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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
FORM 10-K
(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, 1996
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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
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K N ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Kansas 48-0290000
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
370 Van Gordon Street
P.O. Box 281304, Lakewood, Colorado 80228-8304
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 989-1740
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock, par value $5 per share New York Stock Exchange
Preferred share purchase rights New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Preferred stock, Class A $5 cumulative series
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant.
$1,242,579,190 as of February 14, 1997
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Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable
date.
Common stock, $5 par value; authorized 50,000,000 shares; outstanding
30,645,962 shares as of February 14, 1997
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List hereunder documents incorporated by reference and the Part of the Form
10-K into which the document is incorporated.
1997 Proxy Statement Part III
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K N ENERGY, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
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Page Number
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1997 Proxy Included
Statement Herein
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PART I
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ITEMS 1 & 2: BUSINESS AND PROPERTIES ................................................................. 3-14
ITEM 3: LEGAL PROCEEDINGS ....................................................................... 14-17
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 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT .................................................... 18-19
PART II
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ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS ..................................................................... 20
ITEM 6: SELECTED FINANCIAL DATA ................................................................. 21
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................................................... 22-29
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants ................................................ 30
Consolidated Statements of Income for the Three
Years Ended December 31, 1996, 1995 and 1994 ......................................... 31
Consolidated Balance Sheets as of December 31, 1996 and 1995 ............................ 32
Consolidated Statements of Common Stockholders' Equity
for the Three Years Ended December 31, 1996, 1995 and 1994 33
Consolidated Statements of Cash Flows for the Three
Years Ended December 31, 1996, 1995 and 1994 ......................................... 34
Notes to Consolidated Financial Statements .............................................. 35-56
Selected Quarterly Financial Data (Unaudited) ........................................... 57
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no such matters during 1996.
PART III
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ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 3-6*,7-18*
ITEM 11: EXECUTIVE COMPENSATION .................................................................. 7-18*
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......................... 3-6*,17-18*,21-22*
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................................... 6-7*
PART IV
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ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to the listing of financial statements and
supplementary data under Item 8 in Part II of this index.
2. Financial Statement Schedules
None
3. Exhibits
Exhibit Index.................................................................. 63-65
List of Executive Compensation Plans and Arrangements.......................... 59-60
Exhibit 12 - Ratio of Earnings to Fixed Charges ............................... 66
Exhibit 13 - 1996 Annual Report to Shareholders** ............................. 67
Exhibit 21 - Subsidiaries of the Registrant.................................... 68
Exhibit 23 - Consent of Independent Public Accountants ........................ 69
Exhibit 27 - Financial Data Schedule***
(b) Reports on Form 8-K ................................................................. 61
SIGNATURES ............................................................................................ 62
</TABLE>
Note: Individual financial statements of the parent Company are omitted
pursuant to the provisions of Accounting Series Release No. 302.
* Incorporated herein by reference.
** Such report is being furnished for the information of the Securities and
Exchange Commission ("SEC") only and is not to be deemed filed as a part
of this annual report on Form 10-K.
*** Included in SEC copy only.
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PART I
ITEMS 1 and 2: BUSINESS and PROPERTIES
As used in this report, the term "K N" means K N Energy, Inc., and the
term "Company" means collectively K N Energy, Inc., and its subsidiaries,
unless the context requires a different meaning. (See "Subsidiaries of the
Registrant" in Exhibit 21.)
All volumes of natural gas referred to herein are stated at a pressure
base of 14.73 pounds per square inch absolute and at 60 degrees Fahrenheit
and, in most instances, are rounded to the nearest major multiple. The term
"Mcf" means thousand cubic feet, the term "MMcf" means million cubic feet, and
the term "Bcf" means billion cubic feet. The term "MMBtus" means million
British thermal units ("Btus"). "NGLs" refers to natural gas liquids, which
consist of ethane, propane, butane, iso-butane, and natural gasoline. The
term "Bbls" means barrels. As used herein, "throughput" refers to volumes of
gas sold by the Company and gas transported on the Company's systems for third
parties.
(A) General Description
The Company is an integrated energy services company with operations that
include natural gas gathering, processing, marketing, field services, storage,
transportation and energy commodity sales of natural gas and NGLs and power
marketing. The Company also sells innovative products and services, such as
its Simple Choice(sm) menu of products and call center services designed for
consumers, utilities and commercial entities.
In 1996, K N purchased a crude oil pipeline for conversion to natural gas
service. This Pipeline, renamed the Pony Express Pipeline ("Pony Express"),
runs from Lost Cabin, Wyoming, in central Wyoming to Freeman, Missouri, near
Kansas City (See Transportation on page 8).
On January 31, 1996, K N and Tom Brown, Inc. ("TBI") closed a transaction,
effective January 1, 1996 , pursuant to which K N transferred its stock in K N
Production Company ("KNPC") a wholly owned subsidiary of K N, to TBI in exchange
for common and convertible preferred stock of TBI. In conjunction with this
transaction, K N and TBI formed a limited liability company, named Wildhorse
Energy Partners, LLC ("Wildhorse"), owned 55 percent by K N and 45 percent by
TBI, which performs certain gathering, processing, field, marketing and storage
services in the mid-continent region of the United States.
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. AOG is
engaged in the business of gathering, processing, storing, transporting,
marketing and selling natural gas and NGLs primarily in West Texas and the Texas
Panhandle. As a result of the merger, each outstanding share of common stock of
AOG was converted into 0.47 of a share of common stock of K N and the right to
receive in cash the value of any fractional share of K N stock. All the
outstanding shares of AOG common stock were converted into approximately 12.2
million shares of K N common stock. The merger was accounted for as a pooling
of interests.
The Company's executive offices are located at 370 Van Gordon Street, P.O.
Box 281304, Lakewood, Colorado 80228-8304 and its telephone number is (303)
989-1740. K N was incorporated in the State of Kansas on May 18, 1927. The
Company employed 1,786 people at December 31, 1996.
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(B) Narrative Description of Business
(1) Gathering, Processing, and Marketing Services
Overview. This business segment provides natural gas gathering,
processing, marketing, and supply services, including transportation and
storage to a variety of customers. Within this business segment, the Company
owns and operates approximately 9,500 miles of pipeline in seven states and
operates 16 gas processing plants in five states and natural gas storage
facilities in West Texas and on the Gulf Coast. This segment's total
processing capacity is approximately 640 MMcf per day of natural gas and
33,000 Bbls per day of NGLs.
In December 1996, K N and El Paso Energy Corporation placed in service the
Coyote Gulch gas treating plant ("Coyote Gulch") in La Plata County, Colorado,
which is part of the TransColorado pipeline project. Coyote Gulch is expected
to eliminate the processing and pipeline constraints which currently exist in
the northern portion of the San Juan basin and provide a platform from which the
balance of the TransColorado pipeline can be built. Coyote Gulch is a 50-50
joint project between K N and El Paso Energy Corporation. It has an initial
processing capacity of 120 MMcf per day. The plant is part of Phase I of the
TransColorado project and included construction of 22.5 miles of 24-inch
diameter pipe and 2.5 miles of 16-inch diameter pipe. The pipeline, which is
regulated by the Federal Energy Regulatory Commission ("FERC"), begins at the
outlet of Coyote Gulch and extends to Blanco, New Mexico.
Revenues from this business segment's gathering, processing, storage,
transporting, marketing and supply activities are generated in four ways. First,
the Company performs a merchant function whereby the Company purchases gas at
the wellhead, combines such gas with other supplies of gas, and markets the
aggregated gas to consumers. Second, the Company gathers, transports and/or
processes gas for producers or other third parties who retain title to the gas.
Third, the Company processes gas and markets NGLs. Fourth, the Company provides
gas marketing and supply services, including certain storage services, to
various natural gas resellers and end users either on or connected to the
Company's pipeline systems or on other pipeline facilities. The Company works
with producers and end users on the pipeline systems to provide a wide range of
services. It arranges the purchase and transportation of producers' excess or
uncommitted gas to end users, acts as shipper or agent for the end users,
administers nominations and provides balancing assistance when needed. Services
provided by the Company within the traditional gathering, processing, storage,
transporting, marketing and supply activities have expanded due to increased
demand for gas and the result of FERC Order No. 636 ("Order 636"). Some of
these services include variable pricing and variable or firm receipt/delivery of
gas. Additionally, storage services and transportation balancing arrangements
are being provided to assist markets in meeting peak demand needs and maximizing
their use of capacity on interstate pipelines.
The Company engages in price risk management activities in the energy
financial instruments market to hedge its price and basis risk exposure in
this business segment. The Company buys and sells gas and crude oil futures
positions on the New York Mercantile Exchange and Kansas City Board of Trade
and uses over-the-counter energy swaps and options for the purpose of reducing
adverse price exposure for gas supply costs or specific market margins. (See
Price Risk Management on page 7.)
Natural Gas Sales. In 1996, this business segment sold natural gas to
more than 4,000 customers in more than 20 states. These customers included
local distribution companies, industrial, commercial and
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agricultural end users, electric utilities, Company affiliates and other
marketers located both on and off this segment's pipeline systems.
The Company's gathering, processing and transportation assets primarily in
West Texas and the Texas Panhandle (the "West Texas system") consist of over
6,900 miles of gathering, transmission and storage pipelines, six gas processing
plants and two storage facilities. These assets are owned or operated primarily
by three intrastate pipelines (Westar Transmission Company, AOG Gas Transmission
Company, L.P. and Red River Pipeline, L.P.), a gathering company (American
Gathering, L.P.), and a storage company (American Gas Storage, L.P.). The West
Texas system has significant markets connected directly to its pipelines
("on-system markets"), including the largest local distribution company in West
Texas and the Texas Panhandle (Energas Company, a division of Atmos Energy
Corporation), and direct-sale customers such as electric utilities, industrial
companies and agricultural end users.
Within this business segment, the Company utilizes its high pressure
transmission facilities to transport gas for third parties at negotiated fees.
The West Texas system and the Company's 1,300 mile Wattenberg system,
located in the Denver-Julesburg Basin in northeastern Colorado, offer both
gathering and transportation services.
Gas Gathering. As of December 31, 1996, the Company's subsidiaries in
this business segment operated gathering systems in Colorado, Kansas,
Nebraska, New Mexico, Texas and Wyoming with more than 5,000 miles of
gathering lines.
In September 1996, Wildhorse purchased gathering and processing assets of
Williams Field Services in western Colorado and eastern Utah. Acquisition of
these assets gives Wildhorse access to existing TBI production and to
approximately 240,000 acres of undeveloped leasehold in the Piceance Basin, and
will also provide gathering to undeveloped third-party acreage throughout the
Piceance and Uinta basins. The assets acquired include approximately 955 miles
of natural gas gathering lines, two processing plants, a carbon dioxide
treatment plant and a dew point control plant. These facilities process and
treat more than 55 MMcf of natural gas per day from more than 700 wells.
Field Services. In January 1996, the Company formed a wholly owned
subsidiary, K N Field Services, Inc. ("KNFS"), to provide field operations
services to gas and oil industry customers who own production, gathering, plant
and transportation assets. To the extent possible, KNFS uses the existing
infrastructure and labor force employed in the Company's own systems to serve
its clients. Services KNFS can provide include well tending, site services,
corrosion monitoring, compression operations and maintenance, safety training,
gathering and pipeline operations and maintenance, measurement, pressure and
flow monitoring, water hauling and line locating.
In August 1996, KNFS purchased Compressor Pump and Engine, Inc. ("CPE")
located in Casper, Wyoming. CPE specializes in compressor maintenance, parts
and overhauls, giving KNFS a foundation for expanding its services in the
compression industry and to provide additional KNFS products to CPE customers.
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In December 1994, the FERC approved the Company's application to transfer
the Bowdoin gathering system from its wholly owned interstate pipeline
subsidiary to a nonregulated gathering subsidiary. The transfer occurred in
early 1995.
Processing and NGLs Marketing. In 1996, this segment operated 16 natural
gas processing plants located in Colorado, Kansas, Nebraska, Texas and Wyoming.
The average combined inlet volume of all these plants for 1996 was approximately
418,000 MMBtus per day. In the same period, the total liquids produced,
including condensate, averaged approximately 22,000 Bbls per day. NGLs from the
gas processing plants are sold by the Company on a contractual basis to various
NGLs pipelines, end-users and marketers at index prices. Gas purchases shown in
the financial statements include fuel and shrink expenses incurred at these
plants.
On December 13, 1996, K N signed a letter of intent to purchase several
Enron Corp. subsidiaries that own the Bushton natural gas processing facility
located in Ellsworth County, Kansas, and other Hugoton Basin gathering assets
located primarily in Kansas. The Bushton facility processes approximately 825
MMcf of natural gas and produces approximately 1.2 million gallons of NGLs and
approximately 1.7 MMcf of crude helium per day. The gathering assets gather
approximately 475 MMcf per day of natural gas through approximately 2,200 miles
of pipeline.
The closing of the transaction is subject to execution of acceptable
definitive agreements and receipt of appropriate regulatory approvals.
Storage. American Gas Storage, L.P. owns a storage facility located in
Gaines County, Texas, which was expanded to have a working storage capacity of
16.5 Bcf of natural gas in 1996. This facility had traditionally been used to
meet peak day requirements of the West Texas system. In 1994, the Company began
marketing storage services to third parties. Currently, the facility has a
take-away peak day natural gas withdrawal capacity of 550 MMcf per day.
This segment's lease rights in the Stratton Ridge facility located in
Brazoria County, Texas, included a peak day natural gas withdrawal capacity of
100 MMcf per day in 1996. Approximately 6.5 Bcf of natural gas was cycled
through storage for this segment at the Stratton Ridge facility in 1996.
Effective June 1, 1995, after receiving FERC approval, the Company
transferred three storage fields and approximately 45 Bcf of recoverable cushion
gas held by its interstate pipeline system to a newly created affiliate which is
allowed to sell gas at market-based rates. Approximately 10.8 Bcf of cushion
gas was produced from these fields during 1996.
Gas Purchases and Supply. Natural gas is purchased by this segment from
various sources, including gas producers, gas processing plants and pipeline
interconnections. Because of prevailing industry conditions, most gas purchase
agreements are for periods of one year or less, and many are for periods of 60
days or less. Various agreements permit the purchaser or the supplier to
renegotiate the purchase price or discontinue the purchase under certain
circumstances.
Purchase volume obligations under many of the agreements utilized by this
business segment are generally "best efforts" and do not have traditional
take-or-pay provisions. However, certain agreements utilized within this
business segment require the Company to prepay for, or to receive, minimum
quantities
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of natural gas. At December 31, 1996, the amount of gas prepayments
outstanding for this business segment (which does not include payments made
under the Basket Agreement discussed below) was $1.3 million, an amount fully
recoupable under the terms of the gas purchase contracts. The Company does,
however, have exposure with regard to such claims under gas purchase contracts
assumed in its acquisition of Westar Transmission Company in 1989 from Cabot
Corporation ("Cabot"), which claims are covered by an agreement with Cabot (the
"Basket Agreement"). Under the Basket Agreement, Cabot and the Company equally
share liability up to a certain amount, after which Cabot bears all such
liabilities. The Company's maximum exposure under this arrangement is $20
million. The Company's estimated liability under the Basket Agreement is
approximately $5.6 million, which was recorded in connection with the
acquisition of the natural gas pipeline business from Cabot, and as such will
not have a material adverse effect on the Company's financial position or
results of operation. (See "Item 3: Legal Proceedings.")
Price Risk Management. The Company uses energy financial instruments to
minimize its risk of price changes in the spot and fixed price natural gas and
NGLs markets. Energy risk management products include commodity futures and
options contracts, fixed price swaps and basis swaps. Pursuant to its Board of
Directors' approved guidelines, the Company is to engage in these activities
only as a hedging mechanism against pre-existing or anticipated physical gas and
condensate sales, gas purchases, system use, and storage in order to protect
profit margins, and is prohibited from engaging in speculative trading. The
activities of the risk management group are monitored by the Company's Risk
Management Committee which is charged with the review and enforcement of the
Board of Directors' risk management guidelines. All energy futures, swaps and
options are recorded at fair value. Gains and losses on hedging positions are
deferred and recognized as gas purchases expenses in the periods the underlying
physical transactions occur. All 1996 and 1995 transactions were recorded as
hedges.
Power Marketing. The Company has filed for and received from the FERC
certification as a Power Marketer. This is a first step in the process of
marketing electricity to wholesale electric customers as well as developing
opportunities for providing power to current wholesale and local distribution
company customers. To gain advantage in an increasingly competitive natural gas
and NGLs market, the Company has developed partnerships for specific products
and services that include electricity. The Company has initially targeted
utilities and municipalities for these power opportunities as part of a
comprehensive energy package, primarily in geographic areas the Company
currently serves.
Acquisitions. Effective February 1, 1995, the Company acquired, for $79
million, two West Texas intrastate pipeline systems, gas storage assets in the
Houston area, and a joint-venture interest in a third West Texas intrastate
pipeline, including certain strategic gas supply contracts and markets which
complement and enhance the Company's West Texas assets. The acquired storage
assets and lease rights near Houston, Texas increased the Company's storage
working gas capacity by 6.0 Bcf.
In October 1995, the Company acquired a 32 MMbtu per day cryogenic NGLs
processing plant and approximately 900 miles of gathering pipeline in the
Texas Panhandle.
Competition. The changes in the natural gas industry have provided this
business segment with expanded marketing and transportation opportunities
outside of its traditional on-system market base. This business segment
competes in these markets with other pipeline companies, marketers and brokers
of
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varying size, resources and experience as well as with producers who are
able to market gas directly to wholesale and end-use markets.
Factors influencing the competitive environment include: (i) regulatory
changes that provide greater access to interstate markets by gas producers and
marketers, (ii) the ability of certain markets to switch to alternative fuels at
favorable prices, and (iii) increased gas storage capacity in the United States.
Principal competitive considerations affecting this business segment's ability
to acquire and market natural gas include price, quality, reliability and types
of services offered, security of supply and physical proximity of pipelines to
customers.
(2) Interstate Transportation and Storage Services
Overview. The Company's interstate pipeline system provides
transportation and storage services to affiliates, third-party natural gas
distribution utilities and shippers. As of December 31, 1996, the Company's
interstate pipeline system provided transportation and storage services
directly to utilities serving 289 communities, as follows:
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Served By Colorado Kansas Nebraska Wyoming
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Affiliated Entities 12 48 178 9
Other Utilities 5 10 27 -
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As of December 31, 1996, the Company's interstate pipeline properties
included over 6,000 miles of transmission and storage lines, a storage field and
one products extraction plant.
The Company's interstate pipeline operation is regulated by the FERC, which
typically bases allowable returns on capital invested. However, the Company was
the first pipeline to gain FERC approval for market-based rates when it did so
in 1996 on its Buffalo Wallow pipeline in Texas.
Transportation. This business segment provides not only firm and
interruptible transportation, but also no-notice services to its customers.
Under no-notice service, customers are able to meet their peak day
requirements without making specific nominations as required by firm and
interruptible transportation service tariffs. The local distribution
companies and other shippers may release their unused firm transportation
capacity rights to other shippers. It is the Company's experience that this
released capacity has, to a large extent, replaced interruptible
transportation on the Company's interstate pipeline system. Interruptible
transportation is billed on the basis of volumes shipped.
In 1996, K N purchased a crude oil pipeline which runs from Lost Cabin,
Wyoming in central Wyoming, to Freeman, Missouri near Kansas City, for
conversion to natural gas service. The Company re-named the pipeline the Pony
Express Pipeline and undertook efforts to prepare the line for transporting
natural gas during 1996. Pony Express provides access to more than 6 trillion
cubic feet of natural gas reserves. On November 26, 1996, the Company took
assignment of two 20-year contracts to provide firm transportation capacity of
230 MMcf of natural gas per day to the Kansas City metropolitan area. The
Company also announced construction of 36 miles of lateral facilities to serve
these customers, which will interconnect with Pony Express and a third-party
pipeline. The new contracts mean that the firm capacity of Pony Express is
fully subscribed at 255 MMBtus per day. The Company is completing the
certificate process with the FERC and anticipates receiving authorization for
operations which are anticipated to begin in the second quarter of 1997.
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In January 1996, the FERC granted the Company the authority to expand its
pipeline system in Wyoming. This project is designed to increase the capacity of
the Company's system to move gas from Wyoming to markets in the midwestern
United States by nearly 35 MMBtus per day. These facilities went into full
service in November 1996.
Storage. The Company's interstate pipeline system provides storage
services to its customers through its Huntsman Storage Field in Cheyenne County,
Nebraska. The facility had a peak natural gas withdrawal capacity of 101 MMcf
per day in 1996, and approximately 6.6 Bcf of natural gas was cycled through
storage for all parties during the year.
Effective June 1, 1995, after receiving FERC approval, the Company
transferred three storage fields and approximately 45 Bcf of recoverable
cushion gas held by its interstate pipeline system to a newly created
affiliate which is allowed to sell gas at market-based rates.
Transportation Marketing. The Company is a one-third joint-venture
partner in the TransColorado Gas Transmission Pipeline Co. ("TransColorado").
TransColorado's pipeline is expected to provide increased flexibility in
accessing multiple natural gas basins in the Rocky Mountain region. Economics
and levels of drilling activity should improve for Rocky Mountain gas producers
who will gain new access to markets.
In December 1996, the southernmost 25 miles of the pipeline were built
and connected with gathering systems in southern Colorado. When fully
completed, the TransColorado pipeline will cover 290 miles, from the Piceance
Basin of Colorado to Blanco, New Mexico, with an initial capacity of 300,000
MMBtus per day, expandable to 600,000 MMBtus. The TransColorado pipeline will
operate as an interstate pipeline system regulated by the FERC.
In late September 1996, the FERC issued an order approving an extension of
the original certificate that will allow the Company until September 1998 to
build the north end of the TransColorado project. The FERC issued an order
approving the first phase of the pipeline in September 1996.
Competition. The interstate transportation pipeline and storage services
business segment faces competition from other transporters. In addition,
natural gas competes as an energy source with fuel oil, coal, propane and
electricity in the areas served by the Company's interstate pipeline system.
(3) Retail Natural Gas Services
Overview. This business segment provides retail natural gas services to
residential, commercial, agricultural and industrial customers for space
heating, crop irrigation and drying, and processing of agricultural products.
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Revenues from this business segment are derived primarily from regulated
natural gas sales and transportation services.
The Company's retail natural gas business served over 230,000 customers and
approximately 300 communities in Colorado, Kansas, Nebraska and Wyoming through
8,600 miles of distribution pipelines as of December 31, 1996. In 1995, the
Company opened a 24-hour Customer Service Center in Scottsbluff, Nebraska,
centralizing customer service calls, service start-up and billing calls, service
dispatch and remittance operations for the four-state region.
In addition, this business segment operated 1,500 miles of intrastate
natural gas transmission, gathering and storage facilities as of December 31,
1996. These intrastate pipeline systems serve industrial customers and much
of the Company's retail natural gas business in Colorado and Wyoming.
The Company's underground storage facilities are used to provide natural
gas for load balancing and peak system demand. Working gas owned by this
business segment is stored in one facility owned and operated by the Company's
interstate pipeline system, five facilities in Wyoming owned and operated by
this business segment and one facility in Colorado owned and operated by
Wildhorse. The peak day natural gas withdrawal capacity available for this
segment in 1996 was 108 MMcf per day. This segment cycled approximately 7.5 Bcf
of natural gas through storage in 1996.
The Company's retail operations in Kansas, Nebraska, Wyoming and northeast
Colorado serve areas that are primarily rural and agriculturally based. In much
of Kansas and Nebraska, the winter heating load is balanced by irrigation
requirements in summer months and grain drying in the fall. The economy in the
western Colorado service territory continues to grow as a result of growth in
mountain resort communities and development of retirement communities.
Unregulated Retail Services. In September 1996, the Company, through its
subsidiary K N Services, Inc. ("KNS") began marketing its Simple Choice(sm)
package of products and services. Under Simple Choice(sm), customers can order
satellite TV, guaranteed stable natural gas bills, appliance protection,
long-distance telephone service, wireless Internet access and other products and
services with one call, paid for with one monthly payment, and backed by one
service guarantee. Simple Choice(sm) was launched in Scottsbluff, Nebraska,
where the Company also opened its first Simple Choice(sm) General Store. Also
in 1996, the Company opened additional Simple Choice(sm) stores in Kearney,
Nebraska; Laramie and Casper, Wyoming; and Montrose, Colorado. The Company
plans to open 15 more stores in early 1997 and is engaged in efforts to create
Simple Choice(sm) partnerships and licensing agreements with other utilities.
On January 23, 1997, K N and PacifiCorp jointly formed en*able, LLC to
market the Simple Choice(sm) brand to other utilities, as well as to
Pacificorp's 1.4 million customers.
An integral part of the Simple Choice(sm) package is outsourced billing and
customer service for third-party utilities. To enhance this capability, early
in 1997 KNS and PacifiCorp's subsidiary, PacificCorp Holdings, Inc. acquired
Orcom Systems, Inc., the software development company that designed the billing
system which supports the Simple Choice(sm) brand of products and services.
