-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, USsAazM7SVbdwi6dHMDbkCl0FwHkuMYK1bp+UcjmbvTvho54HIANy0q7lnbRitCn z1skZZkbhzwoDtjs2TQFdw== 0000927356-99-000473.txt : 19990330 0000927356-99-000473.hdr.sgml : 19990330 ACCESSION NUMBER: 0000927356-99-000473 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN GAS RESOURCES INC CENTRAL INDEX KEY: 0000856716 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 841127613 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10389 FILM NUMBER: 99575186 BUSINESS ADDRESS: STREET 1: 12200 N PECOS ST CITY: DENVER STATE: CO ZIP: 80234-3439 BUSINESS PHONE: 3034525603 MAIL ADDRESS: STREET 1: 12200 NORTH PECOS ST CITY: DENVER STATE: CO ZIP: 80234 10-K 1 WESTERN GAS RESOURCES, INC. FORM 10-K ================================================================================ UNITED STATES 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, 1998 or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] for the transition period from _________________ to _________________ Commission file number 1-10389 ------- WESTERN GAS RESOURCES, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 84-1127613 - ---------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12200 N. Pecos Street, Denver, Colorado 80234-3439 - --------------------------------------- ------------------------- (Address of principal executive offices) (Zip Code) (303) 452-5603 - ------------------------------------------------------------------------------- Registrant's telephone number, including area code No Changes - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Title of each class Name of exchange on which registered - ----------------------------- ------------------------------------ Common Stock, $0.10 par value New York Stock Exchange $2.28 Cumulative Preferred Stock, $0.10 par value New York Stock Exchange $2.625 Cumulative Convertible Preferred Stock, $0.10 par value New York Stock Exchange 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 _____ ----- The aggregate market value of voting common stock held by non-affiliates of the registrant on March 15, 1999 was $130,274,224 As of March 15, 1999, there were 32,147,993 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report (Items 10, 11, 12 and 13) is incorporated by reference from the registrant's proxy statement to be filed pursuant to Regulation 14A with respect to the annual meeting of stockholders scheduled to be held on May 21, 1999. Indicate by check mark if disclosure of delinquent filers 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. [ ] ================================================================================ 1 Western Gas Resources, Inc. Form 10-K Table of Contents
Part Item(s) Page - ------ ----------- ---- I. 1 and 2. Business and Properties.............................................. 3 General.............................................................. 3 Principal Facilities................................................. 5 Gas Gathering, Processing, Storage and Transmission.................. 6 Significant Acquisitions, Projects and Dispositions.................. 7 Marketing............................................................ 10 Producing Properties................................................. 11 Competition.......................................................... 12 Regulation........................................................... 12 Employees............................................................ 13 3. Legal Proceedings.................................................... 13 4. Submission of Matters to a Vote of Security Holders.................. 13 II. 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 6. Selected Financial Data.............................................. 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 16 8. Financial Statements and Supplementary Data.......................... 27 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................. 58 III. 10. Directors and Executive Officers of the Registrant................... 58 11. Executive Compensation............................................... 58 12. Security Ownership of Certain Beneficial Owners and Management....... 58 13. Certain Relationships and Related Transactions....................... 58 IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 58
2 PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES GENERAL Western Gas Resources, Inc. (the "Company") is an independent gas gatherer and processor and energy marketer providing a full range of services to its customers from the wellhead to the sales delivery point. The Company designs, constructs, owns and operates natural gas gathering, processing, treating and storage facilities in major gas-producing basins in the Rocky Mountain, Mid- Continent, Gulf Coast and Southwestern regions of the United States. The Company connects producers' wells to its gathering systems for delivery to its processing or treating plants, processes the natural gas to extract natural gas liquids ("NGLs") and treats the natural gas in order to meet pipeline specifications. The Company markets gas and NGLs nationwide and in Canada, providing risk management, storage, transportation, scheduling, peaking and other services to a variety of customers. The Company owns and operates certain producing properties, primarily in Wyoming and Louisiana. The Company also explores and develops gas reserves, primarily in Wyoming, in support of its existing facilities. Historically, the Company has derived over 95% of its revenues from the sale of gas and NGLs. Set forth below are the Company's revenues by type of operation (000s):
Year Ended December 31, ---------------------------------------------------------- 1998 % 1997 % 1996 % ---------- ------ ---------- ------ ---------- ------ Sale of gas...................................... $1,611,521 75.5 $1,657,479 69.5 $1,440,882 68.9 Sale of NGLs..................................... 449,696 21.1 611,969 25.7 561,581 26.9 Processing, transportation and storage revenues.. 44,743 2.1 40,906 1.7 44,943 2.1 Sale of electric power........................... 20 - 59,477 2.5 30,667 1.5 Other, net....................................... 27,586 1.3 15,429 .6 12,936 .6 ---------- ----- ---------- ----- ---------- ----- $2,133,566 100.0 $2,385,260 100.0 $2,091,009 100.0 ========== ===== ========== ===== ========== =====
Historically, the Company has expanded through acquisitions, joint ventures, internal project development and increased marketing activity. This expansion has strengthened the Company's position in major producing basins and increased its access to natural gas markets. The Company's current strategy focuses on developing opportunities within the active basins in which it operates. The table below illustrates the Company's growth over the last five years:
Average for the Year Ended Average -------------------------------------- Average NGL Gas Gas NGL Gas Sales Sales Throughput Production Production (MMcf/D) (MGal/D) (MMcf/D) (MMcf/D) (MGal/D) ---------- -------- ----------- ----------- ------------ December 31, 1993...... 755 2,941 804 575 2,239 December 31, 1998...... 2,200 4,730 1,162 984 1,912 % increase (decrease).. 191 61 45 71 (15)
The Company's long-term four-part business plan is designed to increase profitability through: (i) investing in projects that complement and extend its core gas gathering, processing, production and marketing business; (ii) creating ventures with producers who dedicate additional acreage to the Company; (iii) maintaining or expanding its energy sales volumes and margins by maximizing its asset base, firm transportation and storage contracts and other contractual arrangements; and (iv) optimizing the profitability of existing operations and in certain cases, considering the disposal of non-growth assets. Historically, crude oil prices have been volatile and the oil and gas industry is currently experiencing ten year lows in these prices. As of March 1, 1999 such prices had declined to approximately $12.25 per barrel. Most NGL value is tied closely to crude oil, accordingly this pricing environment is having a detrimental effect on the Company's results of operations. The Company's 1999 plan provides for the improvement of the balance sheet and liquidity while ensuring the continued development of its two primary growth projects, the Powder River Basin coal bed methane and Southwest Wyoming operations. In order to reduce the Company's overall debt level and provide it with additional liquidity, the Company has signed agreements in March 1999 providing for the sale of its Giddings Gathering System and the Katy Facility for total proceeds of approximately $136 million. These transactions will result in an after-tax loss in 1999 of approximately $14.9 million and are expected to close in the second quarter of 1999, subject to various regulatory approvals and the satisfaction of certain contractual conditions. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Strategy." This section, as well as other sections in this Form 10-K, contain "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology, such as "may," "intend," 3 "will," "expect," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology. This Form 10-K contains forward-looking statements regarding the expansion of the Company's gathering operations, its project development schedules, marketing plans, throughput capacity and anticipated volumes that involve a number of risks and uncertainties, including the composition of gas to be treated and the drilling schedules and success of the producers whose acreage is dedicated to the Company's facilities. In addition to the important factors referred to herein, numerous other factors affecting the gas processing industry generally and in the markets for gas and NGLs in which the Company operates, could cause actual results to differ materially. See further discussion in "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - Summary of Significant Accounting Policies - Use of Estimates and Significant Risks." The Company's principal offices are located at 12200 North Pecos Street, Denver, Colorado 80234-3439, and its telephone number is (303) 452-5603. The Company was incorporated in Delaware in 1989. 4 PRINCIPAL FACILITIES The following table provides information concerning the Company's principal facilities. The Company also owns and operates several smaller treating and processing facilities located in the same areas as its other facilities.
Average for the Year Ended December 31, 1998 Gas Gas ------------------------------------------- Gathering Throughput Gas Gas NGL Year Placed Systems Capacity Throughput Production Production Plant Facilities (1) In Service Miles(2) (MMcf/D)(3) (MMcf/D)(4) (MMcf/D)(5) (MGal/D)(5) - --------------------------------- ----------- -------------------- ---------------- -------------- -------------- ----------- Texas Bethel Treating (6)............ 1997 86 350 61 57 - Edgewood (6)(7)(8)............. 1964 - - 20 6 48 Giddings Gathering (16)........ 1979 661 80 49 41 72 Gomez Treating................. 1971 385 280 118 112 - Midkiff/Benedum................ 1955 2,138 165 151 100 966 Mitchell Puckett Gathering..... 1972 86 85 80 53 1 MiVida Treating (6)............ 1972 289 150 58 56 - Rosita Treating................ 1973 - 60 49 49 - Louisiana Black Lake..................... 1966 56 75 13 8 27 Toca (7)(9).................... 1958 - 160 72 68 56 Wyoming Coal Bed Methane Gathering..................... 1990 378 95 73 67 - Granger (7)(10)(11)(12)........ 1987 431 235 154 142 185 Hilight Complex (7)............ 1969 622 80 41 35 93 Kitty/Amos Draw (7)............ 1969 313 17 10 7 52 Lincoln Road (12).............. 1988 149 50 29 27 28 Newcastle (7).................. 1981 146 5 2 2 17 Red Desert (7)................. 1979 111 42 19 17 34 Reno Junction (10)............. 1991 - - - - 49 Oklahoma Arkoma......................... 1985 64 8 5 5 - Chaney Dell.................... 1966 2,049 180 66 52 212 Westana........................ 1986 789 45 61 53 65 New Mexico San Juan River (6)............. 1955 139 60 27 24 2 Utah Four Corners Gathering......... 1988 104 15 4 3 5 ----- ----- ----- ---- ----- Total......................... 8,996 2,237 1,162 984 1,912 ===== ===== ====== ===== =====
Average for the Year Ended December 31, 1998 Interconnect -------------------- and Gas Storage Pipeline Gas Storage and Year Placed Transmission Capacity Capacity Throughput Transmission Facilities (1) In Service Miles(2) (Bcf)(2) (MMcf/D)(2) (MMcf/D)(4) - --------------------------------- ----------- ------------ ------------ ---------------- ------------- Katy Facility (13)(16)........... 1994 17 20 - 200 MIGC (14)........................ 1970 245 - 130 98 MGTC (15)........................ 1963 252 - 18 10 ----- ----- --- ---- Total.......................... 514 20 148 308 ===== ===== ==== ====
_________________________________ Footnotes on following page. 5 (1) The Company's interest in all facilities is 100% except for Midkiff/Benedum (73%); Black Lake (69%); Lincoln Road (72%); Westana Gathering Company ("Westana") (50%); Newcastle (50%) and Coal Bed Methane Gathering (50%). All facilities are operated by the Company, and all data include interests of the Company, other joint interest owners and producers of gas volumes dedicated to the facility. (2) Gas gathering systems miles, interconnect and transmission miles, gas storage capacity and pipeline capacity are as of December 31, 1998. (3) Gas throughput capacity is as of December 31, 1998 and represents capacity in accordance with design specifications unless other constraints exist, including permitting or field compression limits. MMcf/D means million cubic feet per day. (4) Aggregate wellhead natural gas volumes collected by a gathering system, aggregate volumes delivered over the header at the Katy Hub and Gas Storage Facility (the "Katy Facility") or volumes transported by a pipeline. (5) Volumes of gas and NGLs are allocated to a facility when a well is connected to that facility; volumes exclude NGLs fractionated for third parties. MGal/D means thousand gallons per day. (6) Sour gas facility (capable of processing or treating gas containing hydrogen sulfide and/or carbon dioxide). (7) Fractionation facility (capable of fractionating raw NGLs into end-use products). (8) On October 29, 1998, the Company sold its Edgewood gathering system, including its undivided interest in the producing properties associated with this system. (9) Straddle plant (a plant located near a transmission pipeline that processes gas dedicated to or gathered by a pipeline company or another third party). (10) NGL production includes conversion of third-party feedstock to iso-butane. (11) In February 1998, the Company sold a 50% undivided interest in a small portion of the Granger gathering system for approximately $4.0 million. This amount approximated the Company's cost in such facilities. (12) The Company and its joint venture partner at the Lincoln Road facility have agreed to process such gas at the Company's Granger facility as long as there is available capacity at the Granger facility. Accordingly, operations at the Lincoln Road facility were temporarily suspended for the period between February 1998 and June 1998. (13) Hub and gas storage facility. (14) MIGC is an interstate pipeline located in Wyoming and is regulated by the FERC. (15) MGTC is a public utility located in Wyoming and is regulated by the Wyoming Public Service Commission. (16) In March 1999, the Company signed agreements for the sale of these facilities. These transactions are anticipated to close in the second quarter of 1999, subject to various approvals. Largely as a result of low commodity prices, primarily affecting NGL products, the Company has reduced its budget for capital expenditures in 1999 from the levels expended in 1997 and 1998. Capital expenditures related to existing operations are expected to be approximately $67.0 million during 1999, consisting of the following: (i) capital expenditures related to gathering, processing and pipeline assets are expected to be approximately $39.6 million, of which $6.3 million is for maintaining existing facilities; (ii) capital expenditures on exploration and production activities are expected to be approximately $24.6 million; and (iii) capital expenditures for miscellaneous items are expected to be approximately $2.8 million. Overall, capital expenditures in the Powder River Basin coal bed methane development and in Southwest Wyoming operations represent 53% and 22%, respectively, of the total 1999 budget. Gas Gathering, Processing, Storage and Transmission Gas Gathering and Processing The Company contracts with producers to gather raw natural gas ("natural gas") from individual wells located near its plants or gathering systems. Once a contract has been executed, the Company connects wells to gathering lines through which the natural gas is delivered to a processing plant or treating facility. At a processing plant, the natural gas is compressed, raw NGLs are extracted and the remaining dry gas is treated to meet pipeline quality specifications ("residue gas" or "gas"). Six of the Company's processing plants can further separate, or fractionate, the mixed NGL stream into ethane, propane, normal butane and natural gasoline to obtain a higher value for the NGLs, and three of the Company's plants are able to process and treat natural gas containing hydrogen sulfide or other impurities which require removal prior to transportation. At a treating facility, dry gas, which does not contain liquids that can economically be extracted, is treated to meet pipeline quality specifications by removing hydrogen sulfide or carbon dioxide. For a further discussion of the revenue, operating profit and attributable assets of this business segment, see "Item 8 - Financial Statements and Supplementary Data." 6 The Company acquires dedicated acreage and natural gas supplies in an effort to maintain or increase throughput levels to offset natural production declines. Such natural gas supplies are obtained by purchasing existing systems from third parties, by connecting additional wells, through internally developed projects or through joint ventures. Historically, while certain individual plants have experienced declines in dedicated reserves, the Company has been successful in connecting additional reserves to more than offset the natural declines. There has been a reduction in drilling activity, primarily in basins that produce oil and casinghead gas, from levels that existed in prior years. However, higher gas prices in 1997 and 1998 (relative to 1995 and 1994), improved technology (e.g., 3-D seismic and horizontal drilling) and increased pipeline capacity from the Rocky Mountain region have stimulated drilling in the Powder River Basin and Southwest Wyoming. Company-wide, the level of drilling will depend upon, among other factors, the prices for gas and oil, the drilling budgets of third-party producers, the energy policy of the federal government and the availability of foreign oil and gas, none of which are within the Company's control. There can be no assurance that the Company will continue to be successful in replacing the dedicated reserves processed at its facilities. In 1998, including the reserves associated with the Company's joint ventures and partnerships and excluding the facilities sold during the year, the Company connected new reserves to its gathering systems to replace approximately 86% of 1998 production. On a Company-wide basis, primarily as a result of the sale of the Perkins and Edgewood facilities and a downward revision in the reserves associated with the Bethel facility, dedicated reserves decreased from approximately 3.3 Tcf as of December 31, 1997 to approximately 3.1 Tcf at December 31, 1998. Substantially all gas flowing through the Company's facilities is supplied under long-term contracts providing for the purchase, treating or processing of natural gas for periods ranging from five to twenty years, using three basic contract types. Approximately 70% of the Company's plant facilities' gross margin (revenues at the plants less product purchases) for the year ended December 31, 1998 resulted from percentage-of-proceeds agreements in which the Company is typically responsible for arranging for the transportation and marketing of the gas and NGLs. The price paid to producers is a specified percentage of the net proceeds received from the sale of the gas and the NGLs. This type of contract permits the Company and the producers to share proportionally in price changes. Approximately 20% of the Company's plant facilities' gross margin for the year ended December 31, 1998 resulted from contracts that are primarily fee-based whereby the Company receives a set fee for each Mcf of gas gathered and/or processed. This type of contract provides the Company with a steady revenue stream that is not dependent on commodity prices, except to the extent that low prices may cause a producer to curtail production. The proportion of fee-based contracts is expected to increase as the volumes from the Powder River coal bed methane development and Southwest Wyoming increase. See further discussion in "-Significant Acquisitions, Projects and Dispositions." Approximately 10% of the Company's plant facilities' gross margin for the year ended December 31, 1998 resulted from contracts that combine gathering, compression or processing fees with "keepwhole" arrangements or wellhead purchases. Typically, producers are charged a gathering and compression fee based upon volume. In addition, the Company retains a predetermined percentage of the NGLs recovered by the processing facility and keeps the producers whole by returning to the producers at the tailgate of the plant an amount of residue gas equal on a Btu basis to the natural gas received at the plant inlet. The "keepwhole" component of the contracts permits the Company to benefit when the value of the NGLs is greater as a liquid than as a portion of the residue gas stream. However, when the value of the NGLs is lower as a liquid than as a portion of the residue gas stream, the Company will be adversely affected. Transmission The Company owns and operates MIGC, an interstate pipeline located in the Powder River Basin in Wyoming, and MGTC, an intrastate pipeline located in Northeast Wyoming. As of December 31, 1998, MIGC charges a FERC approved tariff and is connected to the Colorado Interstate Gas Pipeline, the Williston Basin Interstate Pipeline and the Pony Express Pipeline. During July 1998, MIGC received approval from the FERC to increase its pipeline capacity from 90 MMcf per day to 130 MMcf per day. The first two compressors associated with this expansion began operating in December 1998 and the third compressor in the first quarter of 1999. See further discussion in "-Significant Acquisitions, Projects and Dispositions," and for a further discussion of the revenue, operating profit and attributable assets of this business segment, see "Item 8-Financial Statements and Supplementary Data." Significant Acquisitions, Projects and Dispositions The Company's significant acquisitions, projects and dispositions since January 1, 1996 are: 7 Coal Bed Methane The Company is expanding its Powder River Basin coal bed methane natural gas gathering system and developing its own coal seam gas reserves in Wyoming. The Company has acquired drilling rights in the vicinity of known coal bed methane production. The Company and other operators in the area have established production from wells drilled to depths of 400 to 1,200 feet. The typical drilling, completion and gathering costs associated with such activities have approximated $65,000 per well. As deeper wells are drilled, the average cost per well is expected to increase. Production from the Powder River coal bed methane play has been expanding, and the Company estimates that approximately 110 MMcf per day of gas volumes are currently being produced from several operators in the area, including the Company's interest. Most of the coal bed methane gas is being transported by MIGC for redelivery to gas markets in the Rocky Mountain and Midwest regions of the United States. The Company's capital budget in this area provides for expenditures of approximately $35.8 million during 1999. This capital budget includes approximately $18.5 million for drilling costs, production equipment and undeveloped acreage, $15.3 million for compression and $2 million for the Company's investment in the Fort Union Gas Gathering, L.L.C., as described below. Depending upon future drilling success, additional capital expenditures may be required to continue expansion in this basin. However, because of drilling and other uncertainties beyond the Company's control, there can be no assurance that this level of capital expenditure will be incurred or that additional capital expenditures will be made. During the years ended December 31, 1998 and 1997, the Company had expended approximately $46.7 million and $32.2 million, respectively, on this project. In October 1997, the Company sold a 50% undivided interest in its Powder River Basin coal bed methane gas operations to Barrett Resources Corporation ("Barrett"). This sale provided the Company with a substantial acreage dedication for gathering and compression services within an area of mutual interest ("AMI"), additional man-power resources to accelerate development in this area and more technical expertise in exploration and production. The sale involved gathering assets, producing properties, production equipment and certain undeveloped acreage in this area. The final adjusted purchase price was $17.9 million, resulting in a pre-tax gain of $4.7 million, which was recognized in the fourth quarter of 1997. The AMI with Barrett encompasses approximately 2.1 million acres in the Powder River coal bed methane play. Both parties will continue to develop certain specified areas within the AMI, with Barrett becoming the operator of the producing wells on July 1, 1999. The Company has committed to gather and compress for a fee, all gas produced from the jointly-owned properties within the AMI under a long-term agreement. In December 1998, the Company joined with other industry participants to form Fort Union Gas Gathering, L.L.C., which plans to build a 106-mile, 24-inch gathering header to gather coal bed methane in the Powder River Basin in northeast Wyoming. The Company will have an approximate 13% interest and be the construction contractor and field operator of the header and a related gas treating facility. The new gathering header is expected to have an initial capacity of approximately 450 MMcf per day of natural gas with expansion capability. The header will deliver coal bed methane gas to a treating facility to be constructed near Glenrock, Wyoming and will access interstate pipelines to gas markets in the Rocky Mountain and Midwest regions of the United States. Construction is scheduled to begin in April 1999 with operations anticipated to commence on or about the end of the third quarter of 1999. It is anticipated that the new gathering header and treating system will be project-financed, requiring a cash investment by the Company of approximately $2 million. Southwest Wyoming The Company's facilities in Southwest Wyoming are comprised of the Granger facility and a 72% ownership interest in the Lincoln Road facility (collectively the "Granger Complex"). These facilities have a combined operational capacity of 225 MMcf per day and in the year ended December 31, 1998 processed an average of 183 MMcf per day. The Granger Complex processes gas produced in the prolific Greater Green River Basin. Despite the low commodity prices experienced in 1998, drilling activity in this area remained at a high level, as 65 new wells were connected to these facilities. The Company believes that as governmental drilling restrictions affecting a portion of this basin are removed in the fourth quarter of 1999, the Company may have the opportunity to expand these facilities in the year 2000. The Company's capital budget in this area provides for expenditures of approximately $14.5 million during 1999. This capital budget includes approximately $6.1 million for drilling costs and production equipment and approximately $8.4 million related to gathering, transportation and expansion of the Granger facility. Because of drilling and other uncertainties beyond the Company's control, there can be no assurance that this level of capital expenditure will be incurred or that future capital expenditures will be made. During the years ended December 31, 1998 and 1997, the Company has expended approximately $16.0 million and $6.2 million, respectively, on this project. In 1997, the Company entered into an agreement with Ultra Resources, Inc. ("Ultra") to participate in the exploration, development, gathering and processing in the Hoback Basin in Southwestern Wyoming. Under the agreement, a 1.8 million acre AMI was established, in which Ultra currently controls approximately 350,000 acres. The Company has the option to participate in exploration and production activities within the AMI for approximately a 15% working interest. The Company and Ultra have also entered into 8 agreements for the gathering and processing of natural gas, which is developed on 16 prospects within the AMI, through the Company's Granger facility. Additionally, the Company entered into two separate agreements with RIS Resources (USA) Inc. ("RIS"), an affiliate of Ultra, to sell RIS undivided interests in certain assets. Under the first agreement, in February 1998, the Company sold RIS a 50% undivided interest in a small portion of the Granger gathering system servicing the Ultra AMI for approximately $4.0 million. This amount approximated the Company's cost in such facilities. RIS and the Company expect to install jointly additional gathering assets in this area as needed. Under the second agreement with RIS, the Company granted RIS the option to purchase up to 50% of the Granger Complex. In conjunction with this agreement, in February 1998, RIS paid a $1 million non-refundable option payment to the Company. RIS's option to acquire an interest in these facilities expired in the fourth quarter of 1998. Bethel Treating Facility In 1996 and 1997 the Pinnacle Reef trend was rapidly developing into a very active lease acquisition and exploratory play using 3-D seismic technology. The initial discoveries in the play indicated a very large potential gas development. Based on the Company's receipt of large acreage dedications in this area, the Company constructed the Bethel Treating facility for a total cost of approximately $102.8 million with a throughput capacity of 350 MMcf per day. In 1998, the production rates from the wells drilled in this field and the recoverable reserves from these properties, were far less than originally expected by the producers. As a result, in 1998, the Bethel Treating facility averaged gas throughput of approximately 61 MMcf per day. Due to the unexpected poor drilling results and reductions in the producers' drilling budgets, the number of rigs active in this area has decreased from 18 in July 1998 to one active rig in March 1999. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), requires that long-lived assets be reviewed whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. SFAS No.121 also requires that an impairment loss be recognized when the carrying amount of an asset exceeds its fair market value or its expected future undiscounted net cash flows. Because of uncertainties related to the pace and success of third-party drilling programs, declines in volumes produced at certain wells and other conditions outside the Company's control, the Company determined that such an evaluation of the Bethel Treating facility was necessary. The Company compared the net book value of the assets to the discounted expected future cash flows of the facility and determined a pre- tax, non-cash impairment charge of $77.8 million in the fourth quarter of 1998 was required. Edgewood In two transactions which closed in October 1998 the Company sold its Edgewood gathering system, including its undivided interest in the producing properties associated with this facility, and its 50% interest in the Redman Smackover Joint Venture ("Redman Smackover"). The combined sales price was $55.8 million. The proceeds from these sales were used to repay a portion of the balances outstanding under the Revolving Credit Facility. After the accrual of certain related expenses, the Company recognized a pre-tax gain of approximately $1.6 million during the fourth quarter of 1998. Perkins In November 1997, the Company entered into an agreement to sell its Perkins Facility. In March 1998, the Company completed the sale of this facility, with an effective date of January 1, 1998. The sales price was $22.0 million and resulted in a pre-tax gain of approximately $14.9 million. The proceeds from this sale were used to repay a portion of the balances outstanding under the Revolving Credit Facility. Giddings In March 1999, the Company entered into an agreement to sell its Giddings Facility for $36.0 million, which will result in an approximate pre-tax loss of $4.8 million. This agreement is subject to various approvals and is anticipated to close in the second quarter of 1999. 9 Katy The Company continues to view access to storage capacity as a significant element of its marketing strategy. However, as a result of an increase in third-party storage services available in the marketplace combined with the Company's 1999 business plan objective of improving its balance sheet, the Company entered into an agreement in March 1999 to sell all the outstanding common stock of its wholly-owned subsidiary, Western Gas Resources Storage, Inc., for $100.0 million. This transaction will result in an approximate pre-tax loss of $18.5 million. The only asset of this subsidiary is the Katy Facility. This agreement is subject to various regulatory approvals and the satisfaction of certain contractual conditions and is anticipated to close in the second quarter of 1999. The Company has the option to sell approximately 5.4 Bcf of stored gas in the Katy Facility to the same purchaser for total sales proceeds of approximately $10.0 million (which would approximate its cost of the inventory). To meet the needs of its marketing operations, the Company will continue to contract for storage capacity. Accordingly, the Company will enter into a long-term agreement with the purchaser for approximately 3 Bcf of storage capacity at market rates. Other The Company routinely reviews the economic performance of each of its operating facilities to ensure that a desired cash flow objective is achieved. If an operating facility is not generating desired cash flows or does not fit in with the Company's strategic plans, the Company will explore various options, such as consolidation with other Company-owned or third party-owned facilities, dismantlement, asset swap or outright sale. MARKETING Gas The Company markets gas produced at its plants and purchased from third parties to end-users, local distribution companies ("LDCs"), pipelines and other marketing companies throughout the United States and in Canada. Historically, the Company's gas marketing was an outgrowth of the Company's gas processing activities and was directed towards selling gas processed at its plants to ensure their efficient operation. As the Company expanded into new basins and the natural gas industry became deregulated and offered more opportunity, the Company began to increase its third-party gas marketing. For the year ended December 31, 1998, the Company's gas sales volumes averaged 2.2 Bcf per day. Third-party sales and gas storage, combined with the stable supply of gas from the Company's facilities, enable the Company to respond quickly to changing market conditions and to take advantage of seasonal price variations and peak demand periods. The Company sells gas under agreements with varying terms and conditions in order to match seasonal and other changes in demand. Most of the Company's current sales contracts range from a few days to two years. In general, the Company does not expect to increase its third-party sales volumes significantly from levels achieved during the year ended December 31, 1998. The Company's 1999 gas marketing plan emphasizes growth through its asset base and storage and transportation capacities which it controls. During 1997, the Company created a wholly-owned subsidiary to operate a marketing office in Calgary, Alberta. The Calgary office provides the Company with information regarding gas supplies being transported from Canada and establishes a presence in an evolving gas market. The Company continues to view access to storage capacity as a significant element of its marketing strategy. The Company customarily stores gas in underground storage facilities to ensure an adequate supply for long-term sales contracts and for resale during periods when prices are favorable. As of December 31, 1998, the Company had contracts in place for approximately 16.2 Bcf of storage capacity, including storage through its Canadian subsidiary, for resale during periods when prices are favorable. The fees associated with such contracts currently do not exceed $.61 per Mcf and the associated periods range from two months to six years. As of December 31, 1998, the Company also had contracts for approximately 490 MMcf per day of firm transportation; approximately 30% of such contracts expire during 1999. The fees associated with such contracts do not exceed $.33 per Mcf, and the associated periods range from seven months to thirteen years. Certain of these long-term storage and firm transportation contracts require an annual renewal. In addition, certain contracts contain provisions which would require the Company to pay the fees associated with such contracts whether or not the service was used. The Company held gas in storage and held imbalances of approximately 19.9 Bcf at an average cost of $2.13 per Mcf at December 31, 1998 compared to 6.0 Bcf at an average cost of $1.97 per Mcf at December 31, 1997, at various storage facilities, including the Katy Facility. At December 31, 1998, the Company had hedging contracts in place for anticipated sales of approximately 18.6 Bcf of stored gas at a weighted average price of $2.41 per Mcf for the stored inventory. See further discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - - Risk Management Activities." During the year ended December 31, 1998, the Company sold gas to approximately 475 end-users, pipelines, LDCs and other customers. No single gas customer accounted for more than 4% of consolidated revenues for the year ended December 31, 1998. 10 NGLs The Company markets NGLs (ethane, propane, iso-butane, normal butane, natural gasoline and condensate), produced at its plants and purchased from third parties, in the Rocky Mountain, Mid-Continent, Gulf Coast and Southwestern regions of the United States. A majority of the Company's production of NGLs moves to the Gulf Coast area, which is the largest NGL market in the United States. Through the development of end-use markets and distribution capabilities, the Company seeks to ensure that products from its plants move on a reliable basis, avoiding curtailment of production. For the year ended December 31, 1998, NGL sales averaged 4,730 MGal per day, an increase from 2,941 MGal per day in 1993, primarily due to the increase in third-party sales, acquisitions and facility expansions during the five-year period. Consumers of NGLs are primarily the petrochemical industry, the petroleum refining industry and the retail and industrial fuel markets. As an example, the petrochemical industry uses ethane, propane, normal butane and natural gasoline as feedstocks in the production of ethylene, which is used in the production of various plastics products. Over the last several years, the petrochemical industry has increased its use of NGLs as a major feedstock and is projected to continue to increase such usage. Further, propane is used for home heating, transportation and for certain agricultural applications. Demand for NGLs is primarily affected by price, seasonality and the economy. The Company increased sales to third parties by approximately 385 MGal per day for the year ended December 31, 1998 compared to 1997. In general, the Company does not anticipate that sales to third parties in 1999 will increase at the rate experienced in prior years. The Company's NGL marketing plan contemplates: (i) continued growth in sales to end-users; (ii) maximizing profitability on volumes produced at the Company's facilities; and (iii) efficient use of various third-party storage facilities to increase profitability while limiting carrying risk. The Company leases NGL storage space at major trading locations, primarily near Houston and in central Kansas, in order to store products for resale during periods when prices are favorable and to facilitate the distribution of products. In addition, as of December 31, 1998, the Company had contracts in place for approximately 30,450 MGal of storage capacity. The base fees associated with such contracts currently do not exceed $.03 per gallon and the associated periods range from three months to four years. Certain of the long- term contracts require an annual renewal and contain provisions which would require the Company to pay the fees associated with such contracts whether or not the service was used. The Company held NGLs in storage of 16,900 MGal, consisting primarily of propane and normal butane, at an average cost of $.24 per gallon and 14,400 MGal at an average cost of $.37 per gallon at December 31, 1998 and 1997, respectively, at various third-party storage facilities. At December 31, 1998, the Company had no significant hedging contracts in place for anticipated sales of stored NGLs. The Company generally intends that stored NGLs turn over on an annual basis. NGL sales were made to approximately 175 different customers and no single customer accounted for more than 2% of the Company's consolidated revenues for the year ended December 31, 1998. Revenues are also derived from contractual marketing fees charged to some producers for NGL marketing services. For the year ended December 31, 1998, such fees were less than 1% of the Company's consolidated revenues. Power Marketing In July 1996, the FERC issued its final order requiring investor-owned electric utilities to provide open access for wholesale transmission. This action allowed companies to participate in a market previously controlled by electric utilities. During 1996 and 1997, the Company traded electric power in the wholesale market and entered into transactions that arbitraged the value of gas and electric power. During the second half of 1997, the Company elected to discontinue wholesale trading of electric power, due to a lack of profitability. For a further discussion of the revenue, operating profit and attributable assets of the Marketing segment, see "Item 8 -Financial Statements and Supplementary Data." PRODUCING PROPERTIES During 1997, the Company began to invest more capital in oil and gas producing activities primarily to replace declining reserves which are processed at the Company's facilities and to encourage expansion in basins where the Company's facilities are located. See "Business and Properties - Significant Acquisitions, Projects and Dispositions - Coal Bed Methane and -Southwest Wyoming". The Company believes that in order to secure additional gas supply for its facilities, it must be willing to consider its participation 11 in exploration and production activities. Revenues derived from the Company's producing properties comprised approximately 1.3%, 1.3% and 1.6% of consolidated revenues, respectively, for the years ended December 31, 1998, 1997 and 1996. For a further discussion of the revenue, operating profit and attributable assets of this business segment, see "Item 8 - Financial Statements and Supplementary Data." The net annual production volumes are summarized as follows:
December 31, ------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Gas Oil Gas Oil Gas Oil State (MMcf) (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) - ------------------------- ------- ------ ------- ------ ------- ------ Colorado................. 274 2 243 6 73 6 Louisiana................ 2,810 75 4,760 108 7,255 117 Texas (1)................ 1,787 5 6,092 21 7,193 32 Wyoming: Coal Bed Methane....... 7,136 - 1,751 - 12 - All Other.............. 3,283 40 1,752 19 233 3 ------ ---- ------ --- ------ --- Total.................... 15,290 122 14,598 154 14,766 158 ====== ==== ====== === ====== ===
