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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1993
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.
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(Exact name of registrant as specified in its charter)
Kansas 48-0290000
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 989-1740
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock, par value
$5 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Preferred stock, Class A $5 cumulative series
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant.
$728,973,616 as of September 30, 1994
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Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Common stock, $5 par value; authorized 50,000,000 shares; outstanding 27,610,068
shares as of September 30, 1994
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List hereunder documents incorporated by reference and the Part of the Form
10-K into which the document is incorporated.
1994 Proxy Statement....................................................Part III
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K N ENERGY, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
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PART I
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ITEMS 1 & 2: BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . 5-15
ITEM 3: LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-17
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . 17-18
EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . 18-19
PART II
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ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 6: SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 22-27
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants . . . . . . . . . . . . . . . 28
Consolidated Statements of Income for the
Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . . 29
Consolidated Balance Sheets as of December 31, 1993
and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Common Stockholders' Equity
for the Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . 31
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . . . . . 32
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 33-51
Selected Quarterly Financial Data (Unaudited) . . . . . . . . . . . 52
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no such matters during 1993.
PART III
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ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . 2-3* 53-54
ITEM 11: EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . 4-5*, 8-10*, 12*, 13
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3*, 11*, 18-19* 54-55
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . 4* 55-56
PART IV
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ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to the listing of financial state-
ments and supplementary data under Item 8 in Part II
of this index.
2. Financial Statement Schedules
Schedule V - Property, Plant and Equipment for the
Three Years Ended December 31, 1993 . . . . . . . . . . . 60
Schedule VI - Accumulated Depreciation, Depletion
And Amortization for the Three Years Ended
December 31, 1993 . . . . . . . . . . . . . . . . . . . . 61
Schedule IX - Short-Term Borrowings for the Three
Years Ended December 31, 1993 . . . . . . . . . . . . . . 62
Schedule X - Supplementary Income Statement Information
for the Three Years Ended December 31, 1993 . . . . . . . 63
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PART IV (Continued)
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3. Exhibits
List of Executive Compensation Plans and Arrangements . . . 57
Exhibit 3(a) - Restated Articles of Incorporation
(Exhibit 3(a) - Annual Report on Form 10-K for the
year ended December 31, 1988)*
Exhibit 3(b) - By-laws of the Company, as amended
(Exhibit 4.2, File No. 33-42698)*
Exhibit 3(c) - Certificate of the Voting Powers,
Designation, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of the Class A
$8.50 Cumulative Preferred Stock, Without Par Value
(Exhibit 4.3, File No. 33-26314)*
Exhibit 3(d) - Certificate of the Voting Powers,
Designation, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of the Class B
$8.30 Cumulative Preferred Stock, Without Par Value
(Exhibit 4.4, File No. 33-26314)*
Exhibit 4(a) - Indenture dated as of September 1,
1988, between K N Energy, Inc. and Continental Illinois
National Bank and Trust Company of Chicago (Exhibit 1.2,
Current Report on Form 8-K Dated October 5, 1988)*
Exhibit 4(b) - First supplemental indenture dated as of
January 15, 1992, between K N Energy, Inc. and Continental
Illinois National Bank and Trust Company Chicago
(Exhibit 4.2, File No. 33-45091)*
Exhibit 4(c) - Second supplemental indenture dated as of
December 15, 1992, between K N Energy, Inc. and
Continental Bank, National Association (Exhibit 1.2,
Current Report on Form 8-K dated December 15, 1992)*
Exhibit 4(d) - Indenture dated as of November 20, 1993,
between K N Energy, Inc. and Continental Illinois
National Bank and Trust Company of Chicago (Exhibit 4.1,
File No. 33-51115)* Note - Copies of instruments relative
to long-term debt in authorized amounts that do not
exceed ten percent of the consolidated total assets of
the Company and its subsidiaries have not been furnished.
The Company will furnish such instruments to the
Commission upon request.
Exhibit 10(a) - Form of Key Employee Severance Agreement
(Exhibit 10.2, Amendment No. 1 on Form 8 dated September
2, 1988 to the Annual Report on Form 10-K for the year
ended December 31, 1987)*
Exhibit 10(b) - 1982 Stock Option Plan for Nonemployee
Directors of the Company with Form of Grant Certificate
(Exhibit 10.3, Amendment No. 1 on Form 8 dated September
2, 1988 to the Annual Report on Form 10-K for the year
ended December 31, 1987)*
Exhibit 10(c) - 1982 Incentive Stock Option Plan for key
employees of the Company (Exhibit 10.4, Amendment No. 1 on
Form 8 dated September 2, 1988 to the Annual Report on
Form 10-K for the year ended December 31, 1987)*
Exhibit 10(d) - 1986 Incentive Stock Option Plan for key
employees of the Company (Exhibit 10.5, Amendment No. 1
on Form 8 dated September 2, 1988 to the Annual Report on
Form 10-K for the year ended December 31, 1987)*
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PART IV (Continued)
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Exhibit 10(e) - 1988 Incentive Stock Option Plan for key
employees of the Company (Exhibit 10.6, Amendment
No. 1 on Form 8 dated September 2, 1988 to the
Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(f) - Form of Grant Certificate for Employee
Stock Option Plans (Exhibit 10.7, Amendment No.
1 on Form 8 dated September 2, 1988 to the Annual
Report on Form 10-K for the year ended December
31, 1987)*
Exhibit 10(g) - Directors' Deferred Compensation Plan
Agreement (Exhibit 10.8, Amendment No. 1 on Form
8 dated September 2, 1988 to the Annual Report on
Form 10-K for the year ended December 31, 1987)*
Exhibit 10(h) - 1987 Directors' Deferred Fee Plan and
Form of Participation Agreement regarding the Plan
(Exhibit 10.9, Amendment No. 1 on Form 8 dated
September 2, 1988 to the Annual Report on Form 10-K
for the year ended December 31, 1987)*
Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee
Directors of the Company with Form of Grant Certificate
(Exhibit 4.1, File No. 33-46999).
Exhibit 10(j) - K N Energy, Inc. 1993 Executive Incentive
Plan (Exhibit 10(k) to the Annual Report on Form 10-K
for the Year Ended December 31, 1992)*
Exhibit 10(k) - K N Energy, Inc. 1994 Executive Incentive
Plan**
Exhibit 10(l) - 1994 K N Energy, Inc. Long-Term Incentive
Plan (Attachment A to the K N Energy, Inc. 1994 Proxy
Statement on Schedule 14-A)
Exhibit 12 - Ratio of Earnings to Fixed Charges . . . . . . 64
Exhibit 13 - 1993 Annual Report to Shareholders*** . . . . . 65
Exhibit 22 - Subsidiaries of the Registrant . . . . . . . . 66-67
Exhibit 24 - Consent of Independent Public Accountants . . . 68
Exhibit 27 - Financial Data Schedule****
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 58
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
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NOTE: Schedules I to XIII of this report, other than those listed above,
have been omitted as not applicable, not required, or the information
required is included in the financial statements or notes thereto.
Individual financial statements of the parent Company are omitted
pursuant to the provisions of Accounting Series Release No. 302.
* Incorporated herein by reference.
** Included in SEC and NYSE copies only.
*** Such report is being furnished for the information of the Securities
and Exchange Commission only and is not to be deemed filed as a part of
this annual report on Form 10-K/A and does not reflect the effect of
the pooling of interests between K N Energy, Inc. and American Oil and
Gas Corporation.
**** Included in SEC EDGAR Filing Only.
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PART I
ITEMS 1 and 2: BUSINESS and PROPERTIES
As used in this report, the term "K N" means K N Energy, Inc. and the
term "Company" means collectively K N Energy, Inc. and its subsidiaries,
unless the context requires a different meaning. (See "Subsidiaries of the
Registrant" in Exhibit 22.)
All volumes of natural gas referred to herein are stated at a pressure
base of 14.73 pounds per square inch absolute and at 60 degrees Fahrenheit and
in most instances are rounded to the nearest major multiple. The term "Mcf"
means thousand cubic feet, the term "MMcf" means million cubic feet, and the
term "Bcf" means billion cubic feet. The term "MMBtus" means million British
thermal units ("Btus"). "NGLs" refers to natural gas liquids, which consist of
ethane, propane, normal and iso-butane, and natural gasoline. The term "Bbls"
means barrels. As used herein, "throughput" refers to volumes of gas sold by
the Company and gas transported on the Company's systems for third parties.
(A) General Development of Business
The Company is engaged in the business of: (1) developing, producing,
gathering, processing, storing, transporting, selling and marketing natural
gas; (2) processing, selling and marketing NGLs; and (3) developing and
producing crude oil.
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. AOG is engaged in the business of gathering, processing,
transporting, storing, selling and marketing natural gas and NGLs primarily in
West Texas and the Texas Panhandle.
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. (As used in this report, the
term "AOG" means collectively American Oil and Gas Corporation and its
subsidiaries, unless the context requires a different meaning.)
On October 1, 1993, the Company implemented its unbundling of pipeline
services in response to the Federal Energy Regulatory Commission's ("FERC")
Order No. 636 ("Order 636"). The Order is designed to stimulate competition in
the interstate transportation and sale of natural gas. Of the many elements
that make up Order 636, the central feature involves the unbundling of gas
sales and transportation services. Unbundling means that traditional pipeline
customers, such as wholesale customers, direct end-users and shippers, have new
options when contracting for various pipeline services such as transportation
and storage.
In response to Order 636, the Company no longer operates as a single
business unit that purchases, gathers, processes, transports, stores and sells
natural gas at retail and wholesale. Instead, the Company restructured its
operations and now operates its interstate transmission pipeline through a
wholly-owned subsidiary.
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The Company's local distribution operation is operated as a separate
business unit within the parent company. The Company also provides retail
natural gas services through two intrastate divisions in Colorado and Wyoming.
Substantially all of the gathering and processing facilities that were
previously part of the Company's regulated transmission operation are now being
operated as nonregulated facilities by a wholly-owned subsidiary which also
operates a number of other gathering and processing facilities acquired since
its inception in 1989.
Effective April 1, 1992, the Company acquired substantially all of the
assets and assumed substantially all of the liabilities of the Maple Gas
Corporation ("Maple"). The assets consisted of ten natural gas processing
plants and approximately 1,056 miles of related gas gathering pipelines. The
Company and Maple entered into indemnification agreements covering certain
environmental liabilities which the Company assumed in the acquisition. The
purchase price was approximately $86 million.
On April 1, 1993, the Company completed the $48 million acquisition of
the Wattenberg natural gas gathering and transmission system. The transmission
segment of the system is a FERC-regulated interstate pipeline system operated by
a subsidiary. The nonregulated gathering portion of the system is operated by a
gas gathering subsidiary of the Company.
The Company's executive offices are located at 370 Van Gordon Street,
P.O. Box 281304, Lakewood, Colorado 80228-8304 and its telephone number is
(303) 989-1740. The Company was incorporated in the State of Kansas on May 18,
1927. The number of persons employed by the Company at December 31, 1993 was
2,144.
(B) Narrative Description of Business
(1) Gas Services
- -- Retail Natural Gas Services
Overview. This business segment provides retail natural gas services
to residential, commercial, agricultural and industrial customers, mainly for
space heating, crop irrigation and drying, processing of agricultural products
and the manufacture of agriculture-related goods. Revenues from this business
segment are derived primarily from natural gas sales and transportation
services.
The Company's retail distribution business unit serves approximately
151,000 retail customers in 251 communities in northeastern Colorado, western
Kansas, central and western Nebraska and eastern Wyoming through distribution
pipelines totaling 6,159 miles at December 31, 1993. In addition, the Company
operates intrastate natural gas pipeline systems serving industrial customers
and the Company's distribution divisions in Wyoming and Colorado. The Wyoming
intrastate system included 675 miles of transmission, gathering and storage
lines and 1,072 miles of distribution lines at December 31, 1993. The Company
provides retail gas service to approximately 50,000 customers in 25 communities
in central, south central and northeastern Wyoming. The Colorado intrastate
system included 766 miles of transmission, gathering and storage lines and
1,423 miles of distribution lines at December 31, 1993. The Company serves
approximately 31,500 retail customers in 26 communities primarily in western
Colorado.
Underground storage facilities are used to provide deliverabilities
for peak system demand. The retail distribution business unit owned 2.8 Bcf of
working gas at December 31, 1993, stored in facilities operated by the
Company's interstate pipeline system. Five underground storage facilities are
located on the Wyoming intrastate system. On the Wyoming intrastate system,
11.3 Bcf of working gas was available in storage at year-end. The Colorado
intrastate system owned 2.3 Bcf of working gas at year-end, stored in
facilities owned by one of the Company's gas and oil subsidiaries.
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Gas Purchases and Supply. With the implementation of Order 636, gas
purchasing is now the responsibility of each local distribution company
("LDC"). The retail distribution business segment has contracted with one of
the Company's subsidiaries and other pipelines for transportation and storage
services required to serve its markets. It's gas supply requirements are being
met through a combination of purchases from a wholly-owned subsidiary and third
party suppliers.
The retail distribution business unit's gas supply for the interstate
system comes from five major geological areas, as follows:
(1) Anadarko Basin, including the Hugoton, Bradshaw and Panoma
fields in Kansas;
(2) Barton Arch area of central Kansas;
(3) Denver-Julesburg Basin in northeast Colorado, northwest
Kansas, and western Nebraska;
(4) Wind River Basin in central Wyoming; and
(5) Bowdoin area in north central Montana.
The intrastate system in Wyoming purchases its gas supply principally
from producers in the Wind River Basin in central Wyoming. The Colorado
intrastate system purchases approximately 12 percent of its system supply from
one of the Company's gas and oil subsidiaries and the remainder from a number
of third-party producers in the Piceance Basin in western Colorado. Order 636
has not significantly impacted gas purchasing for the Company's intrastate
systems.
