AQUILA GAS PIPELINE CORP, 10-K405, 1998-03-26

AQUILA GAS PIPELINE CORP
10-K405, 1998-03-26
NATURAL GAS TRANSMISSION

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

FOR THE FISCAL YEAR ENDED DECEMBER 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)

<TABLE>
<S> <C>
DELAWARE 47-0731171
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N.E. LOOP 410
SUITE 1000
SAN ANTONIO, TEXAS 78216-4754
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code (210) 342-0685

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, par value $.01 per share New York Stock Exchange
</TABLE>

Securities registered pursuant to Section 12(g) of the Act: None

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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].

The aggregate market value of the voting stock held by nonaffiliates of the
registrant is $64,667,568 based on the March 3, 1998 New York Stock Exchange
closing price of $12.

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the close of the latest practicable date.

<TABLE>
<CAPTION>
CLASS OUTSTANDING ON MARCH 3, 1998
----- ----------------------------
<S> <C>
Common Stock, par value $.01 per share 29,400,000
</TABLE>

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement, to be filed with
the Commission within 120 days of December 31, 1997, for its Annual Meeting of
Stockholders to be held on May 12, 1998, are incorporated by reference in Part
III of this Annual Report.

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<PAGE> 2

AQUILA GAS PIPELINE CORPORATION

1997 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Description Page
PART I ----------- ----

<S> <C> <C>
Item 1. Business......................................................................... 1
General Development of Business............................................... 1
Narrative Description of Business............................................. 2
Gathering and Processing.................................................... 2
Sales and Marketing......................................................... 3
Competition................................................................. 5
Governmental Regulation..................................................... 5
Environmental............................................................... 6
Insurance and Operational Risks............................................. 6
Employees................................................................... 6

Item 2. Properties....................................................................... 7
Item 3. Legal Proceedings................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.............................. 8

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................................... 9
Item 6. Selected Financial Data.......................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 11
Item 8. Financial Statements and Supplementary Data...................................... 16
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure........................................... 16

PART III

Item 10. Directors and Executive Officers of the Registrant............................... 17
Item 11. Executive Compensation........................................................... 18
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................................... 18
Item 13. Certain Relationships and Related Transactions................................... 18

PART IV

Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K....................................................... 19

</TABLE>

<PAGE> 3

PART I

ITEM 1. BUSINESS

Aquila Gas Pipeline Corporation (the Company) is engaged in the business
of purchasing, gathering, processing, transporting and marketing natural gas
and natural gas liquids (NGLs). The Company, through its direct and indirect
subsidiaries, owns and/or operates an interest in twelve natural gas gathering
systems and four natural gas processing plants in Texas and Oklahoma. In
addition, the Company currently owns a 35% interest in Oasis Pipe Line Company
(Oasis) which owns an intrastate pipeline system that connects the Waha, Texas
hub to major marketing pipelines at the Katy, Texas hub. The Company provides
essential services to natural gas producers by connecting producers' wells to
the Company's gathering systems, compressing and treating the natural gas,
gathering the natural gas for delivery to its processing plants, processing the
gas to remove NGLs and providing access for the natural gas and NGLs to various
markets. The Company ranks as one of the leading independent producers of NGLs
in the United States. In addition, the Company purchases, markets and arranges
for delivery of natural gas outside of its pipeline systems.

Substantially all of the Company's revenues are attributable to sales of
natural gas and NGLs. These sales occur on the Company's facilities as well as
on third party gathering and transport lines (off-system). The Company performs
three functions that add value to the natural gas stream received at the
wellhead and enable the Company to realize a profit upon such sales. First, the
Company provides gathering, compression and treatment services prior to
delivery of the natural gas to processing facilities or transport pipelines.
Second, the Company processes natural gas at its processing facilities, thereby
separating the stream into NGLs and residue gas which can generally be sold
separately for a greater combined price than the price of natural gas from the
wellhead. Third, the Company purchases natural gas from producers in the field
and other gas marketing companies and sells natural gas and NGLs to large
volume customers, of which off-system sales represents 61% of the Company's
operating revenues in 1997. The Company also transports third party natural gas
for a fee, which presently represents less than 1% of operating revenues.

The Company's principal assets are located in major gas producing areas in
southeast Texas and western Oklahoma. The Company's Southeast Texas Pipeline
System (the SETPS) is located in the Austin Chalk trend in southeast Texas and
consists of approximately 2,285 miles of pipe with total gross gas throughput
capacity of approximately 710 million cubic feet per day (MMcf/d). The
Company's western Oklahoma pipeline systems, located in the Anadarko Basin,
consist of approximately 482 miles of pipe with total gross gas throughput
capacity of approximately 155 MMcf/d. The Company has several other gathering
systems located in East, West and South Texas totaling approximately 667 miles
of pipe with total gas throughput capacity of approximately 418 MMcf/d.

The Company's LaGrange, Texas natural gas processing plant, which is
connected to the SETPS, is one of the largest NGLs producing facilities in the
United States with a gas throughput capacity of approximately 230 MMcf/d. The
Company also has an interest in three additional natural gas processing plants
with gas throughput capacity aggregating 268 MMcf/d.

The Company's principal executive offices are located at One International
Centre, 100 N.E. Loop 410, Suite 1000, San Antonio, Texas, 78216.

GENERAL DEVELOPMENT OF BUSINESS

The Company, a Delaware corporation, is a majority-owned subsidiary of
Aquila Energy Corporation (Aquila Energy), which is principally a natural gas
marketing company. Aquila Energy was formed in 1985 by UtiliCorp United Inc.
(UtiliCorp), a New York Stock Exchange energy and services company, to take
advantage of natural gas marketing and transportation opportunities created by
the deregulation of the natural gas industry. The Company was founded in 1989
under the name of Aquila Gas Systems to acquire natural gas gathering and
processing assets which would support the natural gas production and marketing
activities of Aquila Energy. In 1993, the Company sold 5.4 million shares of
common stock to the public in an initial public offering.
Aquila Energy currently owns approximately 82% of the common stock outstanding.

Since its formation, the Company's primary objective has been to achieve
growth in cash flow and earnings by increasing the volume of gas that it
gathers, processes, transports and markets through internal project development
and acquisitions.

1
<PAGE> 4

OASIS PIPE LINE COMPANY

In July and November 1996, the Company acquired 15% and 25%, respectively,
of the outstanding capital stock of Oasis and related transportation rights
from Dow Hydrocarbons and Resources Inc. (DHRI) for a cost of $133.6 million
including liabilities assumed. The Company can deliver and receive natural gas
at various points along the Oasis Pipeline. The Oasis Pipeline system consists
of an approximately 600-mile pipeline system and related mainline compression
which connects the Waha, Texas hub located in the Permian Basin producing area
of West Texas to major marketing pipelines at the Katy, Texas hub near Houston,
Texas. Oasis has a nominal one (1) billion cubic feet per day (Bcf/d) of
throughput capacity to move gas between West Texas and the Katy, Texas hub. The
Oasis Pipeline is in proximity to many of the Company's existing gathering
systems.

On April 1, 1997, the Company received $16.8 million from El Paso Natural
Gas Company (El Paso) for its exercise of an option to acquire 5% of all the
capital stock of Oasis and the related transportation rights. The Company,
after the exercise of the option, owns 35% of the capital stock of Oasis and
has 280 MMcf/d of firm intrastate transportation capacity. The acquired
transportation rights are utilized by the Company to conduct additional natural
gas marketing activities not otherwise available to the Company.

NARRATIVE DESCRIPTION OF BUSINESS

The Company's primary source of revenues has historically been sales of
natural gas. Set out below are the types of sales for the last three years
(dollars in thousands):

Year Ended December 31,
---------------------------------------------------------------------------
1997 % 1996 % 1995 %
---------- ---------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C> <C>
Natural Gas $ 926,403 91 $ 706,023 88 $ 420,715 87
NGLs 87,516 9 93,255 12 65,113 13
---------- ---------- ---------- ---------- ---------- ----------

$1,013,919 100 $ 799,278 100 $ 485,828 100
========== ========== ========== ========== ========== ==========

</TABLE>

GATHERING AND PROCESSING

The Company's gas gathering and processing activities include locating and
contracting to purchase natural gas supplies, operating and maintaining a
system of gathering pipelines that connect these gas supplies to transport
lines and natural gas processing plants, and operating and maintaining
processing plants linked to its gathering systems.

PURCHASING

The natural gas supplied to the Company's gathering systems is generally
purchased under individually negotiated long-term contracts. The Company
purchases substantially all of its gas supplies pursuant to contracts that
require producers to commit or dedicate all gas produced from designated
properties. The contracts vary, however, based upon pricing provisions and
whether the contract includes gas processing provisions.

Generally, the contract price may be a specified percentage of the
Company's resale price or other reference price (percentage-of-proceeds
contract) or may be a fixed price per million British thermal units (MMBtu)
that does not vary with the resale price obtained by the Company (fixed price
contract). Most new contracts are percentage-of-proceeds contracts. Under
percentage-of-proceeds contracts, the producer shares the risk of price
fluctuations. Contracts under which the Company purchases a majority of its gas
include provisions that permit the Company to reduce the purchase price paid
for gas based on market conditions.

The Company's gas purchase contracts may be further classified as either
processing contracts or wellhead purchase contracts. Generally, the Company
seeks contracts which have processing provisions in those areas where the
Company operates gas processing plants. Under processing contracts, the Company
agrees to gather and process raw gas from the wells on behalf of the producers
and to allocate the NGLs recovered and the residue gas to each well connected
to its gathering system. The Company retains a percentage of the value of the
NGLs and residue gas extracted and delivered to customers. The producer bears
most of the cost of NGLs extracted in return for a share of NGLs revenue. The
Company also pays either a fixed price or the applicable percentage-of-proceeds
upon sale of residue gas, depending on the form of the contract.

2
<PAGE> 5

Under a wellhead purchase contract the Company pays for gas measured at
the wellhead generally at market related prices. The Company then gathers and
delivers the gas to transmission lines for resale at a higher price or
processes the gas for its own account at its processing facilities and derives
a gross margin equal to the difference between sales proceeds of both the NGLs
and the residue gas and the cost of the natural gas purchased at the wellhead.

In addition to revenue from the sale of NGLs and natural gas, the Company
customarily receives additional fees for compression and treatment services if
a producer's gas does not meet contract specifications.

Certain of the Company's purchase contracts have take-or-pay or minimum
take provisions. Historically, such contracts have not had any material adverse
effect on the Company because the Company has requested and taken all required
natural gas and the contract price has not prevented such natural gas from
being marketed. As a result, the Company believes that its contracts with
take-or-pay or minimum take provisions will not have a material adverse effect
on the Company.

SUPPLY

The performance of the Company depends upon its ability to contract for
additional gas supply. The SETPS has, generally, experienced increased gas
throughput since mid-1990 primarily as the result of the application of
horizontal drilling technology in the Giddings Field of the Austin Chalk trend.
The Company believes this new technology has significantly increased the
economically recoverable reserves within the Austin Chalk trend and the number
of possible drilling locations that could provide natural gas supplies to the
Company. Certain exploitation possibilities may also exist for additional
production within the Austin Chalk trend from existing or new well bores in the
areas that were previously developed using vertical well bores. In addition,
exploration and development opportunities may exist for recompletion of
existing vertical and horizontal wells or drilling new wells into the Taylor,
Wilcox, Buda, Georgetown and Edwards formations, each of which has been proven
to be productive in certain areas served by the SETPS.

The Company expects to be able to continue to add well connections to the
SETPS and to maintain or increase the SETPS throughput in the foreseeable
future. The number of new wells being drilled and, therefore, the opportunities
for the Company to connect new wells to its system will be dependent upon,
among other things, the prices of crude oil and natural gas.

PROCESSING

The Company is one of the largest independent producers of NGLs in the
United States. The Company owns and/or operates an interest in four natural gas
processing plants, each of which is associated with a pipeline gathering system
of the Company. Additionally, the Company has access to process significant
volumes of natural gas at a third party plant described below. The processing
plants complement the Company's gathering operations by enabling the Company to
offer directly to producers the option of wellhead purchase or processing
contracts. The sale of NGLs contributes materially to the overall earnings of
the Company because of the added value from NGLs extraction. In addition, gas
processing supplements and diversifies the earnings derived from natural gas
sales.

The Company's gas processing plants are modern plants with efficient
liquid recovery processes. The plants generally operate at high production
levels which the Company believes result in low operating costs per barrel
produced. Plant locations provide access to nearby markets for the sale of
NGLs, thus reducing transportation costs. The Company believes its processing
plants provide it with a significant competitive advantage in the acquisition
of gas supplies. Most of the Company's gas volume processing capacity has
ethane rejection capability, which allows the Company to optimize margins
during periods when NGLs prices decline significantly relative to gas prices.

The Company has a long-term contract to process natural gas at Exxon
Company, U.S.A.'s (Exxon) natural gas processing plant at Katy, Texas.
Deliveries of gas to the plant began in 1995 upon the completion of the Katy
Pipeline. This long-term contract allows the Company to process up to 275
MMcf/d at the Katy plant. The Company has increased its NGLs production due to
this long-term contract.

SALES AND MARKETING

Substantially all of the Company's revenue is derived from sales of
natural gas and NGLs. In addition to such revenue, the Company customarily
receives additional fees for compression and treatment services if a producer's
gas does not meet contract specifications, as well as transportation
arrangements whereby the Company transports third party natural gas for a fee.

<PAGE> 6

NATURAL GAS

The Company sells natural gas to numerous utility, industrial, and
pipeline customers. The majority of the sales of natural gas are based on spot
market prices for the month in which the gas is sold. These sales range in
length from one day to over a year. The long-term contracts normally contain a
premium to spot pricing.

At December 31, 1997, the Company has only one material fixed price
natural gas sales contract, which will expire in 1999. Two such fixed price
contracts expired in 1997. With the use of appropriate financial instruments,
each of the three contracts were and are hedged against movement in natural gas
commodity prices. The three contracts accounted for approximately 2% of the
Company's total natural gas revenues in 1997.

In July 1996, the Company and DHRI entered into a long-term gas supply
agreement whereby the Company will supply DHRI with 100 MMcf/d of gas in the
Katy, Texas area at prevailing market rates. Natural gas sales to DHRI in 1997
accounted for approximately 11% of the Company's total natural gas revenues.

The Company has multiple delivery connections at most of its gas gathering
systems, which it believes allow it to negotiate favorable spot sales contracts
and avoid curtailments of gas deliveries. For example, the SETPS is directly
connected to five major intrastate systems (which includes the Oasis Pipeline)
and one utility customer. Through the Katy Pipeline and Oasis Pipeline, the
Company is directly connected to one of the largest natural gas hubs in the
state of Texas with access to most intrastate as well as interstate pipeline
systems. Due to the flexibility derived from multiple delivery points, the
Company believes that the loss of any one of its principal customers would not
have a material adverse effect on the Company.

