<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO
_________________
Commission file number 1-10389
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WESTERN GAS RESOURCES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1127613
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12200 N. Pecos Street, Denver, Colorado 80234-3439
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 452-5603
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Registrant's telephone number, including area code
No Changes
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
On November 2, 1998, there were 32,147,993 shares of the registrant's Common
Stock outstanding.
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1
<PAGE>
WESTERN GAS RESOURCES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet - September 30, 1998
and December 31, 1997.................................................... 3
Consolidated Statement of Cash Flows - Nine months ended September
30, 1998 and 1997........................................................ 4
Consolidated Statement of Operations - Three and Nine months ended
September 30, 1998 and 1997.............................................. 5
Consolidated Statement of Changes in Stockholders' Equity - Nine
months ended September 30, 1998.......................................... 6
Notes to Consolidated Financial Statements............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 9
PART II - Other Information
- ---------------------------
Item 1. Legal Proceedings........................................................ 17
Item 6. Exhibits and Reports on Form 8-K......................................... 18
Signatures......................................................................... 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
WESTERN GAS RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(000s, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
ASSETS (Unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 7,638 $ 19,777
Trade accounts receivable, net................................................ 196,156 258,791
Product inventory............................................................. 60,979 17,261
Parts inventory............................................................... 10,301 9,405
Assets held for sale.......................................................... 49,940 -
Other......................................................................... 510 2,364
---------- ----------
Total current assets...................................................... 325,524 307,598
---------- ----------
Property and equipment:
Gas gathering, processing, storage and transmission........................... 1,028,964 1,050,676
Oil and gas properties and equipment.......................................... 122,318 136,129
Construction in progress...................................................... 81,343 64,268
---------- ----------
1,232,625 1,251,073
Less: Accumulated depreciation, depletion and amortization................... (297,068) (294,350)
---------- ----------
Total property and equipment, net......................................... 935,557 956,723
---------- ----------
Other assets:
Gas purchase contracts (net of accumulated amortization of $29,372 and
$27,554, respectively).................................................... 41,869 43,687
Other......................................................................... 35,121 40,268
---------- ----------
Total other assets........................................................ 76,990 83,955
---------- ----------
Total assets................................................................... $1,338,071 $1,348,276
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.............................................................. $ 211,460 $ 326,696
Accrued expenses.............................................................. 27,233 27,151
Dividends payable............................................................. 4,217 4,217
---------- ----------
Total current liabilities................................................. 242,910 358,064
Long-term debt................................................................. 548,214 441,357
Deferred income taxes payable.................................................. 85,155 80,743
---------- ----------
Total liabilities......................................................... 876,279 880,164
---------- ----------
Commitments and contingent liabilities......................................... - -
Stockholders' equity:
Preferred stock, par value $.10; 10,000,000 shares authorized:
$2.28 cumulative preferred stock; 1,400,000 shares issued and outstanding
($35,000,000 aggregate liquidation preference).......................... 140 140
$2.625 cumulative convertible preferred stock; 2,760,000 shares issued and
outstanding ($138,000,000 aggregate liquidation preference)............. 276 276
Common stock, par value $.10; 100,000,000 shares authorized; 32,172,949 and
32,171,453 shares issued, respectively.................................... 3,217 3,217
Treasury stock, at cost, 25,016 shares........................................ (788) (788)
Additional paid-in capital.................................................... 399,577 399,554
Retained earnings............................................................. 60,241 66,999
Cumulative foreign currency translation adjustments........................... 214 -
Notes receivable from key employees secured by common stock................... (1,085) (1,286)
---------- ----------
Total stockholders' equity................................................ 461,792 468,112
---------- ----------
Total liabilities and stockholders' equity..................................... $1,338,071 $1,348,276
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
WESTERN GAS RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(000s)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Reconciliation of net income to net cash (used in) provided by operating activities:
Net income.................................................................................. $ 5,893 $ 16,483
Add income items that do not affect working capital:
Depreciation, depletion and amortization.................................................. 43,605 44,956
Deferred income taxes..................................................................... 4,412 7,872
Distributions in excess of equity income, net............................................. 438 25
(Gain) loss on the sale of property and equipment......................................... (14,813) 73
Foreign currency translation adjustments.................................................. 214 -
Other non-cash items, net................................................................. 964 2,063
----------- ----------
40,713 71,472
----------- ----------
Adjustments to working capital to arrive at net cash (used in) provided by
operating activities:
Decrease in trade accounts receivable..................................................... 62,735 106,286
Increase in product inventory............................................................. (44,277) (20,356)
(Increase) decrease in parts inventory.................................................... (896) 407
Decrease (increase) in other current assets............................................... 1,854 (735)
Decrease (increase) in other assets....................................................... 143 (393)
Decrease in accounts payable.............................................................. (115,237) (106,050)
Decrease in accrued expenses.............................................................. (323) (4,425)
----------- ----------
Total adjustments...................................................................... (96,001) (25,266)
----------- ----------
Net cash (used in) provided by operating activities......................................... (55,288) 46,206
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment...................................................... (72,887) (155,129)
Proceeds from the dispositions of property and equipment.................................. 22,600 2,178
Distribution from unconsolidated affiliate................................................ - 278
Contributions to unconsolidated affiliates............................................. (748) (2,743)
----------- ----------
Net cash used in investing activities....................................................... (51,035) (155,416)
----------- ----------
Cash flows from financing activities:
Net proceeds from exercise of common stock options........................................ 23 175
Debt issue costs paid..................................................................... (45) (711)
Payments on revolving credit facility..................................................... (2,266,350) (955,150)
Borrowings under revolving credit facility................................................ 2,380,350 1,151,150
Payments on long-term debt................................................................ (7,143) (94,643)
Dividends paid............................................................................ (12,651) (12,647)
----------- ----------
Net cash provided by financing activities................................................... 94,184 88,174
----------- ----------
Net decrease in cash and cash equivalents................................................... (12,139) (21,036)
Cash and cash equivalents at beginning of period............................................ 19,777 39,504
----------- ----------
Cash and cash equivalents at end of period.................................................. $ 7,638 $ 18,468
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
WESTERN GAS RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(000s, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Sale of residue gas................................... $ 402,600 $ 384,181 $ 1,207,572 $ 1,120,382
Sale of natural gas liquids........................... 99,947 141,574 332,571 442,316
Sale of electric power................................ - 16,695 20 54,111
Processing, transportation and storage................ 11,459 10,320 33,450 30,192
Other, net............................................ 2,253 3,118 23,872 8,000
----------- ----------- ----------- -----------
Total revenues 516,259 555,888 1,597,485 1,655,001
----------- ----------- ----------- -----------
Costs and expenses:
Product purchases..................................... 469,367 499,884 1,429,835 1,482,401
Plant operating expense............................... 22,258 19,100 62,919 55,607
Oil and gas exploration and production costs.......... 2,050 1,761 5,045 4,925
Depreciation, depletion and amortization.............. 14,277 14,386 43,605 44,956
Selling and administrative expense.................... 6,917 6,453 21,824 22,131
Interest expense...................................... 8,969 6,454 25,265 19,183
----------- ----------- ----------- -----------
Total costs and expenses 523,838 548,038 1,588,493 1,629,203
----------- ----------- ----------- -----------
Income (loss) before taxes............................. (7,579) 7,850 8,992 25,798
Provision (benefit) for income taxes:
Current............................................... 2,336 102 (1,313) 1,443
Deferred.............................................. (5,268) 2,751 4,412 7,872
----------- ----------- ----------- -----------
Total provision (benefit) for income taxes (2,932) 2,853 3,099 9,315
----------- ----------- ----------- -----------
Net income (loss)...................................... (4,647) 4,997 5,893 16,483
Preferred stock requirements........................... (2,610) (2,610) (7,829) (7,829)
----------- ----------- ----------- -----------
Income (loss) attributable to common stock............. $ (7,257) $ 2,387 $ (1,936) $ 8,654
=========== =========== =========== ===========
Earnings (loss) per share of common stock.............. $(.23) $.07 $(.06) $.27
=========== =========== =========== ===========
Weighted average shares of common stock outstanding.... 32,147,993 32,142,427 32,147,354 32,130,038
=========== =========== =========== ===========
Earnings (loss) per share of common stock -
assuming dilution..................................... $(.23) $.07 $(.06) $.27
=========== =========== =========== ===========
Weighted average shares of common stock outstanding -
assuming dilution..................................... 32,147,993 32,145,785 32,148,655 32,133,311
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
WESTERN GAS RESOURCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(000s, except share amounts)
<TABLE>
<CAPTION>
Shares of
Shares of $ 2.625 $ 2.625
$ 2.28 Cumulative Shares of $ 2.28 Cumulative
Cumulative Convertible Shares Common Cumulative Convertible
Preferred Preferred of Common Stock in Preferred Preferred Common Treasury
Stock Stock Stock Treasury Stock Stock Stock Stock
---------- ----------- ---------- -------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997....................... 1,400,000 2,760,000 32,146,437 25,016 $140 $276 $3,217 $(788)
Net income.................. - - - - - - - -
Stock options exercised..... - - 1,556 - - - - -
Loans forgiven.............. - - - - - - - -
Dividends declared on
common stock............... - - - - - - - -
Dividends declared on $2.28
cumulative preferred stock. - - - - - - - -
Dividends declared on $2.625
cumulative convertible
preferred stock............
