<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                                      1934
 
                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
 
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
                                    OF 1934
 
               FOR THE TRANSITION PERIOD FROM         TO
 
                         COMMISSION FILE NUMBER 1-12426
 
                        AQUILA GAS PIPELINE CORPORATION
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      47-0731171
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)
              100 N.E. LOOP 410
                  SUITE 1000
              SAN ANTONIO, TEXAS                                 78216-4754
   (Address of principal executive offices)                      (Zip Code)
</TABLE>
 
       Registrant's telephone number, including area code (210) 342-0685
 
          Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
    Common Stock, par value $.01 per share                New York Stock Exchange
</TABLE>
 
        Securities registered pursuant to Section 12(g) of the Act: None
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
 
     The aggregate market value of the voting stock held by nonaffiliates of the
registrant is $64,667,568 based on the March 3, 1998 New York Stock Exchange
closing price of $12.
 
     Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the close of the latest practicable date.
 
<TABLE>
<CAPTION>
                    CLASS                               OUTSTANDING ON MARCH 3, 1998
                    -----                               ----------------------------
<S>                                            <C>
    Common Stock, par value $.01 per share                       29,400,000
</TABLE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the Registrant's definitive Proxy Statement, to be filed with
the Commission within 120 days of December 31, 1997, for its Annual Meeting of
Stockholders to be held on May 12, 1998, are incorporated by reference in Part
III of this Annual Report.
 
================================================================================
<PAGE>   2



                        AQUILA GAS PIPELINE CORPORATION

                        1997 ANNUAL REPORT ON FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>


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

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

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


    PART II

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


    PART III

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


    PART IV

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

</TABLE>


<PAGE>   3



                                     PART I



ITEM 1.  BUSINESS

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

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

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

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

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

GENERAL DEVELOPMENT OF BUSINESS

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

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



                                       1
<PAGE>   4



     OASIS PIPE LINE COMPANY

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

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

NARRATIVE DESCRIPTION OF BUSINESS

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

<TABLE>
<CAPTION>

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

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

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

</TABLE>

GATHERING AND PROCESSING

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

     PURCHASING

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

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

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


                                       2
<PAGE>   5



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

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

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

     SUPPLY

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

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

     PROCESSING

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

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

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

SALES AND MARKETING

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


                                       3

<PAGE>   6

     NATURAL GAS

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

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

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

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

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

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

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

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

     NGLS MARKETING

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

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

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



                                       4
<PAGE>   7

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

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

COMPETITION

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

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

GOVERNMENTAL REGULATION

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

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

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

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



                                       5
<PAGE>   8



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

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

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

ENVIRONMENTAL

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

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

INSURANCE AND OPERATIONAL RISKS

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

EMPLOYEES

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




                                       6
<PAGE>   9



     ITEM 2.  PROPERTIES

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

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

<TABLE>
<CAPTION>

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

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


</TABLE>


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


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



                                       7
<PAGE>   10



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

<TABLE>
<CAPTION>

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

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

</TABLE>

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

ITEM 3.  LEGAL PROCEEDINGS

     The Internal Revenue Service (IRS) has examined and proposed adjustments
to UtiliCorp's consolidated federal income tax returns for 1988 through 1993.
The proposed adjustment affecting the Company is to lengthen the depreciable
life of certain pipeline assets owned by the Company. The Company has filed a
petition in U.S. Tax Court contesting the IRS proposed adjustments for the
years of 1990 through 1992. The IRS has also proposed an adjustment on the same
issue for 1993, which the Company plans to contest by filing a similar
petition. The Company intends to vigorously contest the proposed adjustment and
believes it is reasonably possible they will prevail. It is expected that
additional assessments for the years 1994 through the present would be made on
the same issue. Under the provisions of the tax sharing agreement with Aquila
Energy and UtiliCorp, the Company would be liable to UtiliCorp for additional
taxes of approximately $8.7 million for the audit period and through the
present plus potential interest of approximately $2.7 million. The additional
taxes would result in an adjustment to the deferred tax liability with no
effect on net income, while any payment of interest would affect net income.
The Company expects that the ultimate resolution of this matter will not have a
material adverse effect on its financial position.

