<PAGE> 1
_______________________________________________________________________________
_______________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
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 1-6446
K N ENERGY, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0290000
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Van Gordon Street
P.O. Box 281304, Lakewood, Colorado 80228-8304
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 989-1740
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $5 par value; authorized 50,000,000 shares;
outstanding 27,614,756 shares as of October 31, 1994.
_______________________________________________________________________________
_______________________________________________________________________________
<PAGE> 2
Form 10-Q
K N ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1994
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Consolidated Balance Sheets . . . . . . . . . . . . 3 & 4
Consolidated Statements of Income
(Unaudited) . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
(Unaudited) . . . . . . . . . . . . . . . . . . . 6 & 7
Notes to Consolidated Financial Statements . . . . . 8 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 11 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 15 - 16
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule*
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 16
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
*Included in SEC EDGAR Filing Only.
2
<PAGE> 3
Form 10-Q
CONSOLIDATED BALANCE SHEETS
K N Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1994 31, 1993
- -----------------------------------------------------------------------------------------------------
(Unaudited)
(In Thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . $ 11,151 $ 14,353
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . 114,398 177,146
Contract Demand Receivables . . . . . . . . . . . . . . . . . . . . . -- 38,732
Material and Supplies, at Average Cost. . . . . . . . . . . . . . . . 11,344 11,604
Gas in Underground Storage. . . . . . . . . . . . . . . . . . . . . . 33,096 20,853
Prepaid Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,239 11,689
Exchange Gas and Other. . . . . . . . . . . . . . . . . . . . . . . . 40,505 38,479
---------- ----------
223,733 312,856
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Gas Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261,322 1,208,965
Gas and Oil Production. . . . . . . . . . . . . . . . . . . . . . . . 62,500 34,381
---------- ----------
1,323,822 1,243,346
Less--Accumulated Depreciation, Deple-
tion and Amortization. . . . . . . . . . . . . . . . . . . . . . . 459,609 427,642
---------- ----------
864,213 815,704
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS . . . . . . . . . . . . . . . . . . 26,829 39,288
---------- ----------
$1,114,775 $1,167,848
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE> 4
Form 10-Q
CONSOLIDATED BALANCE SHEETS
K N Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1994 31, 1993
- ------------------------------------------------------------------------------------------------------
(Unaudited)
(In Thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Preferred Stock
and Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . $ 29,095 $ 26,837
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,570 47,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . 83,723 144,245
Accrued Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,035 10,474
Exchange Gas and Other . . . . . . . . . . . . . . . . . . . . . . 36,470 33,348
---------- ----------
284,893 261,904
---------- ----------
DEFERRED LIABILITIES, CREDITS AND RESERVES:
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 87,988 89,831
Deferred Revenues . . . . . . . . . . . . . . . . . . . . . . . . . 43,198 43,692
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,448 22,136
---------- ----------
156,634 155,659
---------- ----------
LONG-TERM DEBT:
Sinking Fund Debentures . . . . . . . . . . . . . . . . . . . . . . 99,564 99,543
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,305 235,647
---------- ----------
262,869 335,190
---------- ----------
MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES . . . . . . . . . . . 14,090 13,775
---------- ----------
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION . . . . . . . . . . 2,286 2,858
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock-
Authorized - Class A, 200,000 Shares; Class B,
2,000,000 Shares, All Without Par Value
Redeemable Solely at Option of Company at
$105 Per Share - Class A, $5.00 Cumulative
Series; 70,000 Shares . . . . . . . . . . . . . . . . . . . . . 7,000 7,000
---------- ----------
Common Stockholders' Equity
Common Stock-
Authorized - 50,000,000 Shares, Par Value $5 Per Share,
Outstanding 27,610,068 and 27,200,967
Shares, Respectively . . . . . . . . . . . . . . . . . . . . 138,050 136,005
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . 170,865 164,427
