a completed cost per well of approximately
$25,000. The Company will utilize its existing dry gas gathering system and
interstate pipelines to transport this pipeline quality gas to market. If the
producers complete their drilling programs in this area and the Company
successfully develops its acreage, the Company believes it could significantly
increase the volume of coal seam gas gathered from current levels of
approximately 25 MMcf/D at September 30, 1996 to as much as 150 MMcf/D in five
years, including approximately 30 MMcf/D from Company-owned properties. The
coal seam activity is bordered on the east by active coal mines that now use
residue gas in their production processes. The Company is negotiating long-term
residue sales contracts with several coal mines in this area for up to 30
MMcf/D for use in such operations. The Company anticipates that capital
expenditures will be approximately $73 million during the next five years,
primarily for compression equipment, including $9 million for drilling costs
and production equipment. However, because of drilling and other uncertainties,
there can be no assurance that this project will develop or that long-term
residue sales contracts will be executed as currently anticipated.
EXPAND ENERGY MARKETING SERVICES AND VOLUMES
The Company is a full-service marketer of residue gas and NGL products and
has now expanded into the sale of wholesale electric power. The Company focuses
on the individual needs of its customers and is committed to developing
products and services that are tailored to meet their requirements. The Company
plans to expand its energy marketing activities by: (i) pursuing higher-margin,
end-use markets; (ii) increasing third-party gas, NGL and electric power sales
volumes; and (iii) engaging in retail electric power sales as those markets
become available through deregulation.
RESIDUE GAS. The Company sells residue gas nationwide and provides its
customers with a full range of services including risk management, storage,
transportation, scheduling and peaking requirements. Since 1990, the Company's
residue gas sales volumes have increased by 698% to 1.8 Bcf/D for the nine
months ended September 30, 1996, primarily as a result of the increase in
third-party sales. The Company's gas marketing efforts are enhanced by the firm
supply of gas produced at its facilities, its ownership and operation of the
Katy Facility and by firm capacity transportation agreements with various
third-party pipelines. The Company's Katy Facility has 19 Bcf of storage
capacity and is connected to 11 strategic pipeline interconnects providing
transportation access to virtually all regions of the continental United
States. The Company can withdraw gas from the Katy Facility on short notice to
service local distribution companies ("LDCs") and other customers that need a
reliable supply of residue gas on demand. This facility also allows the Company
to bypass certain transportation bottlenecks and to arbitrage pipeline price
differentials. The Company believes it competes effectively with other
marketers due to its national marketing presence and the marketing information
gained thereby, the services it provides and its physical asset base.
NGLS. The Company markets NGLs (ethane, propane, iso-butane, normal butane,
natural gasoline and condensate) produced at its plants and purchased from
third parties to the petrochemical industry, the petroleum refining industry
and the retail and industrial fuel markets. The Company had average NGL sales
of 3,562 MGal/D in the nine months ended September 30, 1996, which represented
an increase of 465% since 1990. Over the last several years, the petrochemical
industry has increased its use of NGLs as a major feedstock and, according to
industry sources, is projected to require an additional 6,300 MGal/D to 8,400
MGal/D of NGL supply by 1998, an increase of approximately 15% to 20%. The
Company's NGL marketing strategy is to increase sales of third-party
S-5
<PAGE>
products, increase sales to end-users, minimize transportation costs by selling
NGL products to markets in the vicinity of its facilities and offer risk
management services to its customers. The Company intends to invest in
additional facilities to upgrade the value of its NGLs where economically
appropriate.
ELECTRIC POWER. In July 1996, the Federal Energy Regulatory Commission issued
its final order requiring investor-owned electric utilities to provide open
access for wholesale transmission. This action allows companies to participate
in a market previously controlled by electric utilities. During the first half
of 1996, the Company created the infrastructure necessary to market electric
power on a nationwide basis. The Company currently trades electric power in the
wholesale market and enters into transactions that arbitrage the value of
natural gas and electric power. The Company intends to expand its marketing
efforts to reach industrial end-users as these markets become available. The
Company believes its expertise in marketing gas in a deregulated environment,
its expanding customer base and its firm supplies of natural gas and NGL
products will allow it to compete effectively in this emerging market.
OPTIMIZE PROFITABILITY
The Company seeks to optimize the profitability of its operations by: (i)
maintaining or increasing natural gas throughput levels; (ii) increasing its
efficiency through the consolidation of existing facilities; (iii) investing in
assets that enhance product value; (iv) selling non-strategic assets; and (v)
controlling operating and overhead expenses.
In order to maintain or increase throughput levels, the Company obtains
additional gas supplies for its facilities by connecting new wells, purchasing
and integrating gathering systems from third parties and entering into joint
ventures with producers or other processors. The opportunity to connect new
wells to existing facilities is primarily affected by the level of drilling
activity near the Company's gathering systems. For example, the Company's
Granger, Lincoln Road and Red Desert systems are located in the Greater Green
River Basin of Southwest Wyoming for which the United States Geological Survey
has estimated the recoverable gas resources to be approximately 120 Tcf. Should
the residue gas prices in this area increase due to the previously announced
expansions of several nearby interstate pipelines, the Company believes
substantial new drilling in the vicinity of its facilities should occur. The
Company has extensive gathering systems and compression with available capacity
in place to capitalize on the in-fill drilling potential in this basin.
S-6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
the Company...................... 5,500,000 shares
the Selling Stockholder.......... 130,000 shares
Total.......................... 5,630,000 shares
Common Stock to be outstanding
after the Offering................ 31,280,310 shares(1)
Use of proceeds.................... To pay a portion of the debt incurred under
the Company's Revolving Credit Facility.
Funds available under the Revolving Credit
Facility will be used together with
operating cash flow to fund the Company's
development and expansion plans and
selected acquisitions as well as for
general corporate purposes. See "Use of
Proceeds" and "Business Strategy--Expansion
of Core Business."
New York Stock Exchange ("NYSE")
symbol............................ WGR
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding on November 21,
1996. Does not include 1,090,825 shares of Common Stock issuable upon
exercise of outstanding stock options as of September 30, 1996 and
2,760,000 shares initially reserved for issuance pursuant to conversion of
the $2.625 Cumulative Convertible Preferred Stock.
S-7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARES, PER SHARE AMOUNTS AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $1,394,658 $ 894,814 $1,256,984 $1,063,489 $ 932,338 $ 600,116 $ 358,242
Depreciation, depletion
and amortization....... 47,134 50,128 65,361 63,586 43,980 26,491 18,515
Gross profit............ 76,527 52,633 75,211 72,556 92,012 88,192 58,152
Income (loss) before
taxes.................. 28,329 2,677 (8,266) 11,524 55,631 58,445 32,783
Provision (benefit) for
income taxes........... 9,783 677 (2,158) 4,160 17,529 18,757 11,933
Net income (loss)....... 18,546 2,000 (6,108) 7,364 38,102 39,688 20,850
Income (loss)
attributable to common
stock.................. 10,717 (10,821) (21,539) (4,848) 32,010 36,416 20,294
Earnings (loss) per
share of common stock.. $ .42 $ (.42) $ (.84) $ (.19) $ 1.25 $ 1.43 $ .94
Weighted average shares
of common stock
outstanding............ 25,774,446 25,750,401 25,753,738 25,695,760 25,608,503 25,453,029 21,669,688
CASH FLOW DATA:
Net cash provided by
operating activities... $ 119,248 $ 76,213 $ 86,373 $ 31,866 $ 107,116 $ 96,655 $ 36,228
EBITDA (1).............. 102,109 80,513 111,897 106,544 112,067 95,016 64,078
Capital expenditures.... 38,803 49,038 78,521 100,540 492,328 67,021 234,124
Dividends declared per
share of common stock
(2).................... $ .15 $ .15 $ .20 $ .20 $ .20 $ .20 $ .15
OPERATING DATA:
Average gas sales
(MMcf/D)............... 1,755 1,553 1,572 1,097 755 442 310
Average NGL sales
(MGal/D)............... 3,562 2,867 2,890 2,970 2,941 2,400 1,097
Average gas volumes
gathered (MMcf/D)...... 1,173 944 1,020 934 804 669 408
Facility capacity
(MMcf/D)............... 1,943 1,985 1,907 1,560 1,586 1,177 1,183
Dedicated reserves (Tcf)
(3).................... -- -- 2.7 2.6 2.2 1.8 1.6
Average gas prices
($/Mcf)................ $ 2.04 $ 1.45 $ 1.53 $ 1.77 $ 2.02 $ 1.72 $ 1.59
Average NGL prices
($/Gal)................ $ .37 $ .31 $ .31 $ .28 $ .31 $ .32 $ .36
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED (4)
---------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets........... $1,174,550 $1,183,030
Long-term debt......... 380,500 304,500
Stockholders' equity... $ 378,808 $ 463,288
</TABLE>
- --------
(1) Reflects income before income taxes, interest expense, depreciation,
depletion and amortization and a $17,642 non-cash impairment loss related
to certain oil and gas assets and plant facilities in the fourth quarter of
1995 in connection with the Company's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This data
does not purport to reflect any measure of operations or cash flow. EBITDA
is not a measure determined pursuant to generally accepted accounting
principles ("GAAP"), nor is it an alternative to GAAP income.
(2) On November 1, 1996, the Company's Board of Directors declared fourth
quarter dividends of $0.05 per share of Common Stock, payable on February
14, 1997 to stockholders of record on December 31, 1996.
(3) Dedicated reserve reports are prepared only at year-end. As a result,
reserve information is not available for the nine month periods.
(4) The as adjusted column reflects the sale by the Company of 5,500,000 shares
in the Offering and the application of the net proceeds therefrom as if the
Offering had occurred on September 30, 1996.
S-8
<PAGE>
DEFINITIONS
<TABLE>
<S> <C>
Bbl Barrel
Bbl/D Barrels per day
Bcf Billion cubic feet
Bcf/D Billion cubic feet per day
Btu British thermal unit
Gal Gallon
MBbls Thousand barrels
Mcf Thousand Cubic feet
MGal Thousand gallons
MGal/D Thousand gallons per day
MMGal Million gallons
MMGal/D Million gallons per day
MMcf/D Million cubic feet per day
Tcf Trillion cubic feet
</TABLE>
S-9
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be approximately $84,480,000 million ($97,152,000 million if the
Underwriters' over-allotment option is exercised in full), all of which will
be used initially to repay a portion of the debt incurred under the Company's
variable rate revolving credit facility (the "Revolving Credit Facility").
Funds available under the Revolving Credit Facility will be used together with
operating cash flow to fund the Company's development and expansion plans and
selected acquisitions as well as for general corporate purposes. See "Business
and Properties--Business Strategy--Expansion of Core Business."
The amount outstanding on the Revolving Credit Facility at October 31, 1996
was $99.7 million, which bore interest at a weighted average rate of 6.8% per
annum and was incurred for general corporate purposes. Upon the placement of
at least $50 million of common or preferred equity, the interest rate paid by
the Company on borrowings under the Revolving Credit Facility will decrease by
.125%.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock being sold by the Selling Stockholder.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
As of November 21, 1996, there were 25,780,310 shares of Common Stock
outstanding held by 402 holders of record. The Common Stock is traded on the
NYSE under the symbol "WGR." The following table sets forth quarterly high and
low closing sales prices per share as reported on the NYSE Composite Tape and
dividends per share on Common Stock payable for the quarterly periods
indicated.
<TABLE>
<CAPTION>
STOCK PRICES
---------------
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
1994
First Quarter....................................... $ 35 $26 1/8 $0.05
Second Quarter...................................... 30 26 0.05
Third Quarter....................................... 28 1/2 18 1/2 0.05
Fourth Quarter...................................... 22 1/8 18 1/8 0.05
1995
First Quarter....................................... 22 1/8 16 3/4 0.05
Second Quarter...................................... 24 1/4 16 5/8 0.05
Third Quarter....................................... 18 1/4 15 1/2 0.05
Fourth Quarter...................................... 17 5/8 15 0.05
1996
First Quarter....................................... 16 5/8 11 1/8 0.05
Second Quarter...................................... 16 3/4 13 1/2 0.05
Third Quarter....................................... 16 3/8 13 1/8 0.05
Fourth Quarter (through November 21, 1996).......... $16 7/8 $13 7/8 $0.05(1)
</TABLE>
- --------
(1) On November 1, 1996, the Company's Board of Directors declared fourth
quarter dividends of $0.05 per share of Common Stock, payable on February
14, 1997 to stockholders of record on December 31, 1996.
Declarations of dividends on the Common Stock are within the discretion of
the Board of Directors and are dependent upon various factors, including the
earnings, cash flow, capital requirements and financial condition of the
Company. In addition, the Company's ability to pay dividends is restricted by
certain covenants in its financing facilities, the most restrictive of which
prohibits declaring or paying dividends on any capital stock after December
31, 1995 that exceed, in the aggregate, the sum of $10 million plus 50% of the
Company's cumulative consolidated net income earned after December 31, 1995
plus 50% of the net proceeds received by the Company after December 31, 1995
from the sale of any equity securities. The dividends declared in the fourth
quarter of 1995, which were paid in 1996, were excluded from this calculation,
pursuant to the terms of the Revolving Credit Facility. At September 30, 1996,
this threshold amounted to $8 million. After giving effect to this Offering,
at September 30, 1996, the threshold would have been $49.6 million.
S-10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted to give effect to the Offering and the use
of estimated net proceeds therefrom. See "Use of Proceeds." This table should
be read in conjunction with the consolidated financial statements and notes
thereto included in the documents incorporated by reference herein.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
--------------------
ACTUAL AS ADJUSTED
--------------------
(IN THOUSANDS)
<S> <C> <C>
CASH (1)................................................... $ 4,043 $ 12,523
======== ========
LONG-TERM DEBT:
Revolving Credit Facility................................. $ 76,000 $ --
Master Shelf and senior notes............................. 292,000 292,000
Bank term loan facility................................... 12,500 12,500
-------- --------
Total long-term debt................................... 380,500 304,500
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock: par value $.10; 10,000,000 shares
authorized
$2.28 Cumulative Preferred Stock, 1,400,000 shares issued
and outstanding......................................... 140 140
$2.625 Cumulative Convertible Preferred Stock, 2,760,000
shares issued and outstanding........................... 276 276
Common Stock, par value $.10; 100,000,000 shares
authorized; 25,803,789 shares issued, 31,303,789 shares
as adjusted (2).......................................... 2,580 3,130
Additional paid-in capital................................ 301,289 385,219
Retained earnings......................................... 77,197 77,197
Treasury Stock, at cost; 25,016 shares in treasury........ (788) (788)
Notes receivable from key employees secured by common
stock.................................................... (1,886) (1,886)
-------- --------
Total stockholders' equity............................. 378,808 463,288
-------- --------
Total capitalization....................................... $759,308 $767,788
======== ========
</TABLE>
- --------
(1) At October 31, 1996 the outstanding principal balance on the Company's
Revolving Credit Facility was $99.7 million. The net proceeds to the
Company from the Offering reflected as cash will be used to repay a
portion of the debt incurred under the Revolving Credit Facility.
(2) Does not include 1,090,825 shares of Common Stock issuable upon exercise
of outstanding stock options and 2,760,000 shares initially reserved for
issuance pursuant to conversion of the $2.625 Cumulative Convertible
Preferred Stock.
S-11
<PAGE>
BUSINESS AND PROPERTIES
Western Gas Resources, Inc. is an independent gas gatherer and processor and
energy marketer providing a full range of services to its customers from the
wellhead to the delivery point. The Company designs, constructs, owns and
operates natural gas gathering, processing, treating and storage facilities in
major gas-producing basins in the Rocky Mountain, Mid-Continent, Gulf Coast
and Southwestern regions of the United States. The Company connects producers'
wells to its gathering systems for delivery to its processing or treating
plants, processes the natural gas to extract NGLs and treats the natural gas
in order to meet pipeline specifications. The Company markets natural gas,
NGLs and wholesale electric power nationwide, providing risk management,
storage, transportation, scheduling, peaking and other services to a variety
of customers.
The Company has positioned itself in major gas-producing basins primarily
through acquisitions. Once established in these regions, the Company has
expanded its presence through internal project development and acquisition of
complementary systems. Concurrent with its growth as a gas gatherer and
processor, the Company has expanded its natural gas marketing operations
throughout the country. The firm supply of residue gas at the Company's
facilities and the peaking and pipeline transfer services provided by its Katy
Facility have enabled the Company to expand its gas marketing services
significantly and to reach a wider range of customers. The table below
illustrates the Company's growth from December 31, 1990 through the nine
months ended September 30, 1996:
<TABLE>
<CAPTION>
AVERAGE FOR THE PERIOD ENDED AS OF
------------------------------------------------------------------- --------------------
GAS
THROUGHPUT GAS GAS NGL RESIDUE NGL DEDICATED
CAPACITY THROUGHPUT PRODUCTION PRODUCTION GAS SALES SALES RESERVES GATHERING
(MMCF/D) (MMCF/D) (MMCF/D) (MGAL/D) (MMCF/D)(1) (MGAL/D)(1) (BCF) MILES
---------- ---------- ---------- ---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1990....... 481 217 164 680 220 630 620 3,844
September 30, 1996...... 1,943 1,173 909 2,251 1,755 3,562 2,748(2) 10,976
% increase.............. 304% 441% 454% 231% 698% 465% 343% 186%
</TABLE>
- --------
(1) Volumes include third-party sales.
(2) As of December 31, 1995.
Natural gas and NGL consumption have grown in the United States by
approximately 16% and 19%, respectively, since 1990. This growth in
consumption together with higher residue gas and NGL prices experienced since
the beginning of 1996 and improved technology (e.g., 3-D seismic and
horizontal drilling), have stimulated drilling in several of the basins in
which the Company operates. Increased drilling has led to increased
production, well connections and opportunities for expansion. The Company is
currently developing a gathering and treating facility to gather gas from the
Cotton Valley Pinnacle Reef trend in East Texas (the Bethel facility) and
expects to expand significantly its existing coal seam gas gathering
facilities in the Powder River basin of Wyoming. See "Business and
Properties--Business Strategy--Expansion of Core Business." The Company
believes its competitive strengths, including the strategic location of its
facilities, the availability of capacity in several very active basins in the
United States, its focus on developing and expanding its core businesses and
its commitment to tight cost controls, will allow the Company to continue to
increase its gas gathering, marketing and processing volumes and to compete
effectively against companies with greater resources.
BUSINESS STRATEGY
The Company's business strategy is to: (i) invest in projects that
complement and extend its core gas gathering, processing and marketing
business; (ii) expand its energy marketing services and sales volumes; and
(iii) continue to optimize the profitability of existing operations. As a part
of this strategy, the Company is completing its 1996 capital expenditure plan
of $82 million. The plan includes capital
S-12
<PAGE>
projects consisting of: (i) $58 million for new well connections, compression
and modifications of existing systems; (ii) $10 million (out of a projected
total of $62 million) for construction of the Bethel facility; and (iii) $14
million for maintenance of existing equipment.
EXPANSION OF CORE BUSINESS
The Company continually evaluates investments in projects that meet its
objectives of complementing existing operations, expanding into new areas or
providing enhanced marketing opportunities. These projects typically include
gas gathering, treating, processing, transportation or storage assets, NGL
product upgrade equipment or peaking power generation facilities. The
following projects are two of the more significant projects currently being
undertaken by the Company.
COTTON VALLEY PINNACLE REEF (BETHEL FACILITY). The Company is currently
constructing the Bethel facility, a 350 MMcf/D gathering and treating facility
in East Texas, that will gather gas from the Cotton Valley Pinnacle Reef
trend. Long-term gathering and treating agreements have been signed with
several producers, including Sonat Exploration Company, Broughton Associates
Joint Venture and UMC Petroleum Corporation, relating to their interests in
the trend. These agreements cover specified areas of dedication in eight
counties in East Texas, aggregating approximately 500,000 acres of previously
undedicated interests. Producers have reserved 225 MMcf/D of firm capacity at
the facility under these fee-based contracts. The Bethel facility has been
designed to accommodate incremental expansions, depending upon the success of
continued development in the trend. Construction of the Bethel facility began
in September 1996, and the facility is expected to commence operations in the
second quarter of 1997. The facility is expected to cost approximately $62
million. The Company plans initially to construct a 75-mile trunk line, with a
diameter ranging from 20 inches to 24 inches, south from the plant site to
existing production in the Cotton Valley Pinnacle Reef trend. The Company will
expand trunk lines to the north and east as the dedicated acreage is
developed. The Company will construct gathering lines from the wellhead to
central points for dehydration and redelivery into the trunk lines. The Bethel
facility will initially have a residue gas connection with a major intrastate
pipeline and other pipeline connections are anticipated. The Company is also
negotiating with other producers active in the trend. Should the current
producers under contract, or others, require additional capacity, the Company
intends to expand the facility in stages to accommodate new discoveries as
they are completed.
Advancements in 3-D seismic technology have been instrumental in providing
exploration companies active in the Cotton Valley Pinnacle Reef trend with the
capability to identify pinnacle reefs which are located at depths of 13,000 to
17,000 feet. Reef features have been identified in clusters within a ten-mile
band stretching 120 miles through several East Texas counties. Reefs can reach
600 feet in height and range up to 100 acres in area, with estimated reserves
and production of up to one Bcf per acre. As of January 1996, four new fields
in the Cotton Valley Pinnacle Reef trend had been discovered with individual
well rates of 9 to 30 MMcf/D and per well reserves estimated at up to 80 Bcf
of gas. Typical reef wells are capable of producing gas at 2 to 4 Bcf per year
(5.5 to 11 MMcf/D) for as long as a decade. The #1 Marshall A well, drilled in
1982, and its replacement well, drilled in 1986, have collectively produced
approximately 50 Bcf in 14 years, an average of 9.8 MMcf/D. Sonat's Fountain
#1 well tested at 30 MMcf/D in April 1996 and recoverable reserves are
estimated by Sonat to be approximately 70 Bcf of gas. Sonat's Scurlock #1 well
was recently completed and has been tested at a rate of 23 MMcf/D with
recoverable reserves estimated by the operator to be in the range of 40 to 50
Bcf. Broughton Associates Joint Venture has significant interests in six
wells, of which three are currently capable of producing 52 MMcf/D, and plans
to drill or participate in an additional 18 exploratory wells in the trend by
the end of 1997.
S-13
<PAGE>
Due to uncertainties related to construction costs, possible delays in
permitting and other conditions outside the Company's control, there can be no
assurance that this project will develop as currently anticipated. In
addition, the production that is anticipated to be gathered and treated at the
Bethel facility is primarily expected to be produced from prospects that have
not yet been drilled, and there can be no assurance of successful completion
of wells in these prospects.
COAL SEAM GATHERING SYSTEM EXPANSION. The Company plans to expand its Powder
River basin (Wyoming) coal seam gas gathering system and develop its own coal
seam gas reserves. The Company has acquired the drilling rights in the
vicinity of known coal seam production of approximately 120,000 gross acres.
The Company and other operators in the area have established production from
wells drilled to depths of 200 to 700 feet, with a completed cost per well of
approximately $25,000. The Company will utilize its existing dry gas gathering
system and interstate pipelines to transport this pipeline quality gas to
market. If the producers complete their drilling programs in this area and the
Company successfully develops its acreage, the Company believes it could
significantly increase the volume of coal seam gas gathered from current
levels of approximately 25 MMcf/D at September 30, 1996 to as much as 150
MMcf/D in five years, including approximately 30 MMcf/D from Company-owned
properties. The coal seam activity is bordered on the east by active coal
mines that now use residue gas in their production processes. The Company is
negotiating long-term residue sales contracts with several coal mines in this
area for up to 30 MMcf/D for use in such operations. The Company anticipates
that capital expenditures will be approximately $73 million during the next
five years, primarily for compression equipment, including $9 million for
drilling costs and production equipment. However, because of drilling and
other uncertainties, there can be no assurance that this project will develop
or that long-term residue sales contracts will be executed as currently
anticipated.
