<PAGE> 1
_______________________________________________________________________________
_______________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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.
(Exact name of registrant as specified in its charter)
Kansas 48-0290000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Van Gordon Street
P.O. Box 281304, Lakewood, Colorado 80228-8304
(Address of principal executive offices) (Zip Code)
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
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
(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
----- -----
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.
$359,218,093 as of March 15, 1994
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 25,000,000 shares; outstanding
15,276,897 shares as of March 15, 1994.
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
_______________________________________________________________________________
_______________________________________________________________________________
<PAGE> 2
K N ENERGY, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
<TABLE>
<CAPTION>
Page Number
------------------------
1994 Proxy Included
Statement in 10-K
---------- ----------
PART I
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<S> <C> <C>
ITEM 1: BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-16
ITEM 2: PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-18
ITEM 3: LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 18-20
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the last quarter of 1993.
EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . 20-21
PART II
-------
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6: SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 24-30
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants . . . . . . . . . . . . . . 31
Consolidated Statements of Income for the Three Years
Ended December 31, 1993 . . . . . . . . . . . . . . . . . . . . 32
Consolidated Balance Sheets as of December 31, 1993
and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Common Stockholders' Equity for
the Years Ended December 31, 1993, 1992 and 1991 . . . . . . . . 34
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1993 . . . . . . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . 36-53
Selected Quarterly Financial Data (Unaudited) . . . . . . . . . . . 54
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no such matters during 1993.
PART III
--------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . 2-3* 55
ITEM 11: EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . 4-5*,8-10*, 12* and 13*
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . 2-3*, 11*, 18-19*
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . 4* 55-56
PART IV
-------
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 Informa-
tion for the Three Years Ended December 31, 1993 . . . . . . 63
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
Page Number
-------------------------
1994 Proxy Included
Statement in 10-K
---------- ----------
PART IV (Continued)
-------------------
<S> <C> <C>
3. Exhibits
List of Executive Compensation Plans and Arrangements . . . . . 57-58
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, Participa-
ting, Optional or Other Special Rights, and Quali-
fications, 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, Participa-
ting, Optional or Other Special Rights, and Quali-
fications, 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 Chi-
cago (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 10 percent of the consolidated total assets
of the Company and its subsidiaries have not been
furnished. The Company will furnish such instru-
ments 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 Non-
employee 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)*
</TABLE>
3
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<TABLE>
<CAPTION>
Page Number
-------------------------
1994 Proxy Included
Statement in 10-K
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PART IV (Continued)
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<S> <C> <C> <C>
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, Amend-
ment 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
Exhibit 24 - Consent of Independent Public
Accountants . . . . . . . . . . . . . . . . . . . . . . . . . 69
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 58
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
</TABLE>
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.
4
<PAGE> 5
PART I
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED FINANCIAL RESULTS
CONTINUING OPERATIONS
Income from continuing operations and the applicable earnings per
share and return on beginning of year common equity for the three years ended
December 31, 1993, were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
Income From Continuing
Operations (Dollars in Millions) $24.3 $19.6 $21.6
===== ===== =====
Earnings Per Share, Continuing
Operations $1.57 $1.28 $1.40
===== ===== =====
Return on Common Equity 12.7% 10.6% 11.1%
===== ===== =====
</TABLE>
Earnings per share for 1993 exceeded 1992 results by 23 percent,
despite the negative effects of record low gas sales to irrigation customers.
The impact of lower irrigation sales was more than offset by positive
contributions from acquisitions of natural gas facilities, expense controls,
favorable resolution of rate cases, and insurance settlements. In addition,
1993 first quarter gas sales, transportation and natural gas liquids revenues
were significantly greater than those in the first quarter of 1992 due to colder
weather.
The decline in 1992 earnings, in comparison with 1991, reflected
the impact of unfavorable weather on natural gas sales and natural gas liquids
revenues, and higher interest expense which resulted, in part, from reduced
operating cash flows. These negative earnings factors were partially offset by
increased transportation revenues, rate increases, lower operating costs as a
result of expense controls and reduced litigation expense provisions.
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 here are before intersegment eliminations (dollars in
millions).
5
<PAGE> 6
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
GAS SERVICE
Operating Revenues -
Gas Sales and Transportation $285.1 $289.0 $322.2
Natural Gas Liquids and Other 35.7 31.6 33.4
------ ------ ------
320.8 320.6 355.6
------ ------ ------
Operating Costs and Expenses -
Gas Purchases 132.9 150.9 178.0
Operations and Maintenance 106.0 91.1 99.5
Depreciation, Depletion and
Amortization 21.8 20.9 19.7
Taxes, Other Than Income Taxes 10.0 9.4 7.8
------ ------ ------
270.7 272.3 305.0
------ ------ ------
Operating Income $ 50.1 $ 48.3 $ 50.6
====== ====== ======
Systems Throughput (Bcf) -
Gas Sales 59.6 69.1 78.3
Transportation 100.1 81.7 68.2
------ ------ ------
159.7 150.8 146.5
====== ====== ======
Natural Gas Liquids
(Millions of Gallons) 81.3 74.4 76.9
====== ====== ======
</TABLE>
Revenues and expenses of the Federal Energy Regulatory Commission
("FERC")-regulated Wattenberg transmission system, acquired on April 1, 1993,
are included in this segment's 1993 operating results.
The decline in gas sales and transportation revenues (and
related gas purchases) primarily reflects FERC Order No. 636 ("Order 636")
implementation and the resultant elimination of the gas cost component from
FERC-regulated service revenues. An additional cause for the decline in 1993
gas sales and transportation revenues was the record low sales to irrigation
customers due to the abnormally wet summer. Irrigation sales were 3.1 Bcf
below 1992 volumes. However, revenues from the Wattenberg transmission system,
rate increases in essentially all K N retail jurisdictions (including
resolution of the 1990 rate case in Nebraska), and increases in 1993
residential and commercial sales volumes (4.3 Bcf above 1992 due to colder
weather) substantially offset the decline in irrigation sales.