Translation adjustments..... - - - - - - - -
---------- ----------- ---------- -------- ---------- ----------- ---------- --------
Balance at September 30,
1998....................... 1,400,000 2,760,000 32,147,993 25,016 $140 $276 $3,217 $(788)
========== =========== ========== ======== ========== =========== ========== ========
<CAPTION>
Cumulative
Foreign Notes Total
Additional Currency Receivable Stock-
Paid-In Retained Translation from Key holders'
Capital Earnings Adjustments Employees Equity
---------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997....................... $399,554 $ 66,999 $ - $ (1,286) $468,112
Net income.................. - 5,893 - - 5,893
Stock options exercised..... 23 - - - 23
Loans forgiven.............. - - - 201 201
Dividends declared on
common stock............... - (4,822) - - (4,822)
Dividends declared on $2.28
cumulative preferred stock. - (2,395) - - (2,395)
Dividends declared on $2.625
cumulative convertible
preferred stock............ (5,434) - - (5,434)
Translation adjustments..... - - 214 214
-------- ---------- ----------- --------- --------
Balance at September 30,
1998....................... $399,577 $ 60,241 $ 214 $ (1,085) $461,792
======== ========== =========== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
WESTERN GAS RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
GENERAL
The interim consolidated financial statements presented herein should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included in the Company's Form 10-K for the year ended December 31, 1997. The
interim consolidated financial statements as of September 30, 1998 and for the
three and nine month periods ended September 30, 1998 and 1997 included herein
are unaudited but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to fairly present the
results for such periods. The results of operations for the three and nine
months ended September 30, 1998 are not necessarily indicative of the results of
operations expected for the year ended December 31, 1998.
Certain prior year amounts in the Consolidated Financial Statements and Notes
have been reclassified to conform to the presentation used in 1998.
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Earnings (loss) per share of common stock is computed by dividing income
attributable to common stock by the weighted average shares of common stock
outstanding. In addition, earnings (loss) per share of common stock - assuming
dilution is computed by dividing income attributable to common stock by the
weighted average shares of common stock outstanding as adjusted for potential
common shares. Income (loss) attributable to common stock is income (loss) less
preferred stock dividends. The Company declared preferred stock dividends of
$2.6 million and $7.8 million, respectively, for both of the three and nine
month periods ended September 30, 1998 and 1997. Common stock options, which
are potential common shares, had a dilutive effect on earnings (loss) per share
and increased the weighted average shares of common stock outstanding by 3,358
shares for the three month period ended September 30, 1997. Common stock
options associated with the three month period ended September 30, 1998 were
excluded from weighted average shares of common stock outstanding in calculating
earnings (loss) per share as they were antidilutive. Common stock options had a
dilutive effect on earnings (loss) per share and increased the weighted average
shares of common stock outstanding by 1,301 and 3,273 shares for the nine month
periods ended September 30, 1998 and 1997, respectively. The numerators and the
denominators for the three and nine month periods ended September 30, 1998 and
1997 are not adjusted to reflect the Company's $2.625 Cumulative Convertible
Preferred Stock outstanding. These shares are antidilutive as the incremental
shares result in an increase in earnings per share after giving effect to the
dividend requirements.
ASSET SALE
In March 1998, the Company completed the sale of its Perkins facility, which was
effective as of January 1, 1998. The sales price was $22.0 million and resulted
in a pre-tax gain of approximately $14.9 million.
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid was $26.5 million and $23.1 million, respectively, for the nine
months ended September 30, 1998 and 1997.
Income taxes paid were $2.6 million for the nine months ended September 30,
1997. No such taxes were paid for the nine months ended September 30, 1998.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS No. 133") with an effective date for fiscal
years beginning after June 15, 1999. The Company will comply with the
accounting and reporting requirements of SFAS No. 133 when required. The
Company has not yet completed its evaluation of the impact that SFAS No. 133
will have upon its financial statements.
7
<PAGE>
SUBSEQUENT EVENT
In two transactions which closed on October 29, 1998, the Company sold its
Edgewood gathering system, including its undivided interest in the producing
properties associated with this facility, and its 50% interest in the
Redman Smackover Joint Venture. The combined sales price was $55.8 million. The
proceeds from these sales were used to repay balances outstanding on the
Revolving Credit Facility. After accrual of certain expenses, the Company
anticipates a pre-tax gain of approximately $1.0 million which will be
recognized in the fourth quarter of 1998. The net book value of these assets is
reflected under the caption "Assets held for sale" in the Consolidated Balance
Sheet.