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . 80,171 92,187
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . (435) (1,157)
---------- ----------
388,651 391,462
---------- ----------
Treasury Stock, at Cost, (74,056 and 0 shares, Respectively) . . (1,648) --
---------- ----------
Total Common Stockholders' Equity . . . . . . . . . . . . . . . . 387,003 391,462
---------- ----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 394,003 398,462
---------- ----------
$1,114,775 $1,167,848
========== ==========
</TABLE>
4
<PAGE> 5
Form 10-Q
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
K N Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------
1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas Services . . . . . . . . . . . . . . . . . . . . . . . . . . $ 224,523 $ 233,621 $ 801,936 $ 734,311
Gas and Oil Production . . . . . . . . . . . . . . . . . . . . . 3,846 1,331 9,706 3,869
--------- --------- --------- ---------
Total Operating Revenues . . . . . . . . . . . . . . . . . . . . 228,369 234,952 811,642 738,180
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Gas Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . 153,288 168,560 584,283 519,737
Operations and Maintenance . . . . . . . . . . . . . . . . . . . 39,066 39,681 119,397 120,552
Depreciation, Depletion and Amortization . . . . . . . . . . . . 13,231 11,502 40,213 33,461
Taxes, Other Than Income Taxes . . . . . . . . . . . . . . . . . 4,467 3,848 13,082 11,604
Merger and Restructuring Costs . . . . . . . . . . . . . . . . . 25,945 -- 25,945 --
--------- --------- --------- ---------
Total Operating Costs and Expenses . . . . . . . . . . . . . . . 235,997 223,591 782,920 685,354
--------- --------- --------- ---------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . (7,628) 11,361 28,722 52,826
--------- --------- --------- ---------
OTHER INCOME AND (DEDUCTIONS):
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . (8,079) (8,051) (22,769) (23,179)
Minority Interests . . . . . . . . . . . . . . . . . . . . . . . (40) 93 (278) 290
Other, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . 501 1,530 2,221 2,538
--------- --------- --------- ---------
Total Other Income and (Deductions) . . . . . . . . . . . . . . . (7,618) (6,428) (20,826) (20,351)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . . . (15,246) 4,933 7,896 32,475
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (2,786) 2,202 5,487 12,059
--------- --------- --------- ---------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . (12,460) 2,731 2,409 20,416
Less--Preferred Stock Dividends . . . . . . . . . . . . . . . . . 157 203 472 651
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK . . . . . . . . . . $ (12,617) $ 2,528 $ 1,937 $ 19,765
========= ========= ========= =========
NUMBER OF COMMON SHARES USED IN COMPUTING EARNINGS PER SHARE . . 28,153 27,435 28,035 27,366
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE . . . . . . . . . . . . . . . . $ (0.45) $ 0.10 $ 0.07 $ 0.73
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.13 $ 0.51 $ 0.38
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
K N Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1994 1993
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,409 $ 20,416
Adjustments to Reconcile Net Income to Net Cash From Operating Activities:
Depreciation, Depletion and Amortization. . . . . . . . . . . . . . . . . . . . . . . . 40,213 33,461
Minority Interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 (290)
Asset Write-off Associated with Merger. . . . . . . . . . . . . . . . . . . . . . . . . 2,500 --
Provisions for Losses on Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . 675 1,015
(Gain) Loss on Sale of Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,357) 99
Resolution of Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . (514) (1,127)
Executive Stock Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043 --
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,317 7,844
Deferred Purchased Gas Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,979 (7,201)
Other Funds Used During Construction. . . . . . . . . . . . . . . . . . . . . . . . . . (147) (186)
Changes in Other Working Capital Items Net of Effects from Acquisitions . . . . . . . . . 23,807 7,714
Changes in Other Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 9,864 16,154
-------- --------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . 84,067 77,899
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (63,743) (75,996)
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,598) (24,354)
Other Funds Used During Construction . . . . . . . . . . . . . . . . . . . . . . . . . . 147 186
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (778) 76
Proceeds from Sale of Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,550 1,568
(Payments) Collections under Basket Agreement . . . . . . . . . . . . . . . . . . . . . . (199) 495
-------- --------