The Company has significant purchases of natural gas and sales of natural
gas and NGLs outside its own gathering and transport lines. These off-system
marketing activities, which include the Oasis off-system marketing activities,
contributed $622.9 million of operating revenues and gross margin of $16.7
million to the Company in 1997, and also assist the Company in avoiding the
curtailment of gas deliveries from its gathering systems and avoiding the
curtailment of firm markets during periods of production fluctuations on the
systems. In addition, such activities provide the Company with access to new
markets and suppliers from which valuable market information is obtained
regarding possible new gathering systems and acquisition opportunities.

The Company, as part of its acquisition of the capital stock of Oasis,
acquired transportation rights on the Oasis Pipeline which amount to 280 MMcf/d
of firm intrastate transportation between the Waha, Texas hub and Katy, Texas
hub, plus the opportunity to utilize excess capacity on an interruptible basis.
The Company can deliver and receive gas at various points along the Oasis
Pipeline. The acquired transportation rights allow the Company to conduct
additional off-system marketing activities not otherwise available to the
Company.

Natural gas is sold primarily for electric power generation and for
end-use as a heating fuel for homes and industry. A majority of the Company's
natural gas sales occur in the Texas intrastate market. Volumes of natural gas
sold are not typically seasonal; however, natural gas sales prices have
historically been higher in the winter months.

The Company generally attempts to match its gas purchases and sales
transactions. However, when appropriate, the Company uses financial instruments
such as futures and options to hedge the risk associated with fluctuating
natural gas prices. See Note 1 and Note 9 of Notes to Consolidated Financial
Statements.

NGLS MARKETING

The Company sells NGLs to various petrochemical firms, refiners, and
marketers. A new long-term sales agreement with Phillips Chemical Company with
a commencement date of October 1, 1997 provides for the sale of approximately
30% of the Company's gross NGLs production. In 1997, the Company continued to
sell a portion of its NGLs to Exxon under its long-term agreement accounting
for approximately 25% of the Company's gross NGLs production. The balance of
the NGLs production is sold to various parties under short-term contracts
generally at a spot index based price.

Prices for certain NGLs closely follow crude oil related products. Gas
processing increases the value of throughput when natural gas prices are low in
relation to NGLs prices. The sale of NGLs contributes materially to the overall
profitability of the Company and reduces its dependence on natural gas sales
and related margins.

In 1997, the Company continued the use of financial instruments including
swaps and forward contracts to hedge the risk associated with volatile NGLs
prices. See Note 1 and Note 9 of Notes to Consolidated Financial Statements.

4
<PAGE> 7

NGLs are typically used as petrochemical feedstocks, petroleum refinery
blendstocks or fuel. Petrochemical plants use ethane, propane, normal butane,
and natural gasoline as feedstocks in the production of ethylene, which has
widespread applications in the production of plastics and plastic products,
building materials, automobile antifreeze and other products. Refineries
enhance the vapor pressure of gasoline in order to improve cold weather
starting of automobile motors with normal butane and iso-butane as a motor fuel
additive after further processing. Propane is used as fuel for home heating and
cooking, industrial heaters and boilers, vehicles, and agricultural
applications.

As feedstock, demand for NGLs is influenced by the demand for the end
products in which they are used. For example, a number of petrochemical
producers have recently added significant new production capacity for ethylene
along the Gulf Coast. The Company anticipates that this development will
increase demand for NGLs in the Mont Belvieu, Texas market, which is the
central delivery point for the Gulf Coast petrochemical industry. Also, the
demand for normal butane and iso-butane, which are important feedstocks in the
production of methyl tertiary butyl ether (MTBE) (an oxygenate), is expected to
increase as demand for MTBE in gasoline production increases. The required use
of oxygenates in motor gasoline under the Clean Air Act Amendments of 1990 in
many parts of the United States is expected to increase demand for MTBE.
Seasonal requirements of purchasers using NGLs as a fuel source also affect
demand. NGLs production is dependent upon the supply and NGLs content of
domestic natural gas. The market price of NGLs relative to natural gas affects
the volume of natural gas processed and the NGLs extracted from the natural
gas. Certain NGLs are produced outside North America and imported by ship,
which has an effect on NGLs prices from time to time.

COMPETITION

The Company operates in a highly competitive environment. The Company
competes in the gathering, processing, marketing and transport business for
supplies of natural gas. Many of the Company's competitors have greater
financial and other resources than the Company. Competition for gas supplies is
primarily based on price, service and the availability of facilities. The
Company believes that its competitive advantages include (i) management
expertise in gas purchasing and marketing, (ii) its ability to connect wells
promptly and efficiently operate pipelines, (iii) its ability to ensure
reliable gas deliveries, and (iv) favorable supplier and market relationships.

There is intense competition in the marketing of natural gas and NGLs. The
Company has numerous competitors, including marketing affiliates of intrastate
and interstate pipelines, the major integrated oil companies and intrastate and
interstate pipelines and other gas gatherers, gas processors and marketers of
widely varying sizes, financial resources, experience and supplies of gas.
Distributors of gas (some of whom are customers of the Company) are, in some
cases, engaged directly and through affiliates, in marketing activities that
compete with those of the Company.

GOVERNMENTAL REGULATION

Currently, federal, state and local regulations do not materially affect
the purchase and sale of gas and the fees received for gathering and processing
by the Company. Therefore, except as constrained by competitive factors and
contracts, the Company has considerable pricing flexibility. However, federal,
state and local laws and regulations, directly or indirectly, govern some
aspects of the operations of the Company. These laws and regulations may in the
future have a significant impact upon the Company's overall operations.

Certain activities of the Company are subject to regulation by the
Railroad Commission of Texas (RRC) pursuant to its jurisdiction over common
purchasers and natural gas utilities. Certain subsidiaries of the Company are
subject to the common purchaser statutes and regulations and the regulations as
an intrastate gas utility.

The RRC has authority to regulate the volumes of natural gas purchased by
common purchasers and the rates charged for the intrastate transportation and
sale to natural gas utilities in Texas. Under the Gas Utility Regulatory Act
and other Texas statutes, the RRC has the duty to ensure that rates for the
transportation and sale of natural gas are just and reasonable and that gas
utilities are prohibited from charging rates that are unreasonably
preferential, prejudicial or discriminatory. The Company believes that its RRC
jurisdictional activities and tariffs are in compliance with applicable laws
and regulations.

All of the Company's pipeline operations are subject to federal safety
standards promulgated by the Department of Transportation under applicable
federal pipeline safety legislation, as supplemented by various state safety
statutes and regulations.

5
<PAGE> 8

The Company's Oklahoma operations are subject to regulation by the State
of Oklahoma. The majority of these regulations are administered by the Oklahoma
Corporation Commission (OCC). Any entity engaged in the business of carrying or
transporting natural gas by pipeline is declared to be a common carrier under
Oklahoma law and is prohibited from any unjust or unlawful discrimination in
the carriage, transportation or delivery of gas. Although Oklahoma law may be
sufficiently broad to permit the OCC to set rates and terms of service for the
transportation and delivery of natural gas involving the Company's Oklahoma
assets, the OCC has not done so to date. There can be no assurance that the OCC
will not do so in the future. Recent Oklahoma legislation prohibits entities
which engage in gathering gas from charging any fee which is unjustly or
unlawfully discriminatory. The Company does not expect this legislation to have
any significant impact on the Company's operations.

An entity carrying or transporting natural gas by pipeline which is
engaged in the business of purchasing natural gas is declared to be a common
purchaser under Oklahoma law and is required to purchase, without
discrimination in favor of persons or price, all natural gas in the vicinity of
its lines. Ratable purchase is required if a purchaser is unable to purchase
all gas offered. To date, such legislation has not had any significant effect
on the Company's Oklahoma operations.

The OCC regulates the amount of gas which producers can sell or deliver to
the Company. Currently, substantially all gas received by the Company in its
Oklahoma operations is produced from wells for which the OCC establishes
allowable production rates at quarterly hearings based upon the OCC's
determination of the market demand.

ENVIRONMENTAL

The Company's operations are subject to numerous laws and regulations
relating to the protection of the environment or the discharge of materials
into the environment which are administered by federal and state regulatory
agencies, including the Federal Environmental Protection Agency (EPA), the
Texas Natural Resources Conservation Commission and the Oklahoma Department of
Environmental Quality. Currently, there are no existing or pending actions,
suits or proceedings relating to any environmental laws or regulations and all
material notices, permits and similar authorizations required to be obtained or
filed to operate the business have been duly obtained or filed.

The Company believes that it is in substantial compliance with
environmental laws and regulations and that such laws and regulations do not
pose a burden on the operations of the Company dissimilar to that placed on its
competitors. Such laws and regulations could impose significant liability on
the Company for damages, cleanup costs and penalties in the event of certain
discharges into the environment. In addition, product sales and markets may be
affected by such laws and regulations. Such laws and regulations have generally
become more stringent in recent years, often imposing greater liability on a
larger number of parties. Because the requirements imposed by such laws and
regulations frequently change, the Company is unable to predict the ultimate
costs of compliance with such requirements or whether the incurrence of such
costs would have a material adverse effect on the operations of the Company.

INSURANCE AND OPERATIONAL RISKS

The Company is subject to various hazards which are inherent in the
industry in which it operates such as explosions, product spills, leaks and
fires, each of which could cause personal injury and loss of life, severe
damage to and destruction of property and equipment, and pollution or other
environmental damage, and may result in curtailment or suspension of operations
at the affected facility. The Company maintains physical damage, comprehensive
general liability, workers' compensation and business interruption insurance.
Such insurance is subject to deductibles that the Company considers reasonable.
The Company is not fully insured against all risks in its business; however,
the Company believes that the coverage it maintains is adequate and consistent
with other companies in the industry. Consistent with insurance coverage
typically available to the natural gas industry, the Company's insurance
policies do not provide coverage for losses or liabilities relating to
pollution, except for sudden and accidental occurrences.

EMPLOYEES

At December 31, 1997, the Company had 310 employees. None of the Company's
employees is a party to a collective bargaining agreement.

6
<PAGE> 9

ITEM 2. PROPERTIES

The Company's operations are conducted from its San Antonio, Texas
headquarters, and several smaller administrative operations offices. The
Company leases its headquarters in San Antonio, Texas, a marketing office in
Dallas, Texas and a field office in Fort Stockton, Texas and owns field offices
in Giddings, Texas, LaGrange, Texas, College Station, Texas, Elk City, Oklahoma
and Woodward, Oklahoma.

At December 31, 1997, the Company owned and/or operated an interest in
twelve active natural gas pipeline systems. Set forth below is information with
respect to the Company's gathering systems at and for the year ended December
31, 1997:

Net
Gross Gas Average Gas
Throughput Throughput
Miles of Capacity(a)(b) (a)(b)(c)
Gathering System Location Pipeline(a) (MMcf/d) (MMcf/d)
- ------------------------------------- ------------------ ------------ -------------- -----------

<S> <C> <C> <C> <C>
Southeast Texas Southeast Texas 2,285 710 416
Mentone West Texas 13 60 --
Gomez West Texas 11 40 --
Menard County Central Texas 120 30 4
Maverick County West Texas 121 20 2
Rhoda Walker West Texas 21 20 8
Panola County East Texas 23 8 1
Elk City Southwest Oklahoma 155 115 84
Mooreland Northwest Oklahoma 327 40 12
Brooks-Hidalgo - 23% (d) South Texas 97 75 3
Dorado - 40% South Texas 57 40 11
Benedum/Wilshire - 20%(e) West Texas 204 125 13
Warwink (f) -- -- 25
---------- ------- -----------
3,434 1,283 579
Fuel and Shrinkage -- -- (96)
---------- ------- -----------
Total Systems 3,434 1,283 483
========== ======= ===========

</TABLE>

- ----------
(a) All mileage, capacity and volume information is approximate.
Capacity figures are management's estimates based on existing
facilities without regard to the present availability of natural
gas.
(b) Gross gas throughput capacity is included at 100% while net average
gas throughput is presented at the Company's present joint venture
ownership interest.
(c) Excludes off-system marketing sales with average daily volumes of 687
MMcf/d sold from other companies' facilities.
(d) In 1997, the Company's ownership percentage increased from 22% to
23%.
(e) In 1997, the Company's ownership percentage increased from 5% to 20%.
(f) On December 1, 1997, Warwink Joint Venture was sold. Average gas
throughput has been included for the period for which the Company
owned an interest in Warwink.

The Company also owns 35% of the capital stock of Oasis and the right to
transport 280 MMcf/d of natural gas on the Oasis Pipeline, plus the opportunity
to utilize excess capacity on an interruptible basis.

7
<PAGE> 10

At December 31, 1997, the Company owned and/or operated an interest in
four natural gas processing plants. Set forth below is information with respect
to the Company's processing plants at and for the year ended December 31, 1997:

Gas Gas NGLs
Throughput Throughput Production
Capacity (a) (a) (b) (a) (b)
Plant (MMcf/d) (MMcf/d) (MBbls/d)(c)
-------------------------- -------------- --------------- ----------------

<S> <C> <C> <C>
LaGrange, Texas 230 175 23.4
Somerville, Texas 28 -- .6
Elk City, Oklahoma 115 83 4.1
Benedum, Texas - 20% 125 13 .8
------ ------ -----
Total -owned plants 498 271 28.9
======
Katy, Texas (d) 200 8.1
------ -----
Total 471 37.0
====== =====

</TABLE>

----------
(a) All capacity and volume information is approximate. Capacity figures
are management's estimates based on existing facilities without
regard to the present availability of natural gas.
(b) Volumes from joint ventures have been included at the Company's
present ownership interest.
(c) Thousands of barrels per day (MBbls/d).
(d) This plant is owned and operated by a third party from which the
Company receives a portion of the NGLs produced from gas the Company
delivers to the plant. This plant is included in this section for
informational purposes to show the gas throughput and NGLs production
the Company received utilizing the access to this plant.

ITEM 3. LEGAL PROCEEDINGS

The Internal Revenue Service (IRS) has examined and proposed adjustments
to UtiliCorp's 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 and UtiliCorp, the Company would be liable to UtiliCorp for additional
taxes of approximately $8.7 million for the audit period and through the
present plus potential interest of approximately $2.7 million. 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders in the fourth
quarter of 1997.

8
<PAGE> 11

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The common stock of the Company is listed on the New York Stock Exchange
(NYSE) under the symbol AQP. Set forth below is the high and low sales prices
of the common stock for 1996 and 1997.

Price Range
------------------------------ Dividends
High Low Paid Per Share
------------ ------------ -------------------

1996:

<S> <C> <C> <C>
First Quarter ..................... $ 14 $ 11 $.0125
Second Quarter..................... $ 14 7/8 $ 12 1/2 $.0125
Third Quarter ..................... $ 13 1/2 $ 12 $.0125
Fourth Quarter..................... $ 16 1/2 $ 13 $.0125

1997:
First Quarter ..................... $ 15 5/8 $ 12 1/2 $.0125
Second Quarter..................... $ 15 1/4 $ 13 1/4 $.0125
Third Quarter ..................... $ 14 $ 9 5/8 $.0125
Fourth Quarter .................... $ 14 5/16 $ 12 7/16 $.0125

</TABLE>

On March 3, 1998, the last reported sales price for the common stock, as
reported on the NYSE Composite Tape, was $12 and the Company had 121
stockholders of record and approximately 1,200 beneficial owners.