     The Company is also a party to additional claims and is involved in
various other litigation and administrative proceedings arising in the normal
course of business. The Company believes it is unlikely that the final outcome
of any of the claims, litigation or proceedings, including those discussed
above, to which the Company is a party would have a material adverse effect on
the Company's financial position or results of operations. However, due to the
inherent uncertainty of litigation, there can be no assurance that the
resolution of any particular claim or proceeding would not have an adverse
effect on the Company's results of operations for the fiscal period in which
such resolution occurred.

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

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




                                       8
<PAGE>   11



                                    PART II


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

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


<TABLE>
<CAPTION>

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

        1996:

<S>                                                  <C>               <C>              <C>   
             First Quarter .....................        $  14             $ 11                      $.0125
             Second Quarter.....................        $  14 7/8         $ 12 1/2                  $.0125
             Third Quarter .....................        $  13 1/2         $ 12                      $.0125
             Fourth Quarter.....................        $  16 1/2         $ 13                      $.0125
             
        1997:                                               
             First Quarter .....................        $  15 5/8         $ 12 1/2                  $.0125
             Second Quarter.....................        $  15 1/4         $ 13 1/4                  $.0125
             Third Quarter .....................        $  14             $  9 5/8                  $.0125
             Fourth Quarter ....................        $  14 5/16        $ 12 7/16                 $.0125
               
        
</TABLE>

        
        


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

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


                                       9
<PAGE>   12



ITEM 6.  SELECTED FINANCIAL DATA

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


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

<TABLE>
<CAPTION>

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

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

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

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

</TABLE>


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


                                      10
<PAGE>   13



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

RECENT OPERATIONS DEVELOPMENTS

     In March 1998, the Company announced that it had retained the services of
Merrill Lynch & Co. to explore strategic alternatives. The action includes
consideration of selling or merging the Company.

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

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


<TABLE>
<CAPTION>

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

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

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

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

<CAPTION>




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

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

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

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

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


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

</TABLE>


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

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



                                      11
<PAGE>   14



RESULTS OF OPERATIONS

     The Company's results of operations are determined primarily by the volume
of gas purchased, processed and resold in its gas gathering systems and natural
gas processing plants, as well as its off-system marketing activities.
Fluctuations in the price levels of natural gas and NGLs also affect results of
operations since the Company generally receives a portion of the natural gas
and NGLs revenue from natural gas throughput. The Company, from time to time,
enters into hedging transactions such as contracts for future deliveries in
order to minimize the risk associated with changes in the price of natural gas
and NGLs. The price of NGLs has declined precipitously in the first quarter of
1998 along with other hydrocarbon liquid prices. The Company has not entered
into hedging transactions to mitigate the effect of lower NGL on its results of
operations. Most of the Company's operating costs do not vary directly with
volumes on existing systems; thus, increases or decreases in volumes on
existing systems generally have a direct effect on net income.


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

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

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

     Cost of sales was $894.6 million, or 88% of operating revenues, in 1997
compared to $664.1 million, or 83% of operating revenues, in 1996. The increase
in the percentage is primarily due to a higher cost of gas supply for the
pipeline systems and the increase in overall off-system marketing activities
which have lower gross margin percentages. Cost of sales increased primarily as
the result of an increase in the average natural gas price and the Oasis
off-system marketing activity.

     Gross margin (operating revenues less cost of sales, which includes only
the direct cost of gas sold and does not include any related operating
expenses) was $119.3 million, or 12% of operating revenues, in 1997 compared to
$135.2 million, or 17% of operating revenues, in 1996. The decrease in
percentage is primarily due to a higher cost of gas supply for the pipeline
systems and to the increase in overall off-system marketing activities which
have lower gross margin percentages. The decrease in the gross margin is due to
lower gross margins from the pipeline systems as a result of decreased
throughput volumes, higher cost of gas supply and a decrease in NGLs revenues.

     Operating expenses decreased 4% to $22.6 million in 1997 compared to $23.6
million in 1996 primarily as a result of a reduction in the insurance expense
and maintenance on the plant and gathering systems offset by recording
additional expenses associated with an increase in the ownership percentage of
the Company's interest in a joint venture.