Certain gas purchase contracts containing market-out clauses were
redetermined to a competitive price for 1993, reflecting an increase in gas
prices from the 1992 redetermined price.
Gas purchase contracts also may contain a take-or-pay clause which
requires that a certain purchase level be attained each contract year, or the
Company must make a payment equal to the contract price multiplied by the
deficient volume. At December 31, 1993, the amount of gas prepayments
outstanding for this business segment was $5.5 million. All such payments are
fully recoupable under the terms of the gas purchase contracts and the existing
regulatory rules and regulations. To date, no buy-out or buy-down payments
relating to take-or-pay contracts have been made by this business segment.
Competition. Natural gas competes with fuel oil, coal, propane and
electricity in the areas served by the Company's retail natural gas businesses.
In a few of the communities for which it has a franchise, the Company competes
with other local distribution systems for retail natural gas sales and
transportation services. Such competition is expected to increase as a result
of implementation of Order 636.
- -- Interstate Transportation and Storage Services
Overview. The Company's primary interstate pipeline system provides
transportation and storage services to affiliates, third-party natural gas
distribution utilities and shippers . As of December 31, 1993, the Company's
interstate pipeline system provided transportation and storage services
directly to utilities serving 293 communities, as follows:
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Served By Colorado Kansas Nebraska Wyoming
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Affiliated Entities 12 52 177 10
Other Utilities 5 10 27 --
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As of December 31, 1993, the interstate pipeline properties included
transmission, gathering and storage lines totaling 8,239 miles and two products
extraction plants. Effective January 1, 1994, 1,691 miles of gathering lines
and
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the products extraction plant in Scott City, Kansas, were transferred to a gas
gathering subsidiary as part of the corporate reorganization. See
"Restructuring and Reorganization".
The cessation of the merchant function as a FERC-regulated service
will substantially reduce this business segment's operating revenues and gas
purchase expenses; however, this will not impact this business segment's
operating income since gas purchases were previously subject to purchased gas
adjustment clauses in the Company's tariffs. Results of this business segment
have historically been seasonal in nature due to fluctuating needs for natural
gas for space heating and irrigation. However, Order 636 mandated the use of
straight fixed-variable rate design ("SFV") for FERC-regulated services. This
rate methodology results in this business segment collecting a significant
portion of its revenues from customers through demand charges collected evenly
throughout the year. Accordingly, fluctuations in operating revenues resulting
from seasonal variations in weather temperatures are reduced.
Transportation. This business segment provides not only firm and
interruptible transportation, but also no-notice services to its customers.
Under no-notice service, customers are able to meet their peak day requirements
without making specific nominations as required by firm and interruptible
transportation services tariffs.
Under Order 636, the LDCs and other shippers may release their unused
firm transportation capacity rights to other shippers. It is anticipated that
this released capacity will, to a large extent, replace interruptible
transportation on the Company's interstate pipeline system. Interruptible
transportation is charged on the basis of volumes shipped.
Storage. The Company's interstate pipeline system provides storage
services to its customers through four underground gas storage facilities. Its
major underground storage facilities are the Huntsman Storage Field in Cheyenne
County, Nebraska and the Big Springs Storage Field in Deuel County, Nebraska.
In connection with Order 636, the Company received FERC approval to
reclassify, as of October 1, 1993, 54.9 Bcf of working gas to cushion gas. As
part of the corporate restructuring, all cushion gas (88.1 Bcf) was transferred
to its wholly-owned interstate pipeline subsidiary. The remaining working gas
of 11.1 Bcf at October 1, 1993, was purchased in-place by the Company's former
wholesale customers, with the Company retaining 4.3 Bcf of this working gas for
LDC service. On the interstate systems, a net injection during 1993 of 2.7 Bcf
increased the total year-end gas inventory owned by all parties to 95.1 Bcf.
The approximate unused working gas capacity at December 31, 1993, was 9.7 Bcf.
Transportation Marketing. The Company is continuing its efforts to
increase its transportation business through expanded capacity and new
interconnects, as well as by adding new transportation services. While there
is considerable competition for this business, the Company has certain
strategic advantages that enable it to be a successful competitor, including
favorable geographic pipeline locations providing access to both major gas
supply areas and potential new markets. The Company will continue developing
its role as an operator of transportation hubs, facilitating market-center
services.
A Company subsidiary is a one-third joint venture partner in the
TransColorado Gas Transmission Pipeline Project ("TransColorado"). This
pipeline is expected to provide increased flexibility in accessing multiple
natural gas basins in the Rocky Mountain region. TransColorado is in its final
preconstruction stage and regulatory work is nearing completion. To focus
marketing activities, the partner companies have opened a TransColorado
marketing office to secure supply and transportation commitments. The pipeline
is expected to be in service in 1996. The TransColorado pipeline will operate
as an interstate pipeline system regulated by FERC.
Restructuring and Reorganization. As authorized by FERC, the Company
implemented Order 636 restructured services on October 1, 1993. The Company
requested and received FERC approval, as a result of Order
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636, to transfer its primary interstate transmission and storage facilities to
a wholly-owned jurisdictional subsidiary and substantially all of its gathering
and processing facilities to a nonjurisdictional wholly-owned subsidiary.
Through discussions with its former wholesale customers, the Company
was able to formulate and implement a plan which resulted in the transition to
Order 636 services and which avoided the necessity of any Gas Supply
Realignment ("GSR") cost recovery filings with FERC.
Competition. The interstate pipeline and storage services business
segment faces competition from other transporters. In addition, natural gas
competes with fuel oil, coal, propane and electricity in the areas served by
the Company's interstate pipeline system.
- -- Gathering, Processing and Marketing Services
Overview. This business segment provides natural gas gathering,
processing, marketing and supply services to a variety of customers. Within
this business segment, the Company owns and operates approximately 11,000 miles
of pipeline in seven states, operating gas processing plants with a total
processing capacity of approximately 730 MMcf per day and a natural gas storage
facility in West Texas. The operations and rates of return of this business
segment are not regulated by FERC.
The Company provides gas marketing and supply services to various
natural gas resellers and end-users on or connected to the Company's pipeline
systems. The Company works with producers and end-users on the pipeline
systems to provide a wide range of services. It arranges the purchase and
transportation of producers' excess or uncommitted gas to end-users, acts as
shipper or agent for the end-users, administers nominations and provides
balancing assistance when needed.
This business segment engages in risk management activities in the gas
commodities futures market. The Company buys and sells gas commodity futures
positions on the New York Mercantile Exchange ("NYMEX") and through the use of
over-the-counter gas commodity derivatives for the purpose of reducing adverse
price exposure for gas supply costs or specific market margins. (See "Hedging
Activities" below.)
Revenues from this business segment's gathering, processing,
transporting and marketing activities are generated in three different ways.
First, the Company performs a merchant function whereby the Company purchases
gas at the wellhead, aggregates such gas with other supplies of gas, and
markets the aggregated gas to consumers. Second, the Company, for a fee,
gathers, transports and may process gas for the producer or other third party
who retains title to the gas. Third, the Company processes gas and markets
NGLs. Services provided by the Company within the traditional gathering,
processing, transporting and marketing activities have expanded due to
increased demand for gas and the result of Order 636. Some of these services
include variable pricing and variable or firm receipt/delivery of gas.
Additionally, storage services and transportation balancing arrangements are
being provided to assist markets in meeting peak demand needs and maximizing
their use of capacity on interstate pipelines.
Natural Gas Sales. In 1993, this business segment sold natural gas to
approximately 500 customers in 15 states, primarily California, Colorado,
Kansas, Louisiana, Nebraska, New Mexico, New York, Oklahoma, Texas and Wyoming.
These customers included local distribution companies, industrial, commercial
and agricultural end-users, electric utilities, Company affiliates and other
marketers located both on- and off-system.
The Company's Westar Transmission is the principal intrastate pipeline
system in West Texas and the Texas Panhandle. The Westar system consists of
approximately 5,700 miles of gathering and transmission lines (of which
approximately 4,400 miles comprise Westar Transmission) and is connected to the
WesTex storage facility. The Westar pipeline system has significant markets
connected directly to its pipelines ("on-system markets"), including the
largest local distribution company in West Texas and the Texas Panhandle, and
direct-sale customers such as
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electric utilities, industrial companies and agricultural end-users. The
Company also owns a 75 percent operating interest in Red River Pipeline, a
372-mile intrastate gas pipeline extending from Hemphill County, Texas, near
the Oklahoma state line to Pecos County in West Texas.
Within this business segment, the Company utilizes its high pressure
transportation facilities to transport gas for third parties at negotiated
fees. The Westar system offers combined gathering and transportation services,
while Red River is solely a transportation system. The Wattenberg system
offers both gathering and transportation services.
The Company's largest customer, Energas Company ("Energas"), a
division of Atmos Energy Corporation, purchased virtually all of the Texas
operation's regulated gas sales. The Company's principal gas sales agreement
with Energas expires in 1998 and obligates Energas to purchase a minimum of 80
percent of its annual requirements from the Company. Energas and its affiliate
accounted for approximately 12 percent of the Company's consolidated revenues
for 1993. No other sales customer accounted for more than ten percent of the
Company's consolidated revenues in 1993.
Pricing mechanisms under the Company's gas sales agreements vary,
including gas sales at fixed margins over cost of gas, at fixed prices where
the unit margin is a function of the sales price and cost of gas, and at market
sensitive prices where the unit margin fluctuates as a percentage of the market
price of gas. A majority of the gas sales are made under agreements with terms
of one year or less.
Gas Gathering. As of December 31, 1993, the Company's subsidiaries
in this business segment operated gathering systems in Colorado, Kansas,
Nebraska, Texas and Wyoming with 5,175 miles of gathering lines. Effective
January 1, 1994, 1,691 miles of gathering lines were transferred to a gathering
subsidiary as part of the corporate reorganization.
Processing and NGLs Marketing. In 1993, the eleven primary
Company-owned gas processing plants averaged total inlet volumes of 408,000
MMBtus per day. In the same period, the total liquids produced, including
condensate, averaged approximately 21,000 Bbls per day. NGLs from the gas
processing plants are sold by the Company on a month-to-month basis to various
NGLs marketers and end-users at negotiated prices.
Storage. The WesTex storage facility has traditionally been used to
meet the peak demand requirements of the Westar system's customers and to
maintain purchases from supply sources on the Westar system during periods of
low demand. The WesTex storage facility has recently been expanded to a working
storage capacity of approximately 13 Bcf. The Company is expanding the WesTex
storage facility by leaching three caverns in a bedded salt formation. Upon
completion, each cavern will have approximately one Bcf of working gas. The
first of these caverns is scheduled for start-up in late 1994. In early 1994
the Company began marketing storage services to third parties who are interested
in the storage facility due to its strategic geographic location (Gaines County,
Texas) and multiple pipeline interconnects which provide access to a variety of
markets and supply sources.
Gas Purchases and Supply. Natural gas is purchased from various
sources, including gas producers, gas processing plants and from pipeline
interconnections. This business segment's gas supply in 1993 was purchased
from approximately 950 suppliers ranging in size from major oil and gas
companies to small independent producers. Most of the gas purchase agreements
are typical of those used in the industry. Because of prevailing industry
conditions, most agreements are for periods of one year or less, and many are
for periods of 30 to 60 days or less. Various agreements permit the purchaser
or the supplier to renegotiate the purchase price or discontinue the purchase
under certain circumstances.
Purchase volume obligations under many of the agreements utilized by
this business segment are generally "best efforts" and do not have traditional
take or pay provisions. However, certain agreements utilized within this
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<PAGE> 11
business segment require the Company to take or pay for, or to receive, minimum
quantities of natural gas. At December 31, 1993, the amount of gas prepayments
outstanding for this business segment, excluding payments made under the Basket
Agreement discussed below, was $6.2 million, and is fully recoupable under the
terms of the gas purchase contracts. In addition, because of the Company's
success in marketing excess gas under contracts, for which it receives credit
against minimum take requirements, the Company believes that its exposure to
potential take-or-pay or minimum take claims is not material. The Company does
have exposure, however, with regard to claims under gas purchase contracts
assumed in its acquisition of the Westar pipeline system from Cabot Corporation
("Cabot"), which claims are covered by an agreement with Cabot (the "Basket
Agreement"). Under the Basket Agreement, Cabot and the Company equally share
liability up to a certain amount, after which Cabot bears all such liabilities.
The Company's maximum exposure under this arrangement is $20 million. The
Company's estimated liability under the Basket Agreement is approximately $6.5
million, which was recorded in connection with the acquisition of the natural
gas pipeline business from Cabot, and as such will not have a material adverse
effect on the Company's financial position or results of operation. (See "Item
3: Legal Proceedings")
Hedging Activities. The Company is exposed to price risks associated
with (i) natural gas purchased for sale under fixed-price sales or purchase
contracts, (ii) natural gas in storage, (iii) natural gas purchased for
processing under "keep whole" contracts and (iv) NGLs prices. The natural gas
futures contract, actively traded on the NYMEX, has brought significant price
discovery to the natural gas market. Various indices and regional natural gas
hubs have changed the method of pricing of much of the gas from long-term
annual redeterminations to short-term, daily or monthly, pricing of gas at
current market levels. As such, gas prices react as quickly to supply and
demand as any other commodity market. During 1993, the Company entered into
various financial transactions to hedge a portion of the price risks associated
with certain of these arrangements. The Company's risk management department
works closely with management in identifying transactions subject to price risk
and developing strategies for minimizing that risk. Management is also
expanding the role of the risk management department to include the development
of services using risk management tools to supplement marketing and customer
services.