Greater systems throughput, costs and expenses of the Wattenberg
transmission system and higher costs related to increased natural gas liquids
recoveries impacted 1993 operations and maintenance expenses. These increases
were partially mitigated by insurance settlements related to the Brookhurst
Subdivision Superfund site near Casper, Wyoming.
6
<PAGE> 7
Gas service's 1992 operating revenues were ten percent below
1991 as a result of unfavorable weather. Most notably impacted by the adverse
1992 weather were gas sales to irrigation customers, which were 7.2 Bcf below
1991. Gas sales revenues were positively affected in 1992 by rate increases,
including $3.8 million collected in prior years but reserved from earnings for
the 1990 eastern and central Nebraska rate case. Transportation revenues in
1992 were $3.4 million higher than 1991 as off-system transport volumes
increased by 13.3 Bcf. Natural gas liquids revenues in 1992 were $2.9 million
below 1991 as the unfavorable weather affected both prices and volumes.
Operating costs and expenses for 1992 were 11 percent below 1991
due principally to reduced on-system throughput and expense controls. Gas
purchases declined significantly as a result of lower 1992 gas sales and
processing of volumes for natural gas liquids recoveries. In addition, 1992
operations and maintenance expenses were affected by lower provisions for
litigation issues. The increase in 1992 taxes, other than income taxes,
primarily results from state property tax legislation in Nebraska.
<TABLE>
<CAPTION>
1993 1992 1991
------ ----- -----
<S> <C> <C> <C>
GAS MARKETING AND GATHERING
Operating Revenues -
Gas Sales $173.5 $64.5 $42.1
Other 33.8 7.1 0.2
------ ----- -----
207.3 71.6 42.3
------ ----- -----
Operating Costs and Expenses -
Gas Purchases 157.6 58.9 35.7
Operations and Maintenance 40.3 11.1 6.1
Depreciation, Depletion and
Amortization 1.0 0.2 --
Taxes, Other Than Income Taxes 1.2 0.1 --
------ ----- -----
200.1 70.3 41.8
------ ----- -----
Operating Income $ 7.2 $ 1.3 $ 0.5
====== ===== =====
Gas Sales and Gathered Volumes (Bcf) 157.8 37.9 19.7
====== ===== =====
Natural Gas Liquids(Millions of Gallons) 64.1 16.1 --
====== ===== =====
</TABLE>
In addition to continued growth in nonregulated gas marketing
activities, this segment's 1993 and 1992 operating results reflect the Douglas
gathering and processing acquisition beginning in October 1992 and the
Wattenberg gathering facilities acquisition beginning in April 1993.
Additionally, with Order 636 restructuring effective October 1, 1993, this
segment assumed the gas sales function previously provided by K N for its
wholesale customers as part of its bundled services.
7
<PAGE> 8
The combined impact on the Company's Gas Services and Gas
Marketing and Gathering activities from the Wattenberg, Douglas and Wind
River transactions were as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Operating Revenues $47.4 $7.8
Operating Costs and Expenses 38.8 6.7
----- ----
Operating Income $ 8.6 $1.1
===== ====
OIL AND GAS PRODUCTION 1993 1992 1991
---- ---- ----
Operating Revenues -
Oil and Gas 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
==== ==== ====
Oil and Gas Production (Equivalent Bcf) 3.7 2.6 1.8
==== ==== ====
</TABLE>
The increases in 1993 and 1992 oil and gas revenues 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>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
OTHER INCOME AND (DEDUCTIONS)
Interest Expense $(21.2) $(19.4) $(17.2)
Other, Net 1.2 0.4 1.2
------ ------ ------
$(20.0) $(19.0) $(16.0)
====== ====== ======
</TABLE>
The increase in interest expense primarily reflects the Company's
issuance of $195 million of long-term debt during the last three years. The
majority of the net proceeds from these debt issues were used to fund capital
expenditures and acquisitions; however, $65 million was used to refund higher
coupon debt in 1993 and 1992. As a result, the Company's year end 1993
weighted- average embedded cost of long-term debt was 8.3 percent compared with
a cost of 9.6 percent at December 31, 1990.
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
INCOME TAXES
Applicable to Continuing Operations $14.4 $11.8 $13.7
===== ===== =====
Effective Tax Rate 37.2% 37.6% 38.8%
===== ===== =====
</TABLE>
8
<PAGE> 9
The effect of the one percent increase in the Federal tax rate,
resulting from enactment of the Revenue Reconciliation Act of 1993, was more
than offset by increased 1993 tax credits on gas production from wells
qualifying for non-conventional fuel credit under Section 29 of the Internal
Revenue Code. The 1991 effective tax rate reflects higher state income tax
provisions.
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 $43.3 million,
$33.2 million and $72.1 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 recoupable take-or-pay payments) and environmental
costs. In both 1993 and 1992, actual cash disbursements exceeded expense
provisions for litigation and environmental issues. Net operating cash flows
for 1993 were also reduced by repayments to gas service customers for previous
years' over-recovery of gas costs.
CAPITAL EXPENDITURES AND COMMITMENTS
Excluding acquisitions, 1993 capital expenditures were $63.1
million compared with expenditures of $60.1 million in 1992 and $59.4 million in
1991. (Refer to Note 13 of Notes to Consolidated Financial Statements for
business segment expenditures.) The increased 1993 spending includes
approximately $9.0 million of Order 636 transition costs (measurement facilities
and systems) and $11.0 million for construction of a new corporate office
building. The regulated portion of the Wattenberg system and the Company's
portion of the Wind River gathering system primarily account for the $26.8
million of capital expenditures for acquisitions in 1993.
