<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 March 31, 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 (I.R.S. 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.
<TABLE>
<CAPTION>
Class Outstanding on May 1, 1997
----- --------------------------
<S> <C>
Common stock, $.01 par value 29,400,000
</TABLE>
<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
March 31, December 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 7,613 $ 17,719
Accounts receivable ........................................................... 86,238 156,667
Inventories and exchanges ..................................................... 3,716 3,630
Materials and supplies ........................................................ 4,787 5,022
--------- ---------
Total current assets .................................................... 102,354 183,038
--------- ---------
INVESTMENT IN AFFILIATE, net ....................................................... 110,867 110,814
--------- ---------
PIPELINE, PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas pipelines ......................................................... 428,327 423,222
Plants and processing equipment ............................................... 68,703 68,115
--------- ---------
497,030 491,337
Less - Accumulated depreciation ............................................... (100,793) (95,463)
--------- ---------
396,237 395,874
--------- ---------
INTANGIBLE ASSETS, net ............................................................. 36,457 37,313
--------- ---------
OTHER, net ......................................................................... 1,351 1,443
--------- ---------
TOTAL ASSETS ....................................................................... $ 647,266 $ 728,482
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .......................................... $ 12,802 $ 12,802
Accounts payable .............................................................. 79,137 152,119
Accrued expenses .............................................................. 7,900 8,712
Accrued interest .............................................................. 3,533 4,393
Income taxes payable to UtiliCorp United Inc. ................................. 3,744 2,833
Intercompany payable due to Aquila Energy Corporation ......................... 2,316 1,038
--------- ---------
Total current liabilities ................................................ 109,432 181,897
--------- ---------
LONG-TERM DEBT ..................................................................... 258,048 277,383
--------- ---------
DEFERRED INCOME TAXES .............................................................. 71,255 68,987
--------- ---------
OTHER LONG-TERM LIABILITIES ........................................................ 547 557
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none outstanding
at March 31, 1997 and December 31, 1996 ..................................... -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 29,400,000
shares issued and outstanding at March 31, 1997 and December 31, 1996 ....... 294 294
Additional paid-in capital .................................................... 90,297 90,297
Retained earnings ............................................................. 117,393 109,067
--------- ---------
Total stockholders' equity ............................................... 207,984 199,658
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $ 647,266 $ 728,482
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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
March 31,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES ............................ $ 273,198 $ 164,917
----------- -----------
COSTS AND EXPENSES:
Cost of sales ............................ 238,570 130,831
Operating ................................ 5,561 5,855
General and administrative ............... 4,476 5,629
Depreciation and amortization ............ 6,307 5,719
----------- -----------
Total costs and expenses ............ 254,914 148,034
----------- -----------
INCOME FROM OPERATIONS ........................ 18,284 16,883
INTEREST AND DEBT EXPENSES, net ............... 4,513 4,366
EQUITY IN NET INCOME OF AFFILIATE ............. 144 --
----------- -----------
INCOME BEFORE INCOME TAXES .................... 13,915 12,517
PROVISION IN LIEU OF INCOME TAX EXPENSE ....... 5,222 4,744
----------- -----------
NET INCOME .................................... $ 8,693 $ 7,773
=========== ===========
EARNINGS PER SHARE ............................ $ .30 $ .26
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .... 29,400,000 29,400,000
=========== ===========
CASH DIVIDENDS PER SHARE OF COMMON STOCK ...... $ .0125 $ .0125
=========== ===========
</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>
Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 8,693 $ 7,773
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................ 6,307 5,719
Deferred income taxes .................................................... 2,268 2,241
Dividends from affiliate ................................................. 91 --
Equity in net income of affiliate ........................................ (144) --
Other non-cash items ..................................................... 113 72
Changes in operating assets and liabilities:
Accounts receivable .............................................. 70,429 3,775
Inventories and exchanges ........................................ (86) 1,072
Materials and supplies ........................................... 235 326
Accounts payable ................................................. (72,982) (8,583)
Accrued expenses ................................................. (812) 1,525
Accrued interest ................................................. (860) 61
Income taxes payable to UtiliCorp United Inc ..................... 911 2,504
Intercompany payable due to Aquila Energy Corporation ............ 1,278 1,797
-------- --------
Net cash provided by operating activities ............................... 15,441 18,282
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to pipeline, property, plant and equipment ........................... (5,853) (11,950)
Proceeds from asset dispositions ............................................... 27 --
-------- --------
Net cash used in investing activities .................................. (5,826) (11,950)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving credit agreements, net ................... (19,224) 1,000
Principal payments of debt ..................................................... (111) (63)
Dividends ...................................................................... (367) (367)
Other .......................................................................... (19) (11)
-------- --------
Net cash (used in) provided by financing activities .................... (19,721) 559
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................................. (10,106) 6,891
CASH AND CASH EQUIVALENTS, beginning of period ....................................... 17,719 8,666
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................. $ 7,613 $ 15,557
======== ========
</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
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 March 31, 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 more 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share".
