<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of earliest event reported: July 13, 1994
K N ENERGY, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kansas 1-6446 48-0290000
- - --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
370 Van Gordon Street, P.O. Box 281304, Lakewood, CO 80228-8304
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, include area code: (303) 989-1740
Page 1 of 31
<PAGE> 2
Item 5. Other Events
With respect to the terms set forth in the Form S-3 Registration Statement (No.
33-53255) of K N Energy, Inc., reference is hereby made to the financial
statements which are filed herewith and incorporated herein by this reference.
Item 7. Financial Statements, Pro-Forma Financial Information and Exhibits
(a) Financial Statements - pages 4-28
(b) Pro-Forma Financial Statements - None
(c) Exhibits -
23.1 Report of Independent Public Accountants
23.2 Consent of K N Independent Public Accountants
Page 2 of 31
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
K N ENERGY, INC.
By: /s/ WILLIAM S. GARNER, JR.
William S. Garner, Jr.
Vice President, General Counsel
and Secretary
Date: July 13, 1994
Page 3 of 31
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------
1993 1992 1991
- - ------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands
Except Per Share Amounts)
<S> <C> <C> <C>
OPERATING REVENUES:
Gas Services $1,030,712 $ 822,687 $ 776,133
Gas and Oil Production 5,321 4,710 3,053
---------- ---------- ----------
Total Operating Revenues 1,036,033 827,397 779,186
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Gas Purchases 680,666 527,336 517,583
Operations and Maintenance 215,100 163,642 136,395
Depreciation, Depletion and
Amortization 44,644 39,353 32,476
Taxes, Other Than Income Taxes 15,419 13,309 11,242
---------- ---------- ----------
Total Operating Costs and Expenses 955,829 743,640 697,696
---------- ---------- ----------
OPERATING INCOME 80,204 83,757 81,490
---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS):
Interest Expense (30,513) (27,012) (23,990)
Minority Interests 292 (1,559) (311)
Other, Net (515) 1,224 1,167
---------- ---------- ----------
Total Other Income and (Deductions) (30,736) (27,347) (23,134)
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 49,468 56,410 58,356
Income Taxes 18,599 20,068 21,282
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 30,869 36,342 37,074
Loss from Discontinued Operations,
Net of Income Taxes -- -- (17,250)
---------- ---------- ----------
NET INCOME 30,869 36,342 19,824
Less - Preferred Stock Dividends 853 2,976 4,808
---------- ---------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK $ 30,016 $ 33,366 $ 15,016
========== ========== ==========
EARNINGS PER COMMON SHARE:
Continuing Operations $ 1.09 $ 1.34 $ 1.45
Discontinued Operations -- -- (0.77)
---------- ---------- ----------
$ 1.09 $ 1.34 $ 0.68
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4 of 31
<PAGE> 5
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1993 1992
- - -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 14,353 $ 23,554
Accounts Receivable 177,146 138,268
Contract Demand Receivables (See Note 1(J)) 38,732 --
Material and Supplies, at Average Cost 11,604 10,422
Gas in Underground Storage 20,853 11,971
Prepaid Gas 11,689 14,404
Exchange Gas and Other 38,479 52,261
---------- ----------
312,856 250,880
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Gas Services 1,208,965 1,033,964
Gas and Oil Production 34,381 31,758
---------- ----------
1,243,346 1,065,722
Less--Accumulated Depreciation, Deple-
tion and Amortization 427,642 354,781
---------- ----------
815,704 710,941
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 39,288 45,590
---------- ----------
$1,167,848 $1,007,411
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Preferred Stock
and Long-Term Debt $ 26,837 $ 11,123
Notes Payable 47,000 2,000
Accounts Payable 144,245 119,536
Accrued Taxes 10,474 10,035
Exchange Gas and Other 33,348 62,029
---------- ----------
261,904 204,723
---------- ----------
DEFERRED LIABILITIES, CREDITS AND
RESERVES:
Deferred Income Taxes 89,831 73,444
Deferred Revenues (See Note 1(J)) 43,692 --
Other 22,136 33,932
---------- ----------
155,659 107,376
---------- ----------
LONG-TERM DEBT 335,190 303,224
---------- ----------
MINORITY INTERESTS IN EQUITY OF
SUBSIDIARIES 13,775 13,540
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
(NOTES 5 AND 12)
PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION 2,858 4,500
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock 7,000 26,310
---------- ----------
Common Stock:
Authorized - 50,000,000 Shares, Par
Value $5 Per Share
Outstanding - 27,200,967 and 17,047,066
Shares, Respectively 136,005 85,235
Additional Paid-in Capital 164,427 186,575
Retained Earnings 92,187 75,928
Deferred Compensation (1,157) --
---------- ----------
Total Common Stockholders' Equity 391,462 347,738
---------- ----------
Total Stockholders' Equity 398,462 374,048
---------- ----------
$1,167,848 $1,007,411
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
Page 5 of 31
<PAGE> 6
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL DEFERRED
--------------------- -------------------- PAID-IN COMPEN- RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION EARNINGS
- - ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1990 14,625,217 $ 73,126 (54,455) $(1,359) $125,849 $ -- $ 53,592
Net Income 19,824
Cash Dividends -
Common, $0.51 Per Share (11,359)
Preferred (4,808)
Loss on Redemption of Preferred Stock (53)
Treasury Stock Acquired (236,100) (5,794)
Employee Stock Options 5,083 26 24,482 613 53 -- (252)
Employee Benefit Plans 112,799 564 82,495 1,934 1,961 -- (17)
Dividend Reinvestment and Stock
Purchase Plans 2 -- 118,808 2,879 -- -- (174)
---------- -------- -------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1991 14,743,101 73,716 (64,770) (1,727) 127,863 -- 56,753
Net Income 36,342
Cash Dividends -
Common, $0.51 Per Share (12,417)
Preferred (2,976)
Treasury Stock Acquired (48,833) (1,306)
Employee Stock Options 46,593 233 -- -- 423 -- --
Employee Benefit Plans 3,943 20 31,070 830 87 -- (51)
Dividend Reinvestment and Stock
Purchase Plans 54,355 271 82,533 2,203 916 -- (108)
Sale of Common Stock 1,981,833 9,909 -- -- 53,098 -- --
Conversion of AOG 9% Cumulative
Convertible Preferred Stock 207,089 1,035 -- -- 4,015 -- --
Other Issuances 10,152 51 -- -- 173 -- --
Buyback of 200,000 AOG Warrants -- -- -- -- -- -- (1,615)
----------- -------- -------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1992 17,047,066 85,235 -- -- 186,575 -- 75,928
Net Income 30,869
Cash Dividends -
Common, $0.51 Per Share (13,757)
Preferred (853)
Common Stock Split 8,639,721 43,199 -- -- (43,233) -- --
Employee Stock Options 81,416 407 -- -- 949 -- --
Employee Benefit Plans 20,717 104 -- -- 560 -- --
Dividend Reinvestment and Stock
Purchase Plans 171,592 858 -- -- 4,135 -- --
Conversion of AOG 9% Cumulative
Convertible Preferred Stock 1,141,755 5,709 -- -- 13,601 -- --
Issuance of Common Shares
as Executive Compensation 94,000 470 -- -- 1,867 (1,420) --
Amortization of Deferred Compensation -- -- -- -- -- 263 --
Other, Net 4,700 23 -- -- (27) -- --
---------- -------- -------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1993 27,200,967 $136,005 -- $ -- $164,427 $(1,157) $ 92,187
========== ======== ======== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 6 of 31
<PAGE> 7
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1993 1992 1991
- - ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from Continuing Operations $ 30,869 $ 36,342 $ 37,074
Adjustments to Reconcile Income from Continuing Operations to
Net Cash from Operating Activities:
Depreciation, Depletion and Amortization 44,644 39,353 32,476
Minority Interests (292) 1,559 311
Equity in Loss of Investees -- 966 1,697
Write down of Investment in WellTech, Inc. 4,513 -- --
Provisions for Losses on Accounts Receivable 1,197 251 710
Gain on Sale of Facilities (902) (63) (13)
Resolution of Contractual Obligations Under Basket Agreement (1,020) (7,780) (1,122)