LEGAL PROCEEDINGS
Reference is made to "Part II - Other Information - Item 1. Legal Proceedings,"
of this Form 10-Q.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion and analysis relates to factors which have affected the
consolidated financial condition and results of operations of the Company for
the three and nine month periods ended September 30, 1998 and 1997. Certain
prior year amounts have been reclassified to conform to the presentation used in
1998. Reference should also be made to the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this document. This section,
as well as other sections in this Form 10-Q, contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology, such
as "may," "intend," "will," "expect," "anticipate," "estimate," or "continue" or
the negative thereof or other variations thereon or comparable terminology. In
addition to the important factors referred to herein, numerous factors affecting
the gas processing industry generally and in the markets for gas and NGLs in
which the Company operates could cause actual results to differ materially from
those in such forward-looking statements.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997 (000S, EXCEPT PER SHARE AMOUNTS AND OPERATING
DATA).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
-------------- --------------
1998 1997 Change 1998 1997 Change
-------------- -------- -------------- ----------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS:
Revenues................................... $516,259 $555,888 (7) $1,597,485 $1,655,001 (3)
Gross profit............................... 8,307 20,757 (60) 56,081 67,112 (16)
Net income (loss).......................... (4,647) 4,997 - 5,893 16,483 (64)
Earnings (loss) per share of common stock.. (.23) .07 - (.06) .27 -
Earnings (loss) per share of common stock -
assuming dilution........ (.23) .07 - (.06) .27 -
Net cash (used in) provided by
operating activities..... $ (3,703) $ 2,837 - $ (55,288) $ 46,206 -
OPERATING DATA:
Average gas sales (MMcf/D)................. 2,295 2,010 14 2,200 1,870 18
Average NGL sales (MGal/D)................. 4,345 4,545 (4) 4,540 4,420 3
Average gas prices ($/Mcf)................. $ 1.90 $ 2.08 (9) $ 2.01 $ 2.19 (8)
Average NGL prices ($/Gal)................. $ .25 $ .34 (26) $ .27 $ .36 (25)
</TABLE>
Revenues from the sale of gas increased approximately $18.4 million to $402.6
million for the quarter ended September 30, 1998 compared to the same period in
1997. Average gas sales volumes increased 285 MMcf per day to 2,295 MMcf per
day for the quarter ended September 30, 1998 compared to the same period in
1997, primarily as a result of an increase in the sale of gas purchased from
third parties. Average gas prices decreased $.18 per Mcf to $1.90 per Mcf for
the quarter ended September 30, 1998 compared to the same period in 1997.
Revenues from the sale of gas increased approximately $87.2 million to $1,207.6
million for the nine months ended September 30, 1998 compared to the same period
in 1997. Average gas sales volumes increased 330 MMcf per day to 2,200 MMcf per
day for the nine months ended September 30, 1998 compared to the same period in
1997, primarily due to an increase in the sale of gas purchased from third
parties. Average gas prices decreased $.18 per Mcf to $2.01 per Mcf for the nine
months ended September 30, 1998 compared to the same period in 1997. Included in
the average gas price was approximately $202,000 of gain and $16,000 of loss,
respectively, recognized for the three and nine months ended September 30, 1998
related to futures positions on equity gas volumes. The Company has entered into
futures positions for a portion of its equity gas for the remainder of 1998 and
for 1999. See further discussion in "Liquidity and Capital Resources -Risk
Management Activities."
Revenues from the sale of NGLs decreased approximately $41.6 million to $99.9
million for the quarter ended September 30, 1998 compared to the same period in
1997. Average NGL sales volumes decreased 200 MGal per day to 4,345 MGal per
day, primarily due to decreased sales associated with the Company's Perkins
facility, which was disposed of in March 1998. Average NGL prices
9
<PAGE>
decreased $.09 per gallon to $.25 per gallon for the quarter ended September 30,
1998 compared to the same period in 1997. Revenues from the sale of NGLs
decreased approximately $109.7 million to $332.6 million for the nine months
ended September 30, 1998 compared to the same period in 1997. Average NGL sales
volumes increased 120 MGal per day to 4,540 MGal per day, primarily due to an
increase in the sale of NGLs purchased from third parties for this same period.
Average NGL prices decreased $.09 per gallon to $.27 per gallon for the nine
months ended September 30, 1998 compared to the same period in 1997. Included in
the average NGL price was approximately $2.1 million and $5.7 million,
respectively, of gain recognized for the three and nine months ended September
30, 1998 related to futures positions on equity volumes. The Company has entered
into futures positions for a portion of its equity production for the remainder
of 1998 and for 1999. See further discussion in "Liquidity and Capital
Resources -Risk Management Activities."
Revenue associated with the sale of electric power decreased $16.7 million and
$54.1 million, respectively, for the three and nine months ended September 30,
1998 compared to the same periods in 1997, primarily because the Company had
minimal transactions in this market during 1998. During the second half of
1997, the Company elected to discontinue wholesale trading of electric power,
due to a lack of profitability.
Other net revenue remained relatively constant and increased $15.9 million,
respectively, for the three and nine months ended September 30, 1998 compared to
the same periods in 1997. The increase for the nine months ended September 30,
1998 was primarily due to a $14.9 million gain on the sale of the Company's
Perkins facility and $1.0 million of revenue related to an option payment
received from RIS Resources (USA) Inc. ("RIS"). The option payment is
associated with the potential sale of a portion of certain of the Company's
assets in Southwest Wyoming. See further discussion at "Liquidity and Capital
Resources -Capital Investment Program - Southwest Wyoming."
Product purchases decreased $30.5 million and $52.6 million, respectively, for
the three and nine months ended September 30, 1998 compared to the same periods
in 1997. The decrease in product purchases for the three and nine month periods
ended September 30, 1998 was primarily due to the decrease in commodity prices.
The decrease in product purchases for the nine months ended September 30, 1998
was somewhat offset by an increase in volumes sold. Included in product
purchases were lower of cost or market write-downs of NGL inventory of $522,000
and $963,000 for the nine months ended September 30, 1998 and 1997,
respectively. Combined product purchases as a percentage of gas, NGL and
electric power sales increased from 92% to 93% for both the three and nine month
periods ended September 30, 1998 compared to the same periods in 1997. Over the
past several years, the Company has experienced narrowing margins in its third-
party sales related to the increasing competitiveness of the natural gas
marketing industry. During the nine months ended September 30, 1998, margins on
the sale of third-party gas declined and averaged approximately $.02 per Mcf
compared to approximately $.03 for the same period in 1997. Contributing to the
increase in the product purchase percentage for the nine months ended September
30, 1998 were higher payments related to the Company's "keepwhole" contracts at
its Granger facility. Under a "keepwhole" contract, the Company's margin is
reduced when the value of NGLs declines relative to the value of gas.
Plant operating expense increased $3.2 million and $7.3 million, respectively,
for the three and nine months ended September 30, 1998 compared to the same
periods in 1997. The increase was primarily due to additional compression costs
associated with the increased Coal Bed Methane production activities and
expenses incurred at the Bethel Treating facility, which became partially
operational during the third quarter of 1997.
Interest expense increased $2.5 million and $6.1 million, respectively, for the
three and nine months ended September 30, 1998 compared to the same periods in
1997. The increase is due to less interest being capitalized related to
capital projects, primarily the Bethel Treating facility, and larger debt
balances outstanding during the three and nine month periods ended September 30,
1998 compared to the corresponding periods in 1997. The larger debt balances
resulted primarily from higher product inventory positions, capital expenditures
and reduced cashflow from operations. Deferred taxes decreased substantially as
a result of the sale of the Edgewood gathering system and related production and
its interest in the Redman Smackover Joint Venture which closed in October 1998
and has impacted the Company's third quarter tax provision.
Deferred taxes decreased substantially as a result of the sale of the Edgewood
gathering system and related production and its interest in the Redman
Smackover Joint Venture which closed in October 1998 and has impacted the
Company's third quarter tax provision.
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 seek 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
10
<PAGE>
growth will be dependent upon success in the areas of marketing, additions to
dedicated plant reserves, acquisitions, new project development and its ability
to obtain financing at favorable terms.