SFAS 128 establishes new standards for computing and presenting earnings per
share. Currently, SFAS 128 will not have a material effect on the Company's
consolidated financial statements.
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.
2. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information for cash paid for interest
and income taxes by the Company:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
-------- ---------
<S> <C> <C>
Interest, net of amount capitalized $5,374 $4,425
Income taxes $2,131 $ 106
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT AND GUARANTIES
The Company has issued irrevocable standby letters of credit totaling
$13,187 at March 31, 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.
5
<PAGE> 6
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company issued financial guarantees of approximately $2,500 at March 31,
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.
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. At the present, no final resolution
of the proposed adjustment has been reached with the IRS. 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 $7,061 for
the audit period and through the present plus potential interest of
approximately $1,714. 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.
6
<PAGE> 7
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. SUBSEQUENT EVENT
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, which will be recorded in the second quarter of 1997,
resulted in no gain or loss on disposition to the Company. The proceeds were
utilized to paydown on the Company's revolving debt.
7
<PAGE> 8
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
months ended March 31, 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 the result of the July 1, 1996 acquisition of Oasis Pipe Line
Company (Oasis).
<TABLE>
<CAPTION>
Three Months Ended Period 1996
March 31, to 1997 Change
------------------------------- ----------------------------------
1997 1996 Amount Percent
------------- ------------- ------------- ---------------
(Dollars in millions, except price data)
<S> <C> <C> <C> <C>
FINANCIAL DATA:
Natural gas revenues $ 244.2 $ 143.2 $ 101.0 71%
Natural gas liquids (NGLs) revenues 29.0 21.7 7.3 34%
--------- --------- --------
Total operating revenues 273.2 164.9 108.3 66%
--------- --------- --------
Cost of sales 238.6 130.8 107.8 82%
--------- --------- --------
Gross margin 34.6 34.1 .5 1%
--------- --------- --------
Operating expenses 5.6 5.8 (.2) (3)%
General and administrative expenses 4.5 5.6 (1.1) (20)%
Depreciation and amortization 6.3 5.7 .6 11%
Interest and debt expenses, net 4.5 4.4 .1 2%
Equity in net income of affiliate .1 -- .1 100%
Provision in lieu of income tax expense 5.1 4.8 .3 6%
--------- --------- --------
Net income $ 8.7 $ 7.8 $ .9 12%
========= ========= ========
OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold 311 368 (57) (15)%
Throughput transported 145 137 8 6%
--------- --------- --------
Total throughput 456 505 (49) (10)%
--------- --------- --------
Marketed off-system excluding Oasis 409 359 50 14%
Marketed off-system Oasis 240 - 240 100%
--------- --------- --------
Total marketed off-system 649 359 290 81%
--------- --------- --------
Total throughput and marketed
off-system 1,105 864 241 28%
======== ========= ========
Gross NGLs production (MBbls/d) 41 40 1 3%
Average natural gas price ($/Mcf) $ 2.77 $ 2.15 $ .62 29%
Average NGLs price ($/gallon) $ .39 $ .31 $ .08 26%
</TABLE>
8
<PAGE> 9
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 MARCH 31, 1997 AND 1996
Total operating revenues increased 66% to $273.2 million in 1997 compared to
$164.9 million in 1996. Natural gas revenues increased 71% to $244.2 million
in 1997 compared to $143.2 million in 1996 partially as the result of the
activity related to the Oasis off-system marketing which contributed natural
gas revenues of $66.8 million with associated marketed natural gas volumes of
240 MMcf/d. Excluding Oasis off-system marketing activity, natural gas
revenues increased 24% to $177.4 million primarily due to a 29% increase in the
average natural gas price to $2.77 per Mcf in 1997 from $2.15 per Mcf in 1996.