(1) The Company sold its producing properties in Texas during 1998. As a result of a review of the reserves at the Company's Black Lake facility, and by comparing the net book value of the assets to the undiscounted expected future cash flows, determined by applying future prices estimated by management over the lives of the associated reserves, the Black Lake reserves and the processing facility associated with such reserves were written down in accordance with SFAS No. 121 to the net present value of expected cash flows discounted using an interest rate commensurate with the risk associated with the underlying asset. Accordingly, the Company recognized a pre-tax, non-cash loss of $28.8 million for the year ended December 31, 1998. In addition, the Company recognized a pre-tax, non-cash loss on the impairment of property and equipment, primarily related to its Black Lake facility and Sand Wash Basin assets, of $34.6 million for the year ended December 31, 1997. Reserve estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and of future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Results of subsequent drilling, testing and production may cause either upward or downward revisions of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. Any significant revision of reserve estimates could materially adversely affect the Company's financial condition and results of operations. COMPETITION The Company competes with other companies in the gathering, processing, treating and marketing businesses both for supplies of natural gas and for customers for its gas and NGLs. Competition for natural gas supplies is primarily based on a processors' efficiency and reliability in providing services, and in the availability of transportation to market centers to obtain a satisfactory price for the producers' natural gas. Competition for customers is primarily based upon reliability and the market price of deliverable gas and NGLs. For customers that have the capability of using alternative fuels, such as oil and coal, the Company also competes primarily on the basis of price against companies capable of providing such alternative fuels. The Company's competitors for obtaining additional natural gas supplies, for gathering and processing natural gas and for marketing gas and NGLs include national and local gas gatherers, brokers, marketers and distributors of various sizes, financial resources and experience. REGULATION The purchase and sale of natural gas and the fees received for gathering and processing by the Company have generally not been subject to regulation and, therefore, except as constrained by competitive factors, the Company has considerable pricing flexibility. 12 Many aspects of the gathering, processing, marketing and transportation of natural gas and NGLs by the Company, however, are subject to federal, state and local laws and regulations which can have a significant impact upon the Company's overall operations. As a processor and marketer of natural gas, the Company depends on the transportation and storage services offered by various interstate and intrastate pipeline companies for the delivery and sale of its own gas supplies as well as those it processes and/or markets for others. Both the performance of transportation and storage services by interstate pipelines, and the rates charged for such services, are subject to the jurisdiction of the FERC under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. The availability of interstate transportation and storage services necessary to enable the Company to make deliveries and/or sales of gas can at times be pre-empted by other system users in accordance with FERC-approved methods for allocating the system capacity of "open access" pipelines. Moreover, the rates charged by pipelines for such services are often subject to negotiation between shippers and the pipelines within certain FERC-established parameters and will periodically vary depending upon individual system usage and other factors. An inability to obtain transportation and/or storage services at competitive rates can hinder the Company's processing and marketing operations and/or adversely affect its sales margins. In 1997, the State of Texas adopted a statute that will require the Company to obtain a pre-construction permit for certain gas gathering lines containing more than 100 parts per million of hydrogen sulfide and grants affected persons, in certain circumstances, the right to request a hearing relating to the issuance of such a permit. This may increase the time and cost associated with constructing hydrogen sulfide gathering lines. The Company operates the MiVida and the Bethel facilities in Texas which removes hydrogen sulfide from the natural gas. Generally, gathering and processing prices are not regulated by the FERC or any state agency. However, in May 1995, the Oklahoma Corporation Commission (the "OCC") was granted limited authority in certain circumstances, after the filing of a complaint by a producer, to compel a gas gatherer to provide open access gathering and to set aside unduly discriminatory gathering fees. The Oklahoma state legislature is considering legislation that would expand the authority of the OCC to compel a gas gatherer to provide open access gas gathering and to establish rates, terms and conditions of services provided by a gas gatherer. In addition, the state legislatures and regulators in certain other states in which the Company gathers gas are also contemplating additional regulation of gas gathering. The Company does not believe that any of the proposed legislation of which it is aware is likely to have a material adverse effect on the Company's financial position or results of operation. However, the Company cannot predict what additional legislation or regulations the States may adopt regarding gas gathering. EMPLOYEES At December 31, 1998, the Company employed approximately 870 full-time employees, none of whom was a union member. The Company considers relations with employees to be excellent. ITEM 3. LEGAL PROCEEDINGS Reference is made to Note 8 of the Company's Consolidated Financial Statements in Item 8 of this Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1998. 13 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 15, 1999, there were 32,147,993 shares of Common Stock outstanding held by 321 holders of record. The Common Stock is traded on the New York Stock Exchange under the symbol "WGR." The following table sets forth quarterly high and low sales prices as reported by the NYSE Composite Tape for the quarterly periods indicated. HIGH LOW --------- --------- 1998 Fourth Quarter..................... $ 9 7/8 $ 5 5/16 Third Quarter...................... 15 1/8 8 Second Quarter..................... 19 5/8 13 7/8 First Quarter...................... 22 1/8 15 7/8 1997 Fourth Quarter..................... 25 9/16 20 Third Quarter...................... 22 1/2 16 3/4 Second Quarter..................... 20 1/2 14 7/8 First Quarter...................... $21 3/8 $17 3/4 The Company paid annual dividends on the Common Stock aggregating $.20 per share during the years ended December 31, 1998 and 1997. The Company has declared a dividend of $.05 per share of Common Stock for the quarter ending March 31, 1999 to holders of record as of such date. Declarations of dividends on the Common Stock are within the discretion of the Board of Directors. In addition, the Company's ability to pay dividends is restricted by certain covenants in its financing facilities, the most restrictive of which prohibits declaring or paying dividends that exceed, in the aggregate, the sum of $50 million plus 50% of the Company's consolidated net income earned after June 30, 1995 (or minus 100% if a net loss), plus the aggregate net cash proceeds received after June 30, 1995 from the sale of any stock. At December 31, 1998, availability under this covenant amounted to $51.5 million. This amount is expected to be reduced by approximately $14.9 million as a result of the after-tax losses recognized on the sales of the Giddings and Katy facilities. 14 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and operating data for the Company. Certain prior year amounts have been reclassified to conform to the presentation used in 1998. The data for the years ended December 31, 1998, 1997 and 1996 should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere in this Form 10-K. The selected consolidated financial data for the years ended December 31, 1995 and 1994 is derived from the Company's audited historical Consolidated Financial Statements. See also Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year Ended December 31, -------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------- --------------- -------------- ---------------- ---------- (000s, except per share amounts and operating data) STATEMENT OF OPERATIONS: Revenues.............................. $2,133,566 $ 2,385,260 $2,091,009 $1,256,984 $1,063,489 Gross profit (a)...................... 66,568 93,755 105,479 75,211 72,556 Income (loss) before income taxes..... (105,623) (b) 2,220 (b) 41,631 (8,266) (c) 11,524 Provision (benefit) for income taxes.. (38,418) 733 13,690 (2,158) 4,160 Net income (loss)..................... (67,205) (b) 1,487 (b) 27,941 (6,108) (c) 7,364 Earnings (loss) per share of common stock......................... (2.42) (.28) .66 (.84) (.19) Earnings (loss) per share of common stock - assuming dilution..... (2.42) (.28) .66 (.84) (.19) CASH FLOW DATA: Net cash provided by operating activities........................... (35,570) 114,755 168,266 86,373 31,866 Capital expenditures.................. 105,216 198,901 74,555 78,521 100,540 BALANCE SHEET DATA (at year end): Total assets.......................... 1,219,377 1,348,276 1,361,631 1,193,997 1,167,362 Long-term debt........................ 504,881 441,357 379,500 529,500 493,000 Stockholders' equity.................. 385,216 468,112 480,467 371,909 436,683 Dividends declared per share of common stock......................... $ .20 $ .20 $ .20 $ .20 $ .20 OPERATING DATA: Average gas sales (MMcf/D)............ 2,200 1,975 1,794 1,572 1,097 Average NGL sales (MGal/D)............ 4,730 4,585 3,744 2,890 2,970 Average gas volumes gathered (MMcf/D).................... 1,162 1,229 1,171 1,020 934 Facility capacity (MMcf/D)............ 2,237 2,302 1,940 1,907 1,560 Average gas prices ($/Mcf)............ $ 2.01 $ 2.30 $ 2.19 $ 1.53 $ 1.77 Average NGL prices ($/Gal)............ $ .26 $ .36 $ .41 $ .31 $ .28
_________________________________________ (a) Excludes selling and administrative, interest, restructuring and income tax expenses and loss on the impairment of property and equipment. See further discussion in notes (b) and (c). (b) SFAS No. 121 requires that an impairment loss be recognized when the carrying amount of an asset exceeds the fair market value of or the expected future undiscounted net cash flows. In accordance with SFAS No. 121, the Company recognized a pre-tax, non-cash loss on the impairment of property and equipment of $108.5 million, ($69.0 million, after-tax) and $34.6 million, pre-tax, ($22.0 million, after-tax) for the years ended December 31, 1998 and 1997, respectively. (c) In accordance with SFAS No. 121, the Company recognized a pre-tax, non-cash loss for the year ended December 31, 1995 on the impairment of property and equipment of $17.6 million, and $12.4 million, after-tax. Also, the Company implemented a cost reduction program to reduce operating and selling and administrative expenses. As a result of this program, a $2.1 million, pre- tax, and $1.3 million, after-tax, restructuring charge was incurred, primarily related to employee severance costs. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis relates to factors that have affected the consolidated financial condition and results of operations of the Company for the three years ended December 31, 1998. Certain prior year amounts have been reclassified to conform to the presentation used in 1998. Reference should also be made to the Company's Consolidated Financial Statements and related Notes thereto and the Selected Financial Data included elsewhere in this Form 10-K. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 (000S, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
Year Ended December 31, Percent ------------------------- 1998 1997 Change ------------- ---------- ------- FINANCIAL RESULTS: Revenues............................................ $2,133,566 $2,385,260 (11) Gross profit........................................ 66,568 93,775 (29) Net income (loss)................................... (67,205) 1,487 - Loss per share of common stock...................... (2.42) (.28) (764) Loss per share of common stock - assuming dilution.. (2.42) (.28) (764) Net cash provided by (used in) operating activities. $ (35,570) $ 114,755 - OPERATING DATA: Average gas sales (MMcf/D).......................... 2,200 1,975 11 Average NGL sales (MGal/D).......................... 4,730 4,585 3 Average gas prices ($/Mcf).......................... $ 2.01 $ 2.30 (13) Average NGL prices ($/Gal).......................... $ .26 $ .36 (28)
Net income decreased $68.7 million for the year ended December 31, 1998 compared to 1997. The decrease in net income for the year was primarily due to a $69.0 million, after-tax, charge for impairment recorded in connection with the evaluation of a decrease in product prices and the impact on the Company's Bethel, Black Lake and Sand Dunes facilities, as required by SFAS No. 121. Revenues from the sale of gas decreased approximately $46.0 million for the year ended December 31, 1998 compared to 1997. Average gas sales volumes increased 225 MMcf per day to 2,200 MMcf per day for the year ended December 31, 1998 compared to 1997, primarily due to an increase in the sale of gas purchased from third parties. The increase in volumes sold was more than offset by a decrease in average gas prices. Average gas prices realized by the Company decreased $.29 per Mcf to $2.01 per Mcf for the year ended December 31, 1998 compared to 1997. Included in the realized gas price is approximately $71,000 of loss recognized in the year ended December 31, 1998 related to futures positions on equity volumes. The Company has entered into futures positions for a portion of its equity gas for 1999 and 2000. See further discussion in "Liquidity and Capital Resources - Risk Management." Revenues from the sale of NGLs decreased approximately $162.3 million for the year ended December 31, 1998 compared to 1997. Average NGL sales volumes increased 145 MGal per day to 4,730 MGal per day for the year ended December 31, 1998 compared to 1997, primarily due to an increase in the sale of NGLs purchased from third parties. The increase in sales volumes was more than offset by a decrease in average NGL prices. Average NGL prices realized by the Company decreased $.10 per gallon to $.26 per gallon for the year ended December 31, 1998 compared to 1997. Included in the realized NGL price was approximately $7.4 million of gain recognized in the year ended December 31, 1998 related to futures positions on equity volumes. The Company has entered into futures positions for a portion of its equity production for 1999. See further discussion in "-Liquidity and Capital Resources - Risk Management." Revenue associated with electric power marketing decreased approximately $59.5 million for the year ended December 31, 1998 compared to 1997, as the Company discontinued wholesale trading of electric power in 1997, due to a lack of profitability. 16 Other net revenue increased approximately $12.2 million for the year ended December 31, 1998 compared to 1997. The increase was primarily due to a $14.9 million gain on the sale of the Company's Perkins facility and a $1.0 million option payment received from RIS in connection with the potential sale of a portion of certain of the Company's assets in Southwest Wyoming. These increases were offset by decreases of approximately $2.8 million in earnings from the Company's investments in joint ventures, primarily due to the decreases in product prices and the sale of its interest in Redman Smackover. See further discussion at "Business and Properties - Significant Acquisitions, Projects and Dispositions - Southwest Wyoming and Significant Acquisitions, Projects and Dispositions - Redman Smackover Joint Venture." The reduction in product purchases of $232.1 million to $1.9 billion for the year ended December 31, 1998 compared to 1997, was primarily due to a decrease in commodity prices. Overall, combined product purchases as a percentage of sales of all products increased from 92% to 93% for the year ended December 31, 1998 compared to 1997. Over the past several years, the Company has experienced narrowing margins in its third-party sales as a result of increasing competitiveness of the natural gas marketing industry. During the year ended December 31, 1998, margins on the sale of third-party gas declined and averaged approximately $.02 per Mcf compared to approximately $.03 per Mcf for 1997. Contributing to the increase in the product purchase percentage for the year ended December 31, 1998 were higher payments related to the Company's "keepwhole" contracts at its Granger facility. Under a "keepwhole" contract, the Company's margin is reduced when the value of NGLs declines relative to the value of gas. Also included in product purchases were lower of cost or market writedowns, primarily related to NGL inventories, of $826,000 and $1.1 million for the years ended December 31, 1998 and 1997, respectively. Plant operating expense increased approximately $7.2 million for the year ended December 31, 1998 compared to 1997. The increase was primarily due to compression costs associated with the increasing Powder River Basin coal bed methane production activities and expenses incurred at the Bethel Treating facility, which became partially operational during the third quarter of 1997. Interest expense increased $6.1 million for the year ended December 31, 1998 compared to 1997. The increase is the result of less interest capitalized to capital projects, primarily the Bethel Treating facility, and larger debt balances outstanding during the year ended December 31, 1998 compared to 1997. The larger debt balances resulted primarily from higher product inventory positions, capital expenditures associated with the Bethel Treating facility and reduced cashflow from operations. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 (000S, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
Year Ended December 31, Percent ------------------------- 1997 1996 Change ------------- ---------- ------- FINANCIAL RESULTS: Revenues....................................................... $2,385,260 $2,091,009 14 Gross profit................................................... 93,775 105,479 (11) Net income..................................................... 1,487 27,941 (95) Earnings (loss) per share of common stock...................... (.28) .66 - Earnings (loss) per share of common stock - assuming dilution.. (.28) .66 - Net cash provided by operating activities...................... $ 114,755 $ 168,266 (32) OPERATING DATA: Average gas sales (MMcf/D)..................................... 1,975 1,794 10 Average NGL sales (MGal/D)..................................... 4,585 3,744 22 Average gas prices ($/Mcf)..................................... $ 2.30 $ 2.19 5 Average NGL prices ($/Gal)..................................... $ .36 $ .41 (12)
Net income decreased $26.5 million for the year ended December 31, 1997 compared to 1996. The decrease in net income for the year was primarily due to a $22.0 million, after-tax, impairment loss recorded in connection with the evaluation of certain property and equipment, primarily related to its Black Lake facility and Sand Wash Basin assets, as required by SFAS No.121. Net income in 1997 increased by a $3.0 million after-tax gain associated with the sale of a 50% interest in the Company's coal bed methane operations. Revenues from the sale of gas increased approximately $216.6 million for the year ended December 31, 1997 compared 17 to 1996. Average gas sales volumes increased 181 MMcf per day to 1,975 MMcf per day for the year ended December 31, 1997 compared to 1996, primarily due to an increase in the sale of gas purchased from third parties. Average gas prices realized by the Company increased $.11 per Mcf to $2.30 per Mcf for the year ended December 31, 1997 compared to 1996. Included in the realized gas price was approximately $5.6 million of loss recognized in the year ended December 31, 1997 related to futures positions on equity volumes. Revenues from the sale of NGLs increased approximately $50.4 million for the year ended December 31, 1997 compared to 1996. Average NGL sales volumes increased 841 MGal per day to 4,585 MGal per day for the year ended December 31, 1997 compared to 1996, largely due to an increase of approximately 800 MGal per day in the sale of NGLs purchased from third parties. Average NGL prices realized by the Company decreased $.05 per gallon to $.36 per gallon for the year ended December 31, 1997 compared to 1996. Included in the realized NGL price was approximately $5.2 million of gain recognized in the year ended December 31, 1997 related to futures positions on equity volumes. Revenue associated with electric power marketing increased $28.8 million for the year ended December 31, 1997 compared to 1996, primarily because the Company had minimal transactions in this market during 1996. Due to a lack of profitability, the Company elected to discontinue trading electric power and began to evaluate its role in this emerging business, during the second half of 1997. The increase in product purchases of $302.3 million to $2.1 billion for the year ended December 31, 1997 compared to 1996, is primarily a combination of higher gas prices and increased sales of NGLs purchased from third parties. Contributing to the increase in product purchases for the year ended December 31, 1997 compared to 1996 were higher payments to producers related to the Company's "keepwhole" contracts at its Granger facility. Under a "keepwhole" contract, the Company's margin is reduced when the value of NGLs declines relative to the value of gas. Also contributing to the increases in product purchases for the year ended December 31, 1997 compared to 1996, were lower of cost or market write-downs of NGL and gas inventories of $1.1 million and $129,000, respectively. Plant operating expense increased approximately $5.0 million for the year ended December 31, 1997 compared to 1996. The increase was primarily due to additional compression cost associated with the MIGC pipeline. In addition, results of operations for the year ended December 31, 1997 were adversely affected by additional costs associated with the Bethel Treating facility. As a result of start-up costs associated with opening the facility and depreciation, the Bethel Treating facility did not contribute positively to earnings in 1997. Depreciation, depletion and amortization decreased $4.0 million for the year ended December 31, 1997 compared to 1996. The decrease was primarily due to decreases in produced volumes related to the Company's Black Lake facility which resulted in a decrease in the associated depletion. Interest expense decreased $7.0 million for the year ended December 31, 1997 compared to 1996. The decrease in interest expense was primarily due to lower average outstanding debt balances due to the use of the Company's net proceeds from the November 1996 public offering of 6,325,000 shares of Common Stock to reduce indebtedness under the Revolving Credit Facility. Overall, profitability for the year ended December 31, 1997 was less than anticipated due to several factors. Combined product purchases as a percentage of all product sales increased from 91% to 92% for the year ended December 31, 1997 compared to 1996. Over the past several years, the Company has experienced narrowing margins related to the increasing competitiveness of the natural gas marketing industry. During the year ended December 31, 1997, the Company's marketing margins were reduced by approximately 50% compared to 1996. Included in the sale of gas and product purchases for the last half of 1997, is the sale of approximately 11.5 Bcf of gas, previously stored in the Katy Facility, at a margin of approximately $.20 per Mcf. BUSINESS STRATEGY The Company's long-term, four-part business plan is designed to increase profitability through: (i) investing in projects that complement and extend its core gas gathering, processing, production and marketing business; (ii) creating ventures with producers who dedicate additional acreage to the Company; (iii) maintaining or expanding its energy sales volumes and margins by maximizing its asset base, firm transportation and storage contracts and other contractual arrangements; and (iv) optimizing the profitability of existing operations and in certain cases, considering the disposal of non-growth assets. Historically, crude oil prices have been volatile and the oil and gas industry is currently experiencing ten year lows in these prices. As of March 1, 1999 such prices had declined to approximately $12.25 per barrel. Most NGL value is tied closely to crude oil, accordingly this pricing environment is having a detrimental effect on the Company's results of operations. 18 The Company's 1999 plan provides for the improvement of the balance sheet and liquidity while ensuring the continued development of its two primary growth projects, the Powder River Basin coal bed methane and Southwest Wyoming operations. In order to reduce the Company's overall debt level and provide it with additional liquidity, the Company has signed agreements in March 1999 providing for the sale of its Giddings Gathering System and Katy Facility for total proceeds of approximately $136 million. These transactions will result in an after-tax loss in 1999 of approximately $14.9 million and are expected to close in the second quarter of 1999, subject to various regulatory approvals and the satisfaction of certain contractual conditions. Expansion of Core Business The Company will continue to evaluate investments in projects that meet its objectives of complementing existing operations, expanding into new areas or providing enhanced marketing opportunities. These projects typically include gas gathering, treating, processing, producing properties, transportation or storage assets and NGL product upgrade equipment. In 1999, the Company's capital expenditures will be reduced compared to levels expended in 1998 and 1997, and will be concentrated on the Powder River Basin coal bed methane and Southwest Wyoming operations. Expenditures on these projects are anticipated to comprise 53% and 22%, respectively, of the total 1999 budget. See further discussion in "Business and Properties -Significant Acquisitions, Projects and Dispositions." Increase Dedicated Acreage The Company enters into agreements which provide it with new dedicated acreage and wells to replace declines in reserves and generate additional volumes for gathering and processing at its facilities. The Company has increased its participation in exploration and production activities. Over the past several years, the Company has attempted to structure its contracts to minimize the impact of fluctuating NGL prices. This has been accomplished by entering fee based contracts and minimizing the use of keep-whole contracts. See further discussion in "Business and Properties - Significant Acquisitions, Projects and Dispositions." Maintain or Expand Energy Marketing Services and Volumes The Company is a full-service marketer of gas and NGL products. The Company focuses on the individual needs of its customers, primarily in the Rocky Mountain region, and is committed to developing products and services that are tailored to meet their requirements. The Company plans to maintain or expand its energy marketing activities by: (i) maximizing profitability on volumes produced at the Company's facilities; (ii) efficient use of various firm transportation and storage contracts and other contractual arrangements to increase profitability while limiting carrying risk; (iii) continuing to pursue higher- margin, end-use markets, primarily in the Rocky Mountain region; and (iv) maintaining third-party gas and NGL sales volumes. The Company believes it competes effectively with other marketers due to its national marketing presence and the marketing information gained thereby, the services it provides and its physical asset base. Optimize Profitability The Company seeks to optimize the profitability of its operations by: (i) maintaining or increasing natural gas throughput levels; (ii) increasing its efficiency through the consolidation of existing facilities; (iii) investing in assets that enhance NGL value; (iv) selling non-growth assets; and (v) controlling operating and overhead expenses. In order to maximize its competitive advantages, the Company continually monitors the economic performance of each of its operating facilities to ensure that a desired cash flow objective and operating efficiency is achieved. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity and capital resources historically have been net cash provided by operating activities, funds available under its financing facilities and proceeds from offerings of equity securities. In the past, these sources have been sufficient to meet its needs and finance the growth of the Company's business. The Company can give no assurance that the historical sources of liquidity and capital resources will be available for future development and acquisition projects, and it may be required to seek alternative financing sources. In 1998, sources of liquidity also included the sale of the Perkins Facility and the Edgewood Facility and related production. Additionally, the Company entered into agreements in March 1999 for the sale of the Giddings Facility and the Katy Facility for amounts approximating $136 million in gross proceeds. These transactions are expected to close in the second quarter of 1999, subject to various regulatory approvals and the satisfaction of certain contractual conditions. The net proceeds from these sales will be used to reduce debt. Net cash provided by operating activities is primarily affected by product prices, sales of inventory, the Company's success in increasing the number and efficiency of its facilities and the volumes of natural gas processed by such facilities, the margin on third-party product purchased for resale, as well as the timely collection of the Company's receivables. 19 The Company's future growth will be dependent upon obtaining additions to dedicated plant reserves, acquisitions, new project development, marketing, efficient operation of its facilities and its ability to obtain financing at favorable terms. Given the depressed oil and NGL prices the Company has been experiencing and the disappointing results from the Bethel Treating Facility, the Company sought and has successfully negotiated amendments to certain covenant requirements in its various financing facilities and has negotiated amendments to these financing facilities which are intended to provide more flexibility in a low price environment. There can be no assurance that further amendments or waivers can be obtained in the future, if necessary, or that the terms would be favorable to the Company. To strengthen credit ratings and to reduce its overall debt outstanding, the Company will continue to dispose of non-strategic assets (such as the Giddings and Katy facilities) and investigate alternative financing sources (including project - financing, joint ventures, public debt and operating leases). The Company believes that the amounts available to be borrowed under the Revolving Credit Facility, together with net cash provided by operating activities and the sale of non-strategic assets, will provide it with sufficient funds to connect new reserves, maintain its existing facilities and complete its current capital expenditure program. Depending on the timing and the amount of the Company's future projects, it may be required to seek additional sources of capital. The Company's ability to secure such capital is restricted by its financing facilities, although it may request additional borrowing capacity from its lenders, seek waivers from its lenders to permit it to borrow funds from third parties, seek replacement financing facilities from other lenders, use stock as a currency for an acquisition, sell existing assets or a combination of such alternatives. While the Company believes that it would be able to secure additional financing, if required, no assurance can be given that it will be able to do so or as to the terms of any such financing. Despite the current depressed oil prices, the Company also believes that cash provided by operating activities and amounts available under its Revolving Credit Facility will be sufficient to meet its debt service and preferred stock dividend requirements for the remainder of 1999. The Company's sources and uses of funds for the year ended December 31, 1998 are summarized as follows (000s): SOURCES OF FUNDS: Borrowings on Revolving Credit Facility................... $3,230,400 Proceeds from the dispositions of property and equipment.. 78,775 Proceeds from exercise of common stock options............ 23 ---------- Total sources of funds.................................. $3,309,198 ========== USES OF FUNDS: Payments related to long-term debt agreements............. $3,166,920 Capital expenditures...................................... 105,216 Net cash used in operating activities..................... 35,570 Dividends paid............................................ 16,869 ---------- Total uses of funds..................................... $3,324,575 ========== Additional sources of liquidity available to the Company are its inventories of gas and NGLs in storage facilities. The Company stores gas and NGLs primarily to ensure an adequate supply for long-term sales contracts and for resale during periods when prices are favorable. The Company held gas in storage and held imbalances of approximately 19.9 Bcf at an average cost of $2.13 per Mcf at December 31, 1998 compared to 6.0 Bcf at an average cost of $1.97 per Mcf at December 31, 1997, at various storage facilities, including the Katy Facility. At December 31, 1998, the Company had hedging contracts in place for anticipated sales of approximately 18.6 Bcf of stored gas at a weighted average price of $2.41 per Mcf for the stored inventory. See "Item 1 and 2 - Business and Properties - Significant Acquistions, Projects and Dispostions - Katy". The Company held NGLs in storage of 16,900 MGal, consisting primarily of propane and normal butane, at an average cost of $.24 per gallon and 14,400 MGal at an average cost of $.37 per gallon at December 31, 1998 and 1997, respectively, at various third-party storage facilities. At December 31, 1998, the Company had no significant hedging contracts in place for anticipated sales of stored NGLs. Historically, while certain individual plants have experienced declines in dedicated reserves, the Company has been successful in connecting additional reserves to more than offset the natural declines. There has been a reduction in drilling activity, primarily in basins that produce oil and casinghead gas, from levels that existed in prior years. However, higher gas prices in 1997 and 1998, improved technology (e.g., 3-D seismic and horizontal drilling) and increased pipeline capacity from the Rocky Mountain region have stimulated drilling in the Powder River Basin and Southwest Wyoming. Company-wide, the level of drilling will depend upon, among other factors, the prices for gas and oil, the drilling budgets of third-party producers, the energy policy of the federal government and the availability of foreign oil and gas, none of which are within the Company's control. There is no assurance that the Company will continue to be successful in replacing the dedicated reserves processed at its facilities. In 1998, including the reserves associated with the Company's joint ventures and partnerships and excluding the facilities sold during the year, the Company connected new reserves 20 to its facilites to replace approximately 86% of 1998 production. On a Company-wide basis, primarily as a result of the sale of the Edgewood and Perkins facilities and a downward revision in the reserves associated with the Bethel Facility, dedicated reserves decreased from approximately 3.3 Tcf as of December 31, 1997 to approximately 3.1 Tcf at December 31, 1998. The Company has effective shelf registration statements filed with the Securities and Exchange Commission for an aggregate of $200 million of debt securities and preferred stock (along with the shares of common stock, if any, into which such securities are convertible) and $62 million of debt securities, preferred stock or common stock. Capital Investment Program For the years ended December 31, 1998, 1997 and 1996 the Company expended $105.2 million, $198.9 million and $74.6 million, respectively, on new projects and acquisitions. For the year ended December 31, 1998, the Company's expenditures consisted of the following: (i) $50.4 million for new connects, system expansions, the Bethel Treating facility and asset consolidations; (ii) $10.6 million for maintaining existing Facilities; (iii) $41.6 million for exploration and production activities and acquisitions; and (iv) $2.6 million of miscellaneous expenditures. Largely as a result of low commodity prices, primarily affecting NGL products, the Company has reduced its budget for capital expenditures in 1999 from the levels expended in 1997 and 1998. Capital expenditures related to existing operations are expected to be approximately $67.0 million during 1999, consisting of the following: (i) capital expenditures related to gathering, processing and pipeline assets are expected to be approximately $39.6 million, of which $6.3 million is for maintaining existing facilities; (ii) capital expenditures on exploration and production activities are expected to be approximately $24.6 million; and (iii) capital expenditures for miscellaneous items are expected to be approximately $2.8 million. Overall, capital expenditures in the Powder River Basin coal bed methane development and in Southwest Wyoming operations represent 53% and 22%, respectively, of the total 1999 budget. Financing Facilities Revolving Credit Facility. The Company's variable rate Revolving Credit Facility was restated and amended in May 1997. The Revolving Credit Facility is with a syndicate of banks and provides for a maximum borrowing commitment of $300 million, $235.5 million of which was outstanding at December 31, 1998. The interest rate payable on the facility at December 31, 1998 was 6.2%. The Company has reached an agreement with the agent bank on a term sheet for a restated facility which will reflect the following changes. The restated Revolving Credit Facility is with a syndicate of banks and will provide for an aggregate borrowing commitment of $300 million consisting of a $100 million 364-day Revolving Credit Facility ("Tranche A") and a five year $200 million Revolving Credit Facility ("Tranche B"). The Revolving Credit Facility will bear interest at certain spreads over the Eurodollar rate, at the Federal Funds rate plus .50% or at the agent bank's prime rate. The Company will have the option to determine which rate will be used. The Company also will pay a facility fee on the commitment. The interest rate spreads and facility fee will be adjusted based on the Company's debt to capitalization ratio and will range from .75% to 2.00%. Pursuant to the Revolving Credit Facility, the Company will be required to maintain a debt to capitalization ratio of not more than 60% through December 31, 2000 and of not more than 55% thereafter, and a senior debt to capitalization ratio of not more than 40% beginning September 30,1999 through December 31, 2001 and of not more than 35% thereafter. The agreement also requires a ratio of EBITDA to interest and dividends on preferred stock as of the end of any fiscal quarter of not less than 1.35 to 1.0 beginning June 30, 1999 increasing to 3.25 to 1.0 by December 31, 2002. Tranche A and Tranche B will be reduced on a pro rata basis to a total of $250 million by September 30, 1999. The Revolving Credit Facility will be guaranteed and secured via a pledge of the stock of the Company's significant subsidiaries. Documentation reflecting this agreement is expected to be completed on or about the end of the first quarter of 1999. The Company generally utilizes excess daily funds to reduce any outstanding balances on the Revolving Credit Facility and associated interest expense, and it intends to continue such practice. 21 Master Shelf Agreement. In December 1991, the Company entered into a Master Shelf agreement (as amended and restated, the "Master Shelf") with The Prudential Insurance Company of America ("Prudential"). Amounts outstanding under the Master Shelf agreement at December 31, 1998 are as indicated in the following table (000s):
Interest Final Issue Date Amount Rate Maturity Principal Payments Due - ------------------------------ -------- ----- ------------------ ----------------------------------------------- October 27, 1992 $ 16,667 7.51% October 27, 2000 $8,333 on each of October 27, 1999 through 2000 October 27, 1992 25,000 7.99% October 27, 2003 $8,333 on each of October 27, 2001 through 2003 September 22, 1993 25,000 6.77% September 22, 2003 single payment at maturity December 27, 1993 25,000 7.23% December 27, 2003 single payment at maturity October 27, 1994 25,000 9.05% October 27, 2001 single payment at maturity October 27, 1994 25,000 9.24% October 27, 2004 single payment at maturity July 28, 1995 50,000 7.61% July 28, 2007 $10,000 on each of July 28, 2003 through 2007 -------- $191,667 ========
