<PAGE> 1
UNITED STATES
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-12426
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 4, 1998
----- --------------------------
<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
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 9,316 $ 5,276
Accounts receivable ................................................................. 105,174 102,420
Inventories and exchanges ........................................................... 1,002 1,637
Materials and supplies .............................................................. 5,934 6,026
--------- ---------
Total current assets .......................................................... 121,426 115,359
--------- ---------
INVESTMENT IN AFFILIATE, net ............................................................. 96,389 96,257
--------- ---------
PIPELINE, PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas pipelines ............................................................... 445,610 442,995
Plants and processing equipment ..................................................... 76,689 76,375
--------- ---------
522,299 519,370
Less - Accumulated depreciation ..................................................... (122,463) (117,179)
--------- ---------
399,836 402,191
INTANGIBLE ASSETS, net ................................................................... 30,141 30,926
--------- ---------
OTHER, net ............................................................................... 1,673 1,600
--------- ---------
TOTAL ASSETS ............................................................................. $ 649,465 $ 646,333
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................................................ $ 12,500 $ 12,500
Accounts payable .................................................................... 103,059 91,425
Accrued expenses .................................................................... 6,941 6,002
Accrued interest .................................................................... 2,580 3,971
Income taxes payable to UtiliCorp United Inc. ....................................... 1,102 2,189
Intercompany payable due to Aquila Energy Corporation ............................... 8,361 7,022
--------- ---------
Total current liabilities ...................................................... 134,543 123,109
--------- ---------
LONG-TERM DEBT ........................................................................... 213,150 223,950
--------- ---------
DEFERRED INCOME TAXES .................................................................... 76,283 75,774
--------- ---------
OTHER LONG-TERM LIABILITIES .............................................................. 182 145
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none outstanding
at March 31, 1998 and December 31, 1997 ............................................ -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 29,400,000 shares
issued and outstanding at March 31, 1998 and December 31, 1997 ...................... 294 294
Additional paid-in capital .......................................................... 90,297 90,297
Retained earnings ................................................................... 134,716 132,764
--------- ---------
Total stockholders' equity ..................................................... 225,307 223,355
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................ $ 649,465 $ 646,333
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
OPERATING REVENUES ............................... $ 237,205 $ 273,198
----------------- -----------------
COSTS AND EXPENSES:
Cost of sales ............................... 214,311 238,570
Operating ................................... 5,377 5,561
General and administrative .................. 4,733 4,476
Depreciation and amortization ............... 6,507 6,307
----------------- -----------------
Total costs and expenses ............... 230,928 254,914
----------------- -----------------
INCOME FROM OPERATIONS ........................... 6,277 18,284
INTEREST AND DEBT EXPENSES, net .................. 2,901 4,513
EQUITY IN NET INCOME OF AFFILIATE ................ 132 144
----------------- -----------------
INCOME BEFORE INCOME TAXES ....................... 3,508 13,915
PROVISION IN LIEU OF INCOME TAX EXPENSE .......... 1,189 5,222
----------------- -----------------
NET INCOME ....................................... $ 2,319 $ 8,693
================= =================
BASIC AND DILUTED EARNINGS PER SHARE ............. $ .08 $ .30
================= =================
BASIC SHARES OUTSTANDING ......................... 29,400,000 29,400,000
================= =================
DILUTED SHARES OUTSTANDING ....................... 29,403,294 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)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................................. $ 2,319 $ 8,693
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 6,507 6,307
Deferred income taxes ............................................................ 509 2,268
Dividends from affiliate ......................................................... -- 91
Equity in net income of affiliate ................................................ (132) (144)
Other non-cash items ............................................................. (131) 113