Natural gas throughput decreased 10% to 456 MMcf/d in 1997 from 505 MMcf/d in
1996 due to a reduction in well connect activity and normal production declines
on the Southeast Texas Pipeline System (SETPS), the Company's principal
gathering system.
NGLs revenues increased 34% to $29.0 million in 1997 compared to $21.7
million in 1996 as the result of a 3% increase in gross NGLs production to
41,000 barrels per day (Bbls/d) in 1997 compared to 40,000 Bbls/d in 1996 and a
26% increase in the average NGLs price to $.39 per gallon from $.31 per gallon.
In 1997, the Company has recognized a gain of approximately $1.9 million
associated with its hedging activities of NGLs.
Cost of sales was $238.6 million, or 87% of operating revenues, in 1997
compared to $130.8 million, or 79% of operating revenues, in 1996. The
increase in the percentage is primarily due to 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 $34.6 million, or 13% of operating revenues, in 1997 compared to $34.1
million, or 21% 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 3% to $5.6 million in 1997 compared to $5.8
million in 1996 primarily as a result of a reduction in the insurance expense
on the pipeline systems.
General and administrative expenses decreased 20% to $4.5 million in 1997
compared to $5.6 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 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 $.6 million. In 1997, the Company's
service agreement costs were lower by $.3 million as compared to 1996.
Depreciation and amortization increased 11% to $6.3 million in 1997 compared
to $5.7 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 2% to $4.5 million in 1997 compared to
$4.4 million in the 1996 period primarily as a result of the Oasis acquisition
offset by the 1996 recording of $1.1 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).
9
<PAGE> 10
Provision in lieu of income tax expense increased 6% to $5.1 million in 1997
compared to $4.8 million in 1996 due to an increase 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 $3.2 million, under the
provisions of the tax sharing agreement, once UtiliCorp assesses the Company
for the agreed-upon tax issues. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates significant cash from operations and expects such cash
and borrowings to be its primary source of liquidity. The $7.1 million working
capital deficit at March 31, 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 March 31, 1997 is mainly the result of lower commodity prices at March 31,
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 $5.9 million and $27.5 million for the three months
ended March 31, 1997 and the year ended December 31, 1996, respectively.
Capital expenditures are expected to be approximately $29.0 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, of $168.0 million with Aquila Energy to provide funds for general
corporate purposes. There was $145.1 million outstanding on the Revolvers at
March 31, 1997. The total amount available to borrow on the Revolvers was $22.9
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
March 31, 1997, $50.0 million was outstanding under the Loan 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 March 31, 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 February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share".
SFAS 128 establishes new standards for computing and presenting earnings per
share. Currently, SFAS 128 will not have a material effect on the Company's
consolidated financial statements.
10
<PAGE> 11
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.
11
<PAGE> 12
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.
On January 3, 1997, the Company filed a Current Report on Form 8-K/A
reporting under Item 7 for the acquisitions, dated July 1, 1996 and November 1,
1996, of the capital stock of Oasis Pipe Line Company (Oasis) and the related
transportation rights by the Company from Dow Hydrocarbons and Resources, Inc.
Included under Item 7 are the required historical financial statements of Oasis
and the required pro forma financial information of the Company.
12
<PAGE> 13
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/ Craig F. Strehl
------------------------------------------
Date: May 14, 1997 By: Craig F. Strehl
Chief Executive Officer, President
and Chief Operating Officer
/s/ Damon C. Button
------------------------------------------
Date: May 14, 1997 By: Damon C. Button
Vice President, Treasurer
and Chief Financial Officer
13
<PAGE> 14
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
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 THREE MONTH PERIOD ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 7,613
<SECURITIES> 0
<RECEIVABLES> 86,238
<ALLOWANCES> 0
<INVENTORY> 3,716
<CURRENT-ASSETS> 102,354
<PP&E> 497,030
<DEPRECIATION> (100,793)
<TOTAL-ASSETS> 647,266
<CURRENT-LIABILITIES> 109,432
<BONDS> 258,048
0
0
<COMMON> 294
<OTHER-SE> 207,690
<TOTAL-LIABILITY-AND-EQUITY> 647,266
<SALES> 273,198
<TOTAL-REVENUES> 273,198
<CGS> 238,570
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,513
<INCOME-PRETAX> 13,915
<INCOME-TAX> 5,222
<INCOME-CONTINUING> 8,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,693
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