Consolidated 1994 capital expenditures are budgeted at $54.5
million, excluding acquisitions. This includes $7.6 million for the first phase
of the Rifle to Avon pipeline being jointly constructed by the Company's
subsidiary, Rocky Mountain Natural Gas Company, and Public Service Company of
Colorado. The second phase of this pipeline will be constructed in 1995; the
Company's portion of estimated costs is approximately $5.0 million. In February
1994, K N's oil and gas subsidiaries completed the acquisition of gas reserves
and production in western Colorado and southwestern Wyoming. During the first
half of 1994, the Company plans to bring in one or more partners to participate
in this acquisition and to assist in further development of 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
payable. All amounts paid by the Company for take-or-pay are fully recoupable
under the terms of the gas purchase contracts under K N's Supply Transition
Program administered by K N Gas Supply Services, Inc., a wholly-owned
subsidiary of K N, or the existing state and local regulatory rules and
9
<PAGE> 10
regulations for K N Retail, K N's local distribution company. As a result, the
Company has experienced no losses due to unfavorable pricing and none are
anticipated. At December 31, 1993, the level of outstanding payments was
$11.7 million.
Statement of Financial Accounting Standards No. 112 ("SFAS 112"),
"Employers' Accounting for Postemployment Benefits," establishes standards of
financial accounting and reporting for the estimated cost of benefits provided
by an employer to former or inactive employees after employment but before
retirement. SFAS 112 is effective for fiscal years beginning after December
15, 1993. Implementation of SFAS 112 is not expected to have a material effect
on the Company's financial position or results of operations.
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 eight banks to either borrow or use as commercial paper support
up to $90 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.
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 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 internal cash flows, short-term borrowings, and the issuance of
common stock for dividend reinvestment and employee benefit plans.
OUTLOOK
RESTRUCTURING AND REORGANIZATION
The Company's implementation of Order 636 and the related
corporate reorganization are discussed in other sections of this annual report.
This discussion will focus on the expected 1994 financial implications of these
events. As a result of recent acquisitions and the transfer of substantially
all of K N interstate's gathering and processing facilities to a nonregulated
subsidiary, the composition of 1994's operating income will differ significantly
from the past. Historically, the Company's gas service segment has accounted
for more than 90 percent of consolidated operating income. The expectation for
1994 is that this segment will account for approximately 65 to 70 percent of
operating income.
Secondly, Order 636 mandated the use of SFV rate design for
FERC-regulated services. Accordingly, fluctuations in operating revenues
resulting from significant variations in weather temperatures should be
reduced. Revenues from the Company's important summer irrigation load will
remain vulnerable to abnormal weather patterns, such as those experienced in
1993 and 1992.
Finally, the effect of both of the above items is expected to
change the Company's historical quarterly earnings distribution. The 1994 first
and fourth quarters will account for a smaller percentage of annual earnings,
while the second and third quarters will be higher.
10
<PAGE> 11
GAS SERVICE
The Company's Order 636 implementation and reorganization will
significantly impact this business segment's future operating results. The
transfer of substantially all of K N interstate's gathering facilities and the
principal processing plant to a subsidiary within the gas marketing and
gathering segment will result in a significant shift in operating revenues,
expenses and operating income. Additionally, with the elimination of the
merchant function from FERC-regulated services, this segment's operating
revenues and gas purchases will be substantially lower than prior periods;
however, this elimination should not impact operating income.
Operating results for 1994 should benefit from a full year's
operation of the Wattenberg transmission system and from 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.
GAS MARKETING AND GATHERING
On January 1, 1994, substantially all of the gathering
facilities and the principal processing plant, which were previously a part of
the K N interstate system, were transferred to a subsidiary within the gas
marketing and gathering business segment. This segment's 1993 operating results
included only partial year activity of the Wattenberg nonregulated gathering
system and the Wind River gas gathering joint venture. Accordingly, this
segment's 1994 operating revenues, expenses and operating income are expected to
be significantly higher than in 1993.
OIL AND GAS 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 Company also believes that its involvement in oil and gas
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. Management 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.
11
<PAGE> 12
INFLATION
Current ratemaking practices allow the Company to recover
through revenues the historical cost, rather than the current replacement cost,
of utility plant and equipment. In the past three years, the rate of inflation
has not had a material impact on the Company's costs.
12
<PAGE> 13
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(D) 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.
Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedules listed in the
index of financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen & Co.
Denver, Colorado,
February 10, 1994.
13
<PAGE> 14
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 Service -
Natural Gas Sales $254,427 $271,967 $308,555
Other 55,709 43,716 42,992
-------- -------- --------
Total Gas Service Revenues 310,136 315,683 351,547
Gas Marketing and Gathering 177,892 71,426 40,739
Oil and Gas Production 5,321 4,710 3,053
-------- -------- --------
Total Operating Revenues 493,349 391,819 395,339
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Gas Purchases 260,520 208,147 211,391
Operations 128,560 91,746 95,705
Maintenance 7,661 7,264 7,364
Depreciation, Depletion and
Amortization 26,156 24,187 21,361
Taxes, Other Than Income Taxes 11,834 10,105 8,249
-------- -------- --------
Total Operating Costs and Expenses 434,731 341,449 344,070
-------- -------- --------
OPERATING INCOME 58,618 50,370 51,269
-------- -------- --------
OTHER INCOME AND (DEDUCTIONS):
Interest Expense (21,200) (19,373) (17,169)