On February 10, 1998, the Board of Directors of the Company declared the
quarterly common stock dividend payable on March 12, 1998, to shareholders of
record on February 26, 1998. The majority of the Company's earnings are
generated by Aquila Southwest Energy Corporation (Aquila Southwest) a
wholly-owned subsidiary. The amount available for the payment of dividends to
the Company by Aquila Southwest under the financial covenants contained in the
indenture governing the 8.29% Senior Notes due 2002 (8.29% Senior Notes) was
approximately $62.6 million as of December 31, 1997. These covenants provide
that no dividends may be paid by Aquila Southwest unless (i) there are no
existing defaults under the indenture, (ii) Aquila Southwest's ratio of
consolidated debt to consolidated capitalization does not exceed .55 to 1.0
through December 31, 1995 and thereafter, (iii) the pro forma fixed charges
coverage ratio is not less than 1.5 to 1.0, and (iv) the aggregate dividend
payment does not exceed the sum of (a) 50% of consolidated net income from July
1, 1992 through December 31, 1995, plus (b) increasing percentages of net
income subsequent to December 31, 1995, plus (c) the net cash proceeds from the
sale of Aquila Southwest stock after June 30, 1992, plus (d) the net cash
proceeds from the conversion of any convertible debt securities. Accordingly,
there can be no assurance that dividends will be paid by the Company in the
future.

9
<PAGE> 12

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial and
operating data of the Company. The selected consolidated financial data for
each of the five years in the period ended December 31, 1997, was derived from
the audited consolidated financial statements of the Company. The financial
data set forth below should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
(Dollars in Thousands, Except Per Share And Operating Data)

Year Ended December 31,
---------------------------------------------------------------------------
INCOME STATEMENT DATA: 1997 1996(a) 1995(b)(c) 1994 1993(d)
------------ ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 1,013,919 $ 799,278 $ 485,828 $ 328,687 $ 366,436
Costs and expenses $ 958,387 $ 730,952 $ 459,063 $ 294,836 $ 319,553
Income from operations $ 55,532 $ 68,326 $ 26,765 $ 33,851 $ 46,883
Net income $ 25,166 $ 32,453 $ 9,065 $ 15,259 $ 22,458
Basic and diluted earnings per share $ .86 $ 1.10 $ .31 $ .52 $ .90
Cash dividends per share $ .05 $ .05 $ .05 $ .05 $ --

CASH FLOW DATA:
Business acquisitions $ -- $ 133,138 $ 16,278 $ 735 $ 1,000
Capital expenditures $ 28,486 $ 27,496 $ 76,164 $ 32,579 $ 54,460

BALANCE SHEET DATA:
Net pipeline, property, plant and equipment $ 402,191 $ 396,701 $ 389,996 $ 334,520 $ 317,206
Total assets $ 646,333 $ 728,482 $ 506,638 $ 402,042 $ 382,681
Long-term obligations and current maturities
of long-term debt $ 236,595 $ 290,742 $ 193,287 $ 136,800 $ 126,500
Stockholders' equity $ 223,355 $ 199,658 $ 168,673 $ 161,078 $ 147,392

OPERATING DATA:
Total natural gas throughput (MMcf/d) 483 493 506 371 325
Total natural gas marketed off-system (MMcf/d) 687 482 360 129 139
Gross NGLs production (MBbls/d) 37 41 32 31 31
Average natural gas price ($/Mcf) $ 2.46 $ 2.33 $ 1.56 $ 1.87 $ 2.16
Average NGLs price ($/gallon) $ .34 $ .35 $ .28 $ .28 $ .30

</TABLE>

(a) The amounts for the investment in Oasis and the Oasis marketing
activities have been included since July 1, 1996. These per day volumes
are being averaged over the entire year. Volumes included are only those
volumes marketed by the Company.
(b) The fourth quarter of 1995 includes a pretax provision for asset
impairments of $13,163.
(c) Includes the acquisition of Tristar Gas Company in January 1995 and
completion of the construction of the Katy Pipeline and Southern
Extension in late 1995.
(d) The Company sold 5.4 million shares of common stock in an initial public
offering for approximately $74,500 in October 1993.

10
<PAGE> 13

ITEM 7. 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.

On April 1, 1997, the Company received $16.8 million from El Paso for its
exercise of an option to acquire 5% of the capital stock of Oasis. The Company,
after the exercise of the option, owns 35% of the capital stock of Oasis and
has 280 MMcf/d of firm intrastate transportation capacity. The proceeds were
utilized to pay down on the Company's revolving debt. Also, see Note 8 of Notes
to Consolidated Financial Statements.

The following discussion and analysis relates to the consolidated
financial position and results of operations of the Company for the three years
ended December 31, 1997. Reference should be made to the Consolidated Financial
Statements and the Notes thereto.

Year Ended December 31,
-------------------------------------
1997 1996(a) 1995
---------- ---------- ----------
(dollars in thousands, except price data)
<S> <C> <C> <C>
FINANCIAL DATA:
Natural gas revenues $ 926,403 $ 706,023 $ 420,715
NGLs revenues 87,516 93,255 65,113
---------- ---------- ----------
Total operating revenues 1,013,919 799,278 485,828
---------- ---------- ----------

Cost of sales 894,591 664,096 387,127
---------- ---------- ----------
Gross margin 119,328 135,182 98,701

Operating expenses 22,597 23,637 21,993
General and administrative expenses 15,611 19,485 15,602
Depreciation and amortization 25,588 23,734 21,178
Provision for asset impairments -- -- 13,163
Interest and debt expenses, net 17,237 15,678 12,033
Other income and (expense), net 931 (211) (135)
Equity in net income of affiliate 903 105 --
Provision in lieu of income tax expense 14,963 20,089 5,532
---------- ---------- ----------
Net income $ 25,166 $ 32,453 $ 9,065
========== ========== ==========

OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold 340 343 390
Throughput transported 143 150 116
---------- ---------- ----------
Total throughput 483 493 506
---------- ---------- ----------
Marketed off-system excluding Oasis 497 381 360
Marketed off-system Oasis 190 101 --
---------- ---------- ----------
Total marketed off-system 687 482 360
---------- ---------- ----------
Total throughput and marketed off-system 1,170 975 866
========== ========== ==========
Gross NGLs production (MBbls/d) 37 41 32
Average natural gas price ($/Mcf) $ 2.46 $ 2.33 $ 1.56
Average NGLs price ($/gal) $ .34 $ .35 $ .28

Period 1996 Period 1995
to 1997 Change to 1996 Change
-------------------- --------------------
Amount Percent Amount Percent
--------- ------- --------- -------
(dollars in thousands, except price data)
FINANCIAL DATA:

<S> <C> <C> <C> <C>
Natural gas revenues $ 220,380 31% $ 285,308 68%
NGLs revenues (5,739) (6)% 28,142 43%
--------- ---------

Total operating revenues 214,641 27% 313,450 65%
--------- ---------
Cost of sales 230,495 35% 276,969 72%
--------- ---------
Gross margin (15,854) (12)% 36,481 37%

Operating expenses (1,040) (4)% 1,644 7%
General and administrative expenses (3,874) (20)% 3,883 25%
Depreciation and amortization 1,854 8% 2,556 12%
Provision for asset impairments -- -- (13,163) (100)%
Interest and debt expenses, net 1,559 10% 3,645 30%
Other income and (expense), net 1,142 541% (76) (56)%
Equity in net income of affiliate 798 760% 105 100%
Provision in lieu of income tax expense (5,126) (26)% 14,557 263%
--------- --------- -------
Net income $ (7,287) (22)% $ 23,388 258%
========= ========= =======

OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold (3) (1)% (47) (12)%
Throughput transported (7) (5)% 34 29%
--------- ---------
Total throughput (10) (2)% (13) (3)%
--------- ---------
Marketed off-system excluding Oasis 116 30% 21 6%
Marketed off-system Oasis 89 88% 101 100%
--------- ---------
Total marketed off-system 205 43% 122 34%
--------- ---------
Total throughput and marketed off-system 195 20% 109 13%
========= =========

Gross NGLs production (MBbls/d) (4) (10)% 9 28%
Average natural gas price ($/Mcf) $ .13 6% $ .77 49%
Average NGLs price ($/gal) $ (.01) (3)% $ .07 25%

</TABLE>

- ---------------------------------

(a) In 1996, the amounts for the investment in Oasis and the Oasis marketing
activities have been included since July 1, 1996. These per day volumes
are being averaged over the entire year. Volumes included are only those
volumes marketed by the Company.

11
<PAGE> 14

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 NGL 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.

YEARS ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996

Total operating revenues increased 27% to $1,013.9 million in 1997
compared to $799.3 million in 1996. Natural gas revenues increased 31% to
$926.4 million in 1997 compared to $706.0 million in 1996 partially as the
result of the activity related to the Oasis off-system marketing which
contributed natural gas revenues of $184.2 million with associated marketed
natural gas volumes of 190 MMcf/d. Excluding Oasis off-system marketing
activity, natural gas revenues increased 25% to $742.2 million due to a 6%
increase in the average natural gas price to $2.46 per Mcf in 1997 from $2.33
per Mcf in 1996 and a 16% increase in natural gas throughput sold and marketed
to 837 MMcf/d in 1997 from 724 MMcf/d in 1996.

NGLs revenues decreased 6% to $87.5 million in 1997 compared to $93.3
million in 1996 as the result of a 3% decrease in the average NGLs price to
$.34 per gallon from $.35 per gallon and a 10% decrease in gross NGLs
production to 37,000 Bbls/d in 1997 compared to 41,000 Bbls/d in 1996. In 1997,
the Company recognized a gain of approximately $3.1 million associated with its
NGLs hedging activities.

Cost of sales was $894.6 million, or 88% of operating revenues, in 1997
compared to $664.1 million, or 83% 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 $119.3 million, or 12% of operating revenues, in 1997 compared to
$135.2 million, or 17% 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, higher cost of gas supply and a decrease in NGLs revenues.

Operating expenses decreased 4% to $22.6 million in 1997 compared to $23.6
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 20% to $15.6 million in 1997
compared to $19.5 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.
The accrual for SARs between 1997 and 1996 decreased $1.6 million. In 1997, the
Company's service agreement costs were lower by $.4 million as compared to
1996.

Depreciation and amortization increased 8% to $25.6 million in 1997
compared to $23.7 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 10% to $17.2 million in 1997 compared
to $15.7 million in 1996 primarily as a result of the Oasis acquisition offset
by the reduction of $1.3 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 (further
discussed below).

12
<PAGE> 15

Other income and expense increased 541% to $.9 million of income in 1997
compared to an expense of $.2 million in 1996 primarily as a result of the gain
on sale of the Warwink Joint Venture of $1.2 million. See Note 8 of Notes to
Consolidated Financial Statements.

Provision in lieu of income tax expense decreased 26% to $15.0 million in
1997 compared to $20.1 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 1990 through 1993
UtiliCorp federal income tax returns (hereinafter referred to as "agreed-upon
tax issues"). In accordance with the provisions of the tax sharing agreement,
UtiliCorp assessed the Company $3.5 million for these agreed-upon tax issues.
The Company paid UtiliCorp these amounts in 1997 and the first quarter of 1998.
The payment of the income taxes associated with these agreed-upon tax issues
had no effect on net income but an adjustment was made to the deferred tax
liability. Also, see Note 4 of Notes to Consolidated Financial Statements.

YEARS ENDED DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995

Total operating revenues increased 65% to $799.3 million in 1996 compared
to $485.8 million in 1995. Natural gas revenues increased 68% to $706.0 million
in 1996 compared to $420.7 million in 1995 due partially to the Oasis marketing
activity, included since July 1, 1996, which contributed revenues of $112.8
million with associated marketed natural gas volumes of 101 MMcf/d. Excluding
Oasis marketing activity, natural gas revenues increased 41% to $593.2 million
due to a 49% increase in the average natural gas price to $2.33 per Mcf in 1996
from $1.56 per Mcf in 1995, despite a slight decrease in natural gas throughput
sold and marketed to 724 MMcf/d in 1996 from 750 MMcf/d in 1995.

NGLs revenues increased 43% to $93.3 million in 1996 compared to $65.1
million in 1995 as the result of a 28% increase in gross NGLs production to
41,000 Bbls/d in 1996 compared to 32,000 Bbls/d in 1995 and a 25% increase in
the average NGLs price to $.35 per gal from $.28 per gal. Increased NGLs
production at Exxon's gas processing plant at Katy, Texas and improved NGLs
recovery processes at the plants primarily accounted for the increased NGLs
production.

Cost of sales was $664.1 million or 83% of operating revenues in 1996
compared to $387.1 million or 80% of operating revenues in 1995. The increase
in the percentage is primarily due to the increase in off-system marketing
activities which have lower gross margin percentages. Cost of sales increased
primarily as the result of the Oasis marketing activity and an increase in
average natural gas price.

Gross margin (operating revenues less cost of sales, which includes only
the direct cost of gas sold and does not include any related operating
expenses) was $135.2 million, or 17% of operating revenues, in 1996 compared to
$98.7 million, or 20% of operating revenues, in 1995. The decrease in the
percentage is primarily due to the increase in off-system marketing activities
which have lower gross margin percentages. The gross margin increased 37% due
to an increase in average natural gas and NGLs prices of 49% and 25%
respectively, an increase in NGLs production and an increase in the natural gas
throughput and marketed, which includes the Oasis marketing activity.

Operating expenses increased 7% to $23.6 million in 1996 compared to $22.0
million in 1995 primarily as a result of expanded gathering system and plant
operations and an overall increase in various costs.

General and administrative expenses increased 25% to $19.5 million in 1996
compared to $15.6 million in 1995 primarily due to increased compensation
costs. Portions of compensation are linked to the Company's net income and the
Company's stock price, both of which increased in 1996.

Depreciation and amortization increased 12% to $23.7 million in 1996
compared to $21.2 million in 1995 primarily as the result of new pipeline,
property, plant and equipment additions on the SETPS and the amortization of
the transportation rights related to Oasis.

Interest and debt expenses increased 30% to $15.7 million in 1996 compared
to $12.0 million in 1995 primarily as a result of increased debt balances
incurred for capital expenditures, the Oasis acquisition and the recognition of
interest associated with certain agreed-upon tax issues (further discussed in
the following paragraph).

13
<PAGE> 16

Provision in lieu of income tax expense increased 263% to $20.1 million in
1996 compared to $5.5 million in 1995 due to an increase in income before
income taxes in 1996 compared to 1995. UtiliCorp has agreed with the IRS on
certain tax issues as a result of the IRS audits of certain UtiliCorp federal
income tax returns. The Company will be liable to UtiliCorp for approximately
$3.1 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, upon
assessment by UtiliCorp.

