<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 1-6446
----------------------------------------------------------
K N ENERGY, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kansas 48-0290000
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Van Gordon Street
P.O. Box 281304, Lakewood, Colorado 80228-8304
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 989-1740
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $5 par value; authorized 50,000,000 shares; outstanding
27,961,771 shares as of October 31, 1995
================================================================================
<PAGE> 2
Form 10-Q
K N ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED September 30, 1995
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . 3 & 4
Consolidated Statements of Income
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 & 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 8 & 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 10 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Exhibit 27 - Financial Data Schedule*
Reports on Form 8-K
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
* Included In SEC EDGAR Filing Only.
2
<PAGE> 3
Form 10-Q
CONSOLIDATED BALANCE SHEETS
K N ENERGY, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1995 1994
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,899 $ 20,613
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,242 151,834
Material and Supplies, at Average Cost . . . . . . . . . . . . . . . . . . 13,033 12,687
Gas in Underground Storage . . . . . . . . . . . . . . . . . . . . . . . . 9,879 31,695
Prepaid Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,050 12,456
Other Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 13,320 33,869
Gas Imbalances and Other . . . . . . . . . . . . . . . . . . . . . . . . . 18,503 16,160
---------- ----------
233,926 279,314
---------- ----------
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,004 9,186
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Retail Natural Gas Services . . . . . . . . . . . . . . . . . . . . . . . 363,578 358,337
Interstate Transportation and Storage Services . . . . . . . . . . . . . . 313,372 371,253
Gathering, Processing and Marketing Services . . . . . . . . . . . . . . . 640,980 533,226
Gas and Oil Production . . . . . . . . . . . . . . . . . . . . . . . . . . 54,928 49,578
---------- ----------
1,372,858 1,312,394
Less - Accumulated Depreciation, Depletion and Amortization . . . . . . . 495,585 461,745
---------- ----------
877,273 850,649
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 36,001 33,235
---------- ----------
$1,160,204 $1,172,384
========== ==========
</TABLE>
3
<PAGE> 4
Form 10-Q
CONSOLIDATED BALANCE SHEETS
K N ENERGY, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1995 1994
---- ----
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Preferred Stock and Long-Term Debt . . . . . . . . . $ 28,802 $ 30,384
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 60,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,674 108,755
Accrued Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,312 6,197
Gas Imbalances and Other . . . . . . . . . . . . . . . . . . . . . . . . 39,155 50,434
---------- ----------
238,943 255,770
---------- ----------
DEFERRED LIABILITIES, CREDITS AND RESERVES:
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,384 96,054
Deferred Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,879 42,090
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,496 28,194
---------- ----------
164,759 166,338
---------- ----------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319,783 334,644
---------- ----------
MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES . . . . . . . . . . . . . . . 15,253 13,231
---------- ----------
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION . . . . . . . . . . . . . . 1,143 1,715
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock -
Authorized - Class A, 200,000 Shares; Class B, 2,000,000 Shares,
All Without Par Value
Redeemable Solely at Option of Company at $105 Per Share - Class A,
$5.00 Cumulative Series; 70,000 Shares . . . . . . . . . . . . . . 7,000 7,000
---------- ----------
Common Stockholders' Equity
Common Stock -
Authorized - 50,000,000 Shares, Par Value $5 Per Share
Outstanding - 27,960,083 and 27,617,531 Shares, Respectively . . . 139,800 138,088
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . 175,563 170,932
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,398 86,032
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . (258) (378)
Treasury Stock, at Cost, (6,905 and 44,417 Shares, Respectively) . . . (180) (988)
---------- ----------
Total Common Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 413,323 393,686
---------- ----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 420,323 400,686
---------- ----------
$1,160,204 $1,172,384
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
Form 10-Q
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
K N ENERGY, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Retail Natural Gas Services . . . . . . . . . . . $ 43,076 $ 38,650 $154,338 $150,956
Interstate Transportation and Storage Services . 4,236 3,152 16,632 13,467
