<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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.
<TABLE>
<CAPTION>
Class Outstanding on May 10, 1999
----- ---------------------------
<S> <C>
Common stock, $.01 par value 29,400,000
</TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 3,018 $ 2,121
Income taxes receivable from UtiliCorp United Inc. .................................. 2,280 3,307
Accounts receivable ................................................................. 83,715 92,011
Inventories and exchanges ........................................................... 4,512 5,929
Materials and supplies .............................................................. 4,782 5,918
--------- ---------
Total current assets .......................................................... 98,307 109,286
--------- ---------
INVESTMENT IN AFFILIATE, net ............................................................. 97,402 97,100
--------- ---------
PIPELINE, PROPERTY, PLANT AND EQUIPMENT, at cost:
Natural gas pipelines ............................................................... 462,191 458,212
Plants and processing equipment ..................................................... 81,714 80,882
--------- ---------
543,905 539,094
Less - Accumulated depreciation ..................................................... (145,278) (139,498)
--------- ---------
398,627 399,596
INTANGIBLE ASSETS, net ................................................................... 26,975 27,766
OTHER, net ............................................................................... 1,686 1,672
--------- ---------
TOTAL ASSETS ............................................................................. $ 622,997 $ 635,420
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ................................................ $ 12,500 $ 12,500
Accounts payable .................................................................... 87,229 106,452
Accrued expenses .................................................................... 8,952 5,733
Accrued interest .................................................................... 2,310 2,405
Intercompany payable due to Aquila Energy Corporation ............................... 7,901 6,209
--------- ---------
Total current liabilities ...................................................... 118,892 133,299
--------- ---------
LONG-TERM DEBT ........................................................................... 202,150 197,450
--------- ---------
DEFERRED INCOME TAXES .................................................................... 77,419 77,916
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none outstanding
at March 31, 1999 and December 31, 1998 ........................................... -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 29,400,000 shares
issued and outstanding at March 31, 1999 and December 31, 1998 .................... 294 294
Additional paid-in capital .......................................................... 90,297 90,297
Retained earnings ................................................................... 133,945 136,164
--------- ---------
Total stockholders' equity ..................................................... 224,536 226,755
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................ $ 622,997 $ 635,420
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING REVENUES .............................. $ 190,854 $ 237,205
------------ ------------
COSTS AND EXPENSES:
Cost of sales .............................. 171,652 214,311
Operating .................................. 5,107 5,377
General and administrative ................. 7,106 4,733
Depreciation and amortization .............. 6,762 6,507
------------ ------------
Total costs and expenses .............. 190,627 230,928
------------ ------------
INCOME FROM OPERATIONS .......................... 227 6,277
INTEREST AND DEBT EXPENSES, net ................. 3,554 2,901
EQUITY IN NET INCOME OF AFFILIATE ............... 302 132
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES ............... (3,025) 3,508
(BENEFIT) PROVISION IN LIEU OF INCOME TAX
EXPENSE ....................................... (1,173) 1,189
------------ ------------
NET (LOSS) INCOME ............................... $ (1,852) $ 2,319
============ ============
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE ..... $ (.06) $ .08
============ ============
BASIC SHARES OUTSTANDING ........................ 29,400,000 29,400,000
============ ============
DILUTED SHARES OUTSTANDING ...................... 29,400,000 29,408,660
============ ============
CASH DIVIDENDS PER SHARE OF COMMON STOCK ........ $ .0125 $ .0125
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ................................................................ $ (1,852) $ 2,319
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 6,762 6,507
Deferred income taxes .................................................. (490) 509
Equity in net income of affiliate ...................................... (302) (132)
Other non-cash items ................................................... (6) (131)
Changes in operating assets and liabilities:
Income taxes receivable from (payable to) UtiliCorp United
Inc. ......................................................... 1,015 (1,087)
Accounts receivable ............................................ 8,296 (2,754)
Inventories and exchanges ...................................... 1,417 635
Materials and supplies ......................................... 1,136 92
Accounts payable ............................................... (19,181) 11,634
Accrued expenses ............................................... 3,212 939
Accrued interest ............................................... (95) (1,391)
Intercompany payable due to Aquila Energy Corporation .......... 1,692 1,339
-------- --------
Net cash provided by operating activities ............................. 1,604 18,479
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to pipeline, property, plant and equipment ...................... (5,083) (5,013)
Proceeds from asset dispositions .......................................... 36 1,708
-------- --------
Net cash used in investing activities ............................. (5,047) (3,305)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under revolving credit agreements, net ................. 4,700 (10,800)
Dividends paid ............................................................... (367) (367)
Other ........................................................................ 7 33
-------- --------
Net cash provided by (used in) financing activities ............... 4,340 (11,134)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................... 897 4,040
CASH AND CASH EQUIVALENTS, beginning of period ..................................... 2,121 5,276
-------- --------
CASH AND CASH EQUIVALENTS, end of period ........................................... $ 3,018 $ 9,316
======== ========
</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 March 31, 1999 and 1998, 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 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, 1998. No changes in accounting principles have occurred since
that date.
