<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-12426
AQUILA GAS PIPELINE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 47-0731171
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 N.E. Loop 410, Suite 1000, San Antonio, Texas
78216-4754
(Address of principal executive offices)
(Zip Code)
(210) 476-1100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding on November 2, 1998
----- -------------------------------
Common stock, $.01 par value 29,400,000
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 4,354 $ 5,276
Accounts receivable .............................................................. 76,910 102,420
Inventories and exchanges ........................................................ 4,828 1,637
Materials and supplies ........................................................... 5,771 6,026
---------- ----------
Total current assets ........................................................ 91,863 115,359
---------- ----------
INVESTMENT IN AFFILIATE, net ........................................................... 97,037 96,257
---------- ----------
PIPELINE, PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas pipelines ............................................................ 451,848 442,995
Plants and processing equipment .................................................. 80,002 76,375
---------- ----------
531,850 519,370
Less - Accumulated depreciation .................................................. (133,736) (117,179)
---------- ----------
398,114 402,191
INTANGIBLE ASSETS, net ................................................................ 28,557 30,926
---------- ----------
OTHER, net ............................................................................ 1,685 1,600
---------- ----------
TOTAL ASSETS .......................................................................... $ 617,256 $ 646,333
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ............................................. $ 12,500 $ 12,500
Accounts payable ................................................................. 72,162 91,425
Accrued expenses ................................................................. 8,211 6,002
Accrued interest ................................................................. 2,624 3,971
Income taxes payable to UtiliCorp United Inc. .................................... 123 2,189
Intercompany payable due to Aquila Energy Corporation ............................ 4,448 7,028
---------- ----------
Total current liabilities ................................................... 100,068 123,115
---------- ----------
LONG-TERM DEBT ........................................................................ 214,750 223,950
---------- ----------
DEFERRED INCOME TAXES ................................................................. 76,324 75,774
---------- ----------
OTHER LONG-TERM LIABILITIES ........................................................... 54 139
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none outstanding
at September 30, 1998 and December 31, 1997 .................................... -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 29,400,000 shares
issued and outstanding at September 30, 1998 and December 31, 1997 ............. 294 294
Additional paid-in capital ....................................................... 90,297 90,297
Retained earnings ................................................................ 135,469 132,764
---------- ----------
Total stockholders' equity .................................................. 226,060 223,355
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 617,256 $ 646,333
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES ...................................................$ 202,689 $ 254,544 $ 705,568 $ 735,906
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales ................................................... 184,550 226,927 643,091 642,649
Operating ....................................................... 5,443 5,626 16,068 16,989
General and administrative ...................................... 3,938 4,091 12,587 12,333
Depreciation and amortization ................................... 6,623 6,444 19,710 19,026
------------- ------------- ------------- -------------
Total costs and expenses ................................... 200,554 243,088 691,456 690,997
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS ............................................... 2,135 11,456 14,112 44,909
INTEREST AND DEBT EXPENSES, net ...................................... 3,715 4,246 10,403 13,029
EQUITY IN NET INCOME OF AFFILIATE .................................... 448 272 780 618
------------- ------------- ------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES .................................... (1,132) 7,482 4,489 32,498
(BENEFIT) PROVISION IN LIEU OF INCOME TAX EXPENSE .................... (1,172) 2,729 683 12,016
------------- ------------- ------------- -------------
NET INCOME ...........................................................$ 40 $ 4,753 $ 3,806 $ 20,482
============= ============= ============= =============
BASIC AND DILUTED EARNINGS PER SHARE ................................$ .00 $ .16 $ .13 $ .70
============= ============= ============= =============
BASIC SHARES OUTSTANDING ............................................. 29,400,000 29,400,000 29,400,000 29,400,000
============= ============= ============= =============
DILUTED SHARES OUTSTANDING .......................................... 29,400,000 29,400,202 29,402,983 29,400,068
============= ============= ============= =============
CASH DIVIDENDS PER SHARE OF COMMON STOCK .............................$ .0125 $ .0125 $ .0375 $ .0375
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 3,806 $ 20,482