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Gas Purchases and Supply. This business segment relies on the Company's
interstate pipeline system, the intrastate pipeline systems it operates, and
third-party pipelines for transportation and storage services required to serve
its markets. Its gas supply requirements are being met through a combination of
purchases from wholly owned marketing subsidiaries and third-party suppliers.
The gas supply for the retail natural gas business segment comes primarily
from basins in Kansas, Montana, Wyoming, Colorado and western Nebraska which
include under-developed basins that represent significant proved reserves. The
Company's gas supplies are strategically located with respect to existing and
planned pipeline capacity, giving the Company access to gas for its retail
customer base.
Certain gas purchase contracts contain take-or-pay clauses which require
that a certain purchase level be attained each contract year, or the Company
must make a payment equal to the contract price multiplied by the deficient
volume. At December 31, 1996, the amount of gas prepayments outstanding
under take-or-pay provisions for this business segment was $10.8 million. All
such payments are fully recoupable under the terms of the gas purchase contracts
and the existing regulatory rules. To date, no buy-out or buy-down payments
relating to take-or-pay contracts have been made by this business segment.
Competition. Natural gas competes with fuel oil, coal, propane and
electricity as an energy source in the areas served by the Company's retail
natural gas business. Such competition is expected to increase as a result of
implementation of Order 636 and state retail unbundling initiatives.
Unbundling Retail Gas Services. Continuing regulatory change will provide
energy consumers with increasing choices among their suppliers. The Company
emerged as a leader in providing for customer choice by filing an application
with the Wyoming Public Service Commission in September 1995 to allow 10,500
residential and commercial customers to choose their energy provider from a
qualified list of suppliers. The proposal provided that the Company would
continue to provide all other utility services. On February 16, 1996, the
Wyoming Public Service Commission issued an order allowing the Company to bring
competition to these 10,500 residential and commercial customers beginning in
June 1996. Choosing from a menu of three competing suppliers, approximately 80%
of the Company's customers chose to remain with the Company. The experience
gave the Company early and valuable experience in competing in an unbundled
environment and led to the development of new products and services that add
value to the natural gas commodity. The innovative program was one of the first
in the nation that allowed essentially all customers the opportunity to exercise
energy choice for natural gas.
(4) General
(a) Federal and State Regulation
Gathering, Processing and Marketing Services. Under the Natural Gas Act,
facilities used for and operations involving the production and gathering of
natural gas are exempt from the FERC's jurisdiction, while facilities used for
and operations involving interstate transmission are not exempt. However, the
FERC's determination of what constitutes exempt gathering facilities as opposed
to jurisdictional transmission facilities has evolved over time. Under current
law, facilities which otherwise are classified as gathering may be subject to
ancillary FERC rate and service jurisdiction when owned by an interstate
pipeline company and used in connection with interstate transportation or
jurisdictional sales.
11
<PAGE> 12
The FERC has historically distinguished between facilities owned by
noninterstate pipeline companies, such as the Company's gathering facilities,
on a fact-specific basis.
The Kansas Corporation Commission, New Mexico Public Service Commission,
Texas Railroad Commission and Wyoming Public Service Commission, as well as
state legislative bodies, have all expressed interest from time to time in
asserting jurisdiction over gathering activities, and the Company is closely
monitoring developments in this area.
As part of its corporate reorganization, the Company requested, was granted
authority and in 1994 transferred substantially all of its gathering facilities
to a wholly owned subsidiary. The FERC determined that after the transfer, the
gathering facilities would be nonjurisdictional, but the FERC reserved the right
to reassert jurisdiction if the Company was found to be operating the facilities
in an anti-competitive manner or contrary to open access principles.
Because certain volumes of gas in interstate commerce are transported by
the Company for third parties and by third parties on behalf of the Company,
the operations of the Company's intrastate pipeline and marketing subsidiaries
in Texas are affected by FERC rules and regulations issued pursuant to the
Natural Gas Act and the Natural Gas Policy Act of 1978. Of particular
importance are regulations which allow increased access to interstate
transportation services by both interstate and intrastate pipeline and
marketing companies, without the necessity of obtaining prior FERC
authorization for each transaction. The most important element of the program
is nondiscriminatory access, under which a participating pipeline must agree,
if capacity is available, to transport gas for any party requesting such
service.
The interstate gas marketing activities of the Company's various
marketing and pipeline subsidiaries are conducted either as unregulated first
sales or pursuant to blanket certificate authority granted by the FERC under
the Natural Gas Act.
The Colorado Public Utilities Commission, Kansas Corporation Commission,
Texas Railroad Commission and the Wyoming Public Service Commission have
authority to regulate the intrastate transportation, sale, delivery and
pricing of natural gas by intrastate pipeline and distribution systems.
Interstate Transportation and Storage Services. Facilities for the
transportation of natural gas in interstate commerce and for storage services
in interstate commerce are subject to regulation by the FERC under the Natural
Gas Act and the Natural Gas Policy Act of 1978. The Company is also subject
to the requirements of FERC Order Nos. 497, et seq., the Marketing Affiliate
Rules, which prohibit preferential treatment by an interstate pipeline of its
marketing affiliates and also govern the provision of information by an
interstate pipeline to its marketing affiliates. In 1996, the FERC agreed
that the Company lacked market power on the Buffalo Wallow system and approved
the use of market-based rates for firm transportation service, the first such
determination granted by the FERC.
Retail Natural Gas Services. The Company's intrastate pipelines,
distribution facilities and retail sales in Colorado, Kansas and Wyoming are
under the regulatory authority of each state's utility commission. The Wyoming
and Colorado commissions also have authority to review the Company's issuance of
securities under some circumstances. In Nebraska, retail gas sales rates for
residential and small commercial customers within a municipality are regulated
by each municipality served.
12
<PAGE> 13
In the incorporated communities in which the Company sells natural gas at
retail, the Company operates under franchises granted by the applicable
municipal authorities. Franchises in Colorado must also be approved by the
state regulatory commission. The duration of franchises varies with
applicable law. In unincorporated areas, the Company's direct sales of
natural gas are not subject to franchise, but, in all states except Nebraska,
are "certificated" by the state regulatory commissions.
(b) Environmental Regulation
The Company's operations and properties are subject to extensive and
evolving Federal, state and local laws and regulations governing the release
or discharge of regulated materials into the environment or otherwise relating
to environmental protection. Numerous governmental departments issue rules
and regulations to implement and enforce such laws which are often difficult
and costly to comply with and which carry substantial penalties for failure to
comply. Moreover, the recent trends toward stricter standards in
environmental legislation and regulation are likely to continue.
The United States Oil Pollution Act of 1990 and regulations promulgated
thereunder by the Minerals Management Service impose a variety of requirements
on persons who are or may be responsible for oil spills in waters of the
United States. The term "waters of the United States" has been broadly defined
to include inland waterbodies, such as wetlands, playa lakes and intermittent
streams. The Company has a limited number of facilities that could affect
"waters of the United States." The Federal Water Pollution Control Act, also
known as the Clean Water Act, and regulations promulgated thereunder, require
containment of potential discharges of oil or hazardous substances and
preparation of oil spill contingency plans. The Company has implemented
programs that address containment of potential discharges and spill
contingency planning. The failure to comply with ongoing environmental
regulatory requirements or inadequate cooperation during a spill event may
subject a responsible party to civil or criminal enforcement actions.
The Comprehensive Environmental Response, Compensation and Liability Act,
as amended ("Superfund"), imposes liability on certain classes of persons who
are considered to have contributed to the release of a "hazardous substance"
into the environment without regard to fault or the legality of the original
conduct. Under Superfund, such persons may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural resources.
Furthermore, neighboring landowners and other third parties have the right to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment.
Federal and state regulations implementing the 1990 Amendments to the Clean
Air Act affect the Company's operations in several ways. Natural gas
compressors for both gathering and transmission activity are now required to
meet stricter air emission standards. Additionally, states in which the Company
operates are adopting regulations under the authority of the "Operating Permit
Program" under Title V of these 1990 Amendments. This Operating Permit Program
requires operators of certain facilities to obtain individual site-specific air
permits containing stricter operational and technological standards of operation
in order to achieve compliance with this section of the 1990 Clean Air Act
Amendments and associated state air regulations.
The Toxic Substances Control Act, as amended ("TSCA"), imposes certain
operational and technical standards on persons who manufacture, process,
distribute, use or dispose of TSCA-regulated
13
<PAGE> 14
substances, including such things as polychlorinated biphenyls ("PCBs"),
asbestos, and lead-based paints. The Company has facilities which contain such
TSCA-regulated substances.
Compliance with Federal, state and local laws and regulations with
respect to the protection of the environment has had no material effect upon
capital expenditures, earnings, or the competitive position of the Company,
except as described in Item 3, "Mystery Bridge Road Environmental Matters" and
"Other Environmental Matters."
(c) Safety Regulation
The operations of certain of the Company's gas pipelines are subject to
regulation by the United States Department of Transportation (the "DOT") under
the Natural Gas Pipeline Safety Act of 1968, as amended (the "NGPSA"). The
NGPSA establishes safety standards with respect to the design, installation,
testing, construction, operation and management of natural gas pipelines, and
requires entities that own or operate pipeline facilities to comply with the
applicable safety standards, to establish and maintain inspection and
maintenance plans, and to comply with such plans.
The NGPSA was amended by the Pipeline Safety Act of 1992 to require the
DOT's Office of Pipeline Safety to consider, among other things, protection
of the environment when developing minimum pipeline safety regulations.
Management believes the Company's operations, to the extent they may be
subject to the NGPSA, comply in all material respects with the NGPSA.
The Company is also subject to state and federal laws and regulations
concerning occupational health and safety.
(d) Other
Amounts spent by the Company during 1996, 1995 and 1994 on research and
development activities were not material.
(D) Financial Information About Foreign and Domestic Operations and Export
Sales
All of the Company's operations are in the contiguous 48 states.
ITEM 3: LEGAL PROCEEDINGS
Mystery Bridge Road Environmental Matters
The Company was named as one of four potentially responsible parties
("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site known
as the Mystery Bridge Road/U.S. Highway 20 site located near Casper, Wyoming
(the "Brookhurst Subdivision") in 1989. A majority of the Company's
groundwater, soil and free phase petroleum cleanup occurred between 1990 and
1996. The total remaining estimated cost is not expected to exceed $150,000.
(United States of America v. Dow Chemical Company, Dowell Schlumberger, Inc.,
and K N Energy, Inc., Civil Action No. 91CV1042, United States District Court
for the District of Wyoming; formerly reported as Administrative Orders for
Removal Action on Consent, October 15, 1987, and Amendment to Administrative
Order for Removal Order on Consent, October 10, 1989, Docket No. CERCLA
VII-88-01, United States Environmental
14
<PAGE> 15
Protection Agency; Judicial Entry of Consent Decree, United States v. Dow
Chemical Company, et al. (D. Wyo) USDC-WY-91CV1042B, Superfund Site Number
8T83, Natrona County, Wyoming; EPA Docket Number CERCLA-VIII.)
Other Environmental Matters
In 1994, a mercury sampling program was initiated on the Company's
systems in central and western portions of Kansas. The Company is working with
the Kansas Department of Health and Environment pursuant to a five-year
assessment program; active remediation will begin in the summer of 1997. The
costs are not expected to have any material adverse impact on the Company's
financial position or results of operations. The cleanup program is not
expected to interrupt or diminish the Company's operational ability to gather
or transport natural gas.
The Company performed environmental audits in Colorado, Kansas and
Nebraska which revealed that certain grease and lubricating oils used at
various pipeline and facilities locations contained polychlorinated biphenyls
("PCBs"). The Company is working with the appropriate regulatory agencies to
manage the cleanup and remediation of the pipelines and facilities.
The Company filed suit against Rockwell International Corporation
("Rockwell"), manufacturer of the PCB-containing grease used in certain of the
Company's pipelines and facilities, and two other related defendants for
expenses and losses incurred by the Company for cleanup or mitigation. The
Company settled with Rockwell in March 1994. (K N Energy, Inc. and Rocky
Mountain Natural Gas Company v. Rockwell International Corp. et al., United
States District Court for the District of Colorado, Case No. 93-711.)
At PCB sites with approved workplans, the Company estimates that the
future cost of remediation, which will occur over a period of years, will be
approximately $1.3 million, a substantial portion of which is recoverable
under the Rockwell settlement. Approximately $1.4 million for PCB remediation
has been expended as of December 31, 1996. The total potential remediation
and cleanup costs at currently identified locations is not expected to have
any material adverse impact on the Company's financial position or results of
operations. The cleanup programs are not expected to interrupt or diminish
the Company's operational ability to gather or transport natural gas.
Pursuant to certain acquisition agreements in 1989 and 1992, The Maple
Gas Corporation and Cabot Corporation ("Cabot"), the Company's largest
stockholder, indemnified the Company for certain environmental liabilities.
Issues have arisen concerning Cabot's indemnification obligations; however, in
conjunction with the AOG merger, the Company and Cabot entered into a
standstill agreement pertaining to these and other matters, which will expire
on March 31, 1997. The Company believes it will be able to reach agreement
with Cabot, and is unable to estimate its potential exposure for such
liabilities at this time, but does not expect them to have a material adverse
impact on the Company's financial position or results of operations.
The Company acquired a 32 MMbtu per day cryogenic NGLs processing plant
and approximately 900 miles of gathering pipeline located in the Texas
Panhandle from Parker & Parsley Gas Processing Co. and its affiliates in
October 1995. In connection with that acquisition, and for a reduction in the
purchase price which included the estimated costs of remediation of $3.9
million, the Company agreed to accept all responsibility and liability for
environmental matters associated with such properties. After consideration
15
<PAGE> 16
of reserves established, such costs are not expected to have a material adverse
impact on the Company's financial position or results of operations. The
cleanup program, which will occur over a number of years, is not expected to
interrupt or diminish the Company's operational ability to gather, process or
transport natural gas.
Grynberg v. K N, et al.
On October 9, 1992, Jack J. Grynberg filed suit in the United States
District Court for the District of Colorado against the Company, Rocky
Mountain Natural Gas Company and GASCO, Inc. (the "K N Entities") alleging
that the K N Entities as well as K N Production Company ("KNPC") and K N Gas
Gathering, Inc., have violated federal and state antitrust laws. In essence,
Grynberg asserts that the defendant 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 have illegally
attempted to monopolize or to enhance or maintain an existing monopoly.
Grynberg also asserts certain causes of action relating to a gas purchase
contract. The Company's potential liability for monetary damages and the
amount of such damages, if any, are subject to dispute between the parties;
however, the Company believes it has a meritorious position in these matters
and does not expect this lawsuit to have a material adverse effect on the
Company's financial position or results of operations. In July 1996, the
U. S. District Court, District of Colorado lifted its stay of this proceeding,
and discovery is ongoing. This case is still pending, but no
trial date has yet been set. (Grynberg v. K N, et al., Civil Action No.
92-2000, United States District Court for the District of Colorado.)
Grynberg v. Alaska Pipeline Company, et al.
On July 26, 1996 K N and Rocky Mountain Natural Gas Company ("RMNG")
along with over 70 other natural gas pipeline companies, were served by Jack
J. Grynberg, acting on behalf of the Government of the United States, with a
Civil False Claims Act lawsuit alleging mismeasurement of the heating content
and volume of natural gas resulting in underpayment of royalties to the
federal government. The government, particularly officials from the
Departments of Justice and Interior, reviewed the complaint and the evidence
presented by Mr. Grynberg and declined to intervene in the action, allowing
Mr. Grynberg to proceed on his own. No specific claims have been made against
K N or RMNG, and no specific monetary damages have been claimed. No trial
date has been set. The Company believes it has a meritorious position in this
matter, and does not expect this lawsuit to have a material adverse effect on
the Company's financial position or results of operations. (United States of
America ex rel. Jack J. Grynberg v. Alaska Pipeline Company, et al., Civil
Action No. 95-725-TF#, United States District Court for the District of
Columbia.)
Take-or-Pay Matters
Certain of the companies acquired from Cabot when the Company acquired
the Westar System were parties to a number of lawsuits or were subject to
asserted claims by natural gas purchase contracts containing take-or-pay
provisions, which require the purchaser either to take a minimum amount of gas
or to pay for such minimum quantities. All of these lawsuits and most claims
have been resolved under terms which the Company considers favorable. Most gas
suppliers of the Company have entered into excess gas purchase contracts with
one of the Company's gas marketing subsidiaries. These excess gas purchases
contracts are generally credited against take-or-pay gas volumes, which
minimizes take-or-pay exposure.
16
<PAGE> 17
The Basket Agreement between the Company and Cabot provides for an equal
sharing of up to $40 million (any excess will be borne solely by Cabot)
between the Company and Cabot of certain gas contract take-or-pay liabilities
of the companies acquired from Cabot for periods prior to the closing date of
the acquisition from Cabot and for certain other potential gas contract
claims. (See "Items 1 and 2: Business and Properties"). The Company's
maximum exposure under this arrangement is $20 million. The Company's
estimated liability under the Basket Agreement is approximately $5.6 million,
which was recorded in connection with the acquisition of the natural gas
pipeline business from Cabot and, as such, the ultimate settlement of such
liability will not have a material adverse effect on the Company's financial
position or results of operation. As of December 31, 1996, the Company had
made net payments of approximately $10.9 million.
The Company is also involved in various disputes and litigation arising
in the normal course of business including take-or-pay exposure not covered by
the matters discussed above, including the Westerman litigation described in
this Item 3. The Company believes that it has adequate defenses or insurance
coverage relating to such litigation and that the outcome of these
proceedings, individually and in the aggregate, will not have a material
adverse effect on the Company's financial position or results of operations.
The Company believes it has meritorious defenses to all lawsuits and
legal proceedings in which it is a defendant and will vigorously defend
against them. Based on its evaluation of the above matters, and after
consideration of reserves established, the Company believes that the
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 18
EXECUTIVE OFFICERS OF THE REGISTRANT
(A) Identification and Business Experience of Executive Officers
Name Age Position and Business Experience
- -------------------------- --- ------------------------------------------------
Morton C. Aaronson........ 38 Chief Marketing Officer since April 1996. Vice
President since January 1996. Vice President,
MCI/ NewsCorp. Business Development from May
1995 to January 1996. Vice President, Market
Management, MCI Communications Corporation from
August 1994 to May 1995. Vice President, Large
Accounts and Global Markets, MCI Communications
Corporation, from July 1993 to August 1994.
Director, Major Accounts Marketing, MCI
Communications Corporation from July 1992 to
July 1993. Director, Sales - New York Metro
Region, MCI Communications Corporation from
December 1990 to July 1992.
John N. DiNardo .......... 49 Vice President and General Manager since April
1996. Vice President - Gas Gathering and
Processing from March 1994 to April 1996.
General Manager, K N Gas Gathering, Inc. and K N
Front Range Gathering Company from May 1993 to
March 1994. Director of Project Development,
K N Gas Gathering, Inc. from August 1991 to May
1993. Consultant to K N Gas Gathering, Inc. from
1989 to August 1991.
Bradley P. Farnsworth ..... 43 Vice President and Controller since August 1995.
Director, Gas Transaction Services, Coastal Gas
Marketing Company from July 1988 to August 1995.
William S. Garner, Jr...... 47 Vice President and General Counsel since April
1996. Vice President, General Counsel and
Secretary from April 1992 to April 1996. Vice
President and General Counsel from January 1991
to April 1992.
Larry D. Hall.............. 54 Chairman of the Board since April 1996.
President and Chief Executive Officer since July
1994. President and Chief Operating Officer
from May 1988 to July 1994. Director since 1984.
S. Wesley Haun............. 49 Vice President since April 1996. Vice
President, Marketing and Supply from May 1993
to April 1996. Vice President, Gas Supply from
March 1990 to May 1993.
E. Wayne Lundhagen......... 59 Vice President and Treasurer since March 1995.
Vice President, Finance and Accounting from May
1988 to March 1995.
Clyde E. McKenzie.......... 49 Vice President and Chief Financial Officer since
April 1996. Vice President and Treasurer, Apache
Corporation from 1988 to 1996.
18
<PAGE> 19
Murray R. Smith............ 42 Vice President-Corporate Communications since
August 1996. Senior Vice President, K N
Services, Inc. from April to August 1996.
Director of Field Communicates, Training and
Sales Programs, MCI Communications Corporation
from October 1995 to April 1996. Director of
Field Marketing and Communication, WorldWide
Sales, MCI Communications Corporation from
October 1994 to October 1995. Director of Field
Marketing - Business Services, MCI
Communications Corporation from June 1992 to
October 1994. Director of Marketing, Southern
Division, MCI Communications Corporation from
November 1990 to June 1992.
H. Rickey Wells .......... 40 Vice President - Business Operations since April
1996. Vice President, Operations from June 1988
to April 1996.
Martha B. Wyrsch.......... 39 Vice President, Deputy General Counsel and
Secretary since April 1996. Deputy General
Counsel from November 1995 to April 1996.
Assistant General Counsel from June 1995 to
November 1995. Senior Counsel from June 1993 to
June 1995. Senior Attorney from June 1991 to
June 1993.
These officers generally serve until April of each year.
(B) Involvement in Certain Legal Proceedings
None.
19
<PAGE> 20
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed for trading on the New York Stock
Exchange under the symbol KNE. On February 14, 1997, there were 10,031
holders of record of the Company's common stock. Dividends paid and the price
range of the Company's common stock by quarter for the last two years are
provided below.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Market Price Data
(Low-High-Close)
Quarter Ended:
March 31 $27.00 - $31.75 - $31.125 $20.25 - $24.75 - $24.00
June 30 $30.625 - $34.375 - $33.50 $23.75 - $27.00 - $25.375
September 30 $31.75 - $36.625 - $35.25 $23.875 - $28.75 - $27.25
December 31 $35.00 - $41.25 - $39.25 $25.25 - $30.25 - $29.125
Dividends
Quarter Ended:
March 31 $0.26 $0.25
June 30 $0.26 $0.25
September 30 $0.26 $0.25
December 31 $0.27 $0.26
Common Stockholders
Year-end 9,794 9,485
</TABLE>
20
<PAGE> 21
ITEM 6: SELECTED FINANCIAL DATA
FIVE-YEAR REVIEW
K N ENERGY, INC. AND SUBSIDIARIES
Selected Financial Data (In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
Gathering, Processing and
Marketing Services $1,193,984 $ 854,462 $ 838,474
Interstate Transportation and
Storage Services 25,352 22,217 21,044
Retail Natural Gas Services 223,838 227,282 220,431
Gas and Oil Production - 7,437 11,328
---------- ---------- ----------
Total Operating Revenues $1,443,174 $1,111,398 $1,091,277
========== ========== ==========
OPERATING INCOME $ 134,801 $ 115,362 $ 54,879
Other Income and (Deductions) (35,085) (33,790) (30,058)
---------- ---------- ----------
Income Before Income Taxes 99,716 81,572 24,821
Income Taxes 35,897 29,050 9,500
NET INCOME 63,819 52,522 15,321
Less - Preferred Stock Dividends 398 492 630
---------- ---------- ----------
EARNINGS AVAILABLE FOR
COMMON STOCK $ 63,421 $ 52,030 $ 14,691
========== ========== ==========
EARNINGS PER COMMON SHARE $ 2.14 $ 1.83 $ 0.52
========== ========== ==========
Dividends Per Common Share $ 1.05 $ 1.01 $ 0.76
========== =========== ==========
Number of Shares Used in
Computing Earnings Per
Common Share 29,624 28,360 28,044
========== ========== ==========
Total Assets $1,629,720 $1,257,457 $1,172,384
========== ========== ==========
Capital Expenditures $ 119,987 $ 79,313 $ 70,511
========== ========== ==========
Acquisitions $ 162,779 $ 35,897 $ 31,363
========== ========== ==========
CAPITALIZATION:
Common Stockholders' Equity $ 519,794 55% $ 426,760 57% $ 393,686 54%
Preferred Stock 7,000 1% 7,000 1% 7,000 1%
Preferred Stock Subject to
Mandatory Redemption - - 572 - 1,715 -
Long-Term Debt 423,676 44% 315,564 42% 334,644 45%
---------- ---- ---------- ---- ---------- ----
Total Capitalization $ 950,470 100% $ 749,896 100% $ 737,045 100%
========== ==== ========== ==== ========== ====
BOOK VALUE PER COMMON SHARE $ 17.16 $ 15.19 $ 14.25
========== ========== ==========
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
OPERATING REVENUES:
Gathering, Processing and
Marketing Services $ 730,895 $ 507,756
Interstate Transportation and
Storage Services 99,838 127,611
Retail Natural Gas Services 212,905 196,025
Gas and Oil Production 5,321 4,710
---------- ----------
Total Operating Revenues $1,048,959 $ 836,102
========== ==========
OPERATING INCOME $ 80,874 $ 83,961
Other Income and (Deductions) (31,406) (27,551)
---------- ----------
Income Before Income Taxes 49,468 56,410
Income Taxes 18,599 20,068
---------- ----------
NET INCOME 30,869 36,342
Less - Preferred Stock Dividends 853 2,976
---------- ----------
EARNINGS AVAILABLE FOR
COMMON STOCK $ 30,016 $ 33,366
========== ==========
EARNINGS PER COMMON SHARE $ 1.09 $ 1.34
========== ==========
Dividends Per Common Share $ 0.51 $ 0.51
========== ==========
Number of Shares Used in
Computing Earnings Per
Common Share 27,424 24,828
========== ==========
Total Assets $1,169,275 $1,007,411
========== ==========
Capital Expenditures $ 100,780 $ 74,787
========== ==========
Acquisitions $ 65,172 $ 110,833
========== ==========
CAPITALIZATION:
Common Stockholders' Equity $ 391,462 53% $ 347,738 51%
Preferred Stock 7,000 1% 26,310 4%
Preferred Stock Subject to
Mandatory Redemption 2,858 - 4,500 1%
Long-Term Debt 335,190 46% 303,224 44%
---------- ---- ---------- ----
Total Capitalization $ 736,510 100% $ 681,772 100%
========== ==== ========== ====
BOOK VALUE PER COMMON SHARE $ 14.39 $ 13.60
========== ==========
</TABLE>
21
<PAGE> 22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED EARNINGS
Net income, the applicable earnings per common share and return on average
common equity for the three years ended December 31, 1996 are set forth in the
following table. Net income for 1994 excludes the effect of a third quarter
pre-tax charge of $25.9 million for non-recurring costs related to the merger
with American Oil and Gas Corporation ("AOG") and for the restructuring of the
retail natural gas services segment. This charge reduced 1994 net income by
$19.3 million, or $0.69 per common share.
