<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 1-12426
AQUILA GAS PIPELINE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 47-0731171
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
100 N.E. Loop 410, Suite 1000, San Antonio, Texas
78216-4754
(Address of principal executive offices)
(Zip Code)
(210) 342-0685
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding on August 1, 1997
- ---------------------------- -----------------------------
Common stock, $.01 par value 29,400,000
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 10,183 $ 17,719
Accounts receivable ...................................... 95,901 156,667
Inventories and exchanges ................................ 5,031 3,630
Materials and supplies ................................... 6,251 5,022
------------ ------------
Total current assets ................................... 117,366 183,038
------------ ------------
INVESTMENT IN AFFILIATE, net ............................... 96,750 110,814
------------ ------------
PIPELINE, PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas pipelines .................................... 432,694 423,222
Plants and processing equipment .......................... 72,822 68,115
------------ ------------
505,516 491,337
Less - Accumulated depreciation .......................... (106,513) (95,463)
------------ ------------
399,003 395,874
------------ ------------
INTANGIBLE ASSETS, net ..................................... 33,150 37,313
------------ ------------
OTHER, net ................................................. 1,467 1,443
------------ ------------
TOTAL ASSETS ............................................... $ 647,736 $ 728,482
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ..................... $ 12,752 $ 12,802
Accounts payable ......................................... 88,891 152,119
Accrued expenses ......................................... 8,497 8,712
Accrued interest ......................................... 3,568 4,393
Income taxes payable to UtiliCorp United Inc. ............ 1,919 2,833
Intercompany payable due to Aquila Energy Corporation .... 3,810 1,038
------------ ------------
Total current liabilities .............................. 119,437 181,897
------------ ------------
LONG-TERM DEBT ............................................. 242,625 277,383
------------ ------------
DEFERRED INCOME TAXES ...................................... 70,817 68,987
------------ ------------
OTHER LONG-TERM LIABILITIES ................................ 204 557
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none outstanding at June 30, 1997 and
December 31, 1996 ...................................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 29,400,000 shares issued and outstanding
at June 30, 1997 and December 31, 1996 ................. 294 294
Additional paid-in capital ............................... 90,297 90,297
Retained earnings ........................................ 124,062 109,067
------------ ------------
Total stockholders' equity ............................. 214,653 199,658
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 647,736 $ 728,482
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES ........................... $ 208,164 $ 167,122 $ 481,362 $ 332,039
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales .............................. 177,152 136,126 415,722 266,957
Operating .................................. 5,802 5,629 11,363 11,484
General and administrative ................. 3,766 4,154 8,242 9,783
Depreciation and amortization .............. 6,275 5,823 12,582 11,542
------------ ------------ ------------ ------------
Total costs and expenses ................. 192,995 151,732 447,909 299,766
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ....................... 15,169 15,390 33,453 32,273
INTEREST AND DEBT EXPENSES, net .............. 4,270 3,285 8,783 7,651
EQUITY IN NET INCOME OF AFFILIATE ............ 202 -- 346 --
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ................... 11,101 12,105 25,016 24,622
PROVISION IN LIEU OF INCOME TAX EXPENSE ...... 4,065 4,588 9,287 9,332
------------ ------------ ------------ ------------
NET INCOME ................................... $ 7,036 $ 7,517 $ 15,729 $ 15,290
============ ============ ============ ============
EARNINGS PER SHARE ........................... $ .24 $ .26 $ .54 $ .52
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ... 29,400,000 29,400,000 29,400,000 29,400,000
============ ============ ============ ============
CASH DIVIDENDS PER SHARE OF COMMON STOCK ..... $ .0125 $ .0125 $ .025 $ .025
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1997 1996
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 15,729 $15,290
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 12,582 11,542
Deferred income taxes ......................................................... 1,830 4,407
Dividends from affiliate ...................................................... 92 --
Equity in net income of affiliate ............................................. (346) --
Other non-cash items .......................................................... 195 150
Changes in operating assets and liabilities:
Accounts receivable ......................................................... 60,766 2,582
Inventories and exchanges ................................................... (1,440) 619
Materials and supplies ...................................................... (1,135) 455
Accounts payable ............................................................ (63,107) (5,993)
Accrued expenses ............................................................ (481) 2,516
Accrued interest ............................................................ (825) 838
Income taxes payable to UtiliCorp United Inc. ............................... (914) 2,021
Intercompany payable due to Aquila Energy Corporation ....................... 2,772 3,635
-------- -------
Net cash provided by operating activities ..................................... 25,718 38,062
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to pipeline, property, plant and equipment ............................ (13,046) (17,056)
Proceeds from asset dispositions ................................................ 16,854 --
-------- -------
Net cash provided by (used in) investing activities ........................... 3,808 (17,056)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under revolving credit agreements, net ................................. (50,574) (9,500)
Borrowings under loan agreement ................................................. 16,250 --
Principal payments of debt ...................................................... (1,689) (226)
Dividends ....................................................................... (734) (734)
Other ........................................................................... (315) (23)
-------- -------
Net cash used in financing activities ......................................... (37,062) (10,483)
-------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............................. (7,536) 10,523
CASH AND CASH EQUIVALENTS, beginning of period .................................... 17,719 8,666
-------- -------
CASH AND CASH EQUIVALENTS, end of period .......................................... $ 10,183 $19,189
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION
GENERAL
The accompanying condensed consolidated financial statements of Aquila
Gas Pipeline Corporation and subsidiaries (the Company) have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. All adjustments of a normal recurring
nature have been made which the Company believes are necessary for a fair
presentation of the Company's financial position and results of operations
for such interim periods. These interim results are not necessarily
indicative of the results for a full year. Certain information and note
disclosures related to the unaudited interim periods ended June 30, 1997 and
1996, normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations although the Company believes the
disclosures are adequate to make the interim period information presented
herein not misleading.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant areas requiring the use of estimates
relate to the fair value of financial instruments and useful lives for
depreciation and amortization. Actual results may differ from those
estimates.
The Company is subject to a number of risks inherent in the industry in
which it operates, primarily fluctuating prices and gas supply. The
Company's financial condition and results of operations will depend
significantly upon the prices received for natural gas and natural gas
liquids (NGLs). These prices are subject to wide fluctuation due to a
variety of factors that are beyond the control of the Company. In addition,
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. The number of new wells drilled will depend on a
variety of factors that are beyond the control of the Company.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. No changes in accounting principles have occurred since
this date.
STOCK-BASED COMPENSATION
In 1997, the Company awarded eligible employees stock options, see Note
5. The Company accounts for the stock options in accordance with Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation". Under SFAS 123, this plan requires either
recording compensation expense or disclosing the pro forma impact on net
income and earnings per share as if the Company elected to record
compensation expense. The Company has elected to disclose pro forma
information required by SFAS 123 in the annual consolidated financial
statements.