Executive Stock Compensation 1,174 -- --
Deferred Income Taxes 9,748 11,258 (4,548)
Deferred Purchased Gas Costs (11,925) -- 11,575
Other Funds Used During Construction (516) (203) (337)
Changes in Other Working Capital Items (23,860) (23,852) 13,151
Changes in Deferred Revenues 4,960 -- --
Changes in Other Assets and Liabilities 9,353 (6,810) 6,645
-------- -------- --------
Net Cash Flows from Continuing Operations 67,943 51,021 97,619
Net Cash Flows from Discontinued Operations -- -- (11,157)
-------- -------- --------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 67,943 51,021 86,462
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures - Continuing Operations (102,671) (74,787) (69,080)
- Discontinued Operations -- -- (1,983)
Acquisitions (Net of Cash Acquired of $1,535,000 in 1992) (45,630) (21,468) --
Other Funds Used During Construction 516 203 337
Investments (150) (3,796) (3,675)
Proceeds from Sale of Facilities 7,206 1,107 368
(Payments) Collections under Basket Agreement 1,760 908 (8,499)
Proceeds from Sale of Discontinued Operations -- -- 7,224
-------- -------- --------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (138,969) (97,833) (75,308)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt (Net) 45,000 2,000 (6,000)
Long-Term Debt - Issued 113,347 151,000 57,000
- Retired (81,401) (154,755) (23,933)
Preferred Stock Redemption (2,143) (2,143) (14,696)
Common Stock Issued 7,020 64,927 2,161
Payment for Buyback of Common Stock Warrants -- (1,615) --
Treasury Stock - Issued -- 3,033 5,426
- Acquired -- (1,306) (5,794)
Cash Dividends - Common (13,757) (12,417) (11,359)
- Preferred (1,217) (3,088) (5,996)
Minority Interests - Contributions 2,306 1,299 911
- Distributions (3,733) (1,125) (1,455)
Premium on Debt Reacquisition and Issue Costs (3,597) (2,557) (481)
-------- -------- --------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 61,825 43,253 (4,216)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (9,201) (3,559) 6,938
Cash and Cash Equivalents at Beginning of Year 23,554 27,113 20,175
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 14,353 $ 23,554 $ 27,113
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 7 of 31
<PAGE> 8
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation
The consolidated financial statements include the accounts of K N
Energy, Inc. ("K N") and American Oil and Gas Corporation ("AOG"), and their
majority-owned subsidiaries (the "Company"). AOG was merged into K N effective
July 13, 1994 (See Note 2). The consolidated financial statements represent
the supplemental statements of the Company and will be the same as the restated
statements that will be issued after post merger operating results have been
published, reflecting pooling of interests accounting.
Investments in jointly-owned gas pipeline systems representing 20
percent to 50 percent ownership of such systems are accounted for under the
equity method. All material intercompany items and transactions have been
eliminated.
(B) Accounting for Regulatory Activities
The Company's regulated public utilities are accounted for in
accordance with Statement of Financial Accounting Standards No. 71, which
prescribes the circumstances in which the application of generally accepted
accounting principles is affected by the economic effect of regulation.
(C) Income Taxes
The Company implemented Statement of Financial Accounting Standards
No. 109 ("SFAS 109"), "Accounting for Income Taxes," effective as of January 1,
1992. SFAS 109 requires recognition of deferred income tax assets and
liabilities based on enacted tax laws for all temporary differences between
financial reporting and tax bases of assets and liabilities. Deferred tax
assets are reduced by a valuation allowance for the amount of any tax benefit
that is not expected to be realized. The adoption of SFAS 109 had an
insignificant effect on the Company's financial position and results of
operations.
(D) Earnings Per Share
Primary earnings per share are computed based on the monthly
weighted average number of common shares outstanding during the periods and the
assumed exercise of dilutive common stock equivalents (stock options and
warrants), using the treasury stock method.
On August 10, 1993, K N's Board of Directors declared a
three-for-two common stock split. The weighted average and per share amounts
in the accompanying financial statements have been restated to reflect the
stock split and the tax-free exchange of 0.47 of a share of K N common stock
for each outstanding share of AOG common
Page 8 of 31
<PAGE> 9
stock (See Note 2). The weighted average number of common shares outstanding
was 27,424,000 in 1993, 24,828,000 in 1992 and 22,320,000 in 1991.
(E) Prepaid Gas
Prepaid gas represents payments made in lieu of taking delivery of
(and purchasing) natural gas under the take-or-pay provisions of the Company's
gas purchase contracts, net of any subsequent recoupments in kind from
producers. Funds paid by the Company for take-or-pay are fully recoupable from
future production, and are recorded as an asset (Prepaid Gas). When recoupment
is made in kind in a subsequent contract year, natural gas purchase expense is
recorded and the asset is reduced.
(F) Property, Plant and Equipment
Property, plant and equipment is stated at cost, which for
constructed utility plant includes indirect costs such as payroll taxes, fringe
benefits, administrative and general costs and an allowance for funds used
during construction. Expenditures which increase capacities or extend useful
lives are capitalized. Routine maintenance, repairs and renewal costs are
expensed as incurred.
The cost of depreciable utility property, plant and equipment
retired, plus the cost of removal less salvage, is deducted from accumulated
depreciation with no effect on current period earnings. Gains or losses are
recognized upon retirement of nonutility property, plant and equipment.
(G) Exploration and Development Costs
K N's gas and oil subsidiaries follow the "successful efforts"
method of accounting. Under this method, acquisition costs, successful
exploration costs and development costs are capitalized and unsuccessful
exploration costs, lease rentals and evaluation costs are expensed.
(H) Depreciation, Depletion and Amortization
Depreciation is computed based on the straight-line method over the
estimated useful life for most gas service property, plant and equipment. The
unit-of-production method is used for computing depreciation, depletion and
amortization for gas and oil properties.
(I) Gas in Underground Storage
K N's regulated interstate retail distribution business and
Northern Gas Company account for gas in underground storage using the last-in
first-out ("LIFO") method. K N Gas Supply Services, Inc., a nonjurisdictional
subsidiary, values gas in underground storage at average cost. Rocky Mountain
Natural Gas Company and AOG use the first-in first-out ("FIFO") method.
The Company also maintains gas in its underground storage
facilities on behalf of certain third parties. The Company receives
Page 9 of 31
<PAGE> 10
a fee for its storage services but does not reflect the value of third party
gas in the accompanying financial statements.
(J) Deferred Revenues
In January 1994, contract demand receivables with a face amount of
$41 million were sold to a financial institution. No gain or loss was recorded
on the sale. The Company is deferring revenues from certain gas sales
agreements associated with these receivables pending final disposition of
related gas purchase contracts.
(K) Natural Gas Financial Instruments
Natural gas financial instruments, primarily futures contracts,
options and swaps, are primarily entered into as a hedge against price risk
associated with fluctuating natural gas prices. Gains and losses on hedging
positions are deferred and included in income as part of the hedged
transactions. Gains and losses on non-hedging positions are included in other
income (expense) as incurred.
(L) Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform with
the 1993 presentation.