EXPAND ENERGY MARKETING SERVICES AND VOLUMES
Prior to deregulation of the natural gas industry, the Company's marketing
activities were directed towards selling residue gas and NGLs processed at its
plants to ensure their efficient operation. As the natural gas industry
deregulated and new market opportunities developed, the Company began to
increase its third-party marketing. In order to compete in today's energy
marketplace, a marketer must provide a full range of services and products to
meet its customers' demands. The Company is a full-service marketer of residue
gas and NGL products and has now expanded into the sale of wholesale electric
power. The Company focuses on the individual needs of its customers and is
committed to developing products and services that are tailored to meet their
requirements. The Company plans to expand its energy marketing activities by:
(i) pursuing higher-margin, end-use markets; (ii) increasing third-party gas,
NGL and electric power sales volumes; and (iii) engaging in retail electric
power sales as those markets become available through deregulation.
RESIDUE GAS. The Company sells residue gas nationwide and provides its
customers with a full range of services including risk management, storage,
transportation, scheduling and peaking requirements. Since 1990, the Company's
residue gas sales volumes have increased by 698% to 1.8 Bcf/D for the nine
months ended September 30, 1996, primarily as a result of the increase in
third-party sales. The Company's gas marketing efforts are enhanced by the
firm supply of gas produced at its facilities, its ownership and operation of
the Katy Facility and by firm capacity transportation agreements with various
third-party pipelines. The Company's Katy Facility has 19 Bcf of storage
capacity and is connected to 11 strategic pipeline interconnects providing
transportation access to virtually all regions of the continental United
States. The Company can withdraw gas from the Katy Facility on short notice to
service LDCs and other customers that need a reliable supply of residue gas on
demand. This facility also allows the Company to bypass certain transportation
bottlenecks and to arbitrage pipeline price differentials. The Company intends
to continue to expand its residue gas marketing business by adding experienced
staff including end-use marketers located in selected
S-14
<PAGE>
market areas. The Company believes it competes effectively with other
marketers due to its national marketing presence and the marketing information
gained thereby, the services it provides and its physical asset base.
NGLS. The Company markets NGLs produced at its plants and purchased from
third parties to the petrochemical industry, the petroleum refining industry
and the retail and industrial fuel markets. The Company had average NGL sales
of 3,562 MGal/D in the nine months ended September 30, 1996, which represented
an increase of 465% since 1990. Over the last several years, the petrochemical
industry has increased its use of NGLs as a major feedstock and, according to
industry sources, is projected to require an additional 6,300 MGal/D to 8,400
MGal/D of NGL supply by 1998, an increase of approximately 15% to 20%. The
Company's NGL marketing strategy is to increase sales of third-party products,
increase sales to end-users, minimize transportation costs by selling NGL
products to markets in the vicinity of its facilities and offer risk
management services to its customers. The Company intends to invest in
additional facilities to upgrade the value of its NGLs where economically
appropriate.
POWER MARKETING. In July 1996, the Federal Energy Regulatory Commission
issued its final order requiring investor-owned electric utilities to provide
open access for wholesale transmission. This action allows companies to
participate in a market previously controlled by electric utilities. During
the first half of 1996, the Company created the infrastructure necessary to
market electric power on a nationwide basis. The Company currently trades
electric power in the wholesale market and enters into transactions that
arbitrage the value of natural gas and electric power. The Company intends to
expand its marketing efforts to reach industrial end-users as these markets
become available. The Company believes its expertise in marketing gas in a
deregulated environment, its expanding customer base and its firm supplies of
natural gas and NGL products will allow it to compete effectively in this
emerging market.
The Company believes that the anticipated deregulation by states of retail
power marketing will offer the Company significant opportunities to offer both
natural gas and electric power to its existing end-user customer base and to
utilize the Company's demonstrated ability in the natural gas sector to
respond quickly to changing regulatory and market conditions. In 1995, the
Company received a certificate from the Federal Energy Regulatory Commission
authorizing it to sell electric power at the wholesale level. The Company
currently has 11 employees dedicated to power marketing. The Company has
developed the contractual infrastructure necessary to market power and, as of
September 30, 1996, has approximately 200 purchase and sale agreements in
place with electric utilities and power marketers to buy and sell wholesale
electric power. There is no assurance that the retail electric power marketing
industry will develop or that the Company will be successful if the industry
develops.
OPTIMIZE PROFITABILITY
The Company seeks to optimize the profitability of its operations by: (i)
maintaining or increasing natural gas throughput levels; (ii) increasing its
efficiency through the consolidation of existing facilities; (iii) investing
in assets that enhance product value; (iv) selling non-strategic assets; and
(v) controlling operating and overhead expenses.
In order to maintain or increase throughput levels, the Company obtains
additional gas supplies for its facilities by connecting new wells, purchasing
and integrating gathering systems from third
S-15
<PAGE>
parties and entering into joint ventures with producers or other processors.
The opportunity to connect new wells to existing facilities is primarily
affected by the level of drilling activity near the Company's gathering
systems. The higher residue gas and NGL prices experienced since the beginning
of 1996 and improved technology (e.g., 3-D seismic and horizontal drilling)
have stimulated drilling in basins in which the Company operates, primarily
the Permian and Anadarko basins, resulting in increased new well connects. For
example, the Company's Granger, Lincoln Road and Red Desert systems are
located in the Greater Green River Basin of Southwest Wyoming for which the
United States Geological Survey has estimated the recoverable gas resources to
be approximately 120 Tcf. Should the residue gas prices in this area increase
due to the previously announced expansions of several interstate pipelines
operating in this area, the Company believes new drilling in the vicinity of
its facilities should occur. The Company has extensive gathering systems and
compression with available capacity in place to capitalize on the in-fill
drilling opportunities in this basin. In addition, the Company believes that
its Toca facility in Southeast Louisiana is strategically located to take
advantage of increases in volumes as the drilling activity in the Gulf of
Mexico accelerates.
In order to maximize its competitive advantages, the Company continually
monitors the economic performance of each of its operating facilities to
ensure that a desired cash flow objective and operating efficiency is
achieved. If an operating facility is not generating desired cash flows or
does not fit in with the Company's strategic plans, the Company will explore
various options, including consolidation of its facilities, asset swap or
outright sale. During 1995 and the first nine months of 1996, the Company
consolidated the operations of three systems in the Anadarko Basin and
suspended processing operations at its Lincoln Road facility and began
processing the Lincoln Road gas at the Granger facility. If volumes increase
substantially beyond Granger's capacity, the Lincoln Road plant might be re-
started. As a result of these consolidations, increases in volumes gathered
(which do not need to be processed) and other operational improvements, the
Company reduced operating expenses through the first nine months of 1996 by
approximately 30% to $.16 per Mcf of gas gathered compared to 1994. While
committed to cost control, the Company continues to emphasize safe operations
and has maintained a safety record better than the industry average. In the
fourth quarter of 1995, the Company determined that it was no longer
economically feasible to operate the Temple facility and in May 1996, sold
that facility.
S-16
<PAGE>
PRINCIPAL FACILITIES
The following table provides information concerning the Company's principal
facilities. The Company also owns and operates several smaller treating and
processing facilities located in the same areas as its other facilities.
<TABLE>
<CAPTION>
AVERAGE FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
GAS GAS -----------------------------------
GATHERING THROUGHPUT GAS GAS NGL
YEAR PLACED SYSTEMS CAPACITY THROUGHPUT PRODUCTION PRODUCTION
FACILITY(1) IN SERVICE MILES(2) (MMCF/D)(2) (MMCF/D)(3) (MMCF/D)(4) (MGAL/D)(4)
- ------------------------ ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SOUTHERN REGION:
Texas
Midkiff/Benedum....... 1955 2,080 150 141 94 865
Giddings Gathering
System............... 1979 653 80 67 57 87
Edgewood(5)(9)........ 1964 93 65 29 11 77
Perkins............... 1975 2,566 40 22 12 145
MiVida(5)............. 1972 287 150 58 55 --
Gomez................. 1971 302 280 159 155 --
Mitchell Puckett...... 1972 86 140 78 77 --
Crockett Gathering
System(6)............ 1973 -- -- 12 11 --
Rosita Treating
System............... 1973 -- 60 49 49 --
Katy(7)............... 1994 18 -- -- -- --
Louisiana
Black Lake............ 1966 56 75 35 23 84
Toca(8)(9)............ 1958 -- 160 95 -- 59
NORTHERN REGION:
Oklahoma
Chaney Dell/Lamont.... 1966 2,009 180 80 62 236
Arkoma................ 1985 51 8 3 2 --
Westana System(10).... 1986 253 45 59 53 58
Wyoming
Granger(9)............ 1987 241 210 117 101 302
Red Desert(9)......... 1979 111 42 24 21 39
Lincoln Road(11)...... 1988 146 50 29 28 35
Hilight Complex(5)(9). 1969 617 80 35 29 86
Kitty/Amos Draw(9).... 1969 304 17 11 8 46
Newcastle(9).......... 1981 145 5 2 1 18
Reno Junction(12)..... 1991 -- -- -- -- 53
Coal Seam Gathering... 1990 6 28 22 21 --
New Mexico
San Juan River(5)..... 1955 127 60 30 27 1
North Dakota
Williston(13)......... 1981 381 -- 7 5 25
Temple(14)............ 1984 -- -- 1 1 4
Teddy Roosevelt(13)... 1979 332 -- 3 2 12
Utah
Four Corners.......... 1988 104 15 4 3 9
Montana
Baker(5)(9)(15)....... 1981 8 3 1 1 10
------ ----- ----- --- -----
Total............... 10,976 1,943 1,173 909 2,251
====== ===== ===== === =====
</TABLE>
- --------
Footnotes on following page.
S-17
<PAGE>
(1) The Company's interest in all facilities is 100% except for
Midkiff/Benedum (72%); Black Lake (69%); Lincoln Road (72%); Williston
(50%); Westana (50%) and Newcastle (50%). All facilities are operated by
the Company and all data include interests of the Company, other joint
interest owners and producers of gas volumes dedicated to the facility.
(2) Gas gathering systems miles and gas throughput capacity are as of
September 30, 1996.
(3) Aggregate wellhead natural gas volumes collected by a gathering system.
(4) Volumes of residue gas and NGLs are allocated to a facility when a well
is dedicated to that facility; volumes exclude NGLs fractionated for
third parties.
(5) Sour gas facility (capable of processing gas containing hydrogen
sulfide).
(6) The Crockett Gathering System was sold effective August 1, 1996.
(7) Hub and gas storage facility.
(8) Straddle plant (a plant located near a transmission pipeline which
processes gas dedicated to or gathered by the pipeline company or another
third party).
(9) Fractionation facility (capable of fractionating raw NGLs into end-use
products).
(10) Gas throughput and gas production in excess of gas throughput capacity is
unprocessed gas delivered directly to an unaffiliated pipeline.
(11) Commencing in March 1996, the Company and its joint venture partner at
the Lincoln Road gas plant temporarily suspended processing operations at
the Lincoln Road plant and began processing the related gas at the
Company's Granger facility. If volumes increase substantially beyond
Granger's capacity, the Lincoln Road plant might be re-started. The
Company anticipates that this consolidation will result in lower overall
plant operating expenses for the combined systems.
(12) NGL production represents conversion of third-party feedstock to iso-
butane.
(13) Processing facilities have been shut-in since August 1993. The gas
dedicated to these facilities is processed by a third party under a
contractual arrangement. In January 1996, Koch Hydorcarbon Company, which
operates the Teddy Roosevelt and Williston Gas Company's assets under a
lease agreement, exercised its option to purchase certain gas gathering
assets located in North Dakota from the Company and Williston. The
closing of the sale is expected to occur on or before January 1, 1997.
(14) The Temple facility was sold effective May 1, 1996.
(15) During the second quarter of 1997, the Company anticipates ceasing
operations at this facility.
GAS GATHERING, TREATING AND PROCESSING
The Company contracts with producers to gather raw natural gas from
individual wells located near its plants. Once a contract has been executed,
the Company connects wells to gathering lines through which the natural gas is
delivered to a processing plant or treating facility. At a processing plant,
the natural gas is compressed, unfractionated NGLs are extracted, and the
remaining dry residue gas is treated to meet pipeline quality specifications.
Eight of the Company's processing plants can further separate, or fractionate,
the mixed NGL stream into ethane, propane, butane and natural gasoline to
obtain a higher value for the NGLs, and five of the Company's plants are able
to process and treat natural gas containing hydrogen sulfide or other
impurities which require removal prior to transportation. In addition, the
Company has one facility which converts normal butane into iso-butane. At a
treating facility, dry gas, which does not contain liquids that can
economically be extracted, is treated to meet pipeline quality specifications
by removing hydrogen sulfide or carbon dioxide.
The Company continually acquires additional dedicated natural gas supplies
to maintain or increase throughput levels to offset natural production
declines in dedicated volumes. Such natural gas supplies are obtained by
purchasing existing systems from third parties or by connecting additional
wells. The opportunity to connect new wells to existing facilities is
primarily affected by levels of drilling activity near the Company's gathering
systems. The Company believes it has expanded into areas which present
significant potential for new drilling or purchases or development of
additional systems.
S-18
<PAGE>
Historically, the Company has connected additional reserves that more than
offset production from reserves dedicated to existing facilities. However,
certain individual plants have experienced declines in dedicated reserves. In
1995, including the reserves associated with the Company's 50% investment in
Westana Gathering Company and 1995 acquisitions, the Company connected new
reserves to its gathering systems to replace approximately 141% of 1995
production. On a Company-wide basis, dedicated reserves, including revisions
to previous estimates, increased from 2.6 Tcf as of December 31, 1994 to
approximately 2.7 Tcf at December 31, 1995. The increase is primarily due to
the Company's acquisition in December 1995 of several gathering systems in
West Texas.
Substantially all gas flowing through the Company's facilities is supplied
under long-term contracts providing for the purchase, treating or processing
of such gas for periods ranging from five to twenty years, using three basic
contract types. Approximately 44% of the Company's gas throughput for the nine
months ended September 30, 1996 was purchased under percentage-of-proceeds
agreements in which the Company is typically responsible for arranging for the
transportation and marketing of the natural gas and NGLs. The price paid to
producers is a specified percentage of the net proceeds received from the sale
of the natural gas and the NGLs. This type of contract permits the Company and
the producers to share proportionally in price changes.
Approximately 32% of the Company's gas throughput for the nine months ended
September 30, 1996 was gathered under contracts which are primarily fee-based
whereby the Company receives a set fee for each Mcf of gas gathered. This type
of contract provides the Company with a steady revenue stream that is not
dependent on commodity prices, except to the extent that low prices may cause
a producer to curtail production.
Approximately 24% of the Company's gas throughput for the nine months ended
September 30, 1996 was processed under contracts which combine gathering and
compression fees with "keep-whole" arrangements or wellhead purchases.
Typically, producers are charged a gathering and compression fee based upon
volume. In addition, the Company retains a predetermined percentage of the
NGLs recovered by the processing facility and keeps the producers whole by
returning to the producers at the tailgate of the plant an amount of residue
gas equal on a Btu basis to the raw gas received at the plant inlet. The
"keep-whole" component of the contracts permits the Company to benefit when
the value of the NGLs is greater as a liquid than as a portion of the residue
gas stream. However, when the value of the NGLs is lower as a liquid than as a
portion of the residue gas stream, the Company may be affected unfavorably.
MARKETING
RESIDUE GAS
The Company markets residue gas produced at its plants and purchased from
third parties to end-users, LDCs, pipelines and other marketing companies
throughout the United States. Historically, the Company's gas marketing was an
outgrowth of the Company's gas processing activities and was directed towards
selling gas processed at its plants to ensure their efficient operation. As
the Company expanded into new basins and the natural gas industry became
deregulated and offered more opportunity, the Company began to increase its
third-party gas marketing. Since 1990, the Company's residue gas sales volumes
have increased by 698% to 1.8 Bcf/D for the nine months ended September 30,
1996, primarily as a result of the increase in third-party sales. The Company
has continued to increase sales to end-users and to achieve greater market
penetration close to its facilities while also expanding into new markets
throughout the United States. The Company sells gas under agreements with
varying terms and conditions in order to match seasonal and other changes in
demand. Most of the Company's current sales contracts are short-term, ranging
from a few days to one year.
S-19
<PAGE>
The Company intends to continue to expand its residue gas marketing and
third-party sales, particularly to industrial and commercial end-users. The
Company's marketing department has recently been restructured along more
specialized lines to include separate managers for national accounts, end-use
sales and electric power marketing. The Company has also expanded its
marketing in areas beyond its traditional gas supply centers (Houston and the
Gulf Coast) to demand centers, such as the Midwest and Northeast. Third-party
sales and residue gas storage, combined with the stable supply from Company
facilities, enable the Company to respond quickly to changing market
conditions and to take advantage of seasonal price variations and peak demand
periods.
The Company customarily stores residue gas in underground storage facilities
to ensure an adequate supply for long-term sales contracts and for resale
during periods when prices are favorable. In order to expand its ability to
provide market services and arbitrage price differentials, the Company
constructed the Katy Facility. The ability to withdraw gas from the Katy
Facility on short notice, positions the Company to market residue gas to LDCs
and other customers that need a reliable yet variable supply of residue gas.
The Katy Facility allows the Company to bypass certain transportation
bottlenecks and enhances flexibility in its marketing operations. This
facility utilizes a partially depleted natural gas reservoir with 19 Bcf of
working gas capacity and a pipeline header system, currently connected to 11
pipelines, which has the capability to deliver up to 400 MMcf/D of residue gas
from the reservoir.
The Company held approximately 13.4 Bcf of residue gas in storage for such
purposes at an average cost of $1.81 per Mcf at September 30, 1996 as compared
to 12.8 Bcf at an average cost of $1.65 per Mcf at December 31, 1995,
primarily at the Katy Facility. At September 30, 1996, the Company had hedging
contracts in place for anticipated sales for approximately 12.5 Bcf of stored
gas at a weighted average price of $2.01 per Mcf for the stored inventory. See
further discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Risk
Management Activities."
The Company has a three-year winter-peaking gas purchase and sales agreement
with a major utility in East Texas, expiring in March 1999, which designates
the Katy Facility as the primary delivery point. Under the agreement, the
utility has the right to purchase, during each year of the contract, up to
approximately 100 MMcf/D and 70 MMcf/D of residue gas in November and March,
respectively, and approximately 140 MMcf/D of residue gas in December, January
and February, at a monthly index price plus a fixed charge. The agreement
calls for a minimum charge to be paid to the Company for each contract term,
whether or not delivery is taken. This minimum charge is calculated based upon
five Bcf of annual storage during each fiscal year of the contract term.
In February 1995, the Company entered into a long-term firm storage and
transportation agreement with a St. Louis-based LDC that expires in March
2000. Under the agreement, the Company has leased approximately three Bcf of
storage capacity of the Katy Facility to the LDC. The gas will principally
serve local distribution requirements of the LDC's customers in central
Missouri.
During the nine months ended September 30, 1996, the Company sold residue
gas to approximately 400 end-users, pipelines, LDCs and other customers. No
single customer accounted for more than 7% of consolidated revenues for the
nine months ended September 30, 1996.
NGLS
The Company markets NGLs produced at its plants and purchased from third
parties in the Rocky Mountain, Mid-Continent, Gulf Coast and Southwestern
regions of the United States. A majority of the Company's production of NGLs
moves to the Gulf Coast area, which is the largest NGL market in the United
States. Through the development of end-use markets and distribution
capabilities, the Company seeks to ensure that products from the plants move
on a reliable basis, avoiding curtailment of production.
S-20
<PAGE>
Consumption of NGLs is primarily determined by various end-user markets
including the petrochemical industry, the petroleum refining industry and the
retail and industrial fuel markets. As an example, the petrochemical industry
uses ethane, propane, normal butane and natural gasoline as feedstocks in the
production of ethylene, which is used in the production of various plastics
products. Over the last several years, the petrochemical industry has
increased its use of NGLs as a major feedstock and, according to industry
sources, is projected to require an additional 6,300 MGal/D to 8,400 MGal/D of
NGL supply by 1998, an increase of approximately 15% to 20%. Further, propane
is used for home heating and cooling, transportation and for certain
agricultural applications. Demand is primarily affected by price, seasonality
and the economy.
The volatility of NGL prices in recent years has caused the Company to move
to short-term contracts, with no prices set on a firm basis for more than a
30-day period. Although some existing contracts do commit the Company for
periods as long as a year, prices are redetermined on a market-related basis.
The Company leases NGL storage space at major trading locations near Houston
and in central Kansas in order to store products so that they can be sold at
higher prices on a seasonal basis. The Company held 18,460 MGal of NGLs in
storage at an average cost of $.33 per gallon and 15,816 MGal at an average
cost of $.31 per gallon at September 30, 1996 and December 31, 1995,
respectively, at various third-party storage facilities. The Company generally
intends that stored NGLs turn over on an annual basis.
For the nine months ended September 30, 1996, NGL sales averaged 3,562
MGal/D, an increase from 630 MGal/D in 1990, primarily due to acquisitions
during the five-year period. Sales were made to approximately 150 different
customers, and no single customer accounted for more than 3% of the Company's
consolidated revenues for the nine months ended September 30, 1996. Revenues
are also derived from contractual marketing fees charged to some producers for
NGL marketing services. For the nine months ended September 30, 1996, such
fees were less than 1% of the Company's consolidated revenues.
HEDGING
In order to reduce the impact of commodity price fluctuations on its
operating results, the Company enters into futures contracts and basis
positions to hedge a portion of its equity production. The Company has entered
into weighted average futures positions for approximately 60% of its equity
residue gas and 45% of its equity NGL production for the remainder of 1996 at
prices chosen by management because they are in excess of the Company's 1996
operating budget and further price increases were not expected. The following
table summarizes the Company's hedged equity positions at September 30, 1996:
<TABLE>
<CAPTION>
RESIDUE GAS NGLS
- ----------------------------------------- ------------------------------------
MMBTU WEIGHTED AVERAGE VOLUMES WEIGHTED AVERAGE
BASIN HEDGED PRICE (1) PRODUCT HEDGED PRICE(2)
- -------------- -------- ---------------- ------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Permian 15,000/D $1.88/MMBtu Ethane 140 MGal/D $ .20/Gal
Rocky Mountain 1,700/D 1.50/MMBtu Propane 160 MGal/D .34/Gal
Gulf Coast 17,300/D 1.99/MMBtu Butane -- --
Mid-Continent 6,700/D $1.78/MMBtu Crude 4,900 Bbl/D $19.72/Bbl(3)
</TABLE>
- --------
(1) The prices shown represent the actual price to be received by the Company
and represent a net price to the producing area, which approximates the
Henry Hub price less the basis differential for such basin.
(2) This price approximates the average Mont Belvieu price for NGLs and a West
Texas Intermediate price for crude oil.
(3) As of September 30, 1996, the Company held a notional quantity of
approximately 300,000 barrels long of over-the-counter call options with a
strike price of $22.00 per barrel.
S-21
<PAGE>
See further discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Risk
Management Activities."