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net Income (In Millions) $63.8 $52.5 $34.7
Earnings per Common Share $2.14 $1.83 $1.21
Return on Average Common Equity 13.4% 12.7% 8.7%
</TABLE>
The 17 percent increase in 1996 earnings per share over 1995 was primarily
attributable to business growth on the interstate pipeline system and on
gathering and processing systems, higher prices for natural gas liquids
("NGLs"), expense savings due to the 1995 corporate restructuring, and sales of
storage gas. Operating results for 1996 were adversely impacted by low demand
for irrigation sales and transportation services due to abnormally heavy
rainfall during the summer.
The 51 percent increase in 1995 earnings over 1994 reflected benefits
realized from the 1994 merger with AOG, year-to-year business growth, improved
irrigation deliveries as a result of normal weather, higher NGLs prices, and
the annualized impact of 1994 rate increases.
RESULTS OF OPERATIONS
A discussion of comparative operating results by business segment
(excluding the $25.9 million 1994 non-recurring merger and restructuring
charges), consolidated other income and (deductions) and income taxes follows.
In January 1996, K N transferred its stock in its gas and oil subsidiary, K N
Production Company, to Tom Brown, Inc. ("TBI") in exchange for common and
convertible preferred stock of TBI. Accordingly, 1995 and 1994 operating
results for the gas and oil segment are excluded from the following discussion;
this segment reported an operating loss of $0.2 million in 1995 and operating
income of $2.9 million in 1994.
22
<PAGE> 23
Segment operating revenues, costs and expenses and volumetric data cited
herein are before intersegment eliminations; dollar amounts are in millions.
<TABLE>
<CAPTION>
GATHERING, PROCESSING AND MARKETING SERVICES 1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Operating Revenues -
Gas Sales $ 976.5 $706.3 $720.3
Natural Gas Liquids 189.9 126.1 114.4
Gathering, Transportation and Other 92.8 67.2 51.2
-------- ------ ------
1,259.2 899.6 885.9
-------- ------ ------
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 1,052.8 704.3 735.9
Operations and Maintenance 89.1 94.2 78.1
Depreciation and Amortization 31.7 26.5 27.0
Taxes, Other Than Income Taxes 11.1 10.0 7.2
-------- ------ ------
1,184.7 835.0 848.2
-------- ------ ------
Operating Income $ 74.5 $ 64.6 $ 37.7
======== ====== ======
Systems Throughput (Trillion Btus) -
Gas Sales 430.1 407.8 353.0
Transportation and Gathering 326.0 306.0 286.8
-------- ------ ------
756.1 713.8 639.8
======== ====== ======
Natural Gas Liquids Sales (Million Gallons) 469.8 388.1 375.0
======== ====== ======
</TABLE>
The 15 percent increase in 1996 operating income over 1995 largely
resulted from three factors - growth in volumes (principally due to
acquisitions, the Wildhorse joint venture with TBI, and sales of storage gas),
higher NGLs prices and expense savings accruing from the 1995 corporate
restructuring. This segment did experience compression of margins during 1996
in all three of its principal activities (gas sales, NGLs sales and
transportation and gathering services) due to competitive factors and
significantly higher gas costs influenced by colder nation-wide weather.
Average 1996 NGLs sales prices exceeded those realized in 1995 by approximately
$0.08 per gallon; however, the impact of higher NGLs prices was offset by the
effect of higher gas prices on shrink and fuel payments to producers under
"keep whole" processing agreements.
The expected 1995 benefits (cost reductions, improved operational
efficiencies and new business opportunities) of the 1994 AOG merger were
largely realized by this business segment, as 1995 operating income exceeded
1994 by $26.9 million. Additional factors contributing to the 1995 positive
results were incremental earnings from gathering and processing facilities and
transmission and storage assets acquired during 1995 and higher average NGLs
prices than realized in 1994.
23
<PAGE> 24
<TABLE>
<CAPTION>
INTERSTATE TRANSPORTATION AND STORAGE SERVICES 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Operating Revenues -
Transportation and Storage $ 63.4 $ 58.6 $ 56.7
Other 8.4 5.8 3.9
------ ------ ------
71.8 64.4 60.6
------ ------ ------
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 7.3 7.7 1.3
Operations and Maintenance 24.3 27.5 30.1
Depreciation and Amortization 8.0 7.8 8.6
Taxes, Other Than Income Taxes 2.8 3.4 4.1
------ ------ ------
42.4 46.4 44.1
------ ------ ------
Operating Income $ 29.4 $ 18.0 $ 16.5
====== ====== ======
Systems Throughput (Trillion Btus) 159.2 155.6 134.7
====== ====== ======
</TABLE>
This segment's 1996 results show substantial improvement over 1995. The
Company has increased its throughput due to expansions of its Wyoming system
which came on line in mid-year 1996. Lower 1996 operations and maintenance and
payroll taxes resulted from expense savings due to the 1995 corporate
restructuring.
Operating results for 1995 were positively impacted by higher rates due to
the 1994 Federal Energy Regulatory Commission ("FERC") rate case settlement.
However, this positive was partially offset by lower 1995 customer requirements
and lower rates for firm storage service accompanying the transfer of three
storage fields to a nonjurisdictional subsidiary, and by increased gas costs
due largely to the resolution of pre-Order 636 exchange imbalances.
<TABLE>
<CAPTION>
RETAIL NATURAL GAS SERVICES 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Operating Revenues -
Gas Sales $190.0 $204.0 $206.9
Transportation and Other 35.4 28.3 19.1
------ ------ ------
225.4 232.3 226.0
------ ------ ------
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 114.3 121.5 128.9
Operations and Maintenance 63.3 61.2 58.2
Depreciation and Amortization 11.5 11.0 10.7
Taxes, Other Than Income Taxes 5.4 5.6 4.5
------ ------ ------
194.5 199.3 202.3
------ ------ ------
Operating Income $ 30.9 $ 33.0 $ 23.7
====== ====== ======
Systems Throughput (Trillion Btus) -
Gas Sales 34.7 39.0 40.8
Transportation 35.0 27.4 18.8
------ ------ ------
69.7 66.4 59.6
====== ====== ======
</TABLE>
Operating results for 1996 were adversely impacted by low demand for
irrigation requirements due to abnormally heavy rainfall during the summer.
Irrigation sales and transportation volumes in 1996 were 3.8 trillion Btus
below the 1995 season; 1995 deliveries to irrigators of 12.6 trillion Btus
essentially represented a normal year. This detriment to 1996 earnings was
partially mitigated by increased customer requirements for grain drying and
growth in transportation volumes on the Company's Rocky Mountain intrastate
pipeline attributable, in part, to the fourth quarter acquisition of
interconnected gathering and processing facilities. Operations and maintenance
expenses were 3.4 percent higher than in 1995, as costs incurred in the
24
<PAGE> 25
development of new marketing initiatives more than offset savings realized from
the 1995 corporate restructuring.
The significant improvement in 1995 operating income over 1994 resulted
from increased deliveries (gas sales and transportation) to irrigation
customers, the annualized impact of rate increases on the Rocky Mountain
distribution system effective in 1994 and higher deliveries to customers for
space heating requirements due to colder 1995 weather.
<TABLE>
<CAPTION>
OTHER INCOME AND (DEDUCTIONS) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest Expense $(35.9) $(34.2) $(31.6)
Minority Interests and Other, Net 0.8 0.4 1.5
------ ------ ------
$(35.1) $(33.8) $(30.1)
====== ====== ======
</TABLE>
Increases in 1996 and 1995 interest expense reflect the issuance of
long-term debt in 1996 and 1994 to fund capital expenditures and acquisitions.
During 1996, the Company capitalized $1.3 million of interest costs in
connection with the acquisition and construction costs of the Pony Express
Pipeline. Minority Interests and Other, Net included a $1.5 million gain from
the sale of a gathering system in 1994.
<TABLE>
<CAPTION>
INCOME TAXES 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Provisions $35.9 $29.1 $ 9.5
===== ===== =====
Effective Tax Rate 36.0% 35.6% 38.3%
===== ===== =====
</TABLE>
Refer to Note 7 of Notes to Consolidated Financial Statements for a
reconciliation of statutory rates to effective rates. The 1994 effective tax
rate reflects the non-deductibility of certain merger costs.
LIQUIDITY AND CAPITAL RESOURCES
During 1996 the primary sources of cash were from the public offerings of
long-term debt and common stock, short-term borrowings and internally generated
cash flows. Cash outflows funded capital expenditures and acquisitions, debt
service, dividend payments, expenditures for the buy-out of above-market gas
purchase contracts, mitigation of pricing disputes and take-or-pay
requirements.
CASH FLOWS FROM OPERATING ACTIVITIES
Net operating cash flows for 1996 totaled $80.8 million, compared with
$129.6 million and $91.2 million for 1995 and 1994, respectively. Excluding
$41 million of proceeds from the sale of contract demand receivables and $18.1
million of expenditures for merger and restructuring costs, 1994 net operating
cash flows aggregated $68.3 million. The decline in 1996's net cash flows from
operations resulted from $8.2 million of expenditures to buy-out above market
gas purchase contracts, to mitigate gas contract pricing disputes and for
take-or-pay requirements. Additionally, 1996 cash flows were adversely
impacted by high gas prices, increases in gas imbalance receivables and by
significant increases in storage gas inventories in anticipation of high demand
during the first quarter of 1997. All these factors reduced 1996 cash flows,
but will benefit future cash flows via purchased gas adjustment filings, lower
contractual prices, or as a source of gas supply already paid for.
25
<PAGE> 26
CAPITAL EXPENDITURES AND COMMITMENTS
Capital expenditures totaled $120.0 million, $79.3 million and $70.5
million for 1996, 1995 and 1994, respectively. The higher level of 1996
expenditures reflects construction costs associated with the Pony Express
Pipeline. The 1997 capital expenditures budget totals $185 million with
approximately 55 percent of these budgeted expenditures for the completion of
construction of the Pony Express Pipeline including transmission facilities
directly into the Kansas City metropolitan area. The Pony Express Pipeline is
expected to begin transporting gas late in the second quarter of 1997; the
actual timing depends upon the date FERC approval is received.
During 1996, the Company expended $154.0 million on acquisitions, which
included the purchase of the Pony Express Pipeline, the Williams Field Services
gathering and processing assets in western Colorado and eastern Utah (through
K N's Wildhorse Energy Partners joint venture) and two contracts under which the
Company will provide firm transportation service to two natural gas
distribution companies serving the Kansas City metropolitan area.
In December 1996, K N signed a letter of intent to purchase several Enron
Corp. subsidiaries that own the Bushton natural gas processing facility and
other Hugoton Basin gathering assets located in Kansas and Oklahoma. The
Bushton facility processes approximately 825 MMcf of natural gas and produces
approximately 1.2 million gallons of natural gas liquids and approximately 1.7
MMcf of crude helium per day. The gathering assets gather approximately 475
MMcf per day of natural gas through approximately 2,200 miles of pipeline. The
closing of the transaction is subject to execution of acceptable definitive
agreements and receipt of appropriate regulatory approvals.
The Company does not believe it has a material exposure related to gas
purchase contract take-or-pay matters. Generally, amounts paid for take-or-pay
are either fully recoupable under terms of the gas purchase contracts, or are
recoverable from offsetting gas purchase obligations under certain contractual
arrangements. At December 31, 1996, the balance of unrecouped take-or-pay
payments was $12.0 million.
CAPITAL RESOURCES
At December 31, 1996, K N had a revolving credit agreement with seven
banks to borrow or use as commercial paper support up to $200 million. On March
7, 1997, this agreement was amended to include a total of 11 banks and to
increase the amount of the credit facility to $350 million. Additionally, under
a 1996 shelf registration filing with the Securities and Exchange Commission,
K N can issue up to approximately $245 million of debt or equity securities. At
December 31, 1996 short-term borrowings were $129.3 million, compared with
$88.0 million at December 31, 1995. At year-end 1996, the Company's long-term
debt to capitalization ratio was 44 percent. K N expects to issue a combination
of short-term debt and equity to fund completion of Pony Express construction
and the acquisition of the Enron Corp. gathering and processing facilities.
In July 1996, Standard & Poor's ("S&P") and Moody's Investors Service
("Moody's") lowered their ratings of K N's senior unsecured debt. S&P lowered
its rating from A- to BBB+; Moody's lowered its rating from A2 to A3.
Additionally, S&P affirmed its A-2 rating on K N's commercial paper, while
Moody's lowered its rating of commercial paper from P-1 to P-2. These rating
changes reflect the Company's strategic growth objectives in nonregulated
businesses.
26
<PAGE> 27
REGULATION
Approximately 45 percent of the Company's assets and operating income, and
19 percent of operating revenues, are subject to regulation at either the
federal, state or local level. In substantially all regulatory jurisdictions,
rates are currently determined using cost-based regulations. At this time, the
Company does not expect a significant change in the manner in which rates are
set by regulators. Thus far, the primary impact of competition on the
Company's regulated businesses has resulted in conversion of services from the
"bundled" merchant and transportation function to transportation services only.
The cost of gas component in the bundled service rate recovers only the actual
gas costs incurred. The Company anticipates the conversion to transportation
service will continue and become more prevalent at the retail level.
RISK MANAGEMENT
To minimize the risk of price changes in the natural gas and NGLs markets,
and interest rate fluctuations, the Company uses certain financial instruments
for hedging purposes only. These instruments include energy products traded on
the New York Mercantile Exchange, the Kansas City Board of Trade and
over-the-counter markets, including futures and options contracts, fixed price
and basis swaps, and interest rate swaps and caps.
Pursuant to its Board of Directors' approved guidelines, the Company is to
engage in these activities only as a hedging mechanism against pre-existing or
anticipated physical gas and condensate sales, gas purchases, system use and
storage in order to protect profit margins, and is not to engage in speculative
trading. Commodity-related activities of the risk management group are
monitored by the Company's Risk Management Committee which is charged with the
review and enforcement of the Board of Directors' risk management guidelines.
The Risk Management Committee reviews the pricing and hedging of all commodity
transactions, the types of hedging instruments used, contract limits and
approval levels. All energy futures, swaps and options are recorded at fair
value. Gains and losses on hedging positions are deferred and recognized as
gas purchases expenses in the periods the underlying physical transactions
occur.
The Company's Treasury Department manages the Company's interest rate
exposure.
OUTLOOK/FORWARD-LOOKING INFORMATION
GENERAL
The statements contained in this section, "Outlook/Forward-Looking
Information," include forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Although the Company believes that these statements are based
upon reasonable assumptions, it can give no assurance that its goals will be
achieved. Important factors that could cause actual results to differ
materially from those in the forward-looking statements contained herein
include, among other factors, the pace of deregulation of retail natural gas
and electricity markets in the United States, federal and state regulatory
developments, the timing and extent of changes in commodity prices for oil,
gas, NGLs, electricity, certain agriculture products and interest rates, the
extent of success in acquiring natural gas facilities, the timing and success
of efforts to develop power, pipeline and other projects, political
developments
27
<PAGE> 28
in foreign countries and conditions of the capital markets and equity markets
during the periods covered by the forward-looking statements.
During 1996, K N realized significant benefit from consolidation and
infrastructure reductions initiated during 1995. In 1997, the Company will
continue to focus on implementing savings programs to provide the lowest-cost
services to its customers. Part of this equation also involves increasing
throughput volumes on its existing asset base, as well as acquiring adjacent
properties where further economies of scale can be realized. Additionally, the
Company expects significant earnings contributions from the Pony Express
Pipeline, starting late in the second quarter, and from the sale of new products
and services under its Simple Choice brand. In January 1997, K N and PacifiCorp
announced the formation of an innovative joint venture that will provide other
utility companies a single package of energy, communication and infotainment
options under the Simple Choice brand.
In regulatory proceedings similar to the proceedings under Order 636,
which unbundled natural gas services, the FERC has determined the need to
unbundle the electric industry and bring competition to electric rates under a
proposed rulemaking. Another regulatory matter affecting the electric industry,
retail wheeling, is being closely monitored by the Company. Retail wheeling
would bring competition to the distribution of electric services, eliminating
the monopoly power of electric utilities in their service territories.
Throughout the United States, the recent FERC actions are also leading to an
opening of a more competitive environment for retail gas services. K N intends
to be a leader in providing customers a choice in services. In 1996, the
Company voluntarily allowed customers in 10 Wyoming communities to choose their
gas supplier. K N will continue to provide all other utility services for
customers in the program. The Company expects to implement similar programs in
other communities it serves during 1997.
The Company's vision is to be a world class provider of integrated energy
services and solutions. During 1997, its strategies will be directed at -
o Wrapping value added services around commodities;
o Becoming the lowest-cost provider in the markets it serves;
o Capturing additional market share;
o Unbundling services to maximize margins; and
o Forming alliances that create new opportunities or enhance existing
operations.
LITIGATION AND ENVIRONMENTAL
As discussed in Note 5 of Notes to Consolidated Financial Statements, the
Company has reported certain environmental liabilities assumed as a result of
the July 13, 1994 merger. Included in these liabilities were certain
environmental matters related to the Company's acquisition of various assets
from the Cabot Corporation in 1989. While the Cabot Corporation agreed to
indemnify the Company against certain of these liabilities, the Company may be
responsible for certain costs associated with remediation in the future. The
Company is presently unable to determine what, if any, dollar amount is
associated with this contingency. However, any potential exposure is not
expected to have a material adverse impact on the Company's results of
operations or financial position. The Company expects to resolve this matter
in 1997.
The Company's overall potential environmental cost exposure for 1997 is
estimated to be approximately $4.7 million. A substantial part of the
Company's 1997 environmental costs are either recoverable through insurance and
indemnification provisions, or have been previously expensed as part of ongoing
business.
28
<PAGE> 29
Refer to Note 5 of Notes to Consolidated Financial Statements for
additional information on the Company's pending litigation and environmental
matters. Company management believes it has established adequate reserves such
that resolution of pending litigation and environmental matters will not have a
material adverse impact on the Company's financial position or results of
operations.
SIGNIFICANT OPERATING VARIABLES
Historically, fluctuations in natural gas prices have had relatively
little impact on the Company's earnings. During the first quarter of 1996, due
to a significant increase in gas prices coupled with several heavy peak demand
periods, the Company did experience a reduction in nonregulated margins tied to
certain sales contracts. Terms of these contracts have been renegotiated to
mitigate future occurrences. In the regulated retail natural gas services
segment, the actual cost of gas incurred is recovered from customers. In the
nonregulated gas sales area, the majority of the sales contracts are either
supplied by fixed-price contracts or both the selling price and the supply
price are tied to indices where the margin is, in effect, locked-in.
Additionally, where price fluctuation exposure exists with respect to sales
contracts or NGLs feedstock, this risk is mitigated by hedging instruments.
During 1996, NGLs prices reached a long-term high, averaging $0.41 per
gallon. The Company expects average prices to be somewhat lower in 1997.
Under current agreements with producers, a one cent change in average per
gallon prices impacts the Company's pre-tax operating income by approximately
$2.0 million.