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.
5
<PAGE> 6
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
1. BASIS OF PRESENTATION: (CONTINUED)
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share" outlines methods of computing and presenting earnings per share. The
following is a reconciliation of (loss) income available to common stockholders
and the weighted average number of common shares outstanding for each respective
period:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
(Loss) income available to common
stockholders .............................. $ (1,852) $ 2,319
Weighted average shares outstanding:
Basic shares outstanding .................. 29,400,000 29,400,000
Effect of dilutive securities:
Options ................................... -- 8,660
------------ ------------
Diluted shares outstanding ............. 29,400,000 29,408,660
============ ============
Basic and diluted (loss) earnings per share .. $ (.06) $ .08
============ ============
</TABLE>
As the Company had a net loss for the three months ended March 31, 1999 and
the average market price for the period was less than the exercise price of all
outstanding options, there were no dilutive securities during the period.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) 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 June 15, 1999, although
earlier adoption is encouraged. The Company is currently evaluating the
potential impact of SFAS No. 133.
In 1998, the FASB's Emerging Issues Task Force issued abstract No. 98-10,
"Accounting for Energy Trading and Risk Management Activities." This abstract
focuses on the accounting for the purchase and sale of energy trading contracts.
The Company is analyzing the potential impact of this abstract upon issuance.
2. STATEMENTS OF CASH FLOWS:
Supplemental disclosure of cash flow information for net (refunds received)
cash paid for interest and income taxes by the Company:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1999 1998
------- -------
<S> <C> <C>
Interest, net of amount capitalized ......... $ 3,835 $ 4,414
Income taxes ................................ $(1,673) $ 1,784
</TABLE>
6
<PAGE> 7
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
3. COMMITMENTS AND CONTINGENCIES:
LETTERS OF CREDIT AND GUARANTEES
The prior agreement the Company had with a bank whereby standby letters of
credit could be issued expired on December 31, 1998. All outstanding letters of
credit under this agreement expired before March 31, 1999. The standby letters
of credit have been replaced by guarantees. The Company has issued various
financial guarantees related to business activities. Management does not believe
it is probable that the financial guarantees will be exercised.
TAXES
The Internal Revenue Service (IRS) has examined and proposed adjustments to
UtiliCorp United, Inc.'s (UtiliCorp) consolidated federal income tax returns for
1988 through 1993. The proposed adjustment affecting the Company is to lengthen
the depreciable life of certain pipeline assets owned by the Company. The
Company has filed a petition in U.S. Tax Court contesting the IRS proposed
adjustments for the years 1990 and 1991. The IRS has also proposed an adjustment
on the same issue for 1992 and 1993. The Company has tentatively agreed with the
IRS to hold this issue in abeyance pending the outcome of the earlier 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 $12,600 for the audit period and
through the present plus potential interest of approximately $3,700. 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.