PRODUCING PROPERTIES
The reserves estimated by the Company for its producing properties
approximated 121 Bcf of natural gas and 715 MBbls of crude oil at December 31,
1995. The producing properties are primarily working interests in a unit
operated by the Company in the Black Lake field in Louisiana, which provides
production to the Black Lake plant, and 20 gas properties in the Smackover
formation of the East Texas Basin, which provide production to the Edgewood
plant. The Company also has working interests in the Powder River Basin in
northeastern Wyoming, the Sandwash Basin in northwestern Colorado, the Austin
Chalk formation in southeast Texas and the San Juan Basin in southwest
Colorado. The Company also owns various working interests in 13 wells in the
Smackover formation through its interest in the Redman Smackover Joint
Venture.
The Company has experienced unexpected water production in one of the wells
at its Black Lake field. In August 1996, the Company retained Williamson
Petroleum Consultants, Inc., an independent petroleum consultant, to perform
an evaluation of the Black Lake field reserves as of June 30, 1996. Williamson
Petroleum Consultants, Inc. estimated total proved reserves as of June 30,
1996 to be 89 Bcf (53 Bcf net to the Company's revenue interests), which is
consistent with the Company's own internal estimate as of June 30, 1996.
Reserve estimates are subject to numerous uncertainties inherent in the
estimation of quantities of proved reserves and in the projection of future
rates of production and the timing of development expenditures. The accuracy
of such estimates is a function of the quality of available data and of
engineering and geological interpretation and judgment. Estimates of
economically recoverable reserves and of future net cash flows expected
therefrom prepared by different engineers or by the same engineers at
different times may vary substantially. Results of subsequent drilling,
testing and production may cause either upward or downward revisions of
previous estimates. Further, the volumes considered to be commercially
recoverable fluctuate with changes in prices and operating costs. Any
significant revision of reserve estimates could materially adversely affect
the Company's financial condition and results of operations.
S-22
<PAGE>
MANAGEMENT
Set forth below is certain information concerning the directors and officers
of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Brion G. Wise............ 51 Chairman of the Board, Chief Executive Officer and
Director(1)
Walter L. Stonehocker.... 72 Vice Chairman of the Board and Director(1)
Lanny F. Outlaw.......... 60 President and Chief Operating Officer
John C. Walter........... 51 Executive Vice President and Secretary
John F. Chandler......... 40 Senior Vice President--Marketing and Pipelines and
Assistant Secretary
Edward A. Aabak.......... 44 Vice President--Northern Region
Vance S. Blalock......... 43 Treasurer and Assistant Secretary
Gary W. Davis............ 40 Vice President--Southern Region
Brian E. Jeffries........ 39 Vice President--Gas Marketing
Jeffery E. Jones......... 43 Vice President--Production
William J. Krysiak....... 36 Vice President--Finance
Bill M. Sanderson........ 67 Director(1)
Joseph E. Reid........... 66 Director
Dean Phillips............ 64 Director
Richard B. Robinson...... 48 Director
Ward Sauvage............. 71 Director(1)
James A. Senty........... 60 Director
</TABLE>
- --------
(1) Member of the Executive Committee.
MR. WISE, a founder of the Company in 1971, has served as Chairman of the
Board since July 1987, a member of the Executive Committee since December
1989, Chief Executive Officer since December 31, 1986 and President from 1971
through 1986. He was a gas processing engineer with Shell Oil Company from
1967 until the organization of the Company. Mr. Wise received his Bachelor of
Science Degree in Chemical Engineering from Washington State University.
MR. STONEHOCKER, a founder of the Company in 1971, has served as Vice
Chairman of the Board since July 1992, as a director since July 1987, a member
of the Executive Committee since May 1995 and from December 1989 to July 1992,
Senior Vice President from January 1985 to July 1992 and Vice President from
1971 to 1985. Mr. Stonehocker has had farming operations in Colorado for over
forty years. In addition, he has been active as a lobbyist for the oil and gas
industry in various western states.
MR. OUTLAW, has been President and Chief Operating Officer since April 1,
1996. Mr. Outlaw served as Executive Vice President from September 1994
through March 1996, Vice President-Business Development and Rocky Mountain
Region from October 1993 to September 1994, and Vice President-Business
Development from August 1987 to October 1993. Mr. Outlaw was employed by Shell
Oil Company from 1958 to 1987 in various engineering management positions
within the exploration and production department. In his last position at
Shell Oil Company, he was in charge of gas processing business development.
Mr. Outlaw received his Bachelor of Science Degree in Engineering from the
South Dakota School of Mines and Technology.
S-23
<PAGE>
MR. WALTER, Executive Vice President and Secretary since September 1994,
served as Vice President-General Counsel from May 1988 to September 1994,
Corporate Counsel from May 1986 to May 1988 and Land Manager from 1982 to May
1986. Mr. Walter received his Bachelor of Arts Degree in Economics and Juris
Doctor Degree from the University of Colorado.
MR. CHANDLER, Senior Vice President-Marketing and Pipelines since April 1,
1996, served as Vice President-Marketing and Pipelines from September 1993
through March 1996, Manager of Business Development from January 1991 through
August 1993 and served in various positions in engineering and business
development from July 1984 through August 1993. Mr. Chandler received his
Bachelor of Science Degree in Engineering from the South Dakota School of
Mines and Technology.
MR. AABAK, Vice President-Northern Region since September 1994, served as
Operations Manager of the Rocky Mountain Region from February 1993 to
September 1994. From 1982 to 1992, Mr. Aabak was employed by Dekalb Energy
Company in various management, engineering and operations functions. From 1976
to 1982, Mr. Aabak was employed by Dome Petroleum Limited. Mr. Aabak holds a
Bachelor of Science Degree in Chemical Engineering from the University of
Alberta.
MS. BLALOCK, Treasurer since November 1994, has been employed by the Company
since 1981, previously as Controller of Systems Development and Acquisitions.
Ms. Blalock received her Bachelor of Science Degree in Commerce from the
University of Louisville and is a Certified Public Accountant.
MR. DAVIS, Vice President-Southern Region since October 1993, served as Vice
President-Engineering/Environmental from January 1985 to October 1993 and has
been an engineer with the Company since June 1980. From 1978 to 1980, he was
employed by Marathon Oil Company as a plant engineer. Mr. Davis received his
Bachelor of Science Degree in Chemical and Petroleum Engineering from the
Colorado School of Mines.
MR. JEFFRIES, Vice President-Gas Marketing since April 1, 1996, has been
employed by the Company since November 1992 as Director of Marketing and
Transportation. Mr. Jeffries was employed by United Gas Pipe Line Company from
1991 to 1992 and for LaSER Marketing Company from 1988 through 1991 in various
marketing management positions. Mr. Jeffries received his Bachelor of Science
Degree in Civil Engineering from the University of Colorado.
MR. JONES, Vice President-Production since October 1993, has been employed
by the Company since 1989, previously as Production Manager. From 1987 to
1989, Mr. Jones was an independent oil and gas consultant. Mr. Jones received
a Bachelor of Science Degree in Psychology from Colorado College and a
Bachelor of Science Degree in Mechanical Engineering from the University of
Colorado.
MR. KRYSIAK, Vice President-Finance since October 1993, has been employed by
the Company since 1985, previously as Corporate Controller. Mr. Krysiak is the
principal financial and accounting officer of the Company. He received his
Bachelor of Science Degree in Business Administration from Colorado State
University and is a Certified Public Accountant.
MR. SANDERSON, has served as a director of the Company since July 1987, a
member of the Executive Committee since December 1989, President from December
1986 through March 1996, Chief Operating Officer from May 1986 through March
1996 and Senior Vice President from 1981 through 1986. He was employed by
Shell Oil Company in various capacities in its exploration and production
department from 1960 to 1981, including an assignment in Venezuela and an
assignment for five years in London with oil and gas production
responsibilities during North Sea development. Mr. Sanderson received his
Bachelor of Science Degree, cum laude, in Chemical Engineering from Texas Tech
University.
S-24
<PAGE>
MR. REID, a director of the Company since May 1994, has served as a member
of the Audit Committee since May 1995 and has served as a member of the
Compensation and Nominating Committee since May 1994. Mr. Reid has been
involved in the oil and gas business since 1956, and since 1987 has been an
independent oil and gas consultant. From 1984 to 1986 he served as President
and Chief Executive Officer of Meridian Oil, Inc., from 1982 to 1984 as an
independent oil and gas consultant and from 1978 to 1982 as President and
Chief Executive Officer of Superior Oil Company. Mr. Reid also serves as a
director for Riverway Bank, Cliffs Drilling Co. and Great Western Resources.
He received his Masters of Business Administration from the Harvard Graduate
School of Business and his Bachelor of Science Degree from Louisiana State
University.
MR. PHILLIPS, a director of the Company since July 1987, has served as a
member of the Compensation and Nominating Committee since May 1995. Mr.
Phillips has been engaged in the wholesale and retail distribution of natural
gas liquids since 1956. Mr. Phillips also serves as an officer and director of
several banking institutions in Missouri and Illinois.
MR. ROBINSON, a director of the Company since July 1987, has served as a
member of the Audit Committee since May 1988 and as a member of the
Compensation and Nominating Committee since September 1993. Mr. Robinson has
been a member of the law firm of Lentz, Evans and King P.C. and an adjunct
professor at the University of Denver College of Law since 1980. He has
represented the Company since 1977 with respect to tax, corporate and
partnership law matters. Mr. Robinson received his Juris Doctor Degree from
the University of Denver and his LL. M. in Taxation from New York University.
MR. SAUVAGE, a director of the Company since July 1987, a member of the
Executive Committee since May 1995 and has been engaged in the wholesale and
retail distribution of natural gas liquids since 1949.
MR. SENTY, a director of the Company since July 1987, has served as a member
of the Audit Committee since May 1988 and as a member of the Compensation and
Nominating Committee since September 1993. Mr. Senty has been engaged in the
wholesale and retail distribution of natural gas liquids since 1960. He has
owned certain banking interests since 1976 and currently serves as Chairman of
the Board of The Park Bank, an independent state chartered bank in Wisconsin.
Mr. Senty is also the Chairman of the Board and President of Midwest Bottle
Gas Co., a company which directly and through subsidiaries is engaged in the
retail and wholesale marketing of natural gas, natural gas liquids and other
related items in several states and is a director and Senior Vice President of
MNIC Companies, the parent organization of several insurance companies in
Wisconsin.
S-25
<PAGE>
SECURITY OWNERSHIP
The table below sets forth the number and percentage of outstanding shares
of Common Stock that are beneficially owned by: (i) each director of the
Company; (ii) the four most highly compensated executive officers for the year
ended December 31, 1995; (iii) all directors and executive officers of the
Company as a group; and (iv) each person known by the Company to own
beneficially more than 5% of the Common Stock as of September 30, 1996, except
as indicated below. The Company believes that each individual or entity named
has sole investment and voting power with respect to shares of Common Stock
indicated as beneficially owned by them except as indicated below.
<TABLE>
<CAPTION>
$2.625 CUMULATIVE
$2.28 CUMULATIVE CONVERTIBLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- ---------------------- --------------------
NAME OF NUMBER % OF NUMBER % OF NUMBER % OF
BENEFICIAL OWNER OF SHARES CLASS OF SHARES CLASS OF SHARES CLASS
---------------- ---------- ------ ---------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Brion G. Wise........... 3,964,430(1) 15.4 800 * -- *
Walter L. Stonehocker... 2,804,341(2) 10.9 14,000 1.0 31,800 1.2
Merrill Lynch & Co.,
Inc. .................. 2,525,158(3) 9.8 -- * -- *
Ward Sauvage............ 2,276,747(4) 8.8 -- * -- *
Dean Phillips........... 1,824,825(5) 7.1 -- * -- *
Bill M. Sanderson....... 575,625(6) 2.2 -- * -- *
Richard B. Robinson..... 7,800(7) * 1,000 * -- *
James A. Senty.......... 4,920(8) * -- * -- *
Joseph E. Reid.......... -- * -- * -- *
Lanny F. Outlaw......... 59,000 * -- * -- *
John C. Walter.......... 32,494(9) * -- * -- *
Gary W. Davis........... 37,387(10) * 1,500(10) * -- *
Directors and officers
as a group (17
persons)............... 11,605,295 45.0 17,900 1.3 31,800 1.2
</TABLE>
- --------
*Less than 1%
(1)See also "Selling Stockholder."
(2) Includes 1,385,579 shares of Common Stock held by Mr. Stonehocker's wife,
127,820 shares of Common Stock held by the WGP Trust, of which Mrs.
Stonehocker is the trustee, 3,183 shares of Common Stock held by a son
directly and through 10% or more ownership in a partnership and 30,000
shares of Common Stock held by Mr. and Mrs. Stonehocker as tenants-in-
common.
(3) Amount and nature of beneficial ownership is at December 31, 1995 as
reported in the applicable Schedule 13G and includes shares held by
subsidiaries and affiliates. The percent of class was calculated using
total shares outstanding at December 31, 1995.
(4) Includes 2,252,576 shares of Common Stock held by Sauvage Gas Company
(owned 48.99% by the Ward Sauvage Trust #1, 48.37% by the Janice Sauvage
Trust #1 and 2.64% by Mr. Sauvage's children) and 23,210 and 961 shares
of Common Stock held in individual retirement accounts for the benefit of
Ward Sauvage and Janice Sauvage, respectively.
(5) Includes 9,100 shares of Common Stock held by Mr. Phillips' wife.
(6) Includes 864 shares of Common Stock held by Mr. Sanderson's wife and
82,082 shares of Common Stock held by the Sanderson Stock Trust, of which
Mr. Sanderson's wife is the trustee.
(7) Includes 6,000 shares of Common Stock held by the Lentz, Evans & King
Pension Fund, for the benefit of Mr. Robinson, 1,000 shares owned
directly by Mr. Robinson's wife and 800 shares of Common Stock held by
Mr. Robinson and his wife as custodians for their minor children.
(8) Includes 600 shares of Common Stock held by Mr. Senty's wife as custodian
for their children and 2,120 shares of Common Stock owned directly by Mr.
Senty's wife.
(9) All of Mr. Walter's shares are held as joint tenants with his wife.
(10) Includes 9,997 shares of Common Stock and 1,500 shares of $2.28
Cumulative Preferred Stock held by Mr. Davis' wife and 21,668 shares of
Common Stock held as tenants-in-common.
S-26
<PAGE>
SELLING STOCKHOLDER
The following table sets forth certain information concerning the beneficial
ownership of Common Stock by the Selling Stockholder as of September 30, 1996
and as adjusted to reflect the sale of 130,000 shares of Common Stock by the
Selling Stockholder.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR OWNERSHIP
TO THIS OFFERING AFTER THIS OFFERING
------------------- --------------------
NUMBER OF % OF NUMBER OF NUMBER OF % OF
SHARES OF COMMON SHARES SHARES OF COMMON
NAME OF BENEFICIAL OWNER COMMON STOCK STOCK BEING OFFERED COMMON STOCK STOCK
- ------------------------------- ------------ ------ ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Brion G. Wise
Chairman of the Board, Chief
Executive Officer and
Director...................... 3,964,430 15.4 130,000 3,834,430(1) 12.3(1)
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the
number of shares of Common Stock and the percentage of the outstanding
shares of Common Stock owned by the Selling Stockholder would be 3,814,930
and 11.9%, respectively.
S-27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial and operating data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements, notes thereto and other information included elsewhere in this
Prospectus and the documents incorporated herein by reference. The selected
financial data for each of the five years in the period ended December 31,
1995 are derived from consolidated financial statements of the Company, which
have been audited by Price Waterhouse LLP, independent public accountants. The
data presented for the nine month periods ended September 30, 1996 and 1995
are derived from the unaudited consolidated financial statements and include,
in the opinion of management, all normal and recurring adjustments necessary
to present fairly the data for such periods. The selected data provided below
for the nine months ended September 30, 1996 are not necessarily indicative of
the results of operations of financial performance of the Company for the full
year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARES, PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sale of residue gas..... $ 979,771 $ 614,711 $ 876,399 $ 707,869 $ 563,068 $ 278,928 $ 179,659
Sale of NGLs............ 361,571 243,516 331,760 309,358 333,880 290,230 150,224
Processing,
transportation and
storage revenue........ 32,421 31,340 41,358 35,057 25,622 22,124 25,538
Other net revenue....... 20,895 5,247 7,467 11,205 9,768 8,834 2,821
Product purchases....... 1,213,955 735,040 1,040,265 853,398 730,676 427,906 243,756
Plant operating expense. 53,402 53,013 71,030 68,500 62,387 54,999 34,499
Selling and
administrative......... 21,552 20,183 26,610 29,598 23,925 19,667 12,589
Depreciation, depletion
and amortization....... 47,134 50,128 65,361 63,586 43,980 26,491 18,515
Interest expense........ 26,646 27,708 37,160 31,434 12,456 10,080 12,780
Gross profit............ 76,527 52,633 75,211 72,556 92,012 88,192 58,152
Income (loss) before
taxes.................. 28,329 2,677 (8,266) 11,524 55,631 58,445 32,783
Provision (benefit) for
income taxes........... 9,783 677 (2,158) 4,160 17,529 18,757 11,933
Net income (loss)....... 18,546 2,000 (6,108) 7,364 38,102 39,688 20,850
Income (loss)
attributable to common
stock.................. 10,717 (10,821) (21,539) (4,848) 32,010 36,416 20,294
Earnings (loss) per
share of common stock.. $ .42 $ (.42) $ (.84) $ (.19) $ 1.25 $ 1.43 $ .94
Weighted average shares
of common stock
outstanding............ 25,774,446 25,750,401 25,753,738 25,695,760 25,608,503 25,453,029 21,669,688
CASH FLOW DATA:
Net cash provided by
operating activities... $ 119,248 $ 76,213 $ 86,373 $ 31,866 $ 107,116 $ 96,655 $ 36,228
EBITDA (1).............. 102,109 80,513 111,897 106,544 112,067 95,016 64,078
Capital expenditures.... 38,803 49,038 78,521 100,540 492,328 67,021 234,124
BALANCE SHEET DATA
(AT PERIOD END):
Total assets............ 1,174,550 1,129,812 1,193,997 1,167,362 1,114,748 582,188 552,321
Long-term debt.......... 380,500 440,000 454,500 418,000 547,000 157,000 216,050
Stockholders' equity.... 378,808 383,895 371,909 436,683 314,387 287,021 221,389
Dividends declared per
share of common
stock(2)............... $ .15 $ .15 $ .20 $ .20 $ .20 $ .20 $ .15
OPERATING DATA:
Average gas sales
(MMcf/D)............... 1,755 1,553 1,572 1,097 755 442 310
Average NGL sales
(MGal/D)............... 3,562 2,867 2,890 2,970 2,941 2,400 1,097
Average gas volumes
gathered (MMcf/D)...... 1,173 944 1,020 934 804 669 408
Facility capacity
(MMcf/D)............... 1,943 1,985 1,907 1,560 1,586 1,177 1,183
Dedicated reserves (Tcf)
(3).................... -- -- 2.7 2.6 2.2 1.8 1.6
Average gas prices
($/Mcf)................ $ 2.04 $ 1.45 $ 1.53 $ 1.77 $ 2.02 $ 1.72 $ 1.59
Average NGL prices
($/Gal)................ $ .37 $ .31 $ .31 $ .28 $ .31 $ .32 $ .36
</TABLE>
- --------
(1) Reflects income before income taxes, interest expense, depreciation,
depletion and amortization and a $17,642 non-cash impairment loss related
to certain oil and gas assets and plant facilities in the fourth quarter
of 1995 in connection with the Company's adoption of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." This data does not purport to reflect any
measure of operations or cash flow. EBITDA is not a measure determined
pursuant to GAAP, nor is it an alternative to GAAP income.
(2) On November 1, 1996, the Company's Board of Directors declared fourth
quarter dividends of $0.05 per share of Common Stock, payable on February
14, 1997 to stockholders of record on December 31, 1996.
(3) Dedicated reserve reports are prepared only at year-end. As a result,
reserve information is not available for the nine month periods.
S-28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in the documents incorporated
by reference herein.
RESULTS OF OPERATIONS
(In thousands, except per share amounts, operating data and percentages)
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------- %
1996 1995 CHANGE
---------- -------- ------
<S> <C> <C> <C>
FINANCIAL RESULTS:
Revenues......................................... $1,394,658 $894,814 56
Gross profit..................................... 76,527 52,633 45
Net income....................................... 18,546 2,000 827
Income (loss) per share of common stock.......... .42 (.42) --
Net cash provided by operating activities........ $ 119,248 $ 76,213 56
OPERATING DATA:
Average gas sales (MMcf/D)....................... 1,755 1,553 13
Average NGL sales (MGal/D)....................... 3,562 2,867 24
Average gas prices ($/Mcf)....................... $ 2.04 $ 1.45 41
Average NGL prices ($/Gal)....................... $ .37 $ .31 19
</TABLE>
Revenues from the sale of residue gas increased approximately $365.1 million
for the nine months ended September 30, 1996 compared to the same period in
1995. Average gas sales volumes increased 202 MMcf/D to 1,755 MMcf/D for the
nine months ended September 30, 1996 compared to the same period in 1995, due
to an increase of approximately 210 MMcf/D in the sale of residue gas
purchased from third parties, partially offset by decreased sales at the
Company's Black Lake facility. Average gas prices increased $.59 per Mcf to
$2.04 per Mcf for the nine months ended September 30, 1996 compared to the
same period in 1995. The effect of the increases in residue gas prices on the
Company's net margin was partially offset by approximately $11.9 million of
loss recognized in the nine month period ended September 30, 1996 related to
futures positions. See further discussion in "Liquidity and Capital
Resources--Risk Management Activities."
Revenues from the sale of NGLs increased approximately $118.1 million for
the nine months ended September 30, 1996 compared to 1995. Average NGL sales
volumes increased 695 MGal/D to 3,562 MGal/D, primarily due to an approximate
580 MGal/D increase in the sale of NGLs purchased from third parties for this
same period and increased production at the Company's facilities most notably
from increases in ethane production at the Granger facility. Average NGL
prices increased $.06 per gallon to $.37 per gallon for the nine months ended
September 30, 1996 compared to 1995. The effect of the increase in NGL prices
on the Company's net margin was partially offset by approximately $5.9 million
of loss recognized in the nine month period ended September 30, 1996 related
to futures positions. See further discussion in "Liquidity and Capital
Resources--Risk Management Activities."
Other net revenue increased $15.6 million for the nine months ended
September 30, 1996 compared to the same period in 1995. The increase for the
nine months ended September 30, 1996 was largely due to the recognition of
$11.4 million of revenue associated with electric power marketing
(substantially offset by a corresponding increase in electric power purchases
reflected in product
S-29
<PAGE>
purchases). Partnership income increased $1.8 million for the nine months
ended September 30, 1996, as compared to the same period in 1995. The increase
in other revenue is also attributable to a $1.9 million gain recognized on the
sale of the Temple facility.
The increase in product purchases corresponds to the increase in third-party
product sales. Combined product purchases (excluding electric power purchases)
as a percentage of residue gas and NGL sales increased four percentage points
to 90% for the nine months ended September 30, 1996 as compared to 1995. The
increased product purchase percentage is a continuing trend based upon the
growth of third-party sales, which typically have lower margins than sales of
the Company's equity production. Until recently, the Company had experienced
narrowing margins related to third-party sales due to the increasing
availability of pricing information in the natural gas industry. The Company
believes, by targeting end-use markets, these margins will continue to
stabilize. These markets are highly competitive and there is no assurance that
the Company will be able to expand its current end-use business.