(M) Cash Flow Information
The Company considers all highly-liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
Changes in Other Working Capital Items Summary, Supplemental
Disclosures of Cash Flow Information and Supplemental Schedule of Noncash
Investing and Financing Activities are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- - ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
CHANGES IN OTHER WORKING CAPITAL ITEMS
SUMMARY (NET OF ACQUISITION EFFECTS):
Accounts Receivable $(35,314) $(30,870) $27,858
Material and Supplies (1,042) 1,365 (2,743)
Gas in Underground Storage (4,292) (1,359) (2,889)
Accounts Payable, Accrued Taxes and Other Current Liabilities 23,887 11,308 2,474
Exchange Gas, Net (833) 1,206 (7,690)
Other Current Assets (6,266) (5,502) (3,859)
-------- -------- -------
$(23,860) $(23,852) $13,151
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest (Net of Amount Capitalized) $ 30,383 $ 25,422 $21,637
======== ======== =======
Income Taxes $ 7,386 $ 7,670 $15,066
======== ======== =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(A) On December 31, 1992, the Company acquired a partner's 25 percent interest
in Red River Pipeline partnership ("Red River") by assuming that partner's
share of Red River's liabilities. In January 1993, the Company acquired an
additional 25 percent interest in Red River for cash and the assumption of
liabilities. In April 1992, the Company acquired the assets of The Maple Gas
Page 10 of 31
<PAGE> 11
Corporation ("Maple") for $5.5 million cash, a $5.5 million note payable and
the assumption of certain of Maple's liabilities. In addition, the Company
purchased all of the capital stock of two corporations, each of which owned
gas distribution systems, for $5,248,000 in 1992. The liabilities assumed in
conjunction with these acquisitions for the years ended December 31, 1993 and
1992, are as follows:
<TABLE>
<S> <C> <C>
Fair value of assets acquired $ 9,194 $104,442
Cash paid for assets and capital stock,
including direct acquisition costs (2,093) (17,700)
------- --------
Liabilities assumed $ 7,101 $86,742
======= =======
</TABLE>
(B) In connection with the exchange and lease of gathering and processing
facilities described in Note 4(D), the Company exchanged its interest in
the Tyrone Gas Gathering system as a portion of the consideration.
2. MERGER
On July 13, 1994, pursuant to the Agreement of Merger dated March
24, 1994 (the "Merger Agreement"), among K N, KNE Acquisition Corporation and
AOG, KNE Acquisition Corporation was merged with and into AOG. KNE Acquisition
Corporation had been formed by K N in February 1994, as its wholly-owned
subsidiary, for the purpose of participating in the merger. As a result of the
merger, each outstanding share of common stock of AOG was converted into 0.47
of a share of common stock of K N and the right to receive in cash the value of
any fractional share of K N. In connection with the merger, all the
outstanding shares of AOG common stock were converted into approximately 12.2
million shares of K N stock, and the authorized number of shares of K N common
stock was increased to 50 million shares. The stockholders of K N and AOG
approved the merger on July 13, 1994.
The merger was accounted for as a pooling of interests, and
accordingly the historical consolidated financial statements for periods prior
to consummation of the merger have been restated as though the companies had
been combined from inception.
3. REGULATORY MATTERS
(A) Restructuring and Reorganization
On April 8, 1992, the Federal Energy Regulatory Commission
("FERC") issued Order No. 636 ("Order 636") which requires a fundamental
restructuring of interstate natural gas pipelines.
A separate restructuring docket was established for each
interstate pipeline, including K N (Docket No. RS92-19-000). On November 2,
1992, K N made its compliance filing reflecting K N's proposal for its
restructured services to implement Order 636. K N's proposal was revised in
response to subsequent FERC orders. As authorized by FERC, K N implemented
Order 636 restructured services on October 1, 1993. As a part of its action on
K N's restructuring proposal, FERC approved implementation of K N's gas supply
realignment ("GSR") crediting mechanism.
Page 11 of 31
<PAGE> 12
K N requested FERC approval, as a result of Order 636, to
transfer all of its interstate transmission and storage facilities to K N
Interstate Gas Transmission Co. ("KNI"), a wholly-owned jurisdictional
subsidiary of K N, and substantially all of its gathering and processing
facilities to K N Gas Gathering, Inc. ("KNGG"), a nonjurisdictional
wholly-owned subsidiary of K N. In its May 5, 1993 order, FERC approved the
transfer of K N's interstate gas transmission and storage facilities to KNI
effective October 1, 1993. On November 1, 1993, FERC authorized the transfer
of gathering and processing facilities from KNI to KNGG. The transfer was
effective January 1, 1994, and included approximately $70 million of gross
property, plant and equipment. AOG's assets and facilities were not a part of
this reorganization.
Order 636 required pipelines to unbundle sales and transportation
services. KNI has complied with FERC's directive to mitigate its GSR costs
caused by this restructuring. KNI's GSR process allows for the assignment of
its above-market contracts. Under KNI's tariff, every shipper has a right to
take assignment of these above-market contracts. Shippers may either take
assignment of these above-market contracts or enter into a negotiated exit fee.
This should obviate the need to make any GSR cost recovery filing with FERC.
(B) Rate Matters
On December 30, 1993, KNI made a rate filing with FERC requesting
a $12.0 million annual increase in revenues. The new rates will become
effective July 1, 1994, subject to refund.
In February 1992, K N filed a rate restatement with FERC pursuant
to FERC's purchased gas adjustment regulations. The filing proposed no change
in K N's current rates. K N submitted an offer of Settlement and Stipulation
("Settlement") in August 1993. FERC approved the Settlement on November 17,
1993. Terms of the Settlement did not have a material effect on K N's
financial position or results of operations.
In February 1993, K N filed general rate applications in all 177
retail Nebraska communities it serves, requesting an increase in aggregate
annual revenues of $2.2 million. Pursuant to Nebraska statute, the new rates
became effective May 2, 1993, subject to refund. An agreement was reached in
August 1993, between the Company and representatives of the 10 rate areas in
Nebraska. Under the terms of the agreement, K N received a $1.4 million annual
rate increase. Revenues collected above the settlement rates were refunded to
the customers in December 1993.
In June 1990, K N filed general rate applications in 147 central
and eastern Nebraska communities requesting an increase in aggregate annual
revenues of $6.7 million. Pursuant to Nebraska statute, the new rates were put
into effect on October 1, 1990, subject to refund. The majority of the
communities adopted a lower rate increase. K N filed for injunctions against
these communities. On August 27, 1993, the Nebraska Supreme Court ruled that
natural gas rates placed into effect by K N as interim rates on October 1,
1990, were properly justified and should be allowed to stand. In 1992, K N
Page 12 of 31
<PAGE> 13
reduced the deferred portion of the increased revenues resulting from these
rate applications and recorded as revenue $3.8 million of amounts previously
deferred in 1990 and 1991. The remaining deferred revenues relating to this
matter, totaling $1.6 million, were recorded as revenue in 1993.
In June 1992, K N filed an application for a "make whole" rate
increase with the Colorado Public Utilities Commission ("CPUC"). The new
rates, which resulted in increased annual revenues of $0.7 million, were
approved by the CPUC and became effective August 1, 1992.
In December 1992, K N filed an application with the Wyoming
Public Service Commission ("WPSC") for an annualized general rate increase of
$1.2 million. In April 1993, the WPSC issued an order granting K N a $1.1
million annual rate increase effective May 1, 1993.
In March 1993, K N filed an application with the Kansas
Corporation Commission ("KCC") for an annualized general rate increase of $3.3
million. On October 28, 1993, the KCC issued an order approving a settlement
agreement between K N and the interested parties which granted K N a $2.4
million annual rate increase effective October 1, 1993.