LEGAL PROCEEDINGS
On November 12, 1998, shareholders of the Company filed four separate but
identical suits in the Court of Chancery in Wilmington, Delaware against the
Company, UtiliCorp and the members of the Company's board of directors. The
suits were filed following UtiliCorp's announcement that it was proposing to
offer $8.00 per share to purchase the 18% of the Company's common stock held by
the public. UtiliCorp, through Aquila Energy, owns approximately 82% of the
Company's outstanding shares. On January 11, 1999, the actions were
consolidated. By agreement of the parties, no response from the defendants in
the suits has been filed. On April 16, 1999, plaintiffs filed an amended class
action complaint, naming as defendants UtiliCorp, the Company, and members of
the board of directors of the Company who are not unaffiliated directors. The
amended complaint alleges that the price offered by UtiliCorp for shares of the
Company is inadequate and constitutes unfair dealing. The amended complaint also
alleges that UtiliCorp is using its position as a majority holder of Company
common stock to prevent any auction or market check, and to engage in wrongful
dealing and coercive conduct. Plaintiffs further allege that the Schedule 14D-1
filed by UtiliCorp fails to disclose information which plaintiffs claim is
material to the decision of the Company's public shareholders whether to tender.
The amended complaint requests injunctive and other equitable relief, as well as
damages.
7
<PAGE> 8
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
3. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
On February 26, 1999, Harmony Exploration, Inc. (Harmony) sought to amend
a complaint it had previously filed against the Company. Harmony had filed an
action for breach of contract and discrimination by a common carrier against the
Company in Bexar County, Texas. Harmony is a producer of several wells in
Burleson County, Texas, with whom the Company had contracts to purchase
casinghead gas. Harmony claims that the Company paid them an inadequate price
under the contracts, improperly charged compression and processing fees with
respect to gas produced from Harmony's wells, improperly failed to hook up
several of Harmony's wells to the Company's gathering system, and improperly
failed to process 100% of the gas from some of Harmony's wells. Harmony seeks
actual damages of an unspecified amount plus attorneys' fees. Harmony sought to
amend its complaint to obtain certification of the case as a class action, and
to include as class members forty (40) or more producers in Burleson County who
allegedly entered into similar contracts with the Company. The Company is
vigorously defending the claim by Harmony, and believes it has meritorious
defenses to the claim. The Company intends to vigorously oppose the efforts to
obtain certification of a class action in the case.
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.
WORKFORCE REDUCTION
On March 2, 1999, the Company announced the implementation of a plan to
restructure its operations including a reduction of 60 employees or 23% of the
total workforce. The reduction included employees in all areas of the company.
It is anticipated that the Company will save $4,000 to $5,000 pretax annually in
the first full year of implementation resulting primarily from reduced employee
costs with additional savings expected from streamlining operations and business
processes. The cost of the plan recorded in the first quarter is $2,000 or $.04
per share after tax. The $2,000 is included in general and administrative
expenses on the statement of income.
8
<PAGE> 9
AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT DEVELOPMENTS:
On April 9, 1999, UtiliCorp announced a cash tender offer of $8.00 per
share for all outstanding shares of common stock of the Company that it did not
currently own. The offer filed with the Securities and Exchange Commission (SEC)
on Schedules 14D-1 and 13E-3, which fully contains the terms and conditions, was
mailed to shareholders and expired May 7, 1999. On April 22, 1999, the board of
directors of the Company filed with the SEC a Schedule 14D-9, which fully
contained the board's response, which was also mailed to all shareholders. The
Company's board of directors made no recommendation with regard to the share
purchase. The Special Committee of the Board of Directors (Special Committee),
consisting of the unaffiliated directors, recommended rejection of UtiliCorp's
offer.