The Company has reached an agreement on an amendment with Prudential which will be effective as of January 1999 with the following provisions. The Company will be required to maintain a current ratio (as defined therein) of at least 1.0 to 1.0, a minimum tangible net worth equal to the sum of $300 million plus 50% of consolidated net earnings earned from January 1, 1999 plus 75% of the net proceeds of any equity offerings after January 1, 1999, and a debt to capitalization ratio of not more than 60% through December 31, 2000 and of not more than 55% thereafter. A senior debt to capitalization ratio will be implemented, if and when, the Company issues subordinated debt. This amendment also requires an EBITDA to interest ratio of not less than 1.75 to 1.0 beginning March 31, 1999 increasing to a ratio of not less than 3.75 to 1.0 by March 31, 2002. Documentation reflecting this amendment is expected to be completed on or about the end of the first quarter of 1999. In addition, under the existing agreement, the Company is prohibited from declaring or paying dividends that in the aggregate exceed the sum of $50 million plus 50% of consolidated net income earned after June 30, 1995 (or minus 100% of a net loss), plus the aggregate net cash proceeds received after June 30, 1995 from the sale of any stock. At December 31, 1998, $51.5 million was available under this limitation. This amount is expected to be reduced by approximately $14.9 million as a result of the after-tax losses recognized on the sales of the Giddings and Katy facilities. The Company presently intends to finance the $8.3 million payment due on October 27, 1999 with amounts available under the Revolving Credit Facility. The Master Shelf agreement is guaranteed and will be secured via a pledge of the stock of the Company's significant subsidiaries. 1995 Senior Notes. In 1995, the Company sold $42 million of Senior Notes (the "1995 Senior Notes") to a group of insurance companies with an interest rate of 8.16% per annum. In February 1999, the Company offered to prepay the 1995 Senior Notes at par. Note holders representing $15 million of the principal amount outstanding on the 1995 Senior Notes accepted the Company's offer and were paid in full in March 1999. These payments were financed by the Bridge Loan and by amounts available under the Revolving Credit Facility. The remaining principal amount outstanding of $27 million is due in a single payment in December 2005. The 1995 Senior Notes are guaranteed and will be secured via a pledge of the stock of the Company's significant subsidiaries. The Company has reached an agreement with the Note holders which provides for modification of certain financial covenants on terms that will be no more restrictive than those contained in the Master Shelf. Documentation reflecting this agreement is expected to be completed on or about the end of the first quarter of 1999. Effective January 1, 1999, the Company will pay an annual fee of no more than .65% on the amounts outstanding on the Master Shelf and the 1995 Senior Notes. This fee will continue until the Company has received an implied investment grade rating on its senior secured debt. 1993 Senior Notes. In 1993, the Company sold $50 million of 7.65% Senior Notes (the "1993 Senior Notes") to a group of insurance companies. Scheduled annual principal payments of $7.1 million on the 1993 Senior Notes were made on April 30 of 1997 and 1998. In February 1999, the Company offered to prepay the 1993 Senior Notes at par. Note holders representing approximately $33.5 million of the total principal amount outstanding of $35.6 million accepted the Company's offer and were paid in full in February 1999. These payments were financed by a $37 million Bridge Loan. The Company intends to pay the remaining outstanding principal of $2.1 million in the second quarter of 1999 with amounts available under the Revolving Credit Facility. Bridge Loan. In February 1999, in order to finance prepayments at par of amounts outstanding on the 1993 and 1995 Senior Notes, the Company entered into a Bridge Loan agreement in the amount of $37 million with its agent bank (the "Bridge Loan"). The Bridge Loan bears interest at certain spreads over the Eurodollar rate ranging from 1.75% at date of issuance to 2.75% at maturity. The Bridge Loan may 22 be prepaid in whole or in part at any time and matures on October 31, 1999. The Company presently intends to finance the payment of the Bridge Loan with amounts available under the Revolving Credit Facility, proceeds from the sale of assets or proceeds from the issuance of public debt. Covenant Compliance. At December 31, 1998, the Company was in compliance with all covenants in its loan agreements. Taking into account all the covenants contained in these agreements, the Company had approximately $64.5 million of available borrowing capacity at December 31, 1998. In March 1999, the Company successfully completed negotiations with its lenders for amendments to its various financing facilities providing for financial flexibility and covenant modifications. These amendments were needed given the depressed commodity pricing experienced in the industry in general and the disappointing results the Company has experienced at its Bethel Treating Facility. There can be no assurance that further amendments or waivers can be obtained in the future, if necessary, or that the terms would be favorable to the Company. To strengthen credit ratings and to reduce its overall debt outstanding, the Company will continue to dispose of non-strategic assets (such as the Giddings and Katy facilities) and investigate alternative financing sources (including the issuance of public debt, project - financing, joint ventures and operating leases). Risk Management Activities The Company's commodity price risk management program has two primary objectives. The first goal is to preserve and enhance the value of the Company's equity volumes of gas and NGLs with regard to the impact of commodity price movements on cash flow, net income and earnings per share in relation to those anticipated by the Company's operating budget. The second goal is to manage price risk related to the Company's physical gas, crude oil and NGL marketing activities to protect profit margins. This risk relates to hedging fixed price purchase and sale commitments, preserving the value of storage inventories, reducing exposure to physical market price volatility and providing risk management services to a variety of customers. The Company utilizes a combination of fixed price forward contracts, exchange- traded futures and options, as well as fixed index swaps, basis swaps and options traded in the over-the-counter ("OTC") market to accomplish these objectives. These instruments allow the Company to preserve value and protect margins because gains or losses in the physical market are offset by corresponding losses or gains in the value of the financial instruments. The Company uses futures, swaps and options to reduce price risk and basis risk. Basis is the difference in price between the physical commodity being hedged and the price of the futures contract used for hedging. Basis risk is the risk that an adverse change in the futures market will not be completely offset by an equal and opposite change in the cash price of the commodity being hedged. Basis risk exists in natural gas primarily due to the geographic price differentials between cash market locations and futures contract delivery locations. The Company enters into futures transactions on the New York Mercantile Exchange ("NYMEX") and the Kansas City Board of Trade and through OTC swaps and options with various counterparties, consisting primarily of financial institutions and other natural gas companies. The Company conducts its standard credit review of OTC counterparties and has agreements with such parties that contain collateral requirements. The Company generally uses standardized swap agreements that allow for offset of positive and negative exposures. OTC exposure is marked to market daily for the credit review process. The Company's OTC credit risk exposure is partially limited by its ability to require a margin deposit from its major counterparties based upon the mark-to-market value of their net exposure. The Company is subject to margin deposit requirements under these same agreements. In addition, the Company is subject to similar margin deposit requirements for its NYMEX counterparties related to its net exposures. The use of financial instruments may expose the Company to the risk of financial loss in certain circumstances, including instances when (i) equity volumes are less than expected, (ii) the Company's customers fail to purchase or deliver the contracted quantities of natural gas or NGLs, or (iii) the Company's OTC counterparties fail to perform. To the extent that the Company engages in hedging activities, it may be prevented from realizing the benefits of favorable price changes in the physical market. However, it is similarly insulated against decreases in such prices. The Company has hedged a portion of its equity volumes of gas and NGLs in 1999, particularly in the first quarter, at pricing levels approximating its 1999 operating budget. The Company's equity hedging strategy establishes a minimum and maximum price to the Company while allowing market participation between these levels. As of February 19, 1999, the Company had hedged approximately 75% of its anticipated equity gas for 1999 at a weighted average NYMEX-equivalent minimum price of $2.00 per Mcf, including approximately 80% of first quarter anticipated equity volumes at a weighted average NYMEX-equivalent minimum price of $2.00 per Mcf. Additionally, the Company has hedged approximately 75% of its anticipated equity NGLs for 1999 at a weighted average composite Mont Belvieu and West Texas Intermediate Crude-equivalent minimum price of $.23 per gallon. 23 At December 31, 1998, the Company had $1.1 million of losses deferred in inventory that will be recognized primarily during the first quarter of 1999 and are expected to be offset by margins from the Company's related forward fixed price hedges and physical sales. At December 31, 1998, the Company had unrecognized net gains of $3.8 million related to financial instruments that are expected to be offset by corresponding unrecognized net losses from the Company's obligations to sell physical quantities of gas and NGLs. The Company enters into speculative futures, swap and option trades on a very limited basis for purposes that include testing of hedging techniques. The Company's policies contain strict guidelines for such trading including predetermined stop-loss requirements and net open positions limits. Speculative futures, swap and option positions are marked to market at the end of each accounting period and any gain or loss is recognized in income for that period. Net gains or losses from such speculative activities for the years ended December 31, 1998 and 1997 were not material. Natural Gas Derivative Market Risk As of December 31, 1998, the Company held a notional quantity of approximately 370 Bcf of natural gas futures, swaps and options extending from January 1999 to December 2000 with a weighted average duration of approximately four months. This was comprised of approximately 178 Bcf of long positions and 192 Bcf of short positions in such instruments. As of December 31, 1997, the Company held a notional quantity of approximately 480 Bcf of natural gas futures, swaps and options extending from January 1998 to December 1999 with a weighted average duration of approximately four months. This was comprised of approximately 230 Bcf of long positions and 250 Bcf of short positions in such instruments. The Company uses a Value-at-Risk (VaR) model designed by J.P. Morgan as one measure of market risk for the Company's natural gas portfolio. The VaR calculated by this model represents the maximum change in market value over the holding period at the specified statistical confidence interval. The VaR model is generally based upon J.P. Morgan's RiskMetrics (TM) methodology using historical price data to derive estimates of volatility and correlation for estimating the contribution of tenor and location risk. The VaR model assumes a one day holding period and uses a 95% confidence level. As of December 31, 1998, the calculated VaR of the Company's entire natural gas portfolio of futures, swaps and options was approximately $1.5 million. This figure includes the risk related to the Company's entire portfolio of natural gas financial instruments and does not include the related underlying hedged physical transactions. All financial instruments for which there are no offsetting physical transactions are treated as either the hedge of an anticipated transaction or a speculative trade. As of December 31, 1998, the VaR of these type of transactions for natural gas was approximately $500,000. Crude Oil and NGL Derivative Market Risk As of December 31, 1998, the Company held a notional quantity of approximately 177,000 MGal of NGL futures, swaps and options extending from January 1999 to December 1999 with a weighted average duration of approximately six months. This was comprised of approximately 129,000 MGal of long positions and 48,000 MGal of short positions in such instruments. As of December 31, 1997, the Company held a notional quantity of approximately 148,000 MGal of NGL futures, swaps and options extending from January 1998 to December 1998 with a weighted average duration of approximately five months. This was comprised of approximately 93,000 MGal of long positions and 55,000 MGal of short positions in such instruments. As of December 31, 1998, the Company had sold 90,000 barrels per month of NYMEX crude swaps for 1999 at an average price of $13.10 per barrel. In addition, the Company had purchased 90,000 barrels per month of $15.00 per barrel NYMEX calls for July 1999 through December 1999 settlement. The Company held no crude oil futures, swaps or options for settlement beyond 1999. As of December 31, 1998, the Company had purchased 200,000 barrels per month of OPIS Mt. Belvieu monthly average settlement $0.210 per gallon puts to hedge a portion of the Company's equity production of propane and butanes for 1999. As of December 31, 1998, the Company had purchased 50,000 barrels per month of OPIS Mt. Belvieu monthly average settlement $0.155 per gallon of purity ethane puts to hedge a portion of the Company's equity production of ethane for 1999. As of December 31, 1998, the Company held no NGL futures, swaps or options for settlement beyond 1999. 24 As of December 31, 1998, the estimated fair value of the aforementioned crude oil and NGL options held by the Company was approximately $315,000. Foreign Currency Derivative Market Risk The Company enters into physical gas transactions payable in Canadian dollars. The Company enters into forward purchases and sales of Canadian dollars from time to time to fix the cost of its future Canadian dollar denominated natural gas purchase, sale, storage and transportation obligations. This is done to protect marketing margins from adverse changes in the U.S. and Canadian dollar exchange rate between the time the commitment for the payment obligation is made and the actual payment date of such obligation. As of December 31, 1998, the notional value of such contracts was approximately $11.0 million in Canadian dollars. As of December 31, 1997, the notional value of such contracts was approximately $5.5 million in Canadian dollars, which approximates its fair market value. Year 2000 The Company has made a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is in the process of identifying and making the appropriate modifications to these computer systems. The Company has: (i) created a Year 2000 awareness program to educate employees; (ii) compiled an inventory of all systems; (iii) developed system test plans as appropriate; and (iv) began the testing and remediation as required for both information and non-information technology systems. Additionally, the Company has initiated a program under which it surveys its business counterparties periodically regarding their Year 2000 conversion and contingency plans. Currently, the Company anticipates spending approximately $2.0 million, of which 30% is currently committed, for remediation purposes, which is primarily for hardware and operating system upgrades. The Company also expects to incur internal staff costs as well as some consulting and other expenses which are expected to be immaterial. The Company anticipates its Year 2000 conversion project to be substantially completed by October 1999. Currently, the Company believes its most significant risk for the Year 2000 issue is that the systems of other companies on which the Company relies will not be Year 2000 compliant and that any such failure to convert by another company would have an adverse effect on the Company. In order to mitigate this risk, contingency plans are being developed and the Company is surveying its vendors and customers to ascertain the status of their conversion and contingency plans. ENVIRONMENTAL The construction and operation of the Company's gathering lines, plants and other facilities used for the gathering, transporting, processing, treating or storing of gas and NGLs are subject to federal, state and local environmental laws and regulations, including those that can impose obligations to clean up hazardous substances at the Company's facilities or at facilities to which the Company sends wastes for disposal. In most instances, the applicable regulatory requirements relate to water and air pollution control or waste management. The Company employs six environmental engineers and seven regulatory compliance specialists to monitor environmental and safety compliance at its facilities. Prior to consummating any major acquisition, the Company's environmental engineers perform audits on the facilities to be acquired. In addition, on an ongoing basis, the environmental engineers perform environmental assessments of the Company's existing facilities. The Company believes that it is in substantial compliance with applicable material environmental laws and regulations. Environmental regulation can increase the cost of planning, designing, constructing and operating the Company's facilities. The Company believes that the costs for compliance with current environmental laws and regulations have not had and will not have a material effect on the Company's financial position or results of operations. The Texas Natural Resource Conservation Commission (the "TNRCC"), which has authority to regulate, among other things, stationary air emissions sources, created a committee to make recommendations to the TNRCC regarding a voluntary emissions reduction plan for the permitting of existing "grandfathered" air emissions sources within the State of Texas. A "grandfathered" air emissions source is one that does not need a state operating permit because it was constructed prior to 1971. The Company operates a number of such sources within the State of Texas, including portions of its Midkiff plant and many of its compressors. The recommendations proposed by the committee would create a voluntary permitting program for grandfathered sources, including certain incentives to participate, such as the ability to operate in such a source in a flexible manner. It is not clear which of the committee's recommendations, if any, that the TNRCC will implement and it is not possible to assess the potential effect on the Company until final regulations are promulgated. The Company anticipates that it is reasonably likely that the trend in environmental legislation and regulation will continue to be towards stricter standards. The Company is unaware of future environmental standards that are reasonably likely to be adopted that will have a material effect on the Company's financial position or results of operations, but it cannot rule out that possibility. 25 The Company is in the process of voluntarily cleaning up substances at certain facilities that it operates. The Company's expenditures for environmental evaluation and remediation at existing facilities have not been significant in relation to the results of operations of the Company and totaled approximately $1.4 million for the year ended December 31, 1998 including approximately $732,000 in air emissions fees to the states in which it operates ($132,000 of which was attributable to the Edgewood facility which was sold in October 1998). Although the Company anticipates that such environmental expenses per facility will increase over time, the Company does not believe that such increases will have a material effect on the Company's financial position or results of operations. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Western Gas Resources, Inc.'s Consolidated Financial Statements as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998: Page ---- Report of Management....................................... 28 Report of Independent Accountants.......................... 29 Consolidated Balance Sheet................................. 30 Consolidated Statement of Cash Flows....................... 31 Consolidated Statement of Operations....................... 32 Consolidated Statement of Changes in Stockholders' Equity.. 33 Notes to Consolidated Financial Statements................. 34 27 REPORT OF MANAGEMENT -------------------- The financial statements and other financial information included in this Annual Report on Form 10-K are the responsibility of Management. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts that are based on Management's informed judgments and estimates. Management relies on the Company's system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with Management's authorization. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal accounting control and that the cost of such systems should not exceed the benefits to be derived. The internal accounting controls, including internal audit, in place during the periods presented are considered adequate to provide such assurance. The Company's financial statements are audited by PricewaterhouseCoopers LLP, independent accountants. Their report states that they have conducted their audit in accordance with generally accepted auditing standards. These standards include an evaluation of the system of internal accounting controls for the purpose of establishing the scope of audit testing necessary to allow them to render an independent professional opinion on the fairness of the Company's financial statements. Oversight of Management's financial reporting and internal accounting control responsibilities is exercised by the Board of Directors, through an Audit Committee that consists solely of outside directors. The Audit Committee meets periodically with financial management, internal auditors and the independent accountants to review how each is carrying out its responsibilities and to discuss matters concerning auditing, internal accounting control and financial reporting. The independent accountants and the Company's internal audit department have free access to meet with the Audit Committee without Management present. Signature Title - --------- ----- /S/ L. F. Outlaw - ---------------------------- L. F. Outlaw President and Chief Operating Officer /S/ William J. Krysiak - ---------------------------- William J. Krysiak Vice President - Finance (Principal Financial and Accounting Officer) 28 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders of Western Gas Resources, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of cash flows, of operations, and of changes in stockholders' equity present fairly, in all material respects, the financial position of Western Gas Resources, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their cash flows and their operations for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Denver, Colorado March 22, 1999 29 WESTERN GAS RESOURCES, INC. CONSOLIDATED BALANCE SHEET (000s, except share data)
December 31 ------------------------------------------ 1998 1997 ------------ ------------ ASSETS ------ Current assets: Cash and cash equivalents.......................................... $ 4,400 $ 19,777 Trade accounts receivable, net..................................... 233,574 258,791 Product inventory.................................................. 46,207 17,261 Parts inventory.................................................... 10,153 9,405 Other.............................................................. 2,951 2,364 ------------ ------------ Total current assets.......................................... 297,285 307,598 ------------ ------------ Property and equipment: Gas gathering, processing, storage and transmission................ 952,531 1,050,676 Oil and gas properties and equipment............................... 111,602 136,129 Construction in progress........................................... 87,943 64,268 ------------ ------------ 1,152,076 1,251,073 Less: Accumulated depreciation, depletion and amortization.............. (305,589) (294,350) ------------ ------------ Total property and equipment, net............................. 846,487 956,723 ------------ ------------ Other assets: Gas purchase contracts (net of accumulated amortization of $29,978 and $27,554, respectively).............................. 41,263 43,687 Other.............................................................. 34,342 40,268 ------------ ------------ Total other assets............................................ 75,605 83,955 ------------ ------------ Total assets............................................................ $1,219,377 $1,348,276 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------- Current liabilities: Accounts payable................................................... 245,315 326,696 Accrued expenses................................................... 31,727 27,151 Dividends payable.................................................. 4,217 4,217 ------------ ------------ Total current liabilities..................................... 281,259 358,064 Long-term debt.......................................................... 504,881 441,357 Deferred income taxes payable, net...................................... 48,021 80,743 ------------ ------------ Total liabilities............................................. 834,161 880,164 ------------ ------------ Commitments and contingent liabilities.................................. - - Stockholders' equity: Preferred Stock; 10,000,000 shares authorized: $2.28 cumulative preferred stock, par value $.10; 1,400,000 shares issued ($35,000,000 aggregate liquidation preference)....................................... 140 140 $2.625 cumulative convertible preferred stock, par value $.10; 2,760,000 shares issued (138,000,000 aggregate liquidation preference)................................................... 276 276 Common stock, par value $.10; 100,000,000 shares authorized; 32,173,009 and 32,171,453 shares issued, respectively......... 3,217 3,217 Treasury stock, at cost; 25,016 shares in treasury................. (788) (788) Additional paid-in capital......................................... 397,344 397,321 Retained (deficit) earnings........................................ (17,075) 66,999 Accumulated other comprehensive income............................. 3,053 2,233 Notes receivable from key employees secured by common stock........ (951) (1,286) ------------ ------------ Total stockholders' equity.................................... 385,216 468,112 ------------ ------------ Total liabilities and stockholders' equity.............................. $1,219,377 $1,348,276 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 30 WESTERN GAS RESOURCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (000s)
Year Ended December 31, -------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Reconciliation of net income (loss) to net cash provided by (used in) operating activities: Net income (loss).......................................................................... $ (67,205) $ 1,487 $ 27,941 Add income items that do not affect cash: Depreciation, depletion and amortization.................................................. 59,346 59,248 63,207 Deferred income taxes.................................................................... (32,722) 465 12,538 Distributions in excess of equity income, net............................................ 963 1,764 4,339 Gain on the sale of property and equipment............................................... (16,478) (4,681) (2,747) Loss on the impairment of property and equipment......................................... 108,447 34,615 - Other non-cash items, net................................................................ 2,595 3,250 336 ---------- ---------- ---------- 54,946 96,148 105,614 ---------- ---------- ---------- Adjustments to working capital to arrive at net cash provided by (used in) operating activities: Decrease (increase) in trade accounts receivable......................................... 25,317 79,963 (134,538) Decrease (increase) in product inventory................................................. (29,810) 7,480 2,115 Increase in parts inventory.............................................................. (748) (6,806) (172) Increase in other current assets......................................................... (587) (1,027) (42) Decrease (increase) in other assets and liabilities, net................................. 257 257 (733) (Decrease) increase in accounts payable.................................................. (81,381) (59,572) 186,758 (Decrease) increase in accrued expenses.................................................. (3,564) (1,688) 9,264 ---------- ---------- ---------- Total adjustments...................................................................... (90,516) 18,607 62,652 ---------- ---------- ---------- Net cash provided by (used in) operating activities....................................... (35,570) 114,755 168,266 ---------- ---------- ---------- Cash flows from investing activities: Purchases of property and equipment, including acquisitions.............................. (104,171) (196,293) (74,203) Proceeds from the disposition of property and equipment.................................. 75,286 20,034 7,656 Contributions to unconsolidated affiliates............................................... (1,045) (2,608) (352) Distribution from unconsolidated affiliates.............................................. 3,489 - 1,500 ---------- ---------- ---------- Net cash used in investing activities..................................................... (26,441) (178,867) (65,399) ---------- ---------- ---------- Cash flows from financing activities: Net proceeds from issuance of common stock............................................... - - 96,376 Net proceeds from exercise of common stock options....................................... 23 239 62 Payments on long-term debt............................................................... (15,476) (94,643) (12,500) Borrowings under revolving credit facility............................................... 3,230,400 1,894,950 1,035,377 Payments on revolving credit facility.................................................... (3,151,400) (1,738,450) (1,172,877) Debt issue costs paid.................................................................... (44) (847) - Dividends paid........................................................................... (16,869) (16,864) (15,596) ---------- ---------- ---------- Net cash provided by (used in) financing activities....................................... 46,634 44,385 (69,158) ---------- ---------- ---------- Net (decrease) increase in cash........................................................... (15,377) (19,727) 33,709 Cash and cash equivalents at beginning of year............................................ 19,777 39,504 5,795 ---------- ---------- ---------- Cash and cash equivalents at end of year.................................................. $ 4,400 $ 19,777 $ 39,504 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 31 WESTERN GAS RESOURCES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (000s, except share and per share amounts)
Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Revenues: Sale of gas............................................................. $ 1,611,521 $ 1,657,479 $ 1,440,882 Sale of natural gas liquids............................................. 449,696 611,969 561,581 Processing, transportation and storage revenue.......................... 44,743 40,906 44,943 Sale of electric power.................................................. 20 59,477 30,667 Other, net.............................................................. 27,586 15,429 12,936 ----------- ----------- ----------- Total revenues........................................................ 2,133,566 2,385,260 2,091,009 ----------- ----------- ----------- Costs and expenses: Product purchases....................................................... 1,914,303 2,146,430 1,844,151 Plant operating expense................................................. 85,353 78,113 73,116 Oil and gas exploration and production costs............................ 7,996 7,714 5,056 Depreciation, depletion and amortization................................ 59,346 59,248 63,207 Selling and administrative expense...................................... 30,128 29,446 29,411 Interest expense........................................................ 33,616 27,474 34,437 Loss on the impairment of property and equipment........................ 108,447 34,615 - ----------- ----------- ----------- Total costs and expenses.............................................. 2,239,189 2,383,040 2,049,378 ----------- ----------- ----------- Income (loss) before income taxes........................................ (105,623) 2,220 41,631 Provision (benefit) for income taxes: Current................................................................. (5,696) 268 1,152 Deferred................................................................ (32,722) 465 12,538 ----------- ----------- ----------- Total provision (benefit) for income taxes............................. (38,418) 733 13,690 ----------- ----------- ----------- Net income (loss)........................................................ (67,205) 1,487 27,941 Preferred stock requirements............................................. (10,439) (10,439) (10,439) ----------- ----------- ----------- Income (loss) attributable to common stock............................... $ (77,644) $ (8,952) $ 17,502 =========== =========== =========== Earnings (loss) per share of common stock................................ $ (2.42) $ (.28) $ .66 =========== =========== =========== Weighted average shares of common stock outstanding...................... 32,147,354 32,134,011 26,519,635 =========== =========== =========== Earnings (loss) per share of common stock - assuming dilution............ $ (2.42) $ (.28) $ .66 =========== =========== =========== Weighted average shares of common stock outstanding - assuming dilution.. 32,147,354 32,137,803 26,541,565 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 32 WESTERN GAS RESOURCES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (000s, except share amounts)
Shares of Shares of $2.625 $ 2.28 Cumulative Shares Cumulative Convertible Shares of Common Preferred Preferred of Common Stock Stock Stock Stock in Treasury ----------- ------------- ----------- ------------- Balance at December 31, 1995............... 1,400,000 2 ,760,000 25,769,712 25,016 Net income, 1996........................... - - - - Stock options exercised.................... - - 14,423 - Loans forgiven............................. - - - - Common stock offering...................... - - 6,325,000 - Dividends declared on common stock......... - - - - Dividends declared on $2.28 cumulative preferred stock........................... - - - - Dividends declared on $2.625 cumulative convertible preferred stock............... - - - - ----------- ------------- ----------- ------------- Balance at December 31, 1996............... 1,400,000 2,760,000 32,109,135 25,016 Net income, 1997........................... - - - - Stock options exercised.................... - - 37,302 - Tax benefit related to stock options....... - - - - Loans forgiven............................. - - - - Dividends declared on common stock......... - - - - Dividends declared on $2.28 cumulative preferred stock........................... - - - - Dividends declared on $2.625 cumulative convertible preferred stock............... - - - - ----------- ------------- ----------- ------------- Balance at December 31, 1997............... 1,400,000 2,760,000 32,146,437 25,016 Net income 1998............................ - - - - Stock options exercised.................... - - 1,556 - Loans forgiven............................. - - - - Dividends declared on common stock......... - - - - Dividends declared on $2.28 cumulative preferred stock......................... - - - - Dividends declared on $2.625 cumulative convertible preferred stock.............. - - - - Translation adjustments.................... - - - - ----------- ------------- ----------- ------------- Balance at December 31, 1998.............. 1,400,000 2,760,000 32,147,993 25,016 =========== ============= =========== ============= $2.625 $2.28 Cumulative Cumulative Convertible Preferred Preferred Common Treasury Stock Stock Stock Stock ----------- ------------- ----------- ------------- Balance at December 31, 1995............... $ 140 $ 276 $2,580 $(788) Net income, 1996........................... - - - - Stock options exercised.................... - - 1 - Loans forgiven............................. - - - - Common stock offering...................... - - 632 - Dividends declared on common stock......... - - - - Dividends declared on $2.28 cumulative preferred stock........................... - - - - Dividends declared on $2.625 cumulative convertible preferred stock............... - - - - ----------- ------------- ----------- ------------- Balance at December 31, 1996............... 140 276 3,213 (788) Net income, 1997........................... - - - - Stock options exercised.................... - - 4 - Tax benefit related to stock options....... - - - - Loans forgiven............................. - - - - Dividends declared on common stock......... - - - - Dividends declared on $2.28 cumulative preferred stock........................... - - - - Dividends declared on $2.625 cumulative convertible preferred stock............... - - - - ----------- ------------- ----------- ------------- Balance at December 31, 1997............... 140 276 3,217 (788) Net income 1998............................ - - - - Stock options exercised.................... - - - - Loans forgiven............................. - - - - Dividends declared on common stock......... - - - - Dividends declared on $2.28 cumulative preferred stock......................... - - - - Dividends declared on $2.625 cumulative convertible preferred stock............. - - - - Translation adjustments.................... - - - - ----------- ------------- ----------- ------------- Balance at December 31, 1998.............. $ 140 $ 276 $3,217 $(788) =========== ============= =========== ============= Accumulated Notes Total Additional Retained Other Receivable Stock- Paid-In (Deficit) Comprehensive from Key holders' Capital Earnings Income Employees Equity ----------- ------------- ----------- ------------- ------------- Balance at December 31, 1995............... $301,234 $ 70,348 $ - $(1,881) $371,909 Net income, 1996........................... - 27,941 - - 27,941 Stock options exercised.................... 83 - - (24) 60 Loans forgiven............................. - - - 92 92 Common stock offering...................... 95,744 - - - 96,376 Dividends declared on common stock......... - (5,472) - - (5,472) Dividends declared on $2.28 cumulative preferred stock........................... - (3,194) - - (3,194) Dividends declared on $2.625 cumulative convertible preferred stock............... - (7,245) - - (7,245) ----------- ------------- ----------- ------------- ------------- Balance at December 31, 1996............... 397,061 82,378 - (1,813) 480,467 Net income, 1997........................... - 1,487 - - 1,487 Stock options exercised.................... 260 - - (25) 239 Tax benefit related to stock options....... - - 2,233 - 2,233 Loans forgiven............................. - - - 552 552 Dividends declared on common stock......... - (6,427) - - (6,427) Dividends declared on $2.28 cumulative preferred stock........................... - (3,194) - - (3,194) Dividends declared on $2.625 cumulative convertible preferred stock............... - (7,245) - - (7,245) ----------- ------------- ----------- ------------- ------------- Balance at December 31, 1997............... 397,321 66,999 2,233 (1,286) 468,112 Net income 1998............................ - (67,205) - - (67,205) Stock options exercised.................... 