COMMODITY RISK MANAGEMENT
NON-TRADING ACTIVITIES
The Company utilizes various exchange-traded and over-the-counter
commodity financial instrument contracts to hedge the anticipated purchases
and sales of natural gas and NGLs and current operating margins (non-trading
activities). The principal financial instruments utilized are futures,
options, forward contracts and price and basis swaps. Financial instruments
are designated as a hedge at inception where there is a direct relationship
to the price risk associated with the Company's future sales and purchases
of commodities used in the Company's operations. Hedges of anticipated
transactions are accounted for under the deferral method with gains and
losses on these transactions recognized in revenues when the hedged
transaction
5
<PAGE> 6
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION (CONTINUED)
occurs. Gains and losses on the early termination or maturity of commodity
financial instrument contracts designated as hedges are deferred and
included in revenues in the period the hedged transaction is recorded. If
the direct relationship to price risk ceases to exist, the difference in the
carrying value and fair value of a commodity financial instrument is
recognized as a gain or loss in revenues in the period the direct
relationship ceases to exist. Future changes in fair value of the commodity
financial instrument are recognized as gains or losses in revenues in the
period of change. Most of the Company's hedging activities could tend to
reduce the Company's participation in rising margins but are intended to
limit the Company's exposure to loss during periods of declining margins.
NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income". SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
financial statements. Adoption of SFAS 130 is required for fiscal years
beginning after December 15, 1997, although earlier adoption is encouraged.
Based on the Company's current operations, SFAS 130 is not anticipated to
have a material effect on the Company's Consolidated Financial Statements.
2. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information for cash paid for
interest and income taxes by the Company:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1997 1996
------ ------
<S> <C> <C>
Interest, net of amount capitalized $9,552 $7,027
Income taxes $8,553 $3,044
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT AND GUARANTIES
The Company has issued irrevocable standby letters of credit totaling
$16,016 at June 30, 1997. The standby letters of credit, which generally
have terms from one to three months, collateralize obligations to third
parties for the purchase of gas. The standby letters of credit are issued
pursuant to a line of credit maintained by the Company. The line of credit
securing the letters of credit has been amended to extend the maturity to
June 30, 1998. At June 30, 1997, the borrowing base was $18,000 with no
principal outstanding.
The Company issued financial guarantees of approximately $250 at June
30, 1997, related to business activities of a 50% owned subsidiary.
Management does not believe it is probable that the financial guarantees
will be exercised.
6
<PAGE> 7
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
In 1987, HECI Exploration, Inc. (HECI) instituted a suit in the
155th Judicial District Court, Fayette County, Texas, against the Company
alleging various breaches of a take-or-pay contract and seeking
approximately $3,000 in damages. The Company's motion for summary
judgment was granted by the lower court. A Texas appellate court,
however, has remanded the case for trial.
In the purchase and sale agreement executed in connection with the
1987 acquisition of Clajon Gas Company by a predecessor of the Company,
Clayton Williams, Jr., individually, and certain selling entities agreed
to jointly and severally indemnify the purchaser from liabilities related
to the conduct of the acquired business or arising out of any assigned
contracts prior to the closing date of the acquisition, subject to
certain limitations. Thus, certain claims and litigation, including the
HECI litigation described above, involving the acquired business and
contracts assigned to the Company are subject to these indemnification
provisions. The indemnity provision limits Mr. Williams' personal
liability to $3,000 in the aggregate.
In August 1995, Mr. Charles Menke instituted suit against the
Company in the 155th Judicial District Court, Waller County, Texas,
alleging the Company has constructed and was operating a pipeline on
property owned by Mr. Menke. Mr. Menke alleges the Company is a
trespasser on his property and seeks unspecified damages for such
trespass including punitive damages. Mr. Menke additionally seeks an
injunction requiring the Company to cease operation of its pipeline and
to remove such pipeline from his property. In October 1995, the Court
denied Mr. Menke's request for a temporary injunction and set this matter
for trial on January 15, 1996. By consent of all parties the January 15,
1996 trial date was postponed and no new trial date has been set. The
Company believes Mr. Menke's claims for injunctive relief are without
merit, and believes it has meritorious defenses to the damage claims. The
Company has filed a denial of all claims and is actively pursuing its
defense of this litigation.
TAXES
The Internal Revenue Service (IRS) has examined and proposed
adjustments to UtiliCorp United Inc.'s (UtiliCorp) consolidated Federal
income tax returns for 1988 through 1993. The proposed adjustment
affecting the Company is to lengthen the depreciable life of certain
pipeline assets owned by the Company. The Company has filed a petition in
U.S. Tax Court contesting the IRS proposed adjustments for the tax years
of 1990 through 1992. The Company plans to file a similar petition for
1993 of which the IRS has also proposed an adjustment on the same issue.
The Company intends to vigorously contest the proposed adjustment and
believes it is reasonably possible it will prevail. It is expected that
additional assessments for the years 1994 through the present would be
made on the same issue. Under the provisions of the tax sharing agreement
with Aquila Energy Corporation (Aquila Energy) and UtiliCorp, the Company
would be liable to UtiliCorp for additional taxes of approximately $7,300
for the audit period and through the present plus potential interest of
approximately $2,100. The additional taxes would result in an adjustment
to the deferred tax liability with no effect on net income, while any
payment of interest would affect net income. The Company expects that the
ultimate resolution of this matter will not have a material adverse
effect on its financial position.
The Company is also a party to additional claims and is involved in
various other litigation and administrative proceedings arising in the
normal course of business. The Company believes it is unlikely that the
final outcome of any of the claims, litigation or proceedings discussed
above to which the Company is a party would have a material adverse
effect on the Company's financial position or results of operations.
However, due to the inherent uncertainty of litigation, there can be
no assurance that the resolution of any particular claim or proceeding would
not have an adverse effect on the Company's results of operations for the
fiscal period in which such resolution occurred.
7
<PAGE> 8
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company, in the normal course of business of its natural gas
pipeline operations, purchases, processes and sells natural gas pursuant to
long-term contracts. Such contracts contain terms which are customary in the
industry. The Company believes that such terms are commercially reasonable
and will not have a material adverse effect on the Company's financial
position or results of operations.
4. INVESTMENT IN OASIS PIPE LINE COMPANY
On April 1, 1997, the Company received $16,800 from El Paso Natural Gas
Company for its exercise of an option arrangement to acquire 5% of all the
capital stock of Oasis Pipe Line Company (Oasis) and the related
transportation rights. The Company, after the exercise of the option
arrangement, owns 35% of the capital stock of Oasis and has 280 million
cubic feet per day (MMcf/d) of firm intrastate transportation capacity. The
exercise of the option arrangement resulted in no gain or loss on
disposition to the Company. The proceeds were utilized to paydown on the
Company's revolving debt.