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 consist of capital expenditures, acquisitions, working
capital requirements, dividends and debt repayment. The Company's historical
net additions to pipeline, property, plant and equipment were $28.5 million and
$27.5 million for the years ended December 31, 1997 and 1996, respectively.
Excluding business acquisitions, if any, capital expenditures are expected to
be approximately $29.0 million in 1998 which the Company expects it can fund
from operating cash flow.

In April 1997, the Company received $16.8 million from El Paso 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 pay down the Company's revolving debt.

The Company maintains revolving credit agreements (the Revolvers), as
amended, of $128.0 million with 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 $20.3 million at December 31, 1997. There was
$107.7 million outstanding on the Revolvers at December 31, 1997. 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 a one year notice not to renew from the commitment period.
Currently, the maturity dates of the Revolvers are in the fourth quarter of
1999. On February 1, 1998, the Company voluntarily reduced its commitment by
$10.0 million on its Revolvers to a commitment of $118.0 million.

The Company 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 maintain certain financial
covenants and limits the activities of the Company in other ways. At December
31, 1997, $50.0 million was outstanding under the Loan and the Company was in
compliance with the covenants.

In April 1997, the Company entered into a Loan Agreement (the Loan
Agreement) with Aquila Energy for an amount of $16.3 million, which matures in
2006, to provide funds for general corporate purposes. The Loan Agreement will
require the Company to meet and maintain certain financial covenants and limits
the activities of the Company in other ways. At December 31, 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) 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 (currently, limited to
$62.6 million) 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 December 31, 1997, $62.5 million was outstanding on the Senior Notes and the
Company was in compliance with the covenants.

The Company believes that 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 STANDARDS

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 (SFAS 128),
"Earnings per Share." SFAS 128 establishes new standards for computing and
presenting earnings per share. The Company adopted SFAS 128 effective December
31, 1997. See Note 1 of Notes to Consolidated Financial Statements.

14
<PAGE> 17

In June 1997, the FASB issued SFAS No. 130 (SFAS 130), "Reporting
Comprehensive Income." SFAS 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of financial
statements. Adoption of SFAS 130 is required for fiscal years beginning after
December 15, 1997, although earlier adoption is encouraged. Based on the
Company's current operations, SFAS 130 does not have an impact on the Company's
consolidated financial statements.

In June 1997, the FASB issued SFAS No. 131 (SFAS 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 131
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. Based on the
Company's current operations, SFAS 131 is not expected to have an impact on the
Company's consolidated financial statements.

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 price; 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.

15
<PAGE> 18

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the consolidated financial statements, the report
thereon, the notes thereto and supplementary data beginning on page F-1 of this
Form 10-K Annual Report which is incorporated by reference herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

16
<PAGE> 19

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For additional information regarding the Directors and Executive Officers
of the Company see the definitive proxy statement for its annual meeting of
shareholders to be held May 12, 1998, which is incorporated by reference in
this Form 10-K Annual Report pursuant to General Instruction G(3) of Form 10-K.

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below are the names and positions of the executive officers of
the Company.

NAME POSITION(S)

F. Joseph Becraft President, Chief Executive Officer and a Director.
Age 54. Present position since August 1997. From
May 1995 through November 1996, Mr. Becraft served
in various capacities including President and
Chief Executive Officer of Valero Energy
Corporation. From 1989 through April 1995, Mr.
Becraft served as President and Chief Executive
Officer of Transok Inc.

Damon C. Button Vice President, Treasurer and Chief Financial
Officer. Age 44. Present position since August
1993. From July 1992 to July 1993, Mr. Button
held the same position with Aquila Southwest.
From 1980 to July 1992, Mr. Button held the same
position with the general partner of Clajon
Holdings, L. P. and its predecessor.

Travis H. Lynch Vice President, Gas Supply. Age 59. Present
position with the Company since August 1993.
From July 1992 to July 1993, Mr. Lynch held the
same position with Aquila Southwest. From 1978
to July 1992, Mr. Lynch held the same position
with the general partner of Clajon Holdings, L. P.
and its predecessor.

Mitchell R. Roper Managing Vice President, Gas Supply and Marketing.
Age 39. Present position since January 1995.
From November 1993 to December 1994, Mr. Roper
served as Vice President, Corporate Development
of the Company. From May 1992 to October 1993, Mr.
Roper served as Vice President, Gas Marketing of
the Company. From 1990 to 1992, Mr. Roper served
as Director, Gas Marketing of the Company. From
1988 to 1990, Mr. Roper served as a gas marketing
representative of Aquila Energy.

James E. Wade Vice President, Gas Marketing. Age 37. Present
position since March 1996. From January 1994
through February 1996, Mr. Wade served as
Director, Gas Marketing of the Company. From
1984 through 1993, Mr. Wade held various
positions with Tenneco Oil Company, Tennessee Gas
Pipeline, and their affiliates.

Douglas H. Westmoreland Vice President, Operations and Engineering.
Age 51. Present position since August 1993. From
1991 to 1993, Mr. Westmoreland served a
subsidiary of the Company as Director of
Operations, and for more than three years prior
to 1991 as District Engineering Supervisor.

<PAGE> 20

ITEM 11. EXECUTIVE COMPENSATION

For information regarding executive compensation, see the definitive proxy
statement for the annual meeting of shareholders to be held May 12, 1998, which
is incorporated by reference in this Form 10-K Annual Report pursuant to
General Instruction G(3) of Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

For information regarding beneficial ownership, see the definitive proxy
statement for the annual meeting of shareholders to be held May 12, 1998, which
is incorporated by reference in this Form 10-K Annual Report pursuant to
General Instruction G(3) of Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For information regarding certain relationships and related transactions,
see the definitive proxy statement for the annual meeting of shareholders to be
held May 12, 1998, which is incorporated by reference in this Form 10-K Annual
Report pursuant to General Instruction G(3) of Form 10-K.

18
<PAGE> 21

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<S> <C> <S>
Page(s)
-------
(a) The following documents are filed as part of this report:

(1) Aquila Gas Pipeline Corporation and Subsidiaries Consolidated Financial Statements:
Report of Independent Public Accountants......................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996..................................... F-3
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995............................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995............................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995............................................................................ F-6
Notes to Consolidated Financial Statements....................................................... F-7

(2) Financial Statement Schedule:
Aquila Gas Pipeline Corporation
Schedule I-Parent Company Only Financial Statements............................................ F-24
----

All other schedules are omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.

(3) List of Exhibits:
Incorporated herein by reference to the Index to Exhibits.

(b) Reports on Form 8-K.

There were no reports on Form 8-K during the fourth quarter of 1997.

</TABLE>

19
<PAGE> 22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE

<TABLE>
<CAPTION>
Page
----
<S> <C>
Aquila Gas Pipeline Corporation and Subsidiaries Consolidated Financial Statements:
Report of Independent Public Accountants ...................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 .................................. F-3
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995 .............................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 ........................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 ........................................................................ F-6
Notes to Consolidated Financial Statements .................................................... F-7

Aquila Gas Pipeline Corporation Financial Statement Schedule:
Schedule I-Parent Company Only Financial Statements ........................................... F-24
</TABLE>

F-1

<PAGE> 23

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Aquila Gas Pipeline Corporation:

We have audited the accompanying consolidated balance sheets of Aquila Gas
Pipeline Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aquila Gas Pipeline Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

As explained in Note 1 to the consolidated financial statements, in 1995 the
Company changed its method of assessing the impairment of long-lived assets.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplemental Schedule I is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. The schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

ARTHUR ANDERSEN LLP

San Antonio, Texas
February 12, 1998

F-2

<PAGE> 24

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 5,276 $ 17,719
Accounts receivable .................................................... 102,420 156,667
Inventories and exchanges .............................................. 1,637 2,803
Materials and supplies ................................................. 6,026 5,022
---------- ----------
Total current assets ............................................... 115,359 182,211
---------- ----------

INVESTMENT IN AFFILIATE, net .............................................. 96,257 110,814
---------- ----------

PIPELINE, PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas pipelines .................................................. 442,995 424,049
Plants and processing equipment ........................................ 76,375 68,115
---------- ----------
519,370 492,164
Less - Accumulated depreciation ........................................ (117,179) (95,463)
---------- ----------
402,191 396,701

INTANGIBLE ASSETS, net .................................................... 30,926 37,313
---------- ----------

OTHER, net ................................................................ 1,600 1,443
---------- ----------

TOTAL ASSETS .............................................................. $ 646,333 $ 728,482
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt ................................... $ 12,500 $ 12,802
Accounts payable ....................................................... 91,425 152,119
Accrued expenses ....................................................... 6,002 8,712
Accrued interest ....................................................... 3,971 4,393
Income taxes payable to UtiliCorp United Inc. .......................... 2,189 2,833
Intercompany payable due to Aquila Energy Corporation .................. 7,022 1,038
---------- ----------
Total current liabilities .......................................... 123,109 181,897
---------- ----------

LONG-TERM DEBT ............................................................ 223,950 277,383
---------- ----------
DEFERRED INCOME TAXES ..................................................... 75,774 68,987
---------- ----------
OTHER LONG-TERM LIABILITIES ............................................... 145 557
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none outstanding at December 31, 1997 and 1996 ....................... -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 29,400,000
shares issued and outstanding at December 31, 1997 and 1996 ......... 294 294
Additional paid-in capital ............................................. 90,297 90,297
Retained earnings ...................................................... 132,764 109,067
---------- ----------
Total stockholders' equity ......................................... 223,355 199,658
---------- ----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 646,333 $ 728,482
========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

<PAGE> 25

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES .......................... $1,013,919 $ 799,278 $ 485,828
---------- ---------- ----------

COSTS AND EXPENSES:
Cost of sales ............................ 894,591 664,096 387,127
Operating ................................ 22,597 23,637 21,993
General and administrative ............... 15,611 19,485 15,602
Depreciation and amortization ............ 25,588 23,734 21,178
Provision for asset impairments .......... -- -- 13,163
---------- ---------- ----------

Total costs and expenses ............. 958,387 730,952 459,063
---------- ---------- ----------

INCOME FROM OPERATIONS ...................... 55,532 68,326 26,765

INTEREST AND DEBT EXPENSES, net ............. 17,237 15,678 12,033

OTHER INCOME AND (EXPENSE), net ............. 931 (211) (135)

EQUITY IN NET INCOME OF AFFILIATE ........... 903 105 --
---------- ---------- ----------

INCOME BEFORE INCOME TAXES .................. 40,129 52,542 14,597

PROVISION IN LIEU OF INCOME TAX EXPENSE ..... 14,963 20,089 5,532
---------- ---------- ----------

NET INCOME .................................. $ 25,166 $ 32,453 $ 9,065
========== ========== ==========

BASIC AND DILUTED EARNINGS PER SHARE ........ $ .86 $ 1.10 $ .31
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

<PAGE> 26

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 .................. 29,400,000 $ 294 $ 90,297 $ 70,487 $ 161,078
Cash dividends paid, $.05 per share ...... -- -- -- (1,470) (1,470)
Net income ............................... -- -- -- 9,065 9,065
---------- ---------- ---------- ---------- ------------

BALANCE, December 31, 1995 .................. 29,400,000 294 90,297 78,082 168,673
Cash dividends paid, $.05 per share ...... -- -- -- (1,468) (1,468)
Net income ............................... -- -- -- 32,453 32,453
---------- ---------- ---------- ---------- ------------

BALANCE, December 31, 1996 .................. 29,400,000 294 90,297 109,067 199,658
Cash dividends paid, $.05 per share ...... -- -- -- (1,469) (1,469)
Net income ............................... -- -- -- 25,166 25,166
---------- ---------- ---------- ---------- ------------

BALANCE, December 31, 1997 .................. 29,400,000 $ 294 $ 90,297 $ 132,764 $ 223,355
========== ========== ========== ========== ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

<PAGE> 27

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 25,166 $ 32,453 $ 9,065
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................ 25,588 23,734 21,178
Deferred income taxes ................................................ 6,787 10,507 2,026
Provision for asset impairments ...................................... -- -- 13,163
Dividends from affiliate ............................................. 1,142 585 --
Equity in net income of affiliate .................................... (903) (105) --
Other non-cash items ................................................. (1,032) 755 144
Changes in operating assets and liabilities,
net of the effect of acquisitions and dispositions ................... (5,219) 6,648 (4,707)
---------- ---------- ----------

Net cash provided by operating activities ............................ 51,529 74,577 40,869
---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired ............................. -- (133,138) (16,278)
Additions to pipeline, property, plant and equipment .................... (28,486) (27,496) (76,164)
Proceeds from asset dispositions ........................................ 20,426 168 540
Other ................................................................... 848 (827) --
---------- ---------- ----------

Net cash used in investing activities ................................ (7,212) (161,293) (91,902)
---------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings under revolving credit agreements, net ........... (56,624) 110,324 17,200
Borrowings under loan agreements ....................................... 16,250 -- 50,000
Principal payments of debt ............................................. (14,566) (12,835) (12,892)
Dividends paid ......................................................... (1,469) (1,468) (1,470)
Other .................................................................. (351) (252) 230
---------- ---------- ----------

Net cash (used in) provided by financing activities .................. (56,760) 95,769 53,068
---------- ---------- ----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ..................... (12,443) 9,053 2,035

CASH AND CASH EQUIVALENTS, beginning of year .............................. 17,719 8,666 6,631
---------- ---------- ----------

CASH AND CASH EQUIVALENTS, end of year .................................... $ 5,276 $ 17,719 $ 8,666
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

<PAGE> 28

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS

Aquila Gas Pipeline Corporation owns and operates natural gas gathering
and pipeline systems and gas processing plants and is engaged in the business of
purchasing, gathering, transporting, processing, storing and marketing natural
gas and natural gas liquids (NGLs), primarily in the states of Texas and
Oklahoma.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying consolidated financial statements include the historical
operations and accounts of Aquila Gas Pipeline Corporation and subsidiaries
(referred to herein as the Company). The Company's interests in certain business
entities similar to joint ventures are proportionately consolidated. The
Company's 35% investment in the capital stock of Oasis Pipe Line Company
(Oasis), acquired in 1996 (see Note 8), is accounted for using the equity method
of accounting, see Note 11 for additional information. All significant
intercompany transactions have been eliminated in consolidation. Certain
reclassifications to prior period amounts have been made to conform to the 1997
presentation.

In 1993, the Company completed an initial public offering of 5,400,000
shares of its common stock at $15.00 per share. As a result of the offering,
approximately 18% of the Company's common stock is held by the public while
Aquila Energy Corporation (Aquila Energy) holds the remaining 82%. Aquila Energy
is a wholly-owned subsidiary of UtiliCorp United Inc. (UtiliCorp).

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 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.

