<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 September 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 November 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)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 8,412 $ 17,719
Accounts receivable ........................................................... 126,906 156,667
Inventories and exchanges ..................................................... 4,307 3,630
Materials and supplies ........................................................ 6,272 5,022
----------- -----------
Total current assets .................................................... 145,897 183,038
----------- -----------
INVESTMENT IN AFFILIATE, net ....................................................... 97,022 110,814
----------- -----------
PIPELINE, PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas pipelines ......................................................... 438,445 423,222
Plants and processing equipment ............................................... 76,538 68,115
----------- -----------
514,983 491,337
Less - Accumulated depreciation ............................................... (111,812) (95,463)
----------- -----------
403,171 395,874
----------- -----------
INTANGIBLE ASSETS, net ............................................................. 32,325 37,313
----------- -----------
OTHER, net ......................................................................... 1,548 1,443
----------- -----------
TOTAL ASSETS ....................................................................... $ 679,963 $ 728,482
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .......................................... $ 12,751 $ 12,802
Accounts payable .............................................................. 131,696 152,119
Accrued expenses .............................................................. 9,827 8,712
Accrued interest .............................................................. 3,101 4,393
Income taxes payable to UtiliCorp United Inc. ................................. 3,411 2,833
Intercompany payable due to Aquila Energy Corporation ......................... 5,144 1,038
----------- -----------
Total current liabilities ................................................ 165,930 181,897
----------- -----------
LONG-TERM DEBT ..................................................................... 222,762 277,383
----------- -----------
DEFERRED INCOME TAXES .............................................................. 72,054 68,987
----------- -----------
OTHER LONG-TERM LIABILITIES ........................................................ 178 557
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none
outstanding at September 30, 1997 and December 31, 1996...................... -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 29,400,000
shares issued and outstanding at September 30, 1997 and December 31, 1996 ... 294 294
Additional paid-in capital .................................................... 90,297 90,297
Retained earnings ............................................................. 128,448 109,067
----------- -----------
Total stockholders' equity ............................................... 219,039 199,658
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $ 679,963 $ 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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES ............................ $ 254,544 $ 202,548 $ 735,906 $ 534,587
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales ............................ 226,927 170,663 642,649 437,620
Operating ................................ 5,626 5,932 16,989 17,416
General and administrative ............... 4,091 4,106 12,333 13,889
Depreciation and amortization ............ 6,444 5,990 19,026 17,532
------------ ------------ ------------ ------------
Total costs and expenses ............ 243,088 186,691 690,997 486,457
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ........................ 11,456 15,857 44,909 48,130
INTEREST AND DEBT EXPENSES, net ............... 4,246 3,636 13,029 11,287
EQUITY IN NET INCOME (LOSS) OF AFFILIATE ...... 272 (35) 618 (35)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .................... 7,482 12,186 32,498 36,808
PROVISION IN LIEU OF INCOME TAX EXPENSE ....... 2,729 4,642 12,016 13,974
------------ ------------ ------------ ------------
NET INCOME .................................... $ 4,753 $ 7,544 $ 20,482 $ 22,834
============ ============ ============ ============
EARNINGS PER SHARE ............................ $ .16 $ .26 $ .70 $ .78
============ ============ ============ ============
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 $ .0375 $ .0375
============ ============ ============ ============
</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>
Nine Months Ended
September 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 20,482 $ 22,834
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................ 19,026 17,532
Deferred income taxes .................................................... 3,067 7,592
Dividends from affiliate ................................................. 92 300
Equity in net (income) loss of affiliate ................................. (618) 35
Other non-cash items ..................................................... 156 206
Changes in operating assets and liabilities:
Accounts receivable .............................................. 35,435 (4,340)
Inventories and exchanges ........................................ (749) 598
Materials and supplies ........................................... (1,126) 819
Accounts payable ................................................. (26,349) 4,645
Accrued expenses ................................................. 1,000 4,317
Accrued interest ................................................. (1,292) 343
Income taxes payable to UtiliCorp United Inc. .................... 578 1,580
Intercompany payable due to Aquila Energy Corporation ............ 4,504 5,675
-------- --------
Net cash provided by operating activities ............................... 54,206 62,136
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions ........................................................ -- (48,329)
Additions to pipeline, property, plant and equipment ......................... (23,277) (22,465)
Proceeds from asset dispositions ............................................. 17,076 --
-------- --------
Net cash used in investing activities ............................... (6,201) (70,794)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings under revolving credit agreements, net ................... (57,874) 42,443
Borrowings under loan agreement ................................................ 16,250 --
Principal payments of debt ..................................................... (14,253) (12,759)
Dividends ...................................................................... (1,101) (1,101)
Other .......................................................................... (334) (134)
-------- --------
Net cash (used in) provided by financing activities ................. (57,312) 28,449
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............................. (9,307) 19,791
CASH AND CASH EQUIVALENTS, beginning of period .................................... 17,719 8,666
-------- --------
CASH AND CASH EQUIVALENTS, end of period .......................................... $ 8,412 $ 28,457
======== ========
</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 September 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 material changes in accounting principles have occurred since this
date.