During 1993 the Company entered into futures contracts that were not
designated as hedging positions. These activities were conducted under controls
established by management covering trading parameters and measures to limit
losses. Income from these positions totaled approximately $1.0 million in
1993. As of December 31, 1993, the Company's open non-hedging positions
consisted of approximately 300 option contracts, which expired in early 1994
with a minimal impact on earnings. In the future, the Company will not enter
into non-hedging positions.
Acquisitions. 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.
On April 1, 1993, the Company completed its acquisition of the
Wattenberg natural gas gathering and transmission system for $48 million. This
system gathers and transports gas from approximately 1,800 receipt points in
northeast Colorado, and transports up to 250,000 MMBtus of gas per day.
Competition. The deregulation of the natural gas industry has
provided this business segment with expanded marketing and transportation
opportunities outside of its traditional on-system market base. This business
segment competes in these markets with other pipeline companies, marketers and
brokers of varying size, resources and experience as well as with producers who
are able to market gas directly.
Factors influencing the competitive environment include (i) the
industrywide supply and demand imbalance that has existed since the early 1980s
but which was substantially reduced during 1993, (ii) regulatory changes that
provide greater access to interstate markets by gas producers and marketers
(Order 636), (iii) the ability of certain markets to switch to alternative
fuels at favorable prices, and (iv) increased gas storage capacity in the
United States.
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<PAGE> 12
Principal competitive considerations affecting this business segment's ability
to acquire and market natural gas include price, services offered, reliability,
security of supply and physical proximity of pipelines to customers.
(2) Gas and Oil Production
Overview. The Company owns and participates in the development and
production of gas and oil reserves through two wholly- owned subsidiaries.
Total net reserves for the gas and oil business segment approximate 75
Bcf equivalent of natural gas (including net reserves purchased in the
acquisition described below). During 1993, this business segment participated
in the drilling and completion of 16 development wells in the Denver-Julesburg
Basin, one exploratory well in the Oklahoma Panhandle, one development well in
Colorado and in working-over ten wells on the Western Slope. At December 31,
1993, the Company had approximately 170,000 net undeveloped acres under lease
and owned interests in 223 producing wells (142 net), of which it operated 137
(119 net). In addition to oil and gas properties, one of the gas and oil
subsidiaries owns the Wolf Creek gas storage field in Colorado, and also owns
interests in three small gathering systems, all in Colorado.
Acquisitions. In February 1994, this business segment finalized an
acquisition of gas reserves and production for approximately $30 million. The
properties are located near existing gas and oil operations in western Colorado
and in the Moxa Arch region of southwestern Wyoming. Total net reserves
purchased in this acquisition approximate 50 Bcf equivalent of natural gas. In
October 1994, the Company expects to sell a 50 percent undivided interest in
these properties and to enter into a joint development agreement governing the
management and operations of the properties, under which a Company subsidiary
will act as manager.
This business segment will continue to focus on the acquisition and
development of natural gas reserves in the Mid-Continent and Rocky Mountain
regions, emphasizing areas contiguous to current and future Company pipeline
operations.
Competition. Gas and oil exploration and development are subject to
competition from not only numerous other companies in the industry, but also
from alternative fuels, including coal and nuclear energy.
(3) GENERAL
- -- Federal and State Regulation
Retail Natural Gas Services. The Company's intrastate pipelines,
distribution facilities and retail sales in Colorado, Kansas and Wyoming are
under the regulatory authority of each state's utility commission. The Wyoming
and Colorado commissions also may review the Company's issuance of securities.
In Nebraska, retail gas sales rates for residential and commercial customers
are regulated by each municipality served.
In the incorporated communities in which the Company sells natural gas
at retail, the Company operates under franchises granted by the applicable
municipal authorities. The Company is seeking to renew its franchises in:
Eagle, Colorado; Atkinson and Gothenburg, Nebraska; and Casper and Laramie,
Wyoming. Sales are currently being made during the renewal process. In
Colorado, these franchises must also be approved by the state regulatory
commission. The duration of franchises varies with applicable law. In
unincorporated areas, the Company's direct sales of natural gas are not subject
to franchise, but, in all states except Nebraska, are "certificated" by the
state regulatory commissions.
Interstate Transportation and Storage Services. Facilities for the
transportation of natural gas in interstate commerce and for storage services
in interstate commerce, are subject to regulation by FERC. In addition, the
12
<PAGE> 13
Company is subject to the requirements of FERC Order Nos. 497, et al., the
Marketing Affiliate Rules, which govern the provision of information by an
interstate pipeline to its marketing affiliates.
Through agreements with its former wholesale customers, the Company
was able to formulate and implement a plan which resulted in the transition to
Order 636 services and which avoided the necessity of any GSR cost recovery
filings with FERC. As a part of its action on the Company's restructuring
proposal, on January 13, 1994, FERC approved the offer of settlement which
implemented the Company's GSR crediting mechanism.
Gathering, Processing and Marketing Services. Under the Natural Gas
Act, facilities used for and operations involving the production and gathering
of natural gas are exempt from FERC jurisdiction, while facilities used for and
operations involving interstate transmission are not. However, FERC's
determination of what constitutes exempt gathering facilities as opposed to
jurisdictional transmission facilities has evolved over time. Under current
law, facilities which otherwise are classified as gathering may be subject to
ancillary FERC rate and service jurisdiction when owned by an interstate
pipeline company and used in connection with interstate transportation or
jurisdictional sales. Respecting facilities owned by noninterstate pipeline
companies, such as the Company's gathering facilities, FERC has historically
distinguished between these types of activities on a very fact-specific basis.
The Kansas Corporation Commission, Texas Railroad Commission and
Wyoming Public Service Commission have all expressed interest in asserting
jurisdiction over gathering issues, and the Company is closely monitoring
developments in this area.
As part of its corporate reorganization, K N requested and was granted
authority to transfer substantially all of its gathering facilities to a
wholly-owned subsidiary. FERC determined that after the transfer, the
gathering facilities would be nonjurisdictional, but FERC reserved the right to
reassert jurisdiction if the Company was found to be operating the facilities
in an anti-competitive manner or contrary to open access principles.
Because certain volumes of gas in interstate commerce are transported
by the Company for third parties and by third parties on behalf of the Company,
the operations of the Company's intrastate pipeline and marketing subsidiaries
in Texas are affected by FERC rules and regulations issued pursuant to the
Natural Gas Act and the NGPA. Of particular importance are regulations which
allow increased access to interstate transportation services by both interstate
and intrastate pipeline and marketing companies, without the necessity of
obtaining prior FERC authorization for each transaction. The most important
element of the program is nondiscriminatory access, under which a participating
pipeline must agree, if capacity is available, to transport gas for any party
requesting such service. The FERC also adopted a policy relating to the
pass-through in pipeline rates to interstate transportation and sales customers
of "buyout" or "buydown" costs prudently incurred in the settlement of
take-or-pay liabilities. The effect on the Company's and other pipelines of
these pass-through costs will be to increase the cost of gas acquired from, and
costs of transportation in, certain interstate pipelines.
The interstate gas marketing activities of the Company's various
marketing and pipeline subsidiaries are conducted either as unregulated first
sales or pursuant to blanket certificate authority granted by the FERC under
the Natural Gas Act.
The Colorado Public Utilities Commission, Kansas Corporation
Commission, Texas Railroad Commission and the Wyoming Public Service Commission
have authority to regulate the intrastate transportation, sale, delivery and
pricing of natural gas by intrastate pipeline and distribution systems.
Gas and Oil Production. Gas and oil operations are primarily subject
to the regulation of the Minerals Management Service ("MMS") and the Bureau of
Land Management on the Federal level. Each state in which the Company's gas
and oil subsidiaries operate regulates the volume and manner of production of
natural gas in that state under laws directed toward conservation and the
prevention of waste of natural resources.
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<PAGE> 14
- -- Environmental Regulation
The Company's operations and properties are subject to extensive and
changing Federal, state and local laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. Numerous governmental departments issue rules and regulations to
implement and enforce such laws which are often difficult and costly to comply
with and which carry substantial penalties for failure to comply. Moreover, the
recent trends toward stricter standards in environmental legislation and
regulation are likely to continue.
The United States Oil Pollution Act of 1990 (the "OPA") and
regulations promulgated thereunder by the MMS impose a variety of requirements
on persons who are or may be responsible for oil spills in waters of the United
States. The term "waters of the United States" has been broadly defined to
include inland waterbodies, including wetlands, playa lakes and intermittent
streams. The Company has oil and gas facilities that could affect "waters of
the United States." The Federal Water Pollution Control Act, also known as the
Clean Water Act, and regulations promulgated thereunder, require containment of
potential discharges of oil or hazardous substances and preparation of oil
spill contingency plans. The Company currently is implementing programs that
address containment of potential discharges and spill contingency planning.
The failure to comply with ongoing requirements or inadequate cooperation
during a spill event may subject a responsible party to civil or criminal
enforcement actions.
The Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("Superfund"), imposes liability, without regard to fault or
the legality of the original conduct, on certain classes of persons who are
considered to have contributed to the release of a "hazardous substance" into
the environment. Under Superfund, such persons may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources.
Furthermore, it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly caused
by the hazardous substances released into the environment.
Federal and state regulations have recently been changed as a result
of the 1990 Amendments to the Clean Air Act. This affects the Company's
operations in several ways. Natural gas compressors for both gathering and
transmission activity are now required to meet stricter air emission standards.
Additionally, states in which the Company operates are adopting new regulations
under the authority of the "Operating Permit Program" under Title V of these
1990 Amendments. These Operating Permits will require operators of certain
facilities to obtain individual site-specific air permits containing stricter
operational and technological standards of operation in order to achieve
compliance with this section of the 1990 Clean Air Act Amendments and
associated state air regulations.
Compliance with Federal, state and local provisions with respect to
the protection of the environment has had no material effect upon capital
expenditures, earnings, or the competitive position of the Company, except as
described in Item 3, "Mystery Bridge Road Environmental Matters" and "Other
Environmental Matters."
- -- Safety Regulation
The operations of certain of the Company's gas pipelines are subject
to regulation by the United States Department of Transportation (the "DOT")
under the Natural Gas Pipeline Safety Act of 1968 (the "NGPSA"), as amended.
The NGPSA establishes safety standards with respect to the design,
installation, testing, construction, operation and management of natural gas
pipelines, and requires entities that own or operate pipeline facilities to
comply with the applicable safety standards, to establish and maintain
inspection and maintenance plans and to comply with such plans.
The NGPSA was amended by the Pipeline Safety Act of 1992 to require
the DOT's Office of Pipeline Safety to consider, among other things,
protection of the environment when developing minimum pipeline safety
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<PAGE> 15
regulations. Management believes the Company's operations, to the extent they
may be subject to the NGPSA, comply in all material respects with the NGPSA.
The Company is also subject to laws and regulations concerning
occupational health and safety.
- -- Other
Amounts spent by the Company during 1993, 1992 and 1991 on research
and development activities were not material.
(D) Financial Information About Foreign and Domestic Operations and Export
Sales
All of the Company's operations are in the contiguous 48 states.
ITEM 3: LEGAL PROCEEDINGS
Mystery Bridge Road Environmental Matters
The Company is named as one of four potentially responsible parties
("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site,
pursuant to 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. (United States of
America v. Dow Chemical Company, Dowell Schlumberger, Inc., and K N Energy,
Inc., Civil Action No. 91CV1042, United States District Court for the District
of Wyoming; formerly reported as Administrative Orders for Removal Action on
Consent, October 15, 1987, and Amendment to Administrative Order for Removal
Order on Consent, October 10, 1989, Docket No. CERCLA VII-88-01, United States
Environmental Protection Agency; Judicial Entry of Consent Decree, United
States v. Dow Chemical Company, et al. (D. Wyo) USDC-WY-91CV1042B, Superfund
Site Number 8T83, Natrona County, Wyoming; EPA Docket Number CERCLA-VIII.)
With regard to this same Superfund site, in 1987 the State of Wyoming
filed suit against several parties (including the Company) 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
the Company had diligently remedied the alleged pollution. (Wyoming v. Little
America Refining Co., K N Energy, Inc. and Dowell Schlumberger, Civil Action
No. 62325, Wyoming District Court (Natrona County).)
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
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<PAGE> 16
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. (Albertson, et al., v. Dow Chemical Co., K N Energy, Inc., et
al., Civil Action No. 65212, 7th Judicial District, Natrona County District
Court, State of Wyoming.)
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. (K N v. Allianz Insurance Company, et al., Civil Action
No. 90CV301-J, United States District Court for the District of Wyoming.)
Other Environmental Matters
An environmental audit 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 initial 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 PCB 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 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 the Company's
operational ability to gather or transport natural gas.
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, at a total cost not expected to exceed $600,000. The
asbestos cleanup program did not interrupt or diminish the Company's
operational ability to gather or transport natural gas.
Grynberg v. K N et al.
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 (the "K N Entities") alleging that the K N
Entities as well as KNPC 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
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<PAGE> 17
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. (Grynberg v. K N, et al.,
Civil Action No. 92-2000, United States District Court for the District of
Colorado.)
Take-or-Pay Matters
The Company's exposure in take-or-pay matters is not material.
However, certain of the companies acquired from Cabot were parties to a number
of lawsuits or were subject to asserted claims by natural gas purchase
contracts containing take-or-pay provisions, which require the purchaser either
to take a minimum amount of gas or to pay for such minimum quantities. All of
these lawsuits and most claims have been resolved under terms which the Company
considers favorable. Most gas suppliers of the Company have entered into
excess gas purchase contracts with one of the Company's gas marketing
subsidiaries. These excess gas purchase contracts are generally credited
against take-or-pay gas volumes, which minimizes take-or-pay exposure.