On March 11, 1994, Rocky Mountain Natural Gas Division of K N
Energy, Inc. ("RMNGD") filed an application for a "make whole" rate increase of
$2.5 million on an annual basis with the CPUC. The CPUC approved interim rate
relief of $1.5 million which became effective, subject to refund, on April 2,
1994. Pursuant to the request of the CPUC, on April 28, 1994, RMNGD filed a
continuation of the March 11, 1994 application, supplementing its request for
the $2.5 million "make whole" rate increase.
4. ACQUISITIONS
(A) Natural Gas Processing Business
Effective April 1, 1992, the Company acquired substantially all
of the assets and assumed substantially all of the liabilities of Maple. The
assets consisted of ten natural gas processing plants and approximately 1,056
miles of related gas gathering pipelines. The purchase price was approximately
$86 million, consisting of $5.5 million cash, a $5.5 million note payable and
the assumption of substantially all of Maple's liabilities. The acquisition
was accounted for as a purchase.
The results of operations of the acquired business are included
in the consolidated statements of operations of the Company from the date of
the acquisition.
(B) Wattenberg
On April 1, 1993, the Company completed the $48 million
acquisition of the Wattenberg natural gas gathering and transmission system.
The system has both regulated and nonregulated components. The regulated
transmission segment, approximately $18 million of the acquisition, was
financed with corporate funds, and the balance of the
Page 13 of 31
<PAGE> 14
system was financed through an operating lease. The system gathers and
transports gas from approximately 1,800 receipt points in northeastern
Colorado.
(C) Oil and Gas Reserve Acquisition
On February 1, 1994, the Company's oil and gas development
subsidiaries, K N Production Company and GASCO, Inc., acquired gas reserves and
production properties located near existing K N operations in western Colorado
and in the Moxa Arch region of southwestern Wyoming for a total purchase price
of approximately $30 million. The acquired properties have total net reserves
of approximately 50 billion cubic feet equivalent of natural gas. On April 20,
1994, the Company entered into a letter of intent to sell a 50 percent interest
in substantially all the acquired properties.
(D) Exchange and Lease of Gathering and Processing Facilities
On October 1, 1992, K N exchanged its Tyrone gas gathering system
located in the Oklahoma panhandle for a natural gas processing plant and
gathering system located near Douglas, Wyoming. KNGG is operator of the
Douglas system, and entered into an operating lease for the facilities with a
financial institution.
5. Litigation
K N is named as one of four potentially responsible parties
("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site,
pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"). The site is known as the Mystery Bridge Road/U.S.
Highway 20 site located near Casper, Wyoming (the "Brookhurst Subdivision").
The EPA's remedy consists of two parts, "Operating Unit One," which addresses
the groundwater cleanup and "Operating Unit Two," which addresses cleanup
procedures for the soil and free-phase petroleum product.
A Consent Decree between the Company, the EPA and another PRP was
entered on October 2, 1991, in the Wyoming Federal District Court. Groundwater
cleanup under Operating Unit One has been proceeding since 1990. On September
14, 1993, the EPA certified that the remedial action for Operating Unit One was
"operational and functional." This is the last step in the Superfund process
prior to remedy completion.
In July 1992, the EPA approved the Company's Operating Unit Two
workplan and the Company received an EPA "Statement of Work." The work
required to be performed for Operating Unit Two commenced during the third
quarter of 1992 and is expected to continue through 1995 at a total cost
estimated not to be more than $1.0 million.
With regard to this same Superfund site, in 1987 the State of
Wyoming filed suit against several parties (including K N) for injunctive
relief, penalties and unquantified damages claimed to have resulted from
alleged pollution of groundwater and soils in the Brookhurst Subdivision. On
April 1, 1993, the Wyoming District Court dismissed the lawsuit, finding that
K N had diligently remedied the alleged pollution.
Page 14 of 31
<PAGE> 15
On October 20, 1989, a lawsuit was filed against the Company and
18 other defendants on behalf of a group of 268 individuals who reside or
resided in the Brookhurst Subdivision, seeking damages for alleged releases of
certain chemicals to the soil, groundwater and air. On February 5, 1993, the
Company reached agreement to settle the above-described dispute. The
settlement, which was approved by the Wyoming District Court, resolved all
disputes between the parties and closed the lawsuit. A reserve for the
settlement amount and related matters had been established in the Company's
financial statements prior to 1993 and, accordingly, such settlement did not
have any material adverse impact on the Company's financial position or results
of operations.
On November 30, 1990, the Company initiated an action against a
number of its insurance carriers for a declaration of the carriers' contractual
obligations to provide insurance coverage for all sums associated with the
alleged losses under the state, Federal and toxic tort claims related to the
Brookhurst Subdivision. The Company entered into formal settlements with all
of the defendants in the lawsuit in 1993, and received settlement proceeds
associated therewith.
Environmental audits performed by the Company revealed that a
grease known as Rockwell 860 had been used as a valve sealant at several of the
Company's locations in Nebraska and Colorado. Rockwell 860 is a solid
clay-like material which does not easily spill into the environment, but
contains approximately ten percent polychlorinated biphenyls ("PCBs"). Based
on the Company's studies, the PCBs are contained within the pipeline and valves
at the subject locations. PCBs are regulated by the EPA under the Toxic
Substances Control Act.
On March 31, 1993, the Company filed suit against Rockwell
International Corporation, manufacturer of the valve sealant, and two other
related defendants, claiming under contractual, statutory, tort and strict
liability theories that the defendants share responsibility for the Company's
environmental expenses and commercial losses resulting from any EPA or state
required PCBs cleanup or mitigation. The Company reached final settlement with
Rockwell, et al. in March 1994 which resolved all disputes between the parties.
During February 1994, the Company submitted its Phase I Report
and PCBs Work Plan to EPA Region VII (covering Nebraska) and EPA Region VIII
(covering Colorado). During March 1994, EPA Region VIII accepted both the
Phase I Report and the PCBs Work Plan as administratively complete. EPA Region
VIII also granted the Company permission to proceed with implementation of the
PCBs management and remediation activities described in its Work Plan to
address sites in Colorado. EPA Region VII has not yet formally responded to
the Company's Phase I Report and PCBs Work Plan.
The Company currently cannot estimate the extent of the PCB
remediation nor costs, though such costs are not expected to exceed the
settlement amounts or to have any material adverse impact on the Company's
financial position or results of operations. The PCB cleanup program is not
expected to interrupt or diminish K N's operational ability to gather or
transport natural gas.
Page 15 of 31
<PAGE> 16
Certain used pipe reclaimed at the Company's Holdrege, Nebraska
pipeyard was wrapped with asphalt-saturated asbestos felt, which was commonly
removed in accordance with Company practices. The removed wrap contains
friable asbestos fibers above the regulatory standard. The Nebraska Department
of Environmental Control ("DEC"), the agency having jurisdiction over this
matter, was notified and approved the Company's remediation plan. Remediation
is effectively complete, at a total cost not to exceed $600,000. The asbestos
cleanup program did not interrupt or diminish K N's operational ability to
gather or transport natural gas.
On October 9, 1992, Jack J. Grynberg filed suit in the United
States District Court for the District of Colorado against the Company, Rocky
Mountain Natural Gas Company and GASCO, Inc. (the "K N Entities") alleging that
the K N Entities as well as K N Production Company and KNGG, have violated
Federal and state antitrust laws. In essence, Grynberg asserts that the
companies have engaged in an illegal exercise of monopoly power, have illegally
denied him economically feasible access to essential facilities to transport
and distribute gas produced from fewer than 20 wells located in northwest
Colorado, and illegally have attempted to monopolize or to enhance or maintain
an existing monopoly. Grynberg also asserts certain causes of action relating
to a gas purchase contract.