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (2,754) 70,429
Inventories and exchanges ................................................ 635 (86)
Materials and supplies ................................................... 92 235
Accounts payable ......................................................... 11,634 (72,982)
Accrued expenses ......................................................... 939 (812)
Accrued interest ......................................................... (1,391) (860)
Income taxes payable to UtiliCorp United Inc. ............................ (1,087) 911
Intercompany payable due to Aquila Energy Corporation .................... 1,339 1,278
-------- --------
Net cash provided by operating activities ....................................... 18,479 15,441
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to pipeline, property, plant and equipment .................................... (5,013) (5,853)
Proceeds from asset dispositions ........................................................ 1,708 27
-------- --------
Net cash used in investing activities ........................................... (3,305) (5,826)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under revolving credit agreements, net ......................................... (10,800) (19,224)
Principal payments of debt .............................................................. -- (111)
Dividends paid .......................................................................... (367) (367)
Other ................................................................................... 33 (19)
-------- --------
Net cash used in financing activities ........................................... (11,134) (19,721)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... 4,040 (10,106)
CASH AND CASH EQUIVALENTS, beginning of period ............................................ 5,276 17,719
-------- --------
CASH AND CASH EQUIVALENTS, end of period ................................................ $ 9,316 $ 7,613
======== ========
</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)
(IN THOUSANDS)
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, 1998 and 1997, 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 Standard No. 128 (SFAS 128), "Earnings per
Share." SFAS 128 establishes new standards for computing and presenting earnings
per share (EPS). At December 31, 1997, the Company adopted SFAS 128. The
following is a reconciliation of income available to common stockholders and the
weighted average number of common shares outstanding for each respective period.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1998 1997
----------------- ------------------
<S> <C> <C>
Income available to common stockholders ...... $ 2,319 $ 8,693
Weighted average shares outstanding:
Basic shares outstanding .................. 29,400,000 29,400,000
Effect of dilutive securities:
Options ................................... 3,294 --
----------- -----------
Diluted shares outstanding ............. 29,403,294 29,400,000
=========== ===========
Basic and diluted earnings per share ......... $ .08 $ .30
=========== ===========
</TABLE>
Certain options to purchase 29,000 shares of common stock at $14.00 per
share were outstanding for the periods presented but were not included in the
computation of EPS because the options' exercise price was greater than the
average market price of the common shares.
5
<PAGE> 6
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. BASIS OF PRESENTATION: (CONTINUED)
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, 1997. No changes in accounting principles have occurred since that 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,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Interest, net of amount capitalized ............................. $ 4,414 $ 5,374
Income taxes .................................................... $ 1,784 $ 2,131
</TABLE>
3. COMMITMENTS AND CONTINGENCIES:
LETTERS OF CREDIT AND GUARANTIES
The Company has issued irrevocable standby letters of credit totaling
$9,336 at March 31, 1998. 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 Company has issued various financial guarantees related to business
activities. Management does not believe it is probable that the financial
guarantees will be exercised.
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 years of 1990 through 1992. The IRS has also proposed an
adjustment on the same issue for 1993, which the Company plans to contest by
filing a similar petition. The Company intends to vigorously contest the
proposed adjustment and believes it is reasonably possible they 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
$9,668 for the audit period and through the present plus potential interest of
approximately $3,141. 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 including those 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)
(IN THOUSANDS)
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.
7
<PAGE> 8
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RECENT OPERATIONS DEVELOPMENTS
In March 1998, the Company announced that it had retained the services of
Merrill Lynch & Co. to explore strategic alternatives. The action includes
consideration of selling or merging the Company. The process is ongoing and
considerable interest has been shown in the Company. It is expected that a
transaction will be completed shortly after mid-year.