The Company believes that its subsidiaries are able to raise various
regulatory, statutory, contractual and common law defenses to take-or-pay
claims. Each such claim involves interpretation of individual contract terms
and determinations regarding the actual deliverability of individual wells and
the impact of Texas Railroad Commission regulations on the specific contractual
provisions regarding takes from a specific well. Accordingly, each take-or-pay
claim includes questions of fact unique to the individual claim or dispute. As
a result, the outcome of any particular case may not be a reliable indicator in
predicting the outcome of other cases.
The Basket Agreement between the Company and Cabot provides for an
equal sharing of up to $40 million (any excess will be borne solely by Cabot)
between the Company and Cabot of certain gas contract take-or-pay liabilities
of the companies acquired from Cabot for periods prior to the closing date of
the acquisition from Cabot and for certain other potential gas contract claims.
(See "Items 1 and 2: Business and Properties") The Company's maximum exposure
under this arrangement is $20 million. The Company's estimated liability under
the Basket Agreement is approximately $6.5 million, which was recorded in
connection with the acquisition of the natural gas pipeline business from
Cabot, and as such will not have a material adverse effect on the Company's
financial position or results of operation. As of December 31, 1993, the
Company had made net payments of approximately $13.2 million. The excess of
net payments over 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.
The Company is also involved in various disputes and litigation
arising in the normal course of business including take-or-pay exposure not
covered by the Basket Agreement. The Company believes that it has adequate
defenses or insurance coverage relating to such litigation and that the outcome
of these proceedings, individually and in the aggregate, will not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant held its Annual Meeting of Shareholders on March 24,
1994.
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<PAGE> 18
(i) Proxies for the meeting were solicited pursuant to
Regulation 14 of the Securities Exchange Act of 1934.
There was no solicitation in opposition to
management's nominees for directors as listed in the
Proxy Statement and all such nominees were elected.
(ii) A proposal to adopt the K N Energy, Inc. Long-Term
Incentive Plan was voted upon at the Annual Meeting
and the number of affirmative votes, negative votes
and abstentions with respect to this matter were as
follows:
<TABLE>
<S> <C>
For: 10,644,714
Against: 2,866,140
Abstain: 397,034
</TABLE>
(b) The Registrant held a Special Meeting of Stockholders on July
13, 1994. Proxies for the meeting were solicited pursuant to
Section 14 of the Securities Exchange Act of 1934.
(i) A proposal to adopt an amendment to K N's Restated
Articles of Incorporation, as amended, increasing the
maximum number of directors of K N from 14 to 15 was
voted upon at the Special Meeting and the number of
affirmative votes, negative votes and abstentions
with respect to this matter were as follows:
<TABLE>
<S> <C>
For: 12,220,356
Against: 503,554
Abstain: 166,354
</TABLE>
(ii) A proposal to adopt an amendment to K N's Restated
Articles of Incorporation, as amended, increasing its
authorized Common Stock from 25,000,000 shares to
50,000,000 shares was voted upon at the Special
Meeting and the number of affirmative votes, negative
votes, abstentions and broker non-votes with respect
to this matter were as follows:
<TABLE>
<S> <C>
For: 12,333,211
Against: 315,871
Abstain: 181,948
Broker Non-Votes: 59,234
</TABLE>
(iii) A proposal to issue and reserve for issuance by K N
up to 14,000,000 shares of its Common Stock pursuant
to an Agreement of Merger dated as of March 24, 1994,
among K N, KNE Acquisition Corporation and AOG,
providing for the merger of KNE Acquisition
Corporation with and into AOG, and pursuant to which
each outstanding share of AOG Common Stock would be
converted into 0.47 of a share of K N Common Stock
was voted upon at the Special Meeting and the number
of affirmative votes, negative votes, abstentions and
broker non-votes with respect to this matter were as
follows:
<TABLE>
<S> <C>
For: 12,187,911
Against: 222,090
Abstain: 212,204
Broker Non-Votes: 268,059
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
(A) Identification and Business Experience of Executive Officers
<TABLE>
<CAPTION>
Name Age Position and Business Experience
- --------------------------------------------------------------- ----- ---------------------------------
<S> <C> <C>
Judith A. Aden . . . . . . . . . . . . . . . . . . . . . . . . 52 Vice President and Treasurer since March 1991.
Treasurer since January 1981. Assistant Secretary
since March 1989.
</TABLE>
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<PAGE> 19
<TABLE>
<S> <C> <C>
William E. Asbury . . . . . . . . . . . . . . . . . . . . . . . 41 Vice President, Gas Service since 1988.
Eugene B. Bade . . . . . . . . . . . . . . . . . . . . . . . . 47 Vice President and Controller since May 1993. Vice
President of certain subsidiaries since July 1989.
Director of Internal Audit from November 1985 to
April 1989.
Charles W. Battey . . . . . . . . . . . . . . . . . . . . . . . 62 Chairman since January 1989. Chief Executive
Officer from January 1989 to July 1994. Director
since 1971.
Richard M. Buxton . . . . . . . . . . . . . . . . . . . . . . . 45 Vice President, Strategic Planning and Financial
Services since March 1991. Director, Financial
Services from 1986 to March 1991.
David M. Carmichael . . . . . . . . . . . . . . . . . . . . . . 55 Vice Chairman and Director since July 1994.
Chairman of the Board and Chief Executive Officer
of AOG since 1986. President of AOG until October
1993.
William S. Garner, Jr . . . . . . . . . . . . . . . . . . . . . 44 Vice President, General Counsel and Secretary since
April 1992. Vice President and General Counsel
since January 1991. Vice President and Deputy
General Counsel from September 1989 through 1990.
Vice President, Law from June 1988 to September
1989.
Larry D. Hall . . . . . . . . . . . . . . . . . . . . . . . . . 51 President and Chief Executive Officer since July
1994. President and Chief Operating Officer since
May 1988. Director since 1984.
S. Wesley Haun . . . . . . . . . . . . . . . . . . . . . . . . 46 Vice President, Marketing and Supply since May
1993. Vice President, Gas Supply from March 1990
to May 1993. Vice President, Gas Acquisition
from November 1988 to March 1990.
Leland L. Hurst . . . . . . . . . . . . . . . . . . . . . . . . 63 Senior Vice President since May 1993. Senior Vice
President, Operations from June 1988 to May 1993.
E. Wayne Lundhagen . . . . . . . . . . . . . . . . . . . . . . 57 Vice President, Finance and Accounting since May
1988.
John W. Simonton . . . . . . . . . . . . . . . . . . . . . . . 48 Vice President, Administration and Human Resources
since May 1988.
H. Rickey Wells . . . . . . . . . . . . . . . . . . . . . . . . 37 Vice President, Operations since June 1988.
</TABLE>
These officers generally serve until March of each year.
(B) Involvement in Certain Legal Proceedings
None.
19
<PAGE> 20
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed for trading on the New York Stock
Exchange under the symbol KNE. Dividends paid and the price range of the
Company's common stock by quarters for the last two years, restated for an
October 1993 three-for-two stock split, are provided below.
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
MARKET PRICE DATA
(LOW-HIGH-CLOSE)
Quarter Ended:
March 31 $18.67 - $24.67 - $23.50 $15.17 - $18.33 - $16.00
June 30 22.17 - 24.67 - 24.33 13.83 - 16.58 - 16.17
September 30 23.33 - 26.83 - 26.67 15.83 - 20.00 - 18.92
December 31 24.75 - 30.00 - 25.75 17.17 - 19.33 - 18.75
DIVIDENDS
Quarter Ended:
March 31 $0.121 $0.135
June 30 0.121 0.119
September 30 0.133 0.126
December 31 0.133 0.126
COMMON STOCKHOLDERS
Year-end 9,818 9,496
</TABLE>
20
<PAGE> 21
ITEM 6: SELECTED FINANCIAL DATA
FIVE-YEAR REVIEW
Selected Financial Data (In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas Services $1,027,226 $ 819,571 $ 776,133 $ 807,308 $ 532,233
Gas and Oil Production 5,321 4,710 3,053 3,164 2,816
---------- ---------- --------- --------- ---------
Total Operating Revenues $1,032,547 $ 824,281 $ 779,186 $ 810,472 $ 535,049
========== ========== ========= ========= =========
OPERATING INCOME $ 80,204 $ 83,757 $ 81,490 $ 69,282 $ 45,193
Other Income (Deductions) (30,736) (27,347) (23,134) (27,693) (32,781)
---------- ---------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 49,468 56,410 58,356 41,589 12,412
Income Taxes 18,599 20,068 21,282 16,526 11,183
---------- ---------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 30,869 36,342 37,074 25,063 1,229
Income (Loss) from Discontinued
Operations -- -- (17,250) 320 (2,754)
---------- ---------- --------- --------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 30,869 36,342 19,824 25,383 (1,525)
Extraordinary Item -- -- -- 30,244 --
---------- ---------- --------- --------- ---------
NET INCOME (LOSS) 30,869 36,342 19,824 55,627 (1,525)
Less - Preferred Stock Dividends 853 2,976 4,808 5,470 3,513
---------- ---------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE FOR
COMMON STOCK $ 30,016 $ 33,366 $ 15,016 $ 50,157 $ (5,038)
========== ========== ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE (1):
Continuing Operations $ 1.09 $ 1.34 $ 1.45 $ 0.89 $ (0.12)
Discontinued Operations -- -- (0.77) 0.01 (0.15)
Extraordinary Item -- -- -- 1.37 --
---------- ---------- --------- --------- ---------
$ 1.09 $ 1.34 $ 0.68 $ 2.27 $ (0.27)
========== ========== ========= ========= =========
Dividends Per Common Share (1) $ 0.51 $ 0.51 $ 0.51 $ 0.46 $ 0.50
========== ========== ========= ========= =========
Number of Shares Used in Computing
Earnings Per Common Share (1) $ 27,424 $ 24,828 $ 22,320 $ 22,098 $ 18,568
========== ========== ========= ========= =========
TOTAL ASSETS $1,167,848 $1,007,411 $ 816,514 $ 828,525 $ 844,955
========== ========== ========= ========= =========
CAPITAL EXPENDITURES -
CONTINUING OPERATIONS:
Constructed $ 100,780 $ 74,787 $ 69,080 $ 51,656 $ 50,148
Acquired 63,281 110,833 1 7,684 121,383
---------- ---------- --------- --------- ---------
Total Capital Expenditures $ 164,061 $ 185,620 $ 69,081 $ 59,340 $ 171,531
========== ========== ========= ========= =========
CAPITALIZATION:
Common Stockholders' Equity $ 391,462 53% $ 347,738 51% $ 256,605 50% $ 251,208 50% $ 211,890 45%
Preferred Stock 7,000 1% 26,310 4% 31,360 6% 31,360 6% 31,560 7%
Preferred Stock Subject to Mandatory
Redemption 2,858 0% 4,500 1% 6,643 1% 21,286 4% 28,429 6%
Long-Term Debt 335,190 46% 303,224 44% 222,850 43% 199,586 40% 193,659 42%
---------- --- ---------- --- --------- --- --------- --- --------- ---
Total Capitalization $ 736,510 100% $ 681,772 100% $ 517,458 100% $ 503,440 100% $ 465,538 100%
========== === ========== === ========= === ========= === ========= ===
BOOK VALUE PER COMMON SHARE (1) $ 14.39 $ 13.60 $ 11.60 $ 11.45 $ 9.65
========== ========== ========= ========= =========
</TABLE>
(1) Restated to reflect a three-for-two common stock split in 1993.
21
<PAGE> 22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On July 13, 1994, K N completed the merger with 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
- -- CONTINUING OPERATIONS
Income from continuing operations was $30.9 million, $36.3 million and
$37.1 million for 1993, 1992 and 1991, respectively. After payment of
preferred dividends, the respective earnings per common share were $1.09, $1.34
and $1.45.
The decline in 1993 earnings reflects the impact of unfavorable summer
weather on natural gas sales to irrigation customers, a significant decline in
prices of natural gas liquids (NGLs) during the second half of 1993 and the
Company's $4.5 million write-down of its investment in WellTech, Inc. These
negative factors were partially offset by positive contributions from
acquisitions of natural gas gathering and processing facilities, favorable
resolution of rate cases in the Company's retail jurisdictions and insurance
settlements related to the Brookhurst Superfund site near Casper, Wyoming.
The slight decline in 1992 income from continuing operations, relative
to 1991 results, was attributable to unfavorable weather adversely affecting
space-heating and irrigation load and the related reduction of recoveries of
NGLs. Incremental earnings from acquisitions and lower litigation and
environmental costs partially mitigated the effects of unfavorable weather.
- -- DISCONTINUED OPERATIONS
In 1991, the Company recorded an after-tax loss of $17.3 million
resulting from the sale of its coal subsidiaries and the discontinuance of this
business segment.
RESULTS OF CONTINUING OPERATIONS
Discussion of operating results by business segment and consolidated
other income and (deductions) and income taxes follows. Segment operating
revenues, gas purchases, operations and maintenance expenses and volumetric
data cited below are before intersegment eliminations (dollars in millions).