No specific monetary damages have been claimed, although Grynberg
has requested that any actual damages awarded be trebled. In addition,
Grynberg has requested that the K N Entities be ordered to divest all interests
in natural gas exploration, development and production properties, all
interests in distribution and marketing operations, and all interests in
natural gas storage facilities, separating these interests from the Company's
natural gas gathering and transportation system in northwest Colorado.
On August 13, 1993, the United States District Court, District of
Colorado, stayed this proceeding pending exhaustion of appeals in a related
state court action involving the same plaintiff.
The Company believes it has meritorious defenses to all lawsuits
and legal proceedings in which it is a defendant and will vigorously defend
against them. Based on its evaluation of the above matters, and after
consideration of reserves established, management believes that the resolution
of such matters will not have a material adverse effect on the Company's
financial position or results of operations.
6. Income Taxes
See Note 1(C) regarding the method of accounting for income taxes.
Components of the income tax provision applicable to Federal and
state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes Currently Payable:
Federal $ 6,272 $ 8,025 $ 5,350
State 2,579 785 1,185
</TABLE>
Page 16 of 31
<PAGE> 17
<TABLE>
<S> <C> <C> <C>
------- ------- -------
Total 8,851 8,810 6,535
------- ------- -------
Taxes Deferred:
Federal 9,920 9,616 (4,091)
State (172) 1,642 (457)
------- ------- -------
Total 9,748 11,258 (4,548)
------- ------- -------
Total Tax Provision 18,599 20,068 1,987
Less Tax Effect of:
Discontinued Coal Mining Operations -
Loss from Operations -- -- (351)
Loss on Sale -- -- (18,944)
------- ------- -------
Total Tax Provision on Income from Continuing Operations $18,599 $20,068 $21,282
======= ======= =======
Effective Tax Rate on Income from Continuing Operations 37.6% 35.6% 36.5%
======= ======= =======
</TABLE>
The difference between the statutory Federal income tax rate and
the Company's effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Income Tax Rate 35.0% 34.0% 34.0%
Increase (Decrease) as a Result of -
State Income Tax, Net of Federal Benefit 3.1% 3.0% 3.0%
Other (0.5%) (1.4%) (0.5%)
----- ----- -----
Effective Tax Rate 37.6% 35.6% 36.5%
===== ===== =====
</TABLE>
The Company has recorded deferred regulatory assets of $1.5 million
and $2.1 million, and deferred regulatory liabilities of $4.4 million and $7.3
million at December 31, 1993 and 1992, respectively, which are expected to
result in cost-of-service adjustments. These amounts reflect the "gross of
tax" presentation required under SFAS 109. The Company reduced its deferred
regulatory liability by $2.2 million as a result of the Federal tax rate
increase from 34 percent to 35 percent. The deferred tax assets and
liabilities and deferred regulatory assets and liabilities for rate-regulated
entities computed according to SFAS 109 at December 31, 1993 and 1992 result
from the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1993 1992
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Unbilled Revenue $ 2,521 $ 1,705
Vacation Accrual 1,482 1,295
State Taxes 2,724 2,617
Capitalized Overhead Adjustment 3,605 4,026
Operating Reserves 1,826 2,723
Rate Matters (PGA) -- 1,479
Deferred Revenues 1,568 --
Revenue Subject to Refund -- 486
Net Operating Loss ("NOL") Carryforwards 1,500 1,354
Alternative Minimum Tax ("AMT") Credits 8,029 7,701
Investment Tax Credit ("ITC") Carryforwards 1,247 1,247
Other 3,815 2,773
-------- --------
Total Deferred Tax Assets 28,317 27,406
-------- --------
Deferred Tax Liabilities:
Liberalized Depreciation 105,925 92,197
Rate Matters 6,270 4,197
Prepaid Pension 3,526 3,199
Other 2,427 1,257
-------- --------
Total Deferred Tax Liabilities 118,148 100,850
-------- --------
</TABLE>
Page 17 of 31
<PAGE> 18
<TABLE>
<S> <C> <C>
Net Deferred Tax Liabilities $89,831 $ 73,444
======= ========
SFAS 109 Deferred Accounts for Rate Regulated Entities:
Liabilities $ 4,379 $ 7,305
======= ========
Assets $(1,455) $ (2,148)
======= ========
</TABLE>
As of December 31, 1993, the Company had for tax purposes: (i)
estimated NOL carryforwards of $4.2 million, (ii) capital loss carryforwards of
$0.5 million and (iii) ITC carryforwards of $1.2 million. The NOL
carryforwards will expire in 1998 through 2004 and the ITC carryforwards will
expire in 1996 through 2000. The capital loss carryforwards, which are
available to reduce future capital gains, expire in 1996. The Company also has
AMT credits of approximately $8.0 million available to reduce its regular
future tax liability in excess of the AMT otherwise due in any year.
7. Financing
(A) Notes Payable
K N has credit agreements with eight banks to either borrow or
use as commercial paper support, up to a total of $90.0 million at December 31,
1993. At December 31, 1993, $10.0 million was outstanding under the credit
agreements at an interest rate of 3.27 percent. No amounts were outstanding
under the credit agreements at December 31, 1992. Borrowings are made at prime
or a rate less than prime negotiated on the borrowing date and for a term of
not more than one year. During 1993 all borrowings were made for terms of
approximately one month. K N pays the banks a fee of one quarter of one
percent per annum of the unused commitment.
Commercial paper issued by K N represents unsecured short-term
notes with maturities not to exceed 270 days from the date of issue. During
1993 all commercial paper issued was redeemed within 90 days, with interest
rates ranging from 3.2 percent to 3.7 percent. At December 31, 1993 and 1992,
$37.0 million and $2.0 million of commercial paper, respectively, were
outstanding.
(B) Long-Term Debt
Long-term debt at December 31, 1993 and 1992 was as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1993 1992
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debentures:
6.5% Series, Due 2013 $ 50,000 $ --
7.85% Series, Due 2022 29,985 30,000
Sinking Fund Debentures:
10 3/4% Series, Due 2008 -- 35,000
9.95% Series, Due 2020 20,000 20,000
9 5/8% Series, Due 2021 45,000 45,000
8.35% Series, Due 2022 35,000 35,000
Unamortized Debt Discount (604) (491)
Senior Notes:
7.27%, Due 1995-2002 35,000 35,000
11.846% (AOG), Due 1994-1999 39,018 43,929
Medium-Term Notes:
9.96% Average Rate, Due 1994-1999 20,500 24,500
$75 million Senior Revolving
</TABLE>
Page 18 of 31
<PAGE> 19
<TABLE>
<S> <C> <C>
Credit and Term Note Facility
(AOG), interest at a bank's
base rate or Eurodollar rates
plus .875% (4.125% and
4.375%, respectively, Due 1997 58,000 30,000
$25 million Subordinated Revolving
Credit Note (AOG) with Cabot
Corporation, interest at the
London Interbank Offered Rate
("LIBOR") plus .925% and .8%
at December 31, 1993 and 1992,
respectively (4.4875% and 5.05%,
respectively), Due 1994 13,282 14,197
8.5% Note Payable of Red River,
75%-owned by AOG, guaranteed
by partners, Due 1994-1998 16,346 --
Other (AOG) -- 1,212
Current Maturities of Long-Term Debt (26,337) (10,123)
-------- --------
Total Long-Term Debt $335,190 $303,224
======== ========
</TABLE>
Maturities of long-term debt for the five years ending December 31,
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- - -----------------------------------------------------------------------------------------------------------
<S> <C>
1994 $26,337
1995 24,805
1996 46,055
1997 37,805
1998 19,056
</TABLE>
In September 1993, K N sold $50 million of 6.5% debentures at an
all-in cost to K N of 6.61 percent. The principal of each debenture is payable
annually in equal installments of ten percent of the original principal amount
beginning in September 2004, and K N has an option to increase such
installments by up to ten percent of the original principal amount. Proceeds
from the debt financing were used to redeem K N's 10 3/4% sinking fund
debentures and to fund capital expenditures.