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................ 19,710 19,026
Deferred income taxes .................................................... 550 3,067
Dividends from affiliate ................................................. -- 92
Equity in net income of affiliate ........................................ (780) (618)
Other non-cash items ..................................................... (93) 156
Changes in operating assets and liabilities:
Accounts receivable .............................................. 25,510 35,435
Inventories and exchanges ........................................ (3,191) (749)
Materials and supplies ........................................... 255 (1,126)
Accounts payable ................................................. (19,263) (26,349)
Accrued expenses ................................................. 2,209 1,000
Accrued interest ................................................. (1,347) (1,292)
Income taxes payable to UtiliCorp United Inc. .................... (2,066) 578
Intercompany payable due to Aquila Energy Corporation ......... (2,580) 4,504
--------- ----------
Net cash provided by operating activities ............................... 22,720 54,206
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to pipeline, property, plant and equipment ........................ (15,177) (23,277)
Proceeds from asset dispositions ............................................ 1,858 17,076
--------- ----------
Net cash used in investing activities .............................. (13,319) (6,201)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving credit agreements, net ................... 3,300 (57,874)
Borrowings under loan agreement.................................................. -- 16,250
Principal payments of debt ..................................................... (12,500) (14,253)
Dividends paid ................................................................. (1,101) (1,101)
Other ...................................................................... (22) (334)
--------- ----------
Net cash used in financing activities ............................... (10,323) (57,312)
--------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......................................... (922) (9,307)
CASH AND CASH EQUIVALENTS, beginning of period ................................... 5,276 17,719
--------- ----------
CASH AND CASH EQUIVALENTS, end of period .......................................... $ 4,354 $ 8,412
========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements of Aquila Gas
Pipeline Corporation and subsidiaries (the Company) have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. All adjustments of a normal recurring nature have been
made which the Company believes are necessary for a fair presentation of the
Company's financial position and results of operations for such interim periods.
These interim results are not necessarily indicative of the results for a full
year. Certain information and note disclosures related to the unaudited interim
periods ended September 30, 1998 and 1997, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations although
the Company believes the disclosures are adequate to make the interim period
information presented herein not misleading.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The more significant areas requiring the use of estimates
relate to the fair value of financial instruments and useful lives for
depreciation and amortization. Actual results may differ from those estimates.
The Company is subject to a number of risks inherent in the industry in
which it operates, primarily fluctuating prices and gas supply. The Company's
financial condition and results of operations will depend significantly upon the
prices received for natural gas and natural gas liquids (NGLs). These prices are
subject to wide fluctuation due to a variety of factors that are beyond the
control of the Company. In addition, the Company must continually connect new
wells to its gathering systems in order to maintain or increase throughput
levels to offset natural declines in dedicated volumes. The number of new wells
drilled will depend on a variety of factors that are beyond the control of the
Company.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 establishes new standards for computing and presenting
earnings per share. At December 31, 1997, the Company adopted SFAS No. 128. The
following is a reconciliation of income available to common stockholders and the
weighted average number of common shares outstanding for each respective period:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Income available to common stockholders ........ $ 40 $ 4,753 $ 3,806 $ 20,482
Weighted average shares outstanding:
Basic shares outstanding .................... 29,400,000 29,400,000 29,400,000 29,400,000
Effect of dilutive securities:
Options ..................................... -- 202 2,983 68
------------ ----------- ------------- -----------
Diluted shares outstanding ............... 29,400,000 29,400,202 29,402,983 29,400,068
============ =========== ============= ===========
Basic and diluted earnings per share ........... $ .00 $ .16 $ .13 $ .70
============ =========== ============= ===========
</TABLE>
5
<PAGE> 6
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. BASIS OF PRESENTATION: (CONTINUED)
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997. No changes in accounting principles have occurred since that date.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. Adoption of SFAS No. 133 is required for all fiscal
quarters of all fiscal years beginning after September 15, 1999, although
earlier adoption is encouraged. The Company is currently evaluating the
potential impact of SFAS No. 133.