29
<PAGE> 30
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, 1996
and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado
February 4, 1997
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF INCOME
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1996 1995 1994
---- ---- ----
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C>
OPERATING REVENUES:
Gathering, Processing and Marketing Services $1,193,984 $ 854,462 $ 838,474
Interstate Transportation and Storage Services 25,352 22,217 21,044
Retail Natural Gas Services 223,838 227,282 220,431
Gas and Oil Production - 7,437 11,328
---------- --------- ---------
Total Operating Revenues 1,443,174 1,111,398 1,091,277
---------- --------- ---------
OPERATING COSTS AND EXPENSES:
Gas Purchases and Other Costs of Sales 1,062,062 752,129 777,634
Operations and Maintenance 175,778 174,181 165,516
Depreciation, Depletion and Amortization 51,212 49,891 50,278
Taxes, Other Than Income Taxes 19,321 19,835 17,025
Merger and Restructuring Costs - - 25,945
---------- --------- ---------
Total Operating Costs and Expenses 1,308,373 996,036 1,036,398
---------- --------- ---------
OPERATING INCOME 134,801 115,362 54,879
---------- --------- ---------
OTHER INCOME AND (DEDUCTIONS):
Interest Expense (35,933) (34,211) (31,605)
Minority Interests (2,946) (905) (659)
Other, Net 3,794 1,326 2,206
---------- --------- ---------
Total Other Income and (Deductions) (35,085) (33,790) (30,058)
---------- --------- ---------
INCOME BEFORE INCOME TAXES 99,716 81,572 24,821
Income Taxes 35,897 29,050 9,500
---------- --------- ---------
NET INCOME 63,819 52,522 15,321
Less - Preferred Stock Dividends 398 492 630
---------- --------- ---------
EARNINGS AVAILABLE FOR
COMMON STOCK $ 63,421 $ 52,030 $ 14,691
========== ========= =========
EARNINGS PER COMMON SHARE $ 2.14 $ 1.83 $ 0.52
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 32
CONSOLIDATED BALANCE SHEETS
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1995
---------- ----------
(In Thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 17,005 $ 22,571
Accounts Receivable 298,072 214,963
Materials and Supplies 6,092 10,515
Gas in Underground Storage 43,511 13,534
Prepaid Gas 12,001 7,800
Other Prepaid Expenses 12,824 13,536
Gas Imbalances and Other 65,319 23,880
---------- ----------
454,824 306,799
---------- ----------
INVESTMENTS:
Investment in Tom Brown, Inc. 44,331 -
Investment in Gas and Oil Properties, Net - 36,451
Other 6,207 15,784
---------- ----------
50,538 52,235
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 1,029,171 859,203
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 95,187 39,220
---------- ----------
TOTAL ASSETS $1,629,720 $1,257,457
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 26,971 $ 28,197
Notes Payable 129,300 88,000
Accounts Payable 241,187 157,340
Accrued Taxes 16,045 5,423
Gas Imbalances and Other 85,113 50,878
---------- ----------
498,616 329,838
---------- ----------
DEFERRED LIABILITIES, CREDITS AND RESERVES:
Deferred Income Taxes 122,371 112,267
Deferred Revenues 6,940 20,823
Other 24,990 30,356
---------- ----------
154,301 163,446
---------- ----------
LONG-TERM DEBT 423,676 315,564
---------- ----------
MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 26,333 14,277
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
(NOTES 1, 5 AND 14)
PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION - 572
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock 7,000 7,000
---------- ----------
Common Stock:
Authorized - 50,000,000 Shares, Par Value $5 Per Share
Outstanding - 30,295,792 and 28,097,749 Shares, Respectively 151,479 140,489
Additional Paid-in Capital 228,902 176,910
Retained Earnings 142,578 109,895
Deferred Compensation (2,908) (222)
Treasury Stock, at Cost - 7,216 and 10,739 Shares, Respectively (257) (312)
---------- ----------
Total Common Stockholders' Equity 519,794 426,760
---------- ----------
Total Stockholders' Equity 526,794 433,760
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,629,720 $1,257,457
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE> 33
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED TREASURY STOCK
------------ PAID-IN RETAINED COMPEN - ---------------
SHARES AMOUNT CAPITAL EARNINGS SATION SHARES AMOUNT
---------- -------- -------- -------- ------- ------- ------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 27,200,967 $136,005 $164,427 $ 92,187 $(1,157) - $ -
Net Income 15,321
Cash Dividends -
Common, $0.76 Per Share (20,846)
Preferred (630)
Treasury Stock Acquired (91,601) (2,065)
Employee Stock Options 59,492 298 466
Employee Benefit Plans 136,922 685 2,858 27,805 633
Dividend Reinvestment and
Stock Purchase Plans 181,069 905 2,676 19,379 444
Exercise of Common Stock Warrants 19,081 95 111
Issuance of Common Shares as
Executive Compensation 20,000 100 394 (322)
Amortization of Deferred
Compensation 1,101
---------- -------- -------- -------- ------- ------- ------
BALANCE, DECEMBER 31, 1994 27,617,531 138,088 170,932 86,032 (378) (44,417) (988)
Net Income 52,522
Cash Dividends -
Common, $1.01 Per Share (28,167)
Preferred (492)
Treasury Stock Acquired (72,500) (1,959)
Employee Stock Options 354,901 1,774 4,006
Employee Benefit Plans 20,738 104 394 80 2
Dividend Reinvestment and
Stock Purchase Plans 97,979 490 1,444 106,098 2,633
Issuance of Common Shares as
Executive Compensation 6,600 33 134
Amortization of Deferred
Compensation 156
---------- -------- -------- -------- ------- ------- ------
BALANCE, DECEMBER 31, 1995 28,097,749 140,489 176,910 109,895 (222) (10,739) (312)
Net Income 63,819
Cash Dividends -
Common, $1.05 Per Share (30,738)
Preferred (398)
Sale of Common Stock, Net 1,715,000 8,575 44,591
Redemption and Cancellation of
Common Stock Warrants (7,420)
Unrealized Holding Gains on
Available-for-Sale Securities 5,735
Treasury Stock Acquired (220,178) (7,069)
Acquisition of Businesses 1,648 33,765 1,183
Employee Stock Options 292,421 1,462 2,981 517 16
Dividend Reinvestment and
Stock Purchase Plans 95,572 478 1,438 189,419 5,925
Issuance of Common Shares as
Executive Compensation 95,050 475 3,019 (3,494)
Amortization of Deferred
Compensation 808
---------- -------- -------- -------- ------- ------- ------
BALANCE, DECEMBER 31, 1996 30,295,792 $151,479 $228,902 $142,578 $(2,908) (7,216) $ (257)
========== ======== ======== ======== ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 63,819 $ 52,522 $ 15,321
Adjustments to Reconcile Net Income to
Net Cash Flows From Operating Activities:
Depreciation, Depletion and Amortization 51,212 49,891 50,278
Deferred Income Taxes 16,443 15,975 7,302
Deferred Purchased Gas Costs (8,109) (1,458) 1,601
Provision for Losses on Accounts Receivable 307 949 627
Loss (Gain) on Sale of Facilities 491 - (1,458)
Asset Write-off Associated with Merger - - 2,500
Changes in Other Working Capital Items (27,561) 19,297 16,523
Changes in Deferred Revenues (13,883) (21,267) (1,602)
Other, Net (1,890) 13,671 120
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES 80,829 129,580 91,212
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (119,987) (79,313) (70,511)
Acquisitions (154,007) (31,945) (31,231)
Investments (2,142) (6,598) (3,906)
Proceeds from Sale of Facilities 11,922 2,706 22,305
Collections (Payments) Under Basket Agreement 6 1,491 (306)
--------- --------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (264,208) (113,659) (83,649)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt, Net 41,300 28,000 13,000
Long-Term Debt - Issued 125,000 - 83,100
- Retired (18,170) (21,322) (79,078)
Preferred Stock Redemption (572) (1,143) (1,643)
Common Stock Issued 61,668 8,379 8,093
Redemption and Cancellation of Common Stock Warrants (7,420) - -
Common Stock Issuance Costs (2,143) - -
Treasury Stock - Issued 5,941 2,635 1,077
- Acquired (7,069) (1,959) (2,065)
Cash Dividends - Common (30,738) (28,167) (20,846)
- Preferred (398) (492) (630)
Minority Interests - Contributions 13,586 2,906 1,163
- Distributions (2,182) (2,765) (2,183)
Premium on Debt Re-acquisition and Issuance Costs (990) (35) (1,291)
--------- --------- ---------
NET CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES 177,813 (13,963) (1,303)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (5,566) 1,958 6,260
Cash and Cash Equivalents at Beginning of Year 22,571 20,613 14,353
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 17,005 $ 22,571 $ 20,613
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations
K N Energy, Inc. ("K N") is an energy services provider and has
operations in nine states in the Rocky Mountain and Mid-Continent regions.
Natural gas services include gathering, processing, storing, transporting and
marketing natural gas, providing retail natural gas distribution services,
providing field services to natural gas producers and marketing natural gas
liquids. A branded package of consumer services and customer billing and call
center services are also offered. The Company's operations are divided
between regulated and nonregulated sectors.
(B) Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported amounts of revenues and expenses. Actual results could
differ from these estimates.
The consolidated financial statements include the accounts of K N and its
majority-owned subsidiaries (the "Company"). Investments in jointly owned
operations in which the Company has 20 to 50 percent ownership are accounted
for under the equity method. All material intercompany items and transactions
have been eliminated.
(C) Accounting for Regulatory Activities
The Company's regulated public utilities are accounted for in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 71, Accounting for the Effects of Certain Types of Regulation, which
prescribes the circumstances in which the application of generally accepted
accounting principles is affected by the economic effect of regulation.
Regulatory assets and liabilities represent probable future revenues or
expenses to the Company associated with certain charges and credits which will
be recovered from or refunded to customers through the ratemaking process.
The following regulatory assets and liabilities are reflected in the
accompanying consolidated financial statements (in thousands):
35
<PAGE> 36
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1995
----- -----
<S> <C> <C>
REGULATORY ASSETS:
Employee Benefit Costs $ 1,084 $ 923
Debt Refinancing Costs 3,100 3,514
Deferred Income Taxes 706 755
Purchased Gas Costs 28,814 15,254
Plant Acquisition Adjustments 454 454
Rate Regulation and Application Costs 830 1,401
------- -------
Total Regulatory Assets 34,988 22,301
------- -------
REGULATORY LIABILITIES:
Deferred Income Taxes 4,218 4,621
Purchased Gas Costs 6,529 10,640
------- -------
Total Regulatory Liabilities 10,747 15,261
------- -------
NET REGULATORY ASSETS $24,241 $ 7,040
======= =======
</TABLE>
As of December 31, 1996, $32.5 million of the Company's regulated assets
and $9.9 million of the Company's regulated liabilities were being recovered
from or refunded to customers through rates over periods ranging from one to
17 years.
(D) Earnings Per Share
Primary earnings per share are computed based on the monthly weighted
average number of common shares outstanding during the periods and the assumed
exercise of dilutive common stock equivalents (stock options and warrants)
using the treasury stock method. The number of common shares used in
computing earnings per share was 29,624,000 in 1996, 28,360,000 in 1995 and
28,044,000 in 1994.
(E) Gas in Underground Storage
K N's regulated retail distribution business and Northern Gas Company
account for gas in underground storage using the last-in, first-out ("LIFO")
method. K N Gas Supply Services, Inc., K N Marketing, Inc., and K N Natural
Gas, Inc., wholly owned subsidiaries of K N, value gas in underground storage
at average cost. AOG Gas Transmission Company, L.P., K N Marketing, L.P.,
Rocky Mountain Natural Gas Company and Westar Transmission Company, wholly
owned subsidiaries of K N, use the first-in, first-out ("FIFO") method.
The Company also maintains gas in its underground storage facilities on
behalf of certain third parties. The Company receives a fee for its storage
services but does not reflect the value of third party gas in the accompanying
financial statements.
36
<PAGE> 37
(F) Prepaid Gas
Prepaid gas represents payments made in lieu of taking delivery of (and
purchasing) natural gas under the take-or-pay provisions of certain of the
Company's gas purchase contracts, net of any subsequent recoupments in kind
from producers. Funds paid by the Company for take-or-pay are fully
recoupable from future production and are recorded as an asset (Prepaid Gas).
When recoupment is made in kind in a subsequent contract year, natural gas
purchase expense is recorded and the asset is reduced.
(G) Property, Plant and Equipment
Property, plant and equipment is stated at historical cost which, for
constructed plant, includes indirect costs such as payroll taxes, fringe
benefits, and administrative and general costs. Expenditures which increase
capacities or extend useful lives are capitalized. Routine maintenance,
repairs and renewal costs are expensed as incurred.
Gains or losses are recognized upon retirement of nonutility property,
plant and equipment. 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.
(H) Depreciation, Depletion and Amortization
Depreciation is computed based on the straight-line method over estimated
useful lives ranging from 3 to 40 years for most property, plant and
equipment.
(I) Deferred Revenues
In conjunction with the Federal Energy Regulatory Commission ("FERC")
Order No. 636 ("Order 636") restructuring activities, the Company negotiated
new gas sales agreements with its former wholesale customers. As a result, the
Company is now responsible for performance under, or to otherwise dispose of,
certain pre-Order 636 gas purchase contracts. These gas sales agreements
provide for such customers to pay fixed demand charges over the agreement
term, and to purchase gas from a subsidiary of the Company at negotiated
commodity rates. The demand portion of the gas sales agreements was recorded
as deferred revenues in 1993. Commodity charges are recorded as deferred
revenues as gas is delivered under these agreements. Gas purchase, gathering,
transportation and contract administration costs are recorded as a reduction
to the related revenues. In addition, margins on sales of excess gas supplies
under the previously described contracts to affiliates at market clearing or
contracted rates are recorded in deferred revenues. Subsequent margins earned
on these sales by the affiliates are recognized as income when the gas is
delivered. Company management believes that the revenues being collected and
deferred under these agreements will be sufficient to offset future costs
associated with the gas purchase contracts, and will not have a material
adverse effect on the Company's financial position or results of operations.
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.
(J) Accounting Pronouncements Issued But Not Yet Effective
Effective January 1, 1997, the Company will adopt the provisions of
Statement of Position ("SOP") No. 96-1, Environmental Remediation Liabilities.
This Statement provides authoritative guidance for recognition,
37
<PAGE> 38
measurement, display, and disclosure of environmental remediation liabilities
in financial statements. The Company has recorded environmental remediation
liabilities of $2.9 million at December 31, 1996. SOP 96-1 is not expected to
have a material impact on the Company's financial position or results of
operations upon adoption.
(K) Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
(L) 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 and Supplemental
Disclosures of Cash Flow Information are as follows (in thousands):
CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY (NET OF ACQUISITION EFFECTS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Accounts Receivable $ (82,903) $ (67,364) $ 24,685
Contract Demand Receivables - - 38,732
Materials and Supplies 4,761 2,172 (1,083)
Gas in Underground Storage (29,977) 17,950 (10,842)
Other Current Assets (45,498) 16,981 (16,329)
Accounts Payable, Accrued Taxes and
Other Current Liabilities 126,056 49,558 (18,640)
--------- --------- --------
$ (27,561) $ 19,297 $ 16,523
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest (Net of Amount Capitalized) $ 31,748 $ 34,503 $ 28,721
========= ========= ========
Income Taxes $ 14,156 $ 9,774 $ 12,763
========= ========= ========
</TABLE>
2. AOG MERGER
On July 13, 1994, pursuant to the Agreement of Merger dated March 24,
1994, American Oil & 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 1994 relating to the merger and
the formal restructuring plan of the Company's retail distribution operations.
The restructuring plan was completed during 1995. Total cash expenditures
related to these charges were $23.4 million.
38
<PAGE> 39
3. MERGER AND ACQUISITIONS
(A) Pony Express Pipeline
In 1996, K N purchased a 900-mile crude oil pipeline owned by Amoco
Pipeline Company for conversion to natural gas service. In May, one of K N's
regulated interstate pipeline subsidiaries, K N Interstate Gas Transmission
Co. ("KNI"), filed with the FERC requesting authority to purchase from K N the
portion of the line, renamed the Pony Express Pipeline, from Lost Cabin,
Wyoming in central Wyoming to Freeman, Missouri near Kansas City. KNI also
requested authority to convert the pipeline to natural gas service, install
compression and construct additional pipeline facilities. The pipeline is
expected to begin limited operations late in the second quarter of 1997; the
actual timing depends upon the date FERC approval is received.
On November 27, 1996, KNI took assignment of two contracts to provide
firm transportation capacity of 230 MMcf per day to the Kansas City
metropolitan area part of which will be transported through the Pony Express
Pipeline. KNI will also construct approximately 36 miles of lateral
facilities to connect the new markets with the Pony Express Pipeline and a
third party pipeline. These facilities are expected to be in service by
September 1997.
(B) Gas and Oil Properties
On January 31, 1996, K N and Tom Brown, Inc. ("TBI") closed a transaction
pursuant to which K N transferred its stock in K N Production Company
("KNPC"), a wholly owned subsidiary of K N, to TBI in exchange for common and
convertible preferred stock of TBI. The transaction represents a non-monetary
exchange (valued at $38.6 million) of oil and gas assets for accounting
purposes. The common shares are considered available-for-sale securities and,
as a result, unrealized holding gains totaling $5.7 million are included in
additional paid-in capital in the consolidated Balance Sheet at December 31,
1996.
In conjunction with this transaction, K N and TBI formed Wildhorse Energy
Partners, LLC, owned 55 percent by K N and 45 percent by TBI, which performs
certain gathering, processing, field, marketing and storage services in a
defined area of mutual interest.
(C) Gathering Assets
In September 1996, Wildhorse Energy Partners, LLC executed a definitive
agreement to purchase Williams Field Services' gathering and processing assets
in western Colorado and eastern Utah. The assets acquired include 955 miles
of gathering lines and related facilities and two natural gas processing
plants.
(D) Transmission and Storage Systems
In February 1995, the Company acquired certain 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 connected to K N's core pipeline system. In addition, surface
facilities, lease rights and approximately 10.3 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 purchase price was $79
million. The Company utilized an operating lease and short-term debt
financing arrangements to fund the acquisition.
39
<PAGE> 40
(E) TransColorado Project
During 1996, an agreement was executed providing for the construction and
operation of a new unregulated gas treating plant in southwestern Colorado
owned by affiliates of K N and El Paso Natural Gas Company. The
treating plant is connected to Phase I (New Mexico pre-build) of the
TransColorado pipeline. On September 30, 1996, the FERC approved TransColorado
Gas Transmission Company's application to construct Phase I of the project
which consists of 22.5 miles of 24-inch pipeline and 2.5 miles of 16-inch
lateral pipeline. Both the pipeline and plant, which have a combined capital
cost of approximately $30 million and a design capacity to handle up to 120,000
MMBtu per day, were placed in service in December 1996.
(F) Processing Assets
On December 13, 1996, K N signed a letter of intent to purchase several
Enron Corp. subsidiaries that own the Bushton natural gas processing facility
located in Ellsworth County, Kansas, and other Hugoton Basin gathering assets
located in Kansas and Oklahoma. The Bushton facility processes approximately
825 MMcf of natural gas and produces approximately 1.2 million gallons of
natural gas liquids and approximately 1.7 MMcf of crude helium per day. The
gathering assets gather approximately 475 MMcf per day of natural gas through
approximately 2,200 miles of pipeline.
The closing of the transaction is subject to execution of acceptable
definitive agreements and receipt of appropriate regulatory approvals.
4. REGULATORY MATTERS
On February 16, 1996, the Wyoming Public Service Commission issued an
order authorizing K N to implement a program to allow approximately 10,500
residential and commercial customers to choose their energy provider from a
qualified list of suppliers. This new service commenced on June 1, 1996. K N
continues to provide all other utility services and manages the gas supplies
for customers in the program.
KNI made a rate filing with the FERC in December 1993 which became
effective July 1, 1994, subject to refund. The Stipulation and Agreement
approved by the FERC in January 1995 provides for an $8.7 million annual
increase in revenues. Revenues collected above the settlement rates were
refunded to customers in early 1995.
In January 1995, as a result of an agreement reached with its customers,
the Company filed an application with the FERC to transfer three storage fields,
including approximately 45 Bcf of cushion gas held by KNI, to a newly created
affiliate, K N Natural Gas, Inc. ("KNNG"). On May 2, 1995, the FERC issued an
order approving the storage reorganization filing. With the approval of this
transfer, KNI owns only the Huntsman, Nebraska storage facilities, which remain
as jurisdictional facilities and continue to provide storage services.
Jurisdictional rates were restated to reflect this transfer. KNNG began selling
gas at market rates from the three storage facilities which were transferred,
effective June 1, 1995.
In December 1994, KNI sought authority from the FERC to install pipeline
and compressor facilities in the vicinity of Casper, Wyoming which would
increase KNI's mainline capacity by 47.5 MMBtus per day. By an order dated
January 18, 1996, the FERC granted the requested authority. KNI has
constructed $8.7 million of facilities which increase westend system capacity
by 35 MMBtus per day and is holding in abeyance construction of the rest of
the authorized facilities pending action by the FERC on its Pony Express
Pipeline application.
40
<PAGE> 41
K N's retail natural gas services business segment received rate
increases from the Colorado Public Utilities Commission during 1994 as
summarized below:
<TABLE>
<CAPTION>
ENTITY REQUESTING APPROVED ANNUALIZED EFFECTIVE DATE
INCREASE REVENUE INCREASE OF NEW RATES
-------- ---------------- ------------
(In Millions)
<S> <C> <C> <C>
RMNGD* $ 1.5 4-2-94
RMNGD* 0.5 9-1-94
</TABLE>
*Rocky Mountain Natural Gas Division of K N
5. LEGAL MATTERS
The Company was named as one of four potentially responsible parties
("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site known
as the Mystery Bridge Road/U.S. Highway 20 site located near Casper, Wyoming
(the "Brookhurst Subdivision") in 1989. A majority of the Company's
groundwater, soil and free phase petroleum cleanup occurred between 1990 and
1996. The total remaining estimated cost is not expected to exceed $150,000.
In 1994, a mercury sampling program was initiated on the Company's
systems in central and western portions of Kansas. The Company is working with
the Kansas Department of Health and Environment pursuant to a five-year
assessment program; active remediation will begin in the summer of 1997. The
costs are not expected to have any material adverse impact on the Company's
financial position or results of operations. The cleanup program is not
expected to interrupt or diminish the Company's operational ability to gather
or transport natural gas.
The Company performed environmental audits in Colorado, Kansas and
Nebraska which revealed that certain grease and lubricating oils used at
various pipeline and facilities locations contained polychlorinated biphenyls
("PCBs"). The Company is working with the appropriate regulatory agencies to
manage the cleanup and remediation of the pipelines and facilities. The Company
filed suit against Rockwell International Corporation ("Rockwell"),
manufacturer of the PCB-containing grease used in certain of the Company's
pipelines and facilities, and two other related defendants for expenses and
losses incurred by the Company for cleanup or mitigation. The Company settled
with Rockwell in March 1994. At PCB sites with approved workplans, the Company
estimates that the future cost of remediation, which will occur over a period
of years, will be approximately $1.3 million, a substantial portion of which is
recoverable under the Rockwell settlement. Approximately $1.4 million for PCB
remediation has been expended as of December 31, 1996. The total potential
remediation and cleanup costs at currently identified locations is not expected
to have a material adverse impact on the Company's financial position or
results of operations. The cleanup programs are not expected to interrupt or
diminish the Company's operational ability to gather or transport natural gas.
Pursuant to certain acquisition agreements in 1989 and 1992, The Maple
Gas Corporation and Cabot Corporation ("Cabot"), the Company's largest
stockholder, indemnified the Company for certain environmental liabilities.
Issues have arisen concerning Cabot's indemnification obligations; however, in
conjunction with the AOG merger, the Company and Cabot entered into a
standstill agreement pertaining to these and other matters, which will expire
on March 31, 1997. The Company believes it will be able to reach agreement with
Cabot, and is unable to estimate its potential exposure for such liabilities at
this time, but does not expect them to have a material adverse impact on the
Company's financial position or results of operations.
41
<PAGE> 42
The Company acquired a 32 MMBtu per day cryogenic NGLs processing
plant and approximately 900 miles of gathering pipeline located in the Texas
Panhandle from Parker & Parsley Gas Processing Co. and its affiliates in
October 1995. In connection with that acquisition, and for a reduction in the
purchase price, which included the estimated costs of remediation of $3.9
million, the Company agreed to accept all responsibility and liability for
environmental matters associated with such properties. After consideration of
reserves established, such costs are not expected to have a material adverse
impact on the Company's financial position or results of operations. The
cleanup program, which will occur over a number of years, is not expected to
interrupt or diminish the Company's operational ability to gather, process or
transport natural gas.
On October 9, 1992, Jack J. Grynberg filed suit in the United States
District Court for the District of Colorado against the Company, Rocky Mountain
Natural Gas Company and GASCO, Inc. (the "K N Entities") alleging that the K N
Entities as well as KNPC and K N Gas Gathering, Inc., have violated federal and
state antitrust laws. In essence, Grynberg asserts that the defendant 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 have
illegally attempted to monopolize or to enhance or maintain an existing
monopoly. Grynberg also asserts certain causes of action relating to a gas
purchase contract. The Company's potential liability for monetary damages and
the amount of such damages, if any, are subject to dispute between the parties;
however, the Company believes it has a meritorious position in these matters and
does not expect this lawsuit to have a material adverse effect on the Company's
financial position or results of operations. In July 1996, the U. S. District
Court, District of Colorado lifted its stay of this proceeding, and discovery is
ongoing. This case is still pending, but no trial date has yet been set. On July
26, 1996 K N and Rocky Mountain Natural Gas Company ("RMNG") along with over 70
other natural gas pipeline companies, were served by Jack J. Grynberg, acting on
behalf of the Government of the United States, with a Civil False Claims Act
lawsuit alleging mismeasurement of the heating content and volume of natural gas
resulting in underpayment of royalties to the federal government. The
government, particularly officials from the Departments of Justice and Interior,
reviewed the complaint and the evidence presented by Mr. Grynberg and declined
to intervene in the action, allowing Mr. Grynberg to proceed on his own. No
specific claims have been made against K N or RMNG, and no specific monetary
damages have been claimed. No trial date has been set. The Company believes it
has a meritorious position in this matter, and does not expect this lawsuit to
have a material adverse effect on the Company's financial position or results of
operations.
The Company believes it has meritorious defenses to all lawsuits and
legal proceedings in which it is a defendant and will vigorously defend against
them. Based on its evaluation of the above matters, and after consideration of
reserves established, the Company believes that the resolution of such matters
will not have a material adverse effect on the Company's financial position or
results of operations.
42
<PAGE> 43
6. PROPERTY, PLANT AND EQUIPMENT
Investment in property, plant and equipment, at cost, and accumulated
depreciation and amortization ("Accumulated D&A"), detailed by business
segment, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
PROPERTY, PLANT ACCUMULATED
AND EQUIPMENT D&A NET
------------- ----------- ----------
Gathering, Processing and Marketing Services $ 683,569 $ 212,926 $ 470,643
Interstate Transportation and Storage Services 454,427 156,358 298,069
Retail Natural Gas Services 409,626 149,167 260,459
---------- ---------- ----------
$1,547,622 $ 518,451 $1,029,171
========== ========== ==========
<CAPTION>
DECEMBER 31, 1995
-----------------
PROPERTY, PLANT ACCUMULATED
AND EQUIPMENT D&A NET
------------- ----------- ----------
<S> <C> <C> <C>
Gathering, Processing and Marketing Services $ 663,754 $ 205,702 $ 458,052
Interstate Transportation and Storage Services 315,686 149,267 166,419
Retail Natural Gas Services 369,576 134,844 234,732
---------- ---------- ----------
$1,349,016 $ 489,813 $ 859,203
========== ========== ==========
</TABLE>
Effective January 1, 1996, the Company adopted SFAS No. 121,
Accounting for the Impairment of Long- Lived Assets and Long-Lived Assets to be
Disposed Of. This statement imposes a stricter criterion for both nonregulated
and regulated long-lived assets by requiring that such assets be probable of
future recovery at each balance sheet date. Based on the current regulatory
structure in which the Company operates, this conclusion may change in the
future as competitive factors influence wholesale and retail pricing in the
industry. Adoption of this standard had no impact on the Company's financial
position or results of operations.
7. INCOME TAXES
Deferred income tax assets and liabilities are recognized based on
enacted tax laws for all temporary differences between financial reporting and
tax bases of assets and liabilities. Deferred tax assets are reduced by a
valuation allowance for the amount of any tax benefit that is not expected to
be realized.