In September 1992, K N sold publicly $65 million of debentures in
two separate offerings at a combined all-in cost to the Company of 8.38
percent. One offering consisted of $35 million of 8.35% sinking fund
debentures due September 2022, with mandatory annual sinking fund payments
commencing in September 2003. The other offering consisted of $30 million of
7.85% debentures due September 2022. In December 1992, K N sold $35 million of
7.27% senior notes. Final maturity of this debt is December 2002, with note
maturities commencing in December 1995. Proceeds from these debt financings
were used to refund the 8 1/2%, 9% and 9 7/8% sinking fund debentures, reduce
short-term debt, and fund capital expenditures.
On November 30, 1993, the Securities and Exchange Commission
declared effective, pursuant to Section 8(a) of the Securities Act of 1933, a
shelf registration for the sale of $200 million in debt securities in
anticipation of future long-term financing needs. No funds have been drawn
under this shelf registration.
Page 19 of 31
<PAGE> 20
Under terms of the $75 million senior revolving credit and term
note facility, AOG may borrow up to $75 million for general corporate purposes
through September 30, 1995. A commitment fee of .375% to .5% is payable on the
unused portion of the facility. On September 30, 1995, the facility converts
to a term loan that is payable in eight equal quarterly installments. Interest
on the facility is computed, at the Company's option, at either a bank's base
rate or Eurodollar rates plus .875%. These rates can be increased by the banks
for changes in AOG's credit rating or debt to capitalization ratio.
As discussed more fully in Note (12), AOG entered into two
interest-rate swap agreements in 1993 covering $35 million of notional
principal. These agreements effectively converted $35 million of AOG's
fixed-rate debt into variable-rate debt. Differences between the estimated
variable-rate amounts paid by AOG and the fixed-rate amounts received from the
counterparties are included in interest expense. During 1993, these
interest-rate swaps reduced interest expense by approximately $0.2 million,
which did not materially impact interest expense or the effective interest
rates of the underlying debt obligations.
Management is currently assessing the AOG debt instruments to
determine whether any modifications or repayments are desirable.
At December 31, 1993 and 1992, the carrying amount of the
Company's long-term debt was $362.1 million and $313.8 million, respectively,
and the estimated fair value was $384.0 million and $329.7 million,
respectively. The fair value of the Company's long-term debt is estimated
based on the quoted market prices for the same or similar issues, or on the
current rates offered to the Company for debt of the same remaining maturation.
8. Preferred Stock
Preferred stock at December 31, 1993 and 1992 was as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1993 1992
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized - K N Class A, 200,000 Shares; K N Class B, 2,000,000 Shares,
All Without Par Value-
Redeemable Solely at Option of Company -
K N Class A, $5.00 Cumulative
Series, 70,000 Shares $7,000 $ 7,000
AOG 9% Cumulative Convertible Preferred, 19,310 Shares in 1992 -- 19,310
------ -------
$7,000 $26,310
====== =======
Subject to Mandatory Redemption at $100 Per Share -
Class A, $8.50 Cumulative Series, 5,000 Shares in 1993 and
15,000 Shares in 1992 $ 500 $1,500
Class B, $8.30 Cumulative Series, 28,576 Shares in 1993 and
40,004 Shares in 1992 2,858 4,000
</TABLE>
Page 20 of 31
<PAGE> 21
<TABLE>
<S> <C> <C>
Current Sinking Fund Requirements (500) (1,000)
------ ------
Total Preferred Stock Subject to Mandatory Redemption $2,858 $4,500
====== ======
</TABLE>
(A) K N Class A $8.50 Preferred Stock
The K N Class A $8.50 Preferred Stock is subject to mandatory
redemption through a sinking fund (at $100 per share, plus accrued and unpaid
dividends) of $500,000 in 1994. At the option of the Company, this stock is
redeemable, in whole or in part, at $100.85 per share during 1994. In each of
the years 1993 and 1992, the Company redeemed 10,000 shares subject to
mandatory redemption. In 1991, the Company redeemed 10,000 shares subject to
mandatory redemption and an additional 25,000 shares at $102.13 per share.
(B) K N Class B $8.30 Preferred Stock
The K N Class B $8.30 Preferred Stock is subject to mandatory
redemption through a sinking fund (at $100 per share, plus accrued and unpaid
dividends) of $571,400 annually from 1995 through 1998 and $572,000 in 1999.
At the option of the Company, this stock is redeemable, in whole or in part, at
$101.74 per share prior to January 2, 1995; such redemption price is reduced
annually thereafter until January 2, 1998, when it becomes $100 per share.
Also, at the option of the Company, 5,714 shares of this stock may be redeemed
in each of the years 1994 through 1998, inclusive, at $100 per share. In each
of the years 1993, 1992 and 1991, the Company redeemed 5,714 shares subject to
mandatory redemption, and an additional 5,714 shares at $100 per share.
(C) K N Class A $5.00 Preferred Stock
The K N Class A $5.00 Preferred Stock is redeemable, in whole or in
part, at the option of the Company at any time on 30 days' notice at $105 per
share plus accrued dividends. This series has no sinking fund requirements.
(D) AOG 9% Cumulative Convertible Preferred Stock
In November 1992, AOG called all outstanding shares of its 9%
cumulative convertible preferred stock for redemption. Prior to the redemption
date, all holders elected to convert their shares into AOG's common stock.
Effective January 20, 1993, AOG issued 2,429,265 AOG common shares (1,141,755
shares of K N common stock) in connection with the conversion. In an earlier
transaction, holders converted 5,050 preferred shares into 660,922 AOG common
shares (310,633 shares of K N common stock).
(E) Rights of Preferred Shareholders
All outstanding series of preferred stock have voting rights.
If, for any class of preferred stock, the Company (i) is in arrears
on dividends, (ii) has failed to pay or set aside any amounts required to be
paid or set aside for all sinking funds, or (iii) is in default on any of its
redemption obligations, then no dividends shall
Page 21 of 31
<PAGE> 22
be paid or declared on any junior stock nor shall any junior stock be purchased
or redeemed by the Company. Also, if dividends on any class of preferred stock
are sufficiently in arrears, the holders of that stock may elect one-third of
the Company's Board of Directors.
(F) Combined Aggregate Redemption Requirements
The combined aggregate amount of mandatory redemption requirements
for all preferred issues for the five years ending December 31, 1998, are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C>
1994 $500
1995-1998 571
</TABLE>
(G) Fair Value
At December 31, 1993, both the carrying amount and the estimated
fair value of the Company's outstanding preferred stock subject to mandatory
redemption were $3.4 million, compared with $5.5 million and $5.6 million,
respectively, at December 31, 1992. The fair value of the Company's preferred
stock is estimated based on an evaluation made by an independent security
analyst.
9. Employee Benefits
(A) Retirement Plans
The Company has defined benefit pension plans covering
substantially all full-time K N employees. The Merger Agreement provides that,
beginning January 1, 1995, K N will provide to employees who were employed by
AOG at the effective time of the merger, benefit plans, policies and programs
that are no less favorable than those provided to K N's similarly situated
employees. These plans provide pension benefits that are based on the
employees' compensation during the period of employment. These plans are tax
qualified subject to the minimum funding requirements of ERISA. The Company's
funding policy is to contribute annually the recommended contribution using the
actuarial cost method and assumptions used for determining annual funding
requirements. Plan assets consist primarily of pooled fixed income and equity
funds.