5. BENEFIT PLANS
In May 1997, the stockholders approved the 1997 Stock Incentive Plan
(the Plan). The Plan allows for awards of up to 500,000 shares of the
Company's common stock. The Plan provides for granting of options to
purchase common stock, awards of restricted stock, stock appreciation
rights, performance units or performance shares and other stock-based awards
to eligible employees, subject to certain restrictions. Generally, options
and other stock-based awards are granted with an exercise price at not less
than 100% of the closing market price on the date of the grant.
In 1997, the Company granted 35,000 options to purchase the Company's
common stock at an exercise price of $14.00 per share. The options become
exercisable in installments of one-third per year from the date of grant.
6. DEBT
On April 1, 1997, the Company entered into a Loan Agreement (the Loan)
with Aquila Energy for an amount of $16,250. The Loan is unsecured and bears
interest at 6.83% due semi-annually. The principal amount of the Loan shall
be repaid to Aquila Energy by October 15, 2006. The Loan also requires the
Company to comply with certain financial covenants and limits the activities
of the Company in other ways.
On June 1, 1997, the Company voluntarily reduced its commitment, by
$40,000, of its revolving credit agreements with Aquila Energy. The Company,
at June 30, 1997, has a commitment of $128,000, with outstanding principal
of $113,750, on its revolving credit agreements.
8
<PAGE> 9
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis relates to the condensed consolidated
financial position and results of operations of the Company for the three and
six months ended June 30, 1997 and 1996. Reference should be made to the
Condensed Consolidated Financial Statements and the Notes thereto. The increase
in 1997 off-system results of operations and the equity in net income of
affiliate are primarily the result of the July 1, 1996 acquisition of Oasis
Pipe Line Company (Oasis).
<TABLE>
<CAPTION>
Three Months Ended Period 1996 Six Months Ended Period 1996
June 30, to 1997 Change June 30, to 1997 Change
---------------------- ------------------ ------------------- ------------------
1997 1996 Amount Percent 1997 1996 Amount Percent
--------- --------- ------- -------- ------- -------- -------- -------
(Dollars in millions, except price data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Natural gas revenues $ 188.7 $ 147.4 $ 41.3 28 % $ 432.9 $ 290.6 $ 142.3 49 %
Natural gas liquids (NGLs)
revenues 19.5 19.7 (.2) (1)% 48.5 41.4 7.1 17 %
---------- -------- -------- -------- -------- --------
Total operating revenues 208.2 167.1 41.1 25 % 481.4 332.0 149.4 45 %
---------- -------- -------- -------- -------- --------
Cost of sales 177.1 136.1 41.0 30 % 415.7 266.9 148.8 56 %
---------- -------- -------- -------- -------- --------
Gross margin 31.1 31.0 .1 1 % 65.7 65.1 .6 1 %
---------- -------- -------- -------- -------- --------
Operating expenses 5.8 5.6 .2 4 % 11.4 11.5 (.1) (1)%
General and administrative
expenses 3.7 4.2 (.5) (12)% 8.2 9.8 (1.6) (16)%
Depreciation and amortization 6.3 5.8 .5 9 % 12.6 11.5 1.1 10 %
Interest and debt expenses, net 4.3 3.3 1.0 30 % 8.8 7.7 1.1 14 %
Equity in net income of affiliate .2 -- .2 100 % .3 -- .3 100 %
Provision in lieu of income tax
expense 4.2 4.6 (.4) (9)% 9.3 9.3 -- -- %
---------- -------- -------- -------- -------- --------
Net income $ 7.0 $ 7.5 $ (.5) (7)% $ 15.7 $ 15.3 $ .4 3 %
========== ======== ======== ========= ========= =========
OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold 378 382 (4) (1)% 344 375 (31) (8)%
Throughput transported 156 151 5 3 % 151 145 6 4 %
---------- -------- -------- -------- -------- --------
Total throughput 534 533 1 1 % 495 520 (25) (5)%
---------- -------- -------- -------- -------- --------
Marketed off-system excluding
Oasis 434 366 68 19 % 422 362 60 17 %
Marketed off-system Oasis 208 -- 208 100 % 224 -- 224 100 %
---------- -------- -------- -------- -------- --------
Total marketed off-system 642 366 276 75 % 646 362 284 78 %
---------- -------- -------- -------- -------- --------
Total throughput and
marketed off-system 1,176 899 277 31 % 1,141 882 259 29 %
========== ======== ======== ========= ========= =========
Gross NGLs production (MBbls/d) 38 40 (2) (5)% 39 40 (1) (3)%
Average natural gas price ($/Mcf) $ 2.02 $ 2.15 $ (.13) (6)% $ 2.38 $ 2.15 $ .23 11 %
Average NGLs price ($/gallon) $ .30 $ .32 $ (.02) (6)% $ .35 $ .31 $ .04 13 %
</TABLE>
1997 OUTLOOK
Results of operations for the remainder of the year will be influenced by
many factors, including system throughput volumes and gas marketing margins.
The Company's connection of the Brown #1-H and Eberele #1 wells during March,
1997 contributed to the increase in gas throughput volumes in the 1997 second
quarter compared to the 1997 first quarter. However, recent offset development
activity subsequent to connection of these wells has not been as favorable.
As a result, gas throughput for the month of July has declined to
approximately 470 million cubic feet per day (MMcf/d). Producers have indicated
in discussions with the Company that they are continuing to drill in the area
of the Brown #1-H and Eberele #1 wells and plan to drill further offsets and
extension wells.
The Company is well positioned to gather additional gas supply as it
develops because of its contractual commitments and the location of its
facilities. However, given the Company's projected flat throughput volumes and
lower gas marketing margins, the Company will be unlikely to match the
Company's 1996 earnings performance in the second half of this year.
Gas marketing margins will be affected by the relative differential of gas
values between the West Texas Waha hub and the Katy hub near Houston due to the
Company's interest in Oasis which provides 280 MMcf/d of firm transportation
capacity. The forward market reflected by futures contracts and cash markets
shows that the differential has declined to the $.05 per Mcf range for the 1997
third quarter as contrasted to the $.09 per Mcf average for the 1997 second
quarter and $.13 per Mcf for the year 1996. The Company may mitigate the lower
differentials through its marketing operations, but the downward trend in the
forward market affects the earnings potential of the Company's gas marketing
operations if the lower forward differentials are actually realized. Such
current lower differentials may not reflect the long-term transportation value
of the pipeline service.
9
<PAGE> 10
RESULTS OF OPERATIONS
The Company's results of operations are determined by the volume of gas
purchased, processed and resold in its gas gathering systems and processing
plants, as well as its off-system marketing activities. Fluctuations in the
price levels of natural gas and NGLs also affect results of operations since
the Company generally receives a portion of the natural gas and NGLs revenue
from natural gas throughput. Most of the Company's operating costs do not vary
directly with volume on existing systems; thus, increases or decreases in
volumes on existing systems generally have a direct effect on net income.