Historically, crude oil prices have been volatile and the oil and gas industry
is currently experiencing ten year lows in crude oil prices. As of November 10,
1998 such prices had declined to approximately $13.50 per barrel. Most NGL value
is tied closely to crude oil thereby having a detrimental effect on the
Company's results of operations. In addition, the volumes associated with the
Bethel Treating facility have been lower than anticipated. If the low oil and
NGL prices continue or decline and volumes associated with the Bethel Treating
facility do not increase, the Company is uncertain as to its ability to satisfy
its interest coverage covenants under certain of its debt agreements during
1999. To strengthen credit ratings and to reduce its overall debt outstanding
the Company will continue to dispose of non-strategic assets (such as the
Perkins facility and Edgewood facility and related production) and investigate
alternative financing (including project financing, joint ventures and operating
leases). The Company believes if it continues to address covenant coverage
concerns it can obtain amendments or waivers from the necessary lenders.
However, there can be no assurance that such amendments or waivers can be
obtained or that the terms would be favorable to the Company.
The Company believes that the amounts available to be borrowed under the
Revolving Credit Facility, together with cash provided by operating activities,
will provide it with sufficient funds to connect new reserves, maintain its
existing facilities and complete its current capital expenditure program.
Depending on the timing and the amount 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 its lenders, 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. Despite the declining oil prices experienced thus far in 1998,
the Company also believes that cash provided by operating activities will be
sufficient to meet its debt service and preferred stock dividend requirements
for the remainder of 1998 and for 1999.
The Company's sources and uses of funds for the nine months ended September 30,
1998 are summarized as follows (000s):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
Borrowings on revolving credit facility................... $2,380,350
Proceeds from the dispositions of property and equipment.. 22,600
Proceeds from exercise of common stock options............ 23
----------
Total sources of funds............................... $2,402,973
==========
USES OF FUNDS:
Payments related to long-term debt agreements............. $2,273,538
Capital expenditures...................................... 73,635
Net cash used in operating activities..................... 55,288
Dividends paid............................................ 12,651
----------
Total uses of funds.................................. $2,415,112
==========
</TABLE>
Additional sources of liquidity available to the Company are volumes of gas and
NGLs in storage facilities. The Company stores gas and NGLs primarily to ensure
an adequate supply for long-term sales contracts and for resale during periods
when prices are favorable. The Company held gas in storage and held imbalances
for such purposes of approximately 21.3 Bcf at an average cost of $2.08 per Mcf
at September 30, 1998 compared to 6.0 Bcf at an average cost of $1.97 per Mcf at
December 31, 1997, at various storage facilities, including the Katy Facility.
At September 30, 1998, the Company had hedging contracts in place for
anticipated sales of approximately 20.2 Bcf of stored gas at a weighted average
price of $2.36 per Mcf. The Company held NGLs in storage of 50,700 MGal,
consisting primarily of propane, at an average cost of $.28 per gallon, and
14,400 MGal, at an average cost of $.37 per gallon, at September 30, 1998 and
December 31, 1997, respectively, at various third-party storage facilities. At
September 30, 1998, the Company had no significant hedging contracts in place
for anticipated sales of stored NGLs.
Risk Management Activities
The Company enters into futures transactions on the New York Mercantile Exchange
("NYMEX") and the Kansas City Board of Trade and OTC swaps and options with
counterparties it considers to be creditworthy consisting primarily of financial
institutions and other natural gas companies. Using these tools, as well as
physical forward transactions, the Company has hedged a portion of its equity
volumes of gas and NGLs in 1998 at pricing levels in excess of its 1998
operating budget. The
11
<PAGE>
Company's 1998 hedging strategy established a minimum and maximum price to the
Company while allowing market participation between these levels. As of
November 2, 1998, the Company had hedged approximately 75% of its anticipated
equity gas for the remainder of 1998 at a weighted average NYMEX-equivalent
minimum price of $2.31 per Mcf. Additionally, the Company has hedged
approximately 10% of its anticipated equity NGLs, primarily crude oil, for the
remainder of 1998 at a weighted average composite Mont Belvieu and West Texas
Intermediate Crude-equivalent minimum price of $.44 per gallon.
Capital Investment Program
Capital expenditures related to existing operations are expected to be
approximately $97.0 million during 1998, consisting of the following: capital
expenditures related to gathering, processing and pipeline assets are expected
to be approximately $59.1 million, of which approximately $49.1 million is
budgeted to be used for new connects, system expansions and asset consolidations
and approximately $10.0 million for maintaining existing facilities. The
Company expects capital expenditures on exploration and production activities
and other miscellaneous items to be approximately $33.5 million and $4.4
million, respectively. These capital expenditures represent anticipated
expenditures, and to a certain extent, are subject to adjustment in response to
present or forecasted market conditions. As of September 30, 1998, the Company
had expended $73.6 million, consisting of the following: (i) $37.9 million for
new connects, system expansions and asset consolidations; (ii) $7.5 million for
maintaining existing facilities; (iii) $25.9 for exploration and production
activities; and (iv) $2.3 million related to other miscellaneous items.
Coal Bed Methane. The Company is expanding its Powder River Basin coal bed
methane natural gas gathering system and developing its own coal seam gas
reserves in Wyoming. The Company's revised capital budget provides for
expenditures of approximately $46.7 million during 1998. This capital budget
includes approximately $28.2 million for drilling costs, production equipment
and purchase of operating wells and undeveloped acreage. The remainder is to be
used primarily for compression equipment. On July 20, 1998, the United States
Court of Appeals, Tenth Circuit, ruled in favor of the Southern Ute Indian Tribe
in a case entitled Southern Ute Indian Tribe v. Amoco Production Company, et
---------------------------------------------------------
al., ("Southern Ute Litigation") and found that coal bed methane was reserved
- ---
under patents issued pursuant to the 1909 and 1910 Coal Land Acts to the United
States government, and subsequently transferred to a Native American tribe,
along with the coal. As of September 1998, approximately 29% of the Company's
leases in the Powder River basin were from land owners whose title was derived
under those acts and under which the federal government could claim the rights
to the coal bed methane. In response to this court decision, the Company
curtailed drilling on affected lands pending resolution of the issue. On October
21, 1998, federal legislation was enacted whereby the federal government agreed
to honor certain leases and contracts in place as of the enactment date. Upon
the enactment of the law, the Company re-established its drilling plan.
Depending upon future drilling success, additional capital expenditures will be
required to continue expansion in the Powder River Basin. However, because of
drilling and other uncertainties beyond the Company's control there can be no
assurance that this level of capital expenditures will be incurred or that
future capital expenditures will be made. See further discussion at "Part II -
Other Information - Item 1. Legal Proceedings," of this Form 10-Q.
On July 10, 1998 MIGC received approval from the Federal Energy Regulatory
Commission ("FERC") to increase its pipeline capacity from 90 MMcf per day to
130 MMcf per day. The Company plans to expand the pipeline to approximately 130
MMcf per day to meet current capacity requirements and anticipates that
construction will be completed by December 31, 1998. This portion of the
construction is expected to cost approximately $6.0 million and is included in
the $46.7 million capital budget. The Company is in negotiations with producers
and other third parties to explore the possibility of constructing a non-
jurisdictional, large diameter gathering system and treating facility to
transport additional Powder River Basin coal bed methane gas.