NET CASH FLOWS USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . (90,621) (98,025)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt (Net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,570 22,500
Long-Term Debt - Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100 77,847
Long-Term Debt - Retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71,762) (72,205)
Common Stock Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,990 6,042
Treasury Stock - Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 --
- Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,065) --
Cash Dividends - Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,953) (10,149)
- Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (472) (651)
Minority Interests Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,163 2,425
Minority Interests Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,636) (2,507)
Premium on Debt Reacquisition and Issue Costs . . . . . . . . . . . . . . . . . . . . . . -- (3,577)
-------- --------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . 3,352 19,725
-------- --------
Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . (3,202) (401)
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . 14,353 23,554
-------- --------
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . . . . . . . $ 11,151 $ 23,153
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
K N Energy, Inc. and Subsidiaries
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1994 1993
- --------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY:
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . $ 62,073 $ 14,434
Contract Demand Receivables . . . . . . . . . . . . . . . . . . . . 38,732 --
Material and Supplies . . . . . . . . . . . . . . . . . . . . . . . 260 (1,586)
Gas in Underground Storage . . . . . . . . . . . . . . . . . . . . (12,243) (12,595)
Accounts Payable, Accrued Taxes and Other Current Liabilities . . . (61,271) 13,901
Exchange Gas, Net . . . . . . . . . . . . . . . . . . . . . . . . . 6,192 (3,728)
Other Current Assets . . . . . . . . . . . . . . . . . . . . . . . (9,936) (2,712)
-------- --------
$ 23,807 $ 7,714
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest (Net of Amount Capitalized) . . . . . . . . . . . . . . $ 24,799 $ 25,248
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,066 $ 7,781
</TABLE>
7
<PAGE> 8
Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
In the opinion of management, all adjustments necessary for a fair statement of
the results for the unaudited interim periods have been made. These adjustments
consist only of normal recurring accruals.
2. Merger
On July 13, 1994, pursuant to the Agreement of Merger dated March 24, 1994,
among K N, KNE Acquisition Corporation and American Oil and Gas Corporation
("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. On July 13,
1994, the stockholders of K N approved the issuance of stock in connection with
the merger, as well as certain other matters, and the shareholders of AOG
approved the merger.
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 for
all periods reported herein.
The following table provides a reconciliation of revenues and earnings reported
by K N to the combined amounts presented for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1994 September 30, 1993
--------------------------------- --------------------------------
K N AOG* TOTAL K N AOG TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating
Revenues $541,767 $269,875 $811,642 $334,828 $403,352 $738,180
======== ======== ======== ======== ======== ========
Net
Income (Loss) $ (204)** $ 2,613 $ 2,409 $ 12,864 $ 7,552 $ 20,416
======== ======== ======== ======== ======== ========
</TABLE>
* Represents revenues and earnings of AOG prior to the July 13, 1994
merger.
** Includes merger and restructuring costs totaling $19.3 million after
taxes.
3. Merger and Restructuring Costs
The Company has recorded merger and restructuring costs totaling $25.9 million
in the third quarter of 1994. Total cash expenditures relating
8
<PAGE> 9
Form 10-Q
to these charges through September 30, 1994, were $15.9 million; $7.5 million
of the charges remained unspent at that date.
Merger expenses include $12.4 million in investment bankers and other
professional fees, $7.7 million for severance and employee benefit costs for
approximately 230 employees terminated through consolidation of administrative
and operational staff, and $4.6 million in costs to eliminate duplicative
space requirements and equipment and to write-off certain information systems
costs as a result of the merger.
Costs related to the formal restructuring plan of the Company's retail
distribution operations total $1.2 million, representing severance and
employee benefit costs for terminating approximately 90 retail distribution
employees as a result of the restructuring and centralization of customer
service functions. The restructuring is expected to be completed in the third
quarter of 1995.