Net pension cost for 1993, 1992 and 1991 included the following
components (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost - Benefits Earned During the Period $ 2,579 $ 2,712 $ 2,467
Interest Cost on Projected Benefit Obligation 5,698 5,153 4,888
Actual Return on Assets (14,976) (5,486) (15,550)
Net Amortization and Deferral 6,714 (2,598) 8,610
------- ------- -------
Net Periodic Pension Cost $ 15 $ (219) $ 415
======= ======= =======
</TABLE>
The following table sets forth the plans' funded status and amounts
recognized in the Company's financial statements at December 31, 1993 and 1992
(in thousands):
Page 22 of 31
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1993 1992
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested Benefit Obligation $(71,914) $(65,367)
======== ========
Accumulated Benefit Obligation $(73,005) $(66,792)
======== ========
Projected Benefit Obligation $(81,554) $(74,765)
Plan Assets at Fair Value 101,457 89,739
-------- --------
Plan Assets in Excess of Projected Benefit Obligation 19,903 14,974
Unrecognized Net Gain (9,504) (5,235)
Prior Service Cost Not Yet Recognized in Net Periodic Pension Costs 236 256
Unrecognized Net Asset at January 1 (1,675) (1,817)
-------- --------
Prepaid Pension Cost $ 8,960 $ 8,178
======== ========
</TABLE>
The rate of increase in future compensation and the expected
long-term rate of return on assets were 4.5 percent and 8.5 percent,
respectively, for 1993, and 5.0 percent and 9.25 percent, respectively, for
1992 and 1991. The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.5 percent for
all three periods.
The Company also contributes the lesser of ten percent of K N's net
income or ten percent of normal K N employee compensation to the Employees
Retirement Fund Trust Profit Sharing Plan (a defined contribution plan).
Contributions by the Company were $2,588,000, $2,090,000 and $464,000 for 1993,
1992 and 1991, respectively.
(B) Other Postretirement Employee Benefits
The Company has a defined benefit postretirement plan providing
medical care benefits upon retirement for all eligible K N employees with at
least five years of credited service as of January 1, 1993, and their eligible
dependents. Retired K N employees are required to contribute monthly amounts
which depend upon the retired employee's age, years of service upon retirement
and date of retirement.
This plan also provides life insurance benefits upon retirement for
all K N employees with at least ten years of credited service who are age 55 or
older when they retire. The Company pays for a portion of the life insurance
benefit; K N employees may at their option increase the benefit by making
contributions from age 55 until age 65 or retirement, whichever is earlier. In
1993, the Company began funding the future expected postretirement benefit
costs under the plan by making payments to Voluntary Employee Benefit
Association trusts. The Company's funding policy is to contribute amounts
within the deductible limits imposed on Internal Revenue Code Sec. 501(c)(9)
trusts. Plan assets consist primarily of pooled fixed income funds.
Effective January 1, 1993, the Company prospectively adopted
Statement of Financial Accounting Standards No. 106 ("SFAS 106") which requires
the accrual of the expected costs of postretirement benefits other than
pensions during the years that employees render service. The Accumulated
Postretirement Benefit Obligation ("APBO") of the plan at January 1, 1993, was
approximately $18.8 million. The Company has elected to amortize this
transition obligation to expense over a 20-year period.
Page 23 of 31
<PAGE> 24
Net postretirement benefit cost for the defined benefit plan in
1993 included the following components (in thousands):
<TABLE>
<CAPTION>
1993
- - -------------------------------------------------------------------------------------------------------------------
<S> <C>
Service Cost - Benefits Earned During the Period $ 379
Interest Cost on APBO 1,349
Actual Return on Assets (14)
Net Amortization and Deferral 953
------
Net Periodic Postretirement Benefit Cost $2,667
======
</TABLE>
Prior to 1993, the cost of providing medical care benefits to
retired K N employees was recognized as expense as claims were paid, and the
cost of life insurance benefits for retirees was not accrued. Instead, life
insurance claims were paid from a trust fund resulting from termination of
third party coverage. The Company's net cost of medical care claims for
retirees was approximately $1.2 million and $1.1 million in 1992 and 1991,
respectively. In 1993, the incremental effect on postretirement cost as a
result of adopting SFAS 106 was a $1.3 million increase.
The following table sets forth the plan's funded status and the
amounts recognized in the Company's financial statements at December 31,
1993(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1993
- - --------------------------------------------------------------------------------------------------------------------
<S> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $(13,920)
Active Plan Participants (5,197)
--------
Total APBO (19,117)
Plan Assets at Fair Value 924
--------
Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (18,193)
Unrecognized Net Gain (6)
Prior Service Cost Not Yet Recognized in Net Periodic Postretirement Benefit Cost --
Unrecognized Transition Obligation 17,847
--------
Accrued Postretirement Benefit Cost $ (352)
========
</TABLE>
The weighted average discount rate used in determining the
actuarial present value of the APBO was 7.5 percent; the assumed health care
cost trend rate was 11 percent for 1993, nine percent for 1994 and seven
percent for 1995 and beyond. A one-percentage-point increase in the assumed
health care cost trend rate for each future year would have increased the
aggregate of the service and interest cost components of the 1993 net periodic
postretirement benefit cost by $0.1 million and would have increased the APBO
as of December 31, 1993, by $0.1 million.
K N's interstate retail distribution business, in connection with
rate filings described in Note 3(B) for Kansas, Nebraska and Wyoming, has
received regulatory approval to include in the cost-of-service component of its
rates the cost of postretirement benefits as measured by application of SFAS
106. In addition, KNI has requested similar regulatory treatment from FERC in
connection with its rate filing, also described in Note 3(B). At December 31,
1993, no SFAS 106 costs were deferred as regulatory assets.
(C) Other Postemployment Benefits
Page 24 of 31
<PAGE> 25
In November 1992, FASB issued SFAS 112, which establishes standards
of financial accounting and reporting for the estimated cost of benefits
provided by an employer to former or inactive employees after employment but
before retirement. SFAS 112 is effective for fiscal years beginning after
December 15, 1993. Implementation of SFAS 112 is not expected to have a
material effect on the Company's financial position or results of operations.
10. COMMON STOCK OPTION AND PURCHASE PLANS
K N has incentive stock option plans for key employees and
nonqualified stock option plans for its nonemployee directors. AOG maintains a
Stock Incentive Plan ("AOG's Stock Plan") for its key employees and its
directors. Under the plans, options are granted at not less than 100 percent
of the market value of the stock at the date of grant. Outstanding stock
options granted under AOG's Stock Plan have been converted to stock options for
K N common stock using the exchange ratio of 0.47.
Pursuant to amendments to the K N plans' provisions, options
granted after 1989 vest over three to five years and expire ten years after
date of grant. Under earlier grants, all options vested immediately or within
three years and are exercisable for ten years from date of grant.
The stock options granted under AOG's Stock Plan generally become
exercisable at a rate of 33 percent per year on a cumulative basis beginning
one year from the date of grant and lapse ten years from the date of grant.
Stock appreciation rights and restricted stock may be issued pursuant to AOG's
Stock Plan. As of December 31, 1993, no stock appreciation rights had been
issued.
During 1993, AOG issued to its chief executive officer 50,000
shares of restricted AOG common stock (23,500 shares of K N common stock) which
vest 50 percent per year. AOG also sold 150,000 shares of AOG common stock
(70,500 shares of K N common stock) to its president and chief operating
officer for $0.04 per share of AOG common stock ($0.0851 per share of K N
common stock). One-half of these shares was fully vested and nonforfeitable
upon issuance, and the remainder became fully vested upon consummation of the
merger described in Note 2.