43
<PAGE> 44
Components of the income tax provision applicable to federal and state
income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
TAXES CURRENTLY PAYABLE:
Federal $17,685 $11,069 $ 5,992
State 1,769 2,006 (3,794)
------- ------- -------
Total 19,454 13,075 2,198
------- ------- -------
TAXES DEFERRED:
Federal 15,601 15,672 4,081
State 842 303 3,221
------- ------- -------
Total 16,443 15,975 7,302
------- ------- -------
TOTAL TAX PROVISION $35,897 $29,050 $ 9,500
======= ======= =======
EFFECTIVE TAX RATE 36.0% 35.6% 38.3%
======= ======= =======
</TABLE>
The difference between the statutory federal income tax rate and the
Company's effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
FEDERAL INCOME TAX RATE 35.0% 35.0% 35.0%
INCREASE (DECREASE) AS A RESULT OF:
State Income Tax, Net of Federal Benefit 1.7% 1.8% (1.5%)
Nonconventional Fuels Credit - (1.0%) (3.0%)
Nondeductible Merger Costs - - 7.8%
Other (0.7%) (0.2%) -
---- ---- ----
EFFECTIVE TAX RATE 36.0% 35.6% 38.3%
==== ==== ====
</TABLE>
44
<PAGE> 45
The Company has recorded deferred regulatory assets of $0.7 million
and $0.8 million, and deferred regulatory liabilities of $4.2 million and $4.6
million at December 31, 1996 and 1995, respectively, which are expected to
result in cost-of-service adjustments. These amounts reflect the "gross of tax"
presentation required under SFAS No. 109, Accounting for Income Taxes. The
deferred tax assets and liabilities and deferred regulatory assets and
liabilities for rate-regulated entities computed according to SFAS 109 result
from the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1995
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Unbilled Revenue $ 925 $ 2,113
Vacation Accrual 1,599 1,577
State Taxes 4,438 4,358
Capitalized Overhead Adjustment 1,858 2,069
Operating Reserves 1,155 772
Stock Investments - 1,425
Deferred Revenues - 1,525
Alternative Minimum Tax Credits 10,164 10,011
Other 4,339 5,327
-------- --------
TOTAL DEFERRED TAX ASSETS 24,478 29,177
-------- --------
DEFERRED TAX LIABILITIES:
Liberalized Depreciation 131,192 129,048
Rate Matters 6,757 4,574
Prepaid Pension 2,735 3,988
Stock Investments 3,457 -
Other 2,708 3,834
-------- --------
TOTAL DEFERRED TAX LIABILITIES 146,849 141,444
-------- --------
NET DEFERRED TAX LIABILITIES $122,371 $112,267
======== ========
DEFERRED ACCOUNTS FOR RATE REGULATED ENTITIES:
Assets $ 706 $ 755
======== ========
Liabilities $ 4,218 $ 4,621
======== ========
</TABLE>
8. FINANCING
(A) Notes Payable
At December 31,1996, K N had a revolving credit agreement with seven
banks to borrow for general corporate purposes, including commercial paper
support, up to a total of $200 million. On March 7, 1997, this agreement was
amended to include a total of 11 banks and to increase the amount of the credit
facility to $350 million. Borrowings are made at rates negotiated on the
borrowing date and for a term of no more than 360 days. Under the credit
agreement, K N agrees to pay a facility fee based on the total commitment, at
rates which vary based on the financial rating of K N's long-term debt.
Facility fees paid in both 1996 and 1995 were $0.2 million. The amended credit
agreement expires March 7, 2002. At December 31, 1996, $40 million was
outstanding under this credit agreement, compared with $10 million at December
31, 1995 under other agreements that were not renewed during 1996.
Commercial paper issued by K N represents unsecured short-term notes
with maturities not to exceed 270 days from the date of issue. During 1996, all
commercial paper was redeemed within 63 days, with interest rates ranging from
5.15 to 6.63 percent. Commercial paper outstanding at December 31, 1996 and
1995, respectively, were $89.3 and $78.0 million. The weighted average interest
rates on short-term borrowings outstanding at December 31, 1996 and 1995,
respectively, were 6.93 percent and 6.01 percent.
45
<PAGE> 46
Average short-term borrowings outstanding during 1996 and 1995 were
$60.8 million and $47.8 million, respectively. During 1996 and 1995, the
weighted average interest rates on short-term borrowings outstanding were 5.62
percent and 6.01 percent, respectively.
(B) Long-Term Debt
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
DEBENTURES:
6.5% Series, Due 2013 $ 50,000 $ 50,000
7.85% Series, Due 2022 27,545 28,434
8.75% Series, Due 2024 75,000 75,000
7.35% Series, Due 2026 125,000 -
SINKING FUND DEBENTURES:
9.95% Series, Due 2020 20,000 20,000
9.625% Series, Due 2021 45,000 45,000
8.35% Series, Due 2022 35,000 35,000
Unamortized Debt Discount (1,013) (1,069)
SENIOR NOTES:
7.27%, Due 1997-2002 30,000 32,500
11.846% (AOG), Due 1997-1999 18,661 25,446
Medium-Term Notes, 10.07%
Average Rate, Due 1997-1999 8,000 12,500
$25 Million Subordinated Revolving
Credit Note (AOG) with Cabot
Corporation, Interest at the
London Interbank Offered Rate
("LIBOR") Plus 0.925%
at December 31, 1996 and 1995,
(6.425% and 6.8625%, Respectively), Due 1997 10,916 11,142
8.5% Note Payable of Red River Pipeline, L.P.,
Due 1997-1998 6,538 9,808
Current Maturities of Long-Term Debt (26,971) (28,197)
-------- --------
Total Long-Term Debt $423,676 $315,564
======== ========
</TABLE>
Maturities of long-term debt for the five years ending December 31,
2001, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------
<C> <C>
1997 $26,971
1998 19,055
1999 13,089
2000 5,000
2001 6,000
</TABLE>
On May 23, 1996, K N filed a universal shelf registration statement
with the Securities and Exchange Commission ("SEC") for common stock and
unsecured debt securities up to an aggregate initial offering of $300 million.
On July 26, 1996, K N sold publicly $125 million of 30-year 7.35%
debentures at an all-in cost to the Company of 7.40 percent. This debt was
issued from the $200 million shelf registration filed with the SEC in
46
<PAGE> 47
November 1993. Net proceeds from this financing were used to reduce short-term
indebtedness and fund capital expenditures, including costs of acquiring the
Pony Express Pipeline (See Note 3(A)).
At December 31, 1996 and 1995, the carrying amount of the Company's
long-term debt was $451.7 million and $344.8 million, respectively, and the
estimated fair value was $471.6 million and $383.2 million, respectively. The
fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues, or on the current rates offered
to the Company for debt of the same remaining maturity.
(C) Common Stock
On August 6, 1996, K N sold publicly 1,715,000 million shares of its
common stock at $32.25 per share, less offering expenses. The stock was sold
from the $300 million shelf registration filed with the SEC in May 1996. K N
applied approximately $7.4 million of the net proceeds from the offering to
redeem and cancel outstanding warrants to purchase a total of 545,200 shares of
K N's common stock. The balance of the net proceeds from the offering were used
in the same manner as the net proceeds from the debt financing described above
in Note 9(B).
In connection with the sale of K N common stock described above, Cabot
Corporation sold 1,850,000 shares of K N common stock. K N did not receive any
of the proceeds from the sale of K N common stock by Cabot Corporation. After
the sale, Cabot Corporation owned 2,990,186 shares, or 9.9 percent of the
common stock of K N, including 642,232 shares of common stock underlying
warrants expiring on September 30, 1999.
9. PREFERRED STOCK
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1995
---- ----
(In Thousands)
<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 B, $8.30 Cumulative Series,
5,720 Shares at December 31, 1995 $ - $ 572
======= ======
</TABLE>
(A) 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.
(B) Class B $8.30 Preferred Stock
The remaining 5,720 shares of K N Class B $8.30 Preferred Stock
subject to mandatory redemption were redeemed by the Company in 1996. In each
of the years 1995 and 1994, the Company redeemed 5,714 shares subject to
mandatory redemption, and an additional 5,714 shares at $100 per share.
47
<PAGE> 48
(C) 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.
(D) Fair Value
The Company redeemed all shares of preferred stock subject to
mandatory redemption during 1996. The carrying amount and estimated fair value
of the Company's outstanding preferred stock subject to mandatory redemption at
December 31, 1995 was $0.6 million. The fair value of the Company's preferred
stock was estimated based on an evaluation made by an independent security
analyst.
10. RISK MANAGEMENT
The Company uses two types of risk management instruments - energy
financial instruments and interest rate swaps - which are discussed below. The
Company is exposed to credit-related losses in the event of nonperformance by
counterparties to these financial instruments, but does not expect any
counterparties to fail to meet their obligations given their existing credit
ratings.
The fair value of these risk management instruments reflects the
estimated amounts that the Company would receive or pay to terminate the
contracts at the reporting date, thereby taking into account the current
unrealized gains or losses on open contracts. Market quotes are available for
substantially all instruments used by the Company.
(A) Energy Financial Instruments
The Company uses energy financial instruments to minimize its risk of
price changes in the spot and fixed price natural gas and NGLs markets. Energy
risk management products include commodity futures and options contracts, fixed
price swaps and basis swaps. Pursuant to its Board of Directors' approved
guidelines, the Company is to engage in these activities only as a hedging
mechanism against pre-existing or anticipated physical gas and condensate
sales, gas purchases, system use, and storage in order to protect profit
margins, and is prohibited from engaging in speculative trading. The activities
of the risk management group are monitored by the Company's Risk Management
Committee which is charged with the review and enforcement of the Board of
Directors' risk management guidelines. All energy futures, swaps and options
are recorded at fair value. Gains and losses on hedging positions are deferred
and recognized as gas purchases expenses in the periods the underlying physical
transactions occur. All 1996 and 1995 transactions were recorded as hedges.
As of December 31, 1996 the Company had deferred net gains of $1.8
million, representing the difference between the current market value and the
original physical contracts' value, associated with hedging activities, of
which $1.6 million of losses relate to commodity contracts and $3.4 million of
gains relate to over-the-counter swaps and options. The deferrals will be
offset by the corresponding underlying physical transactions and are reflected
as net deferred charges in the accompanying consolidated financial statements.
At December 31, 1996 the Company held notional long volumetric positions of
21.4 Bcf of gas, of which 1.7 were
48
<PAGE> 49
held in gas commodity positions and 19.7 were held in over-the-counter swaps
and options. Of the 21.4 notional total, associated physical transactions of
17.2 Bcf are expected to occur in 1997 and 4.2 Bcf in 1998. A change of plus
or minus 10 percent of the fair market prices of the above financial
instruments would have the approximate effect of reducing or increasing the
deferrals by $4.3 million, which would be offset by corresponding increases or
decreases in the value of the underlying physical transactions.
(B) Interest Rate Swaps
The Company has entered into various interest rate swap and cap
agreements for the purpose of managing interest rate exposure. Settlement
amounts payable or receivable under these agreements are recorded as interest
expense or income in the accounting period they are incurred.
In February 1993, AOG entered into a three-year interest rate swap
agreement covering $25 million of notional principal whereby it pays LIBOR,
which is reset every six months in arrears, in exchange for a fixed rate of
5.07 percent. This agreement terminated in March 1996. In September 1993, AOG
entered into a second three-year interest rate swap agreement covering $10
million of notional principal at a LIBOR rate, which is reset every 12 months
in arrears, in exchange for a fixed rate of 5.27 percent. In August 1994, the
counterparty to this second agreement exercised its rights to extend this
agreement by one additional year, with the agreement now terminating in
September 1997.
In 1994, the Company entered into four interest rate cap agreements
which effectively cap the LIBOR rate to be paid by the Company under these swap
agreements at 7.5 percent for the terms of the original swap agreements.
11. 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 the Employee
Retirement Income Security Act. 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, equity, bond and money market funds.
Net pension cost includes the following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service Cost - Benefits Earned During the Period $ 3,289 $ 3,332 $ 2,721
Interest Cost on Projected Benefit Obligation 6,756 6,372 5,986
Actual Return on Assets (18,243) (17,569) 565
Net Amortization and Deferral 8,896 8,415 (9,166)
-------- -------- --------
Net Periodic Pension Cost $ 698 $ 550 $ 106
======== ======== ========
</TABLE>
As a result of restructuring activities, curtailment gains of $.07
million are reflected in the net amortization and deferral component of net
periodic pension cost for 1995.
49
<PAGE> 50
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated financial statements at December 31,
1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1995
---- ----
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested Benefit Obligation $ (84,861) $ (77,490)
========= =========
Accumulated Benefit Obligation $ (90,779) $ (82,937)
========= =========
Projected Benefit Obligation $ (97,182) $ (90,046)
Plan Assets at Fair Value 123,736 111,084
--------- ---------
Plan Assets in Excess of Projected Benefit Obligation 26,554 21,038
Unrecognized Net Gain (16,023) (9,678)
Prior Service Cost Not Yet Recognized in Net Periodic
Pension Costs 155 171
Unrecognized Net Asset at January 1 (1,282) (1,429)
--------- ---------
Prepaid Pension Cost $ 9,404 $ 10,102
========= =========
</TABLE>
The rate of increase in future compensation and the expected long-term
rate of return on assets were 3.5 and 8.5 percent, respectively, for both 1996
and 1995. The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5 percent for both 1996
and 1995.
In 1996, a maximum of 10 percent of eligible employee compensation was
contributed to the Employees Retirement Fund Trust Profit Sharing Plan (the
"Profit Sharing Plan"), a defined contribution plan. The Company's contribution
was determined by comparing actual 1996 results to a predetermined graduated
scale of annual operating income goals. Prior to 1996 the Company contributed
the lesser of 10 percent of the Company's net income or 10 percent of eligible
employee compensation to the Profit Sharing Plan. Contributions by the Company
were $6.6 million, $5.6 million and $2.3 million for 1996, 1995 and 1994,
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 10 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. The
Company funds the future expected postretirement benefit costs under the plan
by making payments to Voluntary Employee Benefit Association trusts. The
Company's funding policy is to contribute amounts within the deductible limits
imposed on Internal Revenue Code Sec. 501(c)(9) trusts. Plan assets consist
primarily of pooled fixed income funds.
Net postretirement benefit cost includes the following components (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service Cost - Benefits Earned During the Period $ 324 $ 378 $ 321
Interest Cost on APBO 1,392 1,381 1,307
Actual Return on Assets (114) (156) 7
Net Amortization and Deferral 894 884 805
------- ------- -------
Net Periodic Postretirement Benefit Cost $ 2,496 $ 2,487 $ 2,440
======= ======= =======
</TABLE>
50
<PAGE> 51
The following table sets forth the plan's funded status and the
amounts recognized in the Company's consolidated financial statements as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1996 1995
---- ----
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $(15,578) $(13,138)
Eligible Active Plan Participants (1,549) (3,524)
Ineligible Active Plan Participants (2,294) (2,751)
-------- --------
Total APBO (19,421) (19,413)
Plan Assets at Fair Value 3,192 2,623
-------- --------
Accumulated Postretirement Benefit Obligation in
Excess of Plan Assets (16,229) (16,790)
Unrecognized Net Gain (1,179) (649)
Prior Service Cost Not Yet Recognized in Net
Periodic Postretirement Benefit Cost - -
Unrecognized Transition Obligation 14,865 15,794
-------- --------
Accrued Postretirement Benefit Cost $ (2,543) $ (1,645)
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the APBO was 7.5 percent for both 1996 and 1995. The assumed
health care cost trend rate was seven percent for 1996 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 1996 net periodic postretirement benefit cost by
approximately $16,000 and would have increased the APBO as of December 31,
1996, by approximately $204,000.
K N's retail distribution business in 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
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
In addition, KNI has received approval from the FERC for similar regulatory
treatment. At both December 31, 1996 and 1995, no SFAS 106 costs were deferred
as regulatory assets.
(C) Other Postemployment Benefits
On January 1, 1994, the Company adopted SFAS No. 112, Employers'
Accounting for Postemployment Benefits, 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. Implementation of SFAS 112 had no material effect on the Company's
financial position or results of operations. SFAS 112 costs deferred as
regulatory assets were $1.1 million and $0.9 million at December 31, 1996 and
1995, respectively.
12. COMMON STOCK OPTION AND PURCHASE PLANS
The Company has the following stock option plans: The 1982 Incentive
Stock Option Plan ("the 1982 Plan"), the 1982 Stock Option Plan for
Non-Employee Directors ("the 1982 Directors' Plan"), the 1986 Incentive Option
Plan ("the 1986 Plan"), the 1988 Incentive Stock Option Plan ("the 1988 Plan"),
the 1992 Stock Option Plan for Non-Employee Directors ("the 1992 Directors'
Plan"), the 1994 K N Energy, Inc. Long-Term Incentive Plan ("the LTIP Plan")
and the American Oil and Gas Corporation Stock Incentive Plan ("the AOG Plan").
The Company also has an employee stock purchase plan ("the ESP Plan").
51
<PAGE> 52
During 1993, AOG issued to its chief executive officer 50,000 shares
of restricted AOG common stock (23,500 shares of K N common stock) which vest
50 percent per year. AOG also sold 150,000 shares of AOG common stock (70,500
shares of K N common stock) to its president and chief operating officer for
$0.04 per share of AOG common stock ($0.0851 per share of K N common stock).
One-half of these shares was fully vested and nonforfeitable upon issuance, and
the remainder became fully vested upon consummation of the merger described in
Note 2. The market value of these AOG shares issued was approximately $2.3
million based on the average market price per share of AOG common stock on the
date of issuance. The market value of the restricted shares was reflected as
deferred compensation and was amortized over the vesting period.
The Company accounts for its plans under Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. The Company
recorded compensation expense totaling $0.8 million, $0.2 million and $1.3
million for 1996, 1995 and 1994, respectively, relating to restricted stock
grants awarded under the plans.
Had compensation cost for these plans been determined consistent with
SFAS No. 123, Accounting for Stock- Based Compensation, the Company's net
income and earnings per share would have been reduced to the following pro
forma amounts (in thousands except per share amounts):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NET INCOME:
As Reported $63,819 $52,522
======= =======
Pro Forma $62,497 $52,101
======= =======
EARNINGS PER SHARE:
As Reported $ 2.14 $ 1.83
======= =======
Pro Forma $ 2.10 $ 1.82
======= =======
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the pro forma amounts include $0.4 million and $0.3 million
related to the purchase discount offered under the ESP Plan for 1996 and 1995,
respectively.
The Company may sell up to 600,000 shares of stock to its eligible
employees under the ESP Plan. Employees purchased 87,615 shares and 95,572
shares in 1996 and 1995, respectively, and have purchased 484,599 shares
through December 31, 1996. Employees purchase shares through voluntary payroll
deductions at a 15 percent discount from the market value of the common stock,
as defined in the plan. The fair value per share of shares purchased in 1996
and 1995 was $6.45 and $5.35, respectively.
<TABLE>
<CAPTION>
OPTION SHARES
GRANTED
SHARES SUBJECT THROUGH EXPIRATION
PLAN NAME TO THE PLAN DECEMBER 31, 1996 VESTING PERIOD PERIOD
- --------- ----------- ----------------- -------------- ------
<S> <C> <C> <C> <C>
1982 Plan 888,525 888,525 Immediate 10 years
1982 Directors' Plan 124,393 124,393 Three years 10 years
1986 Plan 412,500 412,500 Immediate 10 years
1988 Plan 412,500 408,665 Immediate 10 years
1992 Directors' Plan 350,000 83,250 Immediate 10 years
LTIP Plan 2,200,000 1,425,800 0 - 5 years 5 - 10 years
AOG Plan 517,000 517,000 Three years 10 years
</TABLE>
52
<PAGE> 53
Under all plans, except the LTIP Plan and the AOG Plan, options are
granted at not less than 100 percent of the market value of the stock at the
date of grant. Under the LTIP Plan options may be granted at less than 100
percent of the market value of the stock at the date of grant.
At December 31, 1996, 135 employees, officers and directors of the
Company held options under the plans. A summary of the status of the Company's
stock option plans at December 31, 1996 and 1995, and changes during the years
then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
WTD AVG WTD AVG
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
OUTSTANDING AT BEGINNING
OF YEAR 1,164,510 $ 21.25 1,214,024 $ 18.49
Granted 925,126 $ 31.61 348,200 $ 25.87
Exercised (329,574) $ 15.88 (373,423) $ 16.54
Forfeited (33,575) $ 23.69 (24,291) $ 21.80
---------- --------- ---------- ---------
OUTSTANDING AT END OF YEAR 1,726,487 $ 27.78 1,164,510 $ 21.25
========== ========= ========== =========
EXERCISABLE AT END OF YEAR 604,962 $ 24.52 584,902 $ 18.16
========== ========= ========== =========
WEIGHTED AVERAGE FAIR VALUE
OF OPTIONS GRANTED $ 9.53 $ 4.71
========== ==========
</TABLE>
200,626 of the 1,726,487 options outstanding December 31, 1996 have
exercise prices between $0 and $16.79 with a weighted average exercise price of
$7.70 and a weighted average remaining contractual life of 6.22 years. 104,076
of these options are exercisable; their weighted average exercise price is
$14.85. 797,944 options have exercise prices between $21.68 and $31.75 with a
weighted average exercise price of $25.36 and a weighted average remaining
contractual life of 7.55 years. 424,644 of these options are exercisable; their
weighted average exercise price is $24.87. The remaining 727,917 options have
exercise prices between $32.13 and $38.50 with a weighted average exercise
price of $35.96 and a weighted average remaining contractual life of 9.63
years. Of these options 76,242 are exercisable; their weighted average exercise
price is $35.81.
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following assumptions:
risk-free interest rates of 5.5 percent, expected weighted average lives of 4
years and expected volatility of 20 percent for grants in both 1996 and 1995;
and expected dividend yields of 2.5 and 3.5 percent for grants in 1996 and
1995, respectively.
Option balances and option price ranges per share for 1994 under APB
25 were as follows: beginning balance of 983,628 shares at $8.96 to $28.99,
options granted of 309,500 shares at $0.00 to $24.00, options exercised of
67,093 shares at $0.00 to $23.04 and options forfeited of 12,011 shares at
$15.08 to $23.01.
13. COMMON STOCK WARRANTS
At December 31, 1996 and 1995, warrants to purchase 642,232 and
1,187,432 shares of the Company's common stock were outstanding, respectively.
The warrants are exercisable at $17.55 per warrant and expire on September 30,
1999. In August 1996, warrants for 545,200 shares were redeemed and cancelled
at a total cost of $7.4 million.
53
<PAGE> 54
14. COMMITMENTS AND CONTINGENT LIABILITIES
(A) Leases
On February 16, 1995, AOG Gas Transmission Company, L.P., a wholly
owned subsidiary of K N, acquired natural gas transmission pipeline and storage
assets in Texas. (See Note 3(D)). A portion of these assets has been funded
through 10-year operating leases. These operating leases contain purchase
options at the end of their lease terms. The Company also leases certain office
space, properties and equipment under operating leases.
Payments made under operating leases were $22.3 million in 1996,
$16.2 million in 1995 and $9.6 million in 1994.
Future minimum commitments under major operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- ----------- ------
<C> <C>
1997 $ 17,126
1998 13,400
1999 12,707
2000 12,042
2001 11,103
Thereafter 98,594
--------
Total Commitments $164,972
========
</TABLE>
(B) Basket Agreement
Under terms of an agreement (the "Basket Agreement") entered into with
Cabot as part of AOG's acquisition of Cabot's natural gas pipeline business,
AOG and Cabot equally share net payments made in settlement of certain
liabilities related to operations of the acquired business prior to the
acquisition date. At December 31, 1996 and 1995, the Company's estimated net
liability was $5.5 million and $5.6 million, respectively. The Company had made
net payments of $10.9 million as of December 31, 1996 and 1995. The difference
between net payments made by the Company and its estimated liability is
reflected in current assets and consists of (i) the present value of Cabot's
share of net payments and (ii) future recoveries from customers. The Basket
Agreement is expected to be settled in 1997.
(C) Guarantees of Unconsolidated Subsidiaries' Debt
The Company executed guarantees of two unconsolidated subsidiaries'
revolving credit agreements with Credit Lyonnais, effective July 19, 1996. One
guarantee is for TransColorado Gas Transmission Company ("TransColorado") for a
maximum of $7.5 million due by December 31, 1999 and another guarantee is for
Coyote Gas Treating, LLC ("Coyote") for a maximum of $10 million due by
December 31, 1999. As of December 31, 1996, $3.1 and $7.2 million,
respectively, represent the guaranteed amounts by the Company borrowed against
the TransColorado and Coyote agreements.
54
<PAGE> 55
(D) Capital Expenditure Budget
The consolidated capital expenditure budget for 1997 is approximately
$185 million, excluding acquisitions. Approximately $9.4 million had been
committed for the purchase of plant and equipment at December 31, 1996.
15. MAJOR CUSTOMER
Atmos Energy Corporation and affiliates comprised 10 percent of
consolidated revenues in 1995 and 11 percent in 1994.
16. BUSINESS SEGMENT INFORMATION
The Company is a natural gas energy products and services provider
engaged in the following activities:
o gathering, processing, marketing, storing and transporting natural
gas; providing field services to natural gas producers; and marketing
natural gas liquids (Gathering, Processing and Marketing Services);
o interstate storing and transporting natural gas (Interstate
Transportation and Storage Services);
o providing retail natural gas sales and transportation services
(Retail Natural Gas Services).