<TABLE>
<CAPTION>
GAS SERVICES 1993 1992 1991
- ------------ --------- --------- ---------
<S> <C> <C> <C>
Operating Revenues -
Gas Sales and Transportation $ 919.9 $ 723.5 $ 732.6
Natural Gas Liquids and Other 107.3 96.1 43.5
--------- --------- ---------
1,027.2 819.6 776.1
--------- --------- ---------
Operating Costs and Expenses -
Gas Purchases 725.5 558.2 525.1
Operations and Maintenance 166.5 129.4 128.0
Depreciation, Depletion and Amortization 41.3 36.3 30.9
Taxes, Other Than Income Taxes 15.0 12.7 10.8
--------- --------- ---------
948.3 736.6 694.8
--------- --------- ---------
Operating Income $ 78.9 $ 83.0 $ 81.3
========= ========= =========
Systems Throughput (Bcf) -
Gas Sales 333.0 289.8 294.8
Transportation 307.2 198.3 166.7
--------- --------- ---------
640.2 488.1 461.5
========= ========= =========
Natural Gas Liquids (Millions of Gallons) 321.8 245.5 101.3
========= ========= =========
</TABLE>
Acquisitions of natural gas gathering and processing facilities in
1993 and 1992 have resulted in significant increases in operating revenues,
costs, expenses and income. In April 1992, the Company acquired ten processing
plants
22
<PAGE> 23
and related gathering facilities from The Maple Gas Corporation. In October
1992, the Company assumed operations of the Douglas gathering and processing
system. The Company acquired the Wattenberg gathering and transmission system
in April 1993 and the Wind River gathering joint venture facilities in June
1993. The combined impact of these acquisitions were as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Operating Revenues $ 97.9 $ 56.4
Operating Costs and Expenses 83.6 43.9
---------- ----------
Operating Income $ 14.3 $ 12.5
========== ==========
</TABLE>
The following discusses operating results excluding the effects of
acquisitions.
Operating revenues for 1993 were $166.1 million, or 22 percent, higher
than 1992. This significant increase in operating revenues is largely due to
growth in both K N and AOG's nonregulated, lower margin gas sales activities
which have related positive impacts on transportation services and NGL
recoveries. Although 1993 gross margins from gas sales, transportation and
NGLs sales were $14.8 million above 1992, unit margins declined due to lower
1993 sales to K N's high margin irrigation customers and lower NGLs prices
during the second half of 1993. Operations and maintenance increased by $17.2
million, or 15 percent, due principally to greater systems throughput and
higher processing costs. These increases were partially offset by insurance
settlements related to the Brookhurst Subdivision Superfund site near Casper,
Wyoming.
Operating revenues for 1992 were two percent below the previous year.
Unfavorable 1992 winter and summer weather adversely impacted the Company's gas
sales and transportation services to space heating and irrigation customers.
Continued growth in the nonregulated gas marketing arena partially offset this
decline in higher margin sales. Operations and maintenance expenses were $9.4
million lower than 1991 due to lower on-system throughput, expense controls and
lower provisions for environmental and litigation issues.
<TABLE>
<CAPTION>
GAS AND OIL PRODUCTION 1993 1992 1991
- ---------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues -
Gas and Oil Sales $ 7.2 $ 5.3 $ 3.3
Other 1.3 1.8 1.4
----------- ----------- -----------
8.5 7.1 4.7
----------- ----------- -----------
Operating Costs and Expenses -
Operations and Maintenance 3.2 2.6 2.5
Depreciation, Depletion and Amortization 3.3 3.1 1.6
Taxes, Other Than Income Taxes 0.7 0.6 0.4
----------- ----------- -----------
7.2 6.3 4.5
----------- ----------- -----------
Operating Income $ 1.3 $ 0.8 $ 0.2
=========== =========== ===========
Gas and Oil Production (Equivalent Bcf) 3.7 2.6 1.8
=========== =========== ===========
</TABLE>
The increases in 1993 and 1992 gas and oil revenues, expenses and
production result from the July 1992 acquisition of producing properties in
western Colorado and successful drilling in the Denver-Julesburg Basin in
northeastern Colorado.
<TABLE>
<CAPTION>
OTHER INCOME AND (DEDUCTIONS) 1993 1992 1991
- ----------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Interest Expense $ (30.5) $ (27.0) $ (24.0)
Minority Interests and Other, Net (0.2) (0.3) 0.9
----------- ----------- -----------
$ (30.7) $ (27.3) $ (23.1)
=========== =========== ===========
</TABLE>
The increase in interest expense reflects the issuance of $320 million
of long-term debt during the last three years to fund capital expenditures and
acquisitions, and for the refunding of $65 million of higher coupon debt in
1993 and 1992.
23
<PAGE> 24
<TABLE>
<CAPTION>
INCOME TAXES 1993 1992 1991
- ------------ ----------- ----------- -----------
<S> <C> <C> <C>
Applicable to Continuing Operations $ 18.6 $ 20.1 $ 21.3
=========== =========== ===========
Effective Tax Rate 37.6% 35.6% 36.5%
=========== =========== ===========
</TABLE>
The 1993 effective tax rate primarily reflects the one percent
increase in the Federal tax rate resulting from enactment of the Revenue
Reconciliation Act of 1993. Refer to Note 6 of Notes to Consolidated Financial
Statements for a reconciliation of statutory rates to effective rates.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during 1993 included cash
generated from operations, short-term borrowings and the issuance of long-term
debt. Principal cash outflows were capital expenditures and acquisitions,
redemptions of long-term debt and preferred stock, and payment of interest and
dividends.
- -- CASH FLOWS FROM OPERATING ACTIVITIES
Net cash flows from continuing operations were $67.9 million, $51.0
million and $97.6 million for 1993, 1992 and 1991, respectively. In addition
to the factors discussed previously, which affect cash generation as well as
operating results, net cash flows have been impacted by litigation settlements
(including take-or-pay payments), purchase gas contract resolutions and
environmental costs. In both 1993 and 1992, actual cash disbursements exceeded
expense provisions for litigation and environmental matters.
- -- CAPITAL EXPENDITURES AND COMMITMENTS
Excluding acquisitions, 1993 capital expenditures were $102.7 million
compared with expenditures of $74.8 million in 1992 and $69.1 million in 1991.
The increased spending in 1993 results from implementation of Order 636
(transition costs for measurement facilities and systems) and the construction
of a new corporate office building.
Consolidated 1994 capital expenditures are budgeted at $78.0 million,
excluding acquisitions. In February 1994, the Company's gas and oil
subsidiaries completed an approximately $30 million acquisition of gas reserves
and production in western Colorado and southwestern Wyoming. In October 1994,
the Company expects to sell a 50 percent undivided interest in substantially
all the acquired properties to a party with whom they will jointly develop the
properties.
The Company has no substantial disagreements related to take-or-pay
matters. The Company monitors contractual obligations, including obligations
to pay above-market prices under certain contracts, and at the end of each
contract year pays those producers to whom take-or-pay amounts are due. All
amounts paid by the Company for take-or-pay are either fully recoupable under
the terms of the gas purchase contracts, or are recoverable from offsetting gas
purchase obligations under certain contractual arrangements, or the existing
state and local regulatory rules and regulations for K N's retail distribution
operations. As a result, the Company has experienced no losses due to
unfavorable pricing and none are anticipated. At December 31, 1993, the amount
of outstanding take-or-pay payments was $11.7 million.
- -- CAPITAL RESOURCES
Short-term debt was $47.0 million at December 31, 1993, compared with
$2.0 million of borrowings at December 31, 1992. The Company has credit
agreements with nine banks to either borrow or use as commercial paper support
up to $120 million. In November 1993, K N filed a shelf registration statement
with the Securities and Exchange Commission for the sale of $200 million of
debt securities in anticipation of long-term financing needs over the next
three years.
24
<PAGE> 25
In January 1994, the Company received $41.0 million from the sale of
contract demand receivables to a financial institution. The demand receivables
resulted from the gas sales contracts between some of K N's former wholesale
customers and a K N subsidiary. Proceeds were used to reduce short-term debt.
The Company expects that 1994 cash requirements for debt service,
preferred stock redemptions, dividends and capital expenditures will be
provided by external cash flows, long- and short-term borrowings and the
issuance of common stock for dividend reinvestment and employee benefit plans.
OUTLOOK
- -- MERGER BENEFITS
As a result of the July 13, 1994 merger, the Company expects to
achieve substantial recurring improvements in earnings by enhancing gross
margin and by reducing general/administrative and operating costs. Among the
areas identified for improvement are:
Natural Gas Supply. The merged Company operates along an axis of
major gas supply basins stretching from the northern Rocky Mountain region
through the Mid-Continent to South Texas. Access to six major, geographically
diverse producing basins enables the Company to balance complementary peaking
periods with a greater choice of supply alternatives. An additional future
opportunity to provide broader gas supply access for the Company should come
from its participation in the proposed TransColorado Pipeline Project.
The Company's Texas service territory experiences strong demand in the
summer when natural gas is used to generate electricity and to power irrigation
pump engines, whereas the Company's strongest demand in Colorado, Wyoming,
Nebraska and Kansas occurs during the winter heating season. The Company's
Texas operations have paid a premium for gas supply during peaking periods, and
should be able to obtain gas from affiliates at more competitive prices during
these periods.
Gas Sales, Marketing, Transportation and Storage. The marketing
efforts of the merged Company should yield efficiencies in purchasing gas
supplies, provide leverage in contracting for those supplies and improve
utilization of the systems by increasing sales to non-historical market areas.
In addition, the Company should be more effective in converting current spot
market sales to longer term premium markets and in developing incremental
marketing, transportation, storage and other service opportunities, while
retaining the current retail and on-system markets as a base load. The Company
now has over 18,700 total miles of transmission and gathering pipelines that
both serve direct markets and interconnect with more than 60 delivery points
into 20 major pipelines. The combined natural gas sales volumes in 1993 for K N
and AOG were 333 Bcf.
The Company now has over 27 Bcf of core working gas storage capacity
in conventional storage fields near major pipeline interconnects in the Rocky
Mountain, Mid-Continent and Permian Basin areas. The present combined
deliverability from these storage fields is over 600 MMcf of gas per day. The
Company's Texas storage fields have working gas capacity of approximately 13
Bcf, with an additional three Bcf of high-deliverability salt cavern storage
under development. The salt cavern storage projects have the potential to
provide multiple cycling of gas during seasonal peak periods, a service which
should be in high demand in the post-Order 636 environment. These Texas
storage sites are located near the Waha, Texas market center and are directly
connected to Waha and to K N's Buffalo Wallow market center in the Texas
Panhandle through the Red River Pipeline. The key location of this pipeline
between two market centers, with storage connected, means that the Company will
be able to provide a broader range of services to its customers than either of
the companies would have been able to do separately. These services will
include physical gas movement between market centers and load balancing
services and delivery reliability supported by storage.
25
<PAGE> 26
Gathering and Processing. The Company should have greater leverage
in the marketing of natural gas liquids. The combined sales volumes of liquids
in 1993 for the Company was 322 million gallons. Adding incremental gathering
and processing volumes to the Company's Texas systems provides additional gas
supply volumes that are transported through downstream pipelines and may be
purchased and sold to incremental markets. Thus, gathering and processing are
an integral part of the total business opportunity. In 1993, the Company's
Texas processing facilities operated at approximately 60 percent of total
processing capacity, and the Company is looking for opportunities to more fully
utilize this processing capacity.
Cost Savings. The Company expects a recurring improvement in results
through consolidation of administrative and operational staff, space
requirements and information systems. Cost savings will also result from
eliminating certain outside legal, accounting and other services. Combined
general and administrative expenses for both companies totaled $57 million for
1993.
At December 31, 1993, the Company had equity capital of approximately
$391 million and a long-term debt to total capitalization ratio of
approximately 46 percent, which provides significant financial flexibility to
pursue continued growth opportunities. The ratio compares to an average
long-term debt to total capitalization ratio of 50 percent among diversified
natural gas companies and about 55 percent among natural gas gathering,
transportation and marketing companies. The performance of the Company is
expected to increase cash flow from operations and provide for positive
earnings momentum once the non-recurring transaction costs associated with the
combination have been absorbed. Such costs are expected to be approximately
$22 million before income taxes, and will be expensed in 1994. This amount
includes the cost of restructuring the Company's retail distribution
operations.
The Company believes that recurring operating income benefits that
should result from incremental profit margin generating opportunities and
expense reductions should total in a range of at least $15-20 million annually
for 1995 and beyond. These profit margin enhancements and expense reductions
are expected to be realized over time as the consolidation is completed.
Because of the increased competitive nature of the natural gas industry and the
inherent uncertainties involved in combining two companies, there can be no
assurance that the merged company will be able to fully realize the profit
margin enhancements and expense reductions discussed above. Further, there can
be no assurance that operating income resulting from identified profit margin
enhancements and expense reductions will not be offset by other revenue
shortfall or expense increases.
- -- GAS SERVICES
Operating results for 1994 should benefit from a full year's operation
of the Wattenberg transmission system and from retail distribution rate
increases placed into effect during 1993.
As a result of the unbundling and the diverse services offered under
the post-Order 636 environment, competition will increase. The Company
believes that its interstate and intrastate systems are well-positioned to
capitalize on opportunities resulting from future development of natural gas
reserves in the Rocky Mountain region. The Company expects continued moderate
growth in its retail distribution operations due, principally, to the continued
customer additions being realized by its Colorado intrastate system.
The Company believes gas sales on its Texas system will continue to
show improvement in 1994 due to improvements in the Company's price risk
management activities and the reformation of certain contracts in 1993.
- -- GAS AND OIL PRODUCTION
The February 1994 acquisition of producing properties and undeveloped
gas reserves in western Colorado and southwestern Wyoming is expected to have a
positive impact on 1994 operating results of this business segment. The
26
<PAGE> 27
Company also believes that its involvement in gas and oil development and
production provides opportunities to enhance the value of its associated gas
service, gathering and processing businesses.