23 - - - 23 Loans forgiven............................. - - - 335 335 Dividends declared on common stock......... - (6,430) - - (6,430) Dividends declared on $2.28 cumulative preferred stock......................... - (3,194) - - (3,194) Dividends declared on $2.625 cumulative convertible preferred stock.............. - (7,245) - - (7,245) Translation adjustments.................... - - 820 - 820 ----------- ------------- ----------- ------------- ------------- Balance at December 31, 1998.............. $397,344 $(17,075) $3,053 $ (951) $385,216 ============ ============= ============ ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 33 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF ORGANIZATION - ------------------------------- Western Gas Resources, Inc. (the "Company") is an independent gas gatherer and processor and energy marketer providing a full range of services to its customers from the wellhead to the delivery point. The Company designs, constructs, owns and operates natural gas gathering, processing, treating and storage facilities in major gas-producing basins in the Rocky Mountain, Mid- Continent, Gulf Coast and Southwestern regions of the United States. The Company connects producers' wells to its gathering systems for delivery to its processing or treating plants, processes the natural gas to extract natural gas liquids ("NGLs") and treats the natural gas in order to meet pipeline specifications. The Company markets gas and NGLs nationwide and in Canada, providing risk management, storage, transportation, scheduling, peaking and other services to a variety of customers. The Company owns and operates certain producing properties, primarily in Wyoming and Louisiana. The Company also explores and develops gas reserves, primarily in Wyoming, in support of its existing facilities. Western Gas Resources, Inc. was formed in October 1989 to acquire a majority interest in Western Gas Processors, Ltd. (the "Partnership") and to assume the duties of WGP Company, the general partner of the Partnership. The Partnership was a Colorado limited partnership formed in 1977 to engage in the gathering and processing of natural gas. The reorganization was accomplished in December 1989 through an exchange for common stock of partnership units held by the former general partners of WGP Company and an initial public offering of Western Gas Resources, Inc. Common Stock. On May 1, 1991, a further restructuring ("Restructuring") of the Partnership and Western Gas Resources, Inc. (together with its predecessor, WGP Company, collectively, the "Company") was approved by a vote of the security holders. The combinations were reorganizations of entities under common control and were accounted for at historical cost in a manner similar to poolings of interests. The Company has completed three public offerings of Common Stock. In December 1989, the Company issued 3,527,500 shares of Common Stock at a public offering price of $11.50. In November 1991, the Company issued 4,115,000 shares of Common Stock at a public offering price of $18.375 per share. In November 1996, the Company issued 6,325,000 shares of Common Stock at a public offering price of $16.25 per share. The net proceeds to the Company from the November 1996 public offering of Common Stock of $96.4 million were primarily used to reduce indebtedness under the Revolving Credit Facility. The Company has also issued preferred stock in a private transaction and has completed two public offerings of preferred stock. In October 1991, the Company issued 400,000 shares of 7.25% Cumulative Senior Perpetual Convertible Preferred Stock ("7.25% Preferred Stock") with a liquidation preference of $100 per share to an institutional investor. In May 1995, the Company redeemed all of the issued and outstanding shares of its 7.25% Preferred Stock pursuant to the provisions of its Certificate of Designation relating to such preferred stock, at an aggregate redemption price of approximately $42.0 million, including a redemption premium of $2.0 million. In November 1992, the Company issued 1,400,000 shares of $2.28 Cumulative Preferred Stock with a liquidation preference of $25 per share, at a public offering price of $25 per share, redeemable at the Company's option on or after November 15, 1997. In February 1994, the Company issued 2,760,000 shares of $2.625 Cumulative Convertible Preferred Stock with a liquidation preference of $50 per share, at a public offering price of $50 per share, redeemable at the Company's option on or after February 16, 1997 and convertible at the option of the holder into Common Stock at a conversion price of $39.75. SIGNIFICANT BUSINESS ACQUISITIONS, DISPOSITIONS AND PROJECTS Coal Bed Methane The Company is expanding its Powder River Basin coal bed methane natural gas gathering system and developing its own coal seam gas reserves in Wyoming. The Company has acquired drilling rights in the vicinity of known coal bed methane production. During the years ended December 31, 1998, 1997 and 1996, the Company has expended approximately $46.7 million, $32.2 million and $6.9 million, respectively, on this project. On October 30, 1997, the Company sold a 50% undivided interest in its Powder River Basin coal bed methane gas operations. The final adjusted purchase price was $17.9 million, resulting in a pre-tax gain of $4.7 million, which was recognized in the fourth quarter of 1997. In December 1998, the Company joined with other industry participants to form the Fort Union Gas Gathering, L.L.C., which plans to build a 106-mile, 24-inch gathering header to gather coal bed methane in the Powder River Basin in northeast Wyoming. The Company will have an approximate 13% interest and be the construction contractor and field operator of the header and a related gas treating facility. Construction is scheduled to begin in April 1999 with operations to commence on or about the end of the third quarter 34 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of 1999. It is anticipated that the new gathering header and treating system will be project-financed, requiring a cash investment by the Company of approximately $2 million. Southwest Wyoming The Company's facilities in Southwest Wyoming are comprised of the Granger facility and a 72% ownership interest in the Lincoln Road facility (collectively the "Granger Complex"). The Company began to expand its gas gathering and exploration and production activities in Southwest Wyoming during 1997. The expansion in this area is primarily intended to develop acreage to replace declines in reserves and generate additional volumes for gathering and processing at its facilities. During the years ended December 31, 1998 and 1997, the Company has expended approximately $16.0 million and $6.2 million, respectively, on this project. In February 1998, the Company sold a 50% undivided interest in a small portion of the Granger gathering system for approximately $4.0 million. This amount approximated the Company's cost in such facilities. In 1997, the Company granted an option to an affiliate of a producer behind the Granger Complex to purchase up to 50% of the Granger Complex. In conjunction with this agreement, in February 1998, the Company received a $1 million non- refundable option payment. The option to acquire an interest in these facilities expired in the fourth quarter of 1998. Bethel Treating Facility In 1996 and 1997 the Pinnacle Reef trend was rapidly developing into a very active lease acquisition and exploratory play using 3-D seismic technology. The initial discoveries in the play indicated a very large potential gas development. Based on the Company's receipt of large acreage dedications in this area, the Company constructed the Bethel Treating facility for a total cost of approximately $102.8 million with a throughput capacity of 350 MMcf per day. In 1998, the production rates from the wells drilled in this field and the recoverable reserves from these properties, were far less than originally expected by the producers. As a result, in 1998, the Bethel Treating facility averaged gas throughput of approximately 61 Mmcf per day. Due to the unexpected poor drilling results and reductions in the producers' drilling budgets, the number of rigs active in this area has decreased from 18 in July 1998 to one active rig in March 1999. In 1998, the Company completed the construction of the Bethel Treating facility in East Texas that gathers gas from the Cotton Valley Pinnacle Reef trend, for a total cost of approximately $102.8 million. Because of uncertainties related to the pace and success of third-party drilling programs, declines in volumes produced at certain wells and other conditions outside of the Company's control, the Company determined that a pre-tax, non-cash impairment charge of $77.8 million in the fourth quarter of 1998 was required. Edgewood In two transactions which closed in October 1998 the Company sold its Edgewood gathering system, including its undivided interest in the producing properties associated with this facility, and its 50% interest in the Redman Smackover Joint Venture ("Redman Smackover"). The combined sales price was $55.8 million. The proceeds from these sales were used to repay a portion of the balances outstanding under the Revolving Credit Facility. After the accrual of certain related expenses, the Company recognized a pre-tax gain of approximately $1.6 million, during the fourth quarter of 1998. Perkins In November 1997, the Company entered into an agreement to sell its Perkins facility. In March 1998, the Company completed the sale of this facility with an effective date of January 1, 1998. The sales price was $22.0 million and resulted in a pre-tax gain of approximately $14.9 million. The proceeds from this sale were used to repay a portion of the balances outstanding under the Revolving Credit Facility. 35 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SUBSEQUENT EVENTS Giddings In March 1999, the Company entered into an agreement to sell its Giddings Facility for $36.0 million, which will result in an approximate pre-tax loss of $4.8 million. This agreement is subject to various approvals and is anticipated to close in the second quarter of 1999. Katy In March 1999, the Company entered into an agreement to sell all of the outstanding common stock of its wholly-owned subsidiary, Western Gas Resources Storage, Inc., for $100.0 million, which will result in an approximate pre-tax loss of $18.5 million. The only asset of this subsidiary is the Katy Facility. This agreement is subject to various regulatory approvals and the satisfaction of certain contractual conditions and is anticipated to close in the second quarter of 1999. The Company has the option to sell approximately 5.4 Bcf of stored gas in the Katy Facility to the same purchaser for total sales proceeds of approximately $10.0 million (which would approximate its cost of the inventory). To meet the needs of its marketing operations, the Company will continue to contract for storage capacity. Accordingly, the Company will enter into a long-term agreement with the purchaser for 3 Bcf of storage capacity at market rates. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- The significant accounting policies followed by the Company and its wholly-owned subsidiaries are presented here to assist the reader in evaluating the financial information contained herein. The Company's accounting policies are in accordance with generally accepted accounting principles. Principles of Consolidation The consolidated financial statements include the accounts of the Company and the Company's wholly-owned subsidiaries. All material intercompany transactions have been eliminated in consolidation. The Company's interest in certain investments is accounted for by the equity method. Inventories For the years ended December 31, 1998 and 1997, the cost of gas and NGL inventories is determined by the weighted average cost on a location-by-location basis. Prior to 1997, the cost of NGL inventories was determined by the last- in, first-out (LIFO) method, on a location-by-location basis. The change in accounting method from LIFO to weighted average cost was not material. As a result, prior year financial statements were not restated. Residue and NGL inventory covered by hedging contracts is accounted for on a specific identification basis. Product inventory includes $42.8 million and $11.9 million of gas and $3.4 million and $5.4 million of NGLs at December 31, 1998 and 1997, respectively. During the years ended December 31, 1998 and 1997, the Company recorded lower of cost or market write-downs of NGL inventories of $826,000 and $1.1 million, respectively. Property and Equipment Property and equipment is recorded at the lower of cost, including interest on funds borrowed to finance the construction of new projects, or estimated realizable value. Interest incurred during the construction period of new projects is capitalized and amortized over the life of the associated assets. Depreciation is provided using the straight-line method based on the estimated useful life of each facility which ranges from three to 35 years. Useful lives are determined based on the shorter of the life of the equipment or the reserves serviced by the equipment. The cost of acquired gas purchase contracts is amortized using the straight-line method. 36 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Oil and Gas Properties and Equipment The Company follows the successful efforts method of accounting for oil and gas exploration and production activities. Acquisition costs, development costs and successful exploration costs are capitalized. Exploratory dry hole costs, lease rentals and geological and geophysical costs are charged to expense as incurred. Upon surrender of undeveloped properties, the original cost is charged against income. Producing properties and related equipment are depleted and depreciated by the units-of-production method based on estimated proved reserves for producing properties and proved developed reserves for lease and well equipment. Income Taxes Deferred income taxes reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. These temporary differences are determined and accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." Foreign Currency Adjustments During the second quarter of 1997, the Company began operating a subsidiary in Canada. The assets and liabilities associated with this subsidiary are translated into U.S. dollars at the exchange rate as of the balance sheet date and revenues and expenses at the weighted-average of exchange rates in effect during each reporting period. SFAS No. 52, "Foreign Currency Translation," requires that cumulative translation adjustments be reported as a separate component of stockholders' equity. The translation adjustment for the year ended December 31, 1998 was $820,000. The adjustment for the year ended December 31, 1997 was not material. Revenue Recognition Revenue for sales or services is recognized at the time the gas, NGLs or electric power is delivered or at the time the service is performed. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires that changes in items of comprehensive income be reported as a separate component of stockholders' equity. The Company's cumulative translation adjustments of $820,000 for the year ended December 31, 1998 and tax benefits related to stock options of $2.2 million for the year ended December 31, 1997 are separately reported on the Consolidated Statement of Changes in Stockholders' Equity. Gas and NGL Hedges Gains and losses on hedges of product inventory are included in the carrying amount of the inventory and are ultimately recognized in gas and NGL sales when the related inventory is sold. Gains and losses related to qualifying hedges, as defined by SFAS No. 80, "Accounting for Futures Contracts," of firm commitments or anticipated transactions (including hedges of equity production) are recognized in gas and NGL sales, as reported on the Consolidated Statement of Operations, when the hedged physical transaction occurs. For purposes of the Consolidated Statement of Cash Flows, all hedging gains and losses are classified in net cash provided by operating activities. To the extent the Company engages in speculative transactions, they are marked to market at the end of each accounting period and any gain or loss is recognized in income for that period. Impairment of Long-Lived Assets The Company complies with SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). The Company reviews its assets at the plant facility and oil and gas producing property levels. SFAS No. 121 also requires long-lived assets be reviewed whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In order to determine whether an impairment exists, the Company 37 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) compares its net book value of the asset to the estimated fair market value or the undiscounted expected future cash flows, determined by applying future prices estimated by management over the shorter of the lives of the facilities or the reserves supporting the facilities. If an impairment exists, write-downs of assets are based upon expected cash flows discounted using an interest rate commensurate with the risk associated with the underlying asset. The Company has written-down property and equipment of $108.5 million and $34.6 million in accordance with SFAS No. 121 during the years ended December 31, 1998 and 1997, respectively. Earnings (Loss) Per Share of Common Stock The Company follows SFAS No. 128, "Earnings per Share" ("SFAS No. 128") which requires that earnings per share and earnings per share - assuming dilution be calculated and presented on the face of the statement of operations. In accordance with SFAS No. 128, earnings (loss) per share of common stock is computed by dividing income (loss) attributable to common stock by the weighted average shares of common stock outstanding. In addition, earnings (loss) per share of common stock -assuming dilution is computed by dividing income (loss) attributable to common stock by the weighted average shares of common stock outstanding as adjusted for potential common shares. Income (loss) attributable to common stock is income (loss) less preferred stock dividends. The Company declared preferred stock dividends of $10.4 million for each of the years ended December 31, 1998, 1997 and 1996, respectively. Common stock options, which are potential common shares, had a dilutive effect on earnings per share and increased the weighted average shares of common stock outstanding by 3,792 and 21,930 shares for the years ended December 31, 1997 and 1996, respectively. The Common Stock options were anti-dilutive in 1998, therefore the numerator and denominator for the year ended December 31, 1998 were not adjusted. SFAS No. 128 dictates that the computation of earnings per share shall not assume conversion, exercise or contingent issuance of securities that would have an antidilutive effect on earnings (loss) per share. As a result, the numerators and the denominators for each of the three years ended December 31, 1998 are not adjusted to reflect the Company's $2.625 Cumulative Convertible Preferred Stock outstanding. The shares are antidilutive as the incremental shares result in an increase in earnings per share, or a reduction of loss per share, after giving affect to the dividend requirements. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable and over-the- counter ("OTC") swaps and options. The risk is limited due to the large number of entities comprising the Company's customer base and their dispersion across industries and geographic locations. At December 31, 1998, the Company believes it had no significant concentrations of credit risk. Cash and Cash Equivalents Cash and cash equivalents includes all cash balances and highly liquid investments with an original maturity of three months or less. Supplementary Cash Flow Information Interest paid was $36.1 million, $33.1 million and $36.7 million, respectively, for the years ended December 31, 1998, 1997 and 1996. Capitalized interest associated with construction of new projects was $2.5 million, $5.1 million and $1.7 million, respectively, for the years ended December 31, 1998, 1997 and 1996. Income taxes paid were $0, $2.6 million and $4.2 million, respectively, for the years ended December 31, 1998, 1997 and 1996. Stock Compensation As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has elected to continue to measure compensation costs for stock-based employee compensation plans as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The Company has complied with the pro forma disclosure requirements of SFAS No. 123 as required under the pronouncement. 38 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company realizes an income tax benefit from the exercise of non-qualified stock options related to the difference between the market price at the date of exercise and the option price. APB No. 25 requires that this difference be credited to additional paid-in capital. In September 1997, the Company recorded a credit of $2.2 million to Additional Paid-In Capital to reflect such difference associated with the Company's $5.40 Stock Option Plan. Use of Estimates and Significant Risks The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of estimates relate to oil and gas reserves, fair value of financial instruments, future cash flows associated with assets and useful lives for depreciation, depletion and amortization. Actual results could 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 gas and NGLs. These prices are subject to fluctuations in response to changes in supply, market uncertainty and a variety of additional 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 upon, among other factors, prices for gas and oil, the drilling budgets of third-party producers, the energy policy of the federal government and the availability of foreign oil and gas, none of which are within the Company's control. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective for fiscal years beginning after June 15, 1999. Under SFAS No. 133, the Company will be required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income depending upon the nature of the underlying transaction. The Company has not yet determined the impact that the adoption of SFAS No. 133 will have on its earnings or financial position. Reclassifications Certain prior years' amounts in the consolidated financial statements and related notes have been reclassified to conform to the presentation used in 1998. NOTE 3 - RELATED PARTIES - ------------------------ The Company enters into joint ventures and partnerships in order to reduce risk, create strategic alliances and to establish itself in oil and gas producing basins in the United States. For the years ended December 31, 1998, 1997 and 1996, the Company had a 50% ownership interest in Williston Gas Company ("Williston") and Westana Gathering Company ("Westana"). In addition, for the years ended December 31, 1997 and 1996 the Company also had a 50% ownership interest in Redman Smackover. This interest was sold effective July 1, 1998. The Company acts as operator for Williston and Westana. The Company also has a 49% interest in the Sandia Energy Resources Joint Venture ("Sandia"), which was formed in March 1996. The Company's share of equity income or loss in these ventures is reflected in Other net revenue. All transactions entered into by the Company with its related parties are consummated in the ordinary course of business. Historically, the Company had purchased a significant portion of the production of Williston. The Company also performed various operational and administrative functions for Williston and charged a monthly overhead fee to cover such services. In August 1996, substantially all of the assets associated with Williston were sold to a third party. The Company expects that Williston will be dissolved during 1999. At December 31, 1998, the Company's investment in Williston was immaterial. 39 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company performs various operational and administrative functions for Westana and charges a monthly overhead fee to cover such services. The Company records receivable and payable balances at the end of each accounting period related to transactions with Westana. At December 31, 1998, the Company's investment in Westana was $26.9 million. The Company provides substantially all of the natural gas that Sandia markets and also provides various administrative services to Sandia. In addition, the Company purchases gas from Sandia. The Company records receivable and payable balances at the end of each accounting period related to the above referenced transactions. At December 31, 1998, the Company's investment in Sandia was $546,000. Sandia will be dissolved in the first quarter of 1999. The following table summarizes account balances reflected in the financial statements (000s):
As of or for the Year Ended December 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Trade accounts receivable.. $ 3,794 $ 4,295 $ 5,552 ======= ======= ======= Accounts payable........... 9,474 7,246 11,041 ======= ======= ======= Sales of gas and NGLs...... 31,319 19,504 10,592 ======= ======= ======= Processing revenue......... 192 336 256 ======= ======= ======= Product purchases.......... 58,899 59,082 57,675 ======= ======= ======= Administrative expense..... $ 483 $ 421 $ 419 ======= ======= =======
The Company has entered into agreements committing the Company to loan to certain key employees an amount sufficient to exercise their options as each portion of their options vests under the Key Employees' Incentive Stock Option Plan and the $5.40 Stock Option Plan (see Note 10). The Company will forgive the loan and accrued interest if the employee has been continuously employed by the Company for periods specified under the agreements and Board of Directors' resolutions. As of December 31, 1998 and 1997, loans totaling $951,000 and $1.3 million, respectively, were outstanding to certain employees under these programs. The loans are secured by a portion of the Common Stock issued upon exercise of the options and are accounted for as a reduction of stockholders' equity. During 1998 and 1997, the Board of Directors approved the forgiveness of loans to certain employees totaling approximately $335,000 and $552,000, respectively, in connection with these plans. NOTE 4 - COMMODITY RISK MANAGEMENT - ---------------------------------- Gas and NGL Hedges The Company's commodity price risk management program has two primary objectives. The first goal is to preserve and enhance the value of the Company's equity volumes of gas and NGLs with regard to the impact of commodity price movements on cash flow, net income and earnings per share in relation to those anticipated by the Company's operating budget. The second goal is to manage price risk related to the Company's physical gas, crude oil and NGL marketing activities to protect profit margins. This risk relates to hedging fixed price purchase and sale commitments, preserving the value of storage inventories, reducing exposure to physical market price volatility and providing risk management services to a variety of customers. The Company utilizes a combination of fixed price forward contracts, exchange- traded futures and options, as well as fixed index swaps, basis swaps and options traded in the over-the-counter ("OTC") market to accomplish these objectives. These instruments allow the Company to preserve value and protect margins because gains or losses in the physical market are offset by corresponding losses or gains in the value of the financial instruments. The Company uses futures, swaps and options to reduce price risk and basis risk. Basis is the difference in price between the physical commodity being hedged and the price of the futures contract used for hedging. Basis risk is the risk that an adverse change in the futures market will not be completely offset by an equal and opposite change in the cash price of the commodity being hedged. Basis 40 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) risk exists in natural gas primarily due to the geographic price differentials between cash market locations and futures contract delivery locations. The Company enters into futures transactions on the New York Mercantile Exchange ("NYMEX") and the Kansas City Board of Trade and through OTC swaps and options with various counterparties, consisting primarily of financial institutions and other natural gas companies. The Company conducts its standard credit review of OTC counterparties and has agreements with such parties that contain collateral requirements. The Company generally uses standardized swap agreements that allow for offset of positive and negative exposures. OTC exposure is marked to market daily for the credit review process. The Company's OTC credit risk exposure is partially limited by its ability to require a margin deposit from its major counterparties based upon the mark-to-market value of their net exposure. The Company is subject to margin deposit requirements under these same agreements. In addition, the Company is subject to similar margin deposit requirements for its NYMEX counterparties related to its net exposures. The use of financial instruments may expose the Company to the risk of financial loss in certain circumstances, including instances when (i) equity volumes are less than expected, (ii) the Company's customers fail to purchase or deliver the contracted quantities of natural gas or NGLs, or (iii) the Company's OTC counterparties fail to perform. To the extent that the Company engages in hedging activities, it may be prevented from realizing the benefits of favorable price changes in the physical market. However, it is similarly insulated against decreases in such prices. The Company has hedged a portion of its equity volumes of gas and NGLs in 1999, particularly in the first quarter, at pricing levels approximating its 1999 operating budget. The Company's equity hedging strategy establishes a minimum and maximum price to the Company while allowing market participation between these levels. As of February 19, 1999, the Company had hedged approximately 75% of its anticipated equity gas for 1999 at a weighted average NYMEX-equivalent minimum price of $2.00 per Mcf, including approximately 80% of first quarter anticipated equity volumes at a weighted average NYMEX-equivalent minimum price of $2.00 per Mcf. Additionally, the Company has hedged approximately 75% of its anticipated equity NGLs for 1999 at a weighted average composite Mont Belvieu and West Texas Intermediate Crude-equivalent minimum price of $.23 per gallon. At December 31, 1998, the Company had $1.1 million of losses deferred in inventory that will be recognized primarily during the first quarter of 1999 and are expected to be offset by margins from the Company's related forward fixed price hedges and physical sales. At December 31, 1998, the Company had unrecognized net gains of $3.8 million related to financial instruments that are expected to be offset by corresponding unrecognized net losses from the Company's obligations to sell physical quantities of gas and NGLs. The Company enters into speculative futures, swap and option trades on a very limited basis for purposes that include testing of hedging techniques. The Company's policies contain strict guidelines for such trading including predetermined stop-loss requirements and net open positions limits. Speculative futures, swap and option positions are marked to market at the end of each accounting period and any gain or loss is recognized in income for that period. Net gains or losses from such speculative activities for the years ended December 31, 1998 and 1997 were not material. Natural Gas Derivative Market Risk As of December 31, 1998, the Company held a notional quantity of approximately 370 Bcf of natural gas futures, swaps and options extending from January 1999 to December 2000 with a weighted average duration of approximately four months. This was comprised of approximately 178 Bcf of long positions and 192 Bcf of short positions in such instruments. As of December 31, 1997, the Company held a notional quantity of approximately 480 Bcf of natural gas futures, swaps and options extending from January 1998 to December 1999 with a weighted average duration of approximately four months. This was comprised of approximately 230 Bcf of long positions and 250 Bcf of short positions in such instruments. Crude Oil and NGL Derivative Market Risk As of December 31, 1998, the Company held a notional quantity of approximately 177 million gallons of NGL futures, swaps and options extending from January 1999 to December 1999 with a weighted average duration of approximately six months. This was comprised of approximately 129 million gallons of long positions and 48 million gallons of short positions in such instruments. As 41 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of December 31, 1997, the Company held a notional quantity of approximately 148 million gallons of NGL futures, swaps and options extending from January 1998 to December 1998 with a weighted average duration of approximately five months. This was comprised of approximately 93 million gallons of long positions and 55 million gallons of short positions in such instruments. As of December 31, 1998, the Company had sold 90,000 barrels per month of NYMEX crude swaps for 1999 at an average price of $13.10 per barrel. In addition, the Company had purchased 90,000 barrels per month of $15.00 per barrel NYMEX calls for July 1999 through December 1999 settlement. The Company held no crude oil futures, swaps or options for settlement beyond 1999. As of December 31, 1998, the Company had purchased 200,000 barrels per month of OPIS Mt. Belvieu monthly average settlement $0.210 per gallon puts to hedge a portion of the Company's equity production of propane and butanes for 1999. As of December 31, 1998, the Company had purchased 50,000 barrels per month of OPIS Mt. Belvieu monthly average settlement $0.155 per gallon of purity ethane puts to hedge a portion of the Company's equity production of ethane for 1999. As of December 31, 1998, the Company held no NGL futures, swaps or options for settlement beyond 1999. As of December 31, 1998, the estimated fair value of the aforementioned crude oil and NGL options held by the Company was approximately $315,000. NOTE 5 - DEBT - ------------- The following summarizes the Company's consolidated debt at the dates indicated (000s):
December 31, ------------------ 1998 1997 -------- -------- Master shelf and senior notes............ $269,381 $284,857 Variable rate revolving credit facility.. 235,500 156,500 -------- -------- Total long-term debt.................... $504,881 $441,357 ======== ========
Revolving Credit Facility. The Company's variable rate Revolving Credit Facility was restated and amended in May 1997. The Revolving Credit Facility is with a syndicate of banks and provides for a maximum borrowing commitment of $300 million, $235.5 million of which was outstanding at December 31, 1998. The interest rate payable on the facility at December 31, 1998 was 6.2%. The Company has reached an agreement with the agent bank on a term sheet for a restated facility which will reflect the following changes. The restated Revolving Credit Facility is with a syndicate of banks and will provide for an aggregate borrowing commitment of $300 million consisting of a $100 million 364-day Revolving Credit Facility ("Tranche A") and a five year $200 million Revolving Credit Facility ("Tranche B"). The Revolving Credit Facility will bear interest at certain spreads over the Eurodollar rate, at the Federal Funds rate plus .50% or at the agent bank's prime rate. The Company will have the option to determine which rate will be used. The Company also will pay a facility fee on the commitment. The interest rate spreads and facility fee will be adjusted based on the Company's debt to capitalization ratio and will range from .75% to 2.00%. Pursuant to the Revolving Credit Facility, the Company will be required to maintain a debt to capitalization ratio of not more than 60% through December 31, 2000 and of not more than 55% thereafter, and a senior debt to capitalization ratio of not more than 40% beginning September 30, 1999 through December 31, 2001 and of not more than 35% thereafter. The agreement also requires a ratio of EBITDA to interest and dividends on preferred stock as of the end of any fiscal quarter of not less than 1.35 to 1.0 beginning June 30, 1999 increasing to 3.25 to 1.0 by December 31, 2002. Tranche A and Tranche B will be reduced on a pro rata basis to a total of $250 million by September 30, 1999. The Revolving Credit Facility is guaranteed and will be secured via a pledge of the stock of the Company's significant subsidiaries. Documentation reflecting this agreement is expected to be completed on or about the end of the first quarter of 1999. The Company generally utilizes excess daily funds to reduce any outstanding balances on the Revolving Credit Facility and associated interest expense, and it intends to continue such practice. 42 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Master Shelf Agreement. In December 1991, the Company entered into a Master Shelf agreement (as amended and restated, the "Master Shelf") with The Prudential Insurance Company of America ("Prudential"). Amounts outstanding under the Master Shelf agreement at December 31, 1998 are as indicated in the following table (000s):
Interest Final Issue Date Amount Rate Maturity Principal Payments Due - ------------------- -------- ----- ------------------ ----------------------------------------------- October 27, 1992 $ 16,667 7.51% October 27, 2000 $8,333 on each of October 27, 1999 through 2000 October 27, 1992 25,000 7.99% October 27, 2003 $8,333 on each of October 27, 2001 through 2003 September 22, 1993 25,000 6.77% September 22, 2003 single payment at maturity December 27, 1993 25,000 7.23% December 27, 2003 single payment at maturity October 27, 1994 25,000 9.05% October 27, 2001 single payment at maturity October 27, 1994 25,000 9.24% October 27, 2004 single payment at maturity July 28, 1995 50,000 7.61% July 28, 2007 $10,000 on each of July 28, 2003 through 2007 -------- $191,667 ========
In March 1999, the Company reached an agreement on an amendment with Prudential which will be effective as of January 1999 with the following provisions. The Company will be required to maintain a current ratio (as defined therein) of at least 1.0 to 1.0, a minimum tangible net worth equal to the sum of $300 million plus 50% of consolidated net earnings earned from January 1, 1999 plus 75% of the net proceeds of any equity offerings after January 1, 1999, and a debt to capitalization ratio of not more than 60% through December 31, 2000 and of not more than 55% thereafter. A senior debt to capitalization ratio will be implemented, if and when, the Company issues subordinated debt. This amendment also requires an EBITDA to interest ratio of not less than 1.75 to 1.0 beginning March 31, 1999 increasing to a ratio of not less than 3.75 to 1.0 by March 31, 2002. Documentation reflecting this amendment is expected to be completed on or about the end of the first quarter of 1999. In addition, under the existing agreement, the Company is prohibited from declaring or paying dividends that in the aggregate exceed the sum of $50 million plus 50% of consolidated net income earned after June 30, 1995 (or minus 100% of a net loss), plus the aggregate net cash proceeds received after June 30, 1995 from the sale of any stock. At December 31, 1998, $51.5 million was available under this limitation. This amount is expected to be reduced by approximately $ 14.9 million as a result of the after-tax losses recognized on the sales of the Giddings and Katy facilities. The Company presently intends to finance the $8.3 million payment due on October 27, 1999 with amounts available under the Revolving Credit Facility. The Master Shelf Agreement is guaranteed and will be secured via a pledge of the stock of the Company's significant subsidiaries. 1995 Senior Notes. In 1995, the Company sold $42 million of Senior Notes (the "1995 Senior Notes") to a group of insurance companies with an interest rate of 8.16% per annum. In February 1999, the Company offered to prepay the 1995 Senior Notes at par. Note holders representing $15 million of the principal amount outstanding on the 1995 Senior Notes accepted the Company's offer and were paid in full in March 1999. These payments were financed by the Bridge Loan and by amounts available under the Revolving Credit Facility. The remaining principal amount outstanding of $27 million is due in a single payment in December 2005. The 1995 Senior Notes are guaranteed and will be secured via a pledge of the stock of the Company's significant subsidaries. The Company has reached an agreement with the Note holders which provides for modification of certain financial covenants on terms that will be no more restrictive than those contained in the Master Shelf. Documentation reflecting this agreement is expected to be completed on or about the end of the first quarter of 1999. Effective January 1, 1999, the Company will pay an annual fee of no more than .65% on the amounts outstanding on the Master Shelf and the 1995 Senior Notes. This fee will continue until the Company has received an implied investment grade rating on its senior secured debt. 1993 Senior Notes. In 1993, the Company sold $50 million of 7.65% Senior Notes (the "1993 Senior Notes") to a group of insurance companies. Scheduled annual principal payments of $7.1 million on the 1993 Senior Notes were made on April 30 of 1997 and 1998. In February 1999, the Company offered to prepay the 1993 Senior Notes at par. Note holders representing approximately $33.5 million of the total principal amount outstanding of $35.6 million accepted the Company's offer and were paid in full in February 1999. These payments were 43 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) financed by a $37 million Bridge Loan. The Company intends to pay the remaining outstanding principal of $2.1 million in the second quarter of 1999 with amounts available under the Revolving Credit Facility. Bridge Loan. In February 1999, in order to finance prepayments at par of amounts outstanding on the 1993 and 1995 Senior Notes, the Company entered into a Bridge Loan agreement in the amount of $37 million with its agent bank (the "Bridge Loan"). The Bridge Loan bears interest at certain spreads over the Eurodollar rate ranging from 1.75% at date of issuance to 2.75% at maturity. The Bridge Loan may be prepaid in whole or in part at any time and matures on October 31, 1999. The Company presently intends to finance the payment of the Bridge Loan with amounts available under the Revolving Credit Facility, proceeds from the sale of assets or proceeds from the issuance of public debt. Covenant Compliance. At December 31, 1998, the Company was in compliance with all covenants in its loan agreements. Taking into account all the covenants contained in these agreements, the Company had approximately $64.5 million of available borrowing capacity at December 31, 1998. In March 1999, the Company successfully completed negotiations with its lenders for amendments to its various financing facilities providing for financial flexibility and covenant modifications. These amendments were needed given the depressed commodity pricing experienced by the industry in general and the disappointing results the Company has experienced at its Bethel Treating facility. There can be no assurance that further amendments or waivers can be obtained in the future, if necessary, or that the terms would be favorable to the Company. To strengthen credit ratings and to reduce its overall debt outstanding, the Company will continue to dispose of non-strategic assets (such as the Giddings and Katy facilities) and investigate alternative financing sources (including the issuance of public debt, project- financing, joint ventures and operating leases). Approximate future maturities of long-term debt at the date indicated, which do not reflect the payments made in the first quarter of 1999, are as follows at December 31, 1998 (000s): 1999.................................... $ 15,476 2000.................................... 15,477 2001.................................... 40,476 2002.................................... 250,976 2003.................................... 75,476 Thereafter.............................. 107,000 -------- Total................................. $504,881 ========
NOTE 6 - FINANCIAL INSTRUMENTS - ------------------------------ The estimated fair values of the Company's financial instruments have been determined by the Company using available market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amount that the Company could realize upon the sale or refinancing of such financial instruments.