The Company was involved in developing and producing natural gas and crude oil
in 1995 and 1994 (Gas and Oil Production).
55
<PAGE> 56
BUSINESS SEGMENT INFORMATION
(Before Intersegment Eliminations)
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING REVENUES:
Gathering, Processing and Marketing Services $ 1,259,171 $ 899,581 $ 885,949
Interstate Transportation and
Storage Services 71,769 64,405 60,562
Retail Natural Gas Services 225,432 232,317 225,960
Gas and Oil Production - 10,721 14,128
Intersegment Eliminations (113,198) (95,626) (95,322)
----------- ----------- -----------
$ 1,443,174 $ 1,111,398 $ 1,091,277
=========== =========== ===========
OPERATING INCOME:
Gathering, Processing and Marketing Services $ 74,460 $ 64,623 $ 21,716
Interstate Transportation and
Storage Services 29,460 17,933 16,503
Retail Natural Gas Services 30,881 32,995 13,752
Gas and Oil Production - (189) 2,908
----------- ----------- -----------
OPERATING INCOME 134,801 115,362 54,879
Other Income and (Deductions) (35,085) (33,790) (30,058)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES $ 99,716 $ 81,572 $ 24,821
=========== =========== ===========
IDENTIFIABLE ASSETS:
Gathering, Processing and Marketing Services $ 869,141 $ 685,023 $ 574,280
Interstate Transportation and
Storage Services 315,503 178,882 216,753
Retail Natural Gas Services 419,415 328,166 304,065
Gas and Oil Production - 36,451 43,932
Corporate * 25,661 28,935 33,354
----------- ----------- -----------
$ 1,629,720 $ 1,257,457 $ 1,172,384
=========== =========== ===========
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE:
Gathering, Processing and Marketing Services $ 31,654 $ 26,510 $ 26,933
Interstate Transportation and
Storage Services 8,078 7,767 8,628
Retail Natural Gas Services 11,480 11,006 10,718
Gas and Oil Production - 4,608 3,999
----------- ----------- -----------
$ 51,212 $ 49,891 $ 50,278
=========== =========== ===========
CAPITAL EXPENDITURES AND ACQUISITIONS:
Gathering, Processing and Marketing Services $ 96,486 $ 67,774 $ 26,521
Interstate Transportation and
Storage Services 157,510 11,200 16,424
Retail Natural Gas Services 28,770 30,080 23,673
Gas and Oil Production - 6,156 35,256
----------- ----------- -----------
$ 282,766 $ 115,210 $ 101,874
=========== =========== ===========
</TABLE>
* Principally cash and investments
56
<PAGE> 57
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
K N ENERGY, INC. AND SUBSIDIARIES
QUARTERLY OPERATING RESULTS FOR 1996 AND 1995
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1996
----
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Operating Revenues $385,851 $277,148 $304,317 $475,858
Operating Income 35,776 22,084 30,157 46,784
Net Income 17,507 8,848 13,693 23,771
Preferred Dividends 100 99 99 100
Earnings Available for Common Stock $ 17,407 $ 8,749 $ 13,594 $ 23,671
======== ======== ======== ========
Number of Common Shares Used In
Computing Earnings Per Share 28,945 29,181 30,046 30,875
======== ======== ======== ========
Earnings Per Common Share $ 0.60 $ 0.30 $ 0.46 $ 0.78
======== ======== ======== ========
<CAPTION>
1995
----
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Operating Revenues $294,058 $238,105 $248,976 $330,259
Operating Income 31,781 19,266 25,973 38,342
Net Income 14,518 6,922 11,829 19,253
Preferred Dividends 123 123 123 123
Earnings Available for Common Stock $ 14,395 $ 6,799 $ 11,706 $ 19,130
======== ======== ======== ========
Number of Common Shares Used In
Computing Earnings Per Share 28,144 28,353 28,472 28,649
======== ======== ======== ========
Earnings Per Common Share $ 0.51 $ 0.24 $ 0.41 $ 0.67
======== ======== ======== ========
</TABLE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no such matters during 1996.
57
<PAGE> 58
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) Identification of Directors
For information regarding the Directors, see pages 3-6 of the 1997
Proxy Statement.
(B) Identification of Executive Officers
See Executive Officers of the Registrant under Part I.
(C) Identification of Certain Significant Employees
None.
(D) Family Relationships
See "Election of Directors" on page 6 of the 1997 Proxy Statement.
(E) Business Experience
See Executive Officers of the Registrant under Part I. For business
experience of the Directors, see pages 3-6 of the 1997 Proxy Statement.
(F) Involvement in Certain Legal Proceedings
None.
(G) Promoters and Control Persons
None.
ITEM 11: EXECUTIVE COMPENSATION
See "Director Compensation," "Report of the Compensation Committee in
Executive Compensation," "Executive Compensation," "Stock Options," "Performance
Graph," "Pension and Supplemental Benefits" and "Severance and Other Agreements"
on pages 7-20 of the 1997 Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the following pages of the 1997 Proxy Statement: (i) Pages 3-6
relating to common stock owned by directors; (ii) page 18, "Executive Stock
Ownership;" and (iii) page 21, "Principal Shareholders."
58
<PAGE> 59
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
See "Relationship Between Certain Directors and the Company" on
pages 6-7 of the 1997 Proxy Statement.
(B) Certain Business Relationships
See "Relationship Between Certain Directors and the Company" on
pages 6-7 of the 1997 Proxy Statement.
(C) Indebtedness of Management
None.
(D) Transactions with Promoters
Not applicable.
59
<PAGE> 60
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) See the index for a listing and page numbers of financial
statements and exhibits included herein or incorporated by reference.
Executive Compensation Plans and Arrangements
Form of Key Employee Severance Agreement (Exhibit 10.2,
Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form
10-K for the year ended December 31, 1987)*
1982 Stock Option Plan for Nonemployee Directors of the
Company with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8
dated September 2, 1988 to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
1982 Incentive Stock Option Plan for key employees of the
Company (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the
Annual Report on Form 10-K for the year ended December 31, 1987)*
1986 Incentive Stock Option Plan for key employees of the
Company (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the
Annual Report on Form 10-K for the year ended December 31, 1987)*
1988 Incentive Stock Option Plan for key employees of the
Company (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the
Annual Report on Form 10-K for the year ended December 31, 1987)*
Form of Grant Certificate for Employee Stock Option Plans
(Exhibit 10.7, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual
Report on Form 10-K for the year ended December 31, 1987)*
Directors' Deferred Compensation Plan Agreement (Exhibit
10.8, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on
Form 10-K for the year ended December 31, 1987)*
1987 Directors' Deferred Fee Plan As Amended and Form of
Participation Agreement regarding the Plan (Exhibit 10(h) to the Annual Report
on Form 10-K for the year ended December 31, 1995)*
1992 Stock Option Plan for Nonemployee Directors of the
Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)*
1994 K N Energy, Inc. Long-Term Incentive Plan (Attachment A
to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)*
60
<PAGE> 61
K N Energy, Inc. 1996 Executive Incentive Plan (Exhibit 10(l)
to the Annual Report on Form 10-K for the year ended December 31, 1995)*
K N Energy, Inc. Nonqualified Deferred Compensation Plan
(Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December
31, 1994)*
K N Energy, Inc. Nonqualified Retirement Income Restoration
Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended
December 31, 1994)*
K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan
(Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December
31, 1994)*
Employment Agreement dated December 14, 1995 between K N
Energy, Inc. and Morton C. Aaronson (Exhibit 10(p) to the Annual Report on
Form 10-K for the year ended December 31, 1995)*
Letter Agreement dated December 4, 1995 between K N Energy,
Inc. and Charles W. Battey (Exhibit 10(q) to the Annual Report on Form 10-K
for the year ended December 31, 1995)*
K N Energy, Inc. Performance Incentive Plan (Exhibit 10(u) to
the Annual Report on Form 10-K for the year ended December 31, 1995)*
Form of Change of Control Severance Agreement (Attached
hereto as Exhibit 10(u))**
Form of Incentive Stock Option Agreement (Attached hereto as
Exhibit 10(v))**
Form of Restricted Stock Agreement (Attached hereto as Exhibit
10(w))**
Employment Agreement dated March 21, 1996 between K N Energy,
Inc. and Murray R. Smith (Attached hereto as Exhibit 10(x))**
(b) Reports on Form 8-K
On January 23, 1997, a Current Report on Form 8-K was filed to report
that on that date K N and PacifiCorp announced the formation of a joint
venture, called enable, which will provide a broad portfolio of products and
services under the Simple Choice(sm) brand. Simple Choice(sm) offers to
utilities a single package of energy, home-oriented, communication and
infotainment products and services which can be marketed under a licensee's own
corporate name.
On January 28, 1997, a Current Report on Form 8-K was filed to report
that on that date K N and Enron Corp. announced the execution of a letter of
intent providing for the purchase by K N of several Enron Corp. subsidiaries
which own the Bushton, Kansas natural gas processing facility and other Hugoton
Basin gathering assets, located primarily in Kansas.
* Incorporated herein by reference.
** Included in SEC and NYSE copies only.
61
<PAGE> 62
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)
March 11, 1997 By /s/ Clyde E. McKenzie
---------------------
Clyde E. McKenzie
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Edward H. Austin, Jr. Director
- -------------------------------
Edward H. Austin, Jr.
/s/ Charles W. Battey Director
- -------------------------------
Charles W. Battey
/s/ Stewart A. Bliss Director
- -------------------------------
Stewart A. Bliss
/s/ David W. Burkholder Director
- -------------------------------
David W. Burkholder
/s/ David M. Carmichael Director
- -------------------------------
David M. Carmichael
/s/ Robert H. Chitwood Director
- -------------------------------
Robert H. Chitwood
/s/ Howard P. Coghlan Director
- -------------------------------
Howard P. Coghlan
/s/ Jordan L. Haines Director
- -------------------------------
Jordan L. Haines
/s/ Larry D. Hall Chairman, President, Chief Executive Officer
- ------------------------------- and Director (Principal Executive Officer)
Larry D. Hall
/s/ William J. Hybl Director
- -------------------------------
William J. Hybl
/s/ Clyde E. McKenzie Vice President and Chief Financial Officer
- ------------------------------- (Principal Financial and Accounting Officer)
Clyde E. McKenzie
/s/ Edward Randall, III Director
- -------------------------------
Edward Randall, III
/s/ R. Gordon Shearer Director
- -------------------------------
R. Gordon Shearer
/s/ James C. Taylor Director
- -------------------------------
James C. Taylor
/s/ H. A. True, III Director
- -------------------------------
H. A. True, III
62
<PAGE> 63
Exhibit Index
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
List of Executive Compensation Plans and Arrangements ......... 60-61
Exhibit 3(a) - Restated Articles of Incorporation
(Exhibit 3(a) to the Annual Report on Form 10-K
for the year ended December 31, 1994)*
Exhibit 3(b) - By-Laws of the Company, as amended
(Attached hereto as Exhibit 3(b))**
Exhibit 4(a) - Indenture dated as of September 1,
1988, between K N Energy, Inc. and Continental
Illinois National Bank and Trust Company of Chicago
(Exhibit 1.2, Current Report on Form 8-K
Dated October 5, 1988)*
Exhibit 4(b) - First supplemental indenture dated
as of January 15, 1992, between K N Energy, Inc.
and Continental Illinois National Bank and Trust
Company of Chicago (Exhibit 4.2, File No. 33-45091)*
Exhibit 4(c) - Second supplemental indenture dated
as of December 15, 1992, between K N Energy, Inc.
and Continental Bank, National Association (Exhibit
1.2 Current Report on Form 8-K dated December 15,
1992)*
Exhibit 4(d) - Indenture dated as of November 20,
1993, between K N Energy, Inc. and Continental
Bank, National Association (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 instruments to the
Commission upon request.
Exhibit 10(a) - Form of Key Employee Severance
Agreement (Exhibit 10.2, Amendment No. 1 on Form
8 dated September 2, 1988 to the Annual Report
on Form 10-K for the year ended December 31,
1987)*
Exhibit 10(b) - 1982 Stock Option Plan for 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)*
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)*
</TABLE>
63
<PAGE> 64
Exhibit Index
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Exhibit 10(f) - Form of Grant Certificate for
Employee Stock Option Plans (Exhibit 10.7,
Amendment No. 1 on Form 8 dated September 2,
1988 to the Annual Report on Form 10-K for the
year ended December 31, 1987)*
Exhibit 10(g) - Directors' Deferred Compensation
Plan Agreement (Exhibit 10.8, Amendment No. 1 on
Form 8 dated September 2, 1988 to the Annual
Report on Form 10-K for the year ended December
31, 1987)*
Exhibit 10(h) - 1987 Directors' Deferred Fee Plan
As Amended and Form of Participation Agreement
regarding the Plan (Exhibit 10(h) to the Annual
Report on Form 10-K for the year ended
December 31, 1995)*
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) - 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 10(k) - K N Energy, Inc. 1996 Executive
Incentive Plan (Exhibit 10(l) to the Annual
Report on Form 10-K for the year ended
December 31, 1995)*
Exhibit 10(l) - K N Energy, Inc. Nonqualified
Deferred Compensation Plan (Exhibit 10(m) to the
Annual Report on Form 10-K for the year ended
December 31, 1994)*
Exhibit 10(m) - K N Energy, Inc. Nonqualified
Retirement Income Restoration Plan (Exhibit
10(n) to the Annual Report on Form 10-K for the
year ended December 31, 1994)*
Exhibit 10(n) - K N Energy, Inc. Nonqualified
Profit Sharing Restoration Plan (Exhibit 10(o)
to the Annual Report on Form 10-K for the year
ended December 31, 1994)*
Exhibit 10(o) - Employment Agreement dated December 14, 1995
between K N Energy, Inc. and Morton C. Aaronson
(Exhibit 10(p) to the Annual Report on Form 10-K for
the year ended December 31, 1995)*
Exhibit 10(p) - Letter Agreement dated December 4,
1995 between K N Energy, Inc. and Charles W.
Battey (Exhibit 10(q) to the Annual Report on
Form 10-K for the year ended December 31, 1995)*
Exhibit 10(q) - Amended and Restated Basket
Agreement dated as of June 30, 1990, by and
between American Pipeline Company ("APC"), Cabot
and Cabot Transmission Corporation (Exhibit
10.5(a) to the Annual Report on Form 10-K for
American Oil and Gas Corporation ("AOG") for the
year ended December 31, 1993)*
Exhibit 10(r) - First Amendment to Amended and
Restated Omnibus Acquisition Agreement and
Amended and Restated Basket Agreement dated as
of March 31, 1992 by and among AOG, APC, Cabot
and Cabot Transmission (Exhibit 10.5(d) to the
Annual Report on Form 10-K for AOG for the year
ended December 31, 1993)*
Exhibit 10(s) - Rights Agreement between K N
Energy, Inc. and the Bank of New York, as Rights
Agent, dated as of August 21, 1995 (Exhibit 1 on
</TABLE>
64
<PAGE> 65
Exhibit Index
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Form 8-A dated August 21, 1995)*
Exhibit 10(t) - K N Energy, Inc. Performance
Incentive Plan (Exhibit 10(u) to the Annual
Report on Form 10-K for the year ended December
31, 1995)*
Exhibit 10(u) - Form of Change of Control Severance
Agreement (Attached hereto as Exhibit 10(u))**
Exhibit 10(v) - Form of Incentive Stock Option Agreement
(Attached hereto as Exhibit 10(v))**
Exhibit 10(w) - Form of Restricted Stock Agreement
(Attached hereto as Exhibit 10(w))**
Exhibit 10(x) - Employment Agreement dated March 21,
1996 between K N Energy, Inc. and Murray R. Smith
(Attached hereto as Exhibit 10(x))**
Exhibit 12 - Ratio of Earnings to Fixed Charges .............. 66
Exhibit 13 - 1996 Annual Report to Shareholders*** ........... 67
Exhibit 21 - Subsidiaries of the Registrant .................. 68
Exhibit 23 - Consent of Independent Public Accountants ....... 69
Exhibit 27 - Financial Data Schedule****
</TABLE>
* Incorporated herein by reference.
** Included in SEC and NYSE copies only.
*** Such report is being furnished for the information of the Securities
and Exchange Commission only and is not to be deemed filed as a part
of this annual report on Form 10-K.
**** Included in SEC copy only.
65
<PAGE> 66
EXHIBIT 12
K N ENERGY, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Earnings:
Income From Continuing Operations
per Statements of Income $ 63,819 $ 52,522 $ 15,321 $ 30,869 $ 36,342
Add:
Interest and Debt Expense 37,760 34,316 32,009 31,478 27,608
Income Taxes 35,897 29,050 9,500 18,599 20,068
Portion of Rents Representative
of the Interest Factor 7,417 5,082 3,492 2,863 1,901
-------- -------- -------- -------- --------
Income as Adjusted $144,893 $120,970 $ 60,322 $ 83,809 $ 85,919
======== ======== ======== ======== ========
Fixed Charges:
Interest and Debt Expense per
Statements of Income
(Includes Amortization of Debt
Discount, Premium and Expense) $ 35,933 $ 34,211 $ 31,815 $ 30,909 $ 27,090
Add:
Interest Capitalized 1,827 105 338 965 842
Portion of Rents Representative
of the Interest Factor 7,417 5,082 3,492 2,863 1,901
Preferred Stock Dividends of
Subsidiary - - - 69 3,084
-------- -------- -------- -------- --------
Fixed Charges $ 45,177 $ 39,398 $ 35,645 $ 34,806 $ 32,917
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 3.21 3.07 1.69 2.41 2.61
======== ======== ======== ======== ========
</TABLE>
66
<PAGE> 67
EXHIBIT 13
K N ENERGY, INC.
1996 ANNUAL REPORT TO SHAREHOLDERS
Interested persons may receive a copy of the Company's 1996
Annual Report to Shareholders without charge by forwarding a written request
to: K N Energy, Inc., Investor Relations Department, P. O. Box 281304,
Lakewood, Colorado 80228-8304.
67
<PAGE> 68
EXHIBIT 21
K N ENERGY, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF COMPANY STATE OF INCORPORATION
- --------------- ----------------------
<S> <C>
AOG Gas Transmission Company, L.P. ......................... Texas
American Gas Storage, L.P. ................................. Texas
American Gathering, L.P. ................................... Texas
American Oil & Gas Corporation ............................. Delaware
American Pipeline Company .................................. Delaware
American Processing, L.P. .................................. Texas
Caprock Pipeline Company ................................... Delaware
Compressor Pump & Engine Machine, Inc. ..................... Wyoming
K N Field Services, Inc. ................................... Colorado
K N Gas Gathering, Inc. .................................... Colorado
K N Gas Supply Services, Inc. .............................. Colorado
K N Interstate Gas Transmission Co. ........................ Colorado
K N Marketing, Inc. ........................................ Colorado
K N Marketing, L.P. ........................................ Texas
K N Natural Gas, Inc. ...................................... Colorado
K N Services, Inc. ......................................... Colorado
K N Trading, Inc. .......................................... Delaware
K N Wattenberg Transmission Limited Liability Company ...... Colorado
K N WesTex Gas Service Company ............................. Texas
Northern Gas Company ....................................... Wyoming
Red River Pipeline, L.P. ................................... Texas
Rocky Mountain Natural Gas Company ......................... Colorado
Westar Transmission Company ................................ Delaware
Wildhorse Energy Partners, LLC ............................. Delaware
</TABLE>
All of the subsidiaries named above are included in the consolidated financial
statements of the Registrant included herein.
68
<PAGE> 69
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in (i) Registration Statements on Form S-16, File
Nos. 2-51894, 2-55664, 2-63470 and 2-75654; (ii) Registration Statements on
Form S-8, File Nos. 2-77752, 33-10747, 33-24934, 33-33018, 33-54403, 33-54443,
33-54555, 333-08059 and 333-08087; and (iii) Registration Statements on Form
S-3, Files Nos. 2-84910, 33-26314, 33-23880, 33-42698, 33-44871, 33-45091,
33-46999, 33-54317, 33-69432 and 333-04385 of our report dated February 4,
1997, on the consolidated financial statements of K N Energy, Inc. and
subsidiaries for the year ended December 31, 1996.
/s/ Arthur Andersen LLP
Denver, Colorado
March 11, 1997
69
<PAGE> 1
EXHIBIT 3(b)
K N ENERGY, INC.
(Formerly Kansas-Nebraska Natural Gas Company, Inc.)
---ooOoo---
B Y - L A W S
As Amended to August 20, 1996
Effective August 20, 1996
---ooOoo---
ARTICLE I
OFFICES
Section 1. Offices. The registered office shall be at 205 F Street
in the City of Phillipsburg, County of Phillips, State of Kansas. The
Company's principal executive office shall be at 370 Van Gordon Street,
Lakewood, Colorado 80228-8304 (mailing address: Post Office Box 281304,
Lakewood, Colorado 80228-8304).
Section 2. Additional Offices. The corporation may also have offices
at such other places both within and without the State of Kansas as the Board
of Directors may from time to time determine or the business of the corporation
may require.
ARTICLE II
MEETING OF STOCKHOLDERS
Section 1. Time and Place. The annual meeting of the shareholders
for the election of directors and all special meetings of shareholders for that
or for any other purpose may be held at such time and place within or without
the State of Kansas
<PAGE> 2
as shall be stated in the notice of the meeting, or in a duly executed waiver
of notice thereof.
Section 2. Annual Meeting. The annual meeting of the shareholders
shall be held each year at a time to be determined by the Board of Directors,
at which meeting the shareholders shall elect a Board of Directors, and
transact such other business as may be properly brought before the meeting.
Section 3. Special Meetings. Special meetings of the shareholders,
for any purpose or purposes, unless otherwise prescribed by statute may be
called by the Chairman of the Board, if any, the President or the Board of
Directors, and shall be called by the President or the Secretary at the request
in writing of a majority of the directors, or at the request in writing of
shareholders owning at least fifty-one percent (51%) in amount of the shares of
the Corporation issued and outstanding and entitled to vote. Such request
shall state the purpose or purposes of the proposed meeting.
Section 4. Notice. Written notice of the place, date and hour of any
annual or special meeting of shareholders shall be given personally or by mail
to each shareholder entitled to vote thereat, not less than ten (10) nor more
than fifty (50) days prior to the meeting.
2
<PAGE> 3
The notice shall state in addition, the purpose or purposes for which
the meeting is called, and by, or at whose direction it is being issued.
Section 5. Quorum. Except as otherwise provided by the Articles of
Incorporation, the holders of a majority of the shares of the Corporation
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall be necessary to and shall constitute a quorum for
the transaction of business at all meetings of the shareholders.
If, however, such quorum shall not be present or represented at any
meeting of the shareholders, the shareholders entitled to vote thereat present
in person or represented by proxy shall have power to adjourn the meeting from
time to time, but not for more than thirty (30) days, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed.
Section 6. Voting. At any meeting of the shareholders every
shareholder having the right to vote shall be entitled to vote in person, or by
proxy. Except as otherwise provided by law or the Articles of Incorporation,
each shareholder of record shall be entitled, as to each proposal, to one vote
for each share of stock standing in his name on the books of the Corporation on
the date fixed as the record date for the
3
<PAGE> 4
determination of its shareholders entitled to vote. All elections of directors
shall be by written ballot and shall be determined by a plurality vote, and,
except as otherwise provided by law or the Articles of Incorporation, all other
matters shall be determined by vote of a majority of the shares present or
represented at such meeting and voting on such questions.
Section 7. Proxies. Every proxy must be executed in writing by the
shareholder or by his attorney-in-fact. No proxy shall be valid after the
expiration of eleven (11) months from the date thereof, unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure of the
shareholder executing it, except in those cases where an irrevocable proxy is
permitted by law.
Section 8. Consents. Whenever by any provision of law or of the
Articles of Incorporation, the vote of shareholders at a meeting thereof is
required or permitted to be taken in connection with any corporate action, the
meeting and vote of shareholders may be dispensed with, if all the shareholders
who would have been entitled to vote upon the action if such meeting were held,
shall consent in writing to such corporate action being taken.
Section 9. Presiding Officer. Meetings of the shareholders shall be
presided over by the Chairman of the Board, if any, or if he is not present, by
the President, or, if he is not present,
4
<PAGE> 5
by a Vice President or, if neither the Chairman of the Board, the President nor
a Vice President is present, by a chairman to be chosen at the meeting. The
Secretary of the Company or, if he is not present, an Assistant Secretary of
the Company or, if neither the Secretary nor an Assistant Secretary is present,
a secretary to be chosen at the meeting, shall act as secretary of the meeting.