The Company, from time to time, enters into hedging transactions such as
contracts for future deliveries in order to minimize the risk associated with
changes in the price of natural gas and NGLs. The hedging program was
established to minimize variances in operating results due to fluctuating
commodity prices. Gains and losses related to these transactions are deferred
and recognized in the results of operations when the hedged transaction occurs.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Total operating revenues increased 25% to $208.2 million in 1997 compared
to $167.1 million in 1996. Natural gas revenues increased 28% to $188.7 million
in 1997 compared to $147.4 million in 1996 partially as the result of the
activity related to the Oasis off-system marketing which contributed natural
gas revenues of $40.9 million with associated marketed natural gas volumes of
208 MMcf/d. Excluding Oasis off-system marketing activity, natural gas revenues
increased 1% to $147.8 million primarily due to a 9% increase in natural gas
throughput sold and marketed to 812 MMcf/d in 1997 from 748 MMcf/d in 1996
offset by a 6% decrease in the average natural gas price to $2.02 per Mcf in
1997 from $2.15 per Mcf in 1996.
NGLs revenues decreased 1% to $19.5 million in 1997 compared to $19.7
million in 1996 as the result of a 5% decrease in gross NGLs production to
38,000 barrels per day (Bbls/d) in 1997 compared to 40,000 Bbls/d in 1996 and a
6% decrease in the average NGLs price to $.30 per gallon in 1997 from $.32 per
gallon in 1996. In 1997, the Company has recognized a gain of approximately $.8
million associated with its hedging activities of NGLs.
Cost of sales was $177.1 million, or 85% of operating revenues, in 1997
compared to $136.1 million, or 81% of operating revenues, in 1996. The increase
in the percentage is primarily due to a higher cost of gas supply for the
pipeline systems and the increase in overall off-system marketing activities
which have lower gross margin percentages. Cost of sales increased, primarily,
as the result of an increase in the Oasis off-system marketing activity and in
the volume of natural gas sold and marketed offset by a decrease in average
natural gas price.
Gross margin (operating revenues less cost of sales, which includes only
the direct cost of gas sold and does not include any related operating
expenses) was $31.1 million, or 15% of operating revenues, in 1997 compared to
$31.0 million, or 19% of operating revenues, in 1996. The decrease in
percentage is primarily due to a higher cost of gas supply for the pipeline
systems and to the increase in overall off-system marketing activities which
have lower gross margin percentages. The increase in the gross margin is due
mainly to an increase in the volume of natural gas sold and marketed offset by
a decrease in NGLs revenues.
Operating expenses increased 4% to $5.8 million in 1997 compared to $5.6
million in 1996 primarily as a result of recording additional operating
expenses associated with an increase in the ownership percentage of the
Company's interest in a joint venture.
General and administrative expenses decreased 12% to $3.7 million in 1997
compared to $4.2 million in 1996 due to a reduction in compensation costs. The
Company accrues compensation related to the stock appreciation rights (SARs)
based on the price of the Company's common stock. Based on the Company's stock
price in 1996 the Company increased its accrual for SARs while in 1997 the
Company decreased its accrual for SARs, which resulted in a decrease between
periods of $.2 million.
Depreciation and amortization increased 9% to $6.3 million in 1997 compared
to $5.8 million in 1996 primarily as the result of fixed asset additions on the
Southeast Texas Pipeline System (SETPS) and the amortization of the
transportation rights related to Oasis.
Interest and debt expenses increased 30% to $4.3 million in 1997 compared
to $3.3 million in the 1996 period primarily as a result of the Oasis
acquisition offset by the 1996 recording of $1.2 million of cumulative interest
associated with certain agreed-upon tax issues with the Internal Revenue
Service (IRS) resulting from the IRS examination of certain UtiliCorp United,
Inc. (UtiliCorp) Federal income tax returns (further discussed in the following
paragraph).
10
<PAGE> 11
Provision in lieu of income tax expense decreased 9% to $4.2 million in
1997 compared to $4.6 million in 1996 due, primarily, to a decrease in income
before income taxes in 1997 compared to 1996. UtiliCorp has agreed with the IRS
on certain tax issues as a result of the IRS audits of certain UtiliCorp
Federal income tax returns (hereinafter referred to as "agreed-upon tax
issues"). The Company will be liable to UtiliCorp for approximately $1.2
million, under the provisions of the tax sharing agreement, once UtiliCorp
assesses the Company for the agreed-upon tax issues. In June 1997, the Company
paid UtiliCorp $2.0 million for agreed-upon tax issues relating to 1990 and
1991 IRS audits of UtiliCorp's Federal income tax returns. The payment of the
income taxes associated with the agreed-upon tax issues will have no effect on
net income, as it will be an adjustment to the deferred tax liability.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Total operating revenues increased 45% to $481.4 million in 1997 compared
to $332.0 million in 1996. Natural gas revenues increased 49% to $432.9 million
in 1997 compared to $290.6 million in 1996 partially as the result of the
activity related to the Oasis off-system marketing which contributed natural
gas revenues of $107.7 million with associated marketed natural gas volumes of
224 MMcf/d. Excluding Oasis off-system marketing activity, natural gas revenues
increased 12% to $325.2 million primarily due to an 11% increase in the average
natural gas price to $2.38 per Mcf in 1997 from $2.15 per Mcf in 1996. Natural
gas throughput decreased 5% to 495 MMcf/d in 1997 from 520 MMcf/d in 1996 due
to a reduction in well connect activity and normal production declines on the
SETPS.
NGLs revenues increased 17% to $48.5 million in 1997 compared to $41.4
million in 1996 as the result of a 13% increase in the average NGLs price to
$.35 per gallon from $.31 per gallon offset by a 3% decrease in gross NGLs
production to 39,000 Bbls/d in 1997 compared to 40,000 Bbls/d in 1996. In 1997,
the Company has recognized a gain of approximately $2.7 million associated with
its hedging activities of NGLs.
Cost of sales was $415.7 million, or 86% of operating revenues, in 1997
compared to $266.9 million, or 80% of operating revenues, in 1996. The increase
in the percentage is primarily due to a higher cost of gas supply for the
pipeline systems and the increase in overall off-system marketing activities
which have lower gross margin percentages. Cost of sales increased, primarily
as the result of an increase in the average natural gas price and the Oasis
off-system marketing activity.
Gross margin (operating revenues less cost of sales, which includes only
the direct cost of gas sold and does not include any related operating
expenses) was $65.7 million, or 14% of operating revenues, in 1997 compared to
$65.1 million, or 20% of operating revenues, in 1996. The decrease in
percentage is primarily due to a higher cost of gas supply for the pipeline
systems and to the increase in overall off-system marketing activities which
have lower gross margin percentages. The increase in the gross margin is due
mainly to an increase in NGLs revenues offset by lower gross margin from the
pipeline systems as a result of decreased throughput volumes and higher cost of
gas supply.
Operating expenses decreased 1% to $11.4 million in 1997 compared to $11.5
million in 1996 primarily as a result of a reduction in the insurance expense
on the pipeline systems offset by recording additional expenses associated with
an increase in the ownership percentage of the Company's interest in a joint
venture.