Southwest Wyoming. The Company began to expand its gas gathering and
exploration and production activities in Southwest Wyoming during 1997. The
Company's capital budget provides for expenditures of approximately $12.5
million during 1998. This capital budget includes approximately $4.6 million
for drilling costs and production equipment and approximately $7.9 million
related to gathering, transportation and expansion of the Granger facility.
During 1997, the Company entered into two separate agreements with RIS to sell
RIS undivided interests in certain assets. Under the first agreement, in
February 1998, the Company sold RIS a 50% undivided interest in a portion of the
Granger gathering system servicing a large area of mutual interest (the "Bird
Canyon Line") for approximately $4.0 million. This amount approximated the
Company's cost in such facilities. RIS and the Company expect to install
jointly additional gathering assets in this area as needed.
12
<PAGE>
Under the second agreement, as amended, RIS exercised an option to purchase 50%
of the Granger processing facility and its remaining gathering system and a 50%
interest in the Company's 72% ownership interest in the Lincoln Road facility
(collectively the "Granger Complex") for $105 million. Pursuant to the
agreement with RIS, the Company will remain the operator of the Bird Canyon Line
and the Granger Complex. The purchase price will be further increased by a pro-
rata share of capital expenditures incurred at the Granger Complex from November
1997 until closing. The sale is subject to various regulatory approvals and
third-party purchase preferential rights.
Effective October 30, 1998, the second agreement has been extended and amended.
Under the current terms of the amendment, RIS will purchase 25% of the Company's
interest in the Granger Complex for $54.5 million on or about November 30, 1998
with an option to acquire an additional 25% interest for $50.5 million on or
before November 30, 1999. As a component of RIS's financing, the Company has
entered into a letter agreement with RIS to purchase $9 million of 8.5%
preferred stock. The preferred stock will be issued by RIS and will be
redeemable at RIS's option during the initial three years after issuance at
varying premiums. If the preferred stock is not redeemed during the initial
three year period, the preferred stock is convertible into shares of RIS
Resources International Corp., RIS's parent company and a Vancouver Stock
Exchange listed company. Under the same letter agreement, the Company agreed to
purchase 3 million Shares of common stock of Ultra Petroleum Corp. an affiliate
of RIS, for $3 million.
Bethel Treating Facility. In March 1998, the Company completed the
construction of a 60-ton sulfur recovery plant to accommodate wells which
contain greater concentrations of hydrogen sulfide. The Bethel Treating
facility averaged gas throughput of approximately 51 MMcf per day and 61 MMcf
per day for the three and nine months ended September 30, 1998, respectively.
The Company anticipates that in order to cover controllable plant operating
costs, the Bethel Treating facility would need to average approximately 40 MMcf
per day of throughput for 1998. The Bethel Treating facility is not expected to
contribute to profitability during 1998. While drilling continues in this trend,
because of uncertainties related to the pace and success of third-party drilling
programs, declines in volumes produced at certain wells and other conditions
outside of the Company's control, the Company is currently unable to predict
future throughput volumes associated with the Bethel Treating facility, which
may be lower or higher than current throughput levels.
Long-term gathering and treating agreements have been signed with several
producers, including Sonat Exploration Company ("Sonat"), Ocean Energy, Inc.,
Broughton Associates Joint Venture and Union Pacific Resources Company ("UPRC"),
relating to their interests in the Cotton Valley Pinnacle Reef trend. These
agreements, in addition to other agreements, cover specified areas of dedication
aggregating approximately 650,000 acres of previously undedicated interests and
other individual wellsites. Pursuant to its agreement with Sonat, the Company
will begin treating additional volumes in May 1999 which are currently being
treated by a competitor. This production volume has declined from that
previously reported in the Company's Annual Report on Form 10-K of 100 MMcf per
day to approximately 20 MMcf per day. In addition, Sonat announced plans to
reduce its drilling program in the Cotton Valley Pinnacle Reef. UPRC announced
that it intended to divest certain assets, including some of its acreage in the
Cotton Valley Pinnacle Reef. Any purchaser of UPRC's dedicated leases will
continue to be subject to the Company's gathering and treating agreement.
Year 2000. The Company has made a comprehensive review of its computer systems
to identify the systems that could be affected by the "Year 2000" issue and is
in the process of identifying and making the appropriate modifications to these
computer systems. The Company has (i) created a Year 2000 awareness program to
educate employees; (ii) compiled an inventory of all systems; (iii) developed
system test plans as appropriate; and (iv) began the testing and remediation as
required for both information and non-information technology systems.
Additionally, the Company has initiated a program under which it surveys its
business counterparties periodically regarding their Year 2000 conversion and
contingency plans. Currently, the Company anticipates spending approximately
$1.5 million for remediation purposes, which is primarily for hardware and
operating system upgrades. The Company also expects to incur internal staff
costs as well as some consulting and other expenses which are expected to be
immaterial.
13
<PAGE>
The Company anticipates its Year 2000 conversion project to be substantially
completed by October 1999. Currently, the Company believes its most significant
risk for the Year 2000 issue is that the systems of other companies on which the
Company relies will not be Year 2000 compliant and that any such failure to
convert by another company would have an adverse effect on the Company. In order
to mitigate this risk, contingency plans are being developed and the Company is
surveying its vendors and customers to ascertain the status of their conversion
and contingency plans.
Other. 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 unsecured variable rate Revolving
Credit Facility was restated and amended on May 30, 1997. The Revolving Credit
Facility is with a syndicate of nine banks and provides for a maximum borrowing
commitment of $300 million, $271 million of which was outstanding at September
30, 1998. The Company used the proceeds from the sale of the Edgewood gathering
system and associated producing properties and its 50% interest in the Redman
Smackover Joint Venture to repay a portion of the outstanding balance of the
Revolving Credit Facility. As of October 31, 1998, the outstanding balance on
the Revolving Credit Facility was $218 million. The Revolving Credit Facility's
commitment period will terminate on March 31, 2002. At that time, any amounts
outstanding on the Revolving Credit Facility will become due and payable. The
Revolving Credit Facility bears interest at certain spreads over the Eurodollar
rate, at the Federal Funds rate plus .50% or at the agent bank's prime rate. The
Company has the option to determine which rate will be used. The Company also
pays a facility fee on the commitment. The interest rate spreads and facility
fee are adjusted based on the Company's debt to capitalization ratio. At
September 30, 1998, the spread was .425% over the Eurodollar rate and the
facility fee was .25%. The rate payable, including the facility fee, on the
Revolving Credit Facility at September 30, 1998 was 6.3%. Pursuant to the
Revolving Credit Facility, the Company is required to maintain a debt to
capitalization ratio (as defined therein) of not more than 60% as of the end of
any fiscal quarter and a ratio of EBITDA (as defined therein) to interest and
dividends on preferred stock as of the end of any fiscal quarter of not less
than 2.75 to 1.0 through December 31, 1998 (with the exception of the quarter
ended September 30, 1998 when the required ratio was 2.45 to 1.0), 3.0 to 1.0
from January 1, 1999 through December 31, 1999 and 3.25 to 1.0 thereafter. The
Company generally utilizes excess daily funds to reduce any outstanding balances
on the Revolving Credit Facility and associated interest expense and it intends
to continue such practice.