2. STATEMENTS OF CASH FLOWS:
Supplemental disclosure of cash flow information for cash paid for
interest and income taxes by the Company:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
--------- --------
<S> <C> <C>
Interest, net of amount capitalized ....... $ 11,963 $ 14,150
Income taxes .............................. $ 2,248 $ 8,553
</TABLE>
3. COMMITMENTS AND CONTINGENCIES:
LETTERS OF CREDIT AND GUARANTEES
The Company has issued irrevocable standby letters of credit totaling
$9,419 at September 30, 1998. The standby letters of credit, which generally
have terms from one to three months, collateralize obligations to third parties
for the purchase of gas. The standby letters of credit are issued pursuant to a
line of credit maintained by the Company. The line of credit securing the
letters of credit has been amended to reduce the principal amount to $16,000 and
extend the maturity to December 31, 1998.
The Company has issued various financial guarantees related to business
activities. Management does not believe it is probable that the financial
guarantees will be exercised.
6
<PAGE> 7
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
3. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
TAXES
The Internal Revenue Service (IRS) has examined and proposed adjustments
to UtiliCorp United Inc.'s (UtiliCorp) consolidated federal income tax returns
for 1988 through 1993. The proposed adjustment affecting the Company is to
lengthen the depreciable life of certain pipeline assets owned by the Company.
The Company has filed a petition in U.S. Tax Court contesting the IRS proposed
adjustments for the years of 1990 through 1992. The IRS has also proposed an
adjustment on the same issue for 1993, which the Company plans to contest by
filing a similar petition. The Company intends to vigorously contest the
proposed adjustment and believes it is reasonably possible they will prevail. It
is expected that additional assessments for the years 1994 through the present
would be made on the same issue. Under the provisions of the tax sharing
agreement with Aquila Energy Corporation (Aquila Energy) and UtiliCorp, the
Company would be liable to UtiliCorp for additional taxes of approximately
$9,668 for the audit period and through the present plus potential interest of
approximately $4,012. 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, to which the Company is a
party, would have a material adverse effect on the Company's financial position
or results of operations. However, due to the inherent uncertainty of
litigation, there can be no assurance that the resolution of any particular
claim or proceeding would not have an adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurred.
The Company, in the normal course of business of its natural gas pipeline
operations, purchases, processes and sells natural gas pursuant to long-term
contracts. Such contracts contain terms which are customary in the industry. The
Company believes that such terms are commercially reasonable and will not have a
material adverse effect on the Company's financial position or results of
operations.
7
<PAGE> 8
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RECENT DEVELOPMENTS
On November 11, 1998, the Company received a proposal from UtiliCorp
United Inc. (UtiliCorp), its indirect parent corporation, to purchase the 18% of
outstanding common shares of the Company which UtiliCorp does not already own
for $8.00 per share. An independent committee, consisting of the outside
directors of the Company, will handle all negotiations with UCU concerning any
agreement for the proposed buyback of shares, including the form of
consideration to be paid.
The following discussion and analysis relates to the condensed
consolidated financial position and results of operations of the Company for the
three and nine months ended September 30, 1998 and 1997. Reference should be
made to the Condensed Consolidated Financial Statements and the Notes thereto:
<TABLE>
<CAPTION>
Three Months Ended Period 1997 Nine Months Ended Period 1997
September 30, to 1998 Change September 30, to 1998 Change
------------------- ---------------- -------------------- ------------------
1998 1997 Amount Percent 1998 1997 Amount Percent
------- ------- ------ ------ ------- -------- -------- -----