     General and administrative expenses decreased 20% to $15.6 million in 1997
compared to $19.5 million in 1996 due primarily to decreased compensation and
service agreement costs. The Company accrues compensation related to the Stock
Appreciation Rights (SARs) based on the price of the Company's common stock.
The accrual for SARs between 1997 and 1996 decreased $1.6 million. In 1997, the
Company's service agreement costs were lower by $.4 million as compared to
1996.

     Depreciation and amortization increased 8% to $25.6 million in 1997
compared to $23.7 million in 1996 primarily as the result of asset additions on
the SETPS and the amortization of the transportation rights related to Oasis.

     Interest and debt expenses increased 10% to $17.2 million in 1997 compared
to $15.7 million in 1996 primarily as a result of the Oasis acquisition offset
by the reduction of $1.3 million of interest recorded in 1997 as compared to
1996 associated with certain agreed-upon tax issues with the IRS resulting from
the IRS examination of certain UtiliCorp federal income tax returns (further
discussed below).



                                      12
<PAGE>   15



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

     Provision in lieu of income tax expense decreased 26% to $15.0 million in
1997 compared to $20.1 million in 1996 due primarily to a decrease in income
before income taxes in 1997 compared to 1996. UtiliCorp has agreed with the IRS
on certain tax issues as a result of the IRS audits of 1990 through 1993
UtiliCorp federal income tax returns (hereinafter referred to as "agreed-upon
tax issues"). In accordance with the provisions of the tax sharing agreement,
UtiliCorp assessed the Company $3.5 million for these agreed-upon tax issues.
The Company paid UtiliCorp these amounts in 1997 and the first quarter of 1998.
The payment of the income taxes associated with these agreed-upon tax issues
had no effect on net income but an adjustment was made to the deferred tax
liability. Also, see Note 4 of Notes to Consolidated Financial Statements.

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

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

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

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

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

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

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

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

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




                                       13
<PAGE>   16



     Provision in lieu of income tax expense increased 263% to $20.1 million in
1996 compared to $5.5 million in 1995 due to an increase in income before
income taxes in 1996 compared to 1995. UtiliCorp has agreed with the IRS on
certain tax issues as a result of the IRS audits of certain UtiliCorp federal
income tax returns. The Company will be liable to UtiliCorp for approximately
$3.1 million, under the provisions of the tax sharing agreement, once UtiliCorp
assesses the Company for the agreed-upon tax issues. The payment of the income
taxes associated with the agreed-upon tax issues will have no effect on net
income, as it will be an adjustment to the deferred tax liability, upon
assessment by UtiliCorp.

LIQUIDITY AND CAPITAL RESOURCES

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

     In April 1997, the Company received $16.8 million from El Paso upon their
exercise of certain option arrangements to acquire 5% of all the capital stock
of Oasis and related transportation rights from the Company. The proceeds were
utilized to pay down the Company's revolving debt.

     The Company maintains revolving credit agreements (the Revolvers), as
amended, of $128.0 million with Aquila Energy to provide funds for general
corporate purposes. In June 1997, the Company voluntarily reduced its
commitment by $40.0 million on its Revolvers which reduces the available
borrowings on the Revolvers to $20.3 million at December 31, 1997. There was
$107.7 million outstanding on the Revolvers at December 31, 1997. The maturity
dates on the Revolvers automatically renew in one year periods from each
commitment period (the fourth quarter of any given year) unless Aquila Energy
gives at least a one year notice not to renew from the commitment period.
Currently, the maturity dates of the Revolvers are in the fourth quarter of
1999. On February 1, 1998, the Company voluntarily reduced its commitment by
$10.0 million on its Revolvers to a commitment of $118.0 million.

     The Company has a Loan Agreement (the Loan) with Aquila Energy for an
amount of $50.0 million, which matures in 2005, to provide funds for general
corporate purposes. The Loan requires the Company to maintain certain financial
covenants and limits the activities of the Company in other ways. At December
31, 1997, $50.0 million was outstanding under the Loan and the Company was in
compliance with the covenants.