Master Shelf Agreement. In December 1991, the Company entered into an
unsecured Master Shelf Agreement (as amended and restated, the "Master Shelf")
with The Prudential Insurance Company of America ("Prudential"). The Master
Shelf Agreement, as further 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>
Pursuant to the Master Shelf 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 earnings
earned from June 30, 1995 plus 75% of the net proceeds of any equity offerings
after June 30, 1995, a debt to capitalization ratio (as defined therein) of no
more than 55%, and an EBITDA (as defined therein) to interest ratio of not less
than 3.25 to 1.0 through October 31, 1997 and 3.75 to 1.0 thereafter, with the
exception of the quarter ended September 30, 1998 when the required ratio was
3.3 to 1.0. The Company is prohibited from declaring or paying dividends on any
capital stock on or after June 30, 1995, that in the aggregate exceed the sum of
$50 million plus 50% of consolidated net earnings earned after June 30, 1995,
plus the cumulative net proceeds received by the Company after June 30, 1995
from the sale of any equity securities. At September 30,
14
<PAGE>
1998, $109 million was available under this limitation. The Company financed
the $8.3 million payment due on October 27, 1998 with amounts available under
the Revolving Credit Facility. The Company presently intends to finance the
$8.3 million payment due on October 27, 1999 with amounts available under the
Revolving Credit Facility.
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 were and 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 financed
the $7.1 million payment paid on April 30, 1998 with amounts available under the
Revolving Credit Facility. The Company presently intends to finance the $7.1
million payment due on April 30, 1999 with amounts available under the Revolving
Credit Facility. The 1993 Senior Notes are unsecured and contain certain
financial covenants that substantially conform with those contained in the
Master Shelf Agreement.
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 are unsecured and contain certain financial covenants that
conform with those contained in the Master Shelf Agreement.
Covenant Compliance. At September 30, 1998, the Company was in compliance
with all covenants in its loan agreements. Taking into account all the covenants
contained in the Company's financing facilities and maturities of long-term debt
during 1998, the Company had approximately $12 million of available borrowing
capacity at September 30, 1998. Historically, crude oil prices have been
volatile and the oil and gas industry is currently experiencing ten year lows in
crude oil prices. As of November 10, 1998 such prices have declined to
approximately $13.50 per barrel. Most NGL value is tied closely to crude oil
thereby having a detrimental effect on the Company's results of operations. In
addition, the volumes associated with the Bethel Treating facility have been
lower than anticipated. If the low oil and NGL prices continue or decline and
volumes associated with the Bethel Treating facility do not increase, the
Company is uncertain as to its ability to satisfy its interest coverage
covenants under certain of its debt agreements during 1999. To strengthen credit
ratings and to reduce its overall debt oustanding the Company will continue to
dispose of non-strategic assets (such as the Perkins facility and Edgewood
facility and related production) and investigate alternative financing
(including project financing, joint ventures and operating leases). The Company
believes if it continues to address covenant coverage concerns it can obtain
amendments or waivers from the necessary lenders. However, there can be no
assurance that such amendments or waivers can be obtained or that the terms
would be favorable to the Company.
15
<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
Gas Gas September 30, 1998
-------------------------------------------------
Gathering Throughput Gas Gas NGL
Year Placed Systems Capacity Throughput Production Production
Plant Facilities (1) In Service Miles(2) (MMcf/D)(3) (MMcf/D)(4) (MMcf/D)(5) (MGal/D)(5)
- --------------------------- ------------- ----------------- -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
SOUTHERN REGION:
Texas
Bethel Treating (6)...... 1997 86 350 61 58 -
Edgewood (6)(7)(8)....... 1964 89 65 24 7 57
Giddings Gathering....... 1979 660 80 51 42 74
Gomez Treating........... 1971 385 280 121 115 -
Midkiff/Benedum.......... 1955 2,137 165 154 101 991
Mitchell Puckett
Gathering............... 1972 86 85 74 49 1
MiVida Treating (6)...... 1972 289 150 61 58 -
Rosita Treating.......... 1973 - 60 50 50 -
Louisiana
Black Lake............... 1966 56 75 13 8 32
Toca (7)(9).............. 1958 - 160 64 60 50
NORTHERN REGION:
Wyoming
Coal Bed Methane
Gathering............... 1990 345 80 67 63 -
Granger (7)(10)(11)(12).. 1987 401 235 153 140 182
Hilight Complex (7)...... 1969 622 80 41 36 95
Kitty/Amos Draw (7)...... 1969 313 17 10 7 46
Lincoln Road (12)........ 1988 149 50 30 27 28
Newcastle (7)............ 1981 146 5 2 2 17
Red Desert (7)........... 1979 111 42 20 18 35
Reno Junction (10)....... 1991 - - - - 51
Oklahoma
Arkoma................... 1985 64 8 5 5 -
Chaney Dell.............. 1966 2,049 180 67 53 215
Westana.................. 1986 755 45 60 52 70
New Mexico
San Juan River (6)....... 1955 138 60 28 24 1
Utah
Four Corners Gathering... 1988 104 15 4 4 4
----- ----- ----- --- -----
Total................... 8,985 2,287 1,160 979 1,949
===== ===== ===== === =====
</TABLE>
<TABLE>
<CAPTION>
Average for the
Nine Months Ended
Interconnect September 30, 1998
--------------------
and Gas Storage Pipeline Gas
Storage and Year Placed Transmission Capacity Capacity Throughput
Transmission Facilities (1) In Service Miles(2) (Bcf)(2) (MMcf/D)(2) (MMcf/D)(3)
- --------------------------- ------------- -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Katy Facility (13)......... 1994 17 20 - 208
MIGC (14).................. 1970 245 - 130 89
MGTC (15).................. 1963 252 - 18 9
----- ----- ----- -----
Total.................... 514 20 148 306
===== ===== ===== =====
</TABLE>
_________________________
Footnotes on following page.
16
<PAGE>
(1) The Company's interest in all facilities is 100% except for Midkiff/Benedum
(73%); Black Lake (69%); Lincoln Road (72%); Westana Gathering Company
("Westana") (50%); Newcastle (50%) and Coal Bed Methane Gathering (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, interconnect and transmission miles, gas
storage capacity and pipeline capacity are as of September 30, 1998. On
July 10, 1998, MIGC received approval from the FERC to increase its
pipeline capacity from 90 MMcf per day to 130 MMcf per day.
(3) Gas throughput capacity is as of September 30, 1998 and represents capacity
in accordance with design specifications unless other constraints exist,
including permitting or field compression limits.
(4) Aggregate wellhead natural gas volumes collected by a gathering system,
aggregate volumes delivered over the header at the Katy Hub and Gas Storage
Facility ("Katy Facility") or volumes transported by a pipeline.
(5) Volumes of gas and NGLs are allocated to a facility when a well is
connected to that facility; volumes exclude NGLs fractionated for third
parties.
(6) Sour gas facility (capable of processing or treating gas containing
hydrogen sulfide and/or carbon dioxide).
(7) Fractionation facility (capable of fractionating raw NGLs into end-use
products).
(8) On October 29, 1998, the Company sold its Edgewood gathering system,
including its undivided interest in the producing properties associated
with this plant.
(9) Straddle plant (a plant located near a transmission pipeline that processes
gas dedicated to or gathered by a pipeline company or another third party).
(10) NGL production includes conversion of third-party feedstock to iso-butane.
(11) In February 1998, the Company sold a 50% undivided interest in a portion of
the Granger gathering system for approximately $4.0 million. This amount
approximated the Company's cost in such facilities.