F-7

<PAGE> 29

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

STATEMENTS OF CASH FLOWS

In order to determine net cash provided by operating activities, net
income has been adjusted by, among other things, changes in current assets and
current liabilities, excluding changes in cash and cash equivalents. The
Company's cash equivalents are all liquid, short-term investments which mature
in three months or less. The changes in operating assets and liabilities, net of
the effects of acquisitions and dispositions, are as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(Increase) Decrease in:
Accounts receivable ............. $ 54,998 $ (79,464) $ (24,782)
Inventories and exchanges ....... 1,127 1,591 1,066
Materials and supplies .......... (1,941) 1,624 1,389

Increase (Decrease) in:
Accounts payable ................ (61,870) 76,810 19,138
Accrued expenses ................ (2,848) 2,962 (1,361)
Accrued interest ................ (422) 1,639 (9)
Income taxes payable to
UtiliCorp ..................... (645) 2,005 (355)
Intercompany payable due to
Aquila Energy ................. 6,382 (519) 207
---------- ---------- ----------

Total ....................... $ (5,219) $ 6,648 $ (4,707)
========== ========== ==========
</TABLE>

The following provides information related to cash paid for interest and
income taxes by the Company:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest, net of amount capitalized .. $ 17,787 $ 14,462 $ 12,124
Taxes ................................ $ 9,061 $ 7,577 $ 3,924
</TABLE>

REVENUE RECOGNITION

Operating revenues are recognized upon the delivery of natural gas or NGLs
to the buyer of the related products or services.

INVENTORIES AND EXCHANGES

Inventories consist of NGLs products, which are stated at the lower of
cost (determined on a first-in, first-out basis) or market value, and natural
gas in storage, which is stated on a mark-to-market basis. Exchanges consist of
natural gas and NGLs delivery imbalances which are presented net on the
accompanying consolidated balance sheets. NGLs imbalances are stated at amounts
not in excess of market value. Natural gas imbalances are on a mark-to-market
basis.

MATERIALS AND SUPPLIES

Materials and supplies are stated at the lower of cost (determined on a
first-in, first-out basis) or market.

F-8

<PAGE> 30

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

COMMODITY RISK MANAGEMENT:

NON-TRADING ACTIVITIES

The Company utilizes various exchange-traded and over-the-counter
commodity financial instrument contracts to hedge natural gas and NGLs. These
consist primarily of futures, options, forward contracts and swaps. Financial
instruments are designated as a hedge at inception. 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.

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 is recognized as a gain or loss in revenues in the period the
direct relationship ceases to exist. Changes in fair value are recognized as
gains or losses in revenues in the period of change. Most of the Company's
hedging activities have tended 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

Contracts entered into for trading purposes are accounted for under the
mark-to-market method. Under mark-to-market accounting, these contracts,
including both physical transactions and financial instruments, are recorded at
market value, net of allowances. The market prices used to value these
transactions reflect management's estimates considering various factors
including closing exchange and over-the-counter quotations, time value and
volatility factors of the underlying commitments. The values are adjusted to
reflect the potential impact of liquidating a position in an orderly manner over
a reasonable period of time under present market conditions. Changes in the
market 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 market value at the reporting date.

PIPELINE, PROPERTY, PLANT AND EQUIPMENT

Pipeline, property, plant and equipment are stated at cost. Additions and
improvements that add to the productive capacity or extend the useful life of
the asset are capitalized. Expenditures for maintenance and repairs are charged
to expense as incurred. Upon disposition or retirement of pipeline components or
gas plant components, any gain or loss is recorded to accumulated depreciation.
When entire pipeline systems, gas plants or other property and equipment are
retired or sold, any gain or loss is included in operations.

Depreciation of the pipeline systems, gas plants and processing equipment
is provided using the straight-line composite method rate primarily based on an
estimated useful life of 25 years. Interest cost on funds used to finance major
pipeline projects during their construction period is capitalized. Capitalized
interest cost was $155, $173 and $1,006 during 1997, 1996 and 1995,
respectively.

Construction work in progress at December 31, 1997 and 1996 was $4,329 and
$1,630, respectively.

F-9

<PAGE> 31

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

INTANGIBLE ASSETS

Intangible assets are recorded at cost and are generally amortized on a
straight-line basis over their estimated useful lives. Intangible assets consist
of the following:

<TABLE>
<CAPTION>
Estimated December 31,
Useful Lives ----------------------
In Years 1997 1996
------------ -------- --------
<S> <C> <C> <C>
Operating lease rights ............ 7 $ -- $ 963
Gathering producer relationship ... 12 14,015 14,015
Transportation rights ............. 23 18,620 21,150
Excess cost over the fair value
of net assets acquired .......... 10 11,472 11,472
-------- --------
44,107 47,600
Less: Accumulated amortization ... (13,181) (10,287)
-------- --------
Total ........................ $ 30,926 $ 37,313
======== ========
</TABLE>

The transportation rights (see Note 8) had a remaining contractual life of
approximately three years at acquisition. However, management of the Company
believes it is probable the transportation rights will be renegotiated with
comparable terms or similar economic value for a minimum of an additional 20
years.

The operating lease rights were included in the sale of Warwink Joint
Venture (see Note 8).

Amortization expense associated with intangible assets was $3,414, $2,753
and $2,504 during 1997, 1996 and 1995, respectively.

INCOME TAXES

The Company is included in the consolidated federal income tax return
filed by UtiliCorp. Under a formal tax sharing agreement, as amended, between
the Company, Aquila Energy and UtiliCorp, the Company will pay to UtiliCorp the
amount of its current tax liability as if the Company were filing a separate tax
return for tax years in which the Company generates current taxable income. For
tax periods in which the Company generates current tax losses, the Company will
receive the benefit of such losses only to the extent it is able to offset
taxable income generated in years subsequent to the 1992 tax year. In the event
additional income taxes, penalties and interest are assessed by tax authorities
as a result of examinations, the formal tax sharing agreement provides for the
payment terms by the Company of assessed amounts.

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109 (SFAS 109) which requires that
deferred tax assets and liabilities be established for the basis differences
between the reported amounts of assets and liabilities for financial reporting
purposes and income tax purposes.

F-10

<PAGE> 32

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS 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 Year Ended December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income available to common stockholders $ 25,166 $ 32,453 $ 9,065

Weighted average shares outstanding:
Stock .............................. 29,400,000 29,400,000 29,400,000
Common stock equivalents ........... 9,726 -- --
------------ ------------ ------------
Total ........................... 29,409,726 29,400,000 29,400,000
============ ============ ============

Basic and diluted earnings per share .. $ .86 $ 1.10 $ .31
============ ============ ============
</TABLE>

Certain options to purchase 24,000 shares of common stock at $14.00 per
share were outstanding for a portion of 1997 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. The Company began issuing its stock
options in 1997; therefore, there is no change to previously reported EPS data.

IMPAIRMENT OF LONG-LIVED ASSETS

In March 1995, the FASB issued SFAS No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires companies to assess their long-lived assets for impairment.
SFAS 121 requires companies to review for impairment whenever events or changes
in circumstances indicate that the carrying amount of a long-lived asset may not
be recoverable. If the carrying amount of a company's long-lived assets is not
recoverable as assessed at the lowest level of identifiable cash flows, an
impairment loss will be recognized equal to the difference between the asset's
carrying amount and its fair value. The Company adopted SFAS 121 as of October
1, 1995. The effect of the adoption of SFAS 121 was to record an impairment loss
of $13,163, which was recorded in the Statement of Income for the year ended
December 31, 1995.

The impairment loss was calculated as the difference between the asset
carrying amounts and their fair value as determined by projected future net cash
flows, giving consideration to prices, future potential gas supply reserve
additions and discount rates. Included in the impairment loss were several small
pipeline systems where volume decreases had occurred and gas supply additions
were limited due to low overall industry drilling activity.

NEW ACCOUNTING STANDARDS

F-11

<PAGE> 33

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

In June 1997, the FASB issued SFAS No. 131 (SFAS 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 131
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. Based on the Company's
current operations, SFAS 131 is not expected to have an impact on the Company's
consolidated financial statements.

2. RELATED PARTY TRANSACTIONS:

The Company enters into various types of transactions with Oasis, Aquila
Energy and UtiliCorp. The Company sells natural gas to Aquila Energy and
subsidiaries of UtiliCorp and purchases natural gas from Aquila Energy. Aquila
Energy enters into certain natural gas and NGLs hedging transactions with or on
behalf of the Company. Additionally, the Company reimburses Aquila Energy and
UtiliCorp, under a formal service agreement, for the direct and indirect costs
of certain Aquila Energy and UtiliCorp employees who provide services to the
Company and for other costs (primarily general and administrative expenses)
related to the Company's operations. Aquila Energy and UtiliCorp allocate
indirect costs to the Company using a formula based upon the ratio of the
Company's levels of revenues, net pipeline, property, plant and equipment and
number of personnel to the total consolidated Aquila Energy or UtiliCorp levels
for such factors. Management of the Company believes that the use of such a
formula results in a reasonable allocation of indirect costs. Aquila Energy also
provides the Company and its subsidiaries with financing agreements, as
described in Note 3. Additionally, the Company transports gas on the Oasis
Pipeline (see Note 8).

The following table summarizes transactions between the Company and
related parties for the indicated periods:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Natural gas sales to UtiliCorp subsidiaries
and Aquila Energy ................................... $ 55,886 $ 24,929 $ 16,238
Purchases of natural gas from Aquila Energy ........... 45,190 14,278 6,387
Oasis transport fees .................................. 7,757 2,728 --
Recognized (gain) loss from hedging transactions
with Aquila Energy .................................. (7,545) (1,628) 3,251
Interest expense with Aquila Energy and UtiliCorp ..... 11,403 9,061 5,037
Reimbursement of direct costs to
Aquila Energy and UtiliCorp ......................... 2,012 2,808 2,003
Service agreement expenses charged by
Aquila Energy and UtiliCorp ......................... 3,972 4,374 4,340
</TABLE>

<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Trade accounts receivable from (payable to)
affiliated companies, net ........................... $ 6,792 $ (944)
Accrued interest payable to affiliated companies ...... $ 2,460 $ 2,589
</TABLE>

F-12

<PAGE> 34

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

2. RELATED PARTY TRANSACTIONS: (CONTINUED)

The following table summarizes the activity in the intercompany payable
account between the Company and Aquila Energy:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year ..................... $ 1,038 $ 1,557 $ 1,350
Service agreement expenses and direct costs .... 5,984 7,182 6,343
Repayments ..................................... -- (7,701) (6,136)
-------- -------- --------
Balance at end of year ........................... $ 7,022 $ 1,038 $ 1,557
======== ======== ========

Average balance outstanding during year .......... $ 3,957 $ 2,497 $ 2,606
======== ======== ========
</TABLE>

3. DEBT:

The following table summarizes the long-term debt of the Company and its
subsidiaries:

<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revolving credit agreements, bearing interest at the
Eurodollar loan rate and the prime rate (6.59% at
December 31, 1997 and 6.01% to 8.25% at
December 31, 1996) .................................. $ 107,700 $ 161,701
Loan agreement bearing interest at 6.47%, due 2005 .... 50,000 50,000
Loan agreement bearing interest at 6.83%, due 2006 .... 16,250 --
8.29% Senior notes, due 2002 .......................... 62,500 75,000
Other ................................................. -- 3,484
---------- ----------
Total debt .......................................... 236,450 290,185
Less: Current maturities of long-term debt ........... (12,500) (12,802)
---------- ----------
Total long-term debt ............................... $ 223,950 $ 277,383
========== ==========
</TABLE>

Current maturities of long-term debt as of December 31, 1997 are $12,500
in 1998, $120,200 in 1999, $12,500 in 2000, $12,500 in 2001, $12,500 in 2002 and
$66,250 thereafter.

REVOLVING CREDIT AGREEMENTS

The Company and its subsidiaries maintain credit agreements, as amended,
with Aquila Energy that provide revolving credit facilities for borrowings. On
June 1, 1997, the Company voluntarily reduced its commitment, by $40,000, of its
revolving credit agreements with Aquila Energy. The Company had a commitment of
$125,000 with $17,300 unused as of December 31, 1997. On February 1, 1998, the
Company again voluntarily reduced its commitment by $10,000 resulting in a
commitment balance of $115,000. The revolvers bear interest at the Company's
election of either a base rate (the higher of a bank prime rate or 1/2 of 1%
above the Federal Funds rate), an adjusted certificate of deposit rate or a
Eurodollar rate. The maturity dates of 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 a one year notice not to renew from the
commitment period. Currently, the maturity dates are in the fourth quarter of
1999. The notes are unsecured and $50,000 of the revolving credit facilities are
subordinate to the 8.29% senior notes described later. Annual commitment fees of
1/4 of 1% on the unutilized portion of the revolving credit facilities are paid
to Aquila Energy.

F-13

<PAGE> 35

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

3. DEBT: (CONTINUED)

The revolving credit agreements require the Company and its subsidiaries
to comply with certain restrictive covenants. At December 31, 1997, the Company
and its subsidiaries were in compliance with such covenants.

On July 1, 1996, the Company entered into an unsecured $3,000 revolving
note agreement with Aquila Energy. The note bears interest at a bank prime rate
and matures in December 1999. In February 1997, the revolving note agreement was
paid off and there was not a balance outstanding at December 31, 1997. It is
included in "Other" in the previous table.

LOAN AGREEMENTS

The Company has a loan agreement (the Loan) with Aquila Energy for an
amount of $50,000. The Loan is unsecured and bears interest at 6.47% due
semi-annually. The principal amount of the Loan shall be repaid to Aquila Energy
by June 1, 2005. On April 1, 1997, the Company entered into another Loan
Agreement (the Loan Agreement) with Aquila Energy for an amount of $16,250. This
Loan Agreement is unsecured and bears interest at 6.83% due semi-annually. The
principal amount of the Loan Agreement shall be repaid to Aquila Energy by
October 15, 2006.

Both loans require the Company to comply with certain financial covenants
as well as limit the activities of the Company in other ways. At December 31,
1997, the Company was in compliance with such covenants.

SENIOR NOTES

The 8.29% senior notes (Senior Notes) are unsecured and bear interest at
8.29% due semi-annually. Principal payments of $12,500 are required each year
until final maturity in September 2002. Upon issuance of the Senior Notes the
Company deferred approximately $1,886 of initial fees and expenses and is
amortizing such deferred financing costs over the life of the notes.

The Senior Notes contain various restrictive covenants, which among
others, limit the sale of assets, additional indebtedness of a subsidiary, and
the ability to make certain restricted payments, including restrictions on the
ability to make dividend payments for amounts in excess of those calculated in
accordance with the covenants. The Senior Notes also require a subsidiary of the
Company to maintain certain financial covenants related to cash flow, fixed
charges and net worth. At December 31, 1997, the subsidiary of the Company was
in compliance with such requirements and had the ability to pay restricted
payments of approximately $62,600.

LINE OF CREDIT

The Company has an agreement with a bank whereby standby letters of credit
may be issued (see Note 7) in an aggregate amount not to exceed the lesser of
$18,000 or a borrowing base as calculated monthly under the agreement. At
December 31, 1997, the borrowing base was $18,000 with no principal outstanding.
This line of credit expires June 30, 1998, and is secured by the accounts
receivable of certain subsidiaries of the Company. Any draw under a letter of
credit bears interest at the bank's prime rate plus 2%, payable monthly.