General and administrative expenses decreased 16% to $8.2 million in 1997
compared to $9.8 million in 1996 due primarily to decreased compensation and
service agreement costs. The accrual for SARs between 1997 and 1996 decreased
$.8 million. In 1997, the Company's service agreement costs were lower by $.4
million as compared to 1996.
Depreciation and amortization increased 10% to $12.6 million in 1997
compared to $11.5 million in 1996 primarily as the result of fixed asset
additions on the SETPS and the amortization of the transportation rights
related to Oasis.
Interest and debt expenses increased 14% to $8.8 million in 1997 compared
to $7.7 million in the 1996 period primarily as a result of the Oasis
acquisition offset by the 1996 recording of $1.4 million of cumulative interest
associated with certain agreed-upon tax issues with the IRS resulting from the
IRS examination of certain UtiliCorp Federal income tax returns.
Provision in lieu of income tax expense remained the same at $9.3 million
in 1997 and 1996 as a result of comparable income before income taxes in both
periods.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company generates significant cash from operations and expects such
cash as well as borrowings to be its primary source of liquidity. The $2.1
million working capital deficit at June 30, 1997 is expected to be satisfied by
drawings on the Company's revolving credit agreements and cash flow from
operations. The significant decrease in the Company's accounts receivable and
accounts payable at June 30, 1997 is mainly the result of lower commodity
prices at June 30, 1997 as compared to December 31, 1996. The Company's primary
uses of cash are capital expenditures, acquisitions, working capital
requirements, dividends and debt repayment. The Company's historical additions
to pipeline, property, plant and equipment were $13.0 million and $27.5 million
for the six months ended June 30, 1997 and the year ended December 31, 1996,
respectively. Capital expenditures are expected to be approximately $37.4
million in 1997, excluding business acquisitions.
On April 1, 1997, the Company received $16.8 million from El Paso Natural
Gas Company upon their exercise of certain option arrangements to acquire 5% of
all the capital stock of Oasis and related transportation rights from the
Company. The proceeds were utilized to paydown the Company's revolving debt.
The Company maintains revolving credit agreements (the Revolvers), as
amended, with Aquila Energy Corporation (Aquila Energy) to provide funds for
general corporate purposes. In June 1997, the Company voluntarily reduced its
commitment, by $40.0 million, on its Revolvers which reduces the available
borrowings on the Revolvers to $128.0 million. There was $113.8 million
outstanding on the Revolvers at June 30, 1997. The total amount available to
borrow on the Revolvers was $14.2 million. The maturity dates on the Revolvers
automatically renew in one year periods from each commitment period (the fourth
quarter of any given year) unless Aquila Energy gives at least one year notice
not to renew from the commitment period.
Currently, the maturity dates of the Revolvers are in the fourth quarter of
1998.
The Company also has a Loan Agreement (the Loan) with Aquila Energy for an
amount of $50.0 million, which matures in 2005, to provide funds for general
corporate purposes. The Loan requires the Company to meet and maintain certain
financial covenants and limits the activities of the Company in other ways. At
June 30, 1997, $50.0 million was outstanding under the Loan and the Company was
in compliance with such covenants.
In April 1997, the Company entered into a Loan Agreement (the Loan
Agreement) with Aquila Energy for an amount of $16.3 million, which matures in
2006, to provide funds for general corporate purposes. The Loan Agreement will
require the Company to meet and maintain certain financial covenants and limits
the activities of the Company in other ways. At June 30, 1997, $16.3 million
was outstanding under the Loan Agreement and the Company was in compliance with
such covenants.
The 8.29% Senior Notes issued by Aquila Southwest Energy Corporation
(Aquila Southwest), a subsidiary of the Company, in 1992 require principal
payments of $12.5 million annually. Such principal payments are expected to be
made from cash flows from operations and borrowings. The 8.29% Senior Note
purchase agreement has numerous covenants which affect the Company and Aquila
Southwest. These covenants limit the ability to make dividend payments and
incur debt, require maintenance of certain financial ratios and limit the
activities of Aquila Southwest in other ways. Failure to maintain the required
ratios may ultimately result in an acceleration of payments due. At June 30,
1997, $75.0 million was outstanding on the Senior Notes and the Company was in
compliance with such covenants.
The Company believes the cash generated from operations and borrowings
under the Revolvers will be adequate to fund working capital requirements, debt
service payments and planned capital expenditures. Future acquisitions or large
capital expenditures in excess of current plans would require additional
financing that the Company expects would be available through additional debt
facilities.
NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income". SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements .
Adoption of SFAS 130 is required for fiscal years beginning after December 15,
1997, although earlier adoption is encouraged. Based on the Company's current
operations, SFAS 130 is not anticipated to have a material effect on the
Company's consolidated financial statements.
12
<PAGE> 13
FORWARD-LOOKING INFORMATION
The Company is including the following cautionary statement to make
applicable and take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. The factors identified in this
cautionary statement are important factors (but not necessarily all of the
important factors) that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where, in any
forward-looking statement, the Company, or its management, expresses an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis, but there can
be no assurance that the statement of expectation or belief will result or be
achieved or accomplished.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:
a) The ability to increase transmission, gathering, processing, and sales
volumes can be subject to the impact of prices; drilling activity and
success of producers; and service competition, especially due to excess
pipeline availability. Existing volumes are subject to depletion without
addition of future developed gas supplies. The ability to contract
additional gas supplies for the existing systems also is affected by the
available number of drilling locations in the proximity of these existing
gas systems and the related economic reserves of these drilling locations.
b) Growth strategies through acquisition, internal project development, and
investments in joint ventures may face legal and regulatory delays,
financing difficulties, competition from other acquirers and competitors,
and other unforeseeable obstacles beyond the Company's control.
c) Future profitability will be affected by the Company's ability to compete
with the services and economic contractual terms offered by other energy
enterprises which may be larger, offer more services, and possess greater
resources. Future profitability also will be affected by the level of
prices of natural gas, NGLs and competitive fuels and feedstocks.
d) Future operating results and success of business ventures may be subject to
the effects of, and changes in, laws and regulations, political and
governmental changes, inflation rates, taxes, and operating conditions.
Also, future operating results are subject to unexpected items resulting
from such events as, but not limited to, litigation settlements, adverse
rulings or judgments, and unexpected environmental remediation.
e) The Company's operations are subject to the risks incident to the
gathering, transportation, processing and storage of natural gas and NGLs,
such as explosions, product spills, leaks and fires, any of which could
result in substantial losses to the Company and curtailment or suspension
of operations at a Company facility.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to the Condensed Consolidated Financial Statements for a
description of legal proceedings.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
The Company held its annual meeting of shareholders on May 15, 1997. The
following items were voted upon: Harvey J. Padewar and Gary L. Downey were
elected by the stockholders to hold the office of Directors of the Company
for the term of three (3) years. Continuing directors are Charles K.