(Dollars in thousands except volume and price data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Natural gas revenues $195,748 $234,235 $ (38,487) (16)% $674,125 $667,108 $ 7,017 1 %
Natural gas liquids (NGLs) 6,941 20,309 (13,368) (66)% 31,443 68,798 (37,355) (54)%
-------- -------- --------- -------- -------- --------
Total operating revenues 202,689 254,544 (51,855) (20)% 705,568 735,906 (30,338) (4)%
-------- -------- --------- -------- -------- --------
Cost of sales 184,550 226,927 (42,377) (19)% 643,091 642,649 442 -- %
-------- -------- --------- -------- -------- --------
Gross margin 18,139 27,617 (9,478) (34)% 62,477 93,257 (30,780) (33)%
-------- -------- --------- -------- -------- --------
Operating expenses 5,443 5,626 (183) (3)% 16,068 16,989 (921) (5)%
General and administrative expenses 3,938 4,091 (153) (4)% 12,587 12,333 254 2 %
Depreciation and amortization 6,623 6,444 179 3 % 19,710 19,026 684 4 %
Interest and debt expenses, net 3,715 4,246 (531) (13)% 10,403 13,029 (2,626) (20)%
Equity in net income of affiliate 448 272 176 65 % 780 618 162 26 %
(Benefit) provision in lieu of
income tax expense (1,172) 2,729 (3,901) (143)% 683 12,016 (11,333) (94)%
-------- -------- --------- -------- -------- --------
Net income $ 40 $ 4,753 $ (4,713) (99)% $ 3,806 $ 20,482 $(16,676) (81)%
======== ======== ========= ======== ======== ========
OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold 386 346 40 12 % 336 344 (8) (2)%
Throughput transported 113 139 (26) (19)% 122 147 (25) (17)%
-------- -------- --------- -------- -------- --------
Total throughput 499 485 14 3 % 458 491 (33) (7)%
-------- -------- --------- -------- -------- --------
Marketed off-system 716 778 (62) (8)% 851 688 163 24 %
-------- -------- --------- -------- -------- --------
Total throughput and
marketed off-system 1,215 1,263 (48) (4)% 1,309 1,179 130 11 %
======== ======== ========= ======== ======== ========
Gross NGLs production (MBbls/d) 24 38 (14) (37)% 26 39 (13) (33)%
Average natural gas price ($/Mcf) $ 1.94 $ 2.28 $ (.34) (15)% $ 2.07 $ 2.35 $ (.28) (12)%
Average NGLs price ($/gallon) $ .23 $ .32 $ (.09) (28)% $ .25 $ .34 $ (.09) (26)%
</TABLE>
8
<PAGE> 9
RESULTS OF OPERATIONS
The Company's results of operations are determined primarily by the volume
and price 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 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 1998 along
with other hydrocarbon liquid prices. The Company has not entered into any
significant hedging transactions in 1998 to mitigate the effect of lower NGLs
price on its results of operations. Most of the Company's operating costs do not
vary directly with volumes on existing systems; thus, increases or decreases in
volumes on existing systems generally have a direct effect on net income.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total operating revenues inclusive of natural gas and NGLs decreased 20%
to $202.7 million in 1998 compared to $254.5 million in 1997. Natural gas
revenues decreased 16% to $195.7 million in 1998 compared to $234.2 million in
1997 as the result of a 15% decrease in the average natural gas price to $1.94
per thousand cubic feet (Mcf) in 1998 from $2.28 per Mcf in 1997 and a decrease
of 2% in natural gas throughput sold and marketed to 1,102 million cubic feet
per day (MMcf/d) in 1998 compared to 1,124 MMcf/d in 1997.
NGLs revenues decreased 66% to $6.9 million in 1998 compared to $20.3
million in 1997 as the result of a 37% decrease in gross NGLs production to
24,000 barrels per day (Bbls/d) in 1998 compared to 38,000 Bbls/d in 1997. This
decrease resulted from a reduction in NGLs content in the natural gas delivered
to the Company at the wellhead and voluntarily bypassing significant volumes of
lower liquid content gas due to depressed NGLs prices. Average NGLs price
decreased 28% to $.23 per gallon in 1998 from $.32 per gallon in 1997.
Cost of sales was $184.6 million, or 91% of operating revenues, in 1998
compared to $226.9 million, or 89% of operating revenues, in 1997. The increase
in the percentage is primarily due to the off-system marketing activities which
have lower gross margin percentages. Cost of sales decreased as the result of a
decrease in the average natural gas price and a decrease in natural gas marketed
volumes offset by a 3% increase in natural gas throughput volumes.