Selling and administrative expense increased $1.4 million for the nine
months ended September 30, 1996 compared to the prior year period, primarily
as a result of growth in the Company's marketing operations and higher benefit
accruals.
Depreciation, depletion and amortization decreased $3.0 million for the nine
months ended September 30, 1996 compared to the corresponding prior year
period. The decrease was attributable to a reduction in production related to
the Company's oil and gas properties which resulted in lower depletion
expense. In addition, the Company recorded a $17.6 million write-down of
certain oil and gas assets and plant facilities in the fourth quarter of 1995
in connection with its adoption of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The lower asset values contributed to the reduction in depreciation, depletion
and amortization expense for the nine month period ended September 30, 1996.
This decrease was partially offset by increases related to property additions,
primarily the Northern acquisition in December 1995.
The provision for income taxes for the nine months ended September 30, 1996
increased $9.1 million primarily due to the increase in pre-tax income for the
period.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------- %
1995 1994 CHANGE
---------- ---------- ------
<S> <C> <C> <C>
FINANCIAL RESULTS:
Revenues...................................... $1,256,984 $1,063,489 18
Gross profit.................................. 75,211 72,556 4
Net (loss) income............................. (6,108) 7,364 (183)
Loss per share of common stock................ (.84) (.19) (342)
Net cash provided by operating activities..... $ 86,373 $ 31,866 171
OPERATING DATA:
Average gas sales (MMcf/D).................... 1,572 1,097 43
Average NGL sales (MGal/D).................... 2,890 2,970 (3)
Average gas prices ($/Mcf).................... 1.53 1.77 (14)
Average NGL prices ($/Gal).................... .31 .28 11
</TABLE>
Net income decreased $13.5 million and net cash provided by operating
activities increased $54.5 million for the year ended December 31, 1995
compared to 1994. The decrease in net income for the year was primarily due to
a $17.6 million pre-tax impairment loss recorded in connection with
S-30
<PAGE>
the adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," and a $2.1 million pre-
tax restructuring charge the Company recorded in May 1995 relating to its cost
reduction program. In addition, net income was adversely affected by higher
product purchase costs associated with the Company's third-party residue gas
sales and increased depreciation, depletion and amortization expense and
interest expense, partially offset by higher residue gas volumes sold and
higher NGL prices.
Revenues from the sale of residue gas increased approximately $168.5 million
for the year ended December 31, 1995 compared to 1994. Average gas sales
volumes increased 475 MMcf/D to 1,572 MMcf/D for the year ended December 31,
1995 compared to 1994, largely due to an increase of approximately 460 MMcf/D
in the sale of residue gas purchased from third parties. Average gas prices
decreased $.24 per Mcf to $1.53 per Mcf for the year ended December 31, 1995
compared to 1994. The effect of the decrease in residue gas prices on the
Company's net margin from equity production was partially offset by the
Company's futures positions; approximately $10.0 million of gain was
recognized in the year ended December 31, 1995 related to such contracts. The
Company has entered into futures positions for a portion of its equity gas for
1996. See further discussion at "Liquidity and Capital Resources--Risk
Management Activities."
Revenues from the sale of NGLs increased approximately $22.4 million for the
year ended December 31, 1995 compared to 1994. Average NGL sales volumes
remained relatively constant at 2,890 MGal/D and average NGL prices increased
$.03 per gallon to $.31 per gallon for the year ended December 31, 1995
compared to 1994.
Processing, transportation and storage revenues increased $6.3 million for
the year ended December 31, 1995 compared to 1994. Approximately $3.6 million
of the increase was due to greater NGL revenues from the Company's Giddings
system and increased treating revenue, primarily from gathering systems
acquired in December 1994. The remaining increase was primarily due to a long-
term firm storage and transportation agreement at the Katy Facility that the
Company entered into in February 1995.
Other net revenue decreased $3.7 million for the year ended December 31,
1995 compared to 1994. The difference was primarily attributable to a $3.3
million insurance recovery recorded in 1994 for business losses associated
with the December 1993 fire at the Company's Granger facility.
The increase in product purchases corresponds to the increase in third-party
residue gas sales. Combined product purchases as a percentage of residue gas
and NGL sales increased two percentage points to 86% for the year ended
December 31, 1995 compared to 1994. The rising gas purchase percentage is a
continuing trend based upon the growth of third-party sales, which typically
have lower margins than sales of the Company's equity production. Until
recently, the Company had experienced narrowing margins related to third-party
sales due to the increasing availability of pricing information in the natural
gas industry. The Company believes by targeting end-use markets, these margins
will be stabilized. However, there is no assurance that the Company will be
successful in capturing these markets.
Plant operating expense increased $2.5 million for the year ended December
31, 1995. The increase was attributable to assets purchased in the Oasis
acquisition in December 1994, primarily for property taxes and taxes on higher
levels of inventory held at the Katy Facility, partially offset by cost
savings resulting from the cost reduction plan initiated in May 1995.
Selling and administrative expense decreased $3.0 million, primarily due to
the cost reduction plan implemented in May 1995.
Depreciation, depletion and amortization increased $1.8 million for the year
ended December 31, 1995 compared to the prior year period. The increase was
primarily attributable to the Oasis assets,
S-31
<PAGE>
additional depletion related to the Company's oil and gas production and
various plant upgrades and equipment additions in 1995.
Interest expense increased $5.7 million for the year ended December 31, 1995
compared to 1994, due to an increase in the Company's average borrowing rate
from 6.6% to 7.5% per annum and higher average debt outstanding during 1995,
primarily due to the redemption of the 7.25% Cumulative Perpetual Convertible
Preferred Stock.
The provision for income taxes for the year ended December 31, 1995 includes
a $300,000 adjustment to reflect management's estimate of deferred taxes.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------- %
1994 1993 CHANGE
---------- -------- ------
<S> <C> <C> <C>
FINANCIAL RESULTS:
Revenues............................................ $1,063,489 $932,338 14
Gross profit........................................ 72,556 92,012 (21)
Net income.......................................... 7,364 38,102 (81)
Earnings per share of common stock.................. (.19) 1.25 (115)
Net cash provided by operating activities........... $ 31,866 $107,116 (70)
OPERATING DATA:
Average gas sales (MMcf/D).......................... 1,097 755 45
Average NGL sales (MGal/D).......................... 2,970 2,941 1
Average gas prices ($/Mcf).......................... 1.77 2.02 (12)
Average NGL prices ($/Gal).......................... .28 .31 (10)
</TABLE>
Net income decreased $30.7 million and net cash provided by operating
activities decreased $75.3 million for the year ended December 31, 1994
compared to the same period in 1993. Overall, throughput and sales volumes at
the Company's facilities remained comparable to historical levels. The
Company's decrease in net income and net cash provided by operating activities
was primarily attributable to a decline in NGL and residue gas prices and
higher interest, selling and administrative and depreciation, depletion and
amortization costs associated with the Company's 1993 acquisitions of Black
Lake and Mountain Gas, along with the completion of the Katy Facility
construction. In addition, because of lower demand and lower than expected
prices, the Katy Facility did not generate significant revenue. As a result,
revenues from the Katy Facility in 1994 did not fully offset related
depreciation, depletion and amortization, interest and operating costs.
Revenues from the sale of residue gas increased approximately $144.8 million
for the year ended December 31, 1994 compared to the same period in 1993, as a
volume increase of 342 MMcf/D was somewhat offset by a decrease in average
residue gas sales prices of $.25 per Mcf. Approximately 300 MMcf/D of the
volume increase was attributable to an increase in the sale of residue gas
purchased from third parties, primarily resulting from the acquisition of
Citizens National Gas Company assets in the third quarter of 1993. The
remaining volume increase was the result of increased production volumes at
the Company's facilities, primarily due to the Mountain Gas and Black Lake
acquisitions, new well connect activities and consolidations with smaller
gathering systems.
Revenues from the sale of NGLs decreased approximately $24.5 million for the
year ended December 31, 1994 compared to 1993, as a volume increase of
approximately 30 MGal/D was more than offset by a $.03 per gallon decrease in
the average NGL sales price. Approximately 22 MGal/D of the volume increase
was attributable to an increase in the sale of NGLs purchased from third
S-32
<PAGE>
parties. The remaining volume increase was primarily attributable to the
acquisitions of Mountain Gas and Black Lake, new well connect activity and
consolidations with smaller gathering systems. This volume increase was
somewhat offset by unfavorable economics of ethane and propane extraction in
the first quarter of 1994 and by limited NGL volumes at the Granger facility,
primarily as a result of the December 1993 fire. The curtailment of production
while plant improvements were completed during the third quarter of 1994 at
Black Lake also contributed to lower volumes.
Processing, transportation and storage revenues increased $9.4 million for
the year ended December 31, 1994 compared to the same period in 1993. The
increase was due to additional gathering revenue associated with the Company's
Granger gathering system acquired in the Mountain Gas acquisition in July
1993, increased gathering revenue at the Company's Lincoln Road facility and
the recognition of demand fees associated with a winter-peaking gas purchase
and sales contract at the Katy Facility during 1994.
Other net revenue increased $1.4 million for the year ended December 31,
1994 compared to the same period in 1993. For the year ended December 31,
1994, the Company accrued approximately $3.3 million as an amount to be
recovered under its business interruption insurance policy for business losses
associated with the December 1993 fire at the Company's Granger facility and
approximately $1.4 million in rate refunds from a pipeline company. These 1994
recoveries were somewhat offset by a $2.6 million gain recorded as a result of
the termination of interest rate swap agreements in 1993.
Historically, product purchases as a percentage of residue gas and NGL sales
from the Company's plant production have approximated 70%. Product purchases
as a percentage of residue gas and NGL sales from third-party purchases were
substantially higher in 1994 and approximated 95%. Total product purchases as
a percentage of residue gas and NGL sales increased approximately 2.5
percentage points to 84% for the year ended December 31, 1994 compared to the
same period in 1993. The increase in the Company's combined percentage was
primarily due to an increasing proportion of 1994 residue gas sales revenues
resulting from products purchased from third parties.
Plant operating expense and oil and gas exploration and production costs
increased approximately $6.1 million and $2.2 million, respectively, for the
year ended December 31, 1994 compared to the same period in 1993. The increase
in plant operating expense was primarily due to the additional operating costs
associated with three gas processing facilities acquired from Mountain Gas and
Black Lake in July 1993 and the Katy Facility, which commenced operations in
February 1994. The oil and gas exploration and production cost increase
resulted primarily from costs associated with producing properties acquired in
the Black Lake acquisition.
Selling and administrative expense increased approximately $5.7 million for
the year ended December 31, 1994 compared to the same period in 1993,
primarily due to administrative expenses necessitated by the 1993
acquisitions, an overall increase in insurance expenditures and a reduction in
overhead capitalized to the Company's construction projects.
Depreciation, depletion and amortization expense increased approximately
$19.6 million for the year ended December 31, 1994 compared to the same period
in 1993. This increase was primarily due to the acquisitions of Mountain Gas
and Black Lake in July 1993 and the commencement of Katy Facility operations
in February 1994, and was partially offset by lower depreciation and depletion
expense resulting from the addition of recoverable reserves at Black Lake and
Edgewood during 1994.
Interest expense increased approximately $19.0 million for the year ended
December 31, 1994 compared to the same period in 1993, primarily due to
additional borrowings necessitated by the Mountain Gas and Black Lake
acquisitions, a reduction in the amount of interest capitalized to the Katy
Facility and an increase in the Company's variable borrowing rate.
S-33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity and capital resources historically have
been net cash provided by operating activities, funds available under its
financing facilities and proceeds from offerings of equity securities. In the
past, these sources have been sufficient to meet its needs and finance the
growth of the Company's business. The Company can give no assurance that the
historical sources of liquidity and capital resources will be available for
future development and acquisition projects, and it may be required to
investigate alternative financing sources. Net cash provided by operating
activities is primarily affected by product prices and sales of inventory, the
Company's success in increasing the number and efficiency of its facilities
and the volumes of natural gas processed by such facilities, as well as the
margin on third-party product purchased for resale. The Company's continued
growth will be dependent upon success in the areas of marketing, additions to
dedicated plant reserves, acquisitions and new project development.
The Company believes that the amounts available to be borrowed under the
Revolving Credit Facility, together with the proceeds from this offering and
cash provided by operating activities, will provide it with sufficient funds
to connect new reserves, maintain its existing facilities and complete its
current capital improvement projects. Depending on the timing of the Company's
future projects, it may be required to seek additional sources of capital. The
Company's ability to secure such capital is restricted by its credit
facilities, although it may request additional borrowing capacity from the
banks, seek waivers from its lenders to permit it to borrow funds from third-
parties, seek replacement credit facilities from other lenders, use stock as a
currency for an acquisition, sell existing assets or a combination of such
alternatives. While the Company believes that it would be able to secure
additional financing, if required, no assurance can be given that it will be
able to do so or as to the terms of any such financing. The Company also
believes that cash provided by operating activities will be sufficient to meet
its debt service and preferred stock dividend requirements in 1997.
The Company's sources and uses of funds are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, 1996 1995
------------------ ------------
<S> <C> <C>
SOURCES OF FUNDS:
Borrowings under long-term debt agreements... $724,850 $717,400
Net cash provided by operating activities.... 119,248 86,373
Other........................................ 4,003 13,445
-------- --------
Total sources of funds..................... $848,101 $817,218
======== ========
USES OF FUNDS:
Payments related to long-term debt
agreements.................................. $799,353 $682,784
Capital investments.......................... 38,803 78,521
Redemption of the 7.25% Cumulative Senior
Perpetual convertible Preferred Stock....... -- 42,030
Payment of preferred stock dividends......... 7,829 11,643
Payment of common stock dividends............ 3,868 5,153
-------- --------
Total uses of funds........................ $849,853 $820,131
======== ========
</TABLE>
An additional source of liquidity available to the Company is its stored
volumes of residue gas and NGLs. The Company stores residue gas and NGLs
primarily to ensure an adequate supply for long-
S-34
<PAGE>
term sales contracts and for resale during periods when prices are favorable.
The Company held residue gas in storage for such purposes of approximately
13.4 Bcf at an average cost of $1.81 per Mcf at September 30, 1996 as compared
to 12.8 Bcf at an average cost of $1.65 per Mcf at December 31, 1995,
primarily at the Katy Facility. At September 30, 1996, the Company had hedging
contracts in place for anticipated sales of approximately 12.5 Bcf of stored
gas at a weighted average price of $2.01 per Mcf. The Company also held NGLs
in storage of approximately 18,460 MGal at an average cost of $.33 per gallon
and approximately 15,816 MGal at an average cost of $.31 per gallon at
September 30, 1996 and December 31, 1995, respectively, at various third-party
storage facilities.
The Company has been successful overall in replacing production with new
reserves. However, volumes of natural gas dedicated to some of the Company's
plants have declined in recent years because additions to dedicated plant
reserves have not fully offset production. In 1995, including the reserves
associated with Westana Gathering Company ("Westana") and 1995 acquisitions,
the Company connected new reserves to its gathering systems to replace
approximately 141% of 1995 production. On a Company-wide basis, dedicated
reserves, including certain proved undeveloped properties and revisions to
previous estimates, increased from 2.6 Tcf as of December 31, 1994 to
approximately 2.7 Tcf at December 31, 1995. The increase is primarily due to
the Company's Northern Acquisition in December 1995 in West Texas.
In May 1995, the Company redeemed all of the issued and outstanding shares
of its 7.25% Cumulative Senior Perpetual Convertible Preferred Stock
(liquidation preference of $40 million) pursuant to the provisions of the
Certificate of Designation relating to such preferred stock, at an aggregate
redemption price of approximately $42.0 million.
RISK MANAGEMENT ACTIVITIES
The Company's policy is to utilize risk management tools primarily to reduce
commodity price risk for its equity production and to lock in profit margins
for its storage and marketing activities. It is the Company's objective to
maintain a balanced portfolio of financial exposure between physical
obligations (fixed price purchase and sales and storage inventories) and
related financial instruments (futures, swaps, and options positions). This
essentially allows the Company to fix its total margin because gains or losses
in the physical market are offset by corresponding losses or gains in the
financial instruments market.
Hedging and related activities may expose the Company to the risk of
financial loss in certain circumstances, including instances when (i)
production is less than expected, (ii) the Company's customers fail to
purchase or deliver the contracted quantities of natural gas or NGLs, or (iii)
the Company's over-the-counter counterparties ("OTC") fail to perform. To the
extent that the Company engages in hedging activities, it may be prevented
from realizing the benefits of favorable price changes in the physical market.
However, it is similarly insulated against decreases in such prices.
In 1993, the Board of Directors adopted its Natural Gas Futures Trading
Procedures and created a committee of officers to oversee the Company's risk
management activities. As an additional control, the Company has developed
information systems that allow daily monitoring of its risk management
activities and its exposure related to futures, swaps and options positions
resulting from changes in the market.
The Company uses futures, swaps, and options to reduce price risk and basis
risk. Basis is the difference in price between the physical commodity being
hedged and the price of the futures contract used for hedging. Basis risk is
the risk that an adverse change in the futures market will not be completely
offset by an equal and opposite change in the cash price of the commodity
being hedged. Basis risk exists in natural gas primarily due to the geographic
price differentials between cash market locations and futures contract
delivery locations.
S-35
<PAGE>
The Company enters into futures transactions on the New York Mercantile
Exchange and the Kansas City Board of Trade and through OTC swaps with
creditworthy counterparties consisting primarily of financial institutions and
other natural gas companies. The Company conducts its standard credit review
of OTC counterparties and has agreements with such parties which contain
collateral requirements. OTC exposure is marked to market daily for the credit
review process. The Company generally uses standardized swap agreements which
allow for offset of positive and negative exposures.
Gains and losses on hedges of product inventory are included in the carrying
amount of the inventory and are ultimately recognized in residue and NGL sales
when the related inventory is sold. Gains and losses related to qualifying
hedges, as defined by SFAS No. 80, "Accounting for Futures Contracts", of firm
commitments or anticipated transactions are recognized in residue and NGL
sales when the hedged physical transaction occurs. The $215,000 of losses
deferred in inventory at September 30, 1996 will be recognized through the
first quarter of 1997. It is anticipated that these losses will be offset by
margins from the Company's related forward fixed price hedges and physical
sales.
As of November 1, 1996, the Company held a notional quantity of
approximately 315 Bcf of futures, swaps, and options extending from November
1996 through October 1998 related to anticipated sales of residue gas. This
was comprised of approximately 29 Bcf long and 42 Bcf short of exchange traded
futures and 116 Bcf long and 128 Bcf short of OTC swaps and options. As of
December 31, 1995, the Company held a notional quantity of approximately 330
Bcf of natural gas futures, swaps, and options extending from January 1996 to
February 1998. This was comprised of approximately 37 Bcf long and 31 Bcf
short of exchange-traded futures and 126 Bcf long and 136 Bcf short of OTC
swaps and options.
As of November 1, 1996, the Company held a notional quantity of
approximately 2,258 MBbls of futures, swaps, and options extending from
November 1996 through April 1997 related to anticipated sales of propane,
ethane and crude oil. This was comprised of approximately 264 MBbls long and
324 MBbls short of exchange traded futures and 500 MBbls long and 1,170 MBbls
short of OTC swaps and options. No such positions were outstanding as of
December 31, 1995.
The Company enters into speculative futures trades on a very limited basis
for purposes which include testing of hedging techniques. Company procedures
contain strict guidelines for such trading including predetermined stop-loss
requirements and net open positions limits (currently, a total position of 100
net contracts long or short). Speculative futures positions are marked to
market at the end of each accounting period and any gain or loss is recognized
in income for that period. Gains and losses from such speculative activities
for the nine months ended September 30, 1996 and year ended December 31, 1995
were not material. See further discussion of hedging activities at "Financing
Facilities--Interest Rate Swap Agreements."
CAPITAL INVESTMENT PROGRAM
Between January 1, 1993 and December 31, 1995, the Company expended
approximately $672 million on new projects and acquisitions. For the years
ended December 31, 1995, 1994 and 1993, the Company expended $79 million, $101
million and $492 million, respectively, on acquisitions, the construction of
the Katy Facility, connection of new reserves, the acquisition of
consolidating assets for existing systems and upgrades to existing and newly
acquired facilities.
Capital expenditures related to existing operations are expected to be
approximately $82 million during 1996 consisting of the following: capital
expenditures related to gathering, processing and pipeline assets are expected
to be $58 million, of which $44 million will be used for new connects, system
expansions and asset consolidations, $10 million (out of a projected $62
million) for
S-36
<PAGE>
construction of the Bethel facility and $14 million for maintaining existing
facilities. The Company expects capital expenditures on the Katy Facility,
exploration and production activities and miscellaneous items to be
approximately $14 million. For the nine months ended September 30, 1996, the
Company had expended $38.8 million consisting of the following: (i) $22.0
million for new connects, system expansions and asset consolidations; (ii)
$5.8 million for maintaining existing facilities; (iii) $3.6 million for
exploration and production activities; (iv) $500,000 related to the Katy
Facility; and (v) $6.9 million of miscellaneous expenditures.
The Company continually monitors the economic performance of each of its
operating facilities to ensure that a desired cash flow objective is achieved.
If an operating facility is not generating desired cash flows or does not fit
in with the Company's strategic plans, the Company will explore various
options, such as consolidation with other Company-owned facilities,
dismantlement, asset swap or outright sale.
FINANCING FACILITIES
REVOLVING CREDIT FACILITY. The Company's variable rate Revolving Credit
Facility, as restated on September 2, 1994 and subsequently amended, with a
syndicate of eight banks, provides for a maximum borrowing base of $300
million, of which $76 million was outstanding at September 30, 1996. If the
facility is not renewed, its commitment period will terminate on October 1,
1997. Any outstanding balance thereunder at such time will convert to a three-
year term loan, which will be payable in 12 equal quarterly installments,
commencing January 1, 1998. The Revolving Credit Facility bears interest, at
the Company's option, at certain spreads over the Eurodollar rate, at the
Federal Funds rate plus .50%, or at the agent bank's prime rate. The interest
rate spreads are adjusted based on the Company's debt to capitalization ratio.
At September 30, 1996, the spread was 1.25% over the Eurodollar rate,
resulting in an interest rate of 6.90%. Upon the placement of at least $50
million of common or preferred equity, the interest rate paid by the Company
on borrowings under the Revolving Credit Facility will decrease by .125%.
The Company pays a commitment fee on the unused commitment ranging from .15%
to .375% based on the debt to capitalization ratio. At September 30, 1996, the
Company's debt to capitalization ratio was .56 to 1 resulting in a commitment
fee rate of .375%.
TERM LOAN FACILITY. The Company also has a Term Loan Facility with four
banks with aggregate principal outstanding as of September 30, 1996 of $12.5
million which bears interest at 9.87%. The final payment on the Term Loan
Facility of $12.5 million is due in September 1997. The Company intends to
finance the $12.5 million payment due in 1997 through amounts available under
the Revolving Credit Facility.
The agreements governing the Company's Revolving Credit and Term Loan
Facilities (the "Credit Facilities Agreement") contain certain mandatory
prepayment terms. If funded debt of the Company, which has a final maturity on
or before October 1, 2000, exceeds four times (4.0 to 1.0) the sum of the
Company's last four quarters' cash flow (as defined in the agreement) less
preferred stock dividends projected to be paid during the next four quarters,
the overage must be repaid in no more than six monthly payments, commencing 90
days from notification. This mandatory prepayment threshold will be reduced to
3.5 to 1.0 at September 1, 1998. At September 30, 1996, taking into account
all the covenants contained in the Credit Facilities Agreement and expected
maturities of long-term debt during 1996, the Company had approximately $90
million of available borrowing capacity.