Section 10. Notice of Shareholder Business. At an annual meeting of
shareholders, only such business shall be conducted as shall have been properly
brought before the meeting (a) by or at the direction of the Board of Directors
or (b) by a shareholder who is a shareholder of record at the time of giving
such notice, who shall be entitled to vote at such meeting and who complies
with the notice procedures set forth in this Section. For business to be
properly brought before an annual meeting by a shareholder, the shareholder
must have given timely notice thereof in writing to the Secretary. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation, not less than 40 days prior
to the meeting. A shareholder's notice to the Secretary shall set forth as to
each matter the shareholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at
5
<PAGE> 6
the annual meeting, (b) the name and address, as they appear on the
Corporation's books, of the shareholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
shareholder, and (d) any material interest of the shareholder in such business.
Nothwithstanding anything in these By-Laws to the contrary, no business shall
be conducted at an annual meeting except in accordance with the procedures set
forth in this Section. The Chairman of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the provisions of this
Section, and if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provisions of this Section, a
shareholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended and the rules and regulations
thereunder with respect to the matters set forth in this Section.
ARTICLE III
DIRECTORS
Section 1. Number and Tenure. The whole Board of Directors of the
Corporation shall consist of fourteen members. The
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directors shall be classified with respect to the time for which they shall
severally hold office by dividing them into three classes, which were first
approved at the annual meeting of shareholders in 1975; Class I shall consist
of three directors whose initial term of office shall expire in 1994, Class II
shall consist of four directors whose initial term of office shall expire in
1995, and Class III shall consist of three directors whose initial term of
office shall expire in 1996. Each director shall hold office until his
successor is duly elected and qualified or until his resignation in writing has
been filed with the corporation. At each annual election, the successors of
the class of directors whose terms shall expire that year shall be elected to
hold office for a term of three years, so that the term of office of one class
of directors shall expire in each year, except where the Board of Directors
determines that a newly elected director shall be elected by the shareholders
to fill a vacancy of a directorship created subsequent to the previous annual
meeting, such director shall be elected to hold office for the balance of the
term of the class of directors of which he is to be a member, as determined by
the Board of Directors, and until his successor is elected and qualified.
Section 2. Vacancies. A vacancy on the Board of Directors or a newly
created directorship may be filled by a majority of the remaining directors,
though less than a quorum, or by the
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sole director, by election of a new director, who at the time of his election
shall be designated as a member of one of the classes of directors and shall
hold office until the next election of the class of which he has become a
member, unless his term of office is terminated by death, resignation, or
otherwise.
Section 3. Resignation, Retirement; Removal. Any director may resign
at any time. Any director who experiences a change in his personal or business
circumstances or principal employment shall immediately tender his resignation
as a director of the Corporation to the Executive Committee of the Board of
Directors. Any director who is not an employee of the Corporation shall retire
his position as a director at the annual meeting of the shareholders of the
Corporation next occurring after such director attains the age of 72 years.
The Board of Directors may by unanimous vote of other directors then in office,
remove a director with or without cause. The shareholders entitled to vote for
the election of directors may remove a director, with cause as provided in the
Articles of Incorporation.
Section 4. Advisory Directors and Directors Emeritus. The Board of
Directors by a vote of a majority of the directors present and entitled to
vote, at any regular or special meeting at which a quorum is present, may
designate such number of persons as it may from time to time determine, as an
"Advisory Director" or may designate a former member of the Board as a
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"Director Emeritus," if such former member is willing to so serve. Each
Advisory Director and each Director Emeritus shall serve, subject to the
pleasure of the regular Board of Directors, until the next succeeding annual
meeting of the regular Board of Directors, following the annual meeting of the
stockholders, at which such regular directors are elected, unless he shall have
resigned. Each Advisory Director and each Director Emeritus shall be notified
of all regular or special meetings of the regular Board of Directors, shall be
entitled to attend and participate therein, but shall not be entitled to vote.
Each Advisory Director and each Director Emeritus shall be reimbursed for any
necessary expenses of attending directors' meetings.
Section 5. Nomination of Director Candidates.
(a) Eligibility to Make Nominations. Nominations of candidates for
election as directors of the Corporation at any meeting of shareholders called
for election of directors, in whole or in part (an "Election Meeting"), may be
made by the Board of Directors or by any shareholder who is a shareholder of
record at the time of giving notice, who shall be entitled to vote at such
Election Meeting and who complies with the notice procedures set forth in this
Section.
(b) Procedure for Nominations by Shareholders. Nominations, other
than those made by the Board of Directors, shall be made pursuant to timely
notice in writing to the
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Secretary. To be timely, shareholder's notice shall be delivered to or mailed
and received at the principal executive offices of the Corporation not less
than 40 days prior to the date of the Election Meeting. Such shareholder's
notice shall set forth (i) the name, age, business address and residence
address of each nominee proposed in such notice, (ii) the principal occupation
or employment of each such nominee, (iii) the number of shares of capital stock
of the Corporation which are beneficially owned by each such nominee and (iv)
such other information concerning each such nominee as would be required, under
the rules of the SEC, in a proxy statement soliciting proxies for the election
of such nominees. Such notice shall include a signed consent to serve as a
director of the Corporation, if elected, of each such nominee. Such notice
shall also set forth as to the shareholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such shareholder and
(ii) the class and number of shares of the Corporation which are beneficially
owned by such shareholder.
(c) Meeting Procedures. No person shall be eligible for election as
a director of the Corporation unless nominated in accordance with the
procedures set forth in this Section. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by this Section 5, and
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if he should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(d) Substitution of Nominees. In the event that a person is validly
designated as a nominee to the Board and shall thereafter become unable or
unwilling to stand for election to the Board of Directors, the Board of
Directors or the shareholder who proposed such nominee, as the case may be, may
designate a substitute nominee.
(e) Securities Exchange Act of 1934. Notwithstanding the foregoing
provisions of this Section, a shareholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended and the rules
and regulations thereunder with respect to the matters set forth in this
Section.
ARTICLE IV
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. Place. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Kansas.
Section 2. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as shall
from time to time be determined by the Board.
Section 3. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, if any,
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or by the President on two days' notice to each director, either personally or
by mail or by telegram; special meetings shall be called by the Chairman,
President or Secretary in like manner and on like notice on the written request
of two directors.
Section 4. Quorum. At all meetings of the Board of Directors a
majority of the entire Board shall be necessary to and constitute a quorum for
the transaction of business and the act of a majority of the directors present
at any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by statute or by
the Articles of Incorporation. If a quorum shall not be present at any meeting
of the Board of Directors the directors present thereat may adjourn the meeting
from time to time until a quorum shall be present. Notice of such adjournment
shall be given to any directors who were not present and, unless announced at
the meeting, to the other directors.
Section 5. Consents. Unless otherwise restricted by the Articles of
Incorporation or these By-Laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or of such committee as the case
may be, consent thereto in writing and such written consent is filed with the
minutes of the Board or committee. Such consents may be in
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counterpart so that each member will have signed a consent, but all members
need not sign the same document.
Section 6. Compensation. Directors, as such, shall not receive any
stated salary for their services, but, by resolution of the Board of Directors
an annual fee, plus a fee and expenses for attendance at meetings may be
allowed, provided that nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor.
Section 7. Presiding Officer. Meetings of the Board of Directors
shall be presided over by the Chairman of the Board, if any, or, if he is not
present, by the President or, if he is not present, by a chairman to be chosen
at the meeting. The Secretary of the Company, or, if he is not present, an
Assistant Secretary of the Company, or, if neither the Secretary nor an
Assistant Secretary is present, a secretary to be chosen at the meeting, shall
act as secretary of the meeting.
ARTICLE V
COMMITTEES OF DIRECTORS
Section 1. Designation. The Board of Directors, by resolution
adopted by a majority of the whole Board, may designate from among its members
one or more committees, each consisting of two or more directors, each of
which, to the extent
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provided in such resolution, shall have and may exercise the powers of the
Board of Directors in the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it.
The Board may designate one or more directors as alternate members of
any committee who may replace any absent or disqualified member at any meeting
of the committee.
Section 2. Tenure; Reports. Each such committee shall serve at the
pleasure of the Board. It shall keep minutes of its meetings and report the
same to the Board.
ARTICLE VI
EXECUTIVE COMMITTEE
Section 1. Appointment and Authority. The Board of Directors
may by resolution or resolutions passed by a majority of the whole Board create
and designate an Executive Committee consisting of the officer who is
designated as Chief Executive Officer and two or more other directors of the
Company who shall hold office subject to the pleasure of the Board of
Directors, and the Board shall have the power at any time to remove any of the
members of the Executive Committee and to appoint to the Committee other
directors in lieu of the directors so removed. The Chief Executive Officer
shall serve as Chairman of the Executive Committee. During the intervals
between the meetings
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of the Board of Directors the Executive Committee shall possess and may
exercise the powers delegated by the Board of Directors, including the power to
authorize the seal of the Company to be affixed to all papers which may require
it, to authorize the payment of dividends, to authorize the issuance of stock,
to serve as a nominating committee for the Board of Directors and to approve
resolutions necessary for the day-to-day operations of the Company; provided,
however, that the Executive Committee shall not have power to amend these
By-Laws or to fill vacancies on the Board of Directors or to fill vacancies in,
or to change the membership of, said Committee. The Executive Committee shall
also have and may exercise all the powers of the Board of Directors except as
aforesaid whenever a quorum of the Board shall fail to be present at any
meeting of the Board.
Section 2. Report of Action Taken. All action of the Executive
Committee shall be reported to the Board of Directors at its meeting next
succeeding such action, and shall be subject to revision and alteration by the
Board, provided that no rights of third parties shall be affected by any such
revision or alteration. Regular minutes of the proceedings of the Executive
Committee shall be kept in a book provided for that purpose.
Section 3. Quorum and Procedure. A majority of the members of the
Executive Committee shall be necessary to constitute a quorum, and, in every
case, an affirmative vote of a majority of
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the members shall be necessary for the passage of any resolution. It shall fix
its own rules of procedure and shall meet as provided by such rules or by
resolution of the Board, and it shall also meet at the call of the Chairman or
of any two members of the Committee. Should the Executive Committee fail to
fix its own rules therefor, the provisions of these By-Laws, pertaining to the
calling of meetings and conduct of business by the Board of Directors, shall
apply as nearly as may be.
Section 4. Consent. Unless otherwise restricted by statute, the
Articles of Incorporation or these By-Laws, any action required or permitted to
be taken at any meeting of the Executive Committee thereof may be taken without
a meeting, if a written consent thereto is signed by each member of the
Executive Committee, and such written consent is filed with the minutes of
proceedings of the Executive Committee. Such consents may be in counterpart so
that each member will have signed a consent but all members need not sign the
same document.
ARTICLE VII
NOTICES
Section 1. Form; Delivery. Notices to directors and shareholders
shall be in writing and delivered personally or mailed to the directors or
shareholders at their addresses appearing on the books of the Corporation.
Notice by mail shall
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be deemed to be given at the time when the same shall be mailed. Notice to
directors may also be given by telegram.
Section 2. Waiver. Whenever any notice is required to be given under
the provisions of the statutes or of the Articles of Incorporation or of these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be
deemed equivalent thereto. In addition, any shareholder attending a meeting of
shareholders in person or by proxy without protesting at the beginning of the
meeting the lack of notice thereof to him, and any director attending a meeting
of the Board of Directors without protesting prior to the meeting or at its
commencement such lack of notice shall be conclusively deemed to have waived
notice of such meeting.
ARTICLE VIII
OFFICERS
Section 1. Executive Officers. The executive officers of the
Corporation shall be a President and one or more Vice Presidents, a Secretary,
a Treasurer and may include a Chairman of the Board.
Section 2. Designation; Term of Office; Removal. All officers shall
be elected by the Board of Directors and shall hold office for such term as may
be prescribed by the Board or
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until their successors are chosen and qualified or until their resignation is
filed in the office of the Secretary, whichever first occurs. Any officer
elected by the Board may be removed with or without cause at any time by the
Board.
Section 3. Authority and Duties. All officers, as between themselves
and the Corporation, shall have such authority and perform such duties in the
management of the Corporation as may be provided in these By-Laws, or, to the
extent not so provided, by the Board of Directors.
Section 4. Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors and the compensation of
agents shall either be so fixed or shall be fixed by officers thereunto duly
authorized.
Section 5. Vacancies. If an office becomes vacant for any reason,
the Board of Directors shall fill such vacancy. Any officer so elected by the
Board shall serve only until such time
as the unexpired term of his predecessor shall have expired unless re-elected
or reappointed by the Board.
Section 6. The Chairman of the Board. The Chairman of the Board of
Directors, if there be a Chairman, shall preside at all meetings of the
shareholders and directors and shall have such other powers and duties as may
from time to time be assigned by the Board including designation as Chief
Executive Officer if the President is not so designated.
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Section 7. The President. The President shall be the Chief Executive
Officer of the Corporation unless the Chairman of the Board is so designated,
in which event the President shall be Chief Operating Officer of the
Corporation. In the absence of the Chairman of the Board, or if there be no
Chairman, he shall preside at all meetings of the shareholders and directors.
The Chief Executive Officer, whether the Chairman of the Board or the
President, shall be ex officio a member of all standing committees, shall have
general and active management and control of the business and affairs of the
Corporation subject to the control of the Board of Directors, and shall see
that all orders and resolutions of the Board are carried into effect.
Section 8. Vice Presidents. The Vice Presidents in the order of
their seniority or in any other order determined by the Board, shall in the
absence or disability of the President, perform the duties and exercise the
powers of the President, and shall generally assist the President and perform
such other duties as the Board of Directors or the President shall prescribe.
Section 9. The Secretary. The Secretary shall attend all meetings of
the Board and all meetings of the shareholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. He shall give,
or cause to be
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given, notice of all meetings of the shareholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors or President, under whose supervision he shall act. He
shall keep in safe custody the seal of the Corporation and, when authorized by
the Board, affix the same to any instrument requiring it and, when so affixed,
it shall be attested by his signature or by the signature of the Treasurer or
an Assistant Secretary or Assistant Treasurer. He shall keep in safe custody
the certificate books and shareholder records and such other books and records
as the Board may direct and shall perform all other duties incident to the
office of the Secretary.
Section 10. Assistant Secretaries. The Assistant Secretaries, if
any, in order of their seniority or in any other order determined by the Board
shall, in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary and shall perform such other duties as the
Board of Directors or the Secretary shall prescribe.
Section 11. The Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the
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Board of Directors. He shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. He shall establish and execute programs for the provision of the
capital required by the Company, including negotiating the procurement of
capital and maintaining the required financial arrangements. He shall
establish and maintain an adequate market for the Company's securities and, in
connection therewith, maintain adequate liaison with investment bankers,
financial analysts and shareholders. He shall maintain adequate sources for
the Company's current borrowings from commercial banks and other lending
institutions.
He shall maintain banking arrangements to receive, have custody of and
disburse the Company's moneys and securities. He shall invest the Company's
funds as required and establish and coordinate policies for investment in
pension and other similar trusts.
Section 12. Assistant Treasurers. The Assistant Treasurers, if any,
in the order of their seniority or in any other order determined by the Board,
shall in the absence or disability of the Treasurer, perform the duties and
exercise the
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power of the Treasurer and shall perform such other duties as the Board of
Directors or the Treasurer shall prescribe.
ARTICLE IX
CERTIFICATE OF SHARES
Section 1. Form; Signature. The certificates for shares of the
Corporation shall be in such form as shall be determined by the Board of
Directors and shall be numbered consecutively and entered in the books of the
Corporation as they are issued. Each certificate shall exhibit the registered
holder's name and the number and class of shares, and shall be signed by the
President or a Vice President and the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, and shall bear the seal of the
Corporation or a facsimile thereof. Where any such certificate is
countersigned by a transfer agent or by a registrar other than the Corporation,
the signature of any such officer may be a facsimile signature. In case any
officer who signed, or whose facsimile signature or signatures were placed on
any such certificate shall have ceased to be such officer before such
certificate is issued, it may nevertheless be issued by the Corporation with
the same effect as if he were such officer at the date of issue.
Section 2. Lost Certificates. The Board of Directors may direct a
new share certificate or certificates to be issued in
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place of any certificate or certificates theretofore issued by the Corporation
alleged to have been lost or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate to be lost or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost or destroyed.
Section 3. Registration of Transfer. Upon surrender to the
Corporation or any transfer agent of the Corporation of a certificate for
shares duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, it shall be the duty of the Corporation,
or such transfer agent to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 4. Registered Shareholders. Except as otherwise provided by
law, the Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends or
other distributions, and to vote as such owner, and to hold liable for calls a
person
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registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or legal claim to or interest in such share or shares
on the part of any other person.
Section 5. Record Date. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action affecting the interests of shareholders, the Board
of Directors may fix, in advance, a record date. Such date shall not be more
than sixty (60) nor less than ten (10) days before the date of any such
meeting, nor more than sixty (60) days prior to any other action.
In each such case, except as otherwise provided by law, only such
persons as shall be shareholders of record on the date so fixed shall be
entitled to notice of, and to vote at, such meeting and any adjournment
thereof, or to express such consent or dissent, or to receive payment of such
dividend, or such allotment of rights, or otherwise to be recognized as
shareholders for the related purpose, notwithstanding any registration of
transfer of shares on the books of the Corporation after any such record date
so fixed.
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ARTICLE X
GENERAL PROVISIONS
Section 1. Dividends. Subject to the provisions of the Articles of
Incorporation, if any, dividends upon the outstanding shares of the Corporation
may be declared by the Board of Directors at any regular or special meeting,
pursuant to law and may be paid in cash, in property, or in shares of the
Corporation.
Section 2. Reserves. Before payment of any dividends, there may be
set aside out of any funds of the Corporation available for dividends such sum
or sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the directors shall think conducive to the interest
of the Corporation, and the directors may modify or abolish any such reserve in
the manner in which it was created.
Section 3. Annual Statement. The Board of Directors shall present at
each annual meeting, and at any special meeting of the stockholders when called
for by vote of the stockholders, a full and clear statement of the business and
condition of the corporation.
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Section 4. Instruments Under Seal. All deeds, bonds, mortgages,
contracts, and other instruments requiring a seal may be signed in the name of
the Corporation by the President or by any other officer authorized to sign
such instrument by the President or the Board of Directors.
Section 5. Checks. All checks or demands for money and notes or
other instrument evidencing indebtedness or obligation of the Corporation shall
be signed by such officer or officers or such other person or persons as the
Board of Directors may from time to time designate.
Section 6. Fiscal Year. The fiscal year of the Corporation shall
begin on the first day of January of each year and shall end on the
thirty-first day of December following.
Section 7. Seal. The corporate seal shall have inscribed thereon the
name of the corporation and the words "Corporate Seal, Kansas 1927." The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLE XI
AMENDMENTS
Section 1. These By-Laws may be altered or repealed at any regular
meeting of the Board of Directors, or at any special meeting of the Board of
Directors if notice of such alteration or repeal be contained in the notice of
such special meeting.
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ARTICLE XII
SPECIAL MANAGEMENT PROVISIONS
Section 1. General. The provisions of this Article XII of the By-Laws
have been adopted by the Board of Directors of the Corporation pursuant to that
certain Agreement of Merger by and between the Corporation, KNE Acquisition
Corporation, a Delaware corporation, and American Oil and Gas Corporation, a
Delaware corporation dated March 24, 1994 (the "Merger Agreement").
Capitalized terms used in this Article XII not otherwise defined herein shall
have the meaning ascribed to them in the Merger Agreement. The provisions of
this Article XII shall be effective from and after the Effective Time
notwithstanding any other provisions of these By-Laws to the contrary. In the
event of a conflict between the provisions of this Article XII and other
provisions of the By-Laws, the provisions of this Article XII shall control.
Section 2. Cabot Director. For so long as Cabot Corporation shall
continue to own beneficially (within the meaning of Rule 13d-3 promulgated by
the Securities and Exchange Commission) 10% or more of the issued and
outstanding voting stock of the Corporation, Cabot Corporation shall have the
right to designate one person to serve as an advisory director of the
Corporation. In the event beneficial ownership of Cabot
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Corporation of the issued and outstanding voting stock of the Corporation falls
below 10% but constitutes more than 5%, the Board of Directors shall appoint
the Cabot Corporation advisory director as a full director, to serve the then
remaining term of a Class II director. For so long as Cabot Corporation
continues to own beneficially less than 10% but more than 5% of the issued and
outstanding voting stock of the Corporation, the Board of Directors shall
nominate a Cabot Corporation designee (provided that such nominee is otherwise
qualified as required by these By-Laws) for election by the Corporation's
stockholders as a director. The Corporation shall at all times during which
Cabot Corporation shall beneficially own in excess 10% of the issued and
outstanding voting stock of the Corporation, maintain a vacancy on its Board of
Directors for such Cabot designee.
Section 3. Vacancies in Certain Offices. Any vacancy arising
following the Effective Time and prior to the Corporation's Annual Meeting of
Stockholders in 1996, in the offices of the Chairman of the Board,
Vice-Chairman of the Board, President, Chief Executive Officer or Chief
Operating Officer, or on the Management Committee or the Chairman of the
Management Committee, shall be filled by the Board of Directors upon
recommendation by a Special Nominating Committee of the Board of Directors.
The Board of Directors shall by majority vote establish a Special Nominating
Committee in the event of a
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vacancy in any of the foregoing positions. The Special Nominating Committee
shall consist of four directors, two of whom shall be designated by the Board
of Directors from the directors of the Corporation who served as a director
prior to the Effective Time, and two of whom shall be designated by the
directors designated by American Oil and Gas Corporation in the Merger
Agreement.
Section 4. Continuation of Retirement Policy. The Corporation shall
continue its present retirement policy that officers of the Corporation
(including the Chairman of the Board, Vice-Chairman of the Board, President and
Chief Executive Officer or Chief Operating Officer) shall be ineligible and
cease to serve as an officer of the Corporation as of the first of the month
coincident with or next following his or her 65th birthday.
Section 5. Super-Majority Vote. For purposes of this Article XII,
the term "Super-Majority Vote" shall mean the affirmative vote of at least 12
of a 14-member Board of Directors; at least 11 of a 13-member Board of
Directors; at least 10 of a 12-member Board of Directors; at least 9 of an
11-member Board of Directors; or in all other cases, the affirmative vote of a
number of directors equal to at least 85% of the total number of directors. A
Super-Majority Vote shall be required for the following actions to be taken by
the Board of Directors; (i) amendment, modification or revocation of any
provision of this
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Article XII; (ii) amendment, modification or revocation of the current
retirement policy of the Corporation; and (iii) any increase in the number of
members to serve on the Board of Directors; provided that, no Super-Majority
Vote shall be required for any such action taken by the Board of Directors from
and after the date of the annual stockholders meeting for 1997.
I hereby certify that the foregoing are the By-Laws of K N Energy,
Inc. as the same were adopted at the meeting of the Board of Directors on May
20, 1975, and subsequently amended at meetings of the Board of Directors on
November 20, 1975, November 8, 1978, August 5, 1983, November 11, 1983,
November 16, 1984, January 9, 1988, March 24, 1989, August 10, 1989, January
20, 1991, November 10, 1993, June 24, 1994, July 13, 1994, April 11, 1996 and
are still in force and effect on this 20th day of August, 1996.
---------------------------------------
Martha B. Wyrsch
Secretary
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EXHIBIT 10(u)
CHANGE OF CONTROL
SEVERANCE AGREEMENT
AGREEMENT between K N ENERGY, INC. , a Kansas corporation (the
"COMPANY"), and ________________________ (EXECUTIVE"),
W I T N E S S E T H :
WHEREAS, the Company desires to retain certain key employee personnel
and, accordingly, the Board of Directors of the Company (the "BOARD") has
approved the Company entering into a severance agreement with Executive in
order to encourage his continued service to the Company; and
WHEREAS, Executive is prepared to commit such services in return for
specific arrangements with respect to severance compensation and other
benefits;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the Company and Executive agree as follows:
1. DEFINITIONS.
(a) "BOARD OF DIRECTORS" shall mean the Board of
Directors of the Company.
(b) "CHANGE IN DUTIES" shall mean the occurrence, within
two years after the date upon which a Change in Control occurs, of any one or
more of the following:
(i) A significant reduction in the nature, scope
of authority or duties of Executive from those applicable to him
immediately prior to the date on which a Change in Control occurs;
(ii) A substantial reduction in Executive's annual
base salary or bonus opportunity under any applicable bonus or
incentive compensation plan from that provided to him immediately
prior to the date on which a Change in Control occurs;
(iii) Receipt of employee benefits (including but
not limited to medical, dental, life insurance, accidental, death, and
dismemberment, and long-term disability plans) and perquisites by
Executive that are materially inconsistent with the employee benefits
and perquisites provided by the Company to executives with comparable
duties; or
(iv) A substantial change in the location of
Executive's principal place of employment by the Company by more than
50 miles from the location where he was principally employed
immediately prior to the date on which a Change in Control occurs.