STOCK-BASED COMPENSATION
In 1997, the Company awarded eligible employees stock options. The Company
accounts for the stock options in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation".
Under SFAS No. 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 No. 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 occurs.
5
<PAGE> 6
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
1. BASIS OF PRESENTATION (CONTINUED)
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.
TRADING ACTIVITIES
The Company, from time-to-time, utilizes various exchange-traded and
over-the-counter commodity financial instrument contracts for purposes of
trading activities and evaluation of new hedging techniques. The Company enters
into transactions for purposes of using its fundamental and technical analysis
of market conditions to earn additional gross margin. The principal financial
instruments utilized are futures, options, and basis swaps. Contracts entered
into for trading purposes are accounted for under the mark-to-market method.
Changes in fair value of these contracts are recognized as gains or losses in
revenues currently and are recorded in the consolidated balance sheet as current
assets and current liabilities at fair value at the reporting date. The Company
determines the fair value of its exchanged-traded contracts based on the
settlement prices for open contracts, which are established by the exchange on
which the instruments are traded. The fair value of the Company's
over-the-counter contracts is determined based on market-related indexes or by
obtaining quotes from brokers.
NEW ACCOUNTING STANDARDS
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements. Adoption of SFAS No. 130 is required for fiscal
years beginning after December 15, 1997, although earlier adoption is
encouraged. Based on the Company's current operations, SFAS No. 130 is not
anticipated to have a material effect on the Company's consolidated financial
statements.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
establishes the way that public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. SFAS No. 131 establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company is currently evaluating the impact of SFAS No. 131.
6
<PAGE> 7
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
2. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information for cash paid for interest
and income taxes by the Company:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Interest, net of amount capitalized $14,150 $11,319
Income taxes $ 8,553 $ 4,987
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT AND GUARANTIES
The Company has issued irrevocable standby letters of credit totaling
$13,110 at September 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
September 30, 1997, the borrowing base was $18,000 with no principal
outstanding.
The Company issued financial guarantees of approximately $250 at September
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.
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.
7
<PAGE> 8
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
TAXES
The Internal Revenue Service (IRS) has examined and proposed adjustments to
UtiliCorp United Inc.'s (UtiliCorp), the ultimate 82% owner of the Company,
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 $7,500 for the audit period and through the present plus
potential interest of approximately $2,400. 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.
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 pay down on the Company's revolving debt.
5. 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 of its
revolving credit agreements with Aquila Energy by $40,000. The Company, at
September 30, 1997, has a commitment of $128,000, with outstanding principal of
$106,450, 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
nine months ended September 30, 1997 and 1996. Reference should be made to the
Condensed Consolidated Financial Statements and the Notes thereto. The increase
in the nine months September 30, 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
September 30, to 1997 Change
---------------------- ---------------------------
1997 1996 Amount Percent
--------- --------- --------- -----------
(Dollars in millions, except price data)
<S> <C> <C> <C> <C>
FINANCIAL DATA:
Natural gas revenues $ 234.2 $ 177.8 $ 56.4 32%
Natural gas liquids (NGLs) revenues 20.3 24.8 (4.5) (18)%
--------- --------- ---------
Total operating revenues 254.5 202.6 51.9 26%
--------- --------- ---------
Cost of sales 226.9 170.7 56.2 33%
--------- --------- ---------
Gross margin 27.6 31.9 (4.3) (13)%
--------- --------- ---------
Operating expenses 5.6 5.9 (.3) (5)%