Dempster, Robert L. Howell and John L. Mosle, Jr. The vote for Mr. Padewar
was 28,499,955 for, none against, 58,203 withheld, no abstentions and no
broker non-votes. The vote for Mr. Downey was 28,499,555 for, none against,
58,603 withheld, no abstentions and no broker non-votes.
Stockholders also approved the Aquila Gas Pipeline Corporation 1997 Stock
Incentive Plan (the Plan). The vote for the Plan was 25,751,267 for, 2,759,541
against, none withheld, 47,350 abstentions and no broker non-votes.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits.
Incorporated herein by reference to Index to Exhibits.
(b) Reports on Form 8-K.
None.
14
<PAGE> 15
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.
AQUILA GAS PIPELINE CORPORATION
(Registrant)
/s/ Damon C. Button
--------------------------------------
Date: August 14, 1997 By: Damon C. Button
Vice President, Treasurer
and Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- -----------
<S> <C>
10.1 Loan Agreement dated April 1,
1997 between Aquila Gas
Pipeline Corporation and
Aquila Energy Corporation
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Aquila Gas Pipeline Corporation
File Number 1-12426
Exhibit 10.1
Loan Agreement dated April 1, 1997 between
Aquila Gas Pipeline Corporation and
Aquila Energy Corporation
<PAGE> 2
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is made and entered into as of
this 1st day of April 1997, by and between AQUILA ENERGY CORPORATION, a
Missouri corporation (the "Lender"), and AQUILA GAS PIPELINE CORPORATION, a
Delaware corporation (the "Borrower");
W I T N E S S E T H:
WHEREAS, the Borrower desires to enter into a loan agreement with the
Lender and the Lender is willing to extend and make credit available to the
Borrower upon the terms and conditions set forth herein;
NOW, THEREFORE, for and in consideration of the promises and the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
1. Loan Arrangement
1.1 Commitment. Subject to the terms and conditions hereof,
the Lender agrees that it will concurrently herewith loan to the Borrower the
principal amount of $16,250,000 (the "Loan").
1.2 Promissory Note. The loan hereunder shall be evidenced by
a promissory note of the Borrower in substantially the form of Exhibit A
attached hereto (the "Note"). Said Note shall be dated the date of the
borrowing and shall bear interest on the unpaid principal amount thereof at a
rate equal to 6.83 %. Interest shall be payable semi-annually on April 1 and
October 1 of each year, commencing October 1, 1997. Except as herein otherwise
provided, the principal amount of the Loan, together with accrued interest
thereon, shall be repaid by the Borrower to the Lender on or before October 15,
2006.
1.3 Prepayment. The Borrower may, at any time, prepay without
penalty all or, in multiples of $100,000, any part of, the unpaid principal of
the Loan under this Loan Agreement upon the payment of all interest accrued on
the Note to the date of prepayment. All payments to be made by the Borrower of
principal, interest, fees and other amounts due hereunder shall be made without
set off or counterclaim in lawful money of the United States of America, and in
immediately available funds, at the office designated by the Lender from time
to time.
2. Indemnification
The Borrower agrees to indemnify the Lender and to hold the
Lender harmless from any reasonable cost, loss or expenses which the Lender may
sustain or incur as a consequence of a default by the Borrower in payment of
the principal amount of or interest on the Loan.
<PAGE> 3
3. Conditions to Loan
The obligation of the Lender to make the Loan is subject to the
following conditions precedent:
(a) Note. The Lender shall have received the Note,
conforming to the requirements hereof and executed by a duly
authorized officer of the Borrower.
(b) Required Approvals. The Lender shall have received
certified copies of any consent or approval of any public or
governmental authority, agency, or department which is required
in connection with the transactions contemplated by this
Agreement.
(c) Additional Matters. All proceedings and other
documents and legal matters in connection with the transactions
contemplated by this Agreement shall be satisfactory in form and
substance to the Lender and its counsel.
4. Affirmative Covenants
The Borrower represents and warrants to Lender as follows:
(a) Books of Account. The Borrower will itself and will
cause its subsidiaries at all times to keep proper books of
account in conformity with generally accepted accounting
principles ("GAAP") consistently applied, and hereby authorizes
the Lender, its agents, officers, attorneys, accountants and
other authorized representatives, to make or cause to be made at
the Borrower's expense, in such manner and at such times as the
Lender may require, inspections and audits of any books, records
and papers of the Borrower or any of its subsidiaries under the
control of the Borrower or any of its subsidiaries or otherwise
relating to their financial or business conditions, including the
making of copies thereof or extracts therefrom and inspections
and valuations of any of their respective assets.
(b) Incorporation and Authorization. The Borrower is a
corporation duly organized and existing under the laws of the
state of Delaware and is duly authorized to transact business in
all places where the conduct of its business requires it to be
qualified. The execution, delivery and performance of this Loan
Agreement, and the Note to be issued hereunder are within the
Borrower's corporate powers, have been duly authorized and are
not in contravention of any law or the terms of the Borrower's
charter, articles, bylaws or other corporation papers, or of any
indenture, agreement, document or undertaking to which the
Borrower is a party or by which it is bound.
2
<PAGE> 4
(c) Taxes. The Borrower agrees that it will pay
promptly when due all taxes, assessments and governmental charges
upon or against the Borrower or its subsidiaries or the property
or operations of the Borrower, in each case before the same
become delinquent and before penalties accrue thereon.
(d) Contingent Liabilities. The Borrower and its
subsidiaries do not now have and will not during the term of this
Loan Agreement have any material contingent liabilities known to
the Borrower which are not provided for or disclosed by
appropriate notes in the Borrower's financial statements.
(e) Adequate Assets. The Borrower and its subsidiaries
possess adequate assets for the conduct of their respective
businesses.
(f) Corporate Existence and Good Standing. The Borrower
and its subsidiaries will maintain their corporate existence and
their qualification and good standing in all states necessary to
conduct their businesses and own or lease their properties, and
maintain all licenses, permits, franchises, and governmental
authorizations necessary to conduct their businesses and own or
lease their property.
(g) Consolidated Net Worth. The Borrower and its
subsidiaries will maintain at all times Consolidated Net Worth of
not less than $140 million.
"Consolidated Net Worth" means the sum of the capital
stock (excluding treasury stock and capital stock subscribed for
and unissued) and surplus (including earned surplus, capital
surplus, translation adjustment, and the balance of the current
profit and loss account not transferred to surplus) accounts of
the Borrower and its subsidiaries appearing on a consolidated
balance sheet of the Borrower and its subsidiaries prepared as of
the date of determination in accordance with GAAP.
(h) Insurance. The Borrower and its subsidiaries will
maintain insurance (including product and other liability
insurance) with responsible insurance companies against such
risks and in such amounts as is customarily maintained by
companies engaged in the same or similar businesses and similarly
situated (provided that the Borrower or any subsidiary may self-
insure to the extent that adequate reserves have been established
and maintained and exist with respect thereto in accordance with
GAAP).