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, 1998 and 1997. Reference should be made to the
Condensed Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
Three Months Ended Period 1997
March 31, to 1998 Change
------------------------- -------------------------------
1998 1997 Amount Percent
---------- ---------- ---------- -------------
(Dollars in millions, except price data)
<S> <C> <C> <C> <C>
FINANCIAL DATA:
Natural gas revenues $ 223.7 $ 244.2 $ (20.5) (8)%
Natural gas liquids (NGLs) revenues 13.5 29.0 (15.5) (53)%
---------- ---------- ----------
Total operating revenues 237.2 273.2 (36.0) (13)%
---------- ---------- ----------
Cost of sales 214.3 238.6 (24.3) (10)%
---------- ---------- ----------
Gross margin 22.9 34.6 (11.7) (34)%
---------- ---------- ----------
Operating expenses 5.4 5.6 (.2) (4)%
General and administrative expenses 4.7 4.5 .2 4 %
Depreciation and amortization 6.5 6.3 .2 3 %
Interest and debt expenses, net 2.9 4.5 (1.6) (36)%
Equity in net income of affiliate .1 .1 -- --
Provision in lieu of income tax expense 1.2 5.1 (3.9) (76)%
---------- ---------- ----------
Net income $ 2.3 $ 8.7 $ (6.4) (74)%
========== ========== ==========
OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold 300 311 (11) (4)%
Throughput transported 128 145 (17) (12)%
---------- ---------- ----------
Total throughput 428 456 (28) (6)%
---------- ---------- ----------
Marketed off-system 882 649 233 36 %
---------- ---------- ----------
Total throughput and marketed
off-system 1,310 1,105 205 19 %
========== ========== ==========
Gross NGLs production (Bbls/d) 28,000 41,000 (13,000) (32)%
Average natural gas price ($/Mcf) $ 2.07 $ 2.77 $ (.70) (25)%
Average NGLs price ($/gallon) $ .27 $ .39 $ (.12) (31)%
</TABLE>
8
<PAGE> 9
RESULTS OF OPERATIONS
The Company's results of operations are determined primarily by the volume
of gas purchased, processed and resold in its gas gathering systems and natural
gas 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. 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 price of NGLs has declined precipitously in the first quarter of 1998 along
with other hydrocarbon liquid prices. The Company has not entered into hedging
transactions to mitigate the effect of lower NGLs price on its results of
operations. Most of the Company's operating costs do not vary directly with
volumes on existing systems; thus, increases or decreases in volumes on existing
systems generally have a direct effect on net income.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Total operating revenues decreased 13% to $237.2 million in 1998 compared
to $273.2 million in 1997. Natural gas revenues decreased 8% to $223.7 million
in 1998 compared to $244.2 million in 1997 as the result of a 25% decrease in
the average natural gas price to $2.07 per Mcf in 1998 from $2.77 per Mcf in
1997 partially offset by an increase of 23% in natural gas throughput sold and
marketed of 1,182 million cubic feet per day (MMcf/d) in 1998 compared to 960
MMcf/d in 1997.
NGLs revenues decreased 53% to $13.5 million in 1998 compared to $29.0
million in 1997 as the result of a 32% decrease in gross NGLs production to
28,000 barrels per day (Bbls/d) in 1998 compared to 41,000 Bbls/d in 1997 due to
a reduction of 13% in NGLs content in the natural gas delivered to the Company
at the wellhead and bypassing significant volumes of lower liquid content gas.
Average NGLs price decreased 31% to $.27 per gallon from $.39 per gallon. In
1998, the Company has recognized a gain of less than $.1 million compared to
$1.9 million in 1997 associated with its hedging activities of NGLs.
Cost of sales was $214.3 million, or 90% of operating revenues, in 1998
compared to $238.6 million, or 87% of operating revenues, in 1997. 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
decreased primarily as the result of a decrease in the average natural gas price
partially offset by an increase in natural gas throughput sold and marketed
volumes noted above.
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 $22.9 million, or 10% of operating revenues, in 1998 compared to $34.6
million, or 13% of operating revenues, in 1997. The decrease in percentage is
primarily due to the increase in overall off-system marketing activities which
have lower gross margin percentages. The decrease in the gross margin is due to
decreased throughput volumes, a decrease in off-system gross margin and a
decrease in the average NGLs price.
Operating expenses decreased 4% to $5.4 million in 1998 compared to $5.6
million in 1997 as a result of the sale of the Company's ownership interest in
Warwink Joint Venture in December 1997 and a reduction in maintenance expenses
on the plant and gathering systems offset by an increase in the ownership
percentage of the Company's interest in a joint venture.
General and administrative expenses increased 4% to $4.7 million in 1998
compared to $4.5 million in 1997 due primarily to stock appreciation rights
(SARs). The Company accrues compensation related to the SARs based on the price
of the Company's common stock. Based on the Company's stock price in 1998, the
Company increased its accrual for SARs while in 1997 the Company decreased its
accrual for SARs, which resulted in an increase between periods of $.9 million.