The Credit Facilities Agreements are unsecured. Pursuant to the Credit
Facilities Agreement, the Company is required to maintain a current ratio (as
defined therein) of at least 1.0 to 1.0, a minimum tangible net worth equal to
the sum of $345 million plus 50% of consolidated net income earned after June
30, 1995 plus 75% of the net proceeds received after June 30, 1995 from the
sale of equity
S-37
<PAGE>
securities, a debt to capitalization ratio (as defined therein) of no more
than 60% through December 31, 1996 and 55% thereafter, and an EBITDA (as
defined therein) to interest ratio of not less than 3.00 to 1.0 through
October 31, 1996, 3.25 to 1.0 from November 1, 1996 through October 31, 1997
and 3.75 to 1.0 thereafter. The Company is prohibited from declaring or paying
dividends on any capital stock on or after December 31, 1995, that in the
aggregate exceed the sum of $10 million plus 50% of consolidated net income
earned after December 31, 1995 plus 50% of the cumulative net proceeds
received by the Company after December 31, 1995 from the sale of any equity
securities. The dividends declared in the fourth quarter of 1995 and paid in
1996 were excluded, per the agreement, from this calculation. At September 30,
1996, $8 million was available under this limitation, which is sufficient to
pay required preferred stock dividends in 1996. The Company generally utilizes
excess daily funds to reduce any outstanding revolving credit balances and
associated interest expense and it intends to continue such practice. The $4
million cash balance at September 30, 1996 is due to the timing of cash
receipts and the balance is considered temporary.
MASTER SHELF AGREEMENT. In December 1991, the Company entered into a Master
Shelf Agreement (the "Master Shelf") with The Prudential Insurance Company of
America ("Prudential") pursuant to which Prudential agreed to quote, from
time-to-time, an interest rate at which Prudential or its nominee would be
willing to purchase up to $100 million of the Company's senior promissory
notes (the "Master Notes"). Any such Master Notes will mature in no more than
12 years, with an average life not in excess of 10 years, and are unsecured.
The Master Shelf contains certain financial covenants which substantially
conform with those contained in the Credit Facilities Agreement, as restated
and amended. In July 1993 and July 1995, Prudential and the Company amended
the Master Shelf to provide for additional borrowing capacity (for a total
borrowing capacity of $200 million) and to extend the term of the Master Shelf
to October 31, 1995. The Master Shelf Agreement, as restated and amended, is
fully utilized, as indicated in the following table (000s):
<TABLE>
<CAPTION>
INTEREST FINAL
ISSUE DATE AMOUNT RATE MATURITY PRINCIPAL PAYMENTS DUE
- ------------------------ -------- -------- ------------------ -----------------------------------------------
<S> <C> <C> <C> <C>
October 27, 1992........ $ 25,000 7.51% October 27, 2000 $8,333 on each of October 27, 1998 through 2000
October 27, 1992........ 25,000 7.99% October 27, 2003 $8,333 on each of October 27, 2001 through 2003
September 22, 1993...... 25,000 6.77% September 22, 2003 single payment at maturity
December 27, 1993....... 25,000 7.23% December 27, 2003 single payment at maturity
October 27, 1994........ 25,000 9.05% October 27, 2001 single payment at maturity
October 27, 1994........ 25,000 9.24% October 27, 2004 single payment at maturity
July 28, 1995........... 50,000 7.61% July 28, 2007 $10,000 on each of July 28, 2003 through 2007
--------
$200,000
========
</TABLE>
1993 SENIOR NOTES. On April 28, 1993 the Company sold $50 million of 7.65%
Senior Notes ("1993 Senior Notes") due 2003 to a group of insurance companies.
Annual principal payments of $7.1 million on the 1993 Senior Notes are due on
April 30 of each year from 1997 through 2002, with any remaining principal and
interest outstanding due on April 30, 2003. The Company intends to finance the
$7.1 million payment due in 1997 through amounts available under the Revolving
Credit Facility. The 1993 Senior Notes contain certain financial covenants
that substantially conform with those contained in the Master Shelf Agreement,
as restated and amended.
1995 SENIOR NOTES. The Company sold $42 million of 1995 Senior Notes to a
group of insurance companies in the fourth quarter of 1995, with an interest
rate of 8.16% per annum and principal due in a single payment in December
2005. The 1995 Senior Notes contain certain financial covenants that conform
with those contained in the Master Shelf Agreement, as restated and amended.
RECEIVABLES FACILITY. In April 1995, the Company entered into an agreement
with Receivables Capital Corporation ("RCC"), as purchaser, and Bank of
America National Trust and Savings Association ("BA"), as agent, pursuant to
which the Company will sell to RCC at face value on a revolving basis an
undivided interest in certain of the Company's trade receivables. As part of
the sale,
S-38
<PAGE>
the Company granted to RCC a security interest in such receivables. The
Company may sell up to $75 million of trade receivables under the Receivables
Facility, at a rate equal to RCC's commercial paper rate plus .375%, of which
$75 million was funded at a rate of 5.81% as of September 30, 1996. The
Receivables Facility has a 364-day term and contains financial covenants
similar to those in the Credit Facilities Agreement, as restated and amended,
along with certain covenants regarding the quality of the trade receivables
pool. The parties have renewed the facility through May 29, 1997.
COVENANT COMPLIANCE. At September 30, 1996, the Company was in compliance
with all covenants in its loan agreements.
INTEREST RATE SWAP AGREEMENTS. Historically, the Company has entered into
interest rate swap agreements to manage exposure to changes in interest rates.
The transactions generally involve the exchange of fixed and floating interest
payment obligations or the exchange of foreign and U.S. currencies, without
the exchange of the underlying principal amounts. The net effect of interest
rate swap activity is reflected as an increase or decrease in interest
expense. Any gains on termination of interest rate swap agreements and the
effects of foreign currency positions that were marked to market are included
in other income. At September 30, 1996 and December 31, 1995, there were no
outstanding interest rate swap agreements. Also, for the nine months ended
September 30, 1996, the Company has not incurred any gains or losses related
to interest rate swaps. In addition to the financial risk, which will vary
during the life of these swap agreements in relation to the maturity of the
underlying debt and market interest rates, the Company is subject to credit
risk exposure from nonperformance of the counterparties to the swap
agreements.
In anticipation of issuing the 1995 Senior Notes in the fourth quarter of
1995, the Company entered into an interest rate lock on a notional amount of
$50 million, linked to the ten-year U.S. Treasury Bill rate, with a
creditworthy counterparty to hedge against the risk of rising interest rates
while it completed the 1995 Senior Notes placement. At the time the Company
terminated the rate lock, interest rates had decreased, which resulted in the
realization of a $390,000 loss. The Company considered the loss to be a cost
of obtaining the privately placed debt and is therefore amortizing it over the
ten-year term of the 1995 Senior Notes.
The following table summarizes the results of the Company's interest rate
swap and foreign currency positions for each of the three years in the period
ended December 31, 1995 (000s):
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -------
<S> <C> <C> <C>
Net (increase) decrease to interest expense............ $358 $(932) $ 1,769
===== ===== =======
Interest rate swap losses capitalized.................. $390 $ -- $ --
===== ===== =======
Gains on swap termination.............................. $ -- $ -- $ 2,590
===== ===== =======
Losses on foreign currency positions................... $ -- $(361) $(1,175)
===== ===== =======
</TABLE>
ENVIRONMENTAL AND REGULATORY MATTERS
The construction and operation of the Company's gathering lines, plants and
other facilities used for the gathering, transporting, processing, treating or
storing of residue gas and NGLs are subject to federal, state and local
environmental laws and regulations, including those that can impose
obligations to clean up hazardous substances at the Company's facilities or at
facilities to which the Company sends wastes for disposal. In most instances,
the applicable regulatory requirements relate to water and air pollution
control or waste management. The Company employs six environmental engineers
to monitor environmental compliance and potential liabilities at its
facilities.
S-39
<PAGE>
Prior to consummating any major acquisition, the Company's environmental
engineers perform audits on the facilities to be acquired. In addition, on an
ongoing basis, the environmental engineers perform systematic environmental
assessments of the Company's existing facilities. The Company believes that it
is in substantial compliance with applicable material environmental laws and
regulations. Environmental regulation can increase the cost of planning,
designing, constructing and operating the Company's facilities. The Company
believes that the costs for compliance with current environmental laws and
regulations have not had and will not have a material effect on the Company's
financial position or results of operation.
The Company anticipates that it is reasonably likely that the trend in
environmental legislation and regulation will continue to be towards stricter
standards. The Company is unaware of future environmental standards that are
reasonably likely to be adopted that will have a material effect on the
Company's financial position or results of operations, but it cannot rule out
that possibility.
The Company is in the process of voluntarily cleaning up substances at
facilities that it operates. In addition, the former owner of certain
facilities that the Company acquired in 1992 is conducting remediation at
those facilities pursuant to contractual obligations. The Company's
expenditures for environmental evaluation and remediation at existing
facilities have not been significant in relation to the results of operations
of the Company and totaled approximately $1.3 million for the year ended
December 31, 1995. For the year ended December 31, 1995, the Company paid an
aggregate of approximately $757,000 in air emissions fees to the states in
which it operates. Although the Company anticipates that such environmental
expenses will increase over time, the Company does not believe that such
increases will have a material effect on the Company's financial position or
results of operations.
In May 1995, Oklahoma enacted legislation granting the Oklahoma Corporation
Commission limited authority in certain circumstances, after the filing of a
complaint by a producer, to compel a gas gatherer to provide open access
gathering and to set aside unduly discriminatory gathering fees. The Texas
Railroad Commission is in the process of reviewing Texas regulation of
gathering. In addition, the state legislatures and regulators in certain other
states in which the Company gathers gas are also contemplating additional
regulation of gas gathering. The Company does not believe that any of the
proposed legislation of which it is aware is likely to have a material adverse
effect on the Company's financial position or results of operation. However,
the Company cannot predict what additional regulations the states may impose
on gathering and can give no assurance that any such additional regulations
would not have a material adverse effect on the Company's financial position
or results of operations.
S-40
<PAGE>
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this
Prospectus Supplement or the accompanying Prospectus, including statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business and Properties," are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements in this Prospectus Supplement or the Prospectus
generally are accompanied by words such as "anticipate," "believe,"
"estimate," "project" or "expect" or similar statements. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, no assurance can be given that such expectations will prove
correct. Factors that could cause the Company's results to differ materially
from the results discussed in such forward-looking statements include the
risks described under "Risk Factors" in the Prospectus, such as the
fluctuations of the prices received for the Company's residue gas and NGLs,
the ability of the Company to connect new wells to its gathering systems, the
level of drilling activity in the basins in which the Company operates, the
uncertainty of reserve estimates, the ability of the Company to pay its fixed
charges, the availability of expansion projects and the capital to finance
such activities, the competition from other companies in the gathering,
processing and marketing of natural gas and NGLs, the physical hazards
inherent in operating natural gas and NGL facilities and the effects of
governmental and environmental regulation. All forward-looking statements in
this Prospectus Supplement and the Prospectus are expressly qualified in their
entirety by the cautionary statements in this paragraph.
S-41
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholder have severally agreed to sell to each of
the Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and Petrie
Parkman & Co., Inc. are acting as representatives, has severally agreed to
purchase from the Company and the Selling Stockholder, the respective number
of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co. ........................................ 1,305,000
Donaldson, Lufkin & Jenrette Securities Corporation ......... 1,305,000
Petrie Parkman & Co., Inc.................................... 1,305,000
Jefferies & Company, Inc..................................... 120,000
Lehman Brothers Inc.......................................... 223,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ......................................... 223,000
Oppenheimer & Co., Inc....................................... 223,000
PaineWebber Incorporated..................................... 223,000
Principal Financial Securities, Inc. ........................ 120,000
Rauscher Pierce Refsnes, Inc. ............................... 120,000
Rodman & Renshaw, Inc........................................ 120,000
Sands Brothers & Co., Ltd. .................................. 120,000
Wasserstein Perella Securities, Inc.......................... 223,000
---------
Total.................................................... 5,630,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement and in part to certain securities
dealers at such price less a concession of $0.53 per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $0.10
per share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company and the Selling Stockholder have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus Supplement to
purchase up to 825,000 and 19,500, respectively, additional shares of Common
Stock to cover over-allotments, if any. If the Underwriters exercise their
over-allotment option, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the 5,630,000 shares of Common Stock offered.
The Company, its directors and executive officers and the Selling
Stockholder have agreed that, during the period beginning from the date of
this Prospectus Supplement and continuing to and including the date 90 days
after the date of this Prospectus Supplement, they will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company (other
than pursuant to director or employee stock option plans existing, or on the
conversion or exchange of convertible or exchangeable securities outstanding,
on the date of this Prospectus Supplement) which are
S-42
<PAGE>
substantially similar to the shares of Common Stock or which are convertible
into or exchangeable for securities which are substantially similar to the
shares of Common Stock without the prior consent of the representatives,
except for the shares of Common Stock offered in connection with the Offering.
The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
LEGAL OPINIONS
The validity of the issuance of the shares of the Common Stock offered
hereby will be passed upon for the Company by Skadden, Arps, Slate, Meagher &
Flom LLP, New York, New York. Certain legal matters in connection with the
Common Stock offered hereby are being passed upon for the Underwriters by
Baker & Botts, L.L.P., Dallas, Texas.
EXPERTS
The estimates as of June 30, 1996 of proved reserves attributable to the
Black Lake field and the Company's interests therein included in this
Prospectus Supplement are based upon a reserve report prepared by Williamson
Petroleum Consultants, Inc., independent petroleum consultants, and, are
included herein upon the authority of such firm as experts with respect to
such matters covered by such report.
The financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-K of the Company for the year ended December 31,
1995, have been so incorporated in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
S-43
<PAGE>
PROSPECTUS
WESTERN GAS RESOURCES, INC.
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
---------------
[LOGO OF WESTERN GAS RESOURCES, INC. APPEARS HERE]
Western Gas Resources, Inc. (the "Company"), directly, through agents
designated from time to time, or through dealers or underwriters also to be
designated, may offer and issue from time to time debt securities (the "Debt
Securities") in one or more series, on terms to be determined at the time of
sale. The Company may also offer and issue from time to time in one or more
series its Preferred Stock, par value $.10 per share (the "Preferred Stock"),
and its Common Stock, par value $.10 per share (the "Common Stock"), on terms
to be determined at the time of sale. The Debt Securities and Preferred Stock
will be limited to an aggregate initial public offering price of up to
$300,000,000 or the equivalent thereof in one or more foreign currencies or
composite currencies and the Common Stock will be limited to an aggregate
initial public offering price of $100,000,000 plus up to an additional
4,000,000 shares. In addition, up to 150,000 shares of Common Stock may be
offered by the Selling Stockholder of the Company. See "Selling Stockholder."
The Company will not receive any of the proceeds from the sale of such Common
Stock (the "Selling Stockholder Shares"). The Common Stock is listed on the
New York Stock Exchange (the "NYSE") under the symbol "WGR." The Debt
Securities, the Preferred Stock and the Common Stock, including the Selling
Stockholder Shares except as otherwise indicated, are hereafter collectively
referred to as the "Securities." The aggregate initial public offering price
of all the Securities that may be offered pursuant to this Prospectus,
exclusive of the 4,000,000 shares of Common Stock and Selling Stockholder
Shares, will not exceed $300,000,000 or the equivalent thereof.
The accompanying Prospectus Supplement will set forth specific terms of the
Securities, including (i) in the case of Debt Securities, specific
designation, ranking as senior or subordinated Debt Securities, aggregate
principal amount, maturity, rate and time of payment of interest, purchase
price, any terms for redemption, whether and on what terms the Debt Securities
may be converted into the Company's Common Stock, and any other specific terms
of the Debt Securities, (ii) in the case of a particular series of Preferred
Stock, specific designation, aggregate number of shares offered, dividend rate
(or manner of calculation thereof), dividend periods (or manner of calculation
thereof), liquidation preference, voting rights, any terms for redemption,
whether and on what terms the shares of such series may be converted into the
Company's Common Stock at the option of the holder, whether depositary shares
representing shares of such series of Preferred Stock will be offered and, if
so, the fraction of a share of Preferred Stock represented by each depositary
share, listing, if any, on a securities exchange and any other specific terms
of such series of Preferred Stock and (iii) in the case of Common Stock, the
number of shares offered and the purchase price thereof. The accompanying
Prospectus Supplement will also set forth the name of and compensation to each
dealer, underwriter or agent, if any, involved in the sale of the Securities
being offered and the managing underwriters with respect to each series of
Securities sold to or through underwriters. The Company reserves the sole
right to accept and, together with its agents from time to time, to reject, in
whole or in part, any proposed purchase of Securities, exclusive of the
Selling Stockholder Shares, to be made directly or through agents.
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR DISCUSSION OF MATERIAL RISKS IN
CONNECTION WITH THE PURCHASE OF THE SECURITIES.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
If an agent of the Company or, if applicable, the Selling Stockholder, or a
dealer or underwriter is involved in the sale of the Securities in respect of
which this Prospectus is being delivered, the agent's commission, dealer's
purchase price or underwriter's discount is set forth in, or may be calculated
from, the accompanying Prospectus Supplement and the net proceeds to the
Company and, if applicable, the Selling Stockholder, from such sale will be
the purchase price of such Securities less such commission in the case of an
agent, the purchase price of such Securities in the case of a dealer or the
public offering price less such discount in the case of an underwriter, and
less, in each case, the other attributable issuance expenses. The Company may
pay all registration expenses of the Selling Stockholder. See "Plan of
Distribution" for possible indemnification arrangements for any agents,
dealers or underwriters.
---------------
The date of this Prospectus is October 11, 1996
<PAGE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY
UNDERWRITER OR AGENT. THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF AND THEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, IL 60661 and 7 World Trade Center,
13th Floor, New York, NY 10048 and through the Commission's Internet site at
www.sec.gov. Copies of such material can also be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, such material
can be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
The Company has filed a registration statement (the "Registration
Statement") on Form S-3 with respect to the Securities offered hereby with the
Commission under the Securities Act of 1933, as amended (the "Securities
Act"). This Prospectus, which constitutes a part of the Registration
Statement, relates only to the Securities offered by the Company and the
Selling Stockholder and does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the contents of any agreement, instrument or other document referred to are
not necessarily complete. With respect to each such agreement, instrument or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's (i) Annual Report on Form 10-K for the year ended December 31,
1995; (ii) Quarterly Reports on Form 10-Q for the quarters ended March 31 and
June 30, 1996; (iii) Proxy Statement for the Annual Meeting of Stockholders
held on May 15, 1996; (iv) Registration Statement on Form 8-A with respect to
the Company's $2.28 Cumulative Convertible Preferred Stock, declared effective
on November 12, 1992; (v) Registration Statement on Form 8-A with respect to
the Company's $2.625 Cumulative Convertible Preferred Stock, declared
effective by the Commission on February 17, 1994; and (vi) Current Report on
Form 8-K dated January 11, 1996, all of which have previously been filed by
the Company with the Commission, are incorporated by reference in this
Prospectus.
2
<PAGE>
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in this Prospectus
or in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus
to the extent that a statement contained herein or in any subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents referred to above which have
been or may be incorporated by reference herein (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference in
such documents). Requests for such copies should be directed to John C.
Walter, Executive Vice President, Western Gas Resources, Inc., 12200 North
Pecos Street, Denver, Colorado 80234-3439 (telephone (303) 452-5603).
3
<PAGE>
WESTERN GAS RESOURCES, INC.
Western Gas Resources, Inc. is an independent gas gatherer and processor and
an energy marketer providing a full range of services to its customers from
the wellhead to the delivery point. The Company designs, constructs, owns and
operates natural gas gathering, processing, treating and storage facilities in
major gas-producing basins in the Rocky Mountain, Mid-Continent, Gulf Coast
and Southwestern regions of the United States. The Company connects producers'
wells to its gathering systems for delivery to its processing or treating
plants, processes the natural gas to extract natural gas liquids ("NGLs") and
treats the natural gas in order to meet pipeline specifications. The Company
is a nationwide marketer of natural gas, NGLs and wholesale electric power,
providing a full range of services including risk management, storage,
transportation, scheduling and peaking services to a variety of customers. The
Company was incorporated in Delaware in 1989. The Company's principal offices
are located at 12200 North Pecos Street, Denver, Colorado 80234-3439, and its
telephone number is (303) 452-5603.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
AND
EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the unaudited consolidated ratios of earnings
to fixed charges and earnings to fixed charges and preferred stock dividends
of the Company for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -------------------------
JUNE 30, 1996 1995 1994 1993 1992 1991
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges................ 2.17 .76 1.29 3.73 5.30 3.19
Ratio of earnings to
fixed charges and preferred
stock dividends.............. 1.55 .50 .83 2.52 3.87 2.10
</TABLE>
For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges. For the
purpose of computing the ratio of earnings to fixed charges and preferred
stock dividends, earnings consist of income before income taxes and fixed
charges and preferred stock dividends. For purposes of calculating both
ratios, fixed charges consist of interest (including capitalized interest, but
excluding amortization of amounts previously capitalized) on all indebtedness,
amortization of debt discount and expense and that portion (one-third) of
rental expense which the Company believes to be representative of interest.
For the year ended December 31, 1995, the Company's earnings before fixed
charges were insufficient to cover its fixed charges by approximately $9.7
million. In addition, for the years ended December 31, 1995 and 1994, the
Company's earnings before fixed charges and preferred stock dividends were
insufficient to cover its fixed charges and preferred stock dividends by
approximately $30.6 million and $9.1 million, respectively. Excluding the
effect of the adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," which resulted in a non-cash expense of $17.6 million, the
Company's ratio of earnings to fixed charges and ratio of earnings to fixed
charges and preferred stock dividends would have been 1.19 and .76,
respectively, for the year ended December 31, 1995. See further discussion in
"Risk Factors." Statements setting forth the unaudited computations of the
consolidated ratio of earnings to fixed charges and consolidated ratio of
earnings to fixed charges and preferred stock dividends are filed as exhibits
to the Registration Statement of which this Prospectus is a part.
4
<PAGE>
USE OF PROCEEDS
Unless otherwise set forth in the accompanying Prospectus Supplement, the
net proceeds from the sale of the Securities by the Company will be used for
general corporate purposes, which may include repayment of debt, acquisitions,
working capital and capital expenditures. Pending application for specific
purposes, the net proceeds will be invested in short-term marketable
securities. The Company will not receive any of the proceeds from the sale of
the Selling Stockholder Shares.
RISK FACTORS
Prospective investors should carefully review the following factors together
with the other information contained in this Prospectus and any accompanying
Prospectus Supplement prior to making an investment decision.
EFFECT OF VOLATILE PRODUCT PRICES; HEDGING TRANSACTIONS
The Company's future financial condition and results of operations will
depend significantly upon the prices received for the Company's natural gas
and NGLs. Prices for natural gas and NGLs are subject to fluctuations in
response to changes in supply, market uncertainty and a variety of additional
factors that are beyond the control of the Company. These factors include the
level of domestic production, the availability of imported oil and gas,
actions taken by foreign oil and gas producing nations, the availability of
transportation systems with adequate capacity, the availability of competitive
fuels, fluctuating and seasonal demand for oil, gas and NGLs, conservation and
the extent of governmental regulation of production and the overall economic
environment. A substantial or extended decline in gas and/or NGL prices would
have a material adverse effect on the Company's financial position, results of
operations and access to capital.