(12) The Company and its joint venture partner at the Lincoln Road facility have
agreed to process such gas at the Company's Granger facility as long as
there is available capacity at the Granger facility. As a result, a
periodic election is made as to whether or not gas will be processed at the
Lincoln Road facility. Accordingly, operations at the Lincoln Road
facility were temporarily suspended for the period between February 1998
and June 1998.
(13) Hub and gas storage facility.
(14) MIGC is an interstate pipeline located in Wyoming and is regulated by the
FERC.
(15) MGTC is a public utility located in Wyoming and is regulated by the Wyoming
Public Service Commission.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
JN Exploration and Production Litigation
JN Exploration and Production ("JN") is a producer of oil and natural gas that
sold unprocessed natural gas to the Company on a percentage-of-proceeds basis.
The Company processed the natural gas at its Teddy Roosevelt Plant, which is no
longer in operation. In JN Exploration and Production v. Western Gas Resources,
-------------------------------------------------------
Inc. United States District Court for the District of North Dakota,
- ----
Southwestern Division, Civil Action Nos. A1-93-53 and 903-CV-60, JN sued the
Company, alleging that JN was entitled to a portion of a $15 million amendment
fee the Company received in the years 1987 through 1989 from Williston Basin
Interstate Pipeline Company ("WBI"), which had an agreement with the Company to
purchase natural gas. On April 15, 1996, the Court issued a Memorandum and Order
granting JN's summary judgment motion on the issue of liability. On July 11,
1996, the Court issued a Memorandum and Order setting forth the manner in which
damages were to be calculated. On September 17, 1996, the Court entered a final
judgment against the Company in the amount of $421,000 (including pre-judgment
interest). The company appealed the decision to the Eighth Circuit Court of
Appeals. On September 1, 1998, the Court of Appeals reversed the summary
judgment entered for JN on an unjust enrichment theory and remanded the case to
the trial court for a determination on JN's contract claims. The Company
believes that it has meritorious defenses to the remanded claim and will
vigorously defend such claims. At the present time, it is not possible to
predict the outcome of this litigation or any other producer litigation that
might raise similar issues or to estimate the amount of potential damages.
17
<PAGE>
Internal Revenue Service
The Internal Revenue Service ("IRS") has completed its examination of the
Company's returns for the years 1990 and 1991 and has proposed adjustments to
taxable income reflected in such returns that would shift the recognition of
certain items of income and expense from one year to another ("Timing
Adjustments"). To the extent taxable income in a prior year is increased by
proposed Timing Adjustments, taxable income may be reduced by a corresponding
amount in other years. However, the Company would incur an interest charge as a
result of such adjustment. The Company currently is protesting certain of these
proposed adjustments. In the opinion of management, adequate provision has been
made for the additional income taxes and interest that may result from the
proposed adjustments. However, it is reasonably possible that the ultimate
resolution could result in an amount which differs materially from amounts
provided.
Other
The Company is involved in various other litigation and administrative
proceedings arising in the normal course of business. In the opinion of
management, any liabilities that may result from these claims, will not,
individually or in the aggregate, have a material adverse effect on the
Company's financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
10.25 Letter Waiver to that Certain Note Purchase agreement by and among
Western Gas Resources, Inc. and the Purchasers identified therein
relating to the Senior Note Purchase Agreement dated November 29,
1995.
10.26 Letter Waiver to that Certain Note Purchase agreement by and among
Western Gas Resources, Inc. and the Purchasers relating to the Note
Purchase Agreement dated April 1, 1993.
10.27 Letter Waiver to the Second Amended and Restated Master Shelf
Agreement by and among Western Gas Resources, Inc. and the
Prudential Insurance Company of America.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on September 1, 1998 with the Securities and
Exchange Commission to notify the Company's stockholders of the extension
of the closing date of the transactions and modifications to the agreements
between the Company and RIS Resources (USA) Inc.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESTERN GAS RESOURCES, INC.
---------------------------
(Registrant)
Date: November 13, 1998 By: /s/ LANNY F. OUTLAW
-------------------------------------
Lanny F. Outlaw
President and Chief Operating Officer
Date: November 13, 1998 By: /s/ WILLIAM J. KRYSIAK
-------------------------------------
William J. Krysiak
Vice President - Finance
(Principal Financial and Accounting Officer)
19
<PAGE>
LETTER WAIVER TO
THAT CERTAIN NOTE PURCHASE AGREEMENT
September 30, 1998
To Each of the Purchasers:
Ladies and Gentlemen:
We refer to that certain Note Purchase Agreement dated as of November 29,
1995, by and among the undersigned, Western Gas Resources, Inc. (the "Company")
and the Purchasers relating to the purchase and sale of the Company's 8.02%
Senior Notes (the "Agreement"). Unless otherwise defined herein, the terms
defined in the Agreement shall be used herein as therein defined.
In Section 6A(4) of the Agreement, the Company agrees not to permit the
Fixed Charge Coverage Ratio to be less than 3.75 to 1.00 at any time after
October 31, 1997. The Company hereby requests that you waive compliance with
this section for the fiscal quarter ended September 30, 1998 provided that the
Fixed Charge Coverage Ratio may not be less than 3.30 to 1.00 during such
period.
If you agree to the above waiver of compliance with Section 6A(4) for the fiscal
quarter ended September 30, 1998 provided that the Fixed Charge Coverage Ratio
may not be less than 3.30 to 1.00 during such period, please evidence such
agreement by executing and returning one counterpart of this waiver to the
Company at its address at 12200 N. Pecos Street, Denver, CO 80234, Attention:
Vice President - Finance. This waiver shall become effective as of the date
first above written when and if counterparts of this waiver shall have been
executed by the Company and the Required Holders.
Very truly yours,
WESTERN GAS RESOURCES, INC.
By: /s/ William J. Krysiak
________________________
William J. Krysiak,
Vice President - Finance
<PAGE>
To Each of the Purchasers
September 30, 1998
Page 2
AGREED AS OF THE DATE FIRST ABOVE WRITTEN:
THE VARIABLE ANNUITY
LIFE INSURANCE COMPANY
By:_________________________________
AMERICAN GENERAL LIFE
INSURANCE COMPANY
By:_________________________________
AMERICAN GENERAL LIFE AND ACCIDENT INSURANCE COMPANY
(successor in interest to GULF LIFE INSURANCE COMPANY)
By:_________________________________
FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY
By:_________________________________
ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY
By:_________________________________
J. ROMEO & CO., as nominee for
THE MUTUAL LIFE INSURANCE
COMPANY OF NEW YORK
By:_________________________________
<PAGE>
LETTER WAIVER TO THAT
CERTAIN NOTE PURCHASE AGREEMENT
September 30, 1998
To Each of the Purchasers:
Ladies and Gentlemen:
We refer to that certain Note Purchase Agreement dated as of April 1, 1993,
as amended, by and among the undersigned, Western Gas Resources, Inc. (The
"Company") and the Purchasers named therein relating to the purchase and sale of
the Company's 7.65% Senior Notes due April 30, 2003 (the "Agreement"). Unless
otherwise defined herein, the terms defined in the Agreement shall be used
herein as therein defined.
In Section 7.11 of the Agreement, the Company agrees that for the period of
four consecutive fiscal quarters ended on each of September 30, 1998 and
December 31, 1998, Income Available for Fixed Charges shall be at least three
hundred percent (300%) of Fixed Charges. The Company hereby requests that you
waive compliance with this section for the fiscal quarter ended September 30,
1998, provided that for the period of four consecutive fiscal quarters ended
September 30, 1998, Income Available for Fixed Charges shall be at least two
hundred seventy five percent (275%) of fixed Charges.