- -- LITIGATION
During the last three years, the Company has resolved or settled four
major cases or environmental matters, three cases related to the Brookhurst
Subdivision Superfund site near Casper, Wyoming and long-standing litigation
with FM Properties Inc. and other parties. Refer to Note 5 of Notes to
Consolidated Financial Statements for additional information on the Company's
pending litigation. The Company believes it has established adequate reserves
such that resolution of pending litigation or environmental matters will not
have a material adverse effect on the Company's financial position or results
of operations.
27
<PAGE> 28
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To K N Energy, Inc.:
We have audited the accompanying consolidated balance sheets of K N
Energy, Inc. (a Kansas corporation) and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, common
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of K N
Energy, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As explained in Notes 1(C) and 9 of Notes to Consolidated Financial
Statements, the Company changed its method of accounting for income taxes
effective January 1, 1992, and its method of accounting for postretirement
benefits other than pensions effective January 1, 1993.
/s/ Arthur Andersen LLP
Denver, Colorado
October 7, 1994.
28
<PAGE> 29
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 $ 1,027,226 $ 819,571 $ 776,133
Gas and Oil Production 5,321 4,710 3,053
---------------- --------------- ----------------
Total Operating Revenues 1,032,547 824,281 779,186
---------------- --------------- ----------------
OPERATING COSTS AND EXPENSES:
Gas Purchases 723,268 556,549 524,298
Operations and Maintenance 168,735 131,313 129,680
Depreciation, Depletion and Amortization 44,644 39,353 32,476
Taxes, Other Than Income Taxes 15,696 13,309 11,242
---------------- --------------- ----------------
Total Operating Costs and Expenses 952,343 740,524 697,696
---------------- --------------- ----------------
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
Loss From Discontinued Operations, 30,869 36,342 37,074
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.
29
<PAGE> 30
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.
30
<PAGE> 31
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
------------ --------------
SHARES AMOUNT SHARES AMOUNTS
------ ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1990 14,625,217 $ 73,126 (54,455) $ (1,359)
Net Income
Cash Dividends -
Common, $0.51 Per Share
Preferred
Loss on Redemption of Preferred
Stock
Treasury Stock Acquired (236,100) (5,794)
Employee Stock Options 5,083 26 24,482 613
Employee Benefit Plans 112,799 564 82,495 1,934
Dividend Reinvestment and Stock
Purchase Plans 2 -- 118,808 2,879
---------- -------- ------------- --------------
BALANCE, DECEMBER 31, 1991 14,743,101 73,716 (64,770) (1,727)
Net Income
Cash Dividends -
Common, $0.51 Per Share
Preferred
Treasury Stock Acquired (48,833) (1,306)
Employee Stock Options 46,593 233 -- --
Employee Benefit Plans 3,943 20 31,070 830
Dividend Reinvestment and Stock
Purchase Plans 54,355 271 82,533 2,203
Sale of Common Stock 1,981,833 9,909 -- --
Conversion of AOG 9% Cumulative
Convertible Preferred Stock 207,089 1,035 -- --
Other Issuances 10,152 51 -- --
Buyback of 200,000 AOG Warrants -- -- -- --
---------- -------- ------------- --------------
BALANCE, DECEMBER 31, 1992 17,047,066 85,235 -- --
Net Income
Cash Dividends -
Common, $0.51 Per Share
Preferred
Common Stock Split 8,639,721 43,199 -- --
Employee Stock Options 81,416 407 -- --
Employee Benefit Plans 20,717 104 -- --
Dividend Reinvestment and Stock
Purchase Plans 171,592 858 -- --
Conversion of AOG 9% Cumulative
Convertible Preferred Stock 1,141,755 5,709 -- --
Issuance of Common Shares
as Executive Compensation 94,000 470 -- --
Amortization of Deferred -- -- -- --
Compensation
Other, Net 4,700 23 -- --
---------- -------- ------------- --------------
BALANCE, DECEMBER 31, 1993 27,200,967 $136,005 $ -- $ --
========== ======== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED
PAID-IN COMPEN- RETAINED
CAPITAL SATION EARNINGS
------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1990 $ 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
Employee Stock Options 53 -- (252)
Employee Benefit Plans 1,961 -- (17)
Dividend Reinvestment and Stock
Purchase Plans -- (174)
----------- ------- ---------
BALANCE, DECEMBER 31, 1991 127,863 -- 56,753
Net Income 36,342
Cash Dividends -
Common, $0.51 Per Share (12,417)
Preferred (2,976)
Treasury Stock Acquired
Employee Stock Options 423 -- --
Employee Benefit Plans 87 -- (51)
Dividend Reinvestment and Stock
Purchase Plans 916 -- (108)
Sale of Common Stock 53,098 -- --
Conversion of AOG 9% Cumulative
Convertible Preferred Stock 4,015 -- --
Other Issuances 173 -- --
Buyback of 200,000 AOG Warrants -- -- (1,615)
----------- ------- ---------
BALANCE, DECEMBER 31, 1992 186,575 -- 75,928
Net Income 30,869
Cash Dividends -
Common, $0.51 Per Share (13,757)
Preferred (853)
Common Stock Split (43,233) -- --
Employee Stock Options 949 -- --
Employee Benefit Plans 560 -- --
Dividend Reinvestment and Stock
Purchase Plans 4,135 -- --
Conversion of AOG 9% Cumulative
Convertible Preferred Stock 13,601 -- --
Issuance of Common Shares
as Executive Compensation 1,867 (1,420) --
Amortization of Deferred -- 263 --
Compensation
Other, Net (27) -- --
----------- ------- ---------
BALANCE, DECEMBER 31, 1993 $ 164,427 $(1,157) $ 92,187
=========== ======= =========
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 32
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 -- --
Provision 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.
32
<PAGE> 33
NOTES TO 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).
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 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.
33
<PAGE> 34
(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 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.
34
<PAGE> 35
(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, AOG 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, AOG acquired an additional 25
percent interest in Red River for cash and the assumption of liabilities. In
April 1992, AOG acquired the assets of The Maple Gas Corporation ("Maple") for
$5.5 million cash, a $5.5 million note payable and the assumption of certain of
Maple's liabilities. In 1992, K N purchased all of the capital stock of two
corporations, each of which owned gas distribution systems, for $5.2 million.
The liabilities assumed in conjunction with these acquisitions for the years
ended December 31, 1993 and 1992, are as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
(Dollars in Thousands)
<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), K N 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, 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
35
<PAGE> 36
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
previously reported by KNE to the combined amounts currently presented for the
years 1993, 1992 and 1991 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1993 1992 1991
---- ---- ----
K N AOG TOTAL K N AOG TOTAL K N AOG TOTAL
--- --- ----- --- --- ----- --- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 489,863 $ 542,684 $ 1,032,547 $ 388,703 $435,578 $ 824,281 $ 395,339 $ 383,847 $ 779,186
========== ========== =========== ========= ======== ========= ========= ========= =========
Net Income $ 24,275 $ 6,594 $ 30,869 $ 19,593 $ 16,749 $ 36,342 $ 4,350 $ 15,474 $ 19,824
========== ========== =========== ========= ======== ========= ========= ========= =========
</TABLE>
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.
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 eliminated the need to make any GSR cost recovery filing with FERC.
36
<PAGE> 37
(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 became 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 ten 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
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.
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 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.
4. ACQUISITIONS
(A) Natural Gas Processing Business
Effective April 1, 1992, AOG 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
37
<PAGE> 38
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) Gathering and Transmission System
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 system was financed through an
operating lease. The system gathers and transports gas from approximately
1,800 receipt points in northeastern Colorado.
(C) Gas and Oil Reserve Acquisition
On February 1, 1994, the Company's gas and oil 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. In October
1994, the Company expects to sell a 50 percent undivided interest in
substantially all the acquired properties to a party with whom they will
jointly develop the 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
The Company 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 the Company) for injunctive
relief, penalties and unquantified damages claimed to have resulted from
alleged
38
<PAGE> 39
pollution of groundwater and soils in the Brookhurst Subdivision. On April 1,
1993, the Wyoming District Court dismissed the lawsuit, finding that the
Company had diligently remedied the alleged pollution.
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 the Company's operational ability to gather
or transport natural gas.
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 the Company's operational ability
to gather or transport natural gas.
39
<PAGE> 40
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, the Company believes that the resolution of such matters
will not have a material adverse effect on the Company's financial position or
results of operations.
40
<PAGE> 41
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
-------- -------- --------
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):
41
<PAGE> 42
<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
---------- -----------
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 nine banks to either borrow or use as
commercial paper support, up to a total of $120.0 million. 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.
42
<PAGE> 43
(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
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.
43
<PAGE> 44
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.
Under terms of the senior revolving credit and term note facility, AOG
may borrow up to $75 million for general corporate purposes through September
30, 1995. At December 31, 1993, $58 million was outstanding under this
facility. 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.
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
Current Sinking Fund Requirements (500) (1,000)
----------- ------------
Total Preferred Stock Subject to Mandatory Redemption $ 2,858 $ 4,500
=========== ===========
</TABLE>
44
<PAGE> 45
(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 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>
45
<PAGE> 46
(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):
<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.
46
<PAGE> 47
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.
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):
47
<PAGE> 48
<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
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 will have no 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
48
<PAGE> 49
(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:
<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.
49
<PAGE> 50
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>
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. During
1995, the Company expects to settle all significant matters covered by the
Basket Agreement. The Company's estimated liability is approximately $6.5
million, which was recorded in connection with the acquisition of the natural
gas pipeline business from Cabot. As of December 31, 1993, 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.
50
<PAGE> 51
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.
(F) Capital Expenditure Budget
The consolidated capital expenditure budget for 1994 is approximately
$78 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>
51
<PAGE> 52
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY OPERATING RESULTS FOR 1993 AND 1992
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1993
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Operating Revenues $ 286,541 $ 216,687 $ 234,952 $ 294,367
Operating Income 33,981 7,484 11,361 27,378
Net Income 16,665 1,020 2,731 10,453
Earnings Per Common Share (1) $ 0.62 $ 0.04 $ 0.10 $ 0.38
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1992
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Operating Revenues $ 217,607 $ 160,849 $ 179,945 $ 265,880
Operating Income 31,184 11,199 14,494 26,880
Net Income 15,409 2,936 5,803 12,194
Earnings Per Common Share (1) $ 0.68 $ 0.12 $ 0.22 $ 0.47
========= ========= ========= =========
</TABLE>
(1) Restated to reflect a three-for-two common stock split in 1993.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no such matters during 1993.
52
<PAGE> 53
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) Identification of Directors
For information regarding the Directors, see pages 2-3 of the 1994
Proxy Statement. In addition:
<TABLE>
<CAPTION>
Principal Occupation Director
Name During Past Five Years Age Since
- ---- ---------------------- --- -----
<S> <C> <C> <C>
Edward H. Austin Jr. Principal of Austin, Calvert & Flavin, Inc., an 52 1994
investment counseling firm. Mr. Austin also serves
as a director of Security Capital Industrial Trust.
Former Director of American Oil and Gas
Corporation.
John G. L. Cabot Director, Vice Chairman and Chief Financial Officer 59 1994
(Advisory Director, of Cabot Corporation, Boston, Massachusetts.
non-voting) Mr. Cabot also serves as a Director of Cabot Oil
and Gas Corporation, Eaton Vance Corporation
and Hollingsworth and Vose Company.
David M. Carmichael Vice Chairman of the Company since July 1994. 55 1994
Chairman of the Board and Chief Executive Officer
of American Oil and Gas Corporation from 1986 to 1994.
Mr. Carmichael served as President of American Oil and
Gas Corporation until October 1993.
Edward Randall, III Private investor since July 1990; Partner, Duncan 67 1994
Cook & Co. from 1985 to 1990. Mr. Randall also
serves as a director of Paine Webber Group, Inc.
and Enron Oil & Gas Company. Former Director
of American Oil and Gas Corporation.
James C. Taylor Owner and Operator of Wytana Livestock Company. 56 1994
Private Investor.
</TABLE>
(B) Identification of Executive Officers
See Executive Officers of the Registrant under Part I.
(C) Identification of Certain Significant Employees
None.
(D) Family Relationships
None.
53
<PAGE> 54
(E) Business Experience
See Executive Officers of the Registrant under Part I.
(F) Involvement in Certain Legal Proceedings
See Executive Officers of the Registrant under Part I.
(G) Promoters and Control Persons
None.
ITEM 11: EXECUTIVE COMPENSATION
See "Executive Compensation", "Stock Options", "Pension Benefits" and
"Director Compensation" on pages 4-5, 8-10, 12 and 13 of the 1994 Proxy
Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the following pages of the 1994 Proxy Statement:
(i) Pages 2-3 relating to common stock owned by
directors. In addition:
Shares of Common Stock Beneficially Owned at March 24, 1994(1)
<TABLE>
<CAPTION>
Number of Percent of
Name of Beneficial Owner Positions Shares Class
- ------------------------ --------- --------- ----------
<S> <C> <C> <C>
Edward H. Austin Jr. Director 147,086(2) *
John G. L. Cabot Advisory Director 0 *
David M. Carmichael Director and Vice Chairman of the Board 300,640(3) 1.1%
Edward Randall III Director 263,555(4) *
James C. Taylor Director 90,330(5) *
</TABLE>
______________________________________________
(1) Except as otherwise indicated, each Director or Executive
Officer has sole voting and investment power with respect to the
shares owned. Percentages are rounded to the nearest one-tenth of one
percent. An asterisk indicates the percentage is less than 1.0%
(2) Includes (i) 77,250 shares of Common Stock owned by a
family partnership of which Mr. Austin is the sole managing general
partner; and (ii) 3,298 shares of Common Stock owned indirectly by Mr.
Austin through his mother. Mr. Austin is a principal of Austin,
Calvert & Flavin, Inc. and disclaims beneficial ownership of all
shares in which Austin, Calvert & Flavin, Inc. has shared voting and
investment power.