Gathering, Processing and Marketing Services . . 195,248 185,608 591,406 639,802
Gas and Oil Production . . . . . . . . . . . . . 1,836 3,846 6,255 9,706
-------- -------- -------- --------
Total Operating Revenues . . . . . . . . . . . . 244,396 231,256 768,631 813,931
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Gas Purchases . . . . . . . . . . . . . . . . . . 154,406 153,848 507,923 579,863
Operations and Maintenance . . . . . . . . . . . 46,898 41,393 132,405 126,106
Depreciation, Depletion and Amortization . . . . 12,537 13,231 37,414 40,213
Taxes, Other Than Income Taxes . . . . . . . . . 4,606 4,467 14,535 13,082
Merger and Restructuring Costs . . . . . . . . . -- 25,945 -- 25,945
-------- -------- -------- --------
Total Operating Costs and Expenses . . . . . . . 218,447 238,884 692,277 785,209
-------- -------- -------- --------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . 25,949 (7,628) 76,354 28,722
-------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS):
Interest Expense . . . . . . . . . . . . . . . . (8,176) (8,079) (25,646) (22,769)
Minority Interests . . . . . . . . . . . . . . . (341) (40) (1,172) (278)
Other, Net . . . . . . . . . . . . . . . . . . . 936 501 2,124 2,221
-------- -------- -------- --------
Total Other Income and (Deductions) . . . . . . . (7,581) (7,618) (24,694) (20,826)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . 18,368 (15,246) 51,660 7,896
Income Taxes . . . . . . . . . . . . . . . . . . 6,539 (2,786) 18,391 5,487
-------- -------- -------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . 11,829 (12,460) 33,269 2,409
Less - Preferred Stock Dividends . . . . . . . . 123 157 369 472
-------- -------- -------- --------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK . . . $ 11,706 $(12,617) $ 32,900 $ 1,937
======== ======== ======== ========
Number of Shares Used in Computing
Earnings Per Common Share . . . . . . . . . . 28,472 28,153 28,303 28,035
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE . . . . . . . . $ 0.41 $ (0.45) $ 1.16 $ 0.07
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE . . . . . . . . . . . $ 0.25 $ 0.24 $ 0.75 $ 0.51
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements of income.
5
<PAGE> 6
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
K N ENERGY, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,269 $ 2,409
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Depreciation, Depletion and Amortization . . . . . . . . . . . . . . . . 37,414 40,213
Minority Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,172 278
Provisions for Losses on Accounts Receivable . . . . . . . . . . . . . . 826 675
Gain on Sale of Facilities . . . . . . . . . . . . . . . . . . . . . . . -- (1,357)
Executive Stock Compensation . . . . . . . . . . . . . . . . . . . . . . 120 1,043
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 6,583 2,317
Deferred Purchased Gas Costs . . . . . . . . . . . . . . . . . . . . . . 2,887 2,979
Changes in Other Working Capital Items . . . . . . . . . . . . . . . . . 59,532 23,807
Changes in Deferred Revenues . . . . . . . . . . . . . . . . . . . . . . (2,211) (494)
Other, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,578) 12,197
-------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . 129,014 84,067
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (53,107) (63,743)
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,914) (30,598)
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,818) (778)
Proceeds from Sale of Facilities . . . . . . . . . . . . . . . . . . . . . 2,766 4,550
(Payments) Collections Under Basket Agreement . . . . . . . . . . . . . . . 1,237 (199)
Other Funds Used During Construction . . . . . . . . . . . . . . . . . . . 103 147
-------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . (68,733) (90,621)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt (Net) . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,000) 82,570
Long-Term Debt - Issued . . . . . . . . . . . . . . . . . . . . . . . . -- 1,100
- Retired . . . . . . . . . . . . . . . . . . . . . . . . (17,058) (71,762)
Common Stock Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,343 7,990
Treasury Stock - Issued . . . . . . . . . . . . . . . . . . . . . . . . 1,849 417
- Acquired . . . . . . . . . . . . . . . . . . . . . . . (1,041) (2,065)
Cash Dividends - Common . . . . . . . . . . . . . . . . . . . . . . . . (20,534) (13,953)
- Preferred . . . . . . . . . . . . . . . . . . . . . . . (369) (472)
Minority
Interests - Contributions . . . . . . . . . . . . . . . . . . . . . 2,868 1,163
- Distributions . . . . . . . . . . . . . . . . . . . . . (2,018) (1,636)
Premium on Debt Reacquisition and Issue Costs . . . . . . . . . . . . . . . (35) --
-------- ---------
NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES . . . . . . . . . . . . (57,995) 3,352
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . 2,286 (3,202)
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . 20,613 14,353
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . $ 22,899 $ 11,151
======== =========
</TABLE>
The accompanying notes are an integral part of these statements of cash flows.