The accrual for SARs was partially offset by a decrease in other management
incentive compensation.
Depreciation and amortization increased 3% to $6.5 million in 1998
compared to $6.3 million in 1997 primarily as the result of fixed asset
additions on the Southeast Texas Pipeline System in recent periods.
Interest and debt expenses decreased 36% to $2.9 million in 1998 compared
to $4.5 million in 1997 primarily as a result of decreased debt balances and
lower interest rates, especially on the Company's revolving credit agreements.
The provision in lieu of income tax expense percentage declined in 1998
from 37.9% to 35.0% as a result of lower state income tax accrued.
9
<PAGE> 10
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 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 $5.0 million and $28.5 million
for the three months ended March 31, 1998 and the year ended December 31, 1997,
respectively. Capital expenditures are expected to be approximately $26.0
million in 1998, excluding business acquisitions.
In March 1998, the Company received $1.5 million for the sale of its
ownership interest in the assets of the Brooks-Hidalgo Joint Venture. A gain of
$.1 million was recognized on this sale. The proceeds were utilized to pay down
the Company's revolving debt.
The Company maintains revolving credit agreements (the Revolvers), as
amended, of $118.0 million after voluntarily reducing its commitment by $10.0
million in February 1998, with Aquila Energy Corporation (Aquila Energy) to
provide funds for general corporate purposes. The available borrowings on the
Revolvers at March 31, 1998 is $21.1 million. There was $96.9 million
outstanding on the Revolvers at March 31, 1998. 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's notice not to renew from the commitment period. Currently, the maturity
dates of the Revolvers are in the fourth quarter of 1999.
The Company has two general corporate purpose loan agreements with Aquila
Energy in the amounts of $50.0 million maturing in 2005 and $16.3 million
maturing in 2006. At March 31, 1998, $50.0 million and $16.3 million were
outstanding on the loan agreements. Each loan agreement requires the Company to
maintain certain financial covenants and limits the activities of the Company in
other ways. At March 31, 1998, the Company was in compliance with the covenants.
The 8.29% Senior Notes issued in 1992 by Aquila Southwest Energy
Corporation (Aquila Southwest), a subsidiary of the Company, 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, 1998, $62.5
million was outstanding on the Senior Notes and the Company was in compliance
with such covenants.
Upon a change in ownership of the Company, the Revolvers and loan
agreements with Aquila Energy provide for the termination of such facilities and
the Senior Notes include provisions, whereby, the Senior Note holders can elect
prepayment. The Company believes that these facilities could be replaced with
approximately the same terms should a change in ownership of the Company occur.
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.
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.
10
<PAGE> 11
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.
f) The Company's intentions with regard to strategic alternatives discussed
herein involves uncertainties including, but not limited to, negotiations,
regulatory approvals, pricing and other economic factors.
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.
None.
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/ F. Joseph Becraft
-----------------------------------------
Date: May 4, 1998 By: F. Joseph Becraft
Chief Executive Officer, President
and Director
/s/ Damon C. Button
-----------------------------------------
Date: May 4, 1998 By: Damon C. Button
Vice President, Treasurer
and Chief Financial Officer
13
<PAGE> 14
EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,316
<SECURITIES> 0
<RECEIVABLES> 105,174
<ALLOWANCES> 0
<INVENTORY> 1,002
<CURRENT-ASSETS> 121,426
<PP&E> 522,299
<DEPRECIATION> (122,463)
<TOTAL-ASSETS> 649,465
<CURRENT-LIABILITIES> 134,543
<BONDS> 213,150
0
0
<COMMON> 294
<OTHER-SE> 225,013
<TOTAL-LIABILITY-AND-EQUITY> 649,465
<SALES> 237,205
<TOTAL-REVENUES> 237,205
<CGS> 214,311
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,901
<INCOME-PRETAX> 3,508
<INCOME-TAX> 1,189
<INCOME-CONTINUING> 2,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,319
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