Other, Net 1,236 399 1,182
-------- -------- --------
Total Other Income and (Deductions) (19,964) (18,974) (15,987)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 38,654 31,396 35,282
Income Taxes 14,379 11,803 13,682
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 24,275 19,593 21,600
Loss from Discontinued Operations,
Net of Income Taxes -- -- (17,250)
-------- -------- --------
NET INCOME 24,275 19,593 4,350
Less - Preferred Stock Dividends 810 989 1,382
-------- -------- --------
NET INCOME AVAILABLE FOR COMMON STOCK $ 23,465 $ 18,604 $ 2,968
======== ======== ========
EARNINGS PER COMMON SHARE:
Continuing Operations $ 1.57 $ 1.28 $ 1.40
Discontinued Operations -- -- (1.19)
-------- -------- --------
$ 1.57 $ 1.28 $ 0.21
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE> 15
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 $ 4,760 $ 7,962
Accounts Receivable 88,491 57,839
Contract Demand Receivables (See Note 1(L)) 38,732 --
Material and Supplies, at Average Cost 8,603 7,445
Gas in Underground Storage 5,836 665
Prepaid Gas 11,689 14,404
Exchange Gas and Other 28,707 43,288
-------- --------
186,818 131,603
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Natural Gas Utility Plant 830,254 730,519
Gas Marketing and Gathering 12,384 6,461
Oil and Gas Production 34,381 31,758
-------- --------
877,019 768,738
Less--Accumulated Depreciation, Deple-
tion and Amortization 369,957 313,662
-------- --------
507,062 455,076
-------- --------
DEFERRED CHARGES AND OTHER ASSETS 37,389 32,268
-------- --------
$731,269 $618,947
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Preferred Stock
and Long-Term Debt $ 3,500 $ 5,000
Notes Payable 47,000 2,000
Accounts Payable 73,713 52,926
Accrued Taxes 10,299 9,515
Exchange Gas and Other 27,447 51,421
-------- --------
161,959 120,862
-------- --------
DEFERRED LIABILITIES, CREDITS AND
RESERVES:
Deferred Income Taxes 60,444 49,252
Deferred Revenues (See Note 1(L)) 43,692 --
Other 21,879 32,455
-------- --------
126,015 81,707
-------- --------
LONG-TERM DEBT 231,881 220,009
-------- --------
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
COMMITMENTS AND CONTINGENT LIABILITIES
(NOTES 5 AND 11)
PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION 2,858 4,500
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock 7,000 7,000
-------- --------
Common Stock:
Authorized - 25,000,000 Shares, Par
Value $5 Per Share
Outstanding - 15,035,301 and 9,763,592
Shares, Respectively 75,177 48,818
Additional Paid-in Capital 28,907 48,287
Retained Earnings 97,472 87,764
-------- --------
Total Common Stockholders' Equity 201,556 184,869
-------- --------
Total Stockholders' Equity 208,556 191,869
-------- --------
$731,269 $618,947
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
-------------------- ------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
- - -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1990 9,540,817 $47,704 (54,455) $(1,359) $ 44,847 $ 90,623
Net Income 4,350
Cash Dividends -
Common, $0.79 Per Share (11,359)
Preferred (1,382)
Loss on Redemption of Preferred Stock (53)
Treasury Stock Acquired (236,100) (5,794)
Employee Stock Options 5,083 26 24,482 613 53 (252)
Employee Benefit Plans 112,799 564 82,495 1,934 1,961 (17)
Dividend Reinvestment and Stock PurchasePlans 2 -- 118,808 2,879 -- (174)
---------- ------- -------- ------- -------- --------
BALANCE, DECEMBER 31, 1991 9,658,701 48,294 (64,770) (1,727) 46,861 81,736
Net Income 19,593
Cash Dividends -
Common, $0.85 Per Share (12,417)
Preferred (989)
Treasury Stock Acquired (48,833) (1,306)
Employee Stock Options 46,593 233 -- -- 423 --
Employee Benefit Plans 3,943 20 31,070 830 87 (51)
Dividend Reinvestment and Stock Purchase Plans 54,355 271 82,533 2,203 916 (108)
---------- ------- -------- ------- -------- --------
BALANCE, DECEMBER 31, 1992 9,763,592 48,818 -- -- 48,287 87,764
Net Income 24,275
Cash Dividends -
Common, $0.92 Per Share (13,757)
Preferred (810)
Common Stock Split 4,997,984 24,990 -- -- (25,024) --
Employee Stock Options 81,416 407 -- -- 949 --
Employee Benefit Plans 20,717 104 -- -- 560 --
Dividend Reinvestment and Stock Purchase Plans 171,592 858 -- -- 4,135 --
---------- ------- -------- ------- -------- --------
BALANCE, DECEMBER 31, 1993 15,035,301 $75,177 -- $ -- $ 28,907 $ 97,472
========== ======= ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 18
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 $24,275 $19,593 $21,600
Adjustments to Reconcile Income from Continuing Operations to
Net Cash from Operating Activities:
Depreciation, Depletion and Amortization 26,156 24,187 21,361
Provisions for Losses on Accounts Receivable 875 251 510
Gain on Sale of Facilities -- (188) --
Deferred Income Taxes 7,606 4,387 (8,088)
Deferred Purchased Gas Costs (11,925) -- 11,575
Other Funds Used During Construction 516 203 337
Changes in Other Working Capital Items (18,373) (10,933) 17,640
Changes in Deferred Revenues 4,960 -- --
Changes in Other Assets and Liabilities 9,224 (4,273) 7,186
------- ------- -------
Net Cash Flows from Continuing Operations 43,314 33,227 72,121
Net Cash Flows from Discontinued Operations -- -- (11,157)
------- ------- -------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 43,314 33,227 60,964
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures - Continuing Operations (63,068) (60,117) (59,394)
- Discontinued Operations -- -- (1,983)
Acquisitions (Net of Cash Acquired of $1,535,000 in 1992) (25,660) (8,715) --
Other Funds Used During Construction (516) (203) (337)
Investments (150) (1,059) (2,100)
Proceeds from Sale of Facilities 220 281 43
Proceeds from Sale of Discontinued Operations -- -- 7,224
------- ------- -------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (89,174) (69,813) (56,547)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt (Net) 45,000 2,000 (6,000)
Long-Term Debt - Issued 50,000 100,000 45,000
- Retired (39,014) (56,945) (17,467)
Preferred Stock Redemption (2,143) (2,143) (4,696)
Common Stock Issued 6,979 1,791 2,161
Treasury Stock - Issued -- 3,033 5,426
- Acquired -- (1,306) (5,794)
Cash Dividends - Common (13,757) (12,417) (11,359)
- Preferred (810) (989) (1,382)
Premium on Debt Reacquisition and Issue Costs (3,597) (2,557) (481)
------- ------- -------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 42,658 30,467 5,408
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (3,202) (6,119) 9,825
Cash and Cash Equivalents at Beginning of Year 7,962 14,081 4,256
------- ------- -------
Cash and Cash Equivalents at End of Year $ 4,760 $ 7,962 $14,081
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 19
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 all of its subsidiaries (the "Company"). All material
intercompany items and transactions have been eliminated.