6
<PAGE> 7
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
K N ENERGY, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
1995 1994
---- ----
<S> <C> <C>
CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY
(NET OF ACQUISITION EFFECTS):
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,766 $62,073
Contract Demand Receivables . . . . . . . . . . . . . . . . . . . . . . . . -- 38,732
Material and Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . (346) 260
Gas in Underground Storage. . . . . . . . . . . . . . . . . . . . . . . . . 21,816 (12,243)
Accounts Payable, Accrued Taxes and Other Current Liabilities . . . . . . . 12,684 (61,271)
Other Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,612 (3,744)
------- -------
$59,532 $23,807
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest (Net of Amount Capitalized) . . . . . . . . . . . . . . . . . . . $27,774 $24,799
======= =======
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,519 $13,066
======= =======
</TABLE>
7
<PAGE> 8
Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The consolidated financial statements include the amounts of K N Energy, Inc.
("K N") and its majority-owned subsidiaries (the "Company"). In the opinion of
management, all adjustments necessary for a fair statement of the results for
the unaudited interim periods have been made. These adjustments consist only
of normal recurring accruals.
Certain prior year amounts have been reclassified to conform with the 1995
presentation.
2. Merger
On July 13, 1994, pursuant to the Agreement of Merger dated March 24, 1994,
American Oil and Gas Corporation ("AOG") was merged into the Company. As a
result of the merger, each outstanding share of common stock of AOG was
converted into 0.47 of a share of common stock of K N. In connection with the
merger, all the outstanding shares of AOG common stock were converted into
approximately 12.2 million shares of K N stock, and the authorized number of
shares of K N common stock was increased to 50 million shares. The merger was
accounted for as a pooling of interests. The Company recorded merger and
restructuring costs totaling $25.9 million in the third quarter of 1994
relating to the merger and the formal restructuring plan of the Company's
retail distribution operations.
3. Acquisitions
On February 16, 1995, the Company acquired natural gas transmission pipeline
and storage assets in Texas. The assets include two West Texas pipeline
systems, comprised of 347 miles of pipeline and related facilities, which are
currently connected to K N's core pipeline system. In addition, surface
facilities, lease rights and approximately 10.8 Bcf of natural gas in storage
in a leased, Gulf Coast storage field were acquired. K N also acquired the
remaining 50 percent interest it did not previously own in a 90-mile joint
venture pipeline near Midland, Texas. The total price was $80.1 million,
subject to closing adjustments. The Company utilized an operating lease and
short-term debt financing arrangements to fund the acquisition.
4. Regulatory Matters
In January 1995, as a result of an agreement reached with its customers, the
Company filed an application with the Federal Energy Regulatory Commission
("FERC") to transfer three storage fields, including approximately 45 Bcf of
cushion gas held by K N Interstate Gas Transmission Co. ("KNI"), to a newly
created nonjurisdictional affiliate, K N Natural Gas, Inc. ("KNNG"). On May 2,
1995, FERC issued an order approving the storage reorganization filing. With
the approval of this transfer, KNI owns only the Huntsman, Nebraska storage
facilities, which will remain as jurisdictional facilities and continue to
provide storage services. Jurisdictional rates were restated to reflect this
transfer. KNNG began marketing its gas at market rates from the three storage
facilities which were transferred, effective June 1, 1995.