(3) Includes 136,300 shares of Common Stock that Mr.
Carmichael has the right to acquire within 60 days of March 24, 1994
pursuant to the exercise of stock options and 23,500 shares of
restricted stock awarded to Mr. Carmichael under the Company's Stock
Incentive Plan with respect to which he has sole voting power.
Restrictions will be removed from 11,750 shares of restricted stock on
September 15, 1994 and from the remainder on September 15, 1995,
assuming Mr. Carmichael remains an officer or director of the Company
until such dates.
(4) Includes a total of 195,952 shares of Common Stock held by
family trusts in which Mr. Randall, as trustee, exercises sole voting
and investment power, Mr. Randall disclaims beneficial ownership of
the shares held by the family trusts.
(5) Includes (i) 12,350 shares of Common Stock held indirectly
by trust in which Mr. Taylor acts solely as advisor, does not act as
trustee and has no voting power; and (ii) 4,700 shares of Common Stock
held by a limited partnership in which Mr. Taylor is a general partner.
54
<PAGE> 55
(ii) page 11, "Executive Stock Ownership"; and
(iii) pages 18-19, "Principal Shareholders". In addition:
Shares of Common Stock Beneficially Owned at March 24, 1994
<TABLE>
<CAPTION>
Name and Address of Number of Percent of
Beneficial Owner Shares Class
- ---------------- ------ -----
<S> <C> <C>
Cabot Corporation 4,840,187(1) 17.5%(2)
75 State Street
Boston, Massachusetts 02109-1806
The Prudential Insurance 2,186,265(3),(4) 7.9%(5)
Company of America ("Prudential")
751 Broad Street
Newark, New Jersey 07102-3777
</TABLE>
______________________________________________
(1) Comprised of (i) 4,197,954 shares of Common Stock owned of
record by Cabot, which represents approximately 15.2% of the
outstanding shares of Common Stock of the Company; and (ii) 642,232
shares of Common Stock issuable upon the exercise of warrants held by
Cabot.
(2) Assumes (i) exercise of all warrants to acquire additional
shares of Common Stock held by Cabot; and (ii) no exercise of warrants
to acquire additional shares of Common Stock held by any other person.
(3) Comprised of (i) 1,641,065 shares of Common Stock owned by
Prudential, which represents approximately 5.9% of the outstanding
shares of Common Stock of the Company; and (ii) 545,200 shares of
Common Stock issuable upon the exercise of warrants held by
Prudential.
(4) The owner listed above states that it has shared investment
and voting power over all of the shares, and that the shares were
acquired solely for investment purposes.
(5) Assumes (i) exercise of all warrants to acquire additional
shares of Common Stock held by Prudential; and (ii) no exercise of
warrants to acquire additional shares of Common Stock held by any
other person.
______________________________________________
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
See "Relationship Between Certain Directors and the Company" on page 4
of the 1994 Proxy Statement.
(B) Certain Business Relationships
See "Relationship Between Certain Directors and the Company" on page 4
of the 1994 Proxy Statement.
John G. L. Cabot, an advisory, non-voting director of the Company is
Director, Vice Chairman and Chief Financial Officer of Cabot. Cabot, which is
the beneficial owner of more than 10 percent of the Company's Common Stock, has
certain agreements, and participated in certain transactions in 1993, with the
Company as described below:
In connection with the November 1989 acquisition (the "Acquisition")
by the Company and its wholly owned pipeline subsidiary, American Pipeline
Company, of the natural gas pipeline business of Cabot, the Company and Cabot
55
<PAGE> 56
entered into a sharing arrangement under a Basket Agreement (the "Basket
Agreement") regarding certain contingent liabilities and certain gas contract
take-or-pay liabilities of the companies acquired from Cabot for periods prior
to November 13, 1989 (the closing date of the Acquisition) and certain other
potential gas contract claims ("Basket Liabilities"). The sharing arrangement
provides that Basket Liabilities are to be offset by the recovery of certain
settlements or related costs or the liquidation of certain assets ("Basket
Assets") of the companies acquired from Cabot. The Company's aggregate maximum
exposure under the Basket Agreement is $20 million.
The final resolution and apportionment of Basket Assets and Basket
Liabilities is expected to be settled between Cabot and the Company in 1995,
unless extended. In connection with the Acquisition, Cabot also provided the
Company with a $25 million revolving credit facility, primarily to fund payment
of Basket Liabilities. As of December 31, 1993, the Company had outstanding
borrowings under this facility of approximately $13.3 million and $14.3
million, respectively. See Note 12(B) of Notes to Consolidated Financial
Statements.
(C) Indebtedness of Management
None.
(D) Transactions with Promoters
Not applicable.
56
<PAGE> 57
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) See the index for a listing and page numbers of financial
statements, financial statement schedules and exhibits included herein or
incorporated by reference.
<TABLE>
<S> <C>
Executive Compensation Plans and Arrangements
Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended December 31, 1987)*
1982 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit
10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year
ended December 31, 1987)*
1982 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.4, Amendment No. 1 on Form 8
dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)*
1986 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.5, Amendment No. 1 on Form 8
dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)*
1988 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.6, Amendment No. 1 on Form 8
dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)*
Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, Amendment No. 1 on Form 8 dated
September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)*
Directors' Deferred Compensation Plan Agreement (Exhibit 10.8, Amendment No. 1 on Form 8 dated September 2,
1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)*
1987 Directors' Deferred Fee Plan and Form of Participation Agreement regarding the Plan (Exhibit 10.9,
Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
1992 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit
4.1, File No. 33-46999)*
K N Energy, Inc. 1993 Executive Incentive Plan (Exhibit 10(k) to the Annual Report on Form 10-K for the
Year Ended December 31, 1992)*
K N Energy, Inc. 1994 Executive Incentive Plan (Exhibit 10(k) to the Annual Report on Form 10-K for the
Year Ended December 31, 1993)*
1994 K N Energy, Inc. Long-Term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement
on Schedule 14-A)*
</TABLE>
57
<PAGE> 58
(b) Reports on Form 8-K
On February 3, 1994, the Company filed a Form 8-K which
disclosed that on February 1, 1994, K N's gas reserves 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 from Fuel Resources
Development Co., a subsidiary of Public Service Co. of Colorado.*
On March 25, 1994, the Company filed a Form 8-K which
disclosed that on March 24, 1994, the Company and American Oil and Gas
Corporation signed a definitive merger agreement to combine the two companies.*
On July 13, 1994, the Company filed an interim report on Form
8-K which contained supplemental financial statements of K N Energy, Inc. and
subsidiaries, and Exhibits 23.1, Report of Independent Public Accountants and
23.2, Consent of K N Independent Public Accountants. The supplemental
financial statements give retroactive effect to the merger with American Oil
and Gas Corporation on July 13, 1994. These financial statements and the
Report of Independent Public Accountants were, in accordance with the terms set
forth in the Form S-3 Registration Statement (No. 33-53255) of K N Energy,
Inc., incorporated by reference into said Registration Statement.*
On July 28, 1994, the Company filed an interim report on Form
8-K which disclosed the completion of the merger with AOG on July 13, 1994, and
incorporated by reference the supplemental financial statements filed in the
Form 8-K dated July 13, 1994, as well as the Agreement of Merger dated as of
March 24, 1994, and certain other documents.*
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 ending August 31, 1994.*
* Incorporated herein by reference.
** Included in SEC and NYSE copies only.
58
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
K N ENERGY, INC.
(Registrant)
October 7, 1994 By /s/ E. Wayne Lundhagen
E. Wayne Lundhagen
Vice President, Finance and Accounting
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Edward H. Austin, Jr. Director October 7, 1994
Edward H. Austin, Jr.
/s/ Charles W. Battey Chairman and Director October 7, 1994
Charles W. Battey
/s/ Stewart A. Bliss Director October 7, 1994
Stewart A. Bliss
/s/ David W. Burkholder Director October 7, 1994
David W. Burkholder
/s/ David M. Carmichael Vice Chairman and October 7, 1994
David M. Carmichael Director
/s/ Robert H. Chitwood Director October 7, 1994
Robert H. Chitwood
/s/ Howard P. Coghlan Director October 7, 1994
Howard P. Coghlan
/s/ Robert B. Daugherty Director October 7, 1994
Robert B. Daugherty
/s/ Jordan L. Haines Director October 7, 1994
Jordan L. Haines
/s/ Larry D. Hall President, Chief Executive Officer October 7, 1994
Larry D. Hall and Director (Principal Executive
Officer)
/s/ William J. Hybl Director October 7, 1994
William J. Hybl
Vice President, Finance October 7, 1994
/s/ E. Wayne Lundhagen and Accounting (Principal
E. Wayne Lundhagen Financial and Accounting Officer)
/s/ Edward Randall, III Director October 7, 1994
Edward Randall, III
/s/ James C. Taylor Director October 7, 1994
James C. Taylor
/s/ H. A. True, III Director October 7, 1994
H. A. True, III
</TABLE>
59
<PAGE> 60
K N ENERGY, INC. AND SUBSIDIARIES SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
Balance Retirements or Transfers and Balance
Decription Beginning of Period Additions Sales as Cost Adjustments End of Period
---------- ------------------- --------- ------------- ----------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993:
Gas Services Plant
Plant in Service
Intangibles $ 557 $ 1,401 $ -- $ 2,717 $ 4,675
Production 10,657 1,783 (319) 923 13,044
Gathering and Processing 220,834 33,760 (7,641) (822) 246,131
Underground Storage 38,001 8,428 (29) 138 46,538
Transmission 433,838 59,216 (5,154) 19,840 507,740
Distribution 149,107 10,315 (755) 11,304 169,971
General 65,532 28,345 (2,647) 1,337 92,567
Work in Progress 33,881 12,473 (852) 852 46,354
Gas Plant Acquired -- 477 -- (477) --
Gas Stored Underground-Noncurrent 71,844 11,056 -- (10,649) 72,251
Utility Plant Acquisition
Adjustment 9,713 -- -- (19) 9,694
---------- ---------- ------------ ----------- -----------
Total Gas Services Plant 1,033,964 167,254 (17,397) 25,144 1,208,965
Gas and Oil Production 31,758 4,757 (260) (1,874) 34,381
---------- ---------- ------------ ----------- -----------
$1,065,722 $ 172,011 $ (17,657) $ 23,270 $ 1,243,346
========== ========== ============ =========== ===========
Years Ended December 31, 1992:
Gas Services Plant
Plant in Service
Intangibles $ 557 $ -- $ -- $ -- $ 557
Production 10,867 516 (7) (719) 10,657
Gathering and Processing 188,328 63,476 (12,204) (18,766) 220,834
Underground Storage 37,461 1,419 (572) (307) 38,001
Transmission 340,808 72,395 (986) 21,621 433,838
Distribution 134,927 9,158 (1,067) 6,089 149,107
General 57,405 8,506 (2,836) 2,457 65,532
Work in Progress 19,339 14,542 -- -- 33,881
Gas Plant Acquired -- 6,617 -- (6,617) --
Gas Stored Underground-Noncurrent 72,260 (416) -- -- 71,844
Utility Plant Acquisition Adjustment 9,240 -- -- 473 9,713
---------- ---------- ------------ ----------- -----------
Total Gas Services Plant 871,192 176,213 (17,672) 4,231 1,033,964
Gas and Oil Production 24,296 9,397 (637) (1,298) 31,758
---------- ---------- ------------ ----------- -----------
$ 895,488 $ 185,610 $ (18,309) $ 2,933 $ 1,065,722
========== ========== ============ =========== ===========
Year Ended December 31, 1991:
Gas Services Plant
Plant in Service
Intangibles $ 556 $ -- $ -- $ 1 $ 557
Production 9,346 412 (191) 1,300 10,867
Gathering and Processing 187,379 3,805 (2,846) (10) 188,328
Underground Storage 31,989 6,128 (92) (564) 37,461
Transmission 312,444 33,834 (1,166) (4,304) 340,808
Distribution 129,137 5,947 (657) 500 134,927
General 46,426 12,923 (1,768) (176) 57,405
Work in Progress 20,219 (880) -- -- 19,339
Gas Stored Undergound-Noncurrent 68,557 670 -- 3,033 72,260
Utility Plant Acquisition Adjustment 9,240 -- -- -- 9,240
---------- ---------- ------------ ----------- -----------
Total Gas Services Plant 815,293 62,839 (6,720) (220) 871,192
Gas and Oil Production 17,500 6,912 (226) 110 24,296
---------- ---------- ------------ ----------- -----------
$ 832,793 $ 69,751 $ (6,946) $ (110) $ 895,488
========== ========== ============ =========== ===========
</TABLE>
60
<PAGE> 61
K N ENERGY, INC. AND SUBSIDIARIES SCHEDULE VI
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
Additions
------------------------
Charged to Salvage
Balance Clearing and Retirements Less
Beginning Charged to Other or Sales Cost of End of
Description of Period Income Accounts at Cost Removal Transfers Period
----------- --------- ------ -------- ------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1993:
Gas Services Plant $343,540 $41,023 $1,961 $(8,045) $34,625 $ 495 $413,599
Gas and Oil Production 11,241 3,574 -- (168) -- (604) 14,043
Total Accumulated Depreciation,
Depletion and Amortization $354,781 $44,597 $1,961 $(8,213) $34,625 $ (109) $427,642
======== ======= ====== ======== ======= ========= ========
Year Ended December 31, 1992:
Gas Services Plant $317,814 $35,769 $1,625 $(6,202) $ (121) $ (5,345) $343,540
Gas and Oil Production 8,065 3,418 -- 501 -- (743) 11,241
Total Accumulated Depreciation,
Depletion and Amortization $325,879 $39,187 $1,625 $(5,701) $ (121) $ (6,088) $354,781
======== ======= ====== ======== ======== ========= ========
Year Ended December 31, 1991:
Gas Services Plant $292,544 $30,439 $1,484 $(6,455) $ (197) $ (1) $317,814
Gas and Oil Production 6,062 1,657 -- 467 -- (121) 8,065
Total Accumulated Depreciation,
Depletion and Amortization $298,606 $32,096 $1,484 $(5,988) $ (197) $ (122) $325,879
======== ======= ====== ======== ======== ========= ========
</TABLE>
61
<PAGE> 62
SCHEDULE IX
K N ENERGY, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
THREE YEARS ENDED DECEMBER 31, 1993
The Company has credit agreements with nine banks to either borrow or
use as commercial paper support, up to a total of $120 million at December 31,
1993. 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. The Company pays the
banks a fee of one-quarter of one percent per annum of the unused commitment.