4. INCOME TAXES:

Components of income tax expense are as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current .................... $ 7,890 $ 9,279 $ 3,264
Deferred ................... 5,268 8,445 1,611
State:
Current .................... 287 303 242
Deferred ................... 1,518 2,062 415
-------- -------- --------
Total .................... $ 14,963 $ 20,089 $ 5,532
======== ======== ========
</TABLE>

F-14

<PAGE> 36

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

4. INCOME TAXES: (CONTINUED)

Income tax expense is different than the amount computed by applying the
statutory federal income tax rate to income before taxes. The reasons for these
differences are as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal statutory tax rate ....................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ....... 2.9 2.9 2.9
Other ............................................ (.6) .3 --
------ ------ ------
37.3% 38.2% 37.9%
====== ====== ======
</TABLE>

The components of the net deferred tax liability of the Company are as
follows:

<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities ......................... $ 99,613 $ 92,025
Deferred tax assets .............................. (23,839) (23,038)
Valuation allowance on deferred tax assets ....... -- --
-------- --------
$ 75,774 $ 68,987
======== ========
</TABLE>

The deferred tax liabilities noted above arise primarily from the excess
of tax depreciation over book depreciation. The deferred tax assets noted above
relate primarily to alternative minimum tax (AMT) credit carryforwards and net
operating loss carryforwards (NOL) in 1996 which were fully applied in 1997. A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized.

At December 31, 1997, the Company has AMT credit carryforwards of
approximately $23,000 which have no expiration date.

UtiliCorp has agreed with the Internal Revenue Service (IRS) on certain
tax issues as a result of the IRS audits of certain UtiliCorp federal income tax
returns for the years 1990 through 1993 (herein referred to as "agreed-upon tax
issues"). In accordance with the provisions of the tax sharing agreement (see
Note 1), UtiliCorp assessed the Company $3,502 for these agreed-upon tax issues.
The Company paid UtiliCorp this amount in 1997 and the first quarter of 1998.
The payment of the income taxes associated with these agreed-upon tax issues had
no effect on net income but an adjustment was made to the deferred tax
liability.

5. MAJOR CUSTOMERS:

The Company and its subsidiaries had gross sales as a percentage of total
revenue to non-affiliated major customers as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Customer A ....................................... 3% 3% 14%
Customer B ....................................... 12% 11% 9%
Customer C ....................................... 11% 11% 6%
</TABLE>

F-15

<PAGE> 37

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

5. MAJOR CUSTOMERS: (CONTINUED)

The Company's natural gas operations have a concentration of customers in
natural gas transmission, distribution and marketing as well as industrial
end-users while its NGLs operations have a concentration of customers in the
refining and petrochemical industries. These concentrations of customers may
impact the Company's overall exposure to credit risk, either positively or
negatively, in that the customers may be similarly affected by changes in
economic or other conditions. However, management believes that the Company's
portfolio of accounts receivable is sufficiently diversified to minimize any
potential credit risk. Historically, the Company has not incurred significant
problems in collecting its accounts receivable and, as such, no allowance for
doubtful accounts has been provided in the accompanying consolidated financial
statements. The Company's accounts receivable are generally not collateralized.

6. RETIREMENT AND BENEFIT PLANS:

UtiliCorp and its subsidiaries have a defined contribution plan for
virtually all employees. Pursuant to the plan, employees can defer a portion of
their compensation and contribute it to a deferred account. The Company's
matching contribution to the plan was $679, $639 and $519 in 1997, 1996 and
1995, respectively.

The Company has a stock contribution plan under which eligible employees
receive a Company contribution of 3% of their base income in UtiliCorp's common
stock. The Company's expense associated with this plan was $357, $345 and $270
for 1997, 1996 and 1995, respectively.

The Company has a stock option plan under which eligible employees were
granted options to purchase shares of UtiliCorp's common stock. The plan
provides that the options will not be granted at a price below the market price
at the date of grant. No compensation expense was charged to the Company for
1997, 1996 and 1995. At December 31, 1997, 1996 and 1995, 21,100, 26,050 and
26,750 shares, respectively, were outstanding at an option price of $27.3125 per
share. All of the options were granted prior to 1994 and are not subject to the
provisions of SFAS No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." See below.

UtiliCorp has also granted its own stock options to certain key members of
management of the Company. At December 31, 1997 and 1996, there were 20,000 and
16,628 options outstanding at an option price per share of $29.375 and $29.08,
respectively.

The Company has a stock appreciation rights plan, as amended, for key
members of management. Under the plan, the Company can award a total of 700,000
stock appreciation rights (SAR), each SAR giving the holder, upon exercise, the
right to receive a cash payment for the difference between the fair market value
of the Company's common stock on the date of grant and the fair market value on
the exercise date. Each SAR has a term of ten years from the date of grant in
which the employee may exercise the SAR. At the end of each reporting period
within the exercise period, the Company records an adjustment to deferred
compensation expense based upon the excess, if any, of the fair market value of
the Company's common stock and the option price of the related SAR. At December
31, 1997, there were 191,344 SARs outstanding at an average price of $12.006 per
SAR. The Company's benefit associated with this plan was $711 in 1997 while in
1996 and 1995 the associated expense was $873 and $241, respectively.

The Company awarded 11,784, 6,295 and 23,765 shares of the Company's
common stock in 1997, 1996 and 1995, respectively, to certain employees of the
Company as restricted stock awards. The shares issued as restricted stock awards
are held by the Company until certain restrictions lapse, generally on the
second or third award anniversary. The restricted stock, when awarded, is
amortized to compensation expense over a two to three year period. The Company's
expense associated with the restricted stock awards was $81, $75 and $79 for
1997, 1996 and 1995, respectively.

F-16

<PAGE> 38

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

6. RETIREMENT AND BENEFIT PLANS: (CONTINUED)

In 1996, the Company's stockholders approved the 1996 Non-Employee
Director Stock Plan (Stock Plan). The Stock Plan authorizes the issuance of a
maximum of 100,000 shares of the Company's common stock based on the fair market
value of the Company's common stock on the date of issuance. Each non-employee
director is to receive common stock of the Company equal to $2 on a quarterly
basis for services performed in the preceding quarter. In 1997 and 1996, 1,124
and 298 shares of the Company's common stock were issued and $16 and $4 of
expense, respectively, was recognized under the Stock Plan.

In 1997, the Company's stockholders approved the Aquila Gas Pipeline
Corporation 1997 Stock Incentive Plan (the Plan), which provides for the
granting of incentive stock options, nonqualified stock options, awards of
restricted stock, stock appreciation rights, performance units or performance
shares and other stock-based awards to eligible employees. The Company has
reserved 500,000 shares of common stock for issuance in accordance with the
Plan. Stock options vest pursuant to the individual stock option agreements with
unexercised options expiring 10 years from the date of grant. In 1997, 60,000
stock options were granted to certain key employees. These options vest at 25%
after the second anniversary, 25% after the third anniversary and the remaining
50% after the fourth anniversary of the grant date.

The Company has adopted SFAS 123 but has elected to continue to account
for employee stock-based compensation under the provisions of APB Opinion No. 25
"Accounting for Stock Issued to Employees." Accordingly, no compensation expense
has been recognized for options granted to employees where the exercise price is
equal to the market price of the underlying stock at the date of grant.

A summary of the status of the Company's Plan for the year ended December
31, 1997, and changes during the year is presented below:

<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
------- --------
<S> <C> <C>
Outstanding, beginning of period ................ -- $ --
Granted ....................................... 60,000 12.72
Forfeited ..................................... (11,000) 14.00
------- --------
Outstanding, end of period ...................... 49,000 $ 12.44
======= ========
Options exercisable at end of period ............ -- $ --
======= ========
Weighted average grant date fair value per
option for options granted during the period .. $ 6.97
========
</TABLE>

The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:

<TABLE>
<CAPTION>
Weighted
Average Weighted
Options Remaining Average
Exercise Price Outstanding Contractual Life Exercise Price
-------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$14.00 24,000 9.1 years $14.00
$10.94 25,000 9.6 years $10.94
-----------
49,000 9.4 years $12.44
===========
</TABLE>

F-17

<PAGE> 39

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

6. RETIREMENT AND BENEFIT PLANS: (CONTINUED)

Had compensation expense for the Company's stock-based compensation plan
been determined based on the fair value at the grant date for awards under this
Plan consistent with the method prescribed by SFAS 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Net income, as reported ............................. $25,166
Net income, pro forma ............................... $25,130

Basic and diluted earnings per share, as reported ... $ .86
Basic and diluted earnings per share, pro forma ..... $ .85
</TABLE>

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Expected dividend yield ............................. .5%
Expected stock price volatility ..................... 32.5%
Risk-free interest rate ............................. 6.4%
Expected life of options ............................ 10 Years
</TABLE>

No disclosures are presented for the periods ended December 31, 1996 and
1995, as the Company had not issued common stock options prior to 1997.

7. COMMITMENTS AND CONTINGENCIES:

LEASE OBLIGATIONS

The Company has various non-cancelable operating leases. Total rent
expense amounted to approximately $1,382, $1,186, and $994 for 1997, 1996 and
1995, respectively. Future minimum rental payments of the Company under the
existing non-cancelable operating lease agreements as of December 31, 1997 are
as follows:

<TABLE>
<S> <C>
1998 ......................... $ 1,078
1999 ......................... 1,099
2000 ......................... 951
2001 ......................... 40
Thereafter ................... --
--------
$ 3,168
========
</TABLE>

LETTERS OF CREDIT AND GUARANTIES

The Company has issued irrevocable standby letters of credit totaling
$9,340 at December 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 natural gas. The standby letters of credit are issued pursuant
to the line of credit discussed in Note 3.

F-18

<PAGE> 40

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)

The Company issued financial guarantees of approximately $1,225 at
December 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.

TAXES

The IRS has examined and proposed adjustments to UtiliCorp's 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 and UtiliCorp (see
Note 1) the Company would be liable to UtiliCorp for additional taxes of
approximately $8,663 for the audit period and through the present plus potential
interest of approximately $2,747. 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, in the normal course of business of its natural gas pipeline
operations, purchases 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.

8. ACQUISITIONS AND SALES:

OASIS PIPE LINE COMPANY

On July 1, 1996 and November 1, 1996, the Company completed the
acquisition of 15% and 25%, respectively, of the outstanding capital stock of
Oasis and related transportation rights from Dow Hydrocarbons and Resources Inc.
(DHRI) for a cash purchase price of $47,143 and $84,000, respectively. The
acquisition cost exceeded the Company's share of the underlying net assets of
Oasis by approximately $97,000. The transportation rights related to the 15% and
25% capital stock acquisitions of Oasis amounted to approximately 120 and 200
million cubic feet per day (MMcf/d), respectively, of firm intrastate
transportation between the Waha, Texas hub and the Katy, Texas hub, plus the
opportunity to utilize excess capacity on an interruptible basis. The
acquisitions were accounted for using the purchase method and are reflected in
the consolidated financial statements using the equity method of accounting.

On April 1, 1997, the Company received $16,800 from El Paso Natural Gas
Company (El Paso) for its exercise of an option to acquire 5% of all the capital
stock of Oasis and the related transportation rights. The Company, after the
exercise of the option, owns 35% of the capital stock of Oasis and has 280
MMcf/d of firm intrastate transportation capacity. The exercise of the option
resulted in no gain or loss on disposition to the Company. The proceeds were
utilized to pay down on the Company's revolving debt.

F-19

<PAGE> 41

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

8. ACQUISITIONS AND SALES: (CONTINUED)

The unaudited pro forma results of operations assuming the acquisitions of
Oasis had occurred as of January 1, 1995 are as follows:

<TABLE>
<CAPTION>
Years Ended December 31, (a)
-----------------------------
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Operating revenues .................. $ 799,278 $ 485,828
Net income .......................... $ 28,940 $ 3,372
Earnings per common share ........... $ .98 $ .11
</TABLE>

----------
(a) The pro forma amounts are presented at the Company's 40% ownership
and do not include any adjustments to reflect the potential
marketing activity that might have occurred if the Company had
acquired Oasis as of January 1, 1995.

The unaudited pro forma information is based upon available information
and certain estimates and assumptions related to the accounting for the Oasis
acquisition. The unaudited pro forma information is not necessarily indicative
of the results that would have occurred had such transaction actually taken
place at the beginning of the period specified nor does such information purport
to project the results to operations for any future date or period.

TRISTAR GAS COMPANY

In January 1995, the Company acquired Tristar Gas Company (Tristar) for
$13,478 in cash. The Company assumed $21,786 of liabilities in connection with
the acquisition of $35,264 in assets, net of cash acquired, in this transaction.
This acquisition was accounted for using the purchase method of accounting which
resulted in excess of cost over fair value of net assets acquired of $11,472 and
an other intangible asset of $963 relating to a favorable operating lease. The
accompanying consolidated financial statements of the Company include Tristar
since the date of acquisition.

WARWINK JOINT VENTURE

On December 1, 1997, the Company through its subsidiary, Tristar, sold its
ownership interest in the joint venture, Warwink Joint Venture, for a gain of
$1,167.

9. COMMODITY RISK MANAGEMENT:

NON-TRADING ACTIVITIES

The Company utilizes commodity financial instruments, primarily futures,
options, forward contracts and swaps (hedges or hedging), to reduce the risk of
commodity price fluctuations for its revenue share of natural gas and NGLs
throughput/production and for its off-system natural gas transportation.
However, hedging and related activities may expose the Company to other risks of
financial loss in certain circumstances, including variances from hedging
assumptions and counterparty risk.

F-20

<PAGE> 42

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

9. COMMODITY RISK MANAGEMENT: (CONTINUED)

The following table details information on the Company's non-trading
hedges as of December 31, 1997. The fair value of the hedges is the estimated
amount the Company would receive or (pay) to terminate the hedges at December
31, 1997.

<TABLE>
<CAPTION>
Years
Notional Which
Volume Carrying Fair Instruments
Bcf (1) Amount Value Extend
-------- -------- ------- -----------
<S> <C> <C> <C> <C>
Swap contracts
Payor .............. 14.9 $ -- $ 256 up to 1998
Receiver ........... 13.2 -- (121) up to 1998
Future Contracts
Payor .............. 18.6 -- (4,244) up to 1998
Receiver ........... 16.6 -- 4,687 up to 1998
-------- -------
Total ................. $ -- $ 578
======== =======
</TABLE>

(1) Billion cubic feet

All financial commodity hedges disclosed have Aquila Energy as the
counterparty because Aquila Energy maintains a centralized commodity risk
management function for its subsidiaries.