On May 10, 1999, UtiliCorp announced that it had completed its offer by
receiving tender of approximately 3.4 million shares of the Company's common
stock, which represents approximately 11.6 percent of all the issued and
outstanding shares. As a result of the acquisition of those shares in the offer,
UtiliCorp will indirectly own an aggregate of approximately 27.4 million shares
representing approximately 93 percent of the Company's total shares issued and
outstanding. UtiliCorp intends to pay promptly for the shares of the Company's
stock tendered and accepted for payment pursuant to the offer. UtiliCorp also
intends to promptly complete a short-form merger in which the remaining Company
shareholders who did not tender their shares would receive $8.00 per share in
cash.
The following discussion and analysis relates to the condensed
consolidated financial position and results of operations of the Company for the
three months ended March 31, 1999 and 1998. Reference should be made to the
Condensed Consolidated Financial Statements and the Notes thereto:
<TABLE>
<CAPTION>
Three Months Ended Period 1999
March 31, to 1998 Change
------------------------ ------------------------
1999 1998 Amount Percent
--------- --------- --------- ---------
(Dollars in thousands except volume and price data)
<S> <C> <C> <C> <C>
FINANCIAL DATA:
Natural gas revenues ........................ $ 181,733 $ 223,729 $ (41,996) (19)%
Natural gas liquids (NGLs) revenues ......... 9,121 13,476 (4,355) (32)%
--------- --------- ---------
Total operating revenues ................ 190,854 237,205 (46,351) (20)%
--------- --------- ---------
Cost of sales ............................... 171,652 214,311 (42,659) (20)%
--------- --------- ---------
Gross margin ............................ 19,202 22,894 (3,692) (16)%
--------- --------- ---------
Operating expenses .......................... 5,107 5,377 (270) (5)%
General and administrative expenses ......... 7,106 4,733 2,373 50%
Depreciation and amortization ............... 6,762 6,507 255 4%
Interest and debt expenses, net ............. 3,554 2,901 653 23%
Equity in net income of affiliate ........... 302 132 170 129%
(Benefit) provision in lieu of
income tax expense ..................... (1,173) 1,189 (2,362) (199)%
--------- --------- ---------
Net (loss) income ...................... $ (1,852) $ 2,319 $ (4,171) (180)%
========= ========= =========
OPERATING DATA:
Natural gas (MMcf/d):
Throughput sold .......................... 426 300 126 42%
Throughput transported ................... 109 128 (19) (15)%
--------- --------- ---------
Total throughput ....................... 535 428 107 25%
--------- --------- ---------
Marketed off-system ....................... 735 882 (147) (17)%
--------- --------- ---------
Total throughput and
marketed off-system ................. 1,270 1,310 (40) (3)%
========= ========= =========
Gross NGLs production (Bbls/d) .............. 21,000 28,000 (7,000) (25)%
Average natural gas price ($/Mcf) ........... $ 1.71 $ 2.07 $ (.36) (17)%
Average NGLs price ($/gallon) ............... $ .22 $ .27 $ (.05) (19)%
</TABLE>
9
<PAGE> 10
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 hedging program was established to minimize variances
in operating results due to fluctuating commodity prices. Gains and losses
related to these transactions are deferred and recognized in the results of
operations when the hedged transaction occurs. Most of the Company's operating
costs do not vary directly with volumes on existing systems; thus, increases or
decreases in volumes on existing systems generally have a direct effect on net
income.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Total operating revenues inclusive of natural gas and NGLs decreased 20% to
$190.9 million in 1999 compared to $237.2 million in 1998. Natural gas revenues
decreased 19% to $181.7 million in 1999 compared to $223.7 million in 1998 as
the result of a 17% decrease in the average natural gas price to $1.71 per
thousand cubic feet (Mcf) in 1999 from $2.07 per Mcf in 1998 and a decrease of
2% in natural gas throughput sold and marketed to 1,161 million cubic feet per
day (MMcf/d) in 1999 compared to 1,182 MMcf/d in 1998.