(i) Maintenance of Property. The Borrower and its
subsidiaries will maintain all of its property necessary and
useful in its business in good operating condition and repair,
ordinary wear and tear excepted.
3
<PAGE> 5
(j) Environmental Laws. The Borrower and its
subsidiaries will obtain all applicable permits, licenses and
other authorizations which are required under all Environmental
Laws (as defined below) except to the extent failure to have any
such permit, license or authorization would not have a material
adverse effect on the business of Borrower or its financial
condition, operations or prospects. Borrower and its subsidiaries
shall also maintain compliance with the terms and conditions of
all such applicable permits, licenses and authorizations, and
shall also maintain compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in any applicable
Environmental Law or in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued,
entered, promulgated, or approved thereunder, except to the
extent failure to comply would not have a material adverse effect
on its financial condition, operations, business or prospects.
"Environmental Laws" means any federal, state, county, regional
or local law, statute or regulation (including, without
limitation, CERCLA, RCRA and SARA) enacted in connection with or
relating to the protection or regulation of the environment,
including, without limitation, those laws, statutes and
regulations regulating the disposal, removal, production,
storing, refining, handling, transferring, processing or
transporting of any hazardous substances, and any regulations
issued or promulgated in connection with such statutes by any
federal, state or local governmental authority and any orders,
decrees or judgments issued by any court of competent
jurisdiction in connection with any of the foregoing.
As used in this definition:
CERCLA -- means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended from time to
time (by SARA or otherwise), and all rules and regulations
promulgated in connection therewith;
RCRA -- means the Resource Conservation and Recovery Act
of 1976, as amended, and any rules and regulations issued in
connection therewith; and
SARA -- means the Superfund Amendments and Reauthorization
Act of 1986, as amended from time to time, and all rules and
regulations promulgated in connection therewith.
4
<PAGE> 6
(k) Further Assurances. The Borrower and its
subsidiaries will execute and deliver to the Lender, upon
request, such documents and agreements as the Lender may, from
time to time, reasonably request to carry out the terms and
conditions of this Agreement.
5. Negative Covenants - Conduct of Business
The Borrower covenants that, so long as any amounts remain
outstanding under this Agreement and the Note, the Borrower and its
subsidiaries shall not, without the Lender's prior written consent engage,
directly or indirectly, in any line of business other than the business of
purchasing, gathering, transporting, processing and marketing of natural gas
and natural gas liquids.
6. Lender's Call Options
If, at any time, the Lender ceases to own 80% or more of the
outstanding voting securities of the Borrower (a "Control Event"), the Lender
shall have the right and option within 90 days after the occurrence of the
Control Event, but not the obligation, to call the Note for repayment provided,
however, that the Lender shall give the Borrower 90 days prior written notice
of its election to call the Note for repayment (the "Control Call Option"). In
the event that the Lender exercises its Control Call Option, all obligations,
amounts, indebtedness, and interest owing to the Lender by the Borrower shall
be immediately due and payable.
7. Default
7.1 Events of Default. The Lender shall have the right to
terminate this Agreement at any time without notice upon the occurrence of any
one or more of the following events (an "Event of Default") for any reason
whatsoever (whether voluntary or involuntary, or by operation of law or
pursuant to or in compliance with any judgment, decree or order of any court or
any order, rule or regulation of any public authority):
(a) The Borrower fails to pay the principal of or
interest or other amounts due under the Loan and such failure
shall continue for more than ten (10) days after the Lender gives
notice thereof to Borrower;
(b) Default shall occur in the observance or
performance of any of the representations, covenants and
agreements contained in this Agreement, the Note or any other
agreement entered into at any time to which the Borrower or any
subsidiary and the Lender are party and shall continue for more
than thirty (30) days after the Lender gives written notice
thereof to the Borrower; or if any such agreement, instrument or
document shall terminate (other than in accordance with its terms
or the terms hereof or with the written consent of the Lender) or
become void or unenforceable without the written consent of the
Lender;
5
<PAGE> 7
(c) Default shall occur in the payment of any
principal, interest or premium with respect to any indebtedness
for borrowed money of the Borrower or any subsidiary in an
outstanding principal amount in excess of $5,000,000 or under any
agreement or instrument under or pursuant to which any such
indebtedness may have been issued, created, assumed secured, or
guaranteed, and such default shall continue for more than the
period of grace, if any, therein specified, or if any such
indebtedness shall become or be declared due and payable prior to
the stated maturity thereof;
(d) The Borrower or any subsidiary shall: (i) file a
voluntary petition in bankruptcy or file a voluntary petition or
an answer or otherwise commence any action or proceeding seeking
reorganization, arrangement or readjustment of its debts or for
any other relief under the federal bankruptcy code, as amended,
or under any other bankruptcy or insolvency act or law, state or
federal now or hereafter existing, or consent to, approve of, or
acquiesce in, any such petition, action or proceeding; (ii) apply
for or acquiesce in the appointment of a receiver, assignee,
liquidator, sequestrator, custodian, trustee or similar officer
for it or for all or a substantial part of its property; (iii)
make an assignment for the benefit of creditors; or (iv) be
unable generally to pay its debts as they become due;
(e) An involuntary petition shall be filed or an action
or proceeding otherwise commenced seeking reorganization,
arrangement or readjustment of the Borrower's debts or for any
other relief under the federal bankruptcy code, as amended, or
under any other bankruptcy or insolvency act or law, state or
federal, now or hereafter existing and shall not be dismissed
ninety (90) days after such filing, action or proceeding;
(f) A receiver, assignee, liquidator, sequestrator,
custodian, trustee or similar officer for the Borrower or any
subsidiary or for all or a substantial part of its property shall
be appointed involuntarily and shall remain for more than ninety
(90) days; or a warrant of attachment, execution or similar
process shall be issued against any substantial part of the
property of the Borrower or any subsidiary and such remains in
effect for more than ninety (90) days;
(g) The Borrower shall file a certificate of
dissolution under applicable state law or shall be liquidated,
dissolved or wound-up or shall commence or have commenced against
it any action or proceeding for dissolution, winding-up or
liquidation, or shall take any corporate action in furtherance
thereof; or
(h) One or more final judgments for the payment of
money aggregating in excess of $5,000,000 shall be rendered
against the Borrower and the Borrower shall fail to discharge the
same within sixty days from the date of notice of entry
6
<PAGE> 8
thereof or to appeal therefrom or from the order, decree or
process upon which or pursuant to which said judgment was
granted, based or entered and secure a state of execution pending
such appeal.
7.2 Upon the occurrence of any Event of Default, all
obligations and amounts due under this Agreement and Note shall, at the
Lender's election, become immediately due and payable; provided, however, that
upon the occurrence of any Event of Default described in subsections (d), (e),
(f), (g), or (h) of Section 7.1, all obligations and amounts due under this
Agreement and Note shall automatically become immediately due and payable.