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

     The 8.29% Senior Notes issued by Aquila Southwest Energy Corporation
(Aquila Southwest) in 1992 require principal payments of $12.5 million
annually. Such principal payments are expected to be made from cash flows from
operations and borrowings. The 8.29% Senior Note purchase agreement has
numerous covenants which affect the Company and Aquila Southwest. These
covenants limit the ability to make dividend payments (currently, limited to
$62.6 million) and incur debt, require maintenance of certain financial ratios
and limit the activities of Aquila Southwest in other ways. Failure to maintain
the required ratios may ultimately result in an acceleration of payments due.
At December 31, 1997, $62.5 million was outstanding on the Senior Notes and the
Company was in compliance with the covenants.

     The Company believes that cash generated from operations and borrowings
under the Revolvers will be adequate to fund working capital requirements, debt
service payments and planned capital expenditures. Future acquisitions or large
capital expenditures in excess of current plans would require additional
financing that the Company expects would be available through additional debt
facilities.

NEW ACCOUNTING STANDARDS

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



                                      14
<PAGE>   17



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

     In June 1997, the FASB issued SFAS No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," which establishes the way
that public business enterprises report information about operating segments in
annual and interim financial statements issued to shareholders. SFAS 131
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. Based on the
Company's current operations, SFAS 131 is not expected to have an impact on the
Company's consolidated financial statements.

FORWARD-LOOKING INFORMATION

     The Company is including the following cautionary statement to make
applicable and take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. The factors identified in this
cautionary statement are important factors (but not necessarily all of the
important factors) that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company.

     Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where, in any
forward-looking statement, the Company, or its management, expresses an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis, but there can
be no assurance that the statement of expectation or belief will result or be
achieved or accomplished.

     Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
Company:

a)   The ability to increase transmission, gathering, processing, and sales
     volumes can be subject to the impact of price; drilling activity and
     success of producers; and service competition, especially due to excess
     pipeline availability. Existing volumes are subject to depletion without
     addition of future developed gas supplies. The ability to contract
     additional gas supplies for the existing systems also is affected by the
     available number of drilling locations in the proximity of these existing
     gas systems and the related economic reserves of these drilling locations.

b)   Growth strategies through acquisition, internal project development, and
     investments in joint ventures may face legal and regulatory delays,
     financing difficulties, competition from other acquirers and competitors,
     and other unforeseeable obstacles beyond the Company's control.

c)   Future profitability will be affected by the Company's ability to compete
     with the services and economic contractual terms offered by other energy
     enterprises which may be larger, offer more services, and possess greater
     resources. Future profitability also will be affected by the level of
     prices of natural gas, NGLs and competitive fuels and feedstocks.

d)   Future operating results and success of business ventures may be subject
     to the effects of and changes in laws and regulations, political and
     governmental changes, inflation rates, taxes, and operating conditions.
     Also, future operating results are subject to unexpected items resulting
     from such events as, but not limited to, litigation settlements, adverse
     rulings or judgments, and unexpected environmental remediation.

e)   The Company's operations are subject to the risks incident to the
     gathering, transportation, processing and storage of natural gas and NGLs,
     such as explosions, product spills, leaks and fires, any of which could
     result in substantial losses to the Company and curtailment or suspension
     of operations at a Company facility.



                                      15
<PAGE>   18



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     None.



                                      16
<PAGE>   19



                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

                       EXECUTIVE OFFICERS OF THE COMPANY

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

       NAME                                            POSITION(S)

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

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

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

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

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

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



                                      17

<PAGE>   20



ITEM 11.  EXECUTIVE COMPENSATION

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


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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




                                      18
<PAGE>   21



                                    PART IV

<TABLE>
<CAPTION>


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

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

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

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

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

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

(b)       Reports on Form 8-K.