8
<PAGE> 9
Form 10-Q
5. Treasury Stock
In April 1995, K N's Board of Directors authorized the purchase on the open
market of up to 500,000 shares of the Company's common stock through December
31, 1996. Any such purchases will be used to fund Company benefit plans and the
Company's dividend reinvestment plan. Such a program is in the ordinary course
of K N's business and is a continuation of a similar share purchasing program
that K N has used in the past. As of September 30, 1995, the Company had
purchased 40,000 shares under this authorization.
9
<PAGE> 10
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED FINANCIAL RESULTS
K N reported third quarter 1995 net income of $11.8 million, or $0.41 per
common share after payment of preferred dividends, compared with 1994 third
quarter net income of $6.9 million, or $0.24 per share, excluding one-time
merger and restructuring expenses. The notable improvement results from
year-to-year growth in K N Energy's southern and northern regions and the
improvement in gas use for irrigation compared with a weaker 1994 irrigation
season.
For the first nine months of 1995, K N's net income was $33.3 million or $1.16
per common share, compared with 1994 nine months net income, excluding one-time
merger and restructuring expenses, of $21.8 million or $0.76 per common share.
The 53 percent increase in 1995 earnings over 1994, resulted from growth in
K N's business; improved 1995 natural gas liquids prices; improved irrigation
sales; the impact of 1994 rate increases; and the benefits from the July 1994
merger with American Oil and Gas Corporation ("AOG").
In the third quarter of 1994, the Company expensed $25.9 million of one-time
costs related to the merger of AOG into K N on July 13, 1994, and to the
restructuring of the Company's retail gas distribution operations. Including
the effect of the one-time charges ($19.3 million after income taxes, or $0.69
per common share), the Company reported a third quarter 1994 net loss of $12.5
million, or $0.45 per common share, and 1994 nine months net income of $2.4
million, or $0.07 per common share.
RESULTS OF OPERATIONS
Comparative operating results by business segment and consolidated other income
and (deductions) and income taxes, exclusive of the third quarter 1994 one-time
merger and restructuring costs and related income tax effect, are discussed
below. Segment operating revenues, gas purchases, operations and maintenance
expenses and volumetric data cited below are before intersegment eliminations
(dollars in millions).
<TABLE>
<CAPTION>
THIRD QUARTER FIRST NINE MONTHS
-------------------- ---------------------
RETAIL NATURAL GAS SERVICES 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues -
Gas Sales $38.7 $37.5 $145.0 $147.4
Transportation and Other 7.8 3.1 13.1 7.8
----- ----- ------ ------
46.5 40.6 158.1 155.2
----- ----- ------ ------
Operating Costs and Expenses -
Gas Purchases 19.6 21.4 81.2 88.6
Operations and Maintenance 16.2 12.1 43.8 39.1
Depreciation, Depletion and Amortization 3.3 3.1 9.6 9.0
Taxes, Other Than Income Taxes 1.3 1.5 4.5 4.1
----- ----- ------ ------
40.4 38.1 139.1 140.8
----- ----- ------ ------
Operating Income $ 6.1 $ 2.5 $ 19.0 $ 14.4
===== ===== ====== ======
Systems Throughput (Trillion Btus) -
Gas Sales 8.6 8.1 28.2 29.8
Transportation 9.8 5.3 21.0 13.9
----- ----- ------ ------
18.4 13.4 49.2 43.7
===== ===== ====== ======
System-Wide Degree Days 4,056 3,816
====== ======
</TABLE>
10
<PAGE> 11
Form 10-Q
Deliveries (gas sales and transport) to irrigation customers, in the 1995 third
quarter, totaled 11.0 trillion Btus, compared to 6.9 trillion Btus during the
third quarter of 1994. As a result of the warmer and drier weather's impact on
irrigation demand, 1995 third quarter gas sales and transportation margins
exceeded 1994 margins by $5.5 million. Third quarter 1995 operations and
maintenance expenses were adversely impacted by the higher systems throughput
and by employee severance costs as the Company continues to implement cost
initiatives to further enhance its competitive position. As a result of the
significant improvement in 1995 earnings and the impact on 1994 earnings of the
merger restructuring charge, profit sharing provisions included in operations
and maintenance expenses of the retail segment were $2.8 million higher in the
1995 third quarter compared to 1994. Additionally, 1994's nine months
operations and maintenance expenses were reduced by $1.7 million due to
favorable resolutions of certain regulatory and environmental matters.