The Company's risk management policy is to enter into futures, swaps and
option contracts primarily to reduce risk and lock-in profit margins on its
marketing and storage activities. Over-the- counter derivatives, with
creditworthy counterparties, also permit the Company to offer its gas
customers alternate pricing and delivery mechanisms meeting their specific
needs. To ensure a known price for future equity production and a fixed margin
between gas injected into storage and gas withdrawn from storage, the Company
typically will sell a futures contract and related basis swap and thereafter,
either (i) make physical delivery of its product to comply with such futures
contract and settle its basis swap or (ii) buy matching futures and basis
position contracts to unwind its position and sell its production to a
customer in the cash market. The Company also may contract to sell future
production to a customer at a fixed price and then purchase futures contracts
to lock-in a margin. These same techniques also may be utilized to manage
price risk for product purchased from marketing customers. Such contracts may
expose the Company to the risk of financial loss in certain circumstances,
including instances where production is less than expected, the Company's
customers fail to purchase or deliver the contracted quantities of natural gas
or NGLs or credit risk with derivatives counterparties. Furthermore, to the
extent that the Company engages in hedging activities, it may be prevented
from realizing the benefits of price increases above the levels of such
hedges.
GAS SUPPLY
The Company must continually connect new wells to its gathering systems in
order to maintain or increase throughput levels to offset natural declines in
dedicated volumes. Historically, while certain individual plants have
experienced declines in dedicated reserves, the Company has been successful in
connecting additional reserves to more than offset the natural declines and
reserves dedicated to existing facilities. Drilling activity in certain basins
in which the Company operates has continued to be significantly reduced from
levels that existed in prior years. Higher residue gas and NGL prices
experienced since the beginning of 1996 and improved technology (e.g., 3-D
seismic and horizontal
5
<PAGE>
drilling) have stimulated drilling in certain of the basins in which the
Company operates, primarily the Permian and Anadarko basins. The level of
drilling will depend upon, among other factors, the prices for gas and oil,
the energy policy of the federal government and the availability of foreign
oil and gas, none of which is within the Company's control. There is no
assurance that the Company will continue to be suc- cessful in replacing the
dedicated reserves processed at its facilities.
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
Reserve estimates are subject to numerous uncertainties inherent in the
estimation of quantities of proved reserves and in the projection of future
rates of production and the timing of development expenditures. The accuracy
of such estimates is a function of the quality of available data and of
engineering and geological interpretation and judgement. Reserve estimates are
imprecise and should be expected to change as additional information becomes
available. Results of subsequent drilling, testing and production may cause
either upward or downward revisions of previous estimates. In addition, the
estimates of future net revenues from proved reserves of the Company and the
present value thereof are based upon certain assumptions about production
levels, prices and costs, which may not be correct. Further, the volumes
considered to be commercially recoverable fluctuate with changes in prices and
operating costs. The meaningfulness of such estimates is highly dependent upon
the accuracy of the assumptions upon which they were based. Actual results may
differ materially from the results estimated.
The Company has experienced unexpected water production in one of the wells
at its Black Lake Field. The Company retained an independent engineering firm
to perform an evaluation of the reserves. The evaluation has confirmed the
reserves previously estimated by the Company do not need revision at this
time. The Company will continue to monitor the field performance closely and
will revise the estimate as appropriate.
ABILITY TO PAY FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
For the year ended December 31, 1995, the Company's earnings before fixed
charges were insufficient to cover its fixed charges by approximately $9.7
million. In addition, for the years ended December 31, 1995 and 1994, the
Company's earnings before fixed charges and preferred stock dividends were
insufficient to cover its fixed charges and preferred stock dividends by
approximately $30.6 million and $9.1 million, respectively. Excluding the
effect of the adoption of Statement of Financial Accounting Standards No.
121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which resulted in a non-cash expense of $17.6
million, the Company's ratio of earnings to fixed charges and ratio of
earnings to fixed charges and preferred stock dividends would have been 1.19
and .76, respectively, for the year ended December 31, 1995. The Company has
historically met its fixed charges, including interest, and preferred stock
dividends through cash flow from operations. There can be no assurance that
the Company will have sufficient cash flow from operations to satisfy
anticipated cash requirements for these items and its planned capital
expenditures. See "Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Fixed Charges and Preferred Stock Dividends."
EXPANSION OPPORTUNITIES AND AVAILABILITY OF FINANCING
In order for the Company to expand its business through either the purchase
or construction of new gathering and processing facilities, the Company will
be required to identify expansion opportunities and to finance such
activities, using cash flow, equity or debt financing or a combination
thereof. No assurance can be given that appropriate opportunities for
expansion at levels of profitability which satisfy the Company's target rates
can be obtained or that financing on terms acceptable to the Company can be
obtained. Natural gas and NGL price volatility make it difficult to estimate
the value of acquisitions and to budget and forecast the return on the
Company's projects. In addition, unusually volatile prices often disrupt the
market for gas and NGL properties, as buyers and sellers have more difficulty
agreeing on the purchase price of properties.
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COMPETITION
The Company competes with other companies in the gathering, processing and
marketing business both for supplies of natural gas and for customers for its
natural gas and NGLs. Competition for natural gas supplies is primarily based
on efficiency, reliability, availability of transportation and ability to
obtain a satisfactory price for the producers' natural gas. Competition for
customers is primarily based upon reliability and price of deliverable natural
gas and NGLs. For customers that have the capability of using alternative
fuels, such as oil and coal, the Company also competes based primarily on
price against companies capable of providing such alternative fuels. The
Company's competitors for obtaining additional gas supplies, for gathering and
processing gas and for marketing gas and NGLs include national and local gas
gatherers, brokers, marketers and distributors of various size, financial
resources and experience. Until recently, the Company had experienced
narrowing margins related to third-party sales due to the increasing
availability of pricing information in the natural gas industry. The Company
believes, by targeting end-use markets, these margins will continue to
stabilize. These sales are highly competitive and there is no assurance that
the Company will be able to expand its current end-use business.
ENVIRONMENTAL MATTERS
The construction and operation of the Company's gathering lines, plants and
other facilities used for the gathering, transporting, processing, treating or
storing of natural gas and NGLs are subject to federal, state and local
environmental laws and regulations, including those that can impose
obligations to clean-up hazardous substances at the Company's facilities or at
facilities to which the Company sends wastes for disposal. In most instances,
the applicable regulatory requirements relate to water and air pollution
control or waste management. The Company believes that it is in substantial
compliance with applicable material environmental laws and regulations.
Environmental regulation can increase the cost of planning, designing,
constructing and operating the Company's facilities. The Company believes that
the costs for compliance with current environmental laws and regulations have
not had and will not have a material effect on the Company's financial
position or results of operation.
In 1990, the Congress enacted the Clean Air Act Amendments of 1990 (the
"Clean Air Amendments") which impose more stringent standards on emissions of
certain pollutants and establish an operating permit program for certain new
and existing air emissions sources. Under the Clean Air Amendments, individual
states are required to adopt regulations to implement the operating permit
program. The Company does not believe that compliance with the Clean Air
Amendments will require any material capital expenditures, although it will
increase permitting costs in 1996 and will increase certain operating costs,
such as emissions fees, on an on-going basis. The Company does not believe
that such cost increases will have a material effect on the Company's
financial position or results of operations.
The Company believes that it is reasonably likely that the trend in
environmental legislation and regulation will continue to be towards stricter
standards. The Company is unaware of future environmental standards that are
reasonably likely to be adopted that will have a material effect on the
Company's financial position or results of operations, but cannot rule out
that possibility.
REGULATION
Many aspects of the gathering, processing, marketing and transportation of
natural gas and NGLs by the Company are subject to federal, state and local
laws and regulations which can have a significant impact upon the Company's
overall operations. However, the gathering, processing and marketing
activities of the Company have generally not been subject to regulation, and
therefore, except as constrained by competitive factors, the Company has
considerable pricing flexibility.
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As a processor and marketer of natural gas, the Company depends on the
transportation and storage services offered by various interstate and
intrastate pipeline companies for the delivery and sale of its own gas
supplies as well as those it processes and/or markets for others. Both the
performance of transportation and storage services by interstate pipelines and
the rates charged for such services are subject to the jurisdiction of the
Federal Energy Regulatory Commission or state regulatory agencies. An
inability to obtain transportation and/or storage services at competitive
rates can hinder the Company's processing and marketing operations and/or
affect its sales margins.
INSURANCE AND OPERATIONAL RISKS
The Company is subject to various hazards which are inherent in the industry
in which it operates such as explosions, product spills, leaks and fires, each
of which could cause personal injury and loss of life, severe damage to and
destruction of property and equipment, and pollution or other environmental
damage, and may result in curtailment or suspension of operations at the
affected facility. The Company maintains physical damage, comprehensive
general liability, workers' compensation and business interruption insurance.
Such insurance is subject to deductibles that the Company considers
reasonable. The Company is not fully insured against all risks in its
business, however, the Company believes that the coverage it maintains is
adequate and consistent with other companies in the industry. Consistent with
insurance coverage typically available to the natural gas industry, the
Company's insurance policies do not provide coverage for losses or liabilities
relating to pollution, except for sudden and accidental occurrences.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be issued under an indenture (the "Indenture")
between the Company and Texas Commerce Bank National Association, as trustee
(the "Trustee"). The Debt Securities may constitute either senior or
subordinated debt of the Company as set forth in any accompanying Prospectus
Supplement for a specific series of Debt Securities. The following statements
are subject to the detailed provisions of the Indenture, a copy of the form of
which is filed as an exhibit to the Registration Statement. Wherever
references are made to particular provisions of the Indenture, such provisions
are incorporated by reference as a part of the statements made and such
statements are qualified in their entirety by such reference. Capitalized
terms are defined in the Indenture unless otherwise defined herein.
GENERAL
The Indenture does not limit the amount of the Debt Securities which may be
issued thereunder and provides that Debt Securities may be issued in one or
more series thereunder up to the aggregate principal amount that may be
authorized from time to time by the Company's Board of Directors or an
authorized committee thereof. The Debt Securities will be either unsecured
senior obligations of the Company, ranking equally and ratably with all other
unsecured and unsubordinated indebtedness of the Company or subordinated in
right of payment to the prior payment in full of all Senior Indebtedness of
the Company as described below under "Subordinated Debt" and in the Prospectus
Supplement applicable to an offering of subordinated Debt Securities
("Subordinated Debt Securities"). Reference is made to the Prospectus
Supplement relating to the particular Debt Securities offered thereby for the
following terms, where applicable, of the Debt Securities: (1) the designation
of such Debt Securities; (2) classification as senior or subordinated Debt
Securities; (3) the aggregate principal amount of such Debt Securities; (4)
the percentage of their principal amount at which such Debt Securities will be
issued; (5) the date or dates on which such Debt Securities will mature; (6)
the rate or rates (which may be fixed or variable), if any, per annum, at
which such Debt Securities will bear interest, or the method of determination
of such rate or rates; (7) the dates at which such interest, if any, will be
payable; (8) the places where principal of, premium, if any, and interest will
be payable; (9) provisions for sinking, purchase or other analogous fund, if
any; (10) the date or dates, if any, after which such
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Debt Securities may be redeemed at the option of the Company or of the holder
and the redemption price or prices; (11) the terms and conditions, if any,
pursuant to which the Debt Securities are convertible or exchangeable into
Common Stock or Preferred Stock or other debt or exchange provisions; (12) any
index or formula used to determine the amount of payments of principal of and
premium, if any, and interest on, such Debt Securities; (13) if other than the
principal amount thereof, the portion of the principal amount of such Debt
Securities that will be payable upon declaration of the acceleration of the
maturity thereof or the method by which such portion shall be determined; (14)
the person to whom any interest on any such Debt Security shall be payable if
other than the person in whose name such Debt Security is registered on the
applicable record date; (15) any addition to, or modification or deletion of,
any event of Default or any covenant of the Company specified in the Indenture
with respect to such Debt Securities; (16) the application, if any, of such
means of defeasance or covenant defeasance as may be specified for such Debt
Securities; (17) whether such Debt Securities are to be issued in whole or in
part in the form of one or more temporary or permanent global securities and,
if so, the identity of the depositary for such global security or securities;
and (18) any other specific terms of the Debt Securities. Principal, premium,
if any, and interest, if any, will be payable and the Debt Securities offered
hereby will be transferable, at the corporate trust office of the Trustee's
agent in the borough of Manhattan, the City of New York, provided that payment
of interest, if any, may be made at the option of the Company by check mailed
to the address of the person entitled thereto as it appears in the Security
Register. Unless otherwise specified in the applicable Prospectus Supplement,
the Debt Securities will not be listed on any securities exchange.
If the accompanying Prospectus Supplement specifies that a series of Debt
Securities is denominated in a currency or currency unit other than United
States dollars, such Prospectus Supplement shall also specify the denomination
in which such Debt Securities will be issued and the coin or currency in which
the principal, premium, if any, and interest, if any, on such Debt Securities
will be payable, which may be United States dollars based upon the exchange
rate for such other currency or currency unit existing on or about the time a
payment is due. Special material United States federal income tax
considerations applicable to any Debt Securities so denominated shall also be
described in the applicable Prospectus Supplement.
The Debt Securities offered hereby will be issued only in fully registered
form without coupons and, unless otherwise specified in the Prospectus
Supplement, in denominations of $1,000 and multiples of $1,000. Debt
Securities may be issued in book-entry form, without certificates. Any such
issue will be described in the Prospectus Supplement relating to such Debt
Securities. No service charge will be made for any transfer or exchange of the
Debt Securities, but the Company or the Trustee may require payment of a sum
sufficient to cover any tax or other government charge payable in connection
therewith.
Debt Securities may be issued under the Indenture as Original Issue Discount
Securities to be sold at a substantial discount from their stated principal
amount. Material federal income tax consequences and other considerations
applicable thereto will be described in the applicable Prospectus Supplement.
The Indenture contains no covenants or other provisions affording protection
to holders of the Debt Securities in the event of a highly leveraged
transaction, other transactions that may adversely affect the Holders or a
change in control of the Company, except to the limited extent described under
"Limitations on Mergers and Sales of Assets."
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on
behalf of, a depositary (the "Global Depositary"), or its nominee, identified
in the Prospectus Supplement relating to such series. In such a case, one or
more Global Securities will be issued in a denomination or aggregate
denomination equal to the portion of
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the aggregate principal amount of Outstanding Debt Securities of the series to
be represented by such Global Security or Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in definitive registered
form, a Global Security may not be registered for transfer or exchange except
as a whole by the Global Depositary for such Global Security to a nominee for
such Global Depositary and except in the circumstances described in the
applicable Prospectus Supplement.
The specific terms of the depositary arrangement with respect to any portion
of a series of Debt Securities to be represented by a Global Security and a
description of the Global Depositary will be provided in the applicable
Prospectus Supplement.
SENIOR DEBT
The Debt Securities that will be designated and will constitute part of the
Senior Indebtedness (hereafter defined) of the Company, will rank pari passu
with all other unsecured and unsubordinated debt of the Company.
SUBORDINATED DEBT
The Debt Securities that will constitute part of the subordinated debt of
the Company (the "Subordinated Debt Securities"), will be subordinated in
right of payment, as set forth in the Indenture, to the prior payment in full
of all existing and future Senior Indebtedness of the Company. "Senior
Indebtedness" means the principal of (and premium, if any) and interest on
(including interest accrued after the filing of a petition initiating any
proceeding pursuant to any Bankruptcy Law, but only to the extent allowed or
permitted to the holder of such Indebtedness against the bankruptcy or any
other insolvency estate of the Company in such proceeding) or accrued Original
Issue Discount on and other amounts due on or in connection with any
Indebtedness incurred, assumed or guaranteed by the Company, whether
outstanding on the date of the Indenture or thereafter incurred, assumed or
guaranteed, and all renewals, extensions and refunding of any such
Indebtedness; provided, however, that the following will not constitute Senior
Indebtedness: (a) any Indebtedness which expressly provides (i) that such
Indebtedness shall not be senior in right of payment to the Subordinated Debt
Securities or (ii) that such Indebtedness shall be subordinated to any other
Indebtedness of the Company, unless such Indebtedness expressly provides that
such Indebtedness shall be senior in right of payment to the Subordinated Debt
Securities; (b) any Indebtedness or liability for compensation to employees,
for goods or materials purchased in the ordinary course of business or for
services; (c) any Indebtedness of the Company to any Subsidiary for money
borrowed or advanced from such Subsidiary; and (d) any liability for federal,
state, local or other taxes owed or owing by the Company. "Indebtedness" means
any and all obligations of a corporation for money borrowed which in
accordance with generally accepted accounting principles would be reflected on
the balance sheet of such corporation as a liability on the date as of which
Indebtedness is to be determined.
By reason of the subordination described herein, in the event of insolvency,
upon any distribution of the assets of the Company, (i) the Holders of the
Subordinated Debt Securities are required to pay over their share of such
distribution to the trustee in bankruptcy, receiver or other person
distributing the assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all
holders of Senior Indebtedness in full and (ii) unsecured creditors of the
Company who are not Holders of Subordinated Debt Securities or Holders of
Senior Indebtedness of the Company may recover less, ratably, than Holders of
Senior Indebtedness of the Company and may recover more, ratably, than the
Holders of Subordinated Debt Securities.
In the event that the Subordinated Debt Securities are declared due and
payable prior to their Stated Maturity by reason of the occurrence of an Event
of Default, then the Company is obligated to notify promptly holders of Senior
Indebtedness of such acceleration. The Company may not pay the Subordinated
Debt Securities until 120 days have passed after such acceleration occurs and
may thereafter pay the Subordinated Debt Securities if the terms of the
Indenture otherwise permit payment at that time.
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No payment of the principal amount at maturity, Issue Price plus accrued
Original Issue Discount, in the case of Original Issue Discount Securities,
any redemption price, or interest, if any, in respect of the Subordinated Debt
Securities may be made, nor may the Company otherwise acquire any Subordinated
Debt Securities except as set forth in the Indenture, if any default with
respect to Senior Indebtedness occurs and is continuing that permits the
acceleration of the maturity thereof and the Company has actual knowledge of
the default, unless (a) 120 days pass after notice of the default is given to
the Trustee and such default is not then the subject of judicial proceedings
or the default with respect to the Senior Indebtedness is cured (including,
without limitation, by the payment of such Senior Indebtedness in full) or
waived and (b) the terms of the Indenture otherwise permit the payment or
acquisition of the Subordinated Debt Securities at that time. The Company is
required to give the Trustee notice of a default with respect to Senior
Indebtedness within five Business Days after the Company has actual knowledge
of the default.
If this Prospectus is being delivered in connection with a series of
Subordinated Debt Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Indebtedness outstanding as of the end of the most recent
fiscal quarter for which the Company has filed an Annual Report on Form 10-K
or a Quarterly Report on Form 10-Q.
CONVERSION OR EXCHANGE OF DEBT SECURITIES
No series of Debt Securities will be convertible into, or exchangeable for,
other securities or properties except as set forth in the applicable
Prospectus Supplement.
CERTAIN COVENANTS APPLICABLE TO SENIOR DEBT SECURITIES
Unless otherwise set forth in the applicable Prospectus Supplement, the
following covenants will be applicable to Debt Securities that constitute
Senior Indebtedness.
Limitations on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, incur, issue, assume or guarantee any Indebtedness
secured by a Lien on any Restricted Property, or on any shares of stock or
Indebtedness of a Restricted Subsidiary, without providing that the Debt
Securities shall be secured equally and ratably with (or prior to) such
secured Indebtedness, unless after giving effect thereto the aggregate amount
of all such Indebtedness so secured (other than Indebtedness secured by
excepted Liens referred to in the following sentence), together with all
Attributable Debt of the Company and its Restricted Subsidiaries in respect of
Sale-Leaseback Transactions except Sale-Leaseback Transactions the proceeds of
which are applied to the retirement of Funded Debt, would not exceed 10% of
Consolidated Adjusted Net Assets as shown on the Company's latest audited
consolidated financial statements. This restriction will not apply to (a)
Liens on property of, or on any shares of stock or Indebtedness of, any
corporation existing at the time such corporation becomes a Subsidiary, (b)
Liens on property existing at the time of acquisition thereof (including
acquisition through merger or consolidation) or to secure the payment of all
or any part of the purchase price or construction cost thereof or to secure
any Indebtedness incurred prior to, at the time of, or within six months after
such acquisition or completion of such property for the purpose of financing
all or any part of the purchase price or construction cost thereof, (c) Liens
on substantially unimproved property to secure the cost of exploration,
drilling or development of, or improvements to, such property, (d) Liens in
favor of the Company or a Restricted Subsidiary, and (e) any extension,
renewal or replacement of any Lien referred to in the foregoing clauses (a)
through (d) inclusive, provided that such extension, renewal or replacement
Liens shall be limited to all or part of the same property that secured the
Liens extended, renewed or replaced (plus improvements on such property). The
following types of transactions are not deemed to create Indebtedness secured
by a Lien: (i) a sale or transfer of crude oil, natural gas or NGLs in place
for a period of time until, or in an amount such that, the purchaser will
realize therefrom a specified amount of money or of such oil, natural gas
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or NGLs, or any other interest in property commonly referred to as a
"production payment," or (ii) the Lien on any property of the Company or any
Subsidiary in favor of governmental bodies to secure partial, progress,
advance or other payments to the Company or any Subsidiary pursuant to any
contract or statute, or the Lien of any property to secured Indebtedness of
the pollution control or industrial revenue bond type.
Limitation on Sale-Leaseback Transactions. The Indenture provides that the
Company shall not, and it shall not permit any Restricted Subsidiary to, enter
into a Sale-Leaseback Transaction unless: (1) the lease has a term of three
years or less; (2) the lease is between the Company and a Restricted
Subsidiary or between Restricted Subsidiaries; (3) the Company or a Restricted
Subsidiary could create a Lien under the terms of the Indenture on the
Restricted Property to secure Funded Debt at least equal in amount to the
Attributable Debt for the lease; or (4) the Company or a Restricted Subsidiary
could create a Lien on Restricted Property under the terms of the Indenture to
secure Funded Debt at least equal in amount to the Attributable Debt for the
lease without having to secure equally and ratably any Debt Securities that
constitute Senior Indebtedness or (5) the Company or a Restricted Subsidiary
within 120 days of the effective date of the Sale-Leaseback Transaction (i)
retires Funded Debt of the Company or of a Restricted Subsidiary at least
equal in amount to the fair value (as determined by the Company's Board of
Directors) of the Restricted Property at the time of the Sale-Leaseback
Transaction or (ii) if the net proceeds of the Sale-Leaseback Transaction
equal or exceed the fair value of the Restricted Property (as determined by
the Company's Board of Directors), applies the net proceeds to fund investment
in other Restricted Properties which investments were made within 12 months
prior to or subsequent to the Sale-Leaseback Transaction.
LIMITATION ON MERGERS AND SALES OF ASSETS
The Company shall not consolidate with, merge with, or merge into any
corporation or convey or transfer its properties and assets substantially as
an entirety to any Person unless the successor entity shall be a corporation
organized under the laws of the United States or any state or the District of
Columbia and shall expressly assume the obligations of the Company under the
Indenture. If, with respect to Debt Securities that constitute Senior
Indebtedness, upon any such consolidation, merger, conveyance or transfer of
the Company with or into any Person or of any such Subsidiary with or to any
other Subsidiary, any Property of the Company or of any Restricted Subsidiary
or any shares of stock or indebtedness of any Restricted Subsidiary would
thereupon become subject to any Lien (other than a Lien permitted under
"Limitation on Liens" without the Company's having to secure such Debt
Securities equally and ratably), the Company will secure such Debt Securities
(together with, if the Company shall so determine, other securities ranking on
a parity with such Debt Securities) prior to all Liens other than any
theretofore existing.