December 31, 1998 December 31, 1997 ------------------ ------------------ Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- (000s) (000s) Cash and cash equivalents.. $ 4,400 $ 4,400 $ 19,777 $ 19,777 Trade accounts receivable.. 233,574 233,574 258,791 258,170 Accounts payable........... 245,315 245,315 326,696 326,696 Long-term debt............. 504,881 503,001 441,357 447,843 Risk management contracts.. $ - $ 2,281 $ - $ (2,189)
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash and cash equivalents, trade accounts receivable and accounts payable Due to the short-term nature of these instruments, the carrying value approximates the fair value. 44 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Long-term debt The Company's long-term debt was primarily comprised of fixed rate facilities; for this portion, fair market value was estimated using discounted cash flows based upon the Company's current borrowing rates for debt with similar maturities. The remaining portion of the long-term debt was borrowed on a revolving basis which accrues interest at current rates; as a result, carrying value approximates fair value of the outstanding debt. Risk Management Contracts Fair value represents the amount at which the instrument could be exchanged in a current arms-length transaction. NOTE 7 - INCOME TAXES - --------------------- The provision (benefit) for income taxes for the years ended December 31, 1998, 1997 and 1996 is comprised of (000s):
1998 1997 1996 --------- ----- ------- Current: Federal............................. $ (5,696) $ 268 $ 1,152 State............................... - - - -------- ----- ------- Total Current....................... (5,696) 268 1,152 -------- ----- ------- Deferred: Federal............................. (31,272) 448 12,071 State............................... (1,450) 17 467 -------- ----- ------- Total Deferred...................... (32,722) 465 12,538 -------- ----- ------- Total tax provision (benefit).. $(38,418) $ 733 $13,690 ======== ===== =======
Temporary differences and carryforwards which give rise to the deferred tax liabilities (assets) at December 31, 1998 and 1997 are as follows (000s):
1998 1997 -------- -------- Property and equipment......................................... $133,054 $158,258 Differences between the book and tax basis of acquired assets.. 14,386 15,334 -------- -------- Total deferred income tax liabilities......................... 147,440 173,592 -------- -------- Alternative Minimum Tax ("AMT") credit carryforwards........... (21,128) (26,849) Net Operating Loss ("NOL") carryforwards....................... (78,291) (66,000) -------- -------- Total deferred income tax assets.............................. (99,419) (92,849) -------- -------- Net deferred income taxes..................................... $ 48,021 $ 80,743 ======== ========
45 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The differences between the provision (benefit) for income taxes at the statutory rate and the actual provision (benefit) for income taxes for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (000s):
1998 % 1997 % 1996 % -------- ---- ----- ----- ------- ----- Income tax (benefit) at statutory rate......... $(36,968) 35.0 $ 777 35.0 $14,570 35.0 State income taxes, net of federal benefit..... (1,450) 1.4 31 1.4 562 1.4 Permanent differences on asset write-downs..... - - - - - - Reduction of deferred income taxes to reflect adjustment in acquired NOL carryforward....... - - - - (900) (2.2) Adjustment to prior year income taxes.......... - - - - (383) (.9) Other.......................................... - - (75) (3.4) (159) (.4) -------- ---- ----- ---- ------- ---- Total......................................... $(38,418) 36.4 $ 733 33.0 $13,690 32.9 ======== ==== ===== ==== ======= ====
At December 31, 1998 the Company had NOL carryforwards for Federal and State income tax purposes and AMT credit carryforwards for Federal income tax purposes of approximately $215.4 million and $21.1 million, respectively. These carryforwards expire as follows (000s):
Expiration Dates NOL AMT --------------------------- -------- ------- 2003....................... $ 170 $ - 2004....................... 413 - 2005....................... 943 - 2006....................... 478 - 2007....................... - - 2008....................... 12,179 - 2009....................... 56,308 - 2010....................... 59,857 - 2011....................... 16,221 - 2012....................... 39,033 - 2018....................... 29,807 - No expiration.............. - 21,128 -------- ------- Total................. $215,409 $21,128 ======== =======
The Company believes that the NOL carryforwards and AMT credit carryforwards will be utilized prior to their expiration because they are substantially offset by existing taxable temporary differences reversing within the carryforward period or are expected to be realized by achieving future profitable operations based on the Company's dedicated and owned reserves, past earnings history, projections of future earnings and current assets. NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES - ------------------------------------------------ JN Exploration and Production Litigation JN Exploration and Production ("JN") is a producer of oil and natural gas that sold unprocessed natural gas to the Company on a percentage-of-proceeds basis. The Company processed the natural gas at its Teddy Roosevelt Plant, which is no longer in operation. In JN Exploration and Production v. Western Gas Resources, Inc. United States District Court for the District of North Dakota, Southwestern Division, Civil Action Nos. A1-93-53 and 903-CV-60, JN sued the Company, alleging that JN was entitled to a portion of a $15 million amendment fee the Company received in the years 1987 through 1989 from Williston Basin Interstate Pipeline Company ("WBI"), which had an agreement with the Company to purchase natural gas. On April 15, 1996, the Court issued a Memorandum and Order granting JN's summary judgment motion on the issue of liability. On July 11, 1996, the Court issued a Memorandum and Order setting forth the manner in which damages were to be calculated. On September 17, 1996, the Court entered a final judgment against the Company in the amount of $421,000 (including pre-judgment interest). The Company appealed the decision to the Eighth Circuit Court of Appeals. On September 1, 1998 the Court of Appeals reversed the summary judgment entered for JN on an unjust enrichment theory and remanded the case to the trial court for a determination on JN's contract claims. This case 46 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) has now been settled for an immaterial amount and will be dismissed with prejudice. The Company believes that it has meritorious defenses to the remanded claim and will vigorously defend such claims. At the present time, it is not possible to predict the outcome of this litigation or any other producer litigation that might raise similar issues or to estimate the amount of potential damages. Berco Resources, Inc. v. Amerada Hess Corporation and Western Gas Resources, Inc., United States District Court, District of Colorado, Civil Action No. 97-WM-1332 Berco Resources, Inc. ("Berco") is an independent producer and marketer of natural gas and alleges it owns or has the right to produce and sell natural gas in the Temple/Tioga Area in North Dakota. Berco alleges that Amerada Hess engaged in unlawful monopolization under Section 2 of the Sherman Act and Section 7 of the Clayton Act by acquiring natural gas gathering and producing facilities owned by Western Gas. Berco alleges that the Company and Amerada Hess have conspired, through the purchase and sale of the Company's facilities in the Temple/Tioga Area, to create a monopoly affecting an appreciable amount of interstate commerce in violation of Sections 1 and 2 of the Sherman Act. Berco seeks an award against Amerada Hess and the Company of threefold the amount of damages actually sustained by Berco, in an amount to be determined at trial, and/or divestiture of the Company assets acquired by Amerada Hess, for an order against the Company and Amerada Hess restraining and enjoining them from violating the antitrust laws, and for costs, attorney fees and interest. The Company believes that it has meritorious defenses to the claims and will vigorously defend such claims. At the present time it is not possible to predict the outcome of this litigation to estimate the amount of potential damages. Internal Revenue Service The Internal Revenue Service ("IRS") has completed its examination of the Company's tax returns for the years 1990 and 1991 and has proposed adjustments to taxable income reflected in such tax returns that would shift the recognition of certain items of income and expense from one year to another ("Timing Adjustments"). To the extent taxable income in a prior year is increased by proposed Timing Adjustments, taxable income may be reduced by a corresponding amount in other years. However, the Company would incur an interest charge as a result of such adjustments. The Company currently is protesting certain of these proposed adjustments. In the opinion of management, any proposed adjustments for the additional income taxes and interest that may result would not be material. However, it is reasonably possible that the ultimate resolution could result in an amount which differs materially from management's estimates. Other The Company is involved in various other litigation and administrative proceedings arising in the normal course of business. In the opinion of management, any liabilities that may result from these claims, will not, individually or in the aggregate, have a material adverse effect on the Company's financial position or results of operations. NOTE 9 - BUSINESS SEGMENTS AND RELATED INFORMATION - -------------------------------------------------- The Company operates in four principal business segments, as follows: Gas Gathering and Processing, Producing Properties, Marketing and Transmission, and these segments are separately monitored by management for performance against its internal forecast and are consistent with the Company's internal financial reporting package. These segments have been identified based upon the differing products and services, regulatory environment and the expertise required for these operations. The Gas Gathering and Processing segment connects producers' wells to its gathering systems for delivery to its processing or treating plants, processes the natural gas to extract NGLs and treats the natural gas in order to meet pipeline specifications. The residue gas and NGLs extracted at the processing facilities are sold by the Marketing segment. The activities of the Producing Properties segment includes the exploration and development of certain oil and gas producing properties in basins where the Company's facilities are located. The majority of the gas and oil produced from these properties is sold by the Marketing segment. 47 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Marketing segment buys and sells gas and NGLs nationwide and in Canada, providing storage, transportation, scheduling, peaking and other services to a variety of customers. In addition, this segment also markets gas and NGLs produced by the Company's facilities. The operations associated with the Company's Katy Facility are included in the Marketing segment as are the Company's Canadian marketing operations (which is immaterial for separate presentation). The Transmission segment reflects the operations of the Company's MIGC and MGTC pipelines. The majority of the revenue presented in this segment is derived from transportation of residue gas. The following table sets forth the Company's segment information as of and for the years ended December 31, 1998, 1997 and 1996 (in 000s). Due to the Company's integrated operations, the use of allocations in the determination of business segment information is necessary. Intersegment revenues are valued at prices comparable to those of unaffiliated customers.
Gas Gathering and Producing Trans- Eliminating Processing Properties Marketing mission Corporate Entries Total ---------- ----------- ---------- -------- ---------- ---------- ------ Year ended December 31, 1998 Revenues from unaffiliated customers.... $ 38,613 $ 1,979 $2,067,561 $ 4,956 $ 1,091 $ 709 $2,114,909 Interest income......................... 1 - 45 - 29,531 (28,486) 1,091 Other, net.............................. 16,759 703 120 (16) - - 17,566 Intersegment sales...................... 425,895 24,878 81,384 12,365 - (544,522) - -------- --------- ---------- ------- ------- --------- ---------- Total revenues.......................... 481,268 27,560 2,149,110 17,305 30,622 (572,299) 2,133,566 Product purchases....................... 330,369 1,368 2,126,621 - (3,386) (540,669) 1,914,303 Plant operating expense................. 65,318 2,437 6,999 11,167 2,694 (3,262) 85,353 Oil and gas exploration and production expense................. - 7,466 155 - 233 142 7,996 -------- --------- ---------- ------- ------- --------- ---------- Operating profit........................ $ 85,581 $ 16,289 $ 15,335 $ 6,138 $31,081 $ (28,510) 125,914 ======== ========= ========== ======= ======= ========= ========== Depreciation, depletion and amortization 59,346 Interest expense........................ 33,616 Loss on the impairment of property and equipment.............................. 108,447 Selling and administrative expense...... 30,128 ---------- Income (loss) before income taxes....... $ (105,623) ========== Identifiable assets..................... $577,782 $ 89,191 $ 118,661 $63,946 $17,780 $ - $ 867,360 ======== ========= ========== ======= ======= ========= ==========
Year ended December 31, 1997 Revenues from unaffiliated customers.... $ 33,180 $ 1,189 $2,333,064 $ 5,457 $ 780 $ 3,871 $2,377,541 Interest income......................... 18 - 114 - 17,556 (16,460) 1,228 Other, net.............................. 1,094 4,727 132 - 538 - 6,491 Intersegment sales...................... 522,783 34,123 51,411 7,419 - (615,736) - -------- -------- ----------- ------- -------- --------- --------- Total revenues.......................... 557,075 40,039 2,384,721 12,876 18,874 (628,325) 2,385,260 Product purchases....................... 399,651 1,238 2,352,107 4,409 (2,558) (608,417) 2,146,430 Plant operating expense................. 63,749 2,912 6,597 6,394 1,814 (3,353) 78,113 Oil and gas exploration and production expense................. 7 7,634 106 - 3 (36) 7,714 -------- -------- ----------- ------- --------- ---------- ----------- Operating profit........................ $ 93,668 $ 28,255 $ 25,911 $ 2,073 $ 19,615 $ (16,519) $ 153,003 ======== ======== =========== ======= ========= ========== ===========
48 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Gas Gathering and Producing Trans- Eliminating Processing Properties Marketing mission Corporate Entries Total ---------- ---------- ---------- -------- --------- --------- ---------- Year Ended December 31, 1997, cont. Depreciation, depletion and amortization $59,248 Interest expense........................ 27,474 Loss on the impairment of property and equipment.............................. 34,615 Selling and administrative expense...... 29,446 ---------- Income (loss) before income taxes....... $ 2,220 ========== Identifiable assets..................... $698,899 $104,744 $ 121,305 $48,541 $13,723 $ - $ 987,212 ======== ======== ========== ======= ======= ========= ========== Year ended December 31, 1996 Revenues from unaffiliated customers.... $ 45,828 $ 764 $2,032,696 $ 5,187 $(2,785) $ 1,106 $2,082,796 Interest income......................... - - - - 14,316 (13,663) 653 Other, net.............................. 2,748 2,807 106 (6) 1,905 - 7,560 Intersegment sales...................... 506,356 33,041 38,377 6,249 - (584,023) - -------- -------- ---------- ------- ------- --------- ---------- Total revenues.......................... 554,932 36,612 2,071,179 11,430 13,436 (596,580) 2,091,009 Product purchases....................... 390,890 334 2,033,190 4,551 (5,948) (578,866) 1,844,151 Plant operating expense................. 63,980 2,774 7,238 4,266 1,539 (6,681) 73,116 Oil and gas exploration and production expense................. - 4,440 133 - - 483 5,056 -------- -------- ---------- ------- ------- --------- ---------- Operating profit........................ $100,062 $ 29,064 $ 30,618 $ 2,613 $17,845 $ (11,516) 168,686 ======== ======== ========== ======= ======= ========= ========== Depreciation, depletion and amortization 63,207 Interest expense 34,437 Loss on the impairment of property and equipment.............................. - Selling and administrative expense...... 29,411 ---------- Income (loss) before income taxes....... $ 41,631 ========== Identifiable assets..................... $598,453 $119,132 $ 121,978 $36,110 $14,019 $ - $ 889,692 ======== ======== ========== ======= ======= ========= ==========
NOTE 10 - EMPLOYEE BENEFIT PLANS - -------------------------------- Profit Sharing Plan A discretionary profit sharing plan (a defined contribution plan) exists for all Company employees meeting certain service requirements. The Company may make annual discretionary contributions to the plan as determined by the Board of Directors and 49 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) provides for a match of 50% of employee contributions on the first 4% of employee compensation contributed. Contributions are made to common/collective trusts for which Fidelity Management Trust Company acts as trustee. The discretionary contributions made by the Company were $1.9 million, $1.9 million and $1.7 million, for the years ended December 31, 1998, 1997 and 1996, respectively. The matching contributions were $668,000, $310,000 and $256,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Key Employees' Incentive Stock Option Plan and Non-Employee Director Stock Option Plan Effective April 1987, the Board of Directors of the Company adopted a Key Employees' Incentive Stock Option Plan ("Key Employee Plan") and a Non-Employee Director Stock Option Plan ("Directors' Plan") that authorize the granting of options to purchase 250,000 and 20,000 shares of the Company's Common Stock, respectively. Under the plans, each of these options became exercisable as to 25% of the shares covered by it on the later of January 1, 1992 or one year from the date of grant, subject to the continuation of the optionee's relationship with the Company, and became exercisable as to an additional 25% of the covered shares on the later of each subsequent January 1 through 1995 or on each subsequent date of grant anniversary, subject to the same condition. Each of these plans will terminate on the earlier of February 6, 2000 or the date on which all options granted under each of the plans have been exercised in full. The Company has entered into agreements committing the Company to loan certain employees an amount sufficient to exercise their options as each portion of their options vests. The Company will forgive such loans and associated accrued interest if the employee has been continuously employed by the Company for four years after the date of each loan increment. In January 1999, the Board of Directors voted to extend the maturity for all such loans for officers still employed in January 1999, until January 2001. During 1996, under the terms of a severance agreement, the Company extended the maturity date of one former officer's loans to December 31, 2000. In addition, under the terms of a severance agreement, the loans of a former officer are being forgiven over the life of the original loan forgiveness schedule. As of December 31, 1998 and 1997, loans related to 81,250 and 112,500 shares of Common Stock, respectively, totaling $870,000 and $1.2 million, respectively, were outstanding under these terms. 1993 and 1997 Stock Option Plans The 1993 Stock Option Plan ("1993 Plan") became effective on May 24, 1993 and the 1997 Stock Option Plan ("1997 Plan") became effective on May 21, 1997 after approvals by the Company's stockholders. Each plan is intended to be an incentive stock option plan in accordance with the provisions of Section 422 of the Internal Revenue Code of 1986, as amended. The Company has reserved 1,000,000 shares of Common Stock for issuance upon exercise of options under each of the 1993 Plan and the 1997 Plan. The 1993 Plan and the 1997 Plan will terminate on the earlier of March 21, 2003 and May 21, 2007, respectively, or the date on which all options granted under each of the plans have been exercised in full. Under both of the plans, the Board of Directors of the Company determines and designates from time to time those employees of the Company to whom options are to be granted. If any option terminates or expires prior to being exercised, the shares relating to such option are released and may be subject to reissuance pursuant to a new option. The Board of Directors has the right to, among other things, fix the price, terms and conditions for the grant or exercise of any option. The purchase price of the stock under each option shall be the fair market value of the stock at the time such option is granted. Under the 1993 Plan, options granted vest 20% each year on the anniversary of the date of grant commencing with the first anniversary. Under the 1997 Plan, the Board of Directors has the authority to set the vesting schedule from 20% per year to 33 1/3% per year. Under both plans, the employee must exercise the option within five years of the date each portion vests. $5.40 Stock Option Plan In April 1987 and amended in February 1994, the Partnership adopted an employee option plan ("$5.40 Plan") that authorized granting options to employees to purchase 483,000 common units in the Partnership. Pursuant to the Restructuring, the Company assumed the Partnership's obligation under the employee option plan. The plan was amended upon the Restructuring to allow each holder of existing options to exercise such options and acquire one share of Common Stock for each common unit they were originally entitled to purchase. The exercise price and all other terms and conditions for the exercise of such options issued under the amended plan were the same as under the plan, except that the Restructuring accelerated the time upon which certain options may be exercised. All options under the plan were either exercised or forfeited on or before May 31, 1997. The Company has entered into agreements committing the Company to loan to certain employees an amount sufficient to exercise their 50 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) options, provided that the Company will not loan in excess of 25% of the total amount available to the employee in any one year. In accordance with the agreements, the Company forgave the majority of such loans and associated accrued interest on July 2, 1997. Under the terms of a severance agreement, the Company extended the maturity date of one former officer's loans to December 31, 2000. As of December 31, 1998 and 1997, loans related to 15,000 shares of Common Stock in each year, respectively, totaling $81,000, were outstanding under these terms. The following table summarizes the number of stock options exercisable and available for grant under the Company's benefit plans:
Key Employee Directors' $5.40 Plan Plan Plan 1993 Plan 1997 Plan ---------- ------------ --------- --------- --------- EXERCISABLE: December 31, 1996....... 33,148 56,250 11,000 288,438 - December 31, 1997....... - 75,000 12,250 448,171 - December 31, 1998....... - 75,000 13,500 562,138 26,250 AVAILABLE FOR GRANT: December 31, 1996....... - 31,250 1,250 4,734 - December 31, 1997....... - 31,250 1,250 9,382 828,900 December 31, 1998....... - 31,250 1,250 96,609 763,400
51 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes the stock option activity under the Company's benefit plans:
Per Share Number of Shares ------------------------------------------------------------- Price Key Employee Directors' Range $5.40 Plan Plan Plan 1993 Plan 1997 Plan --------------- ---------- ------------ --------- --------- --------- Balance 12/31/95........ 47,571 75,000 13,500 688,061 - Granted................ $13.88 - $18.63 - - - 351,733 - Exercised.............. 5.40 (14,423) - - - - Forfeited or canceled.. 13.25 - 35.00 - - - (46,591) - -------- ------------ --------- -------- --------- Balance 12/31/96........ 33,148 75,000 13,500 993,203 - Granted................ 17.75 - 24.00 - - - 64,654 171,100 Exercised.............. 5.40 - 23.50 (32,077) - - (5,225) - Forfeited or canceled.. 5.40 - 34.13 (1,071) - - (69,302) - -------- ------------ --------- -------- --------- Balance 12/31/97........ - 75,000 13,500 983,330 171,100 Granted................ 19.28 - - - 40,511 106,500 Exercised.............. 15.83 - - - (1,556) - Forfeited or canceled.. $19.19 - $21.78 - - - (129,809) (41,000) -------- ------------ --------- -------- --------- Balance 12/31/98........ - 75,000 13,500 892,476 236,600 ======== ============ ========= ======== =========
The following table summarizes the weighted average option exercise price information under the Company's benefit plans:
Key Employee Directors' $5.40 Plan Plan Plan 1993 Plan 1997 Plan ---------- ------------ ---------- --------- --------- Balance 12/31/95......... $ 5.40 $ 30.23 $14.13 $25.11 - Granted................ - - - 14.63 - Exercised.............. 5.40 - - - - Forfeited or canceled.. - - - 27.05 - ---------- ------------ ---------- --------- --------- Balance 12/31/96......... 5.40 30.23 14.13 21.31 - Granted................ - - - 19.71 19.63 Exercised.............. 5.40 - - 16.91 - Forfeited or canceled.. 5.40 - - 25.54 - ---------- ------------ ---------- --------- --------- Balance 12/31/97......... - 30.23 14.13 20.93 19.63 Granted................ - - - 19.28 11.69 Exercised.............. - - - 14.78 - Forfeited or canceled.. - - - 21.97 19.16 ---------- ------------ ---------- --------- --------- Balance 12/31/98......... $ - $ 30.23 $14.13 $20.71 $16.15
52 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SFAS No. 123 encourages companies to record compensation expense for stock-based compensation plans at fair value. As permitted under SFAS No. 123, the Company has elected to continue to measure compensation costs for such plans as prescribed by APB No. 25. SFAS No. 123 requires pro forma disclosures for each year a statement of operations is presented. Such information was only calculated for the options granted under the 1993 Plan and the 1997 Plan as there were no grants under any other plans. The weighted average fair value of options granted under the 1993 Plan of $0.37, $10.54 and $10.18 for the years ended December 31, 1998, 1997 and 1996, respectively, and the weighted average fair value of options granted under the 1997 Plan of $1.00 and $12.66 for the years ended December 31, 1998 and 1997, respectively, was estimated using the Black-Scholes option-pricing model with the following assumptions:
1993 Plan 1997 Plan -------------------------- ----------------- 1998 1997 1996 1998 1997 ------ ------- ------ ------ ------- Risk-free interest rate......... 5.3% 6.1% 6.35% 5.3% 6.1% Expected life (in years)........ 5 6 7 6 10 Expected volatility............. 45% 42% 37% 45% 42% Expected dividends (quarterly).. $ .05 $ .05 $ .05 $ .05 $ .05
Had compensation expense for the Company's 1998, 1997 and 1996 grants for stock- based compensation plans been determined consistent with the fair value method under SFAS No. 123, the Company's net income (loss), income (loss) attributable to common stock, earnings (loss) per share of common stock and earnings (loss) per share of common stock - assuming dilution would approximate the pro forma amounts below (000s, except per share amounts):
1998 1997 1996 ----------------------- ------------------------ ---------------------- As Reported Pro forma As Reported Pro forma As Reported Pro forma ------------ --------- ------------ ---------- ----------- --------- Net income (loss).................... $(67,205) $(67,997) $ 1,487 $ 941 $27,941 $27,891 Net income (loss) attributable to common stock........................ (77,644) (78,436) (8,952) (9,498) 17,502 17,452 Earnings (loss) per share of common stock............................... (2.42) (2.44) (.28) (.30) .66 .66 Earnings (loss) per share of common stock - assuming dilution.......... $ (2.42) $ (2.44) $ (.28) $ (.30) $ .66 $ .66
The 1993 Plan dictates that the options granted vest 20% each year on the anniversary of the date of grant commencing with the first anniversary. The Board of Directors has the authority to set the vesting schedule from 20% per year to 33 1/3% per year for the 1997 Plan. All options granted in 1997 will vest at the rate of 20% per year. As a result, no compensation expense, as defined under SFAS No. 123, is recognized in the year options are granted. In addition, the fair market value of the options at grant date is amortized over this vesting period for purposes of calculating compensation expense. 53 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES - ---------------------------------------------------------------------- (UNAUDITED): - ------------ Costs The following tables set forth capitalized costs at December 31, 1998, 1997 and 1996 and costs incurred for oil and gas producing activities for the years ended December 31, 1998, 1997 and 1996 (000s):
1998 1997 1996 -------- -------- -------- Capitalized costs: Proved properties............................................... $110,090 $134,102 $140,871 Unproved properties............................................. 33,255 18,464 8,064 -------- -------- -------- Total............................................................ 143,345 152,566 148,935 Less accumulated depletion...................................... (58,994) (61,766) (58,548) -------- -------- -------- Net capitalized costs............................................ $ 84,351 $ 90,800 $ 90,387 ======== ======== ======== The Company's share of Redman Smackover's net capitalized costs.. $ - $ 3,845 $ 4,385 ======== ======== ======== Costs incurred: Acquisition of properties Proved.......................................................... $ 2,174 $ 7,499 $ 242 Unproved........................................................ 22,633 10,457 909 Development costs................................................ 23,208 13,134 3,893 Exploration costs................................................ 4,177 1,322 2,581 -------- -------- -------- Total costs incurred............................................. $ 52,192 $ 32,412 $ 7,625 ======== ======== ======== The Company's share of Redman Smackover's costs incurred......... $ 72 $ 236 $ 8 ======== ======== ========
Results of Operations The results of operations for oil and gas producing activities, excluding corporate overhead and interest costs, for the years ended December 31, 1998, 1997 and 1996 are as follows (000s):
1998 1997 1996 -------- -------- -------- Revenues from sale of oil and gas: Sales................................................ $ 2,592 $ 5,970 $ 1,821 Transfers............................................ 23,188 25,571 31,733 -------- -------- -------- Total.............................................. 25,780 31,541 33,554 Production costs...................................... (6,611) (6,384) (4,256) Exploration costs..................................... (1,599) (1,439) (898) Depreciation, depletion and amortization.............. (11,749) (11,549) (11,756) Impairment of oil and gas properties.................. (16,528) (19,615) - Income tax benefit (expense).......................... 3,690 2,792 (6,261) -------- -------- -------- Results of operations................................. $ 7,017 $ (4,654) $ 10,383 ======== ======== ======== The Company's share of Redman Smackover's operations.. $ 421 $ 1,265 $ 1,745 ======== ======== ========
Reserve Quantity Information Reserve estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and of 54 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Results of subsequent drilling, testing and production may cause either upward or downward revisions of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in commodity prices and operating costs. Any significant revision of reserve estimates could materially adversely affect the Company's financial condition and results of operations. The following table sets forth information for the years ended December 31, 1998, 1997 and 1996 with respect to changes in the Company's proved reserves, all of which are in the United States. The Company has no significant undeveloped reserves.