TRADING ACTIVITIES

The following table details information on the Company's contracts held or
issued for trading purposes as of December 31 1997:

<TABLE>
<CAPTION>
Years
Notional Which
Volume Instruments
Bcf Extend
-------- -----------
<S> <C> <C>
Swap contracts
Payor .................................. 164.2 $ up to 1999
Receiver ............................... 161.6 up to 1999
Future Contracts
Payor .................................. 55.5 up to 1999
Receiver ............................... 49.5 up to 1999
</TABLE>

The following table details the fair values of contracts held or issued for
trading purposes as of December 31, 1997:

<TABLE>
<CAPTION>
Fair Value of Assets (Liabilities)
----------------------------------
Average Ending
----------- -----------
<S> <C> <C>
Assets ........................ $ 2,056 $ 2,391
Liabilities ................... (1,019) (491)
-----------
Net amount .................... $ 1,900
===========
</TABLE>

The net gain from trading activities during the year was $8,053.

F-21

<PAGE> 43

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

10. FINANCIAL INSTRUMENTS:

CASH AND CASH EQUIVALENTS, OTHER CURRENT ASSETS AND OTHER CURRENT
LIABILITIES

The Company's carrying amounts for cash and cash equivalents, other current
assets and other current liabilities approximate fair value.

DEBT

The carrying value of the debt approximates the fair value of the debt.
This determination is based on management's estimate of the fair value at which
such instruments could be sold or obtained in an unrelated third party
transaction.

LETTERS OF CREDIT

The fair value of the outstanding standby letters of credit of $9,340, at
December 31, 1997 is estimated to be the same as the contract value based on the
nature of the fee arrangements with the bank.

11. INVESTMENT IN AFFILIATED COMPANY:

The Company holds an investment in Oasis which is accounted for by the
equity method of accounting. Dividends received from Oasis were $1,142 and $585
during 1997 and 1996, respectively. The Company's net cost basis in Oasis is
greater than the Company's share of the underlying net assets of Oasis by
$84,764 at December 31, 1997. The cost over the underlying net assets is being
amortized over approximately 35 years based on the underlying assets'
depreciable lives. The amortization is included in the equity in net income from
Oasis.

Summarized financial information of Oasis as of and for the years ended
December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
SUMMARIZED BALANCE SHEET INFORMATION:

Current assets ............................... $ 7,873 $ 7,774
Non-current assets ........................... 43,999 45,276
-------- --------

Total assets ............................. $ 51,872 $ 53,050
======== ========

Current liabilities .......................... $ 7,812 $ 6,579
Non-current liabilities ...................... 11,738 17,821
-------- --------
Total liabilities ........................ $ 19,550 $ 24,400
======== ========

Net assets ............................... $ 32,322 $ 28,650
======== ========

SUMMARIZED STATEMENT OF INCOME INFORMATION:

Revenues ..................................... $ 24,356 $ 28,127
Cost and expenses ............................ $ 17,381 $ 20,486
Net income ................................... $ 6,975 $ 7,641
</TABLE>

F-22

<PAGE> 44

AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

12. QUARTERLY FINANCIAL DATA: (UNAUDITED)

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997:
Operating revenues ..................... $ 273,198 $ 208,164 $ 254,544 $ 278,013
Gross margin ........................... $ 34,628 $ 31,012 $ 27,617 $ 26,071
Net income ............................. $ 8,693 $ 7,036 $ 4,753 $ 4,684
Basic and diluted earnings per share ... $ .30 $ .24 $ .16 $ .16

1996:
Operating revenues ..................... $ 164,917 $ 167,122 $ 202,548 $ 264,691
Gross margin ........................... $ 34,086 $ 30,996 $ 31,885 $ 38,215
Net income ............................. $ 7,773 $ 7,517 $ 7,544 $ 9,619
Basic and diluted earnings per share ... $ .26 $ .26 $ .26 $ .33
</TABLE>

F-23

<PAGE> 45

AQUILA GAS PIPELINE CORPORATION

FINANCIAL STATEMENT SCHEDULE

F-24

<PAGE> 46

SCHEDULE I

AQUILA GAS PIPELINE CORPORATION
PARENT COMPANY ONLY

CONDENSED BALANCE SHEETS

(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Current amounts due from affiliated subsidiaries ........ $ 38,044 $ 41,961
Federal income taxes receivable ......................... -- 1,068
Other current assets .................................... 189 3,581
Investment in subsidiaries (equity method) .............. 185,722 192,215
Pipeline, property, plant and equipment, net ............ 97 92
Long-term advances to affiliated subsidiaries ........... 143,139 141,697
-------- --------

TOTAL ASSETS ............................................ $367,191 $380,614
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current amounts due to Aquila Energy Corporation, net ... $ 6,905 $ 822
Federal income taxes payable ............................ 1,845 --
Other current liabilities ............................... 11,136 5,933
Long-term debt .......................................... 123,950 174,201
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock ......................................... 294 294
Additional paid-in capital ........................... 90,297 90,297
Retained earnings .................................... 132,764 109,067
-------- --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............. $367,191 $380,614
======== ========
</TABLE>

The accompanying notes are an integral part of these condensed financial
statements.

F-25

<PAGE> 47

SCHEDULE I
(CONTINUED)

AQUILA GAS PIPELINE CORPORATION
PARENT COMPANY ONLY (CONTINUED)

CONDENSED STATEMENTS OF INCOME

(IN THOUSANDS)

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INCOME AND EXPENSES:
General and administrative ............... $ -- $ -- $ (10)
Interest (income) expense, net ........... (2,703) 1,280 1,067
Depreciation and amortization ............ 32 26 20
Federal income tax expense (benefit) ..... 1,012 (495) (408)
-------- -------- --------
Total (income) and expenses ............ (1,659) 811 669
-------- -------- --------

INCOME (LOSS) BEFORE EQUITY IN EARNINGS
OF SUBSIDIARIES .......................... 1,659 (811) (669)

EQUITY IN NET EARNINGS OF SUBSIDIARIES ..... 23,507 33,264 9,734
-------- -------- --------

NET INCOME ................................. $ 25,166 $ 32,453 $ 9,065
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these condensed financial
statements.

F-26

<PAGE> 48

SCHEDULE I
(CONTINUED)

AQUILA GAS PIPELINE CORPORATION
PARENT COMPANY ONLY (CONTINUED)

CONDENSED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

Net cash provided by operating activities ................... 49,855 11,767 6,309
---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES -
Additions to pipeline, property, plant and equipment .......... (37) (31) (42)
---------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES :
(Repayments) borrowings under revolving
credit agreement, net ....................................... (66,501) 114,201 (3,300)
Borrowings under loan agreements .............................. 16,250 -- 50,000
Advances to affiliates ........................................ (1,441) (123,667) (53,046)
Dividends paid ................................................ (1,469) (1,468) (1,470)
Other ......................................................... -- -- 2
---------- ---------- ----------
Net cash used in financing activities ........................ (53,161) (10,934) (7,814)
---------- ---------- ----------

NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS .......................................... (3,343) 802 (1,547)
---------- ---------- ----------

CASH AND CASH EQUIVALENTS, beginning of year .................... 3,343 2,541 4,088
---------- ---------- ----------

CASH AND CASH EQUIVALENTS, end of year .......................... $ 0 $ 3,343 $ 2,541
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these condensed financial
statements.

F-27

<PAGE> 49

SCHEDULE I
(CONTINUED)

AQUILA GAS PIPELINE CORPORATION
PARENT COMPANY ONLY (CONTINUED)

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. DEBT

See Note 3 of Notes to Consolidated Financial Statements.

2. PIPELINE, PROPERTY, PLANT AND EQUIPMENT

See Note 1 of Notes to Consolidated Financial Statements.

3. COMMITMENTS AND CONTINGENCIES

See Note 7 of Notes to Consolidated Financial Statements.

F-28

<PAGE> 50

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

AQUILA GAS PIPELINE CORPORATION

By /s/ F. Joseph Becraft
-----------------------
F. Joseph Becraft
Chief Executive Officer,
President and Director

Date March 10, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.

<TABLE>

<S> <C> <C>
March 10, 1998 Chairman of the Board /s/ Charles K. Dempster
-----------------------
Charles K. Dempster

March 10, 1998 Chief Executive Officer, President /s/ F. Joseph Becraft
and Director -----------------------
F. Joseph Becraft

March 10, 1998 Vice President
(Principal Financial Officer and /s/ Damon C. Button
Principal Accounting Officer) -----------------------
Damon C. Button

March 10, 1998 Director
/s/ Harvey J. Padewer
-----------------------
Harvey J. Padewer

March 10, 1998 Director
/s/ Robert L. Howell
-----------------------
Robert L. Howell

March 10, 1998 Director
/s/ Jon L. Mosle, Jr.
-----------------------
Jon L. Mosle, Jr.

March 10, 1998 Director
/s/ Gary L. Downey
-----------------------
Gary L. Downey

March 10, 1998 Director
/s/ Robert K. Green
-----------------------
Robert K. Green

</TABLE>

<PAGE> 51

INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
------------ ------------------------------------------------------------------------------- --------------
<S> <C> <C>

*3.1 Restated Certificate of Incorporation of Aquila Gas Pipeline Corporation
(Incorporated by reference herein to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, Registration Number 33-68226 dated
September 1, 1993)
*3.2 Restated Bylaws of Aquila Gas Pipeline Corporation (Incorporated by reference
herein to Exhibit 3.2 to the Registrant's Registration Statement on Form
S-1, Registration Number 33-68226 dated September 1, 1993)
*10.1 Purchase and Sale Agreement dated January 12, 1990 between Phillips 66 Company
and Aquila Southwest Energy Corporation (Incorporated by reference herein
to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1,
Registration Number 33-68226 dated September 1, 1993)
*10.2 Note Purchase Agreement relating to 8.29% Senior Notes Due September 15, 2002
(Incorporated by reference herein to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, Registration Number 33-68226 dated
September 1, 1993)
*10.3 Revolving Credit Agreement dated August 1, 1992 between Aquila Energy
Corporation and Aquila Southwest Energy Corporation (Incorporated by
reference herein to Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1, Registration Number 33-68226 dated September 1,
1993)
*10.4 Amendment No. 1 to Revolving Credit Agreement dated August 1, 1992 between
Aquila Energy Corporation and Aquila Southwest Energy Corporation
(Incorporated by reference herein to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1, Registration Number 33-68226 dated
September 1, 1993)
*10.5 Agreement Relating to Services and Other Matters dated as of August 1, 1993
between UtiliCorp United Inc. and Aquila Gas Pipeline Corporation
(Incorporated by reference herein to Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1, Registration Number 33-68226 dated
September 1, 1993)
*10.6 Agreement Relating to Services and Other Matters dated as of August 1, 1993
between Aquila Energy Corporation and Aquila Gas Pipeline Corporation
(Incorporated by reference herein to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1, Registration Number 33-68226 dated
September 1, 1993)
*10.7 Mooreland Gas Sale Agreement between Aquila Energy Marketing Corporation and
Aquila Gas Systems Marketing Corporation (Incorporated by reference
herein to Exhibit 10.9 to the Registrant's Registration Statement on Form
S-1, Registration Number 33-68226 dated September 1, 1993)
*10.8 Elk City Gas Sale Agreement between Aquila Energy Marketing Corporation and
Aquila Gas Processing Corporation (Incorporated by reference herein to
Exhibit 10.10 to the Registrant's Registration Statement on Form S-1,
Registration Number 33-68226 dated September 1, 1993)

</TABLE>

<PAGE> 52

Sequentially
Exhibit Numbered
Number Description Page
------------ ------------------------------------------------------------------------------- --------------
<S> <C> <C>

*10.9 Tax Sharing Agreement dated August 27, 1993 among UtiliCorp United Inc., Aquila
Energy Corporation and Aquila Gas Pipeline Corporation (Incorporated by
reference herein to Exhibit 10.11 to the Registrant's Registration Statement
on Form S-1, Registration Number 33-68226 dated September 1, 1993)
*10.10 Form of gas purchase agreement between Aquila Gas Pipeline Corporation and
Clayton Williams, Jr., et. al., as amended (Incorporated by reference herein
to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1,
Registration Number 33-68226 dated September 1, 1993)
*10.11 Form of gas purchase agreement between Aquila Gas Pipeline Corporation and Union
Pacific Resources Company (Incorporated by reference herein to Exhibit 10.15
to the Registrant's Registration Statement on Form S-1, Registration Number
33-68226 dated September 1, 1993)
*10.12 Revolving Credit Agreement dated September 26, 1994 between Aquila Energy
Corporation and Aquila Gas Pipeline Corporation (Incorporated by reference
herein to Exhibit 10.16 of the Form 10-Q for the quarterly period ended
September 30, 1994, File No. 1-12426)
*10.13 First Amendment to Note Purchase Agreement dated November 10, 1994 relating to
8.29% Senior Notes due September 15, 2002 (Incorporated by reference herein to
Exhibit 10.15 of the Form 10-K for the year ended December 31, 1994, File No.
1-12426)
*10.14 Acquisition Agreement for Tristar Gas Company and related companies dated January 17,
1995 (Incorporated by reference herein to Exhibit 10.16 of the Form 10-K for
the year ended December 31, 1994, File No. 1-12426)
*10.15 Amendment No. 2 to Revolving Credit Agreement dated August 1, 1992 between Aquila
Energy Corporation and Aquila Southwest Energy Corporation. (Incorporated
by reference herein to Exhibit 10.20 of the Form 10-Q for the quarterly period
ended September 30, 1995, File No. 1-12426)
*10.16 Amendment No. 1 to Revolving Credit Agreement dated September 26, 1994 between
Aquila Energy Corporation and Aquila Gas Pipeline Corporation (Incorporated by
reference herein to Exhibit 10.21 of the Form 10-Q for the quarterly period ended
September 30, 1995, File No. 1-12426)
*10.17 Loan Agreement dated September 1, 1995 between Aquila Energy Corporation and Aquila
Gas Pipeline Corporation (Incorporated by reference herein to Exhibit 10.22
of the Form 10-Q for the quarterly period ended September 30, 1995, File No.
1-12426)
*10.18 Amendment No. 1 to Loan Agreement dated September 1, 1995 between Aquila Energy
Corporation and Aquila Gas Pipeline Corporation (Incorporated by
reference herein to the Form 10-K for the year ended December 31, 1995, File No.
1-12426)
*10.19 Amendment No. 1 to Tax Sharing Agreement dated August 27, 1993 among
UtiliCorp United Inc., Aquila Energy Corporation and Aquila Gas Pipeline
Corporation (Incorporated by reference herein to Exhibit 10.21 of the Form
10-K for the year ended December 31, 1995, File No. 1-12426)
*10.20 Acquisition Agreement for Oasis Pipe Line Company dated June 6, 1996 between Dow
Hydrocarbons and Resources Inc. and AQP Holdings L.P. (Incorporated by
reference herein to Exhibit 10.1 of the Form 10-Q for the quarterly period
ended June 30, 1996, File No. 1-12426)

</TABLE>

<PAGE> 53

Sequentially
Exhibit Numbered
Number Description Page
------------ ------------------------------------------------------------------------------ --------------