4. Rate Matters
In March 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 Colorado Public Utilities Commission ("CPUC").
Settlement was reached with all parties on all issues. RMNGD received a $2.0
million annual rate increase under terms of the settlement; $1.5 million
effective April 2, 1994, and the remainder effective September 1, 1994.
5. Acquisition
On February 1, 1994, the Company's gas and oil development subsidiaries, K N
Production Company ("KNPC") and GASCO, Inc.("GASCO"), 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 October
17, 1994, KNPC and GASCO entered into a joint development agreement with
Genesis Gas and Oil, L.L.C., ("Genesis"), and sold to Genesis a 50 percent
interest in substantially all the acquired properties.
6. Financing
In October 1994, K N sold publicly $75 million of 30-year, 8.75% debentures at
an all-in-cost to the Company of 8.91 percent. This debt was issued from the
$200 million shelf registration filed with the Securities and Exchange
Commission in November 1993. Proceeds from this financing were used to fund
capital expenditures and to reduce short-term borrowing incurred in July 1994
to retire the Senior Revolving Credit and Term Note Facility of AOG.
9
<PAGE> 10
Form 10-Q
7. 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.
8. Postemployment Benefits
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. The Company adopted SFAS 112 on January 1, 1994. Implementation
of SFAS 112 had no material effect on the Company's financial position or
results of operations.
9. Commitments and Contingent Liabilities
See Notes 5, 8 and 11 of Notes to Consolidated Financial Statements on Pages
41-43, 46, 47 and 51 of the 1993 Annual Report on Form 10-K, and Notes 5, 8,
and 12 of Notes to Consolidated Financial Statements on pages 38-40, 44-46, 50
and 51 of Form 10-K/A, Amendment No. 2. There have been no material changes to
these disclosures except as disclosed in Notes 2, 3 and 5, above.
10. Reclassification of 1993 Amounts
Certain 1993 amounts have been reclassified to conform to the 1994
presentation.
10
<PAGE> 11
Form 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MERGER
On July 13, 1994, K N completed the merger with American Oil and Gas
Corporation (AOG). The merger was accounted for as a pooling of interests, and
accordingly the following historical financial information has been restated as
though the companies had been combined from inception.
CONSOLIDATED FINANCIAL RESULTS
Third quarter 1994 net income, excluding one-time merger and restructuring
costs, was $6.9 million, or $0.24 per common share, after payment of preferred
dividends. Net income and earnings per share were more than double the
comparable 1993 reported net income of $2.7 million and earnings per share of
$0.10. The improvement in 1994 third quarter ongoing operations resulted from
increased gas deliveries to irrigation customers in 1994 compared to 1993, and
from continued positive performance of the Company's nonregulated gas
gathering and processing operations. In addition, the 1994 third quarter
earnings reflected improvement over 1993 as a result of the change in timing of
1994 revenues caused by the straight fixed-variable rate design implemented
with the unbundling of interstate pipeline services effective October 1, 1993.
For the first nine months of 1994, net income, excluding the one-time merger
and restructuring expenses, was $21.8 million, or $0.76 per common share,
compared with 1993 nine months net income of $20.4 million, or $0.73 per common
share.
In the third quarter of 1994, the Company expensed $25.9 million of one-time
costs related to the merger of AOG into K N on July 13, 1994, and to the formal
restructuring of the Company's retail gas distribution operations. These
costs, primarily professional fees, severance-related expenses and the
write-off of certain information systems costs, reduced earnings by
$19.3 million, or $0.69 per common share. Including the effect of the
one-time charges, the Company reported a third quarter 1994 net loss of
$12.5 million, or $0.45 per common share, and 1994 nine months ended net income
of $2.4 million, or $0.07 per common share.
RESULTS OF OPERATIONS
The following is a discussion of operating results by business segment and
consolidated other income and (deductions) and income taxes, exclusive of the
one-time merger and restructuring costs and the related income tax effect.