NGLs revenues decreased 32% to $9.1 million in 1999 compared to $13.5
million in 1998 as the result of a 25% decrease in gross NGLs production to
21,000 barrels per day (Bbls/d) in 1999 compared to 28,000 Bbls/d in 1998. This
decrease resulted from a reduction in NGLs content in the natural gas delivered
to the Company at the wellhead and from voluntarily bypassing significant
volumes of lower liquid content gas due to depressed NGLs prices. Average NGLs
price decreased 19% to $.22 per gallon in 1999 from $.27 per gallon in 1998.
Cost of sales was $171.7 million, or 90% of operating revenues, in 1999
compared to $214.3 million, or 90% of operating revenues, in 1998. 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 25% 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 $19.2 million, or 10% of operating revenues, in 1999 compared to $22.9
million, or 10% of operating revenues, in 1998. The $3.7 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.
Operating expenses decreased 5% to $5.1 million in 1999 compared to $5.4
million in 1998 as a result of a reduction in maintenance expenses on the
gathering systems and plants.
General and administrative expenses increased 50% to $7.1 million in 1999
compared to $4.7 million in 1998 due primarily to a $2 million restructuring
charge and $.8 million of expenses related to the UtiliCorp stock buyback offer.
Depreciation and amortization increased 4% to $6.8 million in 1999 compared
to $6.5 million in 1998 primarily as the result of fixed asset additions on the
Southeast Texas Pipeline System (SETPS) in recent periods.
Interest and debt expenses increased 23% to $3.6 million in 1999 compared
to $2.9 million in 1998 primarily as a result of increased borrowing on the
revolvers, and a decrease in interest income due to reduced cash flow.
Benefit (provision) in lieu of income tax expense remained at 35% in 1999
and 1998. The reduction in expense was a result of the loss recorded in 1999.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company historically 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, working capital
requirements, dividends and debt repayment. The Company's historical additions
to pipeline, property, plant and equipment were $ 5.1 million and $22.6 million
for the three months ended March 31, 1999 and the year ended December 31, 1998,
respectively. Capital expenditures are expected to be approximately $15.1
million in 1999, excluding business acquisitions.
The Company maintains revolving credit agreements (the Revolvers), as
amended, of $118.0 million with Aquila Energy to provide funds for general
corporate purposes. The available borrowings on the Revolvers at March 31, 1999
was $19.6 million with $98.4 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 March 31, 1999, $50.0 million and $16.3 million were
outstanding on the loan agreements. Each loan agreement requires the Company to
maintain certain financial covenants and limits the activities of the Company in
other ways. At March 31, 1999, the Company was in compliance with the covenants.
The 8.29% Senior Notes issued in 1992 by Aquila Southwest Energy
Corporation (Aquila Southwest), a subsidiary of the Company, require principal
payments of $12.5 million annually. Such principal payments are expected to be
made from cash flows from operations and borrowings. The 8.29% Senior Note
purchase agreement has numerous covenants which affect the Company and Aquila
Southwest. These covenants limit the ability to make dividend payments and incur
debt, require maintenance of certain financial ratios and limit the activities
of Aquila Southwest in other ways. Failure to maintain the required ratios may
ultimately result in an acceleration of payments due. At March 31, 1999, $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 STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) 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 June 15, 1999, although earlier adoption is
encouraged. The Company is currently evaluating the potential impact of SFAS No.
133.
In 1998, the FASB's Emerging Issues Task Force issued abstract No. 98-10,
"Accounting for Energy Trading and Risk Management Activities." This abstract
focuses on the accounting for the purchase and sale of energy trading contracts.
The Company is analyzing the potential impact of this abstract upon issuance.
YEAR 2000 ISSUE
The Company's systems as presently configured may not recognize the
two-digit of "00" as the year 2000. This could cause systems to shut down or
malfunction. In order to address potential year 2000 issues, UtiliCorp
established a Year 2000 Project Office (Project Office) to coordinate efforts in
its operating units to ensure that computer systems and applications will
function properly beyond 1999.