(B) Basis of Accounting
The accounting policies of the Company conform to generally
accepted accounting principles. For the regulated public utilities in the
Company, these accounting principles are applied 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) Gas Service Revenues
Natural gas revenues are recorded on the basis of gas delivered to
customers to the end of each accounting period. This includes unbilled
revenues representing the estimated amount customers will be billed for gas
delivered from the time meters were last read to the end of the accounting
period, net of cost of gas where applicable. Gas transportation revenues are
recorded on the basis of capacity reserved on and gas transported through the
pipeline systems. The Company receives a fee for its transportation services;
however, there are no purchased gas expenses associated with the transportation
function.
(D) 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, more likely than not, is expected to not be realized. The adoption of
SFAS 109 had an insignificant effect on the Company's financial position and
results of operations, since the Company had already adopted the liability
method of accounting under Statement of Financial Accounting Standards No. 96.
(E) Earnings Per Share
Earnings per share are computed based on the monthly weighted
average number of common shares outstanding during the periods. There are no
other securities or common stock equivalents which have a material dilutive
effect on earnings per share. On August 10, 1993, K N's Board of Directors
declared a three-for-two common stock split which was distributed on October 4,
1993, to common shareholders of record on September 15, 1993. The par value of
the common stock did not change. All weighted average and per share amounts in
the accompanying financial statements have been
19
<PAGE> 20
restated to reflect the stock split. The weighted average number of common
shares outstanding was 14,913,000 in 1993, 14,580,000 in 1992 and 14,459,000 in
1991.
(F) Nonutility Gas Marketing Subsidiaries
Gas marketing subsidiaries' revenues are included in "Gas Marketing
and Gathering," and their gas purchase costs are included in "Gas Purchases."
(G) 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. All 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.
(H) Property, Plant and Equipment
Utility plant is stated at the original cost of construction, which
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.
(I) Exploration and Development Costs
K N's oil and gas 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.
(J) Depreciation, Depletion and Amortization
Depreciation is computed based on the straight-line method over the
estimated useful life for most utility property, plant and equipment. The
unit-of-production method is used for computing depreciation, depletion and
amortization for oil and gas properties.
20
<PAGE> 21
(K) Gas in Underground Storage
K N's regulated interstate retail distribution business and
Northern Gas Company record storage injections at the average cost of purchased
gas for the year. Storage withdrawals are priced on the last-in first-out
("LIFO") method. K N Gas Supply Services, Inc., a nonjurisdictional
subsidiary, prices storage injections at the average cost of purchased gas each
month. Storage withdrawals are priced at the average cost of storage gas at
the beginning of each month. Rocky Mountain Natural Gas Company prices storage
injections at the average cost of purchased gas for the year. Storage
withdrawals are priced on 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.
(L) 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.
(M) Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform with
the 1993 presentation.
(N) 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 $(31,527) $(14,502) $17,458
Material and Supplies (1,158) 806 (809)
Gas in Underground Storage (581) 10 (670)
Accounts Payable, Accrued Taxes and Other Current Liabilities 21,845 6,985 11,991
Exchange Gas, Net (471) 1,440 (7,623)
Other Current Assets (6,481) (5,672) (2,707)
-------- -------- -------
$(18,373) $(10,933) $17,640
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest (Net of Amount Capitalized) $ 21,131 $ 18,088 $15,079
======== ======== =======
Income Taxes $ 7,031 $ 5,264 $ 9,647
======== ======== =======
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(A) The Company purchased all of the capital stock of two corporations,
each of which owned gas distribution systems, for $5,248,000 in 1992. In
conjunction with the acquisitions, liabilities were assumed as follows:
Fair Value of Assets Acquired $ 7,200
Cash Paid for the Capital Stock (5,248)
-------
Liabilities Assumed $ 1,952
=======
(B) In connection with the exchange and lease of gathering and processing
facilities described in Note 4(D), the Company exchanged its interest in
the Tyrone Gas Gathering system as a portion of the consideration.
</TABLE>
2. 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.
Order 636 required pipelines to unbundle sales and transportation
services. KNI has complied with FERC's directive to mitigate its GSR costs
caused by this restructuring. KNI's GSR process allows for the assignment of
its above-market contracts. Under KNI's tariff, every shipper has a right to
take assignment of these above-market contracts. Shippers may either take
assignment of these above-market contracts or enter into a negotiated exit fee.
This should obviate the need to make any GSR cost recovery filing with FERC.
3. REGULATORY MATTERS
On December 30, 1993, KNI made a rate filing with FERC
requesting a $12.0 million annual increase in revenues. The new rates will
become effective July 1, 1994, subject to refund.
In February 1992, K N filed a rate restatement with FERC pursuant
to FERC's purchased gas adjustment regulations. The filing proposed no change
in K N's current rates. K N submitted an offer of Settlement and Stipulation
("Settlement") in August 1993. FERC approved the Settlement
22
<PAGE> 23
on November 17, 1993. Terms of the Settlement did not have a material effect
on K N's financial position or results of operations.
In February 1993, K N filed general rate applications in all 177
retail Nebraska communities it serves, requesting an increase in aggregate
annual revenues of $2.2 million. Pursuant to Nebraska statute, the new rates
became effective May 2, 1993, subject to refund. An agreement was reached in
August 1993, between the Company and representatives of the 10 rate areas in
Nebraska. Under the terms of the agreement, K N received a $1.4 million
annual rate increase. Revenues collected above the settlement rates were
refunded to the customers in December 1993.