General and administrative expenses 4.1 4.1 -- --
Depreciation and amortization 6.4 6.0 .4 7%
Interest and debt expenses, net 4.2 3.6 .6 17%
Equity in net income of affiliate .3 -- .3 100%
Provision in lieu of income tax expense 2.8 4.8 (2.0) (42)%
--------- --------- ---------
Net income $ 4.8 $ 7.5 $ (2.7) (36)%
========= ========= =========
OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold 346 327 19 6%
Throughput transported 139 138 1 1%
--------- --------- ---------
Total throughput 485 465 20 4%
--------- --------- ---------
Marketed off-system excluding Oasis 605 391 214 55%
Marketed off-system Oasis 173 176 (3) (2)%
--------- --------- ---------
Total marketed off-system 778 567 211 37%
--------- --------- ---------
Total throughput and marketed
off-system 1,263 1,032 231 22%
========= ========= =========
Gross NGLs production (MBbls/d) 38 42 (4) (10)%
Average natural gas price ($/Mcf) $ 2.28 $ 2.17 $ .11 5%
Average NGLs price ($/gallon) $ .32 $ .35 $ (.03) (9)%
<CAPTION>
Nine Months Ended Period 1996
September 30, to 1997 Change
---------------------- ---------------------------
1997 1996 Amount Percent
--------- --------- --------- -----------
(Dollars in millions, except price data)
<S> <C> <C> <C> <C>
FINANCIAL DATA:
Natural gas revenues $ 667.1 $ 468.4 $ 198.7 42%
Natural gas liquids (NGLs) revenues 68.8 66.2 2.6 4%
--------- --------- ---------
Total operating revenues 735.9 534.6 201.3 38%
--------- --------- ---------
Cost of sales 642.6 437.6 205.0 47%
--------- --------- ---------
Gross margin 93.3 97.0 (3.7) (4)%
--------- --------- ---------
Operating expenses 17.0 17.4 (.4) (2)%
General and administrative expenses 12.3 13.9 (1.6) (12)%
Depreciation and amortization 19.0 17.5 1.5 9%
Interest and debt expenses, net 13.0 11.3 1.7 15%
Equity in net income of affiliate .6 -- .6 100%
Provision in lieu of income tax expense 12.1 14.1 (2.0) (14)%
--------- --------- ---------
Net income $ 20.5 $ 22.8 $ (2.3) (10)%
========= ========= =========
OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold 344 359 (15) (4)%
Throughput transported 147 141 6 4%
--------- --------- ---------
Total throughput 491 500 (9) (2)%
--------- --------- ---------
Marketed off-system excluding Oasis 481 372 109 29%
Marketed off-system Oasis 207 59 148 251%
--------- --------- ---------
Total marketed off-system 688 431 257 60%
--------- --------- ---------
Total throughput and marketed
off-system 1,179 931 248 27%
========= ========= =========
Gross NGLs production (MBbls/d) 39 41 (2) (5)%
Average natural gas price ($/Mcf) $ 2.35 $ 2.16 $ .19 9%
Average NGLs price ($/gallon) $ .34 $ .33 $ .01 3%
</TABLE>
9
<PAGE> 10
RESULTS OF OPERATIONS
The Company's results of operations are primarily 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 SEPTEMBER 30, 1997 AND 1996
Total operating revenues increased 26% to $254.5 million in 1997 compared to
$202.6 million in 1996. Natural gas revenues increased 32% to $234.2 million in
1997 compared to $177.8 million in 1996 as the result of a 26% increase in
natural gas throughput sold and marketed to 1,124 million cubic feet per day
(MMcf/d) in 1997 from 894 MMcf/d in 1996 and a 5% increase in the average
natural gas price to $2.28 per Mcf in 1997 from $2.17 per Mcf in 1996.
NGLs revenues decreased 18% to $20.3 million in 1997 compared to $24.8
million in 1996 as the result of a 10% decrease in gross NGLs production to
38,000 barrels per day (Bbls/d) in 1997 compared to 42,000 Bbls/d in 1996 and a
9% decrease in the average NGLs price to $.32 per gallon in 1997 from $.35 per
gallon in 1996.
Cost of sales was $226.9 million, or 89% of operating revenues, in 1997
compared to $170.7 million, or 84% 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 as the result
of an increase in the volume of natural gas sold and marketed and in the 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
$27.6 million, or 11% of operating revenues, in 1997 compared to $31.9 million,
or 16% 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 decrease in the gross margin is due mainly to a decrease in
NGLs revenues and a reduction in heating value and NGLs content in the natural
gas delivered to the Company at the wellhead offset by an increase in the volume
of natural gas sold and marketed.
Operating expenses decreased 5% to $5.6 million in 1997 compared to $5.9
million in 1996 primarily as a result of reduced plant and gathering system
operations maintenance. General and administrative expenses were held constant
at $4.1 million in 1997 and 1996.
Depreciation and amortization increased 7% to $6.4 million in 1997 compared
to $6.0 million in 1996 primarily as the result of fixed asset additions on the
Southeast Texas Pipeline System (SETPS).