Many of the Company's information systems and related software are already
year 2000 ready and associated costs are not significant. The 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 completed the
identification and testing phases in 1998 and will begin remediation in 1999. At
this time, the Project Office does not have a contingency plan to address
unforeseen issues, but the Company expects the Project Office to have one by
mid-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 "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.
f) The ability of the Company to successfully implement the initiatives
included in the restructuring plan and realize the anticipated cost
savings.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On November 12, 1998, shareholders of the Company filed four separate but
identical suits in the Court of Chancery in Wilmington, Delaware against the
Company, UtiliCorp and the members of the Company's board of directors. The
suits were filed following UtiliCorp's announcement that it was proposing to
offer $8.00 per share to purchase the 18% of the Company's common stock held by
the public. UtiliCorp, through Aquila Energy Corporation, (Aquila Energy) owns
approximately 82% of the Company's outstanding shares. On January 11, 1999, the
actions were consolidated. By agreement of the parties, no response from the
defendants in the suits has been filed. On April 16, 1999, plaintiffs filed an
amended class action complaint, naming as defendants UtiliCorp, the Company, and
members of the board of directors of the Company who are not unaffiliated
directors. The amended complaint alleges that the price offered by UtiliCorp for
shares of the Company is inadequate and constitutes unfair dealing. The amended
complaint also alleges that UtiliCorp is using its position as a majority holder
of Company common stock to prevent any auction or market check, and to engage in
wrongful dealing and coercive conduct. Plaintiffs further allege that the
Schedule 14D-1 filed by UtiliCorp fails to disclose information which plaintiffs
claim is material to the decision of the Company's public shareholders whether
to tender. The amended complaint requests injunctive and other equitable relief,
as well as damages.
On February 26, 1999, Harmony Exploration, Inc. (Harmony) sought to amend a
complaint it had previously filed against the Company. Harmony had filed an
action for breach of contract and discrimination by a common carrier against the
Company in Bexar County, Texas. Harmony is a producer of several wells in
Burleson County, Texas, with whom the Company had contracts to purchase
casinghead gas. Harmony claims that the Company paid them an inadequate price
under the contracts, improperly charged compression and processing fees with
respect to gas produced from Harmony's wells, improperly failed to hook up
several of Harmony's wells to the Company's gathering system, and improperly
failed to process 100% of the gas from some of Harmony's wells. Harmony seeks
actual damages of an unspecified amount plus attorneys' fees. Harmony sought to
amend its complaint to obtain certification of the case as a class action, and
to include as class members forty (40) or more producers in Burleson County who
allegedly entered into similar contracts with the Company. The Company is
vigorously defending the claim by Harmony, and believes it has meritorious
defenses to the claim. The Company intends to vigorously oppose the efforts to
obtain certification of a class action in the case.
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.
14
<PAGE> 15
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.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AQUILA GAS PIPELINE CORPORATION
(Registrant)
/s/ F. Joseph Becraft
-----------------------------------
Date: May 10, 1999 By: F. Joseph Becraft
Chief Executive Officer, President
and Director
/s/ John G. Pascador
-----------------------------------
Date: May 10, 1999 By: John G. Pascador
Principal Accounting Officer
16
<PAGE> 17
EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ----
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,018
<SECURITIES> 0
<RECEIVABLES> 83,715
<ALLOWANCES> 0
<INVENTORY> 4,512
<CURRENT-ASSETS> 98,307
<PP&E> 543,905
<DEPRECIATION> 145,278
<TOTAL-ASSETS> 622,997
<CURRENT-LIABILITIES> 118,892
<BONDS> 202,150
0
0
<COMMON> 294
<OTHER-SE> 224,242
<TOTAL-LIABILITY-AND-EQUITY> 622,997
<SALES> 190,854
<TOTAL-REVENUES> 190,854
<CGS> 171,652
<TOTAL-COSTS> 176,759
<OTHER-EXPENSES> 13,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,554
<INCOME-PRETAX> (3,025)
<INCOME-TAX> (1,173)
<INCOME-CONTINUING> (1,852)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,852)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