In June 1990, K N filed general rate applications in 147 central
and eastern Nebraska communities requesting an increase in aggregate annual
revenues of $6.7 million. Pursuant to Nebraska statute, the new rates were put
into effect on October 1, 1990, subject to refund. The majority of the
communities adopted a lower rate increase. K N filed for injunctions against
these communities. On August 27, 1993, the Nebraska Supreme Court ruled that
natural gas rates placed into effect by K N as interim rates on October 1,
1990, were properly justified and should be allowed to stand. In 1992, K N
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.
4. ACQUISITIONS
(A) Wattenberg
On April 1, 1993, the Company completed the $48 million
acquisition of the Wattenberg natural gas gathering and transmission system.
The system has both regulated and nonregulated components. The regulated
transmission segment, approximately $18 million of the acquisition, was
financed with corporate funds, and the balance of the system was financed
through an operating lease. The system gathers and transports gas from
approximately 1,800 receipt points in northeastern Colorado.
(B) Oil and Gas Reserve Acquisition
23
<PAGE> 24
On February 1, 1994, the Company's oil and gas development
subsidiaries, K N Production Company and GASCO, Inc., acquired gas reserves and
production properties located near existing K N operations in western Colorado
and in the Moxa Arch region of southwestern Wyoming for a total purchase price
of approximately $30 million. The acquired properties have total net reserves
of approximately 50 billion cubic feet equivalent of natural gas. The Company
is discussing the possible sharing of ownership interests and non-recourse
financing with other parties.
(C) Wind River
Effective June 1, 1993, Wind River Gathering Company acquired
approximately 110 miles of natural gas pipeline and facilities in Wyoming's
Wind River Basin. Wind River Gathering Company is a joint venture between KNGG
and a subsidiary of Tom Brown, Inc., a Wind River Basin producer. KNGG manages
the operations of the gathering system. KNGG paid approximately $2 million for
its interest in the joint venture.
(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.
(E) Distribution Systems
On March 31, 1992, K N acquired the stock of two corporations for
$3.7 million in net cash. The acquired corporations owned two gas utility
distribution systems serving approximately 7,000 customers, mainly in
northeastern Wyoming. The acquisition was accounted for as a purchase, and the
corporations were merged into K N effective April 1, 1992.
5. LITIGATION
K N is named as one of four potentially responsible parties
("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site,
pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund"). The site is known as the Mystery Bridge Road/U.S.
Highway 20 site located near Casper, Wyoming (the "Brookhurst Subdivision").
The EPA's remedy consists of two parts, "Operating Unit One," which addresses
the groundwater cleanup and "Operating Unit Two," which addresses cleanup
procedures for the soil and free-phase petroleum product.
A Consent Decree between the Company, the EPA and another PRP was
entered on October 2, 1991, in the Wyoming Federal District Court. Groundwater
cleanup under Operating Unit One has been proceeding since 1990. On September
14, 1993, the EPA certified that the remedial action for Operating Unit One was
"operational and functional." This is the last step in the Superfund process
prior to remedy completion.
In July 1992, the EPA approved the Company's Operating Unit Two
workplan and the Company received an EPA "Statement of Work." The work
required to be performed for Operating Unit Two commenced during the third
24
<PAGE> 25
quarter of 1992 and is expected to continue through 1995 at a total cost
estimated not to be more than $1.0 million.
With regard to this same Superfund site, in 1987 the State of
Wyoming filed suit against several parties (including K N) for injunctive
relief, penalties and unquantified damages claimed to have resulted from
alleged pollution of groundwater and soils in the Brookhurst Subdivision. On
April 1, 1993, the Wyoming District Court dismissed the lawsuit, finding that K
N had diligently remedied the alleged pollution.
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.
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.
25
<PAGE> 26
The Company believes it has meritorious defenses to all lawsuits
and legal proceedings in which it is a defendant and will vigorously defend
against them. Based on its evaluation of the above matters, and after
consideration of reserves established, management believes that the
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
6. INCOME TAXES
See Note 1(D) 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 $ 4,312 $ 6,728 $ 1,290
State 2,461 688 1,185
------- ------- --------
Total 6,773 7,416 2,475
------- ------- --------
Taxes Deferred:
Federal 7,573 2,993 (7,631)
State 33 1,394 (457)
------- ------- -------
Total 7,606 4,387 (8,088)
------- ------- -------
Total Tax Provision 14,379 11,803 (5,613)
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 $14,379 $11,803 $13,682
------- ------- -------
------- ------- -------
Effective Tax Rate on Income from Continuing Operations 37.2% 37.6% 38.8%
------- ------- -------
------- ------- -------
</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 4.2% 4.4% 5.0%
Other (2.0%) (0.8%) (0.2%)
----- ----- -----
Effective Tax Rate 37.2% 37.6% 38.8%
----- ----- -----
----- ----- -----
</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):
26
<PAGE> 27
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1993 1992
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Unbilled Revenue $ 2,454 $ 1,599
Vacation Accrual 1,443 1,215
State Taxes 2,652 2,454
Capitalized Overhead Adjustment 3,388 3,526
Operating Reserves 1,497 2,378
Rate Matters (PGA) -- 1,387
Deferred Revenues 1,526 --
Other 3,351 2,148
Revenue Subject to Refund -- 456
------- -------
Total Deferred Tax Assets 16,311 15,163
------- -------
Deferred Tax Liabilities:
Liberalized Depreciation 65,098 56,581
Rate Matters 6,104 3,936
Prepaid Pension 3,432 3,000
Other 2,121 898
------- -------
Total Deferred Tax Liabilities 76,755 64,415
------- -------
Net Deferred Tax Liabilities $60,444 $49,252
------- -------
------- -------
SFAS 109 Deferred Accounts for Rate Regulated Entities:
Liabilities $ 4,379 $ 7,305
------- -------
------- -------
Assets $(1,455) $(2,148)
------- -------
------- -------
</TABLE>
7. FINANCING
(A) Notes Payable
The Company has credit agreements with eight banks to either
borrow or use as commercial paper support, up to a total of $90.0 million at
December 31, 1993. At December 31, 1993, $10.0 million was outstanding under
the credit agreements at an interest rate of 3.27 percent. No amounts were
outstanding under the credit agreements at December 31, 1992. Borrowings are
made at prime or a rate less than prime negotiated on the borrowing date and
for a term of not more than one year. During 1993 all borrowings were made for
terms of approximately one month. 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 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.