Segment operating revenues, gas purchases, operations and maintenance expenses,
and volumetric data cited below are before intersegment eliminations (dollars
in millions).
11
<PAGE> 12
Form 10-Q
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------ -----------------
GAS SERVICES 1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Revenues
Gas Sales and Transportation . . . . . . . . . . . $196.7 $206.9 $719.5 $650.8
Natural Gas Liquids and Other . . . . . . . . . . . 28.2 26.8 82.9 83.6
------ ------ ------ ------
224.9 233.7 802.4 734.4
------ ------ ------ ------
Operating Costs and Expenses
Gas Purchases . . . . . . . . . . . . . . . . . . . 153.8 169.1 586.4 521.3
Operations and Maintenance. . . . . . . . . . . . . 37.7 39.2 115.6 119.1
Depreciation, Depletion, and Amortization . . . . . 11.4 10.5 35.0 30.9
Taxes, Other Than Income Taxes . . . . . . . . . . 4.1 3.7 12.1 11.1
------ ------ ------ ------
207.0 222.5 749.1 682.4
------ ------ ------ ------
Operating Income . . . . . . . . . . . . . . . . . $ 17.9 $ 11.2 $ 53.3 $ 52.0
====== ====== ====== ======
Systems Throughput (Trillion Btus)
Gas Sales . . . . . . . . . . . . . . . . . . . . 84.2 81.6 277.6 242.3
Transportation . . . . . . . . . . . . . . . . . 86.5 87.3 266.9 240.5
------ ------ ------ ------
170.7 168.9 544.5 482.8
====== ====== ====== ======
Natural Gas Liquids Sales
(Millions of Gallons) . . . . . . . . . . . . . . 95.7 80.7 284.5 236.8
====== ====== ====== ======
</TABLE>
K N's interstate pipeline unbundled its services on October 1, 1993, per
Federal Energy Regulatory Commission Order No. 636, and consequently no longer
offers a merchant function service. Third quarter 1994 gas sales and
transportation revenues and gas purchases compared to the 1993 third quarter
reflect this elimination of the merchant function. The elimination of this
merchant function is not as apparent in the year-to-date revenues and gas
purchases due to growth in 1994 nonregulated gas sales volumes. Third quarter
1994 gas deliveries to irrigation customers totaled 14.5 trillion Btus compared
to 10.1 trillion Btus in the 1993 third quarter. Irrigation deliveries in 1993
were adversely impacted by an abnormally wet summer.
The decline in 1994 third quarter and first nine month operations and
maintenance expenses compared with 1993 periods primarily reflects staff and
expense reductions resulting from the merger. Future periods' operations and
maintenance expenses will reflect additional savings as the full impact of the
merger (staff reductions and consolidation) and the retail gas service
restructuring become effective.