The market value of the AOG shares issued was approximately $2.3
million based on the average market price per share of AOG common stock on the
date of issuance. The market value of the restricted shares was reflected as
deferred compensation and is being amortized over the vesting period.
Compensation expense for 1993 included approximately $1.2 million related to
these issuances.
At December 31, 1993, 107 employees, officers and directors of K N
and AOG held options under the plans. The changes in stock options outstanding
during 1993, 1992 and 1991 are as follows, restated to reflect the
three-for-two common stock split described in Note 1(D) and the merger
described in Note 2:
Page 25 of 31
<PAGE> 26
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1990 893,875 $ 5.28-$17.29
Granted 99,590 $15.08-$16.04
Exercised (64,505) $10.29-$14.75
Expired (53,811) $ 6.08-$16.76
--------
Outstanding at December 31, 1991 875,149 $ 5.28-$17.29
Granted 39,592 $16.46-$28.99
Exercised (99,840) $ 5.28-$16.76
--------
Outstanding at December 31, 1992 814,901 $ 5.28-$28.99
Granted 311,000 $21.68-$28.00
Exercised (135,522) $ 5.28-$16.79
Expired (6,751) $ 6.72-$23.04
--------
OUTSTANDING AT DECEMBER 31, 1993 983,628 $ 8.96-$28.99
(682,131 SHARES EXERCISABLE) ========
</TABLE>
Unexercised options outstanding at December 31, 1993, expire at
various dates between 1994 and 2003.
Effective April 1, 1990, and for each succeeding year, K N
established an Employee Stock Purchase Plan under which eligible employees may
purchase K N's common stock through voluntary payroll deductions at a 15
percent discount from the market value of the common stock, as defined in the
plan.
Under K N's Stock Option, Dividend Reinvestment, Employee Stock
Purchase and Employee Benefit Plans, and AOG's Stock Plan, 3,918,966 shares
were reserved for issuance at December 31, 1993.
11. COMMON STOCK WARRANTS
At December 31, 1993, warrants to purchase 1,206,514 shares of the
Company's common stock were outstanding. Warrants to purchase 19,082 shares
are exercisable at $7.51 per warrant and expire on March 9, 1997. Warrants to
purchase 1,187,432 shares are exercisable at $17.55 per warrant and expire on
September 30, 1999.
12. COMMITMENTS AND CONTINGENT LIABILITIES
(A) Leases
In 1993, K N Front Range Gathering Company began to lease gas
gathering equipment and facilities under a ten-year operating lease. In 1992,
KNGG began to lease gas gathering facilities and processing equipment under a
seven-year operating lease. These operating leases contain purchase options
at the end of their lease terms. The Company also leases certain office
space, properties and equipment under operating leases.
Payments made under operating leases were $8.3 million in 1993,
$5.1 million in 1992 and $4.1 million in 1991.
Future minimum commitments under major operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C>
</TABLE>
Page 26 of 31
<PAGE> 27
<TABLE>
<S> <C>
1994 $ 7,492
1995 6,852
1996 6,015
1997 4,909
1998 3,844
Thereafter 34,202
-------
Total Commitments $63,314
=======
</TABLE>
(B) Basket Agreement
Under terms of an agreement (the "Basket Agreement") entered into
with Cabot Corporation ("Cabot"), the Company's largest stockholder, as part of
AOG's acquisition of Cabot's natural gas pipeline business, AOG and Cabot
equally share net payments made in settlement of certain liabilities related to
operations of the acquired business prior to the acquisition date. The Company
expects to settle during 1995 all significant matters covered by the Basket
Agreement. As of December 31, 1993, the Company's estimated liability was
approximately $6.5 million, and the Company had made net payments of
approximately $13.2 million. The difference between net payments made by the
Company and its estimated liability is reflected in current assets and consists
of (i) the present value of Cabot's share of net payments and (ii) future
recoveries from customers.
(C) Natural Gas Futures Contracts and Options
Other income (expense) included net gains of approximately $1.0
million and $0.8 million during 1993 and 1992, respectively, related to natural
gas futures contracts and options that were not designated as hedging positions
for accounting purposes. As of December 31, 1993, the Company's open
non-hedging positions consisted of approximately 300 natural gas option
contracts covering notional volumes of approximately three Bcf, all of which
expired in early 1994 with minimal impact on operating results. As of December
31, 1993, the unrealized gains/losses on these contracts were not material.
(D) Interest Rate Swap Agreements
In February 1993, AOG entered into a three-year interest-rate swap
agreement covering $25 million of notional principal whereby it pays LIBOR,
which is reset every six months in arrears, in exchange for a fixed rate of
5.07 percent.
In September 1993, AOG entered into a second three-year
interest-rate swap agreement covering $10 million of notional principal whereby
it pays LIBOR, which is reset every twelve months in arrears, in exchange for a
fixed rate of 5.27 percent.
(E) Investment in WellTech, Inc.
During 1993 WellTech, Inc. ("WellTech") completed a
recapitalization which diluted the Company's ownership interest from
approximately 17 percent to 1.5 percent. In connection with the
recapitalization, AOG wrote down its investment in WellTech by approximately
$4.5 million.
Page 27 of 31
<PAGE> 28
(F) Capital Expenditure Budget
The consolidated capital expenditure budget for 1994 is
approximately $74 million, excluding acquisitions.
13. MAJOR CUSTOMER
Energas Company and affiliates comprised 12 percent of consolidated
revenues in both 1993 and 1992, and 14 percent of consolidated revenues in
1991.
14. DISCONTINUED OPERATIONS
On June 1, 1991, K N sold its wholly-owned coal mining
subsidiaries, Wyoming Fuel Company and North Central Energy Company. The
Company received cash proceeds of $7.2 million, and receives a royalty interest
on all future coal mined and sold from the southern Colorado properties.
The results of operations of the coal mining subsidiaries have been
accounted for as discontinued operations in the financial statements.
Following is a summary of revenues, loss from operations and loss on sale of
this discontinued business (in thousands):
<TABLE>
<CAPTION>
1991
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Revenues $ 5,956
========
Loss from Operations, Net of Income Tax Benefit of $351,000 $ (614)
Loss on Sale, Net of Income Tax Benefit of $18,944,000 (16,636)
--------
Total Loss from Discontinued Operations $(17,250)
========
</TABLE>
Page 28 of 31
<PAGE> 29
INDEX TO EXHIBITS
Exhibits -
23.1 Report of Independent Public Accountants
23.2 Consent of K N Independent Public Accountants
<PAGE> 1
Exhibit 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To K N Energy, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in K N Energy, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1993 and have issued our report thereon dated
February 10, 1994. Reference is made to such report which calls attention to
certain changes in accounting principles during the periods reported thereon.
We have also made a similar audit of the accompanying supplemental consolidated
balance sheets of K N Energy, Inc. and subsidiaries at December 31, 1993 and
1992, and the related supplemental consolidated statements of income, common
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1993. The supplemental consolidated statements give
retroactive effect to the merger with American Oil and Gas Corporation on July
13, 1994, which has been accounted for as a pooling of interests as described
in Note 2. These supplemental financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
supplemental financial statements 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 supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of K N
Energy, Inc. and its subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for
Page 29 of 31
<PAGE> 2
- 2 -
each of the years in the three-year period ended December 31, 1993, after
giving retroactive effect to the merger with American Oil and Gas Corporation
as described in Note 2, all in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen & Co.
Denver, Colorado,
July 13, 1994.
Page 30 of 31
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 8-K, into the Company's previously filed
Registration Statement File No. 33-54317.
/s/ Arthur Andersen & Co.
Denver, Colorado,
July 13, 1994.
Page 31 of 31