27
<PAGE> 28
(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
Medium-Term Notes:
9.96% Average Rate, Due 1994-1999 20,500 24,500
Current Maturities of Long-Term Debt (3,000) (4,000)
-------- --------
Total Long-Term Debt $231,881 $220,009
-------- --------
-------- --------
</TABLE>
Maturities of long-term debt for the five years ending December 31,
1998, are as follows (in thousands):
YEAR ENDING
DECEMBER 31 AMOUNT
- - -----------------------------------------------
[S] [C]
1994 $3,000
1995 7,500
1996 7,000
1997 6,000
1998 9,000
In September 1993, K N sold $50 million of 6.5% debentures at an
all-in cost to K N of 6.61 percent. The principal of each debenture is payable
annually in equal installments of ten percent of the original principal amount
beginning in September 2004, and K N has an option to increase such
installments by up to ten percent of the original principal amount. Proceeds
from the debt financing were used to redeem K N's 10 3/4% sinking fund
debentures and to fund capital expenditures.
In September 1992, K N sold publicly $65 million of debentures in
two separate offerings at a combined all-in cost to the Company of 8.38
percent. One offering consisted of $35 million of 8.35% sinking fund
debentures due September 2022, with mandatory annual sinking fund payments
commencing in September 2003. The other offering consisted of $30 million of
7.85% debentures due September 2022. In December 1992, K N sold $35 million of
7.27% senior notes. Final maturity of this debt is December 2002, with note
maturities commencing in December 1995. Proceeds from these debt financings
were used to refund the 8 1/2%, 9% and 9 7/8% sinking fund debentures, reduce
short-term debt, and fund capital expenditures.
On November 30, 1993, the Securities and Exchange Commission
declared effective, pursuant to Section 8(a) of the Securities Act of 1933, a
shelf registration for the sale of $200 million in debt securities in
anticipation of future long-term financing needs. No funds have been drawn
under this shelf registration.
28
<PAGE> 29
At December 31, 1993 and 1992, the carrying amount of K N's
long-term debt was $235.5 million and $224.5 million, respectively, and the
estimated fair value was $253.3 million and $234.7 million, respectively. The
fair value of K N'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 K N
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 - Class A, 200,000 Shares; Class B, 2,000,000 Shares,
All Without Par Value -
Redeemable Solely at Option of Company - Class A, $5.00 Cumulative
Series, 70,000 Shares $7,000 $7,000
------ ------
------ ------
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>
(A) Class A $8.50 Preferred Stock
The 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) Class B $8.30 Preferred Stock
The 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) Class A $5.00 Preferred Stock
The 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.
29
<PAGE> 30
(D) 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.
(E) 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>
(F) Fair Value
At December 31, 1993, both the carrying amount and the estimated
fair value of K N'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 K N'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 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.
30
<PAGE> 31
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.
The Company also contributes the lesser of ten percent of the
Company's net income or ten percent of normal 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 employees with at least
five years of credited service as of January 1, 1993, and their eligible
dependents. Retired 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 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; 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
31
<PAGE> 32
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 employees was recognized as expense as claims were paid, and the cost
of life insurance benefits for retirees was not accrued. Instead, life
insurance claims were paid from a trust fund resulting from termination of
third party coverage. The Company's net cost of medical care claims for
retirees was approximately $1.2 million and $1.1 million in 1992 and 1991,
respectively. In 1993, the incremental effect on postretirement cost as a
result of adopting SFAS 106 was a $1.3 million increase.
The following table sets forth the plan's funded status and the
amounts recognized in the Company's financial statements at December 31,
1993(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1993
- - --------------------------------------------------------------------------------------------------------
<S> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $(13,920)
Active Plan Participants (5,197)
--------
Total APBO (19,117)
Plan Assets at Fair Value 924
--------
Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (18,193)
Unrecognized Net Gain (6)
Prior Service Cost Not Yet Recognized in Net Periodic Postretirement Benefit Cost --------
Unrecognized Transition Obligation 17,847
--------
Accrued Postretirement Benefit Cost $ (352)
========
</TABLE>
The weighted average discount rate used in determining the
actuarial present value of the APBO was 7.5 percent; the assumed health care
cost trend rate was 11 percent for 1993, nine percent for 1994 and seven
percent for 1995 and beyond. A one- percentage-point increase in the assumed
health care cost trend rate for each future year would have increased the
aggregate of the service and interest cost components of the 1993 net periodic
postretirement benefit cost by $0.1 million and would have increased the APBO
as of December 31, 1993, by $0.1 million.
32
<PAGE> 33
K N's interstate retail distribution business, in connection with
rate filings described in Note 3 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. 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. SFAS 112 is effective for fiscal years beginning after
December 15, 1993. Implementation of SFAS 112 is not expected to have a
material effect on the Company's financial position or results of operations.
10. COMMON STOCK OPTION AND PURCHASE PLANS
The Company has incentive stock option plans for key employees and
nonqualified stock option plans for its nonemployee 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. Pursuant to amendments to the 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.
At December 31, 1993, 91 employees, officers and directors 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(E):
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
- - -----------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1990 480,416 $ 5.28-$16.79
Granted 99,590 $15.08-$16.04
Exercised (64,505) $10.29-$14.75
Expired (2,252) $ 6.08-$14.75
-------
Outstanding at December 31, 1991 513,249 $ 5.28-$16.79
Granted 25,492 $16.46
Exercised (92,790) $ 5.28-$15.08
-------
Outstanding at December 31, 1992 445,951 $ 5.28-$16.79
Granted 123,000 $23.04-$28.00
Exercised (135,522) $ 5.28-$16.79
Expired (6,751) $ 6.72-$23.04
-------
OUTSTANDING AT DECEMBER 31, 1993 426,678 $ 8.96-$28.00
(207,039 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, the Company
established an Employee Stock Purchase Plan under which eligible employees may
purchase the Company'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.