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

</TABLE>


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



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

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


                                      F-1

<PAGE>   23

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



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



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

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

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

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

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




                                       ARTHUR ANDERSEN LLP

San Antonio, Texas
February 12, 1998


                                      F-2

<PAGE>   24

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

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

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

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

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

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

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

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

                      LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

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


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


                                      F-3

<PAGE>   25

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


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

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

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

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

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

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

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

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

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

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

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


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


                                       F-4

<PAGE>   26

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


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

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

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

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


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


                                       F-5

<PAGE>   27

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)


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

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

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

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

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

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

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

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

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


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


                                       F-6

<PAGE>   28

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

      BUSINESS

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

      PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

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

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

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The more significant areas requiring the use of estimates
relate to the fair value of financial instruments and useful lives for
depreciation and amortization. Actual results may differ from those estimates.

      The Company is subject to a number of risks inherent in the industry in
which it operates, primarily fluctuating prices and gas supply. The Company's
financial condition and results of operations will depend significantly upon the
prices received for natural gas and NGLs. These prices are subject to wide
fluctuation due to a variety of factors that are beyond the control of the
Company. In addition, the Company must continually connect new wells to its
gathering systems in order to maintain or increase throughput levels to offset
natural declines in dedicated volumes. The number of new wells drilled will
depend on a variety of factors that are beyond the control of the Company.


                                      F-7

<PAGE>   29


                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

      STATEMENTS OF CASH FLOWS

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

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

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

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

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

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

      REVENUE RECOGNITION

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

      INVENTORIES AND EXCHANGES

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

      MATERIALS AND SUPPLIES

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


                                      F-8

<PAGE>   30

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)



1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

      COMMODITY RISK MANAGEMENT:

          NON-TRADING ACTIVITIES

      The Company utilizes various exchange-traded and over-the-counter
commodity financial instrument contracts to hedge natural gas and NGLs. These
consist primarily of futures, options, forward contracts and swaps. Financial
instruments are designated as a hedge at inception. Hedges of anticipated
transactions are accounted for under the deferral method with gains and losses
on these transactions recognized in revenues when the hedged transaction occurs.

      Gains and losses on the early termination or maturity of commodity
financial instrument contracts designated as hedges are deferred and included in
revenues in the period the hedged transaction is recorded. If the direct
relationship to price risk ceases to exist, the difference in the carrying value
and fair value is recognized as a gain or loss in revenues in the period the
direct relationship ceases to exist. Changes in fair value are recognized as
gains or losses in revenues in the period of change. Most of the Company's
hedging activities have tended to reduce the Company's participation in rising
margins but are intended to limit the Company's exposure to loss during periods
of declining margins.

          TRADING ACTIVITIES

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

      PIPELINE, PROPERTY, PLANT AND EQUIPMENT

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

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

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


                                      F-9

<PAGE>   31

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)


      INTANGIBLE ASSETS

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


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

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

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

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

      INCOME TAXES

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

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


                                      F-10

<PAGE>   32

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

      EARNINGS PER SHARE

      In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128 (SFAS 128), "Earnings per Share." SFAS 128 establishes new
standards for computing and presenting earnings per share (EPS). At December 31,
1997, the Company adopted SFAS 128. The following is a reconciliation of income
available to common stockholders and the weighted average number of common
shares outstanding for each respective period.

<TABLE>
<CAPTION>
                                                             For the Year Ended December 31,
                                                     ----------------------------------------------
                                                         1997             1996             1995
                                                     ------------     ------------     ------------
<S>                                                  <C>              <C>              <C>         
         Income available to common stockholders     $     25,166     $     32,453     $      9,065

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

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


      Certain options to purchase 24,000 shares of common stock at $14.00 per
share were outstanding for a portion of 1997 but were not included in the
computation of EPS because the options' exercise price was greater than the
average market price of the common shares. The Company began issuing its stock
options in 1997; therefore, there is no change to previously reported EPS data.

      IMPAIRMENT OF LONG-LIVED ASSETS

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

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

      NEW ACCOUNTING STANDARDS

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


                                      F-11

<PAGE>   33

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

      In June 1997, the FASB issued SFAS No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," which establishes the way
that public business enterprises report information about operating segments in
annual and interim financial statements issued to shareholders. SFAS 131
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. Based on the Company's
current operations, SFAS 131 is not expected to have an impact on the Company's
consolidated financial statements.