12
<PAGE> 13
Form 10-Q
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- -----------------
GAS AND OIL PRODUCTION 1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Revenues
Gas and Oil Sales . . . . . . . . . . . . . . . . $ 4.3 $ 1.8 $ 11.0 $ 5.3
Other. . . . . . . . . . . . . . . . . . . . . . . 0.4 0.3 1.6 0.9
------ ------ ------ ------
4.7 2.1 12.6 6.2
------ ------ ------ ------
Operating Costs and Expenses
Operations and Maintenance . . . . . . . . . . . . 2.1 0.8 5.0 2.3
Depreciation, Depletion and
Amortization. . . . . . . . . . . . . . . . . . . 1.8 1.0 5.2 2.6
Taxes, Other Than
Income Taxes. . . . . . . . . . . . . . . . . . . 0.4 0.1 1.0 0.5
------ ------ ------ ------
4.3 1.9 11.2 5.4
------ ------ ------ ------
Operating Income. . . . . . . . . . . . . . . . . . $ 0.4 $ 0.2 $ 1.4 $ 0.8
====== ====== ====== ======
Gas and Oil Production
(Equivalent Bcf) . . . . . . . . . . . . . . . . . 2.2 0.9 5.9 2.6
====== ====== ====== ======
</TABLE>
Higher 1994 operating revenues, costs and expenses, operating income and
production result from the February 1994 acquisition of gas reserves and
production.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- -----------------
OTHER INCOME AND DEDUCTIONS 1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest Expense . . . . . . . . . . . . . . . . . $ (8.1) $ (8.0) $(22.8) $(23.2)
Minority Interests and
Other, Net . . . . . . . . . . . . . . . . . . . . 0.5 1.6 2.0 2.8
------ ------ ------ ------
$ (7.6) $ (6.4) $(20.8) $(20.4)
====== ====== ====== ======
</TABLE>
Despite higher levels of 1994 short- and long-term borrowings, interest expense
in 1994 compared to 1993 was favorably impacted by lower interest rates,
including the effect of the September 1993 refunding of $35 million of high
coupon (10-3/4%) sinking fund debentures.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------- -----------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
INCOME TAXES . . . . . . . . . . . . . . . . . . . $ 3.8 $ 2.2 $ 12.1 $ 12.1
====== ====== ====== ======
Effective Tax Rate . . . . . . . . . . . . . . . . 35.7% 37.1%
====== ======
</TABLE>
The lower 1994 effective tax rate reflects greater tax credits on gas
production from wells qualifying for non-conventional fuel credit under
Section 29 of the Internal Revenue Code.
13
<PAGE> 14
Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1994, short-term debt was $129.6 million compared with
short-term borrowings of $24.5 million and $47.0 million at September 30, 1993,
and December 31, 1993, respectively. On the effective date of the merger, the
Company retired through short-term borrowings $57 million of long-term debt
under AOG's revolving credit bank loan facility. In October 1994, the Company
sold publicly $75 million of 8.75% debentures due in 2024 with an all-in-cost
of 8.91 percent. Proceeds from the debenture sale and from the October 1994
sale of a 50 percent interest in certain gas reserves and production were used
to fund capital expenditures and reduce short-term borrowings.
Excluding the $41 million of proceeds received from the January 1994 sale of
contract demand receivables and the cash requirements of the merger and
restructuring costs, net cash flows from operating activities were $66.5
million for the first nine months of 1994 compared with $77.9 for the 1993
period. The decline in 1994 net operating cash flows primarily results from
higher income tax and prepaid gas payments.
ENVIRONMENTAL MATTERS
As discussed more fully in Part II Item 1 of this Form 10-Q, the Company is
reporting two new environmental matters. One concerns potential mercury
remediation costs resulting from the Company's ongoing mercury sampling program
in Kansas, the first phase of which was conducted in July 1994. The other
concerns use of a PCB-containing lubricating oil in the Company's Scott City,
Kansas helium recovery plant which was discovered in May 1994. The Company
does not expect the costs of remediation in either matter to have a material
adverse impact on its financial position or results of operations.
14
<PAGE> 15
Form 10-Q
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Environmental Matters
As reported in the Company's 1993 Annual Report on Form 10-K, as amended on
Form 10-K/A, Amendment No. 2 and in the Company's Quarterly Reports on Form
10-Q for the period ended March 31, 1994, 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.
In March 1993, the Company filed suit against Rockwell International
Corporation, manufacturer of the valve sealant, and two other related
defendants, reaching final settlement with Rockwell, et al. in March 1994. The
Company currently estimates the total cost of remediation to be approximately
$1.7 million, a substantial portion of which is recoverable under the Rockwell
settlement. The unrecoverable amount will not have a material adverse impact
on the Company's financial position or results of operations. The PCB cleanup
program is not expected to interrupt or diminish the Company's operational
ability to gather or transport natural gas, and will occur over a period of
years.
As reported in the Company's 1993 Annual Report on Form 10-K, as amended on
Form 10-K/A, Amendment No. 2, 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, the agency having jurisdiction
over this matter, was notified and approved the Company's remediation plan.