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 $18.1 million, or 9% of operating revenues, in 1998 compared to $27.6
million, or 11% of operating revenues, in 1997. The $9.5 million decrease in
gross margin is due to a decrease in off-system marketing results and a decrease
in gross NGLs production and average NGLs price. The decrease in percentage is
due to the increase in overall off-system marketing activities which have lower
gross margin percentages and a decrease in the average NGLs price
Operating expenses decreased 3% to $5.4 million in 1998 compared to $5.6
million in 1997 as a result of the sale of the Company's ownership interest in
Warwink Joint Venture in December 1997 and a reduction in maintenance expenses
on the gathering systems offset by an increase in expenses due to the purchase
of a treating facility that had previously been leased.
General and administrative expenses decreased 4% to $3.9 million in 1998
compared to $4.1 million in 1997 due primarily to a decrease in management
incentive compensation offset by an increase in service agreement expenses of
$.2 million.
Depreciation and amortization increased 3% to $6.6 million in 1998
compared to $6.4 million in 1997 primarily as the result of fixed asset
additions on the Southeast Texas Pipeline System (SETPS) in recent periods.
Interest and debt expenses decreased 13% to $3.7 million in 1998 compared
to $4.2 million in 1997 primarily as a result of decreased debt balances on the
Company's Senior Notes.
The (benefit) provision in lieu of income tax expense decreased due to a
decline in the percentage from 37.9% in 1997 to 35.0% in 1998 as a result of
lower state income tax accrued and due to the changes in certain estimates,
entity restructurings and other adjustments.
9
<PAGE> 10
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Total operating revenues inclusive of natural gas and NGLs decreased 4% to
$705.6 million in 1998 compared to $735.9 million in 1997. Natural gas revenues
increased 1% to $674.1 million in 1998 compared to $667.1 million in 1997 as the
result of an increase of 15% in natural gas throughput sold and marketed to
1,187 MMcf/d in 1998 compared to 1,032 MMcf/d in 1997 offset by a 12% decrease
in the average natural gas price to $2.07 per Mcf in 1998 from $2.35 per Mcf in
1997.
NGLs revenues decreased 54% to $31.4 million in 1998 compared to $68.8
million in 1997 as the result of a 33% decrease in gross NGLs production to
26,000 Bbls/d in 1998 compared to 39,000 Bbls/d in 1997. This decrease resulted
from a reduction in NGLs content in the natural gas delivered to the Company at
the wellhead and voluntarily bypassing significant volumes of lower liquid
content gas due to depressed NGLs prices. Average NGLs price decreased 26% to
$.25 per gallon in 1998 from $.34 per gallon in 1997. In 1998, the Company has
recognized a gain of less than $.1 million compared to $2.7 million in 1997
associated with its hedging activities of NGLs.
Cost of sales was $643.1 million, or 91% of operating revenues, in 1998
compared to $642.6 million, or 87% of operating revenues, in 1997. The increase
in the percentage is primarily due to the increase in overall off-system
marketing activities which have lower gross margin percentages. Cost of sales
increased primarily as the result of an increase in natural gas marketed volumes
offset by a decrease in the average natural gas price and natural gas throughput
volumes.
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 $62.5 million, or 9% of operating revenues, in 1998 compared to $93.3
million, or 13% of operating revenues, in 1997. The $30.8 million decrease in
gross margin is due to decreased throughput volumes, a decrease in off-system
marketing results, a decrease in average natural gas prices and a decrease in
gross production and the average NGLs price. The decrease in percentage is due
to the increase in overall off-system marketing activities which have lower
gross margin percentages and a decrease in the average NGLs price.
Operating expenses decreased 5% to $16.1 million in 1998 compared to $17.0
million in 1997 as a result of the sale of the Company's ownership interest in
Warwink Joint Venture in December 1997 and a reduction in maintenance and
construction expenses on the gathering systems offset by an increase in expenses
due to the purchase of a treating facility that had previously been leased.
General and administrative expenses increased 2% to $12.6 million in 1998
compared to $12.3 million in 1997 due primarily to compensation expense
attributable to stock appreciation rights (SARs) and strategic alternative
costs. The Company accrues compensation related to the SARs based on the price
of the Company's common stock. Based on the Company's stock price in 1998, the
Company increased its accrual for SARs while in 1997 the Company decreased its
accrual for SARs, which resulted in an increase between periods of $.9 million.