Natural Crude Gas Oil (MMcf) (MBbls) ------- ------ Proved reserves: December 31, 1995.......................................... 108,820 715 Revisions of previous estimates............................ (2,147) 286 Purchases of reserves in place............................. 2,372 - Production................................................. (13,014) (158) ------- ------ December 31, 1996.......................................... 96,031 843 Revisions of previous estimates............................ (18,132) (74) Extensions and discoveries................................. 113,251 191 Purchases of reserves in place............................. 34,588 - Production................................................. (13,142) (154) ------- ------ December 31, 1997.......................................... 212,596 806 Revisions of previous estimates............................ 28,617 (200) Extensions and discoveries................................. 43,248 66 Sales/Purchases of reserves in place, net.................. (31,020) - Production................................................. (14,511) (117) ------- ------ December 31, 1998...................................... 238,930 555 ======= ====== The Company's share of Redman Smackover's proved reserves: December 31, 1996.......................................... 10,811 - ======= ====== December 31, 1997.......................................... 10,218 - ======= ====== December 31, 1998.......................................... - - ======= ======
Standardized Measures of Discounted Future Net Cash Flows Estimated discounted future net cash flows and changes therein were determined in accordance with SFAS No. 69, "Disclosures about Oil and Gas Producing Activities." Certain information concerning the assumptions used in computing the valuation of proved reserves and their inherent limitations are discussed below. The Company believes such information is essential for a proper understanding and assessment of the data presented. Future cash inflows are computed by applying year end prices of oil and gas relating to the Company's proved reserves to the year end quantities of those reserves. Future price changes are considered only to the extent provided by contractual arrangements, including futures contracts, in existence at year end. The assumptions used to compute estimated future net revenues do not necessarily reflect the Company's expectations of actual revenues or costs, nor their present worth. In addition, variations from the expected production rate also could result directly or indirectly from factors outside of the Company's control, such as unintentional delays in development, changes in prices or regulatory controls. The reserve valuation further assumes that all reserves will be disposed of by production. However, if reserves are sold in place, additional economic considerations could also affect the amount of cash eventually realized. Future development and production costs are computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions. 55 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future income tax expenses are computed by applying the appropriate year end statutory tax rates, with consideration of future tax rates already legislated, to the future pre-tax net cash flows relating to the Company's proved oil and gas reserves. Permanent differences in oil and gas-related tax credits and allowances are recognized. An annual discount rate of 10% was used to reflect the timing of the future net cash flows relating to proved oil and gas reserves. Information with respect to the Company's estimated discounted future cash flows from its oil and gas properties for the years ended December 31, 1998, 1997 and 1996 is as follows (000s):
1998 1997 1996 --------- --------- --------- Future cash inflows......................................................... $ 345,217 $ 352,491 $ 305,095 Future production costs..................................................... (108,457) (118,056) (54,306) Future development costs.................................................... (46,066) (28,803) (1,728) Future income tax expense................................................... (33,749) (32,614) (37,870) --------- --------- --------- Future net cash flows....................................................... 156,945 173,018 211,191 10% annual discount for estimated timing of cash flows...................... (59,068) (73,445) (100,474) --------- --------- --------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves............................................... $ 97,877 $ 99,573 $ 110,717 ========= ========= ========= The Company's share of Redman Smackover's standardized measure of discounted future net cash flows relating to proved oil and gas reserves.. $ - $ 6,326 $ 5,684 ========= ========= =========
Principal changes in the Company's estimated discounted future net cash flows for the years ended December 31, 1998, 1997 and 1996 are as follows (000s):
1998 1997 1996 ----------- ----------- --------- January 1....................................... $ 99,573 $ 110,717 $ 81,762 Sales and transfers of oil and gas produced, net of production costs....................... (19,170) (25,157) (29,298) Net changes in prices and production costs related to future production.................. 367 (146,968) 61,888 Development costs incurred during the period... 23,208 13,134 3,893 Changes in estimated future development costs.. (33,723) (26,875) (2,057) Changes in extensions and discoveries.......... 23,336 158,314 - Revisions of previous quantity estimates....... 35,438 (47,859) 2,554 Sales/Purchases of reserves in place, net...... (38,251) 47,867 5,266 Accretion of discount.......................... 9,957 11,072 8,176 Net change in income taxes..................... (1,134) 5,256 (19,484) Other, net..................................... (1,724) 72 (1,983) ---------- --------- -------- December 31..................................... $ 97,877 $ 99,573 $110,717 ========== ========= ========
56 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): - ------------------------------------------------------ The following summarizes certain quarterly results of operations (000s, except per share amounts):
Earnings (Loss) Per Share of Net Earnings (Loss) Common Stock - Operating Gross Income Per Share of Assuming Revenues Profit (a) (Loss) Common Stock Dilution ---------- ---------- -------- -------------- --------------- 1998 quarter ended: March 31....................................... $ 580,455 $ 37,019 $ 13,185 $ .33 $ .33 June 30........................................ 500,771 10,755 (2,645) (.16) (.16) September 30................................... 516,259 8,307 (4,647) (.23) (.23) December 31.................................... 536,081 10,487 (73,098)(c) (2.36) (2.36) ---------- --------- -------- ------ ------- $2,133,566 $ 66,568 $(67,205) $(2.42) $ (2.42) ========== ========= ======== ====== ======= 1997 quarter ended: March 31....................................... $ 635,538 $ 30,847 $ 10,608 $ .25 $ .25 June 30........................................ 463,575 15,508 878 (.05) (.05) September 30................................... 555,888 20,757 4,997 .07 .07 December 31.................................... 730,259 26,643 (14,996)(b) (.55) (.55) ---------- --------- -------- ------ ------- $2,358,260 $ 93,755 $ 1,487 $ (.28) $ (.28) ========== ========= ======== ====== =======
(a) Excludes selling and administrative, interest and income tax expenses and loss on the impairment of property and equipment. (b) Includes a pre-tax, non-cash expense resulting from the evaluation of property and equipment in accordance with SFAS No. 121 of $34.6 million. (c) Includes a pre-tax, non-cash expense resulting from the evaluation of property and equipment in accordance with SFAS No. 121 of $108.5 million. 57 WESTERN GAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12 and 13 are omitted because the Company will file a definitive proxy statement (the "Proxy Statement") pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after the close of the fiscal year. The information required by such Items will be included in the definitive proxy statement to be so filed for the Company's annual meeting of stockholders scheduled for May 21, 1999 and is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements: Reference is made to page 27 for a list of all financial statements filed as a part of this report. (2) Financial Statement Schedules: None required. (3) Exhibits: 3.1 Certificate of Incorporation of Western Gas Resources, Inc. (Filed as exhibit 3.1 to Western Gas Resources, Inc.'s Registration Statement on Form S-1, Registration No. 33-31604 and incorporated herein by reference). 3.2 Certificate of Amendment to the Certificate of Incorporation of Western Gas Resources, Inc. (Filed as exhibit 3.2 to Western Gas Resources, Inc.'s Registration Statement on Form S-1, Registration No. 33-31604 and incorporated herein by reference). 3.3 Certificate of Designation of 7.25% Cumulative Senior Perpetual Convertible Preferred Stock of the Company (Filed as exhibit 3.5 to Western Gas Resources, Inc.'s Registration Statement on Form S-1, Registration No. 33-43077 dated November 14, 1991 and incorporated herein by reference). 3.4 Certificate of Designation of $2.28 Cumulative Preferred Stock of the Company (Filed as exhibit 3.6 to Western Gas Resources, Inc.'s Registration Statement of Form S-1, Registration No. 33-53786 dated November 12, 1992 and incorporated herein by reference). 3.5 Certificate of Designation of the $2.625 Cumulative Convertible Preferred Stock of the Company (Filed under cover of Form 8-K dated February 24, 1994 and incorporated herein by reference). 58 10.1 Restated Profit-Sharing Plan and Trust Agreement of Western Gas Resources, Inc. (Filed as exhibit 10.8 to Western Gas Resources, Inc.'s Registration Statement on Form S-4, Registration No. 33-39588 dated March 27, 1991 and incorporated herein by reference). 10.2 Western Gas Resources, Inc. Key Employees' Incentive Stock Option Plan (Filed as exhibit 10.13 to Western Gas Resources, Inc.'s Registration Statement on Form S-4, Registration No. 33-39588 dated March 27, 1991 and incorporated herein by reference). 10.3 Registration Rights Agreement among Western Gas Resources, Inc., WGP, Inc., Heetco, Inc., NV, Dean Phillips, Inc., Sauvage Gas Company and Sauvage Gas Service, Inc. (Filed as exhibit 10.14 to Western Gas Resources, Inc.'s Registration Statement on Form S-4, Registration No. 33-39588 dated March 27, 1991 and incorporated herein by reference). 10.4 Amendment No. 1 to Registration Rights Agreement as of May 1, 1991 between Western Gas Resources, Inc., Bill Sanderson, WGP, Inc., Dean Phillips, Inc., Heetco, Inc., NV, Sauvage Gas Company and Sauvage Gas Service, Inc. (Filed as exhibit 4.2 to Western Gas Resources, Inc.'s Form 10-Q for the quarter ended June 30, 1991 and incorporated herein by reference). 10.5 Second Amendment and First Restatement of Western Gas Processors, Ltd. Employees' Common Units Option Plan (Filed as exhibit 10.6 to Western Gas Resources, Inc.'s Registration Statement on Form S-1, Registration No. 33-43077 dated November 14, 1991 and incorporated herein by reference). 10.6 Agreement to provide loans to exercise key employees' common stock options (Filed as exhibit 10.26 to Western Gas Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference). 10.7 Agreement to provide loans to exercise employees' common stock options (Filed as exhibit 10.27 to Western Gas Resources, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference). 10.8 Note Purchase Agreement (without exhibits) dated as of April 1, 1993 by and between the Company and the Purchasers for $50,000,000, 7.65% Senior Notes Due April 30, 2003 (Filed as exhibit 10.48 to Western Gas Resources, Inc.'s Form 10-Q for the six months ended June 30, 1993 and incorporated herein by reference). 10.9 General Partnership Agreement (without exhibits), dated August 10, 1993 for Westana Gathering Company by and between Western Gas Resources -Oklahoma, Inc. (a subsidiary of the Company) and Panhandle Gathering Company (Filed as exhibit 10.50 to Western Gas Resources, Inc.'s Form 10-Q for the six months ended June 30, 1993 and incorporated herein by reference). 10.10 Amendment to General Partnership Agreement dated August 10, 1993 by and between Western Gas Resources -Oklahoma, Inc. (a subsidiary of the Company) and Panhandle Gathering Company (Filed as exhibit 10.51 to Western Gas Resources, Inc.'s Form 10-Q for the six months ended June 30, 1993 and incorporated herein by reference). 10.11 Amendment No. 1 to Note Purchase Agreement dated as of August 31, 1993 by and among the Company and the Purchasers (Filed as exhibit 10.61 to Western Gas Resources, Inc.'s Form 10-Q for the nine months ended September 30, 1993 and incorporated herein by reference). 10.12 Amendment No. 2 to Note Purchase Agreement dated as of August 31, 1994 by and among Western Gas Resources, Inc. and the Purchasers (Filed as exhibit 10.68 to Western Gas Resources, Inc.'s Form 10-Q for the nine months ended September 30, 1994 and incorporated herein by reference). 10.13 Amendment No. 3 to Note Purchase Agreement as of March 22, 1995 by and among Western Gas Resources, Inc. and the Purchasers (Filed as exhibit 10.38 to Western Gas Resources, Inc.'s Form 10-Q for the three months ended March 31, 1995 and incorporated herein by reference). 10.14 Form of Employment Agreement by and between Western Gas Resources, Inc. and certain Executive Officers (Filed as exhibit 10.40 to Western Gas Resources, Inc.'s Form 10-Q for the three months ended March 31, 1995 and incorporated herein by reference). 59 10.15 Amendment No. 4 to Note Purchase Agreements as of July 14, 1995 by and among Western Gas Resources, Inc. and the Purchasers (Filed as exhibit 10.43 to Western Gas Resources, Inc.'s Form 10-Q for the six months ended June 30, 1995 and incorporated herein by reference). 10.16 Second Amended and Restated Master Shelf Agreement effective January 31, 1996 by and between Western Gas Resources, Inc. and Prudential Company of America (Filed as exhibit 10.49 to Western Gas Resources, Inc.'s Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.17 Fourth Amendment to First Restated Loan Agreement (Revolver) dated November 29, 1995 by and among Western Gas Resources, Inc. and NationsBank, as agent, and the Lenders (Filed as exhibit 10.51 to Western Gas Resources, Inc.'s Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.18 Senior Note Purchase Agreement dated November 29, 1995 by and among Western Gas Resources, Inc. and the Purchasers identified therein (Filed as exhibit 10.52 to Western Gas Resources, Inc.'s Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.19 Loan Agreement dated May 30, 1997 among Western Gas Resources, Inc. and NationsBank of Texas, N.A. as agent, Bank of America National Trust and Savings Association as Co-agent and Certain Banks as Lenders (Revolver) (Filed as exhibit 10.40 to Western Gas Resources, Inc.'s Form 10-Q for the six months ended June 30, 1996 and incorporated herein by reference). 11.1 Statement regarding computation of per share earnings. 12.1 Amended and Restated Bylaws of Western Gas Resources, Inc. adopted by the Board of Directors on February 12, 1999. 12.2 Second Amendment dated February 17, 1999 to Credit Agreement by and among Western Gas Resources, Inc. and NationsBank N.A., successor to NationsBank of Texas, N.A., by merger, and the Lenders identified in the Original Agreement dated May 30, 1997. 12.3 Offer to Acquire Notes dated February 12, 1999 by and between Western Gas Resources, Inc. and CIGNA Investments, Inc., Royal Maccabees Life Insurance Company, The Canada Life Assurance Company, and Canada Life Insurance Company of America, original Purchasers under the Note Purchase Agreement dated as of April 1, 1993 by and between Company and Purchasers for $50,000,000, 7.65% Senior Notes due April 30, 2003. 12.4 Offer to Acquire Notes dated February 12, 1999 by and between Western Gas Resources, Inc. and MONY Life Insurance Company, one of the original Purchasers under the Note Purchase Agreement dated as of November 29, 1995 by and between Company and Purchasers for $42,000,000, 8.02% Senior Notes due December 1, 2005. 12.5 Loan Agreement dated February 17, 1999 by and among Western Gas Resources, Inc. and NationsBank, N.A., for $37,000,000 Bridge Loan. 21.1 List of Subsidiaries of Western Gas Resources, Inc. 23.1 Consent of PricewaterhouseCoopers LLP (b) Reports on Form 8-K: A report on Form 8-K was filed on December 11, 1998 to announce that all extensions of time for RIS Resources (USA) Inc.,a U.S. subsidiary of R.I.S. Resource International Corp., have expired and that the companies are no longer negotiating the sale of an interest in the Granger and Lincoln Road Complex. (c) Exhibits required by Item 601 of Regulation S-K. See (a) (3) above. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Denver, State of Colorado on March 26, 1998. WESTERN GAS RESOURCES, INC. --------------------------- (Registrant) By: /s/ BRION G. WISE _________________________ Brion G. Wise Chairman of the Board and Chief Executive Officer 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 Registrant and in the capacities and on the dates indicated. /s/ BRION G. WISE Chairman of the Board, Chief Executive Officer March 26, 1999 _____________________________ Brion G. Wise and Director /s/ WALTER L. STONEHOCKER Vice Chairman of the Board and Director March 26, 1999 _____________________________ Walter L. Stonehocker /s/ BILL M. SANDERSON Director March 26, 1999 _____________________________ Bill M. Sanderson Director March 26, 1999 _____________________________ Richard B. Robinson /s/ DEAN PHILLIPS Director March 26, 1999 _____________________________ Dean Phillips /s/ WARD SAUVAGE Director March 26, 1999 _____________________________ Ward Sauvage /s/ JAMES A. SENTY Director March 26, 1999 _____________________________ James A. Senty /s/ JOSEPH E. REID Director March 26, 1999 _____________________________ Joseph E. Reid /s/ WILLIAM J. KRYSIAK Vice President - Finance (Principal Financial and March 26, 1999 _____________________________ William J. Krysiak Accounting Officer)
61 EX-11.1 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 WESTERN GAS RESOURCES, INC. COMPUTATION OF PER SHARE EARNINGS DECEMBER 31, 1998
Weighted Average Shares Of Earnings Common Per Share Stock Net Of Common Outstanding Income Stock ------------ ------------ --------- Net income........................................................ $(67,205,000) Weighted average shares of common stock outstanding............... 32,147,354 Less preferred stock dividends: $2.28 cumulative preferred stock................................. (3,194,000) $2.625 cumulative convertible preferred stock.................... (7,245,000) ----------- ------------ Income attributable to common shareholders........................ 32,147,354 $(77,644,000) =========== ============ Basic earnings per share of common stock.......................... $ (2.42) ========= (Assume no conversion of anti-dilutive convertible preferred stock) Assume exercise of common stock equivalents: Weighted average shares of common stock outstanding.............. (Anti-dilutive common stock equivalents are not used in this calculation) $5.40 employee stock options...................................... ---------- ------------ 32,147,354 $(77,644,000) ========== ============ Earnings per share of common stock - assuming dilution............ $ (2.42) =========
EX-12.1 3 AMENDED & RESTATED BYLAWS OF WESTERN GAS RES. EXHIBIT 12.1 AMENDED AND RESTATED BYLAWS OF WESTERN GAS RESOURCES, INC. ----------------------- ARTICLE I. OFFICES ------- Section 1. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II. MEETINGS OF STOCKHOLDERS ------------------------ Section 1. All meetings of the stockholders for the election of directors shall be held at such place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. (a) Annual meetings of stockholders, commencing with the year 1990, shall be held on the second Wednesday in May, if not a legal holiday, and if a legal holiday, then on the next secular day following, at ten o'clock a.m., or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect a class of Directors and transact such other business as may properly be brought before the meeting. (b) At each meeting of stockholders, the Chairman of the Board, or, in the absence of the Chairman of the Board, the President, shall act as chairman. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. The chairman of the meeting shall announce at each such meeting the date and time of the opening and closing of the voting polls for each matter upon which the stockholders will vote at such meeting. 1 (c) In order for business to be properly brought before the meeting by a stockholder, the business must be legally proper and written notice thereof must have been filed with the Secretary of the corporation not less than 60 nor more than 120 days prior to the meeting. Each such notice shall set forth: (i) the name and address of the stockholder who intends to make the proposal as the same appear in the corporation's records; (ii) the class and number of shares of stock of the corporation that are beneficially owned, directly or indirectly, by such stockholder, and if such stockholder is not the record holder of such shares, the name, based upon the best knowledge of such stockholder, of the record holder thereof, and (iii) a clear and concise statement of the proposal and the stockholder's reasons for supporting it. The filing of a stockholder notice as required above shall not, in and of itself, constitute the making of the proposal described therein. If the chairman of the meeting determines that any proposed business has not been properly brought before the meeting, he shall declare such business out of order; and such business shall not be conducted at the meeting. (d) Either the Board of Directors or, in the absence of an appointment of inspectors by the Board, the Chairman of the Board or the President shall, in advance of each meeting of the stockholders, appoint one or more inspectors to act at such meeting and make a written report thereof. In connection with any such appointment, one or more persons may, in the discretion of the body or person making such appointment, be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at any meeting of stockholders, the chairman of such meeting shall appoint one or more inspectors to act at such meeting. Each such inspector shall perform such duties as are required by law and as shall be specified by the Board, the chairman of the board, the president or the chairman of the meeting. Each such inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Inspectors need not be stockholders. No director or nominee for the office or director shall be appointed such an inspector. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before each annual meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board or by the President of the corporation or by the Board of Directors or by written order of a majority of the directors and shall be called by the President or the Secretary at the request in writing of stockholders owning twenty-five percent in amount of the entire capital 2 stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purposes of the proposed meeting. The Chairman of the Board or the President of the corporation or directors so calling, or the stockholders so requesting, any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question (other than the election of directors) brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. Directors shall be elected by plurality vote. Section 10. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. ARTICLE III. DIRECTORS --------- Section 1. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by law or by the certificate of incorporation or these bylaws directed or required to be exercised or done by the stockholders. Section 2. Except as otherwise provided in any resolution or resolutions adopted by the 3 Board of Directors pursuant to the provisions of Article IV of the certificate of incorporation relating to the rights of holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, the number of directors of the corporation shall be eight (8); that the additional member of the Board of Directors resulting from such amendment shall be a Class Two director; and that the vacancy thus created shall be filled by vote of the stockholders at the annual meeting of stockholders to be held on May 1, 1991, but the number thereof may be increased without limit or decreased to not less than three (two of whom shall not be officers or employees of the corporation) by amendment to this Section 2. Section 3. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by the directors then in office, or by a sole remaining director, and the directors so chosen shall hold office until the expiration of the terms of the directorships whose vacancy is being filled and until their successors are duly elected and qualified, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. Section 4. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Any stockholder entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if written notice of such stockholder's intent to make such nomination is given, either by personal delivery or by postage prepaid, certified United States mail, return receipt requested, to the secretary of the corporation not later than (i) with respect to an election to be held at an annual meeting of stockholders, ninety days in advance of such meeting and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or entity (naming such person or entity) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Securities and Exchange commission thereunder, had each nominee been nominated, or intended to be nominated, for election as a director by the Board of Directors; and (e) the consent of each nominee to serve as a director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge and place upon the ballot the nomination of any person not made in strict compliance with the foregoing procedure. Section 5. The Board of Directors may adopt and from time to time amend and repeal such rules and regulations not inconsistent with the applicable provisions of law, the certificate of incorporation or these bylaws for the conduct of its meetings and the management of the affairs of the corporation as the Board may deem proper. 4 MEETINGS OF THE BOARD OF DIRECTORS ---------------------------------- Section 6. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 7. An annual meeting of the Board of Directors shall be held immediately following and at the same place as the annual meeting of stockholders and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at such time and place, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 8. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 9. A special meeting of the Board of Directors may be called by the Chairman of the Board of Directors or by the President of the corporation and shall be called by the Secretary on the written request of any two directors. The Chairman or President so calling, or the directors so requesting, any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting. In the event that the Board of Directors elects a Chief Operating Officer different from the President in accordance with these Bylaws, the Chief Operating Officer shall have the same powers, as aforesaid, to call a meeting as the President of the corporation. Section 10. A majority of the Board of Directors shall constitute a quorum for the transaction of business of any meeting of the Board of Directors, and the act of a majority of the full sitting Board of Directors shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these bylaws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 11. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if one hundred percent of the members of the Board or one hundred percent of the members of the committee, as the case may be, consent thereto in writing and such writing is filed with the minutes of the proceedings of the Board or committee, as the case may be. Section 12. The members of the Board of Directors or any committee thereof may participate in a meeting of the Board or committee utilizing conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. COMMITTEES OF DIRECTORS ----------------------- Section 13. There shall be an Executive Committee of the Board of Directors of the Corporation consisting of at least two (2) but not more than three (3) members of the Board of 5 Directors, elected to such committee by the Board on an annual basis. The Executive Committee shall have and may exercise, between meetings of the Board of Directors, all the power and authority of the board in the management of the business affairs of the corporation; provided, however, that the Executive Committee shall not have the power or authority to do any of the following: (a) amend the certificate of incorporation of the corporation; (b) adopt an agreement of merger or consolidation involving the corporation; (C) recommend to the stockholders the sale, lease or exchange of all or substantially all of the property and assets of the corporation; (d) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution; (e) adopt, amend or repeal any bylaw; (f) fill vacancies on the Board of Directors or on any committee of the Board, including the Executive Committee; (g) amend or repeal any resolution of the Board of Directors; (h) declare a dividend; or (i) authorize the issuance of stock of the corporation. Section 14. The Executive Committee shall, subject to the provisions of law and any other provision of these bylaws, have the authority and power to cause the corporation to do the following: (a) To deal in real and personal property of the corporation; to create and/or contribute property of the corporation to any entity or business organization formed by the corporation, either alone or with third parties; to pay rom the corporation's funds any and all expenses and fees; to obtain and maintain insurance coverage concerning the property of the corporation. (b) To execute and deliver on behalf of the corporation all leases, bills of sales, assignments, deeds, unitization agreements, contracts, farm-outs and other instruments of transfer; all checks, drafts and other orders for the payment of corporation funds; all contracts or instruments concerning the acquisition, construction, management, operation or disposition of corporate assets; all bonds, promissory notes, mortgages, deeds of trust, security agreements and other similar documents; and all other instruments, documents, contracts or agreements of any kind or character relating to the affairs of the corporation; and to delegate in writing to the officers of the corporation the authority to sign such instruments, notes, deeds, contracts, agreements and documents. 6 (c) To exercise all rights, powers and authority as is necessary or prudent in the operation and maintenance of the business of the corporation. (d) To directly, or by delegation of authority to the officers of the corporation, appoint, employ, remove, suspend and discharge any of the following: (1) Managers, assistants, independent contractors, geologists, geophysicists, land men, employees and agents as from time to time may be deemed advisable and to determine the duties and fix and change the salaries and other terms of employment of such persons. (2) Qualified technical personnel temporarily employed or to be employed on specific problems incident to the operation of the corporation and its businesses. (3) Attorneys, architects, engineers, accountants, contractors, consultants, advertising agencies, sales representatives and all such other agents or independent contractors as such officers shall deem necessary or advisable for the furtherance of the corporation's purposes and operations. Notwithstanding the above, in no event shall the Executive Committee have the authority to approve: (i) with respect to gas purchase and sale agreements, any agreement that provides for the sale or purchase in any single year of gas in excess of Thirty-Five Million Dollars ($35,000,000); (ii) with respect to the purchase of operating supplies, capital expenditures or general and administrative expenditures, any single expenditure or group of related expenditures in excess of Ten Million Dollars ($10,000,000); or (iii) any business transaction with an affiliate of the corporation, without the approval of the Board of Directors. The term "affiliate" as used herein shall mean a person or entity, of any kind or nature, controlling, controlled by or under common control with the corporation and shall include, without limitation, any subsidiaries of the corporation and any person or entity owning, directly or indirectly, five percent or more of the capital stock of the corporation. Section 15. There shall be an Audit Committee of the Board of Directors of the corporation consisting of at least two members of the Board of Directors elected to such committee by the board on an annual basis. The initial members of the Audit Committee shall be the two directors named in the certificate of incorporation who are not officers or employees of the corporation or of any party to a subscription agreement with the corporation. The members of the audit committee elected hereafter shall be eligible to serve thereon under the rules of the New York Stock Exchange as in effect from time to time. Section 16. The Board of Directors may designate one or more additional committees, each committee to consist of two or more directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall 7 have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 17. Regular meetings of the Executive Committee or any other committee of the Board of Directors, of which no notice shall be necessary, may be held at such times and places as shall be fixed by resolution adopted by a majority of the members thereof. Special meetings of the Executive Committee or any other committee of the Board shall be called at the request of any member thereof. Any special meeting of the Executive Committee or any other committee of the Board shall be a legal meeting, without any notice thereof having been given, if all of the members thereof shall be present or if notice thereof shall have been given to each member on the day prior to the day on which the meeting is to be held. The Executive Committee or any other committee may adopt such rules and regulations not inconsistent with the provisions of law, the certificate of incorporation or these bylaws for the conduct of its meetings as such committee may deem proper. The majority of the Executive Committee or any other committee of the Board shall constitute a quorum for the transaction of business at any meeting, and the vote of the majority of the members thereof present at any meeting at which a quorum is present shall be the act of such committee. The Executive Committee or any other committee of the Board of Directors shall keep written minutes of its proceedings and shall report on such proceedings to the Board. COMPENSATION OF DIRECTORS ------------------------- Section 18. The Board of Directors shall have the authority to adopt resolutions fixing the compensation to be paid to directors for service as a director of the corporation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as a director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV. NOTICES ------- Section 1. Whenever, under statutory provisions or pursuant to the certificate of incorporation or these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to require personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by prepaid telegram. Section 2. Whenever any notice is required to be given under statutory provisions or pursuant to the certificate of incorporation or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 8 ARTICLE V. OFFICERS -------- Section 1. The officers of the corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, any one or more of which may be designated Executive Vice President or Senior Vice President, a Secretary and a Treasurer. The Board of Directors may appoint such other officers and agents, including a Vice Chairman of the Board of Directors, a Chief Operating Officer, a Chief Executive Officer different from the President, Assistant Vice Presidents, Assistant Secretaries, and Assistant Treasurers, in each case as the Board of Directors shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined by the Board. The Chairman of the Board and the Vice Chairman of the Board (if provision is made therefor by the Board of Directors) shall be elected from among the directors. With the foregoing exceptions, none of the other officers need to be a director, and none of the officers need be a stockholder of the corporation. Section 2. The officers of the corporation shall be elected annually by the Board of Directors at its first regular meeting held after the annual meeting of stockholders or as soon thereafter as conveniently possible. Each officer shall hold office until his successor shall have been chosen and shall have qualified or until his death or the effective date of his resignation or removal, or until he shall cease to be a director in the case of the Chairman or the Vice Chairman. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors or pursuant to its direction; and no officer shall be prevented from receiving such salary by reason of his also being a director. Section 5. Except as may be otherwise provided by the Board of Directors or in these bylaws, each officer of the corporation shall hold office until the first meeting of directors after the next annual meeting of stockholders following his election or appointment and until his successor is chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. THE CHAIRMAN OF THE BOARD ------------------------- Section 6. (a) The Chairman of the Board shall preside at all meetings of the Board of Directors or of the stockholders of the corporation. The Chairman shall formulate and submit to the Board of Directors or the Executive Committee matters of general policy for the corporation and shall perform such other duties and powers as usually appertain to the office or as may be prescribed by the Board of Directors or the Executive Committee. The Chairman of the Board shall report as to the operations of the corporation to the Board of Directors and, with the chief executive officer of the corporation designated as such by the Board of Directors, to the stockholders at or prior to each annual meeting of the stockholders, and he shall from time to time report to the Board of Directors matters within his knowledge which the interest of the corporation may require to be so reported. 9 (b) The Board of Directors may, in its discretion, elect a Vice Chairman of the Board of Directors of the corporation, and the Vice Chairman shall perform such other duties and have such other powers as may be prescribed herein or by the Board of Directors. In the absence of the Chairman of the Board of Directors or in the event of his inability or refusal to act, the Vice Chairman shall perform the duties of the Chairman, and when so acting, the Vice Chairman of the Board of Directors shall have all the powers of and be subject to all of the restrictions upon the Chairman of the Board of Directors. THE PRESIDENT ------------- Section 7. (a) The President shall, in the absence of the election by the Board of Directors of a Chief Executive Officer, be the chief executive officer of the corporation and, subject to the control of the Board of Directors, shall in general supervise and control the business and affairs of the corporation. In the absence of the Chairman of the Board, the Vice Chairman of the Board (if one is elected by the Board of Directors) or the Chief Executive Officer (if one is so elected), the President shall preside at all meetings of the Board of Directors of the stockholders. He may also preside at any such meeting attended by the Chairman if he is so designated by the Chairman. He shall have the power to appoint and remove subordinate officers, agents and employees, except those elected or appointed by the Board of Directors. The President shall keep the Board of Directors and the Executive Committee fully informed and shall consult them concerning the business of the corporation. He may sign with the Secretary or any other officer of the corporation thereunto authorized by the Board of Directors, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts, or other instruments that the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. He shall vote, or give a proxy to any other officer of the corporation to vote, all shares of stock of any other corporation standing in the name of the corporation and in general he shall perform all other duties normally incident to the office of President and such other duties as may be prescribed by the Board of Directors or the Executive Committee from time to time. (b) The Board of Directors may, in its discretion, elect a Chief Executive Officer of the corporation, and the Chief Executive Officer, rather than the President, shall be the chief executive officer of the corporation and, subject to the control of the Board of Directors, shall in general perform such other duties and have such other powers as may be prescribed herein or by the Board of Directors. The Board of Directors, in connection with the election of a Chief Executive Officer, may assign none, some or all of the President's duties to the Chief Executive Officer, all of the foregoing as the Board of Directors may prescribe from time to time. (c) The Board of Directors may, in its discretion, elect a Chief Operating Officer of the corporation, and the Chief Operating Officer, subject to the control of the Board of Directors, shall in general perform such duties and have such other powers as may be prescribed herein or by the Board of Directors. (d) The Board of Directors may, in its discretion, provide for the relative authority of each of the Chairman of the Board of Directors, the Chief Executive Officer, the 10 President and the Chief Operating Officer, all as the Board of Directors may prescribe from time to time. THE SENIOR VICE PRESIDENT. -------------------------- VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS --------------------------------------------- Section 8. In the absence of the president or in the event of his inability or refusal to act, the senior vice president (or in the event there be more than one senior vice president, the senior vice presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The senior vice presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 9. The vice president or any assistant vice president, or if there be more than one, the vice presidents and assistant vice presidents in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall in the absence of any senior vice president or in the event of the inability or refusal to act of any senior vice president, perform the duties and exercise the powers of such senior vice president and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARIES --------------------------------------- Section 10. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the stockholders and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the president or the chairman of the board, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 11. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS -------------------------------------- Section 12. The treasurer shall have custody of the corporate funds and securities of the corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. 