Although the amount of the Company's property that will constitute a sale of
such property "substantially as an entirety" is not readily quantifiable, a
determination whether such a sale has occurred will depend on the percentage
of operating and total assets transferred, among other measurements, and other
facts and circumstances of the transaction. In any particular transaction,
this determination will be made by the Company and, if such a transaction
occurs, the person to which such amount of the Company's property is
transferred shall enter into a supplemental Indenture satisfactory in form to
the Trustee.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
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"Attributable Debt" means the total net amount of rent (discounted at the
rate per annum indicated in the Indenture) required to be paid during the
remaining term of any lease.
"Consolidated Adjusted Net Assets" means the total amount of assets after
deducting therefrom (a) all current liabilities (excluding any thereof which
are by their terms extendible or renewable at the option of the obligor
thereon to a time more than 12 months after the time as of which the amount
thereof is being computed), and (b) total prepaid expenses and deferred
charges.
"Funded Debt" means, with respect to any Person, all Indebtedness having a
maturity of more than 12 months from the date as of which the amount thereof
is to be determined or having a maturity of less than 12 months but by its
terms being renewable or extendible beyond 12 months from such date at the
option of such Person.
"Restricted Property" means (a) any interest in property located in the
United States, Puerto Rico or Canada (including any interest in property
located off the coast of the United States operated pursuant to leases from
any governmental body) which is producing crude oil, natural gas or NGLs in
paying quantities, or (b) any manufacturing plant or transportation or storage
facility located in the United States, Puerto Rico or Canada, in each case now
owned or hereafter acquired by the Company or a Restricted Subsidiary except
any such plant or facility or portion thereof which has a book value equal to
not more than 2% of the Consolidated Adjusted Net Assets of the Company as
shown on the Company's latest audited consolidated balance sheet.
"Restricted Subsidiary" means a corporation (a) organized under the laws of
the United States, Puerto Rico or Canada or a jurisdiction thereof, (b) that
conducts substantially all of its business and has substantially all of its
Property within the United States, Puerto Rico and Canada, and (c) at least
80% (by number of votes) of each class of Voting Stock of which and 100% of
all other Capital Stock and all other securities convertible into,
exchangeable for, or representing the right to purchase, Voting Stock, of
which are legally and beneficially owned by the Company and its wholly owned
Restricted Subsidiaries.
"Sale and Leaseback Transaction" means an arrangement (other than an
arrangement made for the purposes of Section 168(f)(8) of the Internal Revenue
Code) with any bank, insurance company or other lender or investor
(collectively "lenders") or to which the lender is a party where the Company
or a Restricted Subsidiary now owns or hereafter acquires a Restricted
Property, transfers it to a lender, or to any person to whom funds have been
or are to be advanced by a lender on the security of such Restricted Property
on the rental payments under the lease, and leases it back from the lender or
other person.
"Subsidiary" means, at any time, a corporation more than 50% of the
outstanding voting stock of which is owned, directly or indirectly, by the
Company or by one or more other Subsidiaries or by the Company and one or more
other Subsidiaries.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture with respect to Debt
Securities of any series: (a) failure to pay principal of or premium, if any,
on any Debt Security of that series at its Maturity (in the case of any
Subordinated Debt Securities, whether or not payment is prohibited by the
provisions described under "Subordinated Debt"); (b) failure to pay any
interest on any Debt Security of that series when due, continued for 30 days
(in the case of any Subordinated Debt Securities, whether or not payment is
prohibited by the provisions described under "Subordinated Debt"); (c) failure
to deposit any sinking fund payment, when due, in respect of any Debt Security
of that series (in the case of any Subordinated Debt Securities, whether or
not payment is prohibited by the
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provisions described under "Subordinated Debt"); (d) any other defaults in the
performance, or breach, of any covenant of the Company in the Indenture,
continued for 90 days after notice of such default or breach from the Trustee
or the Holders of at least 25% in principal amount of the Outstanding Debt
Securities of that series (other than a covenant included in the Indenture
solely for the benefit of any series of Debt Securities other than that
series); (e) certain events of bankruptcy, insolvency or reorganization; and
(f) any other Event of Default provided with respect to Debt Securities of
that series.
If an Event of Default with respect to Outstanding Debt Securities of any
series shall occur and be continuing, either the Trustee or the Holders of at
least 25% in principal amount of the Outstanding Debt Securities of that
series may declare the principal amount (or, if the Debt Securities of that
series are Original Issue Discount Securities, such portion of the principal
amount as may be specified in the terms of that series) of all Debt Securities
of that series to be due and payable immediately. However, at any time after a
declaration of acceleration with respect to Debt Securities of any series has
been made, but before a judgment or decree based on such acceleration has been
obtained, the Holders of a majority in principal amount of Outstanding Debt
Securities of that series may, under certain circumstances, rescind and annul
such acceleration. Notwithstanding the foregoing, if any Subordinated Debt
Securities are declared due and payable prior to their Stated Maturity by
reason of the occurrence of an Event of Default, the Company may not pay the
Subordinated Debt Securities until 120 days have passed after such
acceleration occurs and may thereafter pay the Subordinated Debt Securities if
the terms of the Indenture otherwise permit payment at the time. See
"Subordinated Debt." For information as to waiver of defaults, see
"Modification and Waiver."
The Indenture provides that, subject to the provisions of the Trust
Indenture Act of 1939, as amended, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for indemnification
of the Trustee, the Holders of a majority in principal amount of the
Outstanding Debt Securities of any series will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, or exercising any trust or power conferred on the Trustee,
with respect to the Debt Securities of that series.
The Company will be required to furnish annually to the Trustee a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
MODIFICATION AND WAIVER
Modifications and amendments to the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in principal amount
of the Debt Securities of each series affected thereby; provided, however,
that no such modification or amendment may, without the consent of the Holder
of each Outstanding Debt Security affected thereby, (a) change the Stated
Maturity of the principal of, or any installment of principal of or interest
on, any Debt Security, (b) reduce the principal amount of, or the premium, if
any, or interest, if any, on, any Debt Security, (c) reduce the amount of
principal of any Original Issue Discount Security payable upon acceleration of
the Maturity thereof, (d) change the coin or currency in which any Debt
Securities or premium, if any, or interest, if any, thereon is payable, (e) in
the case of convertible Debt Securities, adversely affect the right to convert
any Debt Security, or (f) reduce the percentage in principal amount of
Outstanding Debt Securities of any series, the consent of the Holders of which
is required for (i) modification or amendment of the Indenture, (ii) in the
case of any Subordinated Debt Securities, modification of the subordination
provisions in a manner adverse to the Holders of the Subordinated Debt
Securities, (iii) waiver of compliance with certain provisions of the
Indenture, or (iv) waiver of certain defaults.
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Modifications and amendments of the Indenture may be made by the Company and
the Trustee without the consent of any Holder to evidence a successor to the
Company, to add to, modify or delete any of the Company's covenants or Events
of Default, to permit or facilitate Debt Securities to be issued by book entry
or in bearer form or relating to the place of payment thereof, to provide for
a successor trustee, to establish forms or terms of Debt Securities, to change
or eliminate any provision not adversely affecting any interests of Holders of
Outstanding Debt Securities in any material respect or to cure any ambiguity
or inconsistency.
The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series may on behalf of the Holders of all Debt Securities
of that series waive, insofar as that series is concerned, compliance by the
Company with certain restrictive provisions of the Indenture. The Holders of a
majority in principal amount of the Outstanding Debt Securities of any series
may on behalf of the Holders of all Debt Securities of that series waive any
past default under the Indenture with respect to Debt Securities of that
series, except a default in the payment of the principal of, or premium, if
any, or interest, if any, on, any Debt Security of that series or in respect
to any provision which under the Indenture cannot be modified or amended
without the consent of the Holder of each Outstanding Debt Security of that
series affected.
DEFEASANCE
The following provisions of the Indenture are applicable to the Debt
Securities. The Company (a) shall be discharged from its obligations in
respect of the Debt Securities of such series ("defeasance and discharge"), or
(b) may cease to comply with certain restrictive covenants ("covenant
defeasance") including those described under "Certain Covenants" and
"Limitations on Mergers and Sales of Assets" and, in the case of any
Subordinated Debt Securities, the provisions described under "Subordinated
Debt," and any such omission shall not be an Event of Default with respect to
the Debt Securities of such series, in each case at any time prior to the
Stated Maturity or redemption thereof, when the Company has irrevocably
deposited with the Trustee, in trust, (i) sufficient funds in the currency or
currency unit in which the Debt Securities are denominated to pay the
principal of (and premium, if any), and interest to Stated Maturity (or
redemption) on, the Debt Securities of such series, or (ii) such amount of
direct obligations of, or obligations the principal of and interest on which
are fully guaranteed by, the government which issued the currency in which the
Debt Securities are denominated, and which are not subject to prepayment,
redemption or call, as will, together with the predetermined and certain
income to accrue thereon without consideration of any reinvestment thereof, be
sufficient to pay when due the principal of (and premium, if any), and
interest to Stated Maturity (or redemption) on, the Debt Securities of such
series. Such defeasance and discharge and covenant defeasance are conditioned
upon, among other things, the Company's delivery of (i) an opinion of counsel
that the Holders of the Debt Securities will not recognize income, gain or
loss for United States federal income tax purposes as a result of such
defeasance, and will be taxed in the same manner as if no defeasance and
discharge or covenant defeasance, as the case may be, had occurred and (ii) an
opinion of counsel that such defeasance would not cause the Debt Securities to
be delisted from any national securities exchange on which such Debt
Securities may then be listed. Upon such defeasance and discharge, the Holders
of the Debt Securities of such series shall no longer be entitled to the
benefits of the Indenture, except for the purposes of registration of transfer
and exchange of the Debt Securities of such series and replacement of lost,
stolen or mutilated Debt Securities and shall look only to such deposited
funds or obligations for payment.
GOVERNING LAW
The Indenture and Debt Securities will be governed by, and construed in
accordance with, the laws of the State of New York.
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THE TRUSTEE
The Company may have customary banking relationships with the Trustee in the
ordinary course of business.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue up to 100,000,000 shares of Common Stock,
par value $.10 per share, and up to 10,000,000 shares of Preferred Stock, par
value $.10 per share. As of March 31, 1996, there were 25,773,553 shares of
Common Stock outstanding. The Company also had outstanding on such date
1,400,000 shares of $2.28 Cumulative Preferred Stock with a liquidation
preference of $25 per share (the "$2.28 Preferred Stock") and 2,760,000 shares
of $2.625 Cumulative Convertible Preferred Stock with a liquidation preference
of $50 per share (the "$2.625 Convertible Preferred Stock"). Unless otherwise
provided in any Prospectus Supplement for a series of Preferred Stock offered
hereby (the "Offered Preferred Stock"), the $2.28 Preferred Stock and the
$2.625 Preferred Stock (collectively, the "Existing Preferred Stock") will
rank on a parity with the Offered Preferred Stock.
The Board of Directors of the Company has the power, without further action
by the stockholders unless action is required by applicable laws or
regulations or by the terms of any outstanding Preferred Stock, to issue
Preferred Stock in one or more series and to fix the designations, preferences
and voting rights, and relative, participating, optional and other special
rights, and the qualifications, limitations and restrictions applicable
thereto. The rights of holders of any Offered Preferred Stock will be subject
to, and may be adversely affected by, the rights of holders of any Preferred
Stock which may be issued in the future. The Board of Directors may cause
Preferred Stock to be issued to obtain additional financing, in connection
with acquisitions and for other proper corporate purposes. Issuance of shares
of Preferred Stock by the Company may have the effect, under certain
circumstances, alone or in combination with certain of the provisions of the
Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), described below, of rendering more difficult or discouraging
an acquisition of the Company deemed undesirable by the Board of Directors.
The following summary does not purport to be complete and is, subject to,
and qualified in its entirety by, the Company's Certificate of Incorporation,
including the Certificate of Designation relating to a specific series of the
Offered Preferred Stock (the "Certificate of Designation"), which will be in
the form filed as an exhibit to or incorporated by reference in the
Registration Statement of which this Prospectus is a part at or prior to the
time of issuance of such series of Offered Preferred Stock, the Certificate of
Designation of the $2.28 Preferred Stock and the Certificate of Designation of
the $2.625 Convertible Preferred Stock.
OFFERED PREFERRED STOCK
The following is a description of certain general terms and provisions of
the Offered Preferred Stock. The particular terms of any series of Offered
Preferred Stock will be described in the applicable Prospectus Supplement. If
so indicated in a Prospectus Supplement, the terms of any such series may
differ from the terms set forth below. The summary of terms of the Company's
Offered Preferred Stock contained in this Prospectus does not purport to be
complete and is subject to, and qualified in its entirety by, the provisions
of the Company's Certificate of Incorporation and the Certificate of
Designation.
The Board of Directors is authorized to determine for each series of Offered
Preferred Stock, and the Prospectus Supplement shall set forth with respect to
such series: (i) the number of shares that constitute such series, (ii) the
dividend rate (or the method of calculation thereof) on the shares of such
series, (iii) the dividend periods (or the method of calculation thereof),
(iv) the voting rights of the
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shares, (v) the liquidation preference and any other rights of the shares of
such series upon any liquidation or winding-up of the Company, (vi) whether or
not and on what terms the shares of such series will be subject to redemption
at the option of the Company, (vii) whether and on what terms the shares of
such series will be convertible into shares of Common Stock of the Company,
(viii) whether depositary shares representing shares of such series of
Preferred Stock will be offered and, if so, the fraction of a share of such
series of Offered Preferred Stock represented by each depositary share (see
"Depositary Shares" below), (ix) whether the shares of such series of Offered
Preferred Stock will be listed on a securities exchange and (x) the other
rights and privileges and any qualifications, limitations or restrictions of
such rights or privileges of such series.
DIVIDENDS
Holders of shares of Offered Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of funds of the Company
legally available therefor, an annual cash dividend payable at such dates and
at such rates per share per annum as set forth in the applicable Prospectus
Supplement.
Unless otherwise set forth in the applicable Prospectus Supplement, each
series of Offered Preferred Stock will be junior as to dividends to any
Preferred Stock that may be issued in the future that is expressly senior as
to dividends to the Offered Preferred Stock. If at any time the Company has
failed to pay accrued dividends upon any such senior shares at the time such
dividends are payable, the Company may not pay any dividend on the Offered
Preferred Stock or redeem or otherwise repurchase shares of Offered Preferred
Stock until such accumulated but unpaid dividends on such senior shares have
been paid or set aside for payment in full by the Company.
No dividends may be declared or paid or set apart for payment on any
Preferred Stock, including the Existing Preferred Stock, ranking on parity as
to dividends with the Offered Preferred Stock unless there shall also be or
have been declared and paid or set apart for payment on the outstanding shares
of Offered Preferred Stock dividends for all dividend payment periods of the
Offered Preferred Stock ending on or before the dividend payment date of such
parity Preferred Stock, ratably in proportion to the respective amounts of
dividends, (i) accumulated and unpaid or payable on such parity Preferred
Stock, on the one hand, and (ii) accumulated and unpaid or payable through the
dividend payment period of the Offered Preferred Stock next preceding such
dividend payment date, on the other hand. Except as set forth above, dividends
(other than in Common Stock) may not be paid or declared and set aside for
payment and other distributions may not be made upon the Common Stock or on
any other Preferred Stock of the Company ranking junior to or on parity as to
dividends with the Offered Preferred Stock, including the Existing Preferred
Stock, nor may any Common Stock or such other Preferred Stock of the Company
be redeemed, purchased or otherwise acquired by the Company for any
consideration or any payment be made to or available for a sinking fund for
the redemption of any shares of such stock; provided, however, that any monies
theretofore deposited in any sinking fund with respect to any Preferred Stock
in compliance with the provisions of such sinking fund may thereafter be
applied to the purchase or redemption of such Preferred Stock in accordance
with the terms of such sinking fund, regardless of whether at the time of such
applications full cumulative dividends upon shares of the Offered Preferred
Stock outstanding on the last dividend payment date shall have been paid or
declared and set apart for payment; and provided, further, that any such
junior or parity Preferred Stock or Common Stock may be converted into or
exchanged for stock of the Company ranking junior to the Offered Preferred
Stock as to dividends.
The amount of dividends payable for the initial dividend period or any
period shorter than a full dividend period shall be computed on the basis of a
360-day year of twelve 30-day months. Accrued but unpaid dividends will not
bear interest.
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CONVERTIBILITY
No series of Offered Preferred Stock will be convertible into, or
exchangeable for, other securities or property except as set forth in the
applicable Prospectus Supplement.
REDEMPTION AND SINKING FUND
No series of Offered Preferred Stock will be redeemable or receive the
benefit of a sinking fund except as set forth in the applicable Prospectus
Supplement.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
the holders of shares of each series of Offered Preferred Stock are entitled
to receive out of assets of the Company available for distribution to
stockholders, before any distribution of assets is made to holders of: (i) any
other shares of Preferred Stock ranking junior to such series of Offered
Preferred Stock as to rights upon liquidation, dissolution or winding-up and
(ii) Common Stock, liquidating distributions per share in the amount of the
liquidation preference specified in the applicable Prospectus Supplement for
such series of Offered Preferred Stock plus dividends accrued and accumulated
but unpaid to the date of final distribution; but the holders of each series
of Offered Preferred Stock will not be entitled to receive the liquidating
distribution of, plus such dividends on, such shares until the liquidation
preference of any shares of the Company's capital stock ranking senior to such
series of the Offered Preferred Stock as to the rights upon liquidation,
dissolution or winding-up shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full. If upon any liquidation,
dissolution or winding-up of the Company, the amounts payable with respect to
the Offered Preferred Stock, the Existing Preferred Stock and any other
Preferred Stock ranking as to any such distribution on a parity with the
Offered Preferred Stock are not paid in full, the holders of the Offered
Preferred Stock, the Existing Preferred Stock and such other parity Preferred
Stock will share ratably in any such distribution of assets in proportion to
the full respective preferential amount to which they are entitled. Unless
otherwise specified in a Prospectus Supplement for a series of Offered
Preferred Stock, after payment of the full amount of the liquidating
distribution to which they are entitled, the holders of shares of Offered
Preferred Stock will not be entitled to any further participation in any
distribution of assets by the Company. Neither a consolidation or merger of
the Company with another corporation nor a sale of securities shall be
considered a liquidation, dissolution or winding-up the Company.
VOTING RIGHTS
Holders of Offered Preferred Stock will not have any voting rights except as
set forth below or in the applicable Prospectus Supplement or as otherwise
from time to time required by law. Whenever dividends on any applicable series
of Offered Preferred Stock or any other class or series of stock ranking on a
parity with the applicable series of Offered Preferred Stock with respect to
the payment of dividends shall be in arrears for dividend periods, whether or
not consecutive containing in the aggregate a number of days equivalent to six
calendar quarters, the holders of shares of such series of Offered Preferred
Stock (voting separately as a class with all other series of Preferred Stock,
upon which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of two of the authorized number of directors
of the Company at the next annual meeting of stockholders and at each
subsequent meeting until all dividends accumulated on such series of Offered
Preferred Stock shall have been fully paid or set apart for payment. The term
of office of all directors elected by the holders of such Offered Preferred
Stock shall terminate immediately upon the termination of the rights of the
holders of such Offered Preferred Stock to vote for directors. Unless
otherwise set forth in the applicable Prospectus Supplement, holders of shares
of Offered Preferred Stock will have one vote for each share held.
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So long as any shares of any series of Offered Preferred Stock remain
outstanding, the Company shall not, without the consent of holders of at least
two-thirds of the shares of such series of Offered Preferred Stock outstanding
at the time, voting separately as a class with all other series of Preferred
Stock upon which like voting rights have been conferred and are exercisable
(i) issue or increase the authorized amount of any class or series of stock
ranking prior to the outstanding Offered Preferred Stock as to dividends or
upon liquidation or (ii) amend, alter or repeal the provisions of the
Company's Certificate of Incorporation or of the resolutions contained in the
Certificate of Designation relating to such series of Offered Preferred Stock,
whether by merger, consolidation or otherwise, so as to materially adversely
affect any power, preference or special right of such series of Offered
Preferred Stock or the holders thereof; provided, however, that any increase
in the amount of the authorized Common Stock or authorized Preferred Stock or
any increase or decrease in the number of shares of any series of Preferred
Stock or the creation and issuance of other series of Common Stock or
Preferred Stock ranking on a parity with or junior to Preferred Stock as to
dividends and upon liquidation, dissolution or winding-up shall not be deemed
to materially adversely affect such powers, preferences or special rights.
MISCELLANEOUS
The holders of Offered Preferred Stock will have no preemptive rights.
Offered Preferred Stock, upon issuance against full payment of the purchase
price therefore, will be fully paid and nonassessable. Shares of Offered
Preferred Stock redeemed or otherwise reacquired by the Company shall resume
the status of authorized and unissued shares of Offered Preferred Stock
undesignated as to series, and shall be available for subsequent issuance.
There are no restrictions on repurchase or redemption of the Offered Preferred
Stock while there is any arrearage on sinking fund installments except as may
be set forth in an applicable Prospectus Supplement. Neither the par value nor
the liquidation preference is indicative of the price at which the Offered
Preferred Stock will actually trade on or after the date of issuance. Payment
of dividends on any series of Offered Preferred Stock may be restricted by
loan agreements, indentures and other transactions entered into by the
Company. The accompanying Prospectus Supplement or information incorporated by
reference will describe any material contractual restrictions on dividend
payments.
NO OTHER RIGHTS
The shares of a series of Offered Preferred Stock will not have any
preferences, voting powers or relative, participating, optional or other
special rights except as set forth above or in the applicable Prospectus
Supplement, the Certificate of Incorporation or Certificate of Designation or
as otherwise required by law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for each series of Offered Preferred Stock
will be designated in the applicable Prospectus Supplement.
DEPOSITARY SHARES
GENERAL
The Company may, at its option, elect to offer fractional shares of the
Offered Preferred Stock, rather than full shares of the Offered Preferred
Stock. In the event such option is exercised, the Company will issue receipts
for Depositary Shares, each of which will represent a fraction (to be set
forth in the Prospectus Supplement relating to a particular series of Offered
Preferred Stock) of a share of a particular series of Preferred Stock as
described below.
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The shares of any series of Offered Preferred Stock represented by
Depositary Shares will be deposited under a Deposit Agreement (the "Deposit
Agreement") among the Company, a depositary to be named in the applicable
Prospectus Supplement (the "Preferred Stock Depositary"), and the holders from
time to time of depositary receipts issued thereunder. Subject to the terms of
the Deposit Agreement, each holder of a Depositary Share will be entitled, in
proportion to the applicable fraction of a share of Offered Preferred Stock
represented by such Depositary Share, to all the rights and preferences of the
Offered Preferred Stock represented thereby (including dividend, voting,
redemption, subscription and liquidation rights).