<S> <C> <C>
*10.21 Acquisition Agreement for Oasis Pipe Line Company dated August 28, 1996
between Dow Hydrocarbons and Resources Inc. and AQP Holdings L.P.
(Incorporated by reference herein to Exhibit 10.1 of the Form 10-Q for the
quarterly period ended September 30, 1996, File No. 1-12426)
*10.22 Note Agreement dated July 1, 1996 between Aquila Energy Corporation and AQP
Holdings L.P. (Incorporated by reference herein to Exhibit 10.2 of the Form
10-Q for the quarterly period ended September 30, 1996, File No. 1-12426)
*10.23 Amendment No. 3 to Revolving Credit Agreement dated August 1, 1992 between
Aquila Energy Corporation and Aquila Southwest Energy Corporation
(Incorporated by reference herein to Exhibit 10.3 of the Form 8-K Current
Report dated November 15, 1996, File No. 1-12426)
*10.24 Amendment No. 2 to Revolving Credit Agreement dated September 26, 1994
between Aquila Energy Corporation and Aquila Gas Pipeline Corporation
(Incorporated by reference herein to Exhibit 10.2 of the Form 8-K Current
Report dated November 15, 1996, File No. 1-12426)
*10.25 Loan Agreement dated April 1, 1997 between Aquila Energy Corporation and
Aquila Gas Pipeline Corporation (Incorporated by reference herein to Exhibit
10.1 of the Form 10-Q for the quarterly period ended June 30, 1997, File No.
1-12426)

Management Contracts and Compensatory Plans or Arrangements
-----------------------------------------------------------

*10.26 Stock Option Agreement dated October 29, 1996, between AQP Holdings L.P. and El
Paso Natural Gas Company (Incorporated by reference herein to Exhibit 10.1
of the Form 8-K Current Report dated November 15, 1996, File No. 1-12426)
*10.27 Aquila Gas Pipeline Corporation Stock Appreciation Rights Plan (Incorporated by
reference herein to Exhibit 10.12 to the Registrant's Registration Statement
on Form S-1, Registration Number 33-68226 dated September 1, 1993)
*10.28 Employment Contract with Craig F. Strehl dated as of September 1, 1993, (Incorporated
by reference herein to Exhibit 10.13 to the Registrant's Registration
Statement on Form S-1, Registration Number 33-68226 dated September 1, 1993)
*10.29 Aquila Gas Pipeline Corporation 1994 Restricted Stock Plan (Incorporated
by reference herein to Exhibit 10.19 of the Form 10-K for the year ended
December 31, 1994, File No. 1-12426)
*10.30 Change of Control Agreement dated June 29, 1995 between Aquila Gas Pipeline Corporation
and Craig F. Strehl (Incorporated by reference herein to Exhibit 10.23 of
the Form 10-Q for the quarterly period ended September 30, 1995, File No.
1-12426)
*10.31 Amendment to Employment Contract dated June 12, 1995 between Aquila Gas Pipeline
Corporation and Craig F. Strehl (Incorporated by reference herein to Exhibit
10.24 of the Form 10-Q for the quarterly period ended September 30, 1995,
File No. 1-12426)
*10.32 Aquila Gas Pipeline Corporation Amended Stock Appreciation Rights Plan (Incorporated
by reference herein to Exhibit 10.27 of the Form 10-K for the year ended
December 31, 1995, File No. 1-12426)
*10.33 Aquila Gas Pipeline Corporation 1996 Non-Employee Director Stock Plan (Incorporated
by reference herein to Exhibit 10.2 of the Form 10-Q for the quarterly
period ended June 30, 1996, File No. 1-12426)

</TABLE>

<PAGE> 54

Sequentially
Exhibit Numbered
Number Description Page
------------ ------------------------------------------------------------------------------ --------------
<S> <C> <C>
*10.34 Aquila Gas Pipeline Corporation 1997 Stock Incentive Plan (Incorporated by
reference herein to Appendix A to the Proxy Statement on Schedule 14A dated
April 14, 1997, File No. 1-12426)
10.35 Employment Letter Agreement with F. Joseph Becraft dated as of July 11, 1997 25
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule 31
33

</TABLE>

--------------------------------
* Exhibits marked with an asterisk are incorporated by reference
as indicated pursuant to Rule 12(b)-23.

<PAGE> 1

Aquila Gas Pipeline Corporation

File Number 1-12426

Exhibit 10.35

Employment Letter Agreement with F. Joseph Becraft
dated as of July 11, 1997

<PAGE> 2
July 11, 1997

Joe Becraft
11834 Elmscourt
San Antonio, TX 78230

Dear Joe,

On behalf of Harvey Padewer and the Board of Directors of AQP, I am pleased to
extend this revised offer to you to join AQP as President and Chief Executive
Officer. This position is located in San Antonio and reports to Harvey Padewer
of UtiliCorp Energy Group and to the Board of Directors of AQP. As President and
CEO of AQP, you will be accountable for the public ownership of AQP, in addition
to representing UtiliCorp's interest. You will also be invited to be a member of
the AQP Board of Directors.

The key elements of your employment are summarized below:

o Base Annual Salary: $275,000

o You are eligible to participate in our short-term incentive plan with your
individual target opportunity set at 45% of your base salary. The plan is
uncapped, and will reward significantly above target for outstanding
performance. This is contingent upon corporate achievements as well as
personal achievement of performance levels to be discussed between you and
Harvey Padewer. Your 1997 bonus participation and rewards are to be
prorated based your start date.

- With your award for 1997 performance you will have the option of
purchasing UCU stock and receiving an additional incentive of 25% of
that amount payable in 3-year restricted stock. This will assist you
in reaching your ownership target.

o Ownership levels have been established to help all key managers identify
with the interests of our shareholders. Your target is two (2) times your
annual base salary to be reached over a 5-year period. Your target will be
a composite of both UCU and AQP stock and includes stock held in your name
in all programs (e.g. 401(k). ESCP, ESPP, personal stock, etc).

<PAGE> 3

Joe Becraft
07/11/97
Page 2

o Non-Qualified stock option grant of 20,000 UCU shares with a one year
vesting requirement. The exercise price of this grant will be established
at the next UCU Board of Directors meeting in August.

o You are eligible to participate in our long-term incentive program which is
designed to share and reward our long-term success and to encourage your
continued participation with UEG and AQP. The long-term incentive program
consists of the following components:

o Performance Units. The performance units measure and reward for UEG's
and AQP's success over individual three year cycles. The first cycle
has been reduced to a two year cycle with the second cycle commencing
the same year and will be a three year cycle. Your participation will
be prorated from your date of hire. The metric is our planned level of
EVA for the two and three year periods.

- A new three year period begins each year, thus when fully
implemented, there will be three cycles outstanding at any point
in time. As a participant, you have a performance unit target
award opportunity of $150,000 for each cycle. After EVA results
against plan will determine your award, which can range up to 2
times your annual base salary. The first two cycles began on
January 1, 1997. The first cycle concludes December 31, 1998; the
second cycle concludes December 31, 1999.

o AQP Stock Options. A grant of 25,000 Aquila Gas Pipeline stock options
will be awarded, with strike price equal to the closing price of AQP's
stock at the next Board of Director's meeting. The vesting schedule is
as follows: 0% after one year; 25% after two years; 25% after three
years; 50% after four years with full vesting in year 2000.

o In addition, you will be granted 5,000 shares of AQP restricted stock,
vesting after 2 years of employment.

o Benefit programs

o You will be eligible to participate in UtiliCorp's 401(k) Savings
Plan and Employee Stock Purchase Plan the first of the month following date of
hire. The 401(k) Plan has a dollar for dollar employer match up to 6% of your
pretax and/or after-tax contributions. Employer contributions are made in
UtiliCorp stock and vested over five years at 20% per year. You may make total
contributions up to 12% of pay subject to IRS limitations.

<PAGE> 4

Joe Becraft
07/11/97
Page 3

o Supplemental Contributory Retirement Plan. This plan is a
non-qualified supplement to the 401(k) plan for those who may
exceed IRS limits on 401(k) contributions. This includes the
excess 401(k) program on a pretax or after-tax basis up to 12% of
base salary with the company match of $1 for $1 up to 6% of
salary. You will again have the opportunity to enroll in this
plan within 30 days of your date of hire.

o Capital Accumulation Plan. This plan allows you to defer all or
part of your base salary and all or part of your bonus, within
certain guidelines. Investments choices include equity or a fixed
income return equal to 130% of Moody's Corporate Bond Yield. Your
decision to participate in the deferred compensation plan must be
made within 30 days of your date of hire.

o Executive life insurance which equals three times your base
salary.

o Executive long term disability, 60% of base salary with a maximum
of $20,000 per month.

o Medical/dental plan with an approximate $40.40 per month premium
currently for single coverage, $79.60 per month premium currently
for employee and 1 dependent, $118.80 (Humana HMO $133.21) for
employee and 2 or more dependents.

o Perquisite program and business tools.

o Lump sum payment of $5,000 (net of taxes). This allowance is
designed to provide flexibility in deciding for yourself how
these dollars should be spent, keeping in mind that these dollars
are to be used for the mutual benefit of our customers and our
stockholders in attracting new business, and to the executive to
assist in carrying out executive accountabilities.

o Financial planning services. Up to $5,000 (net of taxes) maximum
per year. You are responsible for selecting the financial
planner.

o Tax preparation services. Up to $300 (net of taxes) maximum per
year. You are responsible for selecting the tax preparation firm.

o Business tools. UtiliCorp will continue to provide tools to
executives which are necessary for the executive to conduct
business. The following items have been approved for you.
Cellular phone (up to $360), personal computer and phone lines
(up to $1,100).

o Change of Control. You are eligible to participate in the Change
In Control program which has been amended to include key
individuals within UEG. In the event of a change in control and
subsequent loss of your job, you will continue to be eligible for
one and one half (1 1/2) times your annual salary. Should you
accept the job the agreement will be forwarded to you.

<PAGE> 5

Joe Becraft
07/11/97
Page 4

o Eligible for four weeks vacation annually with 160 hours balance
provision

o The Employee Stock Purchase Plan allows you to purchase stock at a 15%
discount up to 20% of your base salary in any calendar period up to a
maximum of $25,000.

o The company contributes 3% of your pay in the Employee Stock
Contribution Plan, in corporate stock, vesting at 20% per year with
1,000 hours service.

o In addition to the other conditions on your employment, this offer and
your employment with AQP are contingent on the following.

o You must be able to begin work for AQP, without
restrictions, on or before August 1, 1997; and,

o You must sign and return this offer letter to my attention
on or before August 1, 1997. By signing this offer letter,
you certify that you are not prohibited or restricted in any
manner from working for AQP, due to any express or implied
agreement with any other person or entity, including without
limitation any confidentiality, non-competition, or
non-solicitation agreement.

This offer is contingent upon passing a pre-employment drug test which must
be completed within 2 business days after accepting the position. Please
contact Donna Gavin at (800) 941-6271 to arrange.

This offer is also contingent upon a satisfactory background investigation
which will be completed upon acceptance of this offer.

It should be understood that all the preceding benefit plans are subject to
change during the normal course of UtiliCorp-wide plan re-designs.

If you decide to accept the offer of employment, please complete the
Personal Data Form and employment application enclosed with this letter and
return it along with your written confirmation.

In order for UtiliCorp United to comply with the Immigration Reform and
Control Act of 1986, you must provide documentation of your identity and
legal eligibility for employment in the United States. You must bring this
documentation with you on your first day of employment for your
orientation. A complete list of acceptable documents is enclosed.

<PAGE> 6

Joe Becraft
07/11/97
Page 5

After you have reviewed this offer please give me a call to discuss acceptance,
work location and coordination of your announcement. Please sign to signify your
acceptance and fax a signed copy to me at (816) 467-3520

Sincerely,

Leo Morton
Senior Vice President
Human Resources

cc: Harvey Padewer
Chuck Dempster
Donna Gavin

LM/dg

_____ Offer Accepted _____ Offer Declined

- -----------------------------------
Signature/Date

<PAGE> 1

Aquila Gas Pipeline Corporation

File Number 1-12426

Exhibit 21.1

Subsidiaries of the Registrant

<PAGE> 2

Exhibit 21.1

Subsidiaries of the Registrant

Direct Subsidiaries of Aquila Gas Pipeline Corporation:
Aquila Tristar Corporation, a Delaware corporation
Aquila Southwest Energy Corporation, a Delaware corporation
Aquila Katy Pipeline Corporation, a Delaware corporation
Aquila Gas Processing Corporation, a Delaware corporation
Aquila Southeast Pipeline Corporation, a Delaware corporation
Aquila Gas Systems Corporation, a Delaware corporation
AQP Newco Corporation, a Delaware corporation
AQP Acquisitions L.L.C., a Delaware limited liability company

Direct and Indirect Subsidiaries of Aquila Tristar Corporation:
Tristar Gas Investments Corporation, a Texas corporation
Tristar Gas Company L.P., a Texas limited partnership
Tristar Gas Marketing Company, a 50% owned Texas general partnership
Tristar Gas Marketing LTD, a Texas limited partnership
South Texas Gas Gathering and Treating System, a 50% owned Texas
joint venture
Dorado Joint Venture, a 40% owned Texas joint venture
Nustar Joint Venture, a 20% owned Texas joint venture

Direct and Indirect Subsidiaries of Aquila Southwest Energy Corporation:
Aquila Southwest Pipeline Corporation, a Delaware corporation
Aquila Southwest Marketing Corporation, a Delaware corporation
Brooks-Hidalgo Pipeline System, a 23% owned Texas joint venture
Brooks-Hidalgo Marketing Services, a 50% owned Texas joint venture
Fayette County Gathering System, a 50% owned Texas joint venture
Aquila Southwest Processing, L.P., a Delaware limited partnership
Aquila Southwest Marketing, L.P., a Delaware limited partnership
Aquila Limited Corporation, a Nebraska corporation

Direct Subsidiary of Aquila Gas Systems Corporation:
Aquila Gas Systems Marketing Corporation, a Delaware corporation

Direct Subsidiary of AQP Newco Corporation and AQP Acquisitions L.L.C.:
AQP Holdings L.P., a Delaware limited partnership

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,276
<SECURITIES> 0
<RECEIVABLES> 102,420
<ALLOWANCES> 0
<INVENTORY> 1,637
<CURRENT-ASSETS> 115,359
<PP&E> 519,370
<DEPRECIATION> (117,179)
<TOTAL-ASSETS> 646,333
<CURRENT-LIABILITIES> 123,109
<BONDS> 223,950
0
0
<COMMON> 294
<OTHER-SE> 223,061
<TOTAL-LIABILITY-AND-EQUITY> 646,333
<SALES> 1,013,919
<TOTAL-REVENUES> 1,013,919
<CGS> 894,591
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 63,796
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,237
<INCOME-PRETAX> 40,129
<INCOME-TAX> 14,963
<INCOME-CONTINUING> 25,166
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,166
<EPS-PRIMARY> .86
<EPS-DILUTED> .86

</TABLE>