33
<PAGE> 34
Under the Company's Stock Option, Dividend Reinvestment, Employee
Stock Purchase and Employee Benefit Plans, 2,111,299 shares were reserved for
issuance at December 31, 1993.
11. 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. Also in
1993, K N and certain subsidiaries began to lease various furniture, fixtures
and vehicles under various operating leases with terms from three to seven
years. In 1992, KNGG began to lease gas gathering facilities and processing
equipment under a seven-year operating lease. All of these operating leases
contain purchase options at the end of their lease terms.
Payments made under operating leases were $5.2 million in 1993,
$2.4 million in 1992 and $1.9 million in 1991.
Future minimum commitments under major operating leases for the
five years ending December 31, 1998 and thereafter are as follows (in
thousands):
YEAR ENDING
DECEMBER 31 AMOUNT
- - -----------------------------------------------
1994 $ 5,136
1995 4,915
1996 4,319
1997 3,879
1998 3,767
Thereafter 34,202
-------
Total Commitments $56,218
=======
(B) Capital Expenditure Budget
The consolidated capital expenditure budget for 1994 is
approximately $54.5 million, excluding acquisitions. Approximately $2.0
million had been committed for the purchase of plant and equipment at December
31, 1993.
12. 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>
34
<PAGE> 35
13. BUSINESS SEGMENT INFORMATION
The Company's principal operations are the sale and transportation
of natural gas ("Gas Service"), nonregulated gas marketing and gathering ("Gas
Marketing and Gathering") and exploration, development and production of oil
and gas ("Oil and Gas Production").
Total revenues by segment include sales to unaffiliated customers.
General corporate income and expenses, interest expense and income taxes are
not included in the computation of operating income. Identifiable assets by
segment are those assets used in the Company's operations in each segment.
Corporate assets are principally cash and investments.
35
<PAGE> 36
BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
1993 1992 1991
- - ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
OPERATING REVENUES:
Gas Service $320,854 $320,557 $355,563
Gas Marketing and Gathering 207,242 71,585 42,272
Oil and Gas Production 8,462 7,119 4,690
Intersegment Eliminations (43,209) (7,442) (7,186)
-------- -------- --------
$493,349 $391,819 $395,339
======== ======== ========
OPERATING INCOME:
Gas Service $ 50,140 $ 48,304 $ 50,612
Gas Marketing and Gathering 7,229 1,263 504
Oil and Gas Production 1,249 803 153
-------- -------- --------
OPERATING INCOME 58,618 50,370 51,269
Other Income and (Deductions) - Net (19,964) (18,974) (15,987)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ 38,654 $ 31,396 $ 35,282
======== ======== ========
IDENTIFIABLE ASSETS:
Gas Service $568,311 $562,325 $513,948
Gas Marketing and Gathering 124,501 18,316 7,890
Oil and Gas Production 25,365 22,153 18,366
Corporate 13,092 16,153 19,452
-------- -------- --------
$731,269 $618,947 $559,656
======== ======== ========
DEPRECIATION, DEPLETION AND
AMORTIZATION EXPENSE:
Gas Service $ 21,824 $ 20,876 $ 19,689
Gas Marketing and Gathering 977 218 38
Oil and Gas Production 3,355 3,093 1,634
-------- -------- --------
$ 26,156 $ 24,187 $ 21,361
======== ======== ========
CAPITAL EXPENDITURES:
Gas Service $ 78,110 $ 58,702 $ 51,638
Gas Marketing and Gathering 6,956 2,828 844
Oil and Gas Production 4,757 9,397 6,912
-------- -------- --------
$ 89,823 $ 70,927 $ 59,394
======== ======== ========
</TABLE>
36
<PAGE> 37
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 $152,228 $92,600 $92,654 $155,867
Operating Income 27,020 3,335 5,910 22,353
Net Income (Loss) 13,306 (1,000) 558 11,411
Earnings (Loss) Per Common Share (1) $ 0.88 $ (0.08) $ 0.02 $ 0.75
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1992
- - ---------------------------------------------------------------------------------------------------------------
First Second Third Fourth
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $124,103 $67,168 $65,345 $135,203
Operating Income 23,549 2,116 2,049 22,656
Net Income (Loss) 11,656 (1,477) (768) 10,182
Earnings (Loss) Per Common Share (1) $ 0.79 $ (0.12) $ (0.07) $ 0.68
======== ======= ======= ========
</TABLE>
(1) Restated to reflect a three-for-two common stock split in 1993.
37
<PAGE> 38
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)
June 9, 1994 By /s/ E. Wayne Lundhagen
______________________________________
E. Wayne Lundhagen
Vice President - Finance and Accounting
38
<PAGE> 39
SCHEDULE IX
K N ENERGY, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
THREE YEARS ENDED DECEMBER 31, 1993
The Company has credit agreements with eight banks to either
borrow or use as commercial paper support, up to a total of $90.0 million at
December 31, 1993. 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. 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 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.
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.
39
<PAGE> 40
Index to Exibits
<TABLE>
<CAPTION>
Description Page
----------- ----------
<S> <C>
(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 Informa-
tion for the Three Years Ended December 31, 1993 . . . . . . . 63
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
Description Page
----------- ----------
<S> <C>
3. Exhibits
List of Executive Compensation Plans and Arrangements . . . . . 57-58
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, Participa-
ting, Optional or Other Special Rights, and Quali-
fications, 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, Participa-
ting, Optional or Other Special Rights, and Quali-
fications, 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 Chi-
cago (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 10 percent of the consolidated total assets
of the Company and its subsidiaries have not been
furnished. The Company will furnish such instru-
ments 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 Non-
employee 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)*
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
Description Page
----------- ----------
<S> <C>
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, Amend-
ment 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
Exhibit 24 - Consent of Independent Public
Accountants . . . . . . . . . . . . . . . . . . . . . . . . . 69
</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 to be deemed filed as a part of this
annual report on Form 10-K.