Interest and debt expenses increased 17% to $4.2 million in 1997 compared to
$3.6 million in the 1996 period primarily as a result of the increased debt
balances for asset additions offset by the reduction of $.1 million of interest
recorded in 1997 as compared to 1996 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 42% to $2.8 million in
1997 compared to $4.8 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 1992 through 1993
UtiliCorp Federal income tax returns (hereinafter referred to as "agreed-upon
tax issues"). The Company, at September 30, 1997, 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 these 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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Total operating revenues increased 38% to $735.9 million in 1997 compared to
$534.6 million in 1996. Natural gas revenues increased 42% to $667.1 million in
1997 compared to $468.4 million in 1996 partially as the result of the activity
related to the Oasis off-system marketing which contributed natural gas revenues
of $144.4 million with associated marketed natural gas volumes of 207 MMcf/d.
Excluding Oasis off-system marketing activity, natural gas revenues increased
12% to $522.7 million due to a 9% increase in the average natural gas price to
$2.35 per Mcf in 1997 from $2.16 per Mcf in 1996 and an increase in natural gas
throughput sold and marketed to 825 MMcf/d in 1997 from 731 MMcf/d in 1996.
NGLs revenues increased 4% to $68.8 million in 1997 compared to $66.2
million in 1996 as the result of a 3% increase in the average NGLs price to $.34
per gallon from $.33 per gallon offset by a 5% decrease in gross NGLs production
to 39,000 Bbls/d in 1997 compared to 41,000 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 $642.6 million, or 87% of operating revenues, in 1997
compared to $437.6 million, or 82% 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
$93.3 million, or 13% of operating revenues, in 1997 compared to $97.0 million,
or 18% 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 decrease in the gross margin is due to lower gross margins from
the pipeline systems as a result of decreased throughput volumes and higher cost
of gas supply offset by an increase in NGLs revenues.
Operating expenses decreased 2% to $17.0 million in 1997 compared to $17.4
million in 1996 primarily as a result of a reduction in the insurance expense
and maintenance on the plant and gathering 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 12% to $12.3 million in 1997
compared to $13.9 million in 1996 due primarily to decreased compensation and
service agreement 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, the accrual for SARs between 1997 and 1996
decreased $1.0 million. In 1997, the Company's service agreement costs were
lower by $.5 million as compared to 1996.
Depreciation and amortization increased 9% to $19.0 million in 1997 compared
to $17.5 million in 1996 primarily as the result of asset additions on the SETPS
and the amortization of the transportation rights related to Oasis.
Interest and debt expenses increased 15% to $13.0 million in 1997 compared
to $11.3 million in the 1996 period primarily as a result of the Oasis
acquisition offset by the reduction of $1.4 million of interest recorded in 1997
as compared to 1996 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 decreased 14% to $12.1 million in
1997 compared to $14.1 million in 1996 as a result of a decrease in income
before taxes in 1997 compared to 1996.
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 $20.0 million
working capital deficit at September 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 September 30, 1997 is mainly the result of lower commodity
prices at September 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 $23.3 million and $27.5 million
for the nine months ended September 30, 1997 and the year ended December 31,
1996, respectively. Capital expenditures are expected to be approximately $33.6
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 $106.5 million
outstanding on the Revolvers at September 30, 1997. The total amount available
to borrow on the Revolvers was $21.5 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, however; the maturity
date is expected to be automatically renewed to the fourth quarter of 1999.
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
September 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
requires the Company to meet and maintain certain financial covenants and limits
the activities of the Company in other ways. At September 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 September 30, 1997,
$62.5 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
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Adoption of SFAS No. 130 is required for fiscal years beginning after December
15, 1997, although earlier adoption is encouraged. Based on the Company's
current operations, SFAS No. 130 is not anticipated to have a material effect on
the Company's consolidated financial statements.
12
<PAGE> 13
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
establishes the way that public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. SFAS No. 131 establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company is currently evaluating the impact of SFAS No. 131.
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.
None.
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/ Joe Becraft
---------------------------------------
Date: November 14, 1997 By: Joe Becraft
Chief Executive Officer, President
and Director
/s/ Damon C. Button
---------------------------------------
Date: November 14, 1997 By: Damon C. Button
Vice President, Treasurer
and Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,412
<SECURITIES> 0
<RECEIVABLES> 126,906
<ALLOWANCES> 0
<INVENTORY> 4,307
<CURRENT-ASSETS> 145,897
<PP&E> 514,983
<DEPRECIATION> (111,812)
<TOTAL-ASSETS> 679,963
<CURRENT-LIABILITIES> 165,930
<BONDS> 222,762
0
0
<COMMON> 294
<OTHER-SE> 218,745
<TOTAL-LIABILITY-AND-EQUITY> 679,963
<SALES> 735,906
<TOTAL-REVENUES> 735,906
<CGS> 642,649
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 48,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,029
<INCOME-PRETAX> 32,498
<INCOME-TAX> 12,016
<INCOME-CONTINUING> 20,482
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,482
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
</TABLE>