<TABLE>
<CAPTION>
THIRD QUARTER FIRST NINE MONTHS
--------------------- -------------------
INTERSTATE TRANSPORTATION AND STORAGE SERVICES 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues -
Transportation and Storage $14.4 $12.7 $ 43.7 $40.3
Natural Gas Liquids and Other 1.2 1.1 4.0 2.8
----- ----- ------ -----
15.6 13.8 47.7 43.1
----- ----- ------ -----
Operating Costs and Expenses -
Gas Purchases 1.7 0.3 4.6 1.7
Operations and Maintenance 8.4 8.1 22.2 21.1
Depreciation, Depletion and Amortization 1.8 2.3 5.7 6.5
Taxes, Other Than Income Taxes 0.6 0.9 2.1 3.0
----- ----- ------ -----
12.5 11.6 34.6 32.3
----- ----- ------ -----
Operating Income $ 3.1 $ 2.2 $ 13.1 $10.8
===== ===== ====== =====
Systems Throughput (Trillion Btus) 39.1 27.8 111.4 97.0
===== ===== ====== =====
Natural Gas Liquids (Millions of Gallons) 4.0 3.5 12.5 9.8
===== ===== ====== =====
</TABLE>
The improvement in 1995 third quarter and nine months operating income
primarily reflects higher rates resulting from the late 1994 rate case
settlement. The rate case settlement also increased the useful lives used in
calculating depreciation expense for certain assets, which reduced 1995
depreciation, depletion and amortization compared to 1994. Improved throughput
volumes and NGL recoveries and cost controls, partially offset by 1995
severance costs, also enhanced 1995 results. The impact of the 1994 rate
increase on 1995 results was partially offset by lower customer nominations for
firm storage service. Additionally, 1994 operations and maintenance expenses
were reduced by $1.3 million, due to favorable resolution of certain
environmental and legal contingencies.