The increase in expenses is also due to the recognition of $.7 million in costs
associated with the strategic alternative costs upon the decision not to pursue
these alternatives. Partially offsetting these increases is a decrease in
management incentive compensation.
Depreciation and amortization increased 4% to $19.7 million in 1998
compared to $19.0 million in 1997 primarily as the result of fixed asset
additions on the SETPS in recent periods.
Interest and debt expenses decreased 20% to $10.4 million in 1998 compared
to $13.0 million in 1997 primarily as a result of decreased debt balances and
lower interest rates.
The (benefit) provision in lieu of income tax expense decreased due to a
decline in the percentage from 37.9% in 1997 to 35.0% in 1998 as a result of
lower income tax accrued and due to the changes in certain estimates, entity
restructurings and other adjustments.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company generates significant cash from operations and expects such
cash and borrowings to be its primary source of liquidity. The Company's primary
uses of cash are capital expenditures, acquisitions, working capital
requirements, dividends and debt repayment. The Company's historical additions
to pipeline, property, plant and equipment were $15.2 million and $28.5 million
for the nine months ended September 30, 1998 and the year ended December 31,
1997, respectively. Capital expenditures are expected to be approximately $19.0
million in 1998, excluding business acquisitions.
In March 1998, the Company received $1.5 million for the sale of its
ownership interest in the assets of the Brooks-Hidalgo Joint Venture. The
proceeds were utilized to pay down the Company's revolving debt.
The Company maintains revolving credit agreements (the Revolvers), as
amended, of $118.0 million after voluntarily reducing its commitment by $10.0
million in February 1998, with Aquila Energy Corporation (Aquila Energy) to
provide funds for general corporate purposes. The available borrowings on the
Revolvers at September 30, 1998 was $7.0 million with $111.0 million
outstanding. The maturity dates on the Revolvers automatically renew in one year
periods from each commitment period (the fourth quarter of any given year)
unless Aquila Energy gives at least one year's notice not to renew from the
commitment period. Currently, the maturity dates of the Revolvers are in the
fourth quarter of 2000.
The Company has two general corporate purpose loan agreements with Aquila
Energy in the amounts of $50.0 million maturing in 2005 and $16.3 million
maturing in 2006. At September 30, 1998, $50.0 million and $16.3 million were
outstanding on the loan agreements. Each loan agreement requires the Company to
maintain certain financial covenants and limits the activities of the Company in
other ways. At September 30, 1998, the Company was in compliance with the
covenants.
The 8.29% Senior Notes issued in 1992 by Aquila Southwest Energy
Corporation (Aquila Southwest), a subsidiary of the Company, require principal
payments of $12.5 million annually. Such principal payments are expected to be
made from cash flows from operations and borrowings. The 8.29% Senior Note
purchase agreement has numerous covenants which affect the Company and Aquila
Southwest. These covenants limit the ability to make dividend payments and incur
debt, require maintenance of certain financial ratios and limit the activities
of Aquila Southwest in other ways. Failure to maintain the required ratios may
ultimately result in an acceleration of payments due. At September 30, 1998,
$50.0 million was outstanding on the Senior Notes and the Company was in
compliance with the covenants.
The Company believes the cash generated from operations and borrowings
under the Revolvers will be adequate to fund working capital requirements, debt
service payments and planned capital expenditures. Future acquisitions or large
capital expenditures in excess of current plans would require additional
financing that the Company expects would be available through additional debt
facilities.
11
<PAGE> 12
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Adoption of SFAS No. 133 is required for all fiscal quarters of all fiscal years
beginning after September 15, 1999, although earlier adoption is encouraged. The
Company is currently evaluating the potential impact of SFAS No. 133.
YEAR 2000 ISSUE
At year 2000, the two-digit date of "00" may not be recognized by computer
systems, software applications, and certain operating controls developed in the
1970s and 1980s as the year 2000, causing systems to shut down or malfunction.
UtiliCorp has established a year 2000 Project Office to coordinate the year 2000
efforts of its operating units including the Company to ensure that its computer
systems and applications will function properly beyond 1999.