If you agree to the above limited waiver of compliance with Section 7.11
for the fiscal quarter ended September 30, 1998, provided that for the period of
four consecutive fiscal quarters ended on September 30, 1998, Income Available
for Fixed Charges shall be at least two hundred seventy five percent (275%) of
Fixed Charges, please evidence such agreement by executing and returning one
counterpart of this waiver to the Company at its address at 12200 N. Pecos
Street, Denver, CO 80234, Attention: Vice President - Finance. This waiver shall
become effective as of the date first above written when and if counterparts of
this waiver shall have been executed by the Company and the Required Holders and
written notice along with evidence thereof shall have been provided to you by
the Company.
Exhibit 10.26
<PAGE>
Except to give effect to the specific and limited waiver herein granted,
the terms and provisions of the Agreement shall continue in full force and
effect. No terms or provisions; of the Agreement are modified or changed by this
Letter Waiver, and no further waiver of any condition or term of the Agreement
is intended or implied.
Very truly yours,
WESTERN GAS RESOURCES, INC.
By: /s/ William J. Krysiak
__________________________________
William J. Krysiak
Vice President - Finance
LANCE OIL & GAS COMPANY, INC.
MGTC, INC.
MIGC, INC.
MOUNTAIN GAS RESOURCES, INC.
PINNACLE GAS TREATING, INC.
WESTERN POWER SERVICES. INC.
WESTERN GAS RESOURCES -
OKLAHOMA, INC.
WESTERN GAS RESOURCES-TEXAS, INC.
WGR CANADA, INC.
By: /s/ William J. Krysiak
__________________________________
William J. Krysiak
Vice President - Finance
ACKNOWLEDGED AND ACCEPTED:
__________________________
Exhibit 10.26
<PAGE>
ACKNOWLEDGED AND ACCEPTED:
__________________________
CONNECTICUT GENERAL LIFE INSURANCE COMPANY*
CONNECTICUT GENERAL LIFE INSURANCE COMPANY,*
on behalf of one or more separate accounts
LIFE INSURANCE COMPANY OF NORTH AMERICA*
INSURANCE COMPANY OF NORTH AMERICA*
By: CIGNA Investments, Inc.
By: /s/ James G. Schelling
---------------------------
James G. Schelling
Managing Director
* This entity is either the registered owner of one or more of the securities
pertaining hereto or is a beneficial owner of one or more of such
securities owned by the registered in the name of a nominee for that
entity.
THE CANADA LIFE ASSURANCE COMPANY
By: _____________________________
CANADA LIFE INSURANCE COMPANY OF AMERICA
By: _____________________________
CANADA LIFE INSURANCE COMPANY OF NEW YORK
By: _____________________________
THE FRANKLIN LIFE INSURANCE COMPANY
By: _____________________________
ROYAL MACCABEES LIFE INSURANCE COMPANY
By: _____________________________
Exhibit 10.26
<PAGE>
Exhibit 10.27
LETTER WAIVER
November 5, 1998
The Prudential insurance Company
of America
Pruco Life Insurance Company
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, TX 75201
Ladies and Gentlemen:
We refer to the Second Amended and Restated Master Shelf Agreement dated as
of December 19, 1991 amended by Letter Amendment No. I dated November 21, 1997
(as amended, the "AGREEMENT") by and among the undersigned, Western Gas
Resources, Inc. (the "COMPANY"), The Prudential Insurance Company of America
("PRUDENTIAL") and Pruco Life Insurance Company ("PRUCO"). Unless otherwise
defined herein, the terms defined in the Agreement shall be used herein as
therein defined.
Paragraph 6A(4) of the Agreement requires that the Fixed Charge Coverage
Ratio not be less than 3.75 to 1.00 at any time after October 31, 1997. The
Company hereby requests that you waive compliance with this paragraph for the
fiscal quarter ended September 30, 1998 so long as the Fixed Charge Coverage
Ratio is greater than 3.30 to 1.00 during such period.
If you agree to the above waiver of compliance with paragraph 6A(4) for the
fiscal quarter ended September 30, 1998 provided that the Fixed Charge Coverage
Ratio may not be less than 3.30 to 1.00 during such period, please evidence such
agreement by executing and returning one counterpart of this waiver to the
Company at its address at 12200 N. Pecos Street, Denver, Colorado 80234,
Attention: Vice President - Finance. This waiver shall become effective as of
the date first above written when and if (I) counterparts of this waiver shall
have been executed by the Company and the undersigned, (ii) the consent attached
hereto shall have been executed by each Guarantor and (iii) any similar
provision in the NCNB Agreement shall have been amended or waived in a manner
substantially similar to this letter waiver.
<PAGE>
Exhibit 10.27
The execution, delivery and effectiveness of this letter shall not, except
as expressly provided herein, operate as a waiver of any right, power or remedy
under the Agreement nor constitute a waiver of any provision of the Agreement.
This letter waiver may be executed in any number of counterparts and by any
combination of the parties hereto in separate counterparts, each of which
counterparts shall be an original and all of which taken together shall
constitute one and the same letter waiver.
Very truly yours,
WESTERN GAS RESOURCES, INC.
By: /s/ William J. Krysiak
----------------------------
William J. Krysiak
Vice President - Finance
Agreed as of the date first above written:
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By: /s/ Ric E. Abel
------------------
Ric E. Abel
Vice President
PRUCO LIFE INSURANCE COMPANY
By: /s/ Ric E. Abel
------------------
Ric E. Abel
Vice President
2
<PAGE>
Exhibit 10.27
CONSENT
Each of the undersigned is a Guarantor ("GUARANTOR" and, collectively,
"GUARANTORS") under separate guaranties (each being a "GUARANTY") in favor of
The Prudential Insurance Company of America ("PRUDENTIAL"), for itself and on
behalf of affiliates of Prudential with respect to the obligations of Western
Gas Resources, Inc. (the "COMPANY") under that certain Second Amended and
Restated Master Shelf Agreement dated as of December 19, 1991 (effective as of
January 31, 1996) (the "AGREEMENT"). The terms used herein have the meaning
specified in each Guaranty unless otherwise defined herein, Prudential, Pruco
Life Insurance and the Company are entering into a Letter Waiver dated
November 5, 1998, to which this consent is attached (the "LETTER WAIVER"), which
waives compliance with certain provisions of the Agreement. Each of the
undersigned hereby consents to the Letter Waiver and each hereby confirms and
agrees that its Guaranty is, and shall continue to be, in fall force and effect
and is hereby confirmed and ratified in all respects.
Dated as of November 5, 1998
LANCE OIL & GAS COMPANY, INC.
MGTC, INC.
MIGC, INC.
MOUNTAIN GAS RESOURCES, INC.
PINNACLE GAS TREATING, INC.
WESTERN GAS RESOURCES STORAGE, INC.
WESTERN GAS RESOURCES - TEXAS, INC.
WESTERN GAS RESOURCES OKLAHOMA, INC.
WESTERN POWER SERVICES, INC.
WGR CANADA, INC.
By: ___________________________________________
/S/ William J. Krysiak, as Vice President -
Finance of each of the above-named companies.
3
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0
416
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