8. General
8.1 Waiver. No act, delay or failure of the Lender in
exercising any right, power, privilege or remedy under this Agreement or the
Note shall affect such right, power, privilege or remedy or be deemed to be a
waiver of the same or any part thereof; nor shall any single or partial
exercise thereof or any failure to exercise the same in any instance preclude
any further or future exercise thereof, or the exercise of any other right,
power, privilege or remedy.
8.2 Cumulative Rights and Remedies. All rights and remedies of
the Lender whether or not granted hereunder shall be cumulative and may be
exercised singularly or concurrently. The enumeration of the Lender's rights
and remedies is not intended to be exclusive, and such rights and remedies are
in addition to and not by way of limitation of any other rights or remedies
that the Lender may have under applicable law.
8.3 Right of Set-Off. Whenever an Event of Default exists, the
Lender is hereby authorized at any time and from time to time, to the fullest
extent permitted by law, to set off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by the Lender or any affiliate of the Lender to
or for the credit or the account of the Borrower against any and all of the
amounts owing under this Agreement, whether or not then due and payable. The
Lender shall be deemed to have exercised its right of set off immediately at
the time of its election even though any charge therefor is made or entered on
the Lender's records subsequent to that time. All costs and expenses,
including, without limitation, attorneys' fees, paid or incurred by the Lender
in connection with any such set off shall be paid by the Borrower on demand.
8.4 Fees and Expenses. The Borrower shall reimburse the Lender
on demand for all reasonable costs, fees and expenses incurred by the Lender in
connection with the negotiation, preparation, enforcement, and termination of
this Agreement, any amendment hereof, and any agreements and documents relating
hereto, including, but not limited to, attorneys' fees, costs and expenses
payable in connection with the transactions contemplated by this Agreement and
all out-of-pocket costs, fees and expenses the Lender incurs or becomes
obligated for in connection with: (a) any proceeding relating to this
Agreement; and (b) enforcement of any of the Lender's rights and remedies with
respect to this Agreement.
7
<PAGE> 9
8.5 Notices. Any notice required hereunder shall be in
writing, shall be delivered against receipt, or mailed by registered or
certified mail, return receipt requested, postage prepaid, or sent by
recognized overnight courier service, and addressed to the party to be notified
as follows:
If to the Lender: Aquila Energy Corporation
2533 North 117 Avenue, Suite 200
Omaha, Nebraska 68164-8618
Attention: Chief Financial Officer
with a copy to: UtiliCorp United Inc.
20 West Ninth Street
Kansas City, Missouri 64105
Attention: Chief Financial Officer
If to the Borrower: Aquila Gas Pipeline Corporation
100 N.E. Loop 410, Suite 1000
San Antonio, Texas 78216
Attention: Chief Financial Officer
or to such other address as each party may designate for itself by like notice.
8.6 Governing Law. This Loan Agreement and all rights and
obligations hereunder, including matters of construction, validity and
performance, shall be governed by and construed and interpreted in accordance
with the laws of the state of Missouri.
8.7 Validity. Any provision of this Loan Agreement which shall
be held to be inoperative for any reason shall be ineffective and inapplicable;
but shall not invalidate the remaining provisions hereof or the liens herein
created.
8.8 Successors. This Loan Agreement shall inure to the benefit
of and be binding upon the parties hereto, their respective successors and
assigns; provided, however, that this Loan Agreement may not be assigned by the
Borrower without the prior written consent of the Lender.
8.9 Modification. This agreement is intended by the Borrower
and the Lender to be the final, complete and exclusive expression of the
agreement between the Lender and the Borrower. This Agreement supersedes any
and all prior oral or written agreements relating to the subject matter hereof.
No modification, rescission, waiver, release or amendment of any provision of
this Agreement shall be made, except by a written agreement signed by the
Borrower and a duly authorized officer of the Lender.
8
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed by their duly authorized officers the day and year first above
written.
AQUILA ENERGY CORPORATION
By: /s/ LAWRENCE CLAYTON
---------------------------------
Name: Lawrence Clayton
Title: Sr. Vice President
AQUILA GAS PIPELINE CORPORATION
By: /s/ D. BUTTON
---------------------------------
Name: D. Button
Title: Vice President
9
<PAGE> 11
EXHIBIT "A"
<PAGE> 12
TERM NOTE
U.S. $16,250,000 Dated: April 1, 1997
FOR VALUE RECEIVED, the undersigned, AQUILA GAS PIPELINE CORPORATION
(the "Borrower") hereby promises to pay to the order of AQUILA ENERGY
CORPORATION (the "Lender") (capitalized terms used herein but not otherwise
defined herein shall have the meanings assigned to such terms in the Loan
Agreement referred to below), the principal amount of SIXTEEN MILLION TWO
HUNDRED FIFTY THOUSAND U.S. DOLLARS (US $16,250,000). This Note shall bear
interest on the unpaid principal amount hereof at a rate equal to 6.83 %.
Interest shall be payable semi-annually on April 1 and October 1 of each year,
commencing October 1, 1997. Except as otherwise provided in the Loan Agreement,
the principal amount of the Loan, together with accrued interest thereon, shall
be repaid by the Borrower to the Lender on or before October 15, 2006.
Both principal and interest are payable in lawful money of the United
States of America to the office or financial institution designated by the
Lender from time to time, in immediately available funds.
This Note is the Note referred to in, and is entitled to the benefits of
the Loan Agreement, dated as of April 1, 1997 between the Borrower and the
Lender (the "Loan Agreement"). The Loan Agreement, among other things, provides
(i) for payments and prepayments on account of the principal hereof prior to
the maturity hereof upon certain terms and conditions specified, (ii) for the
right and option on behalf of the Lender to call the Note for repayment upon
certain terms and conditions, and (iii) for acceleration of the maturity based
upon the happening of certain Events of Default.
DEMAND, PRESENTMENT, PROTEST, AND NOTICE OF NON-PAYMENT AND PROTEST ARE
HEREBY WAIVED BY THE BORROWER.
THIS TERM NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MISSOURI.
AQUILA GAS PIPELINE CORPORATION
By: /s/ D. BUTTON
--------------------------------
Name: D. Button
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements for the six month period ended June
30, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,183
<SECURITIES> 0
<RECEIVABLES> 95,901
<ALLOWANCES> 0
<INVENTORY> 5,031
<CURRENT-ASSETS> 117,366
<PP&E> 505,516
<DEPRECIATION> (106,513)
<TOTAL-ASSETS> 647,736
<CURRENT-LIABILITIES> 119,437
<BONDS> 242,625
0
0
<COMMON> 294
<OTHER-SE> 214,359
<TOTAL-LIABILITY-AND-EQUITY> 647,736
<SALES> 481,362
<TOTAL-REVENUES> 481,362
<CGS> 415,722
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,783
<INCOME-PRETAX> 25,016
<INCOME-TAX> 9,287
<INCOME-CONTINUING> 15,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,729
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