11
<PAGE> 12
Form 10-Q
<TABLE>
<CAPTION>
THIRD QUARTER FIRST NINE MONTHS
---------------------- ---------------------
GATHERING, PROCESSING AND MARKETING SERVICES 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues -
Gas Sales $164.4 $157.0 $503.3 $554.6
Transportation and Gathering 12.7 10.9 35.3 33.9
Natural Gas Liquids and Other 29.7 29.0 90.9 86.6
------ ------ ------ ------
206.8 196.9 629.5 675.1
------ ------ ------ ------
Operating Costs and Expenses -
Gas Purchases 157.7 154.9 493.0 557.0
Operations and Maintenance 22.8 21.0 66.2 65.5
Depreciation, Depletion and Amortization 6.5 6.0 18.8 19.5
Taxes, Other Than Income Taxes 2.5 1.8 7.2 5.0
------ ------ ------ ------
189.5 183.7 585.2 647.0
------ ------ ------ ------
Operating Income $ 17.3 $ 13.2 $ 44.3 $ 28.1
====== ====== ====== ======
System Throughput (Trillion Btus) -
Gas Sales 97.7 81.7 292.2 264.7
Transportation and Gathering 95.1 72.9 252.3 213.5
------ ------ ------ ------
192.8 154.6 544.5 478.2
====== ====== ====== ======
Natural Gas Liquids (Millions of Gallons) 91.5 93.3 275.3 276.7
====== ====== ====== ======
</TABLE>
This segment's significant improvement in operating income for the third
quarter of 1995, versus the 1994 third quarter, reflects increased gas sales
(direct and wholesale) to serve irrigation demand. Sales volumes for
irrigation needs totaled 11.3 trillion Btus for the 1995 third quarter;
comparable 1994 volumes were 9.1 trillion Btus. This favorable load
requirement also positively impacted 1995 third quarter transportation and
gathering volumes and NGL recoveries. Year-to-date 1995 operating results
have been positively impacted by higher 1995 NGL prices, cost savings of the
merger and positive contributions from the February acquisition of
transmission and storage assets in Texas. Excluding the impact of this
acquisition, 1995 nine months' operations and maintenance expenses would be
$4.3 million below the comparable 1994 period. In the second quarter of 1994,
depreciation, depletion and amortization included a $1.0 million write-down of
a Texas gathering system.
<TABLE>
<CAPTION>
THIRD QUARTER FIRST NINE MONTHS
------------------ ---------------------
GAS AND OIL PRODUCTION 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues -
Gas and Oil Sales $ 1.5 $3.9 $6.0 $10.6
Other 0.9 0.4 2.2 1.6
----- ---- ---- -----
2.4 4.3 8.2 12.2
----- ---- ---- -----
Operating Costs and Expenses -
Operations and Maintenance 1.8 1.7 4.2 4.6
Depreciation, Depletion and Amortization 1.0 1.8 3.4 5.2
Taxes, Other Than Income Taxes 0.1 0.4 0.6 1.0
----- ---- ---- -----
2.9 3.9 8.2 10.8
----- ---- ---- -----
Operating Income (Loss) $(0.5) $0.4 $ -- $ 1.4
===== ==== ==== =====
Gas and Oil Production (Equivalent Bcf) 1.3 2.2 4.3 5.9
===== ==== ==== =====
</TABLE>
12
<PAGE> 13
Form 10-Q
The decline in 1995 revenues, production and operating income reflects low
natural gas prices and shut-in production. Reduced production also caused a
decrease in depreciation, depletion and amortization expenses calculated on a
units-of-production basis. Additionally, 1994 results included production from
gas and oil reserves acquired in February 1994. In October 1994, the Company
sold a 50 percent interest in these properties.
<TABLE>
<CAPTION>
THIRD QUARTER FIRST NINE MONTHS
-------------------- ---------------------
OTHER INCOME AND (DEDUCTIONS) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Expense $(8.2) $(8.1) $(25.6) $(22.8)
Minority Interests and Other, Net 0.6 0.5 0.9 2.0
----- ----- ------ ------
$(7.6) $(7.6) $(24.7) $(20.8)
===== ===== ====== ======
</TABLE>
The increase in year-to-date 1995 interest expense is due to the October 1994
sale of $75 million of 8.75% debentures. In the second quarter of 1994, a gain
of $1.5 million was realized on the sale of a south Texas gathering system.
<TABLE>
<CAPTION>
THIRD QUARTER FIRST NINE MONTHS
--------------------- -------------------------
INCOME TAXES 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Provisions $ 6.5 $ 3.8 $ 18.4 $ 12.1
===== ===== ====== ======
Effective Tax Rate 35.6% 35.7%
====== ======
</TABLE>
The effective tax rates for both 1995 and 1994 reflect tax credits on
production from gas wells qualifying for non-conventional fuel credit under
Section 29 of the Internal Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of 1995, net cash flows from operations were $129.0
million. Excluding the proceeds received from the February 1994 sale of
contract demand receivables and $15.9 million of 1994 merger expenditures, net
operating cash flows for the 1994 nine-month period aggregated $61.2 million.