The Depositary Shares will be evidenced by depositary receipts issued
pursuant to the Deposit Agreement ("Depositary Receipts"). Depositary Receipts
will be distributed to those persons purchasing the fractional shares of the
related series of Offered Preferred Stock. Copies of the forms of Deposit
Agreement and Depositary Receipt are filed as an exhibit to the Registration
Statement of which this Prospectus is a part, and the following summary is
qualified in its entirety by reference to such exhibit. Immediately following
the issuance of shares of a series of Offered Preferred Stock by the Company,
the Company will deposit such shares with the Preferred Stock Depositary,
which will then issue and deliver the Depositary Receipts to the purchasers
thereof. Depositary Receipts will only be issued evidencing whole Depositary
Shares. A Depositary Receipt may evidence any number of whole Depositary
Shares.
Pending the preparation of definitive Depositary Receipts, the Preferred
Stock Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts
but not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and such temporary Depositary Receipts
will be exchangeable for definitive Depositary Receipts at the Company's
expense.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of the related series of Offered
Preferred Stock to the record holders of Depositary Shares relating to such
series of Offered Preferred Stock in proportion to the number of such
Depositary Shares owned by such holders.
In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Shares entitled thereto in proportion to the number of Depositary
Shares owned by such holders, unless the Preferred Stock Depositary determines
that such distribution cannot be made proportionately among such holders or
that it is not feasible to make such distributions, in which case the
Preferred Stock Depositary may, with the approval of the Company, adopt such
method as it deems equitable and practicable for the purpose of effecting such
distribution, including the sale (at public or private sale) of the Securities
or property thus received, or any part thereof, at such place or places and
upon such terms as it may deem proper.
The amount distributed in any of the foregoing cases will be reduced by any
amounts required to be withheld by the Company or the Preferred Stock
Depositary on account of taxes or other governmental charges.
REDEMPTION OF DEPOSITARY SHARES
If a series of the Offered Preferred Stock underlying the Depositary Shares
is subject to redemption, the Depositary Shares will be redeemed from the
proceeds received by the Preferred Stock Depositary resulting from any
redemption, in whole or in part, of such series of the Preferred
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Stock held by the Preferred Stock Depositary. The redemption price per
Depositary Share will be equal to the applicable fraction of the redemption
price per share payable with respect to such series of the Offered Preferred
Stock. If the Company redeems shares of a series of Offered Preferred Stock
held by the Preferred Stock Depositary, the Preferred Stock Depositary will
redeem as of the same redemption date the number of Depositary Shares
representing the shares of Preferred Stock so redeemed. If less than all the
Depositary Shares are to be redeemed, the Depositary Shares to be redeemed
will be selected by lot or substantially equivalent method determined by the
Preferred Stock Depositary.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Shares will cease, except the right to receive the
moneys payable upon such redemption and any money or other property to which
the holders of such Depositary Shares where entitled upon such redemption,
upon surrender to the Preferred Stock Depositary of the Depositary Receipts
evidencing such Depositary Shares. Any funds deposited by the Company with the
Preferred Stock Depositary for any Depositary Shares that the holders thereof
fail to redeem will be returned to the Company after a period of two years
from the date such funds are so deposited.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of any series of
the Offered Preferred Stock are entitled to vote, the Preferred Stock
Depositary will mail the information contained in such notice of meeting to
the record holders of the Depositary Shares relating to such series of Offered
Preferred Stock. Each record holder of such Depositary Shares on the record
date (which will be the same date as the record date for the related series of
Offered Preferred Stock) will be entitled to instruct the Preferred Stock
Depositary as to the exercise of the voting rights pertaining to the number of
shares of the series of Offered Preferred Stock represented by such holder's
Depositary Shares. The Preferred Stock Depositary will endeavor, insofar as
practicable, to vote or cause to be voted the number of shares of the
Preferred Stock represented by such Depositary Shares in accordance with such
instructions, provided the Offered Preferred Stock Depositary receives such
instructions sufficiently in advance of such meeting to enable it to so vote
or cause to be voted the shares of Offered Preferred Stock, and the Company
will agree to take all reasonable action that may be deemed necessary by the
Preferred Stock Depositary in order to enable the Preferred Stock Depositary
to do so. The Preferred Stock Depositary will abstain from voting shares of
the Offered Preferred Stock to the extent it does not receive specific
instructions from the holders of Depositary Shares representing such Offered
Preferred Stock.
WITHDRAWAL OF PREFERRED STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Stock Depositary and upon payment of the taxes, charges and fees
provided for in the Deposit Agreement and subject to the terms thereof, the
holder of the Depositary Shares evidenced thereby will be entitled to delivery
at such office, to or upon his or her order, of the number of whole shares of
the related series of Offered Preferred Stock and any money or other property,
if any, represented by such Depositary Shares. Holders of Depositary Shares
will be entitled to receive whole shares of the related series of Offered
Preferred Stock, but holders of such whole shares of Offered Preferred Stock
will not thereafter be entitled to deposit such shares of Offered Preferred
Stock with the Preferred Stock Depositary or to receive Depositary Shares
thereof. If the Depositary Receipts delivered by the holder evidence a number
of Depositary Shares in excess of the number of Depositary Shares representing
the number of whole shares of the related series of Offered Preferred Stock to
be withdrawn, the Preferred Stock Depositary will deliver to such holder or
upon his or her order at the same time a new Depositary Receipt evidencing
such excess number of Depositary Shares.
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AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provisions of the Deposit Agreement may at any time and from time to time be
amended by agreement between the Company and the Preferred Stock Depositary.
However, any amendment that materially adversely alters the rights of the
holders of Depositary Shares will not be effective unless such amendment has
been approved by the holders of at least a majority of the Depositary Shares
then outstanding. Every holder of a Depositary Receipt at the time such
amendment becomes effective will be deemed, by continuing to hold such
Depositary Receipt, to be bound by the Deposit Agreement as so amended.
Notwithstanding the foregoing, in no event may any amendment impair the right
of any holder of any Depositary Shares, upon surrender of the Depositary
Receipts evidencing such Depositary Shares and subject to any conditions
specified in the Deposit Agreement, to receive shares of the related series of
Offered Preferred Stock and any money or other property represented thereby,
except in order to comply with mandatory provisions of applicable law. The
Deposit Agreement may be terminated by the Company at any time upon not less
than 60 days prior written notice to the Preferred Stock Depositary, in which
case, on a date that is not later than 30 days after the date of such notice,
the Preferred Stock Depositary shall deliver or make available for delivery to
holders of Depositary Shares, upon surrender of the Depositary Receipts
evidencing such Depositary Shares, such number of whole or fractional shares
of the related series of Offered Preferred Stock as are represented by such
Depositary Shares. The Deposit Agreement shall automatically terminate after
all outstanding Depositary Shares have been redeemed or there has been a final
distribution in respect of the related series of Offered Preferred Stock in
connection with any liquidation, dissolution or winding-up of the Company and
such distribution has been distributed to the holders of Depositary Shares.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and the governmental
charges arising solely from the existence of the depositary arrangements. The
Company will pay the charges of the Preferred Stock Depositary, including
charges in connection with the initial deposit of the related series of
Offered Preferred Stock and the initial issuance of the Depositary Shares and
all withdrawals of shares of the related series of Offered Preferred Stock,
except that holders of Depositary Shares will pay other transfer and other
taxes and governmental charges and such other charges as are expressly
provided in the Deposit Agreement to be for their accounts.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Stock Depositary may resign at any time by delivering to the
Company written notice of its election to do so, and the Company may at any
time remove the Depositary, any such resignation or removal to take effect
upon the appointment of a successor Preferred Stock Depositary, which
successor Preferred Stock Depositary must be appointed within 60 days after
delivery of the notice of resignation or removal and must be a bank or trust
company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Stock Depositary will forward to the holders of Depositary
Shares all reports and communications from the Company that are delivered to
the Preferred Stock Depositary and which the Company is required to furnish to
the holders of the Offered Preferred Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if it
is prevented or delayed by law or any circumstance beyond its control in
performing its obligations under the Deposit Agreement. The obligations of the
Company and the Preferred Stock Depositary under the Deposit Agreement will be
limited to performance with best judgment and in the good faith of their
duties
22
<PAGE>
thereunder, except that they are liable for gross negligence and willful
misconduct in the performance of their duties thereunder, and they will not be
obligated to appear in, prosecute or defend any legal proceeding in respect of
any Depositary Receipts, Depositary Shares or series of Preferred Stock unless
satisfactory indemnity is furnished. The Preferred Stock Depositary and the
Company may rely on advice of legal counsel or accountants of their choice, or
information provided by persons presenting Preferred Stock for deposit,
holders of Depositary Shares or other persons believed in good faith to be
competent and on documents believed to be genuine.
The Preferred Stock Depositary's corporate trust office will be identified
in the applicable Prospectus Supplement. Unless otherwise set forth in the
applicable Prospectus Supplement, the Preferred Stock Depositary will act as
transfer agent and registrar for Depositary Receipts and if shares of a series
of Offered Preferred Stock are redeemable, the Preferred Stock Depositary will
act as redemption agent for the corresponding Depositary Receipts.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders except as otherwise
provided by law. There are no cumulative voting rights with respect to the
election of directors. Holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of legally
available funds. In the event of dissolution of the Company, they will be
entitled to share ratably in all assets remaining after payment of liabilities
and amounts owed in respect of outstanding Preferred Stock, including any
Offered Preferred Stock and the Existing Preferred Stock. Holders of Common
Stock have no preemptive rights and have no right to convert their Common
Stock into any other securities.
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
$2.625 CONVERTIBLE PREFERRED STOCK
On February 25, 1994, the Company issued 2,760,000 shares of Preferred Stock
designated the "$2.625 Cumulative Convertible Preferred Stock." Holders of the
$2.625 Convertible Preferred Stock are entitled to receive dividends quarterly
at an annual rate of $2.625 per share, when and as declared by the Board of
Directors out of funds legally available therefore. Such dividends are
cumulative.
The $2.625 Convertible Preferred Stock has a Liquidation Preference of $50
per share. Holders of $2.625 Convertible Preferred Stock are entitled, in the
event of the Company's liquidation, to share ratably in all of the Company's
assets remaining after payment of all its debts and liabilities up to the
amount of the Liquidation Preference set forth above, plus all accrued and
unpaid dividends. The rights of holders of $2.625 Convertible Preferred Stock
rank upon liquidation of the Company on a parity with the $2.28 Preferred
Stock and prior to the holders of the Common Stock and of any other series of
Preferred Stock which is not specifically on a parity with or senior to the
$2.625 Convertible Preferred Stock.
The $2.625 Convertible Preferred Stock is redeemable on or after February
16, 1997 at a price per share ranging from 103.675% of the Liquidation
Preference on February 16, 1997 to 100% thereof on or after February 16, 2004,
plus in all instances all accrued and unpaid dividends.
Each share of $2.625 Convertible Preferred Stock is convertible into such
number of shares of Common Stock as is equal to the Liquidation Preference of
such share divided by the Conversion Price. As of the date hereof, the
Conversion Price is $39.750, subject to adjustment for stock dividends, stock
splits and other dilutive events.
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<PAGE>
Holders of $2.625 Preferred Stock have no voting rights except as set forth
below or as otherwise from time to time required by law. Whenever dividends on
the $2.625 Preferred Stock or any other class or series of stock ranking on a
parity with the $2.625 Preferred Stock with respect to the payment of
dividends shall be in arrears for dividend periods, whether or not
consecutive, containing in the aggregate a number of days equivalent to six
calendar quarters, the holders of shares of $2.625 Preferred Stock (voting
separately as a class with all other series of Preferred Stock upon which like
voting rights have been conferred and are exercisable) will be entitled to
vote for the election of two of the authorized number of directors of the
Company at the next annual meeting of stockholders and at each subsequent
meeting until all dividends accumulated on the $2.625 Preferred Stock and all
other series of Preferred Stock ranking on a parity as to dividends with the
$2.625 Preferred Stock shall have been fully paid or set apart for payment.
The term of office of all directors elected by the holders of such Preferred
Stock shall terminate immediately upon the termination of the right of the
holders of such Preferred Stock to vote for directors. Holders of shares of
$2.625 Preferred Stock have one vote for each share held.
So long as any shares of the $2.625 Preferred Stock remain outstanding, the
Company shall not, without the consent of holders of at least two-thirds of
the shares of $2.625 Preferred Stock outstanding at the time, voting
separately as a class with all other series of Preferred Stock upon which like
voting rights have been conferred and are exercisable, (i) issue or increase
the authorized amount of any class or series of stock ranking prior to the
outstanding $2.625 Preferred Stock as to dividends or upon liquidation or (ii)
amend, alter or repeal the provisions of the Company's Certificate of
Incorporation or of the resolutions contained in the Certificate of
Designation relating to the $2.625 Preferred Stock, whether by merger,
consolidation or otherwise, so as to materially adversely affect any power,
preference or special right of the outstanding $2.625 Preferred Stock or the
holders thereof; provided, however, that any increase in the amount of the
authorized Common Stock or authorized Preferred Stock or any increase or
decrease in the number of shares of any series of Preferred Stock or the
creation and issuance of other series of Common Stock or Preferred Stock
ranking on a parity with or junior to the $2.625 Preferred Stock as to
dividends and upon liquidation, dissolution or winding-up shall not be deemed
to materially adversely affect such powers, preferences or special rights.
$2.28 PREFERRED STOCK
On November 19, 1992, the Company authorized and issued 1,400,000 shares of
Preferred Stock designated "$2.28 Cumulative Preferred Stock." Holders of
$2.28 Preferred Stock are entitled to receive dividends quarterly at an annual
rate of $2.28125 per share, when and as declared by the Board of Directors out
of funds legally available therefore. Such dividends are cumulative.
The $2.28 Preferred Stock has a liquidation preference of $25.00 per share.
Holders of $2.28 Preferred Stock are entitled, in the event of the Company's
liquidation, to share ratably in all of the Company's assets remaining after
payment of all of its debts and liabilities up to the amount of the
liquidation preference set forth above, plus all accrued and unpaid dividends.
The rights of holders of $2.28 Preferred Stock rank upon liquidation of the
Company on a parity with the $2.625 Preferred Stock and prior to those of the
holders of the Common Stock and of any other series of Preferred Stock which
is not specifically on a parity with or senior to the $2.28 Preferred Stock.
The $2.28 Preferred Stock is redeemable on or after November 15, 1997, at a
redemption price equal to $25.00 per share plus in all instances all accrued
and unpaid dividends.
Holders of $2.28 Preferred Stock have no voting rights except as set forth
below or as otherwise from time to time required by law. Whenever dividends on
the $2.28 Preferred Stock or any other class or series of stock ranking on a
parity with the $2.28 Preferred Stock with respect to the payment of dividends
shall be in arrears for dividend periods, whether or not consecutive,
containing in the
24
<PAGE>
aggregate a number of days equivalent to six calendar quarters, the holders of
shares of $2.28 Preferred Stock (voting separately as a class with all other
series of Preferred Stock upon which like voting rights have been conferred
and are exercisable) will be entitled to vote for the election of two of the
authorized number of directors of the Company at the next annual meeting of
stockholders and at each subsequent meeting until all dividends accumulated on
the $2.28 Preferred Stock and all other series of Preferred Stock ranking on a
parity as to dividends with the $2.625 Preferred Stock shall have been fully
paid or set apart for payment. The term of office of all directors elected by
the holders of such Preferred Stock shall terminate immediately upon the
termination of the right of the holders of such Preferred Stock to vote for
directors. Holders of shares of $2.28 Preferred Stock have one vote for each
share held.
So long as any shares of the $2.28 Preferred Stock remain outstanding, the
Company shall not, without the consent of holders of at least two-thirds of
the shares of $2.28 Preferred Stock outstanding at the time, voting separately
as a class with all other series of Preferred Stock upon which like voting
rights have been conferred and are exercisable, (i) issue or increase the
authorized amount of any class or series of stock ranking prior to the
outstanding $2.28 Preferred Stock as to dividends or upon liquidation or (ii)
amend, alter or repeal the provisions of the Company's Certificate of
Incorporation or of the resolutions contained in the Certificate of
Designation relating to the $2.28 Preferred Stock, whether by merger,
consolidation or otherwise, so as to materially adversely affect any power,
preference or special right of the outstanding $2.28 Preferred Stock or the
holders thereof; provided, however, that any increase in the amount of the
authorized Common Stock or authorized Preferred Stock or any increase or
decrease in the number of shares of any series of Preferred Stock or the
creation and issuance of other series of Common Stock or Preferred Stock
ranking on a parity with or junior to the $2.28 Preferred Stock as to
dividends and upon liquidation, dissolution or winding-up shall not be deemed
to materially adversely affect such powers, preferences or special rights.
REGISTRATION RIGHTS
The Company has a registration rights agreement with certain principal
stockholders, including the Selling Stockholder, granting them the right to
require the Company to effect one registration of any or all of their Common
Stock at their expense. In addition, they have the right to have any or all of
such Common Stock included, at their pro rata expense, in any registration
statement relating to the Common Stock filed by the Company, subject to the
right of the underwriter of that offering to limit the number of shares of
such Common Stock to be included in that registration.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND DELAWARE LAW
The Company's Certificate of Incorporation contains certain provisions that
may have an effect of delaying, deferring or preventing a change of control of
the Company. First, the Certificate of Incorporation provides that the Board
shall consist of three classes of Directors, each serving a three-year term
ending in a successive year. This provision may make it more difficult to
effect a takeover of the Company because it would generally take two annual
meetings of stockholders for an acquiring party to elect a majority of the
Board. As a result, the classified Board may discourage proxy contests for the
election of Directors or purchases of a substantial block of stock because it
could operate to prevent obtaining control of the Board in a relatively short
period of time.
In addition, the Certificate of Incorporation provides that the holders of a
minimum of 60% of the Company's capital stock entitled to vote on a manner (or
such higher percentage as may otherwise be required) may take action thereon
without a meeting by executing a written consent or consents. This increases
the percentage that would otherwise be required under Delaware law to take
certain actions by written consent, and thus may make it more difficult to
effect a takeover of the Company involving certain transactions, such as a
merger or sale of assets, by requiring a potential acquiror to obtain a higher
percentage of the Company's voting securities or hold a stockholders' meeting
before such a transaction could be consummated.
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<PAGE>
The Company is subject to Section 203 of the Delaware General Corporation
Law, which provides for restrictions on business combinations (as defined
therein) with interested persons (any person who acquires 15% or more of the
Company's outstanding voting stock). In general, the Company is prohibited
from engaging in business combinations with an interested person for a period
of three years from the date a person becomes an interested person, subject to
certain exceptions. By restricting the ability of the Company to engage in
business combinations with an interested person, the application of Section
203 to the Company may provide a barrier to hostile or unwanted takeovers.
SELLING STOCKHOLDER
The following table sets forth certain information concerning the beneficial
ownership of Common Stock by the Selling Stockholder as of June 30, 1996 and
as adjusted to reflect the sale of 150,000 shares of Common Stock by the
Selling Stockholder.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR OWNERSHIP
TO THIS OFFERING AFTER THIS OFFERING
----------------------- -----------------------
NUMBER OF PERCENT OF NUMBER OF NUMBER OF PERCENT OF
SHARES OF COMMON SHARES SHARES OF COMMON
NAME OF BENEFICIAL OWNER COMMON STOCK STOCK BEING OFFERED COMMON STOCK STOCK
- ------------------------ ------------ ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Brion G. Wise
Chairman of the Board,
Chief Executive Officer
and Director........... 3,964,430 15.4% 150,000 3,814,430 14.8%
</TABLE>
PLAN OF DISTRIBUTION
The Company and the Selling Stockholder may sell the Securities being
offered hereby directly to purchasers, through agents, through underwriters
and/or through dealers. In addition, any or all of the Selling Stockholder
Shares may be offered and sold to purchasers directly by or on behalf of the
Selling Stockholder from time to time on the NYSE at prices prevailing on such
exchange. Furthermore, any of the Selling Stockholder Shares covered by this
Prospectus which qualify for sale pursuant to Rule 144 may be sold thereunder
rather than pursuant to this Prospectus.
Offers to purchase Securities may be solicited directly by the Company or
the Selling Stockholder or by agents designated by the Company or the Selling
Stockholder from time to time. Any such agent, who may be deemed to be an
underwriter as that term is defined in the Securities Act of 1933, involved in
the offer or sale of the Securities in respect of which this Prospectus is
delivered will be named, and any commissions payable by the Company or the
Selling Stockholder to such agent will be set forth, in the accompanying
Prospectus Supplement. Unless otherwise indicated in the accompanying
Prospectus Supplement, any such agent will be acting on a best-efforts basis
for the period of its appointment (ordinarily five business days or less).
If an underwriter or underwriters are utilized in the sale, the Company and,
if applicable, the Selling Stockholder, will execute an underwriting agreement
with such underwriters at the time of sale to them and the names of the
underwriters and the terms of the transaction will be set forth in the
accompanying Prospectus Supplement, which will be used by the underwriters to
make resales of the Securities in respect of which this Prospectus is
delivered to the public.
If a dealer is utilized in the sale of the Securities in respect of which
this Prospectus is delivered, the Company or the Selling Stockholder will sell
such Securities to the dealer, as principal. The dealer may then resell such
Securities to the public at varying prices to be determined by such dealer at
the time of resale. The name of the dealer and the terms of the transaction
will be set forth in the accompanying Prospectus Supplement.
26
<PAGE>
Agents, underwriters and dealers may be entitled under the relevant
agreements to indemnification by the Company or the Selling Stockholder
against certain liabilities, including liabilities under the Securities Act.
Agents, dealers and underwriters may be customers of, engage in transactions
with, or perform services for the Company in the ordinary course of business.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered are set forth in the accompanying Prospectus
Supplement.
LEGAL OPINIONS
The validity of all the Securities in respect of which this Prospectus is
being delivered exclusive of the Selling Stockholder Shares will be passed on
for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue,
New York, New York 10022. The validity of the Selling Stockholder Shares in
respect of which this Prospectus is being delivered will be passed on for the
Company by John C. Walter, Executive Vice President and Secretary of the
Company. As of June 30, 1996, Mr. Walter owned 32,494 shares of Common Stock.
EXPERTS
The financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-K of the Company for the year ended December 31,
1995, have been so incorporated in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
27
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPEC-
TUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE PRO-
SPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS SUP-
PLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECU-
RITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................. S-3
Use of Proceeds........................................................... S-10
Price Range of Common Stock and Dividend Policy........................... S-10
Capitalization............................................................ S-11
Business and Properties................................................... S-12
Management................................................................ S-23
Security Ownership........................................................ S-26
Selling Stockholder....................................................... S-27
Selected Consolidated Financial and Operating Data........................ S-28
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-29
Forward-Looking Statements................................................ S-41
Underwriting.............................................................. S-42
Legal Opinions............................................................ S-43
Experts................................................................... S-43
</TABLE>
<TABLE>
<S> <C>
PROSPECTUS
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Western Gas Resources, Inc................................................. 4
Consolidated Ratios of Earnings to Fixed Charges and Earnings to Fixed
Charges and Preferred Stock Dividends..................................... 4
Use of Proceeds............................................................ 5
Risk Factors............................................................... 5
Description of Debt Securities............................................. 8
Description of Capital Stock............................................... 16
Selling Stockholder........................................................ 26
Plan of Distribution....................................................... 26
Legal Opinions............................................................. 27
Experts.................................................................... 27
</TABLE>
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5,630,000 SHARES
WESTERN GAS RESOURCES, INC.
COMMON STOCK
(PAR VALUE $0.10 PER SHARE)
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[LOGO OF WESTERN GAS RESOURCES, INC. APPEARS HERE]
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GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PETRIE PARKMAN & CO.
REPRESENTATIVES OF THE UNDERWRITERS
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