Many of the Company's information systems and software are year 2000 ready
and associated costs are not significant. The year 2000 Project Office is
coordinating the identification and testing of remaining software, information
technology devices, embedded technology systems, and services provided by third
parties that may be impacted by the year 2000. The Project Office is expected to
have the identification and testing phases completed by the end of 1998 and
begin remediation in 1999. At this time, the Company does not have a contingency
plan, but it is expected that the Project Office will have developed a
contingency plan to address unforeseen issues by the first quarter 1999. The
Company is currently preparing budgets and estimates of remediation of mission
critical systems. The remediation of certain non-mission critical systems is
expected to extend beyond 1999. The estimated cost to the Company of
administering the year 2000 efforts through the UtiliCorp Project Office is not
significant.
The Project Office is conducting internal evaluations and participating in
industry-wide efforts being conducted by the Gas Industry Standards Board to
appropriately prepare and ensure the Company's efforts are in line with the rest
of the industry.
12
<PAGE> 13
FORWARD-LOOKING INFORMATION
The Company is including the following cautionary statement to make
applicable and take advantage of the new "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statement made
by, or on behalf of, the Company. The factors identified in this cautionary
statement are important factors (but not necessarily all of the important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:
a) The ability to increase transmission, gathering, processing, and sales
volumes can be subject to the impact of prices; drilling activity and
success of producers; and service competition, especially due to excess
pipeline availability. Existing volumes are subject to depletion without
addition of future developed gas supplies. The ability to contract
additional gas supplies for the existing systems also is affected by the
available number of drilling locations in the proximity of these existing
gas systems and the related economic reserves of these drilling locations.
b) Growth strategies through acquisition, internal project development, and
investments in joint ventures may face legal and regulatory delays,
financing difficulties, competition from other acquirers and competitors,
and other unforeseeable obstacles beyond the Company's control.
c) Future profitability will be affected by the Company's ability to compete
with the services and economic contractual terms offered by other energy
enterprises which may be larger, offer more services, and possess greater
resources. Future profitability also will be affected by the level of
prices of natural gas, NGLs and competitive fuels and feedstocks.
d) Future operating results and success of business ventures may be subject
to the effects of, and changes in, laws and regulations, political and
governmental changes, inflation rates, taxes, and operating conditions.
Also, future operating results are subject to unexpected items resulting
from such events as, but not limited to, litigation settlements, adverse
rulings or judgments, and unexpected environmental remediation.
e) The Company's operations are subject to the risks incident to the
gathering, transportation, processing and storage of natural gas and NGLs,
such as explosions, product spills, leaks and fires, any of which could
result in substantial losses to the Company and curtailment or suspension
of operations at a Company facility.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to the Condensed Consolidated Financial Statements for a
description of legal proceedings.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits.
Incorporated herein by reference to Index to Exhibits.
(b) Reports on Form 8-K.
None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AQUILA GAS PIPELINE CORPORATION
(Registrant)
/s/ F. Joseph Becraft
---------------------------------------
Date: November 12, 1998 By: F. Joseph Becraft
Chief Executive Officer, President
and Director
/s/ John G. Pascador
---------------------------------------
Date: November 12, 1998 By: John G. Pascador
Principal Accounting Officer
15
<PAGE> 16
EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements for the nine month period ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,354
<SECURITIES> 0
<RECEIVABLES> 76,910
<ALLOWANCES> 0
<INVENTORY> 4,828
<CURRENT-ASSETS> 91,863
<PP&E> 531,850
<DEPRECIATION> (133,736)
<TOTAL-ASSETS> 617,256
<CURRENT-LIABILITIES> 100,068
<BONDS> 214,750
0
0
<COMMON> 294
<OTHER-SE> 225,766
<TOTAL-LIABILITY-AND-EQUITY> 617,256
<SALES> 705,568
<TOTAL-REVENUES> 705,568
<CGS> 643,091
<TOTAL-COSTS> 659,159
<OTHER-EXPENSES> 32,297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,403
<INCOME-PRETAX> 4,489
<INCOME-TAX> 683
<INCOME-CONTINUING> 3,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,806
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