The significant improvement in 1995 net cash flows results primarily from the
positive 1995 earnings factors and greater utilization of storage gas for
requirements.
Short-term borrowings totaled $32.0 million at September 30, 1995, compared
with short-term debt of $60.0 million and $129.6 million at December 31, 1994
and September 30, 1994, respectively. In February 1995, the Company acquired
natural gas transmission and storage assets in Texas; $66 million of the $80.1
million acquisition price was financed by an operating lease. At this time,
the Company does not expect to do any long-term financing in the 1995 fourth
quarter.
In September 1995, Standard & Poor's ("S & P") affirmed its "A" rating of K N's
senior unsecured debt and preferred stock and its commercial paper rating of
"A-1". To reflect the Agency's perception of a more competitive environment
for the Company and the industry, S & P revised its ratings outlook for K N
from stable to negative.
13
<PAGE> 14
Form 10-Q
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Westerman, et al. vs. K N Energy, Inc., et al.
As reported in the Company's Annual Report on Form 10-K, and updated in
the Company's First and Second Quarter Reports on Form 10-Q, on
December 8, 1994, K N and its wholly-owned subsidiary K N Gas Supply
Services, Inc. ("KNGSS") were sued by gas producers under claims
arising from two gas purchase contracts covering gas purchases from
wells in the Niobrara Field, Colorado. On October 30, 1995, K N and
KNGSS reached settlement with parties representing approximately two-
thirds of the gas ownership interests held by the producers. This
settlement resolves all disputes between these parties, including a
lawsuit filed by K N and KNGSS in federal court in Colorado. The
Company believes that this settlement will have no material adverse
effect on the Company's financial position or results of operations.
Settlement negotiations with the parties representing the remaining
one-third ownership interest under the disputed gas purchase
contracts are continuing.
For information relating to other legal proceedings see Notes 5 and 6
of Notes to Consolidated Financial Statements on Pages 42-46 of the
1994 Annual Report on Form 10-K; and Item 1: Legal Proceedings on page
13 of the Form 10-Q for the First Quarter of 1995 and on page 14 of the
Form 10-Q for the Second Quarter of 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
On September 15, 1995, the Company filed a Form 8-K which disclosed
that on August 17, 1995, the Board of Directors of K N Energy, Inc.
declared a dividend of one preferred share purchase right (a "Right")
for each outstanding share of common stock of the Company, payable on
September 15, 1995, to the Stockholders of record on that date,
pursuant to a Rights Agreement between the Company and the Bank of New
York, as Rights Agent. The Rights Agreement was filed as an exhibit to
the Form 8-K reported herein.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K N ENERGY, INC.
(Registrant)
November 14, 1995 /s/ E. Wayne Lundhagen
-------------------------------------------
E. Wayne Lundhagen
Vice President and Treasurer
(On Behalf of the Registrant and as
Principal Financial and Accounting Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
- ------ ------------------- ----
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 22,899
<SECURITIES> 0
<RECEIVABLES> 144,242
<ALLOWANCES> 0
<INVENTORY> 22,912
<CURRENT-ASSETS> 233,926
<PP&E> 1,372,858
<DEPRECIATION> 495,585
<TOTAL-ASSETS> 1,160,204
<CURRENT-LIABILITIES> 238,943
<BONDS> 319,783
<COMMON> 139,800
1,143
7,000
<OTHER-SE> 273,523
<TOTAL-LIABILITY-AND-EQUITY> 1,160,204
<SALES> 768,631
<TOTAL-REVENUES> 768,631
<CGS> 507,923
<TOTAL-COSTS> 692,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,646
<INCOME-PRETAX> 51,660
<INCOME-TAX> 18,391
<INCOME-CONTINUING> 33,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,269
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 0
</TABLE>