2.    RELATED PARTY TRANSACTIONS:

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

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

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


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


                                      F-12


<PAGE>   34

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


2.    RELATED PARTY TRANSACTIONS:  (CONTINUED)

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


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

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


3.    DEBT:

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


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


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

      REVOLVING CREDIT AGREEMENTS

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


                                      F-13

<PAGE>   35

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


3.    DEBT:  (CONTINUED)

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

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

      LOAN AGREEMENTS

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

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

      SENIOR NOTES

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

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

      LINE OF CREDIT

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

4.    INCOME TAXES:

      Components of income tax expense are as follows:

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


                                      F-14

<PAGE>   36

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


4.    INCOME TAXES: (CONTINUED)

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

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


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

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

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

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

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

5.    MAJOR CUSTOMERS:

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

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


                                      F-15

<PAGE>   37

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


5.    MAJOR CUSTOMERS: (CONTINUED)

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

6.    RETIREMENT AND BENEFIT PLANS:

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

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

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

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

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

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


                                      F-16

<PAGE>   38

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


6.    RETIREMENT AND BENEFIT PLANS: (CONTINUED)

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

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

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

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

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

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

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


                                      F-17

<PAGE>   39

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


6.    RETIREMENT AND BENEFIT PLANS: (CONTINUED)

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

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

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

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

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

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

7.    COMMITMENTS AND CONTINGENCIES:

      LEASE OBLIGATIONS

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

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

      LETTERS OF CREDIT AND GUARANTIES

      The Company has issued irrevocable standby letters of credit totaling
$9,340 at December 31, 1997. The standby letters of credit, which generally have
terms from one to three months, collateralize obligations to third parties for
the purchase of natural gas. The standby letters of credit are issued pursuant
to the line of credit discussed in Note 3.


                                      F-18

<PAGE>   40

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


7.    COMMITMENTS AND CONTINGENCIES: (CONTINUED)

      The Company issued financial guarantees of approximately $1,225 at
December 31, 1997, related to business activities of a 50% owned subsidiary.
Management does not believe it is probable that the financial guarantees will be
exercised.

      TAXES

      The IRS has examined and proposed adjustments to UtiliCorp's consolidated
federal income tax returns for 1988 through 1993. The proposed adjustment
affecting the Company is to lengthen the depreciable life of certain pipeline
assets owned by the Company. The Company has filed a petition in U.S. Tax Court
contesting the IRS proposed adjustments for the years of 1990 through 1992. The
IRS has also proposed an adjustment on the same issue for 1993, which the
Company plans to contest by filing a similar petition. The Company intends to
vigorously contest the proposed adjustment and believes it is reasonably
possible they will prevail. It is expected that additional assessments for the
years 1994 through the present would be made on the same issue. Under the
provisions of the tax sharing agreement with Aquila Energy and UtiliCorp (see
Note 1) the Company would be liable to UtiliCorp for additional taxes of
approximately $8,663 for the audit period and through the present plus potential
interest of approximately $2,747. The additional taxes would result in an
adjustment to the deferred tax liability with no effect on net income, while any
payment of interest would affect net income. The Company expects that the
ultimate resolution of this matter will not have a material adverse effect on
its financial position.

      The Company is also a party to additional claims and is involved in
various other litigation and administrative proceedings arising in the normal
course of business. The Company believes it is unlikely that the final outcome
of any of the claims, litigation or proceedings, including those discussed
above, to which the Company is a party would have a material adverse effect on
the Company's financial position or results of operations. However, due to the
inherent uncertainty of litigation, there can be no assurance that the
resolution of any particular claim or proceeding would not have an adverse
effect on the Company's results of operations for the fiscal period in which
such resolution occurred.

      The Company, in the normal course of business of its natural gas pipeline
operations, purchases and sells natural gas pursuant to long-term contracts.
Such contracts contain terms which are customary in the industry. The Company
believes that such terms are commercially reasonable and will not have a
material adverse effect on the Company's financial position or results of
operations.