11 Section 13. The treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 14. If required by the Board of Directors, the treasurer shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 15. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI. CERTIFICATES OF STOCK --------------------- Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed in the name of the corporation, by the chairman of the board, the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary, certifying the number of shares owned by him in the corporation. Section 2. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, any signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES ----------------- Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, 12 stolen or destroyed. TRANSFERS OF STOCK ------------------ Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE ------------------ Section 5. In order that the corporation may determine the stockholders entitled to notice of and to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of and to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDER ---------------------- Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII. GENERAL PROVISIONS ------------------ INDEMNIFICATION OF OFFICERS AND DIRECTORS ----------------------------------------- Section 1. (a) The corporation shall indemnify any officer or director who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of 13 any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contenders or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The corporation shall indemnify any officer or director who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsection (a) or (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys, fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsection (a) or (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees incurred in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section. (f) The indemnification and advancement of expenses provided by or granted pursuant to this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the certificate of incorporation or any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, 14 and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The corporation shall have power to purchase and maintain insurance on behalf of any officer or director who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions or this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any officer or director who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. INTERESTED DIRECTORS AND OFFICERS; QUORUM ----------------------------------------- Section 2. No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if (i) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the Board, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. DIVIDEND -------- Section 3. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 4. Before payment of any dividend, there may be set aside out of any funds of 15 the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS ------ Section 5. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as authorized by these bylaws or the Board of Directors may from time to time designate. FISCAL YEAR ----------- Section 6. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL ---- Section 7. The corporate seal shall have inscribed thereon the name of the corporation and shall be in such form as may be approved from time to time by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed, imprinted or in any manner reproduced. ARTICLE VIII. AMENDMENTS ---------- These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. 16 EX-12.2 4 SECOND AMENDMENT TO CREDIT AGREEMENT EXHIBIT 12.2 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (herein called this "Amendment") is made as of the l7th day of February, 1999 by and among Western Gas Resources, Inc. ("Borrower") and NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as Agent ("Agent"), and the Lenders referred to in the Original Agreement (as defined below). WITNESSETH: WHEREAS, Borrower, Agent and Lenders have entered into that certain Credit Agreement dated as of May 30, 1997 (as amended, restated, or supplemented to the date hereof, the "Original Agreement"), for the purposes and consideration therein expressed, pursuant to which Lenders made and became obligated to make loans to Borrower as therein provided; and WHEREAS, Borrower, Agent and Lenders desire to amend the Original Agreement to for the purposes set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, in consideration of the loans which may hereafter be made by Lenders to Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. Definitions and References -------------------------- Section 1.1 Terms Defined in the Original Agreement. Unless the context --------------------------------------- otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. The following term shall have the following meaning when used herein: "Credit Agreement" means the Original Agreement as amended hereby. ---------------- ARTICLE II. Amendments, Consent, and Waiver ------------------------------- Section 2.1 Defined Terms. ------------- (a) The following defined terms in Section 1.1 of the Original Agreement are hereby amended in their entirety to read as follows: "Base Rate" means the per annum rate of interest equal to the sum of --------- (i) the greater of (A) the Prime Rate from time to time in effect or (B) the Federal Funds Rate from time to time in effect plus one-half of one percent (.50%), and (ii) the Base Rate Spread. If the Prime Rate or the Federal Funds Rate, as the case may be, changes after the date hereof the Base Rate shall be automatically increased or decreased, as the case may be, without notice to Borrower from time to time as of the effective time of each such change. The Base Rate shall in no event, however, exceed the Highest Lawful Rate." "Eurodollar Spread" means, with respect to each Committed Eurodollar ----------------- Loan: (a) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is less than or equal to .35 to 1.0, .60%; (b) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .3 5 to 1.0 but less than or equal to .45 to 1.0, .80%; (c) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .45 to 1.0 but less than or equal to .50 to 1.0, 1.00%; (d) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .50 to 1.0 but less than or equal to .55 to 1.0, 1.20%; and (e) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .55 to 1.0, 1.25%." (b) The following terms are hereby added to Section 1. 1 of the Original Agreement: "Base Rate Spread" means: ---------------- (a) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is less than or equal to .50 to 1.0, 0.00%; (b) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .50 to 1.0 but less than or equal to .55 to 1.0, .25%; and -2- (c) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .55 to 1.0, .50%." "Bridge Facility" means that certain Loan Agreement among Borrower, as --------------- borrower, and NationsBank, N.A., as lender, dated as of February 17th, 1999." Section 2.2. Facility Fees. Section 2.9 of the Original Agreement is ------------- hereby amended in its entirety to read as follows: "Facility Fees. In consideration of Lenders' commitment to enter into ------------- this Agreement and to advance funds to Borrower hereunder, Borrower will pay to Agent, for pro rata distribution to each Lender in accordance with its Percentage Share, a facility fee determined on a daily basis by multiplying the amount of $300,000,000 by a rate of (a) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is less than or equal to .35 to 1.0, .15% per annum; (b) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .35 to 1.0 but less than or equal to .45 to 1.0, .20% per annum; (c) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .45 to 1.0 but less than or equal to .50 to 1.0, .25% per annum; (d) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than.50 to 1.0 but less than or equal to .55 to 1.0, .30% per annum; and (e) for each period in which the Debt to Capitalization Ratio in effect pursuant to Section 2.17 is greater than .55 to 1.0, .50% per annum. Promptly at the end of each Fiscal Quarter Agent shall calculate the facility fee then due and shall notify Borrower thereof. Borrower shall pay such facility fee to Agent within five Business Days after receiving such notice." Section 2.3. Debt. Section 6.2(a) of the Original Agreement is hereby ---- amended by adding the following subsection as a new subsection (ix) and renumbering subsection (ix) in the Original Agreement as subsection (x) to read as follows: "(ix) Debt under the Bridge Facility the principal amount of which shall not exceed $37,000,000 at any one time outstanding. -3- (x) miscellaneous items of Debt not described in subsections (i) through (ix) of this subsection (a) which do not in the aggregate (taking into account all Debt of all Related Persons) exceed $5,000,000 at any one time outstanding." Section 2.4. Waiver and Consent. Subject to the terms and conditions ------------------ contained herein, each Lender hereby (i) waives any Event of Default arising solely as a result of the violation by Borrower of Section 6.2(m) of the Original Agreement for the Fiscal Quarter ending December 31, 1998 and (ii) consents to one or more prepayments by Borrower of the outstanding principal balance of the indebtedness owing under the Debt Securities not to exceed the aggregate amount of $50,000,000. ARTICLE III. Conditions of Effectiveness --------------------------- Section 3.1. Effective Date. This Amendment shall become effective as -------------- of the date first above written when, and only when, Agent shall have received: (a) all of the following documents, duly authorized, executed and delivered by Borrower and Majority Lenders, and in form and substance satisfactory to Agent: (i) This Amendment. (ii) A certificate of a duly authorized officer of Borrower dated the date of this Amendment (A) to the effect that all of the representations and warranties set forth in Article IV hereof are true and correct at and as of the time of such effectiveness and (B) certifying that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of Borrower authorizing the execution, delivery and performance of this Amendment and certifying the names and true signatures of the officers of Borrower authorized to sign this Amendment. (iii) Such supporting documents as Agent may reasonably request. (b) A waiver and amendment fee in the amount of $280,000 in immediately available funds for pro rata distribution to each Lender (other than Bank of Montreal) in accordance with such Lenders' Percentage Share. -4- ARTICLE IV. Representations and Warranties ------------------------------ Section 4.1. Representations and Warranties of Borrower. In order to ------------------------------------------ induce each Lender to enter into this Amendment, Borrower represents and warrants to each Lender that: (a) The representations and warranties contained in Section 5.1 of the Original Agreement are true and correct at and as of the time of the effectiveness hereof (except as such representations and warranties have been modified by the transactions contemplated herein). (b) Borrower is duly authorized to execute and deliver this Amendment and Borrower is and will continue to be duly authorized to borrow monies and to perform its obligations under the Credit Agreement. Borrower has duly taken all corporate and action necessary to authorize the execution and delivery of this Amendment. (c) The execution and delivery by Borrower of this Amendment, the performance of its obligations thereunder and the consummation of the transactions contemplated hereby do not and will not conflict with any provision of law, statute, rule or regulation or of the certificate of incorporation and bylaws of Borrower or of any material agreement, judgment, license, order or permit applicable to or binding upon Borrower or result in the creation of any lien, charge or encumbrance upon any assets or properties of Borrower. Except for those which have been obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by Borrower and of this Amendment. (d) When duly executed and delivered, this Amendment and the Credit Agreement will each be a legal and binding obligation of Borrower enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and by equitable principles of general application. (e) The Consolidated financial statements of Borrower dated as of September 30, 1998 fairly present the Consolidated financial position at such date and the Consolidated statement of operations and the changes in Consolidated financial position for the periods ending on such date for Borrower. Copies of such financial statements have heretofore been delivered to Agent. Since September 30, 1998, no material adverse change has occurred in the financial condition or business or in the Consolidated financial condition or business of Borrower. -5- ARTICLE V. Miscellaneous ------------- Section 5.1. Ratification of Agreements. The Original Agreement as -------------------------- hereby amended is hereby ratified and confirmed in all respects. Any reference to the Credit Agreement in any Loan Document shall be deemed to be a reference to the Original Agreement as hereby amended. The Loan Documents, as they may be amended or affected hereby, are hereby ratified and confirmed in all respects. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein or therein, operate as a waiver of any right, power or remedy of Lenders under the Credit Agreement, the Notes, or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement, the Notes or any other Loan Document. Section 5.2. Survival of Agreements. All representations, warranties, ---------------------- covenants and agreements of Borrower herein shall survive the execution and delivery of this Amendment and the performance hereof, including without limitation the making or granting of the Loans, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by Borrower hereunder or under the Credit Agreement to any Lender shall be deemed to constitute representations and warranties by, and/or agreements and covenants of, Borrower under this Amendment and under the Credit Agreement. Section 5.3. Loan Documents. This Amendment is a Loan Document, and all -------------- provisions in the Credit Agreement pertaining to Loan Documents apply hereto. Section 5.4. Governing Law. This Amendment shall be governed by and ------------- construed in accordance the laws of the State of Texas and any applicable laws of the United States of America in all respects, including construction, validity and performance. Section 5.5. Counterparts. This Amendment may be separately executed in ------------ counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. -6- IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. WESTERN GAS RESOURCES, INC. By: /s/ John C. Walter ----------------------------------- Name: John C. Walter Title: Executive Vice President -7- NATIONSBANK, N.A., as Agent and a Lender By: /s/ David C. Rubenking -------------------------------------- Name: David C. Rubenking Title: Senior Vice President -8- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ David C. Rubenking ---------------------------------- Name: David C. Rubenking Title: Senior Vice President -9- BANK OF MONTREAL By:_______________________________ Name: Title: -10- BANKBOSTON, N.A. By: /s/ Terrence Ronan ----------------------------------- Name: Terrence Ronan Title: Director -11- CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Xavier Ratouis ---------------------------------- Name: Xavier Ratouis Title: Senior Credit Officer -12- CIBC INC. By: /s/ Roger Colden -------------------------------- Name: Roger Colden Title: EXECUTIVE DIRECTOR, CIBC OPPENHEIMER CORP. AS AGENT -13- U.S. BANK NATIONAL ASSOCIATION By: /s/ Monte E. Deckerd ---------------------------------- Name: Monte E. Deckerd Title: Vice President -14- SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Ronald A. Erbert -------------------------------- Name: RONALD A. ERBERT Title: VICE PRESIDENT -15- ABN AMRO BANK N.V. By: /s/ Robert J. Cunningham ---------------------------------- Name: Robert J. Cunningham Title: Group Vice President By: /s/ Jamie A. Conn ---------------------------------- Name: Jamie A. Conn Title: Vice President -16- CONSENT AND AGREEMENT --------------------- Each of the undersigned hereby (i) consents to the provisions of the Original Agreement as amended by this Amendment and the transactions contemplated herein, and (ii) ratifies and confirms its respective Guaranty dated as of May 30, 1997 made by it favor of Agent for the benefit of each Lender, and agrees that its obligations and covenants thereunder are unimpaired hereby and thereby and shall remain in full force and effect. MIGC, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President MGTC, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President WESTERN GAS RESOURCES TEXAS, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President WESTERN GAS RESOURCE STORAGE, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President MOUNTAIN GAS RESOURCES, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President -17- WESTERN GAS RESOURCES - OKLAHOMA, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President WESTERN POWER SERVICES, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President PINNACLE GAS TREATING, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President WGR CANADA, INC. By: /s/ John C. Walter -------------------------------------- Name: John C. Walter Title: Executive Vice President -18- EX-12.3 5 OFFER TO ACQUIRE NOTES W/ CIGNA, ET AL. EXHIBIT 12.3 Offer to Acquire Notes ---------------------- February 12,1999 Western Gas Resources, Inc., and Guarantors (collectively "Company") pursuant to that certain Note Purchase Agreement dated as of April 1, 1993, as amended to date, by and among the Company and the Purchasers named therein relating to the purchase and sale of the Company's 7.65% Senior Notes due April 30, 2003 (the "Agreement") hereby offers to acquire Notes as described in and pursuant to the terms of Paragraph 7.16 of the Agreement under the following terms and conditions. Unless otherwise defined herein, the terms defined in the Agreement shall be used herein as therein defined. This offer is being made to Purchasers for payment of the Notes in full at par value of the principal amount with interest on such amount being paid as accrued to the "Payment Date" as defined below. The principal amount due to each Purchaser under this Offer to Acquire Notes is as per Schedule I attached hereto. This Offer to Acquire Notes is subject to the approval of the majority lenders of the Company's Loan Agreement with NationsBank of Texas, N.A. as agent, and will expire at 8:00 am MST on Tuesday, February 16, 1999 ("the Expiration"). The "Payment Date" hereunder shall be a date not later than March 5, 1999. In the event that the undersigned Purchaser has accepted this Offer to Acquire Notes, and such Purchaser does not receive payment in full of all its Notes in accordance with the terms hereof on or before March 5, 1999, such Purchaser's acceptance of the terms of this Offer to Acquire Notes shall be null and void and of no force and effect. Upon timely receipt of full payment of its Notes in accordance with the foregoing terms of this Offer to Acquire Notes by each Purchaser which has accepted this offer, such Purchaser's Notes shall be surrendered to the Company for cancellation and shall not be reissued, and no Notes will be issued in substitution thereof. From the date of acceptance of this Offer to Acquire Notes until the timely receipt of full payment of said Notes in accordance with the foregoing terms of this offer, but no later than the Payment Date, each Purchaser accepting this offer agrees to waive compliance with Section 7.11 of the Agreement for the fiscal quarter ended December 31, 1998; provided however, that for the period of four consecutive fiscal quarters ended on December 31, 1998, Income Available for Fixed Charges shall be at least two hundred forty percent (240%), of Fixed Charges. Based upon the foregoing terms and conditions contained in this offer to acquire Notes, please indicate below your acceptance or nonacceptance of the terms hereof and return by facsimile transmission to Company. Your failure to respond prior to the Expiration shall be deemed to constitute your decision to decline this Offer to Acquire Notes. Offer to Acquire Notes February 12, 1999 Page 2 X The undersigned Purchaser ACCEPTS the offer to acquire Notes ----- under the terms and conditions of this offer by Company; The undersigned Purchaser DECLINES the offer to acquire Notes ----- under the terms and conditions of this offer by Company; Dated this day of 11th day of February, 1999 ---- -------- Western, Gas Resources, Inc. /s/ Vance S. Blalock - --------------------------- By: Name: VANCE S. BLALOCK Title: TREASURER Fax: (303) 254-9794 Offer to Acquire Notes February 12, 1999 Page 3 ACKNOWLEDGED AND ACCEPTED: Connecticut General Life Insurance Company* Connecticut General Life Insurance Company, on behalf of one or more separate accounts Life Insurance Company of North America* Insurance Company of North America* BY: CIGNA Investments, Inc., By: /s/ [ILLEGIBLE] -------------------------------- * This entity is either the registered owner of one or more of the securities pertaining hereto or is a beneficial owner of one or more of such securities owned by and registered in the name of a nominee for that entity. BY: THE CANADA LIFE ASSURANCE COMPANY By: /s/ [ILLEGIBLE] -------------------------------- CUMMINGS & CO. PARTNER BY: CANADA LIFE INSURANCE COMPANY OF AMERICA By: /s/ [ILLEGIBLE] -------------------------------- CUMMINGS & CO. PARTNER BY: CANADA LIFE INSURANCE COMPANY OF NEW YORK By: -------------------------------- BY: THE FRANKLIN LIFE INSURANCE COMPANY By: -------------------------------- BY: ROYAL MACCABEES LIFE INSURANCE COMPANY By: /s/ Leonard D. [ILLEGIBLE] -------------------------------- VICE PRESIDENT Offer to Acquire Notes February 12, 1999 Page 4 SCHEDULE I $27,857,142.86 Connecticut General Life Insurance Company* Connecticut General Life Insurance Company, on behalf of one or more separate accounts Life Insurance Company of North America* Insurance Company of North America *This entity is either the registered owner of one or more of the securities pertaining hereto or is a beneficial owner of one or more of such securities owned by and registered in the name of a nominee for that entity. $ 3,571,428.58 The Canada Life Assurance Company Canada Life Insurance Company of America Canada Life Insurance Company of New York $ 2,142,857.16 The Franklin Life Insurance Company $ 2,142,857.16 Royal Maccabees Life Insurance Company EX-12.4 6 OFFER TO ACQUIRE NOTES W/ MONY EXHIBIT 12.4 Offer to Acquire Notes ---------------------- February 12, 1999 Western Gas Resources, Inc., and Guarantors (collectively "Company") pursuant to that certain Note Purchase Agreement dated as of November 29, 1995, (the "Agreement") as amended to date, by and among the Company and the Purchasers named therein relating to the purchase and sale of the Company's 8.02% Senior Notes due December 1, 2005 (the "Notes") hereby offers (the "Offer") to acquire the Notes pursuant to Paragraph 4D., of the Agreement under the following terms and conditions. Unless otherwise defined herein, the terms defined in the Agreement shall be used herein as therein defined. This Offer is being made to Purchasers for payment of the Notes in full at par value of the principal amount with accrued interest on such amount being paid on the "Payment Date" as defined below. The principal amount and accrued interest due to each Purchaser under this Offer is as per Schedule I attached hereto. This Offer will expire at 8:00 am MST on Tuesday, February 16, 1999 ("the Expiration"). The "Payment Date" hereunder is March 1, 1999. Upon receipt of full payment in accordance with the foregoing terms, each accepting Purchaser shall surrender its Notes to the Company. From the date of this Offer until the timely receipt of full payment by accepting Purchasers in accordance with the foregoing terms of this Offer, each Purchaser by accepting this Offer agrees to waive the Company's compliance with (i) Section 6A(l) of the Agreement for the fiscal quarter ended December 31, 1998 so long as Tangible Net Worth is not less than $300,000,000 for the fiscal quarter ended December 31, 1998, (ii) Section 6A(3) of the Agreement for the fiscal quarter ended December 31, 1998 so long as Adjusted Consolidated Debt does not exceed 60% of Consolidated Net Tangible Assets for the fiscal quarter ended December 31, 1998, and (iii) Section 6A(4) of the Agreement for the fiscal quarter ended December 31, 1998 so long as the Fixed Charge Coverage Ratio is greater than 2.80 to 1.00 during such period. Should the Company, its successors or assigns offer to acquire or prepay the Notes, in whole or in part, in either case, with Yield-Maintenance, at any time, through and including August 12, 2000, the Company shall promptly notify accepting Purchasers of such offer or prepayment pursuant to the terms of the Agreement. The Company will also pay such Yield-Maintenance to the Purchasers who accept this Offer and will make such payment in the same proportion to the principal amount of the Notes of such Purchaser as presented on Schedule I, and under the same terms as offered to Purchasers. Offer to Acquire Note February 12, 1999 Page 2 Based upon the foregoing terms and conditions contained in this offer to acquire Notes, please indicate below your acceptance or nonacceptance of the terms hereof and return by facsimile transmission to the Company. Your failure to respond prior to the Expiration shall be deemed to constitute your decision to decline this Offer. X The undersigned Purchaser ACCEPTS the Offer ----- under the terms and conditions of this Offer by Company; The undersigned Purchaser DECLINES the Offer ----- under the terms and conditions of the Offer by Company; Dated this day of day of , 1999 ---- -------- Western, Gas Resources, Inc. /s/ Vance S. Blalock - --------------------------- By: Name: VANCE S. BLALOCK Title: TREASURER Fax: (303) 254-9794 Offer to Acquire Notes February 12, 1999 Page 3 ACKNOWLEDGED AND ACCEPTED: THE VARIABLE ANNUITY LIFE INSURANCE COMPANY By: ----------------------------- AMERICAN GENERAL LIFE INSURANCE COMPANY By: ----------------------------- GULF LIFE INSURANCE COMPANY By: ----------------------------- FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY By: ----------------------------- ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY By: ----------------------------- J. ROMEO & CO., as nominee for MONY LIFE INSURANCE COMPANY By: /s/ [ILLEGIBLE] ----------------------------- Partner Offer to Acquire Notes February 12, 1999 Page 4
SCHEDULE I Accrued Principal Interest - ----------- ----------- $13,000,000 $263,546.11 The Variable Annuity Life Insurance Company $ 5,000,000 $101,363.89 American General Life Insurance Company $ 2,000,000 $ 40,545.56 American General Life and Accident Insurance Company (successor in interest to Gulf Life Insurance Company) $15,000,000 $304,091.67 J. Romeo & Co., as nominee for MONY Insurance Company $4,000,000 $ 81,091.11 First Allmerica, Financial Life Insurance Company $3,000,000 $ 60,818.33 Allmerica Financial Life Insurance and Annuity Company
EX-12.5 7 LOAN AGREEMENT W/ NATIONSBANK RE: BRIDGE NOTE EXHIBIT 12.5 ================================================================================ LOAN AGREEMENT -------------------------------------------- WESTERN GAS RESOURCES, INC. Borrower and NATIONSBANK, N.A. as Bank and NationsBanc Montgomery Securities LLC as Lead Arranger -------------------------------------------- $37,000,000 February 17, 1999 ================================================================================ NATIONSBANK, N.A. 901 Main Street Dallas, Texas 75202 February 17, 1999 Western Gas Resources, Inc. 1200 N. Pecos Street, Suite 230 Denver, Colorado 80234 Ladies and Gentlemen: This Agreement (this "Agreement") will serve to set forth the terms of --------- certain financing transactions by and between Western Gas Resources, Inc., a Delaware corporation ("Borrower"), and NationsBank, N.A. ("Bank"). Capitalized -------- ---- terms used but not defined herein (i) shall have the meanings given them on Annex I hereto or (ii) if not defined on Annex I hereto, shall have the meanings given them in the Revolving Credit Agreement. 1. BRIDGE LOAN. ----------- (a) Subject to the terms and conditions hereof, Bank agrees to make a single advance to Borrower in an amount not to exceed $37,000,000 (the "Bridge ------ Loan") on or before February 23, 1999. Borrower must give to Bank written notice - ---- of the date it requests that the Bridge Loan be made, no later than 10:00 am, Dallas time, on such day. (b) The obligation of Borrower to repay to Bank the Bridge Loan, together with interest accruing in connection therewith, shall be evidenced by a single promissory note made by Borrower payable to the order of Bank (the "Bridge Note") in the form of Exhibit A with appropriate insertions. The amount of principal owing on the Bridge Note at any given time shall be the amount of the Bridge Loan minus all payments of principal theretofore received by Bank on the Bridge Note. Interest on the Bridge Note shall accrue and be payable as provided therein. (c) Borrower shall use all funds from the Bridge Loan to repay in part existing outstanding indebtedness owing under the Debt Securities. In no event shall the proceeds of the Bridge Loan be used directly or indirectly for the purpose, whether immediate, incidental or ultimate, of purchasing, acquiring or carrying any "margin stock" or any "margin securities" (as such terms are defined respectively in Regulation U and Regulation G promulgated by the Board of Governors of the Federal Reserve System) or to extend credit to others directly or indirectly Western Gas Resources, Inc. February 17, 1999 Page 2 for the purpose of purchasing or carrying any such margin stock or margin securities. Borrower represents and warrants to Bank that it is not engaged principally, or as one of its important activities, in the business- of extending credit to others for the purpose of purchasing or carrying such margin stock or margin securities. (d) Borrower will make each payment which it owes hereunder or under the Bridge No e not later than noon, Dallas time, in lawful money of the United States of America and in immediately available funds. Any payment received by Bank after such time will be deemed to have been made oil the next following Business Day. Should any such payment become due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day, and, in the case of a payment of principal or past due interest, interest shall accrue and be payable thereon for the period of such extension as provided in the Agreement Document under which such payment is due. Each payment under a Bridge Loan Document shall be payable at the place provided therein and, if no specific place of payment is provided, shall be payable at the place of payment of the Bridge Note. When Bank collects or receives money on account of the Bridge Loan Obligations, Bank shall apply all such money so distributed, as follows: (i) for the prepayment of amounts owing under the Bridge Loan Documents; (ii) then for the prepayment of principal on the Bridge Note, together with accrued and unpaid interest on the principal so prepaid; and (iii) last, for the payment or prepayment of any other Bridge Loan Obligations. All payments applied to principal or interest on the Bridge Note shall be applied first to any interest then due and payable, then to principal then due and payable, and last to any prepayment of principal and interest in compliance with this Agreement. 2. RATE ELECTIONS. Borrower may from time to time designate all or any -------------- portion of the Bridge Loan as a "Eurodollar Portion". Borrower may make no such election during the continuance of a Default, and Borrower may make such an election with respect to already existing Eurodollar Portions only if such election will take effect at or after the termination of the Interest Period applicable to such already existing Fixed Rate Portions. Each election by Borrower of a Eurodollar Portion shall: Western Gas Resources, Inc. February 17, 1999 Page 3 (a) Be made by written notice to Bank or by telephonic notice to Bank promptly confirmed in writing, in the form and substance of the "Rate Election" attached hereto as Exhibit B, duly completed and signed by an authorized officer of Borrower. (b) Specify the aggregate amount of the Bridge Loan which Borrower desires to designate as such Eurodollar Portion, the first day of the Interest Period which is to apply thereto, and the length of such Interest Period; and (c) Be received by Bank not later than 10:00 a.m., Dallas time, on the second Business Day preceding the first day of the specified Interest Period. Each such election (herein called a "Rate Election") shall be irrevocable. ------------- Borrower may make no Rate Election which does not specify an Interest Period complying with the definition of "Interest Period" in Annex L and the amount of each Eurodollar Portion elected in any Rate Election must be $ 10,000,000 or a higher integral multiple of $1,000,000. Upon the termination of each Interest Period the portion of the Bridge Loan theretofore constituting the related Eurodollar Portion shall, unless the subject of a new Rate Election then taking effect, automatically become a part of the Base Rate Portion of the Bridge Loan and become subject to all provisions of the Bridge Loan Documents governing such Base Rate Portion. Borrower shall have no more than three Eurodollar Portions in effect at any time. 3. OPTIONAL PREPAYMENTS. Borrower may, upon concurrent notice to Bank, -------------------- from time to time and without premium or penalty prepay the Bridge Loan, in whole or in part, so long as each partial prepayment of principal is in an amount greater than or equal to $1,000,000, provided that any prepayment of a Eurodollar Portion shall be accompanied by all amounts due under Section 7. Each prepayment of principal under this section shall be accompanied by all interest then accrued and unpaid on the principal so prepaid. Any principal or interest prepaid pursuant to this section shall be in addition to, and not in lieu of, all payments otherwise required to be paid under the Bridge Loan Documents at the time of such prepayment. 4. MANDATORY PREPAYMENTS. If (i) Borrower shall sell, exchange, lease, --------------------- transfer, or otherwise dispose of any material part of, or material interest in any of its assets having a sales price in excess of $1,000,000 or (ii) Borrower shall issue any public debt or equity instrument, Borrower shall prepay the principal of the Bridge Loan within two (2) Business Days of such transaction in an amount at least equal to (a) ninety percent (90%) of the Fair Market Value of the portion or interest in such assets sold, exchanged, leased, transferred or otherwise disposed of as of the date of such transaction or (b) one hundred percent (100%) of the proceeds of such issuance of such debt or equity instrument (net of Borrower's reasonable costs of sale or Western Gas Resources, Inc. February 17, 1999 Page 4 issuance). Each prepayment of principal under this section shall be accompanied by all interest then accrued and unpaid on the principal so prepaid. Any principal prepaid pursuant to this section shall be in addition to, and not in lieu of, all payments otherwise required to be paid under the Bridge Loan Documents at the time of such prepayment. 5. INCREASED COST OF EURODOLLAR PORTIONS. If any applicable domestic or ------------------------------------- foreign law, treaty, rule or regulation (whether now in effect or hereinafter enacted or promulgated, including Regulation D) or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law): (a) shall change the basis of taxation of payments to Bank of any principal, interest, or other amounts attributable to any Eurodollar Portion or otherwise due under this Agreement in respect of any Eurodollar Portion (other than taxes imposed on the overall net income of Bank or any lending office of Bank by any jurisdiction in which Bank or any such lending office is located); or (b) shall change, impose, modify, apply or deem applicable any insurance fees or premiums or any reserve, special deposit or similar requirements in respect of any Eurodollar Portion (excluding those for which there is full compensation pursuant to adjustments made in the definition of Adjusted Eurodollar Rate), or against assets of, deposits with or for the account of, or credit extended by, Bank; or (c) shall impose on Bank or the interbank eurocurrency deposit market any other condition affecting any Eurodollar Portion, the result of which is to increase the cost to Bank of funding or maintaining any Eurodollar Portion or to reduce the amount of any sum receivable by Bank in respect of any Eurodollar Portion by an amount deemed by Bank to be material, then Bank shall promptly notify Borrower in writing of the happening of such event and (1) Borrower shall upon demand pay to Bank such additional amount or amounts as will compensate Bank for such event and (2) Borrower may elect, by giving to Bank not less than three Business Days' notice, to convert all (but not less than all) of any such Eurodollar Portion into a part of the Base Rate Portion. 6. CHANGE OF LAW. If any change in applicable laws, treaties, rules or ------------- regulations or in the interpretation or administration thereof or in any jurisdiction whatsoever, domestic or foreign, shall make it unlawful or impracticable for Bank to fund or maintain Eurodollar Portions, or shall materially restrict the authority of Bank to purchase, sell or take offshore deposits of dollars (i.e., "eurodollars"), then Borrower's right to elect --- Eurodollar Portions shall be suspended to the Western Gas Resources, Inc. February 17, 1999 Page 5 extent and for the duration of such illegality, impracticability or restriction and all Eurodollar Portions (or portions thereof) which are then outstanding or are then the subject of any Rate Election and which cannot lawfully or practicably be maintained or funded shall immediately become or remain part of the Base Rate Portion of the Bridge Loan. Borrower agrees to indemnify Bank and hold it harmless against all costs, expenses, claims, penalties, liabilities and damages which actually result from any such change in law, treaty, rule, regulation, interpretation or administration. 7. FUNDING LOSSES. Upon the request of Bank, Borrower shall pay to Bank -------------- such amount or amounts as shall be sufficient (in the reasonable opinion of Bank) to compensate Bank for any loss or expense incurred or sustained by Bank (including without limitation any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund or maintain Eurodollar Portions hereunder), as a result of (a) any payment or prepayment (whether authorized or required hereunder or otherwise) of all or a portion of a Eurodollar Portion on a day other than the day on which the applicable Interest Period ends, (b) any payment or prepayment, whether required hereunder or otherwise, of the Bridge Loan made after the delivery, but before the effective date, of a Rate Election, if such payment or prepayment prevents such Rate Election from becoming fully effective, (c) the failure of" any Rate Election to become effective, or (d) any conversion (whether authorized or required hereunder or otherwise) of all or any portion of any Eurodollar Portion into a Base Rate Portion or into a different Eurodollar Portion on a day other than the day on which the applicable Interest Period ends. 8. REIMBURSABLE TAXES; CAPITAL ADEQUACY. Borrower covenants and agrees ------------------------------------ that, whether or not any Eurodollar Portion is ever elected: (a) Borrower will reimburse Bank on demand, on an after-tax basis, for all present and future income, stamp and other taxes, levies, costs and charges whatsoever actually paid by Bank (or required to be withheld and paid on account of Bank) in respect of any Eurodollar Portions, excluding, however, any thereof imposed on or measured by the overall net income of Bank or any lending office of Bank by any jurisdiction in which Bank or any such lending office is located (all such non-excluded taxes, levies, costs and charges being collectively called "Reimbursable Taxes" in this section), and Borrower will pay directly to ------------------ the appropriate authority any Reimbursable Taxes which Borrower is required to withhold and pay. Promptly after the date on which payment of any such Reimbursable Tax to be paid directly by Borrower is due or claimed to be due, Borrower will, at the request of Bank, furnish to Bank evidence in form and substance satisfactory to Bank that Borrower has met its obligation under this section. Western Gas Resources, Inc. February 17, 1999 Page 6 (b) Borrower will indemnify Bank against any loss, liability, claim or expense, including interest, penalties and legal fees, that Bank may incur at any time arising out of or in connection with the failure of Borrower to make any reimbursement required under subsection (a) above or to make any payment, when due or claimed to be due, of Reimbursable Taxes to be withheld and paid directly by Borrower. (c) All payments on account of the principal of, and interest on, the Bridge Loan and the Bridge Note, and all other amounts payable by Borrower to Bank hereunder shall be made free and clear of and without reduction by reason of any Reimbursable Taxes, all of which will be for the account of Borrower and reimbursed or paid by Borrower. (d) If Borrower is ever required to reimburse or pay any Reimbursable Tax with respect to any Eurodollar Portion, Borrower may elect, by giving to Bank not less than three Business Days' notice, to convert all (but not less than all) of any such Eurodollar Portion into apart of the Base Rate Portion of the Bridge Loan, but such election shall not diminish Borrower's obligation to pay all Reimbursable Taxes. (e) If at any time after the date hereof, and from time to time, Bank determines that the adoption or modification of any applicable law, rule or regulation regarding taxation, Bank's required levels of reserves, deposits, insurance or capital (including any allocation of capital requirements or conditions), or similar requirements, or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation, administration or compliance of Bank with any of such requirements, has or would have the effect of (a) increasing Bank's costs relating to the Bridge Loan Obligations, or (b) reducing the yield or rate of return of Bank on the Bridge Loan Obligations, to a level below that which Bank could have achieved but for such adoption, modification, interpretation or application, then Borrower shall, within 30 Business Days after any request by Bank, pay to Bank such additional amounts as (in Bank's sole judgment, after reasonable computation) will compensate Bank for such increase in costs or reduction in yield or rate of return. No failure by Bank to immediately demand payment of any additional amounts payable hereunder shall constitute a waiver of Bank's right to demand payment of such amounts at any subsequent time. Nothing herein contained shall be construed or so operate as to require Borrower to pay any interest, fees, costs or charges not permitted by Section 9. 