Commercial paper issued by the Company represents unsecured short-term
notes with maturities up to 270 days from the date of issue. Rates at which
commercial paper was issued during the year ranged from 3.2 percent to 3.7
percent.
Amounts outstanding during the year and at year-end, and related
interest rates, were as follows:
<TABLE>
<CAPTION>
Maximum Average
Weighted Amount Amount Weighted Average
Balance Average Outstanding Outstanding Interest Rate
Category of Aggregate End of Interest During the During the During the
Short-Term Borrowings Period Rate Period Period (A) Period (B)
- -------------------------- ------ ---- ------ ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993:
Bank Loans $ 10,000 3.3% $ 10,000 $ 5,060 3.5%
Commercial Paper 37,000 3.5 59,500 8,829 3.3
Year Ended December 31, 1992:
Bank Loans $ -- --% $ 10,000 $ 6,329 3.8%
Commercial Paper 2,000 3.7 43,000 10,847 3.6
Year Ended December 31, 1991:
Bank Loans $ -- --% $ -- $ -- --%
Commercial Paper -- -- 15,600 1,368 6.8
</TABLE>
(A) The average borrowings were determined based on the total of daily
outstanding principal balances divided by the number of days in the
year.
(B) The weighted average interest rates during the period were computed by
dividing the actual interest expense by the average short-term debt
outstanding.
62
<PAGE> 63
SCHEDULE X
K N ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
THREE YEARS ENDED DECEMBER 31, 1993
The amounts of depreciation and amortization of intangible assets,
preoperating costs and similar deferrals, advertising costs and royalties are
not considered to be significant. The amount of taxes, other than payroll and
income taxes, and maintenance and repairs for 1993, 1992, and 1991 are as
follows:
<TABLE>
<CAPTION>
Charged to Costs and Expenses
-----------------------------
Item 1993 1992 1991
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Taxes, other than payroll and
income taxes
Add valorem $ 9,408 $ 7,639 $ 5,200
Other 2,396 2,392 2,871
-------- -------- --------
$ 11,804 $ 10,031 $ 8,071
======== ======== =======
Maintenance and repairs $ 14,448 $ 9,361 $ 8,759
======== ======== =======
</TABLE>
63
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
List of Executive Compensation Plans and Arrangements . . . . . . . . . 57
Exhibit 3(a) - Restated Articles of Incorporation
(Exhibit 3(a) - Annual Report on Form 10-K for the
year ended December 31, 1988)*
Exhibit 3(b) - By-laws of the Company, as amended
(Exhibit 4.2, File No. 33-42698)*
Exhibit 3(c) - Certificate of the Voting Powers,
Designation, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of the Class A
$8.50 Cumulative Preferred Stock, Without Par Value
(Exhibit 4.3, File No. 33-26314)*
Exhibit 3(d) - Certificate of the Voting Powers,
Designation, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of the Class B
$8.30 Cumulative Preferred Stock, Without Par Value
(Exhibit 4.4, File No. 33-26314)*
Exhibit 4(a) - Indenture dated as of September 1,
1988, between K N Energy, Inc. and Continental Illinois
National Bank and Trust Company of Chicago (Exhibit 1.2,
Current Report on Form 8-K Dated October 5, 1988)*
Exhibit 4(b) - First supplemental indenture dated as of January
15, 1992, between K N Energy, Inc. and Continental
Illinois National Bank and Trust Company of Chicago
(Exhibit 4.2, File No. 33-45091)*
Exhibit 4(c) - Second supplemental indenture dated as of December
15, 1992, between K N Energy, Inc. and Continental Bank,
National Association (Exhibit 1.2, Current Report on Form
8-K dated December 15, 1992)*
Exhibit 4(d) - Indenture dated as of November 20, 1993, between
K N Energy, Inc. and Continental Illinois National Bank
and Trust Company of Chicago (Exhibit 4.1, File No.
33-51115)* Note - Copies of instruments relative to
long-term debt in authorized amounts that do not
exceed ten percent of the consolidated total assets of
the Company and its subsidiaries have not been furnished.
The Company will furnish such instruments to the
Commission upon request.
Exhibit 10(a) - Form of Key Employee Severance Agreement (Exhibit
10.2, Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(b) - 1982 Stock Option Plan for Nonemployee Directors
of the Company with Form of Grant Certificate (Exhibit
10.3, Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(c) - 1982 Incentive Stock Option Plan for key employees
of the Company (Exhibit 10.4, Amendment No. 1 on Form 8
dated September 2, 1988 to the Annual Report on Form 10-K
for the year ended December 31, 1987)*
Exhibit 10(d) - 1986 Incentive Stock Option Plan for key employees
of the Company (Exhibit 10.5, Amendment No. 1 on Form 8
dated September 2, 1988 to the Annual Report on Form 10-K
for the year ended December 31, 1987)*
Exhibit 10(e) - 1988 Incentive Stock Option Plan for key
employees of the Company (Exhibit 10.6, Amendment
No. 1 on Form 8 dated September 2, 1988 to the
Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(f) - Form of Grant Certificate for Employee
Stock Option Plans (Exhibit 10.7, Amendment No.
1 on Form 8 dated September 2, 1988 to the Annual
Report on Form 10-K for the year ended December
31, 1987)*
Exhibit 10(g) - Directors' Deferred Compensation Plan
Agreement (Exhibit 10.8, Amendment No. 1 on Form
8 dated September 2, 1988 to the Annual Report on
Form 10-K for the year ended December 31, 1987)*
Exhibit 10(h) - 1987 Directors' Deferred Fee Plan and
Form of Participation Agreement regarding the Plan
(Exhibit 10.9, Amendment No. 1 on Form 8 dated
September 2, 1988 to the Annual Report on Form 10-K
for the year ended December 31, 1987)*
Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee
Directors of the Company with Form of Grant Certificate
(Exhibit 4.1, File No. 33-46999).
Exhibit 10(j) - K N Energy, Inc. 1993 Executive Incentive
Plan (Exhibit 10(k) to the Annual Report on Form 10-K
for the Year Ended December 31, 1992)*
Exhibit 10(k) - K N Energy, Inc. 1994 Executive Incentive
Plan**
Exhibit 10(l) - 1994 K N Energy, Inc. Long-Term Incentive
Plan (Attachment A to the K N Energy, Inc. 1994 Proxy
Statement on Schedule 14-A)
Exhibit 12 - Ratio of Earnings to Fixed Charges . . . . . . . . . . . . 64
Exhibit 13 - 1993 Annual Report to Shareholders*** . . . . . . . . . . . 65
Exhibit 22 - Subsidiaries of the Registrant . . . . . . . . . . . . . . 66-67
Exhibit 24 - Consent of Independent Public Accountants . . . . . . . . . 68
Exhibit 27 - Financial Data Schedule****
</TABLE>
* Incorporated herein by reference.
** Included in SEC and NYSE copies only.
*** Such report is being furnished for the information of the Securities
and Exchange Commission only and is not be deemed filed as a part of
this annual report on Form 10-K/A and does not reflect the effect of
the pooling of interests between K N Energy, Inc. and American Oil and
Gas Corporation.
**** Included in SEC EDGAR Filing Only.
<PAGE> 1
EXHIBIT 12
K N ENERGY, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Earings:
Income From Continuing Operations
Before Extraordinary Item
per Statements of Income $ 30,869 $ 36,342 $ 37,074 $ 25,063 $ 1,229
Add:
Interest and Debt Expense 31,478 27,608 24,298 24,454 21,535
Income Taxes 18,599 20,068 21,282 16,526 11,183
Portion of Rents Representative
of the Interest Factor 2,863 1,901 1,542 1,348 1,058
-------- -------- -------- -------- --------
Income as Adjusted $ 83,809 $ 85,919 $ 84,196 $ 67,391 $ 35,005
======== ======== ======== ======== ========
Fixed Charges:
Interest and Debt Expense
per Statements of Income
Includes Amortization of
Debt Discount, Premium
and Expense) $ 30,909 $ 27,090 $ 24,091 $ 24,045 $ 21,488
Add:
Interest Capitalized 965 842 207 409 47
Portion of Rents Representative
of the Interest Factor 2,863 1,901 1,542 1,348 1,058
Preferred Stock Dividends of
Subsidiary 69 3,084 5,393 6,487 2,902
-------- -------- -------- -------- --------
Fixed Charges $ 34,806 $ 32,917 $ 31,233 $ 32,289 $ 25,495
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.41 2.61 2.70 2.09 1.37
======== ======== ======== ======== ========
</TABLE>
64
<PAGE> 1
EXHIBIT 13
K N ENERGY, INC.
1993 ANNUAL REPORT TO SHAREHOLDERS
Interested persons may receive a copy of the Company's 1993 Annual
Report to Shareholders without charge by forwarding a written request to: K N
Energy, Inc., Securities Services Department, P. O. Box 281304, Lakewood,
Colorado 80228-8304.
65
<PAGE> 1
EXHIBIT 22
K N ENERGY, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of Company State of Incorporation
- --------------- ----------------------
<S> <C>
AOG Consulting, Inc. (inactive) . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
AOG Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
AOG Management, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
American Energy Exploration Company (inactive) . . . . . . . . . . . . . . . . . . Texas
American Energy Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
American Gas Storage, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
American Gathering, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
American Oil & Gas Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
American Pipeline Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
American Processing, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
American Webb, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Anthem Energy Company, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas
Caprock Pipeline Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Colorado Gasmark, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
Gas Marketing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
GASCO, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
Industrial Mechanics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utah
K N Dakota Company (inactive) . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
K N Front Range Gathering Company . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
K N Front Range Operating Company (inactive) . . . . . . . . . . . . . . . . . . . Colorado
K N Gas Gathering, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
K N Gas Marketing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
K N Gas Supply Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
K N Interstate Gas Transmission Co. . . . . . . . . . . . . . . . . . . . . . . . . Colorado
K N Optima Company (inactive) . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
K N Production Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
K N Trading, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
K N TransColorado, Inc. (inactive) . . . . . . . . . . . . . . . . . . . . . . . . Colorado
K N Wattenberg Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
</TABLE>
66
<PAGE> 2
<TABLE>
<S> <C>
K N Wattenberg Transmission Limited Liability Company . . . . . . . . . . . . . . . Colorado
Midlands Transportation Company (inactive) . . . . . . . . . . . . . . . . . . . . Kansas
Northern Gas Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wyoming
Picor Pipeline Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
R M N G Gathering Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
RRP Financing Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Red River Gas Pipeline Corporation . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Rocky Mountain Natural Gas Company . . . . . . . . . . . . . . . . . . . . . . . . Colorado
Slurco Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
Slurco, Inc. (inactive) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kansas
Sunflower Pipeline Company (inactive) . . . . . . . . . . . . . . . . . . . . . . . Kansas
TCP Gathering Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
Westar Transmission Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Wyoming Gasmark, Inc. (inactive) . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Wind River Gathering Company . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado
</TABLE>
All of the subsidiaries named above are included in the consolidated financial
statements of the Registrant included herein.
67
<PAGE> 1
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in: (i) Registration Statements on Form S-16, File
Nos. 2-51894, 2-55664, 2-63470 and 2-75654; (ii) Registration Statements on
Form S-8, File Nos. 2-77752, 33-10747, 33-24934, 33-33018, 33-54403, 33-54443
and 33-54555; (iii) Registration Statements on Form S-3, File Nos. 2-84910,
33-26314, 33- 23880, 33-42698, 33-44871, 33-45091, 33-46999, 33-51115 and
33-54317; and (iv) Registration Statement on Form S-4, File No. 33-53255 of our
report dated October 7, 1994, on the consolidated financial statements of K N
Energy, Inc. and subsidiaries and on supplemental Schedules V, VI, IX and X
included in this Form 10-K/A, as amended, for the year ended December 31, 1993.
/s/ Arthur Andersen LLP
Denver, Colorado
October 7, 1994.
68
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> DEC-31-1993
<CASH> 14,353
<SECURITIES> 0
<RECEIVABLES> 215,878
<ALLOWANCES> 0
<INVENTORY> 11,604
<CURRENT-ASSETS> 312,856
<PP&E> 1,243,346
<DEPRECIATION> 427,642
<TOTAL-ASSETS> 1,167,848
<CURRENT-LIABILITIES> 261,904
<BONDS> 335,190
<COMMON> 136,005
2,858
7,000
<OTHER-SE> 255,457
<TOTAL-LIABILITY-AND-EQUITY> 1,167,848
<SALES> 1,032,547
<TOTAL-REVENUES> 1,032,547
<CGS> 723,268
<TOTAL-COSTS> 952,343
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,513
<INCOME-PRETAX> 49,468
<INCOME-TAX> 18,599
<INCOME-CONTINUING> 30,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,869
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 0
</TABLE>