8.    ACQUISITIONS AND SALES:

      OASIS PIPE LINE COMPANY

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

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


                                      F-19

<PAGE>   41

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


8.    ACQUISITIONS AND SALES: (CONTINUED)

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

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

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

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

      TRISTAR GAS COMPANY

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

      WARWINK JOINT VENTURE

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

9.    COMMODITY RISK MANAGEMENT:


      NON-TRADING ACTIVITIES

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


                                      F-20

<PAGE>   42

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


9.    COMMODITY RISK MANAGEMENT: (CONTINUED)

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

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


      (1)  Billion cubic feet

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

      TRADING ACTIVITIES

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

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


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

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


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


                                      F-21

<PAGE>   43

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


10.  FINANCIAL INSTRUMENTS:

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

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

      DEBT

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

      LETTERS OF CREDIT

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

11.   INVESTMENT IN AFFILIATED COMPANY:

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

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

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

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

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

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

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

         SUMMARIZED STATEMENT OF INCOME INFORMATION:

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


                                      F-22

<PAGE>   44

                AQUILA GAS PIPELINE CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


12.   QUARTERLY FINANCIAL DATA:  (UNAUDITED)


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

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


                                      F-23

<PAGE>   45


                        AQUILA GAS PIPELINE CORPORATION

                          FINANCIAL STATEMENT SCHEDULE


                                      F-24

<PAGE>   46

                                                                      SCHEDULE I


                         AQUILA GAS PIPELINE CORPORATION
                               PARENT COMPANY ONLY

                            CONDENSED BALANCE SHEETS

                                 (IN THOUSANDS)


                                     ASSETS

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

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



                      LIABILITIES AND STOCKHOLDERS' EQUITY


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

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


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


                                      F-25

<PAGE>   47

                                                                      SCHEDULE I
                                                                     (CONTINUED)


                         AQUILA GAS PIPELINE CORPORATION
                         PARENT COMPANY ONLY (CONTINUED)

                         CONDENSED STATEMENTS OF INCOME

                                 (IN THOUSANDS)


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

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

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

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


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


                                      F-26

<PAGE>   48

                                                                      SCHEDULE I
                                                                     (CONTINUED)


                         AQUILA GAS PIPELINE CORPORATION
                         PARENT COMPANY ONLY (CONTINUED)

                       CONDENSED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                      ------------------------------------------
                                                                         1997            1996            1995
                                                                      ----------      ----------      ----------
<S>                                                                   <C>             <C>             <C>       
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net  income ....................................................     $   25,166      $   32,453      $    9,065
  Adjustments to reconcile net income to net cash provided by
  operating activities:
    Equity in net earnings of subsidiaries ......................        (23,507)        (33,264)         (9,734)
    Dividends received from affiliated subsidiaries .............         30,000              --              --
    Depreciation and amortization ...............................             32              26              20
  Changes in current assets and current liabilities .............         18,164          12,552           6,958
                                                                      ----------      ----------      ----------

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

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

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

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

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

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


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


                                      F-27

<PAGE>   49

                                                                      SCHEDULE I
                                                                     (CONTINUED)


                         AQUILA GAS PIPELINE CORPORATION
                         PARENT COMPANY ONLY (CONTINUED)

                     NOTES TO CONDENSED FINANCIAL STATEMENTS



1.  DEBT

    See Note 3 of Notes to Consolidated Financial Statements.

2.  PIPELINE, PROPERTY, PLANT AND EQUIPMENT

    See Note 1 of Notes to Consolidated Financial Statements.

3.  COMMITMENTS AND CONTINGENCIES

    See Note 7 of Notes to Consolidated Financial Statements.


                                      F-28

<PAGE>   50



                                   SIGNATURES


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

                                                AQUILA GAS PIPELINE CORPORATION



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





Date  March 10, 1998

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

<TABLE>

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


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

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

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

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

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

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

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

</TABLE>


<PAGE>   51


<TABLE>
<CAPTION>

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

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

</TABLE>


<PAGE>   52

<TABLE>
<CAPTION>



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

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


</TABLE>


<PAGE>   53

<TABLE>
<CAPTION>



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

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

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

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

</TABLE>




<PAGE>   54

<TABLE>
<CAPTION>

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

</TABLE>

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