9. COMPENSATION PROCEDURE. If Bank notifies Borrower of the incurrence of ---------------------- additional costs under Sections 5 through 8, Bank shall in such notice to Borrower set forth in reasonable detail the basis and amount of its request for compensation. Determinations and allocations by Bank for purposes of Sections 5 through 8 of the effect of any change in Western Gas Resources, Inc. February 17, 1999 Page 7 applicable laws, treaties, rules or regulations or in the interpretation or administration thereof, any losses or expenses incurred by reason of the liquidation or reemployment of deposits or other funds, any taxes, levies, costs and charges imposed, or the effect of capital maintained on its costs or rate of return of maintaining the Bridge Loan, or on amounts receivable by it in respect of the Bridge Loan and of the amounts required to compensate Bank under Sections 5 through 8, shall be conclusive and binding for all purposes, provided that such determinations and allocations are made on a reasonable basis and there shall be no demand for duplicate payments of the same additional cost. Any request for compensation under this Section 9 shall be paid by Borrower within thirty (30) Business Days of the receipt by Borrower of the notice described in this Section 9. 10. CONDITIONS PRECEDENT. Bank has no obligation to make the Bridge Loan -------------------- unless all of the following conditions shall have been satisfied: (a) Bank has received all of the following, at Bank's offices, duly executed and delivered and in form, substance and date satisfactory to Bank: (i) This Agreement. (ii) The Bridge Note. (iii) An absolute and unconditional guaranty of the Bridge Loan Obligations executed by each Subsidiary of Borrower in a form acceptable to Bank. (iv) An officer's certificate of Borrower dated as of the date of the making of the Bridge Loan, which shall contain the names and signatures of the officers of Borrower duly authorized to execute the Bridge Loan Documents. (v) Such supporting documents as Bank may reasonably request. (b) All representations and warranties made by Borrower in the Revolving Credit Agreement shall be true on and as of the date of the Bridge Loan (except to the extent that the facts upon which such representations are based have been changed by the transactions therein contemplated) as if such representations and warranties had been made as of the date of the Bridge Loan. (c) No Default shall exist at the date of the Bridge Loan. Western Gas Resources, Inc. February 17, 1999 Page 8 (d) Borrower shall have performed and complied with all agreements and conditions required in the Bridge Loan Documents to be performed or complied with by it on or prior to the date of the Bridge Loan. (e) All legal matters relating to the Bridge Loan Documents and the consummation of the transactions contemplated thereby shall be satisfactory to Thompson & Knight, a Professional Corporation, counsel to Bank. (f) Borrower shall have paid to Bank a commitment fee in the amount of $185,000 in immediately available funds. (g) Majority Lenders shall have consented in writing to the execution and delivery by Borrower and Bank of this Agreement. 11. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and ------------------------------ warrants to Bank that each of the representations and warranties contained in Section 5.1 of the Revolving Credit Agreement are true and correct as of the date hereof and as of the date the Bridge Loan is made (except to the extent that the facts upon which such representations are based have been changed by the transactions therein contemplated). 12. AFFIRMATIVE COVENANTS. Until (i) the Bridge Note is fully paid and --------------------- satisfied, and (ii) this Agreement is terminated, Borrower agrees and covenants that it will, unless Bark shall otherwise consent in writing, comply with each provision of Section 6.1 and Section 6.2 of the Revolving Credit Agreement. 13. BANK ACCOUNTS; OFFSET. To secure the repayment of the Bridge Loan, --------------------- Borrower hereby grants to Bank a security interest, a lien, and a right of offset, each of which shall be upon and against all right, title, and interest of Borrower in (a) any and all moneys, securities or other property (and the proceeds therefrom) of Borrower now or hereafter held or received by or in transit to Bank from or for the account of Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, (b) any and all deposits (general or special, time or demand, provisional or final) of Borrower with Bank, and (c) any other credits and claims of Borrower at any time existing against Bank, including claims under certificates of deposit. Upon the occurrence of any Default, Bank is hereby authorized to foreclose upon, offset, appropriate, and apply, at any time and from time to time, without notice to Borrower or any Guarantor, any and all items hereinabove referred to against the Bridge Loan Obligations (whether or not such Bridge Loan Obligations are then due and payable). Western Gas Resources, Inc. February 17, 1999 Page 9 14. GUARANTIES OF SUBSIDIARIES. Each Subsidiary of Borrower which (i) is -------------------------- now existing shall on date hereof or (ii) is created, acquired or comes into existence after the date hereof shall promptly execute and deliver to Bank an absolute and unconditional guaranty of the timely repayment of the Bridge Loan Obligations, which guaranty shall be satisfactory to Bank in form and substance. Borrower and each Guarantor will cause each such Related Person to deliver to Bank, simultaneously with its delivery of such a guaranty, written evidence satisfactory to Bank and its counsel that such Related Person has taken all corporate or partnership action necessary to duly approve and authorize its execution, delivery and performance of such guaranty and any other documents which it is required to execute. 15. FURTHER ASSURANCES. Borrower hereby- agrees to, and to cause each ------------------ Related Person to, execute and deliver any and all documents, instruments, guaranties, agreements, certificates, and other writings of any kind and character which Bank determines in its sole and absolute discretion are necessary or appropriate to effectuate the intent of the Bridge Loan Documents. 16. EVENTS OF DEFAULT. Each of the following shall constitute an "Event of ----------------- Default" under this Agreement: (a) Any Related Person fails to pay any Bridge Loan Obligations when due and payable, whether at. a date for the payment of a fixed installment or contingent or other payment to Bank or as a result of acceleration or otherwise; (b) Any Related Person fails (other than as referred to in subsections (a) and (b) above) to duly observe, perform or comply with any covenant, agreement, condition or provision of any Bridge Loan Document; (c) An "Event of Default" occurs under the Revolving Credit Agreement. 17. REMEDIES. Upon the occurrence of any one or more of the foregoing -------- Events of Default, the entire unpaid balance of principal of the Bridge Note, together with all accrued but unpaid interest thereon, and all other indebtedness owing to Bank by Borrower at such time shall, at the option of Bank, become immediately due and payable without further notice, demand, presentation, notice of dishonor, notice of intent to accelerate, notice of acceleration, protest or notice of protest of any kind, all of which are expressly waived by Borrower; provided, however concurrently and automatically -------- ------- with the occurrence of an "Event of Default" under Section 8.1 (h)(i), (ii), or (iii) of the Revolving Credit Agreement, the Bridge Note and all other indebtedness owing to Bank by Borrower under the Bridge Loan Documents at such time shall, without any action by Bank, become due and payable, without further notice, demand, Western Gas Resources, Inc. February 17, 1999 Page 10 presentation, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or notice of protest of any kind, all of which are expressly waived by Borrower. All rights and remedies of Bank set forth in this Agreement and in any of the other Bridge Loan Documents may also be exercised by Bank, at its option to be exercised in its sole discretion, upon the occurrence of an Event of Default. 18. RIGHTS; CUMULATIVE. All rights of Bank under the terms of this ------------------ Agreement shall be cumulative of, and in addition to, the rights of Bank under any and all other agreements between Borrower and Bank (including, but not limited to, the other Bridge Loan Documents), and not in substitution or diminution of any rights now or hereafter held by Bank under the terms of any other agreement. 19. WAIVER AND AGREEMENT. Neither the failure nor any delay on the part -------------------- of Bank to exercise any right, power or privilege herein or under any of the other Bridge Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver of any provision in this Agreement or in any of the other Bridge Loan Documents and no departure by Borrower therefrom shall be effective unless the same shall be in writing and signed by Bank, and then shall be effective only in the specific instance and for the purpose for which given and to the extent specified in such writing. No modification or amendment to this Agreement or to any of the other Bridge Loan Documents shall be valid or effective unless the same is signed by the Party against whom it is sought to be enforced. 20. BENEFITS. This Agreement shall be binding upon and inure to the -------- benefit of Bank and Borrower, and their respective successors and assigns, provided, however, that Borrower may not, without the prior written consent of Bank, assign any rights, powers, duties or obligations under this Agreement or any of the other Bridge Loan Documents. 21. NOTICES. All notices, requests, demands or other communications ------- required or permitted to be given pursuant to this Agreement shall be in writing and given by (i) facsimile, (ii) personal delivery, (iii) expedited delivery service with proof of delivery, or (iv) United States mail, postage prepaid, registered or certified mail, return receipt requested, sent to the intended addressee at the address set forth on the signature page hereof and shall be deemed to have been received either, in the case of facsimile or personal delivery, as of the time of facsimile or personal delivery, in the case of expedited delivery service, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of mail, upon deposit in a depository receptacle under the care and custody of the United States Postal Service. Either party shall have the right to change its address for notice hereunder to any other location within Western Gas Resources, Inc. February 17, 1999 Page 11 the continental United States by notice to the other party of such new address at least thirty (30) days prior to the effective date of such new address. All notices required to be given by Bank to any Related Person other than Borrower pursuant to any Bridge Loan Document shall be given to such Related Person at the address of Borrower on the signature page hereof in accordance with this Section 21. 22. LIMITATION ON INTEREST. Bank and Borrower intend to contract in ---------------------- strict compliance with applicable usury law from time to time in effect. In furtherance thereof Bank and Borrower stipulate and agree that none of the terms and provisions contained in the Agreement shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by applicable Law from time to time in effect. Neither Borrower nor any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any Obligation shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable Law from time to time in effect, and the provisions of this section shall control over all other provisions of the Agreement which may be in conflict or apparent conflict herewith. Bank expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of any Obligation is accelerated. If (a) the maturity of any Obligation is accelerated for any reason, (b) any Obligation is prepaid and as a result any amounts held to constitute interest are determined to be in excess of the legal maximum, or (c) Bank or any other holder of any or all of the Bridge Loan Obligations shall otherwise collect moneys which are determined to constitute interest which would otherwise increase the interest on any or all of the Bridge Loan Obligations to an amount in excess of that permitted to be charged by applicable Law then in effect, then all sums determined to constitute interest in excess of such legal limit shall, without penalty, be promptly applied to reduce the then outstanding principal of the related Bridge Loan Obligations or, at Bank's or such holder's option, promptly returned to Borrower or the other payor thereof upon such determination. In determining whether or not the interest paid or payable, under any specific circumstance, exceeds the maximum amount permitted under applicable Law, Bank and Borrower (and any other payors thereof) shall to the greatest extent permitted under applicable Law, (i) characterize any non-principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and spread the total amount of interest throughout the entire contemplated ' term of the instruments evidencing the Bridge Loan Obligations in accordance with the amounts outstanding from time to time thereunder and the maximum legal rate of interest from time to time in effect under applicable Law in order to lawfully charge the maximum amount of interest permitted under applicable Law. In the event applicable Law provides for an interest ceiling under Chapter 303 of the Texas Finance Code (the "Texas Finance Code") as amended, for that day, the ceiling Western Gas Resources, Inc. February 17, 1999 Page 12 shall be the "weekly ceiling" as defined in the Texas Finance Code, provided that if any applicable Law permits greater interest, the Law permitting the greatest interest shall apply. As used in this section the term "applicable Law" means the laws of the State of Texas or the laws of the United States of America, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. 23. CONSTRUCTION. This Agreement and the other Bridge Loan Documents have ------------ been executed and delivered in the State of Texas, shall be governed by and construed in accordance with the laws of the State of Texas. 24. INVALID PROVISIONS. If any provision of this Agreement or any of the ------------------ other Bridge Loan Documents is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and the remaining provisions of this Agreement or any of the other Bridge Loan Documents shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance. 25. EXPENSES. Borrower agrees to pay on demand all reasonable costs and -------- expenses of Bank in connection with the syndication, preparation, execution, delivery, administration, Modification, and amendment of this Agreement, the other Bridge Loan Documents, and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for Bank (including the cost of internal counsel) with respect thereto and with respect to advising Bank as to its rights and responsibilities under the Bridge Loan, Documents. Borrower further agrees to pay on demand all costs and expenses of Bank, if any (including, without limitation, reasonable attorneys' fees and expenses and the cost of internal counsel), in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of the Bridge Loan Documents and the other documents to be delivered hereunder. The agreements contained in this Section shall survive payment in full of the Bridge Loan and all other amounts payable under this Agreement. 26. PARTICIPATION OF THE BRIDGE LOAN. Borrower agrees that Bank may, at -------------------------------- its option, sell interests in the Bridge Loan and its rights under this Agreement to a financial institution or institutions and, in connection with each such sale, Bank may disclose any financial and other information available to Bank concerning Borrower to each perspective purchaser. 27. ENTIRE AGREEMENT. THIS AGREEMENT, TOGETHER WITH THE OTHER BRIDGE LOAN ---------------- DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF Western Gas Resources, Inc. February 17, 1999 Page 13 PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. 28. CONFLICTS. In the event any term or provision hereof is inconsistent --------- with or conflicts with any provision of the other Bridge Loan Documents, the terms and provisions contained in this Agreement shall be controlling. 29. COUNTERPARTS. This Agreement may be separately executed in any number ------------ of counterparts, each of which shall be an original, but all of which, taken together, shall be deemed to constitute one and the same instrument. This Agreement may be validly executed and delivered by facsimile or other electronic transmission. 30. INDEMNITY. Borrower agrees to indemnify Bank, upon demand, from and --------- against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (including reasonable fees of attorneys, accountants, experts and advisors) of any kind or nature whatsoever (in this section collectively called "liabilities and costs") which to any extent (in whole or in part) may be imposed on, incurred by, or asserted against Bank growing out of, resulting from or in any other way associated with any of the collateral, the Bridge Loan Documents and the transactions and events (including without limitation the enforcement or defense thereof) at any time associated therewith or contemplated therein (including any violation or noncompliance with any environmental laws or any liabilities as duties with respect to hazardous materials found in or released into the environment). THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY WAY OR TO ANY EXTENT ARISE, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY BANK, provided only that Bank shall be not entitled under this section to receive indemnification for that portion, if any, of any liabilities and costs which is proximately caused by its own individual gross negligence or willful misconduct. As used in this section the term "Bank" shall refer not only to NationsBank, N.A. but also to each director, officer, Bank, attorney, employee, representative and affiliate of such person. 31. SURVIVAL OF AGREEMENTS; CUMULATIVE NATURE. All of the Related ----------------------------------------- Persons' various representations, warranties, covenants and agreements in the Bridge Loan Documents shall survive the execution and delivery of this Agreement and the other Bridge Loan Documents and the performance hereof and thereof, including the making or granting of the Bridge Loan and the delivery of the Bridge Note and the other Bridge Loan Documents, and shall further survive until all of the Bridge Loan Obligations are paid in full and all of Bank's obligations to Borrower Western Gas Resources, Inc. February 17, 1999 Page 14 pursuant to this Agreement are terminated. All statements and agreements contained in any certificate or other instrument delivered by any Related Person to Bank under any Bridge Loan Document shall be deemed representations and warranties by Borrower or agreements and -covenants of Borrower under this Agreement. The representations, warranties, indemnities, and covenants made by the Related Persons in the Bridge Loan Documents, and the rights, powers, and privileges granted to Bank in the Bridge Loan Documents, are cumulative, and, except for expressly specified waivers and consents, no Bridge Loan Document shall be construed in the context of another to diminish, nullify, or otherwise reduce the benefit to Bank of any such representation, warranty, indemnity, covenant, right, power or privilege. In particular and without limitation, no exception set out in this Agreement to any representation, warranty, indemnity, or covenant herein contained shall apply to any similar representation, warranty, indemnity, or covenant contained in any other Bridge Loan Document, and each such similar representation, warranty, indemnity, or covenant shall be subject only to those exceptions which are expressly made applicable to it by the terms of the various Bridge Loan Documents. 32. LIMITED SURVIVAL UPON TERMINATION. Upon the payment in full of the --------------------------------- Bridge Loan Obligations and the termination of this Agreement and notwithstanding anything herein to the contrary, any waivers or admissions made by any Related Person in any Bridge Loan Document, and any obligations which any Person may have to indemnify or compensate Bank shall survive any termination of this Agreement or any other Bridge Loan Document. At the request and expense of Borrower, Bank shall prepare and execute all necessary instruments to reflect and effect such termination of the Bridge Loan Documents. 33. WAIVERS AND AMENDMENTS; ACKNOWLEDGMENTS. --------------------------------------- (a) No failure or delay (whether by course of conduct or otherwise) by Bank in exercising any right, power or remedy which Bank may have under any of the Bridge Loan Documents shall operate as a waiver thereof or of any other right, power or remedy, nor shall any single or partial exercise by Bank of any such right, power or remedy preclude any other or further exercise thereof or of any other right, power or remedy. No failure or delay (whether by course of conduct or otherwise) by Borrower in exercising any right, power or remedy which Borrower may have under any of the Bridge Loan Documents shall operate as a waiver thereof or of any other right, power or remedy, nor shall any single or partial exercise by Borrower of any such right, power or remedy preclude any other or further exercise thereof or of any other right, power or remedy. No waiver of any provision of any Bridge Loan Document and no consent to any departure therefrom shall ever be effective unless it is in writing and signed as provided below in this section, and then such waiver or consent shall be effective only in the specific instances and for the purposes for which given and to the extent specified in such writing. No Western Gas Resources, Inc. February 17, 1999 Page 15 notice to or demand on any Related Person shall in any case of itself entitle any Related Person to any other or further notice or demand in similar or other circumstances. (b) No waiver or supplement to this Agreement or the other Bridge Loan Documents shall be valid or effective against any party hereto unless the same is in writing and signed by (i) if such party is Borrower, by Borrower, and (ii) if such party is Bank, by Bank. (c) Borrower hereby represents, warrants, acknowledges and admits that (i) it has been advised by counsel in the negotiation, execution and delivery of the Bridge Loan Documents to which it is a party, (ii) it has made an independent decision to enter into this Agreement and the other Bridge Loan Documents to which it is a party, without reliance on any representation, warranty, covenant or undertaking by Bank, whether written, oral or implicit, other than as expressly set out in this Agreement or in another Bridge Loan Document delivered on or after the date hereof, (iii) there are no representations, warranties, covenants, undertakings or agreements by Bank as to the Bridge Loan Documents except as expressly set out in this Agreement or in another Bridge Loan Document delivered on or after the date hereof, (iv) Bank has no fiduciary obligation toward Borrower with respect to any Bridge Loan Document or the transactions contemplated thereby, (v) the relationship pursuant to the Bridge Loan Documents between Borrower, oil one hand, and Bank, on the other hand, is and shall be solely that of debtor and creditor, respectively, (vi) no partnership or joint venture exists with respect to the Bridge Loan Documents between Borrower and Bank, (vii) should an Event of Default or Default occur or exist Bank will determine in its sole discretion and for its own reasons what remedies and actions it will or will not exercise or take at that time, (viii) without limiting any of the foregoing, Borrower is not relying upon any representation or covenant by Bank, or any representative thereof, and no such representation or covenant has been made, that Bank will, at the time of an Event of Default or Default, or at any other time, waive, negotiate, discuss, or take or refrain from taking any action permitted under the Bridge Loan Documents with respect to any such Event of Default or Default or any other provision of the Bridge Loan Documents, and (ix) Bank has relied upon the truthfulness of the acknowledgments in this section in deciding to execute and deliver this Agreement and to make the Bridge Loan. THIS WRITTEN AGREEMENT AND THE OTHER BRIDGE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. Western Gas Resources, Inc. February 17, 1999 Page 16 THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 34. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. EACH OF BORROWER AND ------------------------------------------- BANK HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THE BRIDGE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY; (B) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY "SPECIAL DAMAGES", AS DEFINED BELOW, (C) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OF NOR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT ANY PARTY HERETO WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER BRIDGE LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER. THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED IN THIS SECTION, "SPECIAL DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR FUNDS WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER PARTY HERETO. Western Gas Resources, Inc. February 17, 1999 Page 17 If the foregoing correctly sets forth our mutual agreement, please so acknowledge by signing and returning this Agreement to the undersigned. Very truly yours, NATIONSBANK, N. A. By: __________________________________ Name: Title: Bank's Address: 901 Main Street Dallas, Texas 75202 COPIES OF ALL NOTICES MUST BE SENT TO: NationsBank N. A. 370 17th Street Denver, Colorado 80202 Attention: David C. Rubenking Tel: 303/629-6969 Fax: 303/629-6303 Western Gas Resources, Inc. February 17, 1999 Page 18 ACCEPTED as of the date first written above. WESTERN GAS RESOURCES, INC. By: /s/ William Krysiak ----------------------------- Name: WILLIAM KRYSIAK Title: V.P. FINANCE 1200 N. Pecos Street, Suite 230 Denver, Colorado 80234 Tel: 303/450-8439 Fax: 303/252-3362 ANNEX I ------- DEFINITIONS ----------- "Adjusted Base Rate" means the rate per annum equal to the Base Rate plus ------------------ the Base Rate Spread. The Adjusted Base Rate shall in no event, however, exceed the Highest Lawful Rate. "Adjusted Eurodollar Rate" means, with respect to each particular ------------------------ Eurodollar Portion of the Bridge Loan and the associated Eurodollar Rate and Reserve Percentage, the rate per annum calculated by Agent (rounded upwards, if necessary, to the next higher 0.01%) determined on a daily basis pursuant to the following formula: Adjusted Eurodollar Rate = Eurodollar Rate + Eurodollar Spread - ---------------------------- 100.0% - Reserve Requirement Such Adjusted Eurodollar Rate shall change as the Eurodollar Spread and the associated Reserve Requirement change. The Adjusted Eurodollar Rate shall in no event, however, exceed the Highest Lawful Rate. "Base Rate" means the per annum rate of interest equal to the greater of --------- (i) the Prime Rate from time to time in effect or (ii) the Federal Funds Rate from time to time in effect, plus one-half of one percent (.50%). If the Prime Rate or the Federal Funds Rate, as the case may be, changes after the date hereof the Base Rate shall be automatically increased or decreased, as the case may be, without notice to Borrower from time to time as of the effective time of each such change. "Base Rate Portion" means that portion of the unpaid principal balance of ----------------- the Bridge Loan which is not made up of Eurodollar Portions. "Base Rate Spread" means: ---------------- (a) from the date of the Agreement until and including April 31, 1999, 0.50%; (b) from and including May 1, 1999 until and including, July 31, 1999, 1.00%; and (c) from and including August 1, 1999 until and including the Maturity Date, 1.50%. "Bridge Loan Documents" means the Agreement, the Bridge Note, all --------------------- guaranties of Borrower's Subsidiaries required to be delivered under the Agreement, and the other agreements, instruments, and documents evidencing, securing, governing, guaranteeing, and/or pertaining to the Bridge Loan. "Bridge Loan Obligations" means all Debt from time to time owing by ----------------------- Borrower or any other Person under or pursuant to any of the Bridge Loan Documents. "Bridge Loan Obligation" means any part of the Bridge Loan Obligations. "Default" means any Event of Default as described in Section 16 and any ------- default, event or condition which would, with the giving of any requisite notices and the passage of any requisite periods of time, constitute an Event of Default. "Default Rate" means, at the time in question, four percent (4.0%) per ------------ annum. plus the Adjusted Base Rate. The Default Rate shall in no event, however, exceed the Highest Lawful Rate. "Eurodollar Portion" means any portion of the unpaid principal balance ------------------ of the Bridge Loan which Borrower designates as such in a Rate Election. "Eurodollar Rate" means, for any Eurodollar Portion and with respect to --------------- the related Interest Period therefor, the rate per annum. (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on the Dow Jones Market Service (formerly Telerate Access Service) Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar Portion and with respect to the related Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits of Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%); to Bank or shall be calculated by bank by a substantially similar methodology as that theretofore used to determine such rate on Reuters Screen LIBO Page. "Eurodollar Rate Payment Date" means, with respect to any Eurodollar ---------------------------- Portion: (i) the day on which the related Interest Period ends and (ii) any day on which past due interest or past due principal is owed hereunder with respect to such Bridge Loan and is unpaid. If the terms of the Bridge Loan Documents provide that payments of interest or principal with respect to such Bridge Loan shall be deferred from one Eurodollar Rate Payment Date to another day, such other day shall also be a Eurodollar Rate Payment Date. 2 "Eurodollar Spread" means: ----------------- (a) from the date of the Agreement until and including May 31, 1999, 1.75%; (b) from and including June 1, 1999 until and including July 31, 1999, 2.25%; and (c) from and including August 1, 1999 until and including the Maturity Date, 2.75%. "Fair Market Value" of any property or any portion thereof or interest ----------------- therein, as of any date, means the after-tax cash proceeds that would be obtained in an arms' length transaction for the sale thereof consummated on such date between an informed and willing buyer and an informed and willing seller, under no compulsion, respectively, to buy or sell, assuming that such property has been maintained and operated in all material respects in accordance with the requirements of the Revolving Credit Agreement, such price to be as agreed between Borrower and Bank or, if Borrower and Bank are unable to agree, as determined by a mutually acceptable qualified third-party appraiser. "Guarantor " means any other Person who has guaranteed some or all of --------- the Bridge Loan "Highest Lawful Rate" means, with respect to Bank, the maximum ------------------- nonusurious rate of interest that Bank is permitted under applicable law to contract for, take, charge, or receive with respect to the Bridge Loan. "Interest Period" means, with respect to each particular Eurodollar --------------- Portion, a period of 1, 2 or 3 months, as specified in the Rate Election applicable thereto, beginning on and including the date specified in such Rate Election (which must be a Business Day), and ending on but not including the same day of the month as the day on which it began (e.g., a period beginning on the third day of one month shall end on but not. include the third day of another-month), provided that each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (unless such next succeeding Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the immediately preceding Business Day). No Interest Period may be elected, which would extend past the date on which the Bridge Note is due and payable in fall. "Maturity Date" means October 31, 1999. ------------- "Person" means an individual, corporation, partnership, limited liability ------ company, association, joint stock company, trust or trustee thereof, estate or executor thereof, unincorporated organization or joint venture, court or governmental unit or any agency or subdivision thereof, or-any other legally recognizable entity. 3 "Prime Rate" means the per annum rate of interest established from time ---------- to time by Bank as its prime rate, which rate may not be the lowest rate of interest charged by Bank to its customers. "Rate Election" has the meaning given it in Section 2. ------------- "Related Person" means any of Borrower, each Guarantor, and each other -------------- Subsidiary of Borrower, with the exception of Williston Gas Company, Westana, and Sandia. "Reserve Requirement" means, on any day with respect to the Bridge Loan, ------------------- the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include the Bridge Loan. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement. "Revolving Credit Agreement" means that certain Credit Agreement dated as -------------------------- of May 30, 1997 among Borrower and NationsBank, N.A., successor in interest by merger to NationsBank of Texas, N.A., as Agent, and certain other financial institutions, as Lenders, as from time to time amended, supplemented, or restated. "Subsidiary" means, with respect to any Person, any corporation, ---------- association, partnership, joint venture, or other business or corporate entity, enterprise or organization which is directly or effectively through one or more intermediaries, controlled by or owned fifty-one percent or more by such Person, provided that associations, joint ventures or other relationships (a) which are established pursuant to a standard form operating agreement or similar agreement or which are partnerships for purposes of federal income taxation only, (b) which are not corporations or partnerships (or subject to the Uniform Partnership Act) under applicable state law, and (c) whose businesses are limited to the exploration, development and operation of oil, gas, mineral, gas gathering or gas processing properties and interests owned directly by the parties in such associations, joint ventures or relationships, shall not be deemed to be "Subsidiaries" of such Person. 4 Exhibit A --------- PROMISSORY NOTE $37,000,000 Dallas, Texas February _, 1999 FOR VALUE RECEIVED, the undersigned, Western Gas Resources Inc., a Delaware corporation (herein called "Borrower"), hereby promises to pay to the order of NATIONSBANK, N.A. ("Bank"), the principal sum of Thirty-Seven Million Dollars ($37,000,000), or, if greater or less, the aggregate unpaid principal amount of the Bridge Loan made under this Note by Bank to Borrower pursuant to the terms of the Agreement (as hereinafter defined), together with interest on the unpaid principal balance thereof as hereinafter set forth, both principal and interest payable as herein provided in lawful money of the United States of America at the offices of Bank, 901 Main Street, Dallas, Texas or at such other place within Dallas County, Texas, as from time to time may be designated by the holder of this Note. This Note (i) is issued and delivered under that certain Agreement dated as of February 17, 1999, among Borrower and Bank (herein, as from time to time supplemented, amended or restated, called the "Agreement"), and is the "Bridge Note" as defined therein, (ii) is subject to the terms and provisions of the Agreement, which contains provisions for payments and prepayments hereunder and acceleration of the maturity hereof upon the happening of certain stated events, and (iii) is secured by and entitled to the benefits of certain guaranties. Payments on this Note shall be made and applied as provided herein and in the Agreement. Reference is hereby made to the Agreement for a description of certain rights, limitations of rights, obligations and duties of the parties hereto and for the meanings assigned to terms used and not defined herein. The principal amount of this Note. shall be due and payable in full on the Maturity Date. This Note is subject to mandatory prepayments as required in the Agreement. The Base Rate Portion of the Bridge Loan (exclusive of any past due principal or interest) from time to time outstanding shall bear interest on each day outstanding at the Adjusted Base Rate in effect on such day; provided that if an Event of Default has occurred and is continuing, the Base Rate Portion of the Bridge Loan (exclusive of any past due principal or interest) from time to time outstanding shall bear interest on each day outstanding at the Default Rate in effect on such day. On each Base Rate Payment Date, Borrower shall pay to the holder hereof all unpaid interest which has accrued on the Base Rate Portion to but not including such Base Rate Payment Date. Each Eurodollar Portion of the Bridge Loan (exclusive of any past due principal or interest) shall bear interest on each day during the related Interest Period at the related Adjusted Eurodollar Rate in effect on such day; provided that if an Event of Default has occurred and is continuing, each Eurodollar Portion of the Bridge Loan (exclusive of any past due principal or interest) shall bear interest on each day during the related Interest Period at the Default Rate in effect on such day. On each Eurodollar Rate Payment Date, Borrower shall pay to the holder hereof all unpaid interest which has accrued on such Eurodollar Portion to but not including such Eurodollar Rate Payment Date. All past due principal of and past due interest on the Bridge Loan shall bear interest on each day outstanding at the Default Rate in effect on such day, and such interest shall be due and payable immediately as it accrues. Notwithstanding the foregoing paragraph and all other provisions of this Note, in no event shall the interest rate payable hereon, whether before or after maturity, exceed the Highest Lawful Rate, and this Note is expressly made subject to the provisions of the Agreement which more fully set out the limitations on how interest accrues hereon. In the event applicable law provides for a ceiling under Chapter 303 of the Texas Finance Code, as amended (the "Texas Finance Code"), for that day, that ceiling shall be the "weekly" ceiling as defined in the Texas Finance Code and shall be used in this Note for calculating the Highest Lawful Rate and for all other purposes. The term "applicable law" as used in this Note shall mean the laws of the State of Texas or the laws of the United States, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. If this Note is placed in the hands of an attorney for collection after default, or if all or any part of the indebtedness represented hereby is proved, established or collected in any court or in any bankruptcy, receivership, debtor relief, probate or other court proceedings, Borrower and all endorsers, sureties and guarantors of this Note jointly and severally agree to pay reasonable attorneys' fees and collection costs to the holder hereof in addition to the principal and interest payable hereunder. Borrower and all endorsers, sureties and guarantors of this Note hereby severally waive demand, presentment for payment, protest, notice of protest, notice of intention to accelerate the maturity of this Note, notice of the acceleration of the maturity of this Note, diligence in collecting, the bringing of any suit against any party and any notice of or defense on account of any extensions, renewals, partial payments or changes in any manner of or in this Note or in any of its terms, provisions and covenants, or any releases or substitutions of any security, or any delay, indulgence or other act of any trustee or any holder hereof, whether before or after maturity. 2 THIS NOTE AND THE RIGHTS, DUTIES AND LIABILITIES OF THE PARTIES HEREUNDER AND/OR ARISING FROM OR RELATING IN ANY WAY TO THE INDEBTEDNESS EVIDENCED BY THIS NOTE OR THE TRANSACTION OF WHICH SUCH INDEBTEDNESS IS A PART SHALL BE GOVERNED AND CONSTRUED FOR ALL PURPOSES BY THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THE SAME ARE GOVERNED BY APPLICABLE FEDERAL LAW. WESTERN GAS RESOURCES, INC. By:__________________________________ Name: Title: 3 Exhibit B --------- RATE ELECTION Reference is made to that certain Agreement dated as of February 17, 1999 (as from Time to time amended, the "Agreement"), by and among Western Gas --------- Resources, Inc. ("Borrower") and NationsBank, N.A. Terms which are defined in -------- the Agreement and which are used but not defined herein are used herein with the meanings given them in the Agreement. Pursuant to the terms of the Agreement Borrower hereby elects a Eurodollar Portion in the aggregate amount of $_________ with an Interest Period beginning on _______________ and continuing for A period of ______________. The undersigned officer of Borrower hereby certifies that he is a duly elected, qualified and acting officer of Borrower, having all necessary authority to act in making the election herein contained. IN WITNESS WHEREOF this instrument is executed as of ___________, 1999. WESTERN GAS RESOURCES, INC. By:________________________________ Name: Title: EX-21.1 8 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF WESTERN GAS RESOURCES, INC.
NAME OF SUBSIDIARY RELATIONSHIP - ------------------ ------------ 1) MIGC, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 2) MGTC, Inc. Wholly-owned subsidiary of MIGC, Inc. 3) Western Gas Resources - Texas, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 4) Western Gas Resources Storage, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 5) Western Gas Resources - Oklahoma, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 6) Mountain Gas Resources, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 7) Western Power Services, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 8) Pinnacle Gas Treating, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 9) WGR Canada, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 10) Lance Oil & Gas Company, Inc. Wholly-owned subsidiary of Western Gas Resources, Inc. 11) Mountain Gas Transportation, Inc. Wholly-owned subsidiary of Mountain Gas Resources, Inc. 12) Western Gas Wyoming, L.L.C. Wholly-owned subsidiary of Western Gas Resources, Inc. 13) Green River Gathering Company A joint venture between Western Gas Resources, Inc. and Mountain Gas Resources, Inc. 14) Westana Gathering Company A general partnership with Western Gas Resources, Inc., as general partner
EX-23.1 9 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (No. 33-66516, No. 33-54741, No. 333-00903 and No. 333-13099) and in the Registration Statements on Form S-8 (No. 33-67834 and No. 333-29711) of Western Gas Resources, Inc. of our report dated March 22, 1999 appearing on page 28 of this Form 10-K. PRICEWATERHOUSECOOPERS LLP Denver, Colorado March , 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 4,400 0 233,574 0 56,360 297,285 1,152,076 (305,589) 1,219,377 281,259 504,881 0 416 3,217 381,583 1,219,377 2,105,980 2,133,566 1,914,303 1,914,303 291,270 0 33,616 (105,623) (38,418) (67,205) 0 0 0 (67,205) (2.42) (2.42)
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