Remediation is effectively complete, and the total cost is not expected to
exceed $700,000. The asbestos cleanup program did not interrupt or diminish
the Company's operational ability to gather or transport natural gas.
In the spring of 1994, the Kansas Department of Health and Environment ("KDHE")
notified a number of pipeline companies operating in Kansas, including K N,
that residual elemental mercury might be present in the soils adjacent to
certain natural gas metering facilities. In July 1994, the Company initiated a
voluntary mercury sampling program on its systems in central and western
portions of Kansas, pursuant to a five year assessment program which has been
approved by the KDHE and will require that 20 percent (135) of the 675 sites be
tested each year. The sampling for the first year has been completed, however,
no determination regarding remediation has been reached at this time. The
Company currently cannot estimate the extent of the remediation nor the costs,
although the Company believes all or a portion of such costs will be
recoverable from insurance carriers. Such costs are not expected to have any
material adverse impact on the Company's financial position or results of
operations. The mercury cleanup program is not expected to interrupt or
diminish the Company's operational ability to gather or transport natural gas.
15
<PAGE> 16
Form 10-Q
In May 1994, the Company discovered that use of a PCB-containing lubricating
oil has caused contamination in certain equipment, soils and liquids at the
Company's Scott City, Kansas helium extraction facility. PCB's are regulated
by the U.S. Environmental Protection Agency ("EPA") under the Toxic Substances
Control Act. A Site Assessment Report has been submitted to the EPA for its
review, and no response has yet been received. The Company's investigation of
this situation is ongoing, and a workplan is being developed for EPA review.
The Company estimates the total cost for remediation to be approximately
$600,000, which is not expected to have a material adverse impact on the
Company's financial position or results of operations. The PCB cleanup program
is not expected to interrupt or diminish the Company's operational ability at
the helium facility.
For information relating to other legal proceedings, see Notes 2, 3, 4 and 5 of
Notes to Consolidated Financial Statements on Pages 39-43 of the 1993 Annual
Report on Form 10-K; Notes 3, 4 and 5 of Notes to Consolidated Financial
Statements on Pages 36-40 of Form 10-K/A, Amendment No. 2; Item 3: Legal
Proceedings on Pages 18-20 of the 1993 Form 10-K; and Item 3: Legal Proceedings
on Pages 15-17 of the Form 10-K/A, Amendment No. 2.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On October 7, 1994, the Company filed a Form 8-K which reported the unaudited
post-merger combined operations for K N Energy, Inc. and AOG for the one-month
period ended August 31, 1994.
On October 18, 1994, the Company filed a Form 8-K which disclosed that K N
Energy, Inc. sold $75 million of its 8.75% Debentures due October 15, 2024
pursuant to an underwritten public offering.
16
<PAGE> 17
Form 10-Q
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 thereunto duly authorized.
K N ENERGY, INC.
(Registrant)
November 14, 1994 /s/ E. Wayne Lundhagen
E. Wayne Lundhagen
Vice President - Finance and Accounting
(On Behalf of the Registrant and as
Principal Financial and Accounting Officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 11,151
<SECURITIES> 0
<RECEIVABLES> 114,398
<ALLOWANCES> 0
<INVENTORY> 44,440
<CURRENT-ASSETS> 223,733
<PP&E> 1,323,822
<DEPRECIATION> 459,609
<TOTAL-ASSETS> 1,114,775
<CURRENT-LIABILITIES> 284,893
<BONDS> 262,869
<COMMON> 138,050
2,286
7,000
<OTHER-SE> 248,953
<TOTAL-LIABILITY-AND-EQUITY> 1,114,775
<SALES> 811,642
<TOTAL-REVENUES> 811,642
<CGS> 584,283
<TOTAL-COSTS> 782,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,769
<INCOME-PRETAX> 7,896
<INCOME-TAX> 5,487
<INCOME-CONTINUING> 2,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,409
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0
</TABLE>