(c) "CHANGE IN CONTROL" means the occurrence of one or
more of the following events:
<PAGE> 2
(i) any "person", as such term is used in
Sections 13(d) and 14(d) of the Exchange Act (other than the Company,
any trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any corporation owned, directly or
indirectly, by the shareholders of the Company in substantially the
same proportions as their ownership of stock of the Company), is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company's
then outstanding securities; or
(ii) during any period of two consecutive years
(not including any period prior to the effective date of this
Agreement), individuals who at the beginning of such period constitute
the Board of Directors, and any new director (other than a director
designated by a person who has entered into an agreement with the
Company to effect a transaction described in (i), (iii) or (iv) of
this Paragraph) whose election by the Board of Directors or nomination
for election by the Company's shareholders was approved by a vote of
at least two-thirds (b) of the directors then still in office who
either were directors at the beginning of the period or whose election
or nomination for election was previously so approved, cease for any
reason other than normal retirement, death or disability to constitute
at least a majority thereof; or
(iii) the shareholders of the Company approve a
merger or consolidation of the Company with any other person, other
than (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or being
converted into voting securities for the surviving entity) more than
fifty percent (50%) of the combined voting power of the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (B) a merger in
which no "person" (as defined above) acquires more than thirty percent
(30%) of the combined voting power of the Company's then outstanding
securities; or
(iv) the shareholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the
Company's assets (or any transaction having a similar effect).
(d) "CODE" shall mean the Internal Revenue Code of 1986,
as amended.
(e) "COMPANY'S INDUSTRY" shall mean (i) the energy
industry, including without limitation the acquisition, development,
transportation, distribution, and provision of electric and natural gas sources
and services; and (ii) any other nature or type of business or industry in
which, at the time of Executive=s termination, the Company is engaged or
involved or has plans to engage or become involved within one year thereafter.
(f) "COMPENSATION" shall mean the greater of:
(i) Executive's base salary immediately prior to
the date on which a Change in Control occurs plus the amount of any
cash incentive bonus to be paid to Executive pursuant to the Company's
annual incentive plan based on the maximum of the
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<PAGE> 3
current year's target; or
(ii) Executive's base salary at the time of his
Involuntary Termination plus the amount of any cash incentive bonus to
be paid to Executive pursuant to the Company's annual incentive plan
based on the maximum of the current year=s target.
(g) "COMPENSATION COMMITTEE" shall mean the Compensation
Committee of the Board of Directors.
(h) "CONFIDENTIAL INFORMATION" shall include all
information relating to (i) the Company's Customers, Prospective Customers,
providers, suppliers, and other business affiliates; (ii) the Company's
policies, practices, operating information, financial information, business
plans, and market approaches; and (iii) other information, techniques or
approaches used by the Company and not generally known in the Company's
Industry. The Company believes that some or all of this information
constitutes trade secrets; however, the "Confidential Information" covered by
the Restrictive Covenants set forth in Paragraph 6 hereof need not satisfy the
legal definition or requirements of a "trade secret" to be protected from
disclosure thereunder.
(i) "CUSTOMER" shall include any person or entity to whom
electricity, natural gas, or services are sold by the Company, and any person
or entity with whom the Company has established strategic marketing, services
or other alliances.
(j) "EXCHANGE ACT" shall mean the Securities Exchange Act
of 1934, as amended.
(k) "INVOLUNTARY TERMINATION" shall mean any termination
of Executive's employment with the Company which:
(i) does not result from a resignation by Executive
(other than a resignation pursuant to clause (ii) of this subparagraph
(k)); or
(ii) results from a resignation by Executive on or
before the date which is sixty days after the date upon which
Executive receives notice of a Change in Duties;
provided, however, the term "INVOLUNTARY TERMINATION" shall not include a
Termination for Cause or any termination as a result of death, disability under
circumstances entitling him to benefits under the Company's long-term
disability plan, or Retirement.
(l) "PROSPECTIVE CUSTOMER" shall include any person or
entity toward whom the Company has directed efforts to establish a Customer
relationship or strategic alliance and with whom the Company has a reasonable
expectation of establishing such a relationship or alliance.
(m) "RETIREMENT" shall mean Executive's resignation on or
after the date he reaches age sixty-five.
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<PAGE> 4
(n) "SEVERANCE AMOUNT" shall mean an amount equal to [one
(1)/two (2)/three (3)] times Executive's Compensation.
(o) "TERMINATION FOR CAUSE" shall mean termination of
Executive's employment by the Company (or its subsidiaries) by reason of
Executive's (i) gross negligence in the performance of his duties, (ii) willful
failure to perform his duties or (iii) willful engagement in conduct which is
injurious to the Company or its subsidiaries (monetarily or otherwise).
(p) "WELFARE BENEFIT COVERAGES" shall mean the medical,
dental, life insurance and accidental death and dismemberment coverages
provided by the Company to its active employees.
2. SERVICES. Executive agrees that he will render services to
the Company (as well as any subsidiary thereof or successor thereto) during the
period of his employment to the best of his ability and in a prudent and
businesslike manner and that he will devote substantially the same time,
efforts and dedication to his duties as heretofore devoted.
3. SEVERANCE BENEFITS. If Executive's employment by the Company
or any subsidiary thereof or successor thereto shall be subject to an
Involuntary Termination which occurs within two years after the date upon which
a Change in Control occurs, then Executive shall be entitled to receive, as
additional compensation for services rendered to the Company (including its
subsidiaries), the following severance benefits:
(a) A lump sum cash payment in an amount equal to
Executive's Severance Amount.
(b) Executive shall be entitled to continue the Welfare
Benefit Coverages for himself and, where applicable, his eligible dependents
following his Involuntary Termination for up to [twelve (12)/twenty-four
(24)/thirty-six (36)] months. Such benefit rights shall apply only to those
Welfare Benefit Coverages which the Company has in effect from time to time for
active employees. Welfare Benefit Coverage(s) shall immediately end upon
Executive's obtainment of new employment and eligibility for reasonably
comparable Welfare Benefit Coverage(s) (with Executive being obligated
hereunder to promptly report such eligibility to the Company). Nothing herein
shall be deemed to adversely affect in any way the additional rights, after
consideration of this extension period, of Executive and his eligible
dependents to health care continuation coverage as required pursuant to Part 6
of Title I of the Employee Retirement Income Security Act of 1974, as amended.
(c) The severance payments under this Agreement shall be
paid to an Executive on or before the 10th business day after the last day of
Executive's employment with the Company. Any severance benefits paid pursuant
to this Paragraph will be deemed to be a severance payment and not compensation
for purposes of determining benefits under the Company's qualified plans and
shall be subject to any required tax withholding.
(d) Notwithstanding anything to the contrary in this or
any other agreement, upon a Change in Control, Executive's stock options or
restricted stock granted and outstanding
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<PAGE> 5
under all K N Energy, Inc. stock plans shall become immediately exercisable and
all restrictions thereon shall be removed.
4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided
for in Paragraph 3(a) hereof is not made when due, the Company shall pay to
Executive interest on the amount payable from the date that such payment should
have been made under such paragraph until such payment is made, which interest
shall be calculated at the prime or base rate of interest announced by
Citibank, N.A. (or any successor thereto) at its principal office in New York,
New York and shall change when and as any such change in such prime or base
rate shall be announced by such bank.
5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding
anything to the contrary in this Agreement, in the event that any payment or
distribution by the Company to or for the benefit of Executive, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest or penalties, are
hereinafter collectively referred to as the "Excise Tax"), the Company shall
pay to Executive an additional payment (a "Gross-up Payment") in an amount such
that after payment by Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax imposed
on any Gross-up Payment, Executive retains an amount of the Gross-up Payment
equal to the Excise Tax imposed upon the Payments. The Company and Executive
shall make an initial determination as to whether a Gross-up Payment is
required and the amount of any such Gross-up Payment. Executive shall notify
the Company immediately in writing of any claim by the Internal Revenue Service
which, if successful, would require the Company to make a Gross-up Payment (or
a Gross-up Payment in excess of that, if any, initially determined by the
Company and Executive) within five days of the receipt of such claim. The
Company shall notify Executive in writing at least five days prior to the due
date of any response required with respect to such claim if it plans to contest
the claim. If the Company decides to contest such claim, Executive shall
cooperate fully with the Company in such action; provided, however, the Company
shall bear and pay directly or indirectly all costs and expenses (including
additional interest and penalties) incurred in connection with such action and
shall indemnify and hold Executive harmless, on an after-tax basis, for any
Excise Tax or income tax, including interest and penalties with respect
thereto, imposed as a result of the Company's action. If, as a result of the
Company's action with respect to a claim, Executive receives a refund of any
amount paid by the Company with respect to such claim, Executive shall promptly
pay such refund to the Company. If the Company fails to timely notify
Executive whether it will contest such claim or the Company determines not to
contest such claim, then the Company shall immediately pay to Executive the
portion of such claim, if any, which it has not previously paid to Executive.
6. RESTRICTIVE COVENANTS. Executive is a member of the Company's
executive and management personnel whose duties include the formulation,
administration, and execution of Company policies, and high-level contact with
and responsibility for the Company's Customers and Prospective Customers. In
addition, Executive is provided with extensive information regarding the
Company's policies, practices, operating information, financial information,
business plans, market approaches, and Customers. The Noncompetition and
Nondisclosure Covenants
-5-
<PAGE> 6
contained in this Paragraph 6 are each reasonable and necessary for the
protection of the Company's legitimate business interests, relations with
Customers and Prospective Customers, Confidential Information and trade secrets
in the event of Executive's separation from employment. These Restrictive
Covenants constitute material consideration to the Company for the rights and
benefits provided to Executive in this Agreement; and the availability of such
rights and benefits constitutes good and sufficient consideration to Executive
for his agreement to these Restrictive Covenants, regardless of whether such
rights are ever exercised or such benefits are ever realized by Executive.
(a) NONCOMPETITION COVENANT. During the time that
Executive is employed by the Company and for a period of one (1) year
thereafter, and within the states of Colorado, Kansas, Missouri, Nebraska,
Oklahoma, Texas, Utah and Wyoming, Executive shall not, directly or indirectly,
individually or as an employee, officer, director, independent contractor,
consultant, or agent, or as a venturer, partner, member, shareholder, or other
beneficial holder of any interest in any sole proprietorship, joint venture,
partnership, limited liability company, corporation, or other entity or
business organization: (i) engage in or be involved in any way in the
Company's Industry; or (ii) solicit the business of or seek to enter into a
business relationship with any Customer or Prospective Customer of the Company
in areas of the Company's Industry. However, this Noncompetition Covenant
shall not apply or be enforceable if Executive is terminated by the Company
without cause (as "cause" is defined in Paragraph 1(o) hereof) and if there has
not been a Change in Duties for Executive.
(b) NONDISCLOSURE COVENANT. During the time that
Executive is employed by the Company and for a period of two years thereafter
(regardless of the reason or cause for termination), Executive shall not,
directly or indirectly, (i) use or apply any Confidential Information, alone or
with any other person or entity; or (ii) disclose or provide any Confidential
Information to any person or entity not authorized by the Company to receive
such Confidential Information.
(c) REMEDIES. In the event of the breach or threatened
breach of any provision of these Restrictive Covenants by Executive, the
Company shall be entitled to all appropriate legal and equitable relief,
including without limitation temporary restraining orders, preliminary and
permanent injunctions, and monetary damages.
(d) SURVIVAL AND INDEPENDENCE. These Restrictive
Covenants shall be construed as independent of any other agreements between the
parties and, except as provided in Paragraph 6(a) hereof, shall survive the
termination of employment of Executive for any reason. The existence of any
claim or cause of action of Executive against the Company or its successors or
assigns, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Company of such Covenants.
(e) SEVERABILITY. If any provision of these Restrictive
Covenants as applied to any party or to any circumstances is adjudged by a
court to be unreasonable, invalid or unenforceable as written, the parties
agree that the court making such a determination shall have the power to reduce
or alter the duration, area, nature or scope of the subject provision, and in
its reduced or altered form such provision will then be enforceable and will be
enforced.
-6-
<PAGE> 7
7. GENERAL. This Agreement shall supersede and replace any prior
agreement between the Company and Executive providing for severance benefits in
the event of a change in control of the Company.
(a) TERM. The effective date of this Agreement is
October 18, 1996. The initial term of this Agreement shall be the period
beginning on said effective date and ending on the one-year anniversary of said
effective date. Within sixty days after the expiration of the initial term
hereof and within sixty days after each successive one-year period of time
thereafter that this Agreement is in effect, the Company shall have the right
to review this Agreement, and in its sole discretion either continue and extend
this Agreement, terminate this Agreement, and/or offer Executive a different
agreement. The Compensation Committee (excluding any member of the
Compensation Committee who is covered by this Agreement or by a similar
agreement with the Company) will vote on whether to so extend, terminate,
and/or offer Executive a different agreement and will notify Executive of such
action within sixty days following the expiration of each one-year period of
time that this Agreement is in effect. This Agreement shall remain in effect
until so terminated and/or modified by the Company. Failure of the
Compensation Committee to take any action within sixty days following the
expiration of each one-year period of time that this Agreement is in effect
shall be considered as an extension of this Agreement for an additional
one-year period of time. Notwithstanding anything to the contrary contained in
this "SUNSET PROVISION," it is agreed that if a Change in Control occurs while
this Agreement is in effect, then this Agreement shall not be subject to
termination or modification under this "SUNSET PROVISION," and shall remain in
force for a period of two years after such Change in Control, and if within
said two years the contingency factors occur which would entitle Executive to
the benefits as provided herein, this Agreement shall remain in effect in
accordance with its terms. If, within such two years after a Change in
Control, the contingency factors that would entitle Executive to said benefits
do not occur, thereupon this one-year "SUNSET PROVISION" shall again be
applicable with the sixty-day time period for Compensation Committee action to
thereafter commence at the expiration of said two years after such Change in
Control and on each one-year anniversary date thereafter.
(b) INDEMNIFICATION. If Executive shall obtain any money
judgment or otherwise prevail with respect to any litigation brought by
Executive or the Company to enforce or interpret any provision contained
herein, the Company, to the fullest extent permitted by applicable law, hereby
indemnifies Executive for his reasonable attorneys' fees and disbursements
incurred in such litigation and hereby agrees (i) to pay in full all such fees
and disbursements and (ii) to pay prejudgment interest on any money judgment
obtained by Executive from the earliest date that payment to him should have
been made under this Agreement until such judgment shall have been paid in
full, which interest shall be calculated at the prime or base rate of interest
announced by Citibank, N.A. (or any successor thereto) at its principal office
in New York, New York and shall change when and as any such change in such
prime or base rate shall be announced by such bank.
(c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's
obligation to pay (or cause one of its subsidiaries to pay) Executive the
amounts and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any cir-
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<PAGE> 8
cumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Company (including its
subsidiaries) may have against him or anyone else. All amounts payable by the
Company (including its subsidiaries hereunder) shall be paid without notice or
demand. Executive shall not be obligated to seek other employment in
mitigation of the amounts payable or arrangements made under any provision of
this Agreement, and, except as provided in Paragraph 3(b) hereof, the obtaining
of any such other employment shall in no event effect any reduction of the
Company's obligations to make (or cause to be made) the payments and
arrangements required to be made under this Agreement. Notwithstanding
anything to the contrary in this Agreement, in the event the Company should
acquire knowledge of conduct of Executive that would be defined as "cause" in
Paragraph 1(o) hereof after Executive's termination of employment, but before
any severance payments are paid hereunder, the Company shall have the right to
withhold payment of all or a portion of such severance payments.
(d) SUCCESSORS. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company, by merger
or otherwise. This Agreement shall also be binding upon and inure to the
benefit of Executive and his estate. If Executive shall die prior to full
payment of amounts accrued pursuant to this Agreement, such amounts shall be
payable pursuant to the terms of this Agreement to his estate.
(e) SEVERABILITY. Any provision in this Agreement which
is prohibited or unenforceable in any jurisdiction by reason of applicable law
shall, as to such jurisdiction, be ineffective only to the extent of such
prohibition or unenforceability without invalidating or affecting the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(f) NON-ALIENATION. Executive shall not have any right
to pledge, hypothecate, anticipate or assign this Agreement or the rights
hereunder, except by will or the laws of descent and distribution.
(g) NOTICES. Any notices or other communications
provided for in this Agreement shall be sufficient if in writing. In the case
of Executive, such notices or communications shall be effectively delivered if
hand delivered to Executive at his principal place of employment or if sent by
registered or certified mail to Executive at the last address he has filed with
the Company. In the case of the Company, such notices or communications shall
be effectively delivered if sent by registered or certified mail to the Company
at its principal executive offices.
(h) CONTROLLING LAW. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Colorado.
(i) RELEASE. As a condition to the receipt of any
benefit under Paragraph 3 hereof, Executive shall first execute a release, in
the form established by the Company, releasing the Company, its shareholders,
partners, officers, directors, employees and agents from any and all claims and
from any and all causes of action of any kind or character, including but not
limited to all claims or causes of action arising out of Executive's employment
with the Company or the termination of such employment.
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<PAGE> 9
(j) FULL SETTLEMENT. If Executive is entitled to and
receives the benefits provided hereunder, performance of the obligations of the
Company hereunder will constitute full settlement of all claims the Executive
might or could otherwise assert against the Company on account of his
employment or termination of employment.
(k) UNFUNDED OBLIGATION. The obligation to pay amounts
under this Agreement is an unfunded obligation of the Company (including its
subsidiaries), and no such obligation shall create a trust or be deemed to be
secured by any pledge or encumbrance on any property of the Company (including
its subsidiaries).
(l) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall
not be deemed to constitute a contract of employment, nor shall any provision
hereof affect (a) the right of the Company (or its subsidiaries) to discharge
Executive at will or (b) the terms and conditions of any other agreement
between the Company and Executive except as provided herein.
(m) NUMBER AND GENDER. Wherever appropriate herein,
words used in the singular shall include the plural and the plural shall
include the singular. The masculine gender where appearing herein shall be
deemed to include the feminine gender.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the ______ day of ________________, 1996.
"EXECUTIVE"
---------------------------------------
"COMPANY"
K N ENERGY, INC.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
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<PAGE> 1
EXHIBIT 10(v)
INCENTIVE STOCK OPTION AGREEMENT
AGREEMENT made this 19th day of August, 1996, between K N ENERGY,
INC., a Kansas corporation (the "Company"), and ______________ ("Employee").
To carry out the purposes of the 1994 K N ENERGY, INC. LONG-TERM
INCENTIVE PLAN (the "Plan"), by affording Employee the opportunity to purchase
shares of the common stock of the Company ("Stock"), and in consideration of
the mutual agreements and other matters set forth herein and in the Plan, the
Company and Employee hereby agree as follows:
1. GRANT OF OPTION. The Company hereby irrevocably grants to
Employee the right and option ("Option") to purchase all or any part of an
aggregate of ______ shares of Stock, on the terms and conditions set forth
herein and in the Plan, which Plan is incorporated herein by reference as a
part of this Agreement. This Option is intended to constitute an incentive
stock option, within the meaning of section 422(b) of the Internal Revenue Code
of 1986, as amended (the "Code").
2. PURCHASE PRICE. The purchase price of Stock purchased
pursuant to the exercise of this Option shall be $________ per share, which has
been determined to be not less than the fair market value of the Stock at the
date of grant of this Option. For all purposes of this Agreement, fair market
value of Stock shall be determined in accordance with the provisions of the
Plan.
3. EXERCISE OF OPTION. Subject to the remaining provisions of
this Paragraph and the earlier expiration of this Option as herein provided,
this Option may be exercised, by written notice to the Company at its principal
executive office addressed to the attention of its Chief Executive Officer at
any time and from time to time after the date of grant hereof. The aggregate
number of shares offered by this Option shall be divided into equal [one-third]
[one-fifth] increments to correspond with each year of the [three-] [five-]
year period following the grant hereof (the "Increments") and a portion of the
shares in each Increment shall be exercisable based on the Company's compounded
annual increase in earnings per share for the corresponding year in accordance
with the following schedule:
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<PAGE> 2
<TABLE>
<CAPTION>
COMPOUNDED ANNUAL INCREASE PORTION OF SHARES IN INCREMENT
IN EARNINGS PER SHARE THAT MAY BE PURCHASED
--------------------------------------------------------------
<S> <C>
15% or more 100%
10% but less than 15% 50%
less than 10% 0%
</TABLE>
Notwithstanding anything in this Agreement to the contrary, this Option shall
be fully exercisable with respect to the aggregate number of shares offered by
the Option as of the earlier of: (a) the occurrence of a Change in Control of
the Company (as such term is defined in the Plan) or (b) nine years and six
months after the date of grant hereof. This Option may be exercised only while
Employee remains an employee of the Company and will terminate and cease to be
exercisable upon Employee's termination of employment with the Company, except
that:
4. If Employee's employment with the Company terminates
by reason of disability (within the meaning of section 22(e)(3) of the
Code), this Option may be exercised in full by Employee (or Employee's
estate or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of
Employee) at any time during the period of one year following such
termination.
5. If Employee dies while in the employ of the Company,
Employee's estate, or the person who acquires this Option by will or
the laws of descent and distribution or otherwise by reason of the
death of Employee, may exercise this Option in full at any time during
the period of one year following the date of Employee's death.
6. If Employee's employment with the Company terminates
for any reason other than as described in (a) or (b) above, this
Option may be exercised by Employee at any time during the period of
three months following such termination, or by Employee's estate (or
the person who acquires this Option by will or the laws of descent and
distribution or otherwise by reason of the death of Employee) during a
period of one year following Employee's death if Employee dies during
such three-month period, but in each case only as to the number of
shares Employee was entitled to purchase hereunder as of the date
Employee's employment so terminates unless such termination was by
reason of normal retirement at or after age sixty-five in which case
this Option shall be exercisable in full.
This Option shall not be exercisable in any event after the expiration of ten
years from the date of grant hereof. Except as provided in Paragraph 4, the
purchase price of shares as to which this Option is exercised shall be paid in
full at the time of exercise (a) in cash (including check, bank draft or money
order payable to the order of the Company), (b) by delivering to the Company
shares of Stock having a fair market value equal to the purchase price, (c) any
combination of cash or Stock or (d) any other arrangement satisfactory to the
Committee. No fraction of a share of Stock shall be issued by the Company upon
exercise of an Option or accepted by the Company in payment of the purchase
price thereof; rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole shares of
Stock. Unless and until a certificate or certificates representing such shares
shall have been issued by the Company to Employee, Employee (or the person
permitted to exercise this Option in the event of Employee's death) shall not
be or have any of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
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<PAGE> 3
7. WITHHOLDING OF TAX. To the extent that the exercise of this
Option or the disposition of shares of Stock acquired by exercise of this
Option results in compensation income to Employee for federal, state, or local
income tax purposes, Employee shall pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of any federal, state, or local
taxes of any kind required by law to be withheld with respect to such income.
The Committee may permit payment of such taxes to be made through the tender of
cash or Stock, the withholding of Stock out of the shares distributable upon
the exercise or any other arrangement satisfactory to the Committee. The
Company shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment of any kind otherwise due to the Employee.
8. STATUS OF STOCK. The Company has registered for issuance
under the Securities Act of 1933, as amended (the "Act") the shares of Stock
acquirable upon exercise of this Option, and intends to keep such registration
effective throughout the period this Option is exercisable. In the absence of
such effective registration or an available exemption from registration under
the Act, issuance of shares of Stock acquirable upon exercise of this Option
will be delayed until registration of such shares is effective or an exemption
from registration under the Act is available. The Company intends to use its
best efforts to ensure that no such delay will occur. In the event exemption
from registration under the Act is available upon an exercise of this Option,
Employee (or the person permitted to exercise this Option in the event of
Employee's death or incapacity), if requested by the Company to do so, will
execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
Employee agrees that the shares of Stock which Employee may acquire by
exercising this Option will not be sold or otherwise disposed of in any manner
which would constitute a violation of any applicable securities laws, whether
federal or state. Employee also agrees (i) that the certificates representing
the shares of Stock purchased under this Option may bear such legend or legends
as the Committee deems appropriate in order to assure compliance with
applicable securities laws, (ii) that the Company may refuse to register the
transfer of the shares of Stock purchased under this Option on the stock
transfer records of the Company if such proposed transfer would in the opinion
of counsel satisfactory to the Company constitute a violation of any applicable
securities laws and (iii) that the Company may give related instructions to its
transfer agent, if any, to stop registration of the transfer of the shares of
Stock purchased under this Option.
9. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement,
Employee shall be considered to be in the employment of the Company as long as
Employee remains an employee of either the Company, a parent or subsidiary
corporation (as defined in section 424 of the Code) of the Company, or a
corporation or a parent or subsidiary of such corporation assuming or
substituting a new option for this Option. Any question as to whether and when
there has been a termination of such employment, and the cause of such
termination, shall be determined by the Committee and its determination shall
be final.
10. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of any successors to the Company and all persons lawfully
claiming under Employee.
-3-
<PAGE> 4
11. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Colorado.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Employee has executed
this Agreement, all effective as of the day and year first above written.
K N ENERGY, INC.
BY:
-----------------------------------
--------------------------------------
EMPLOYEE
-4-
<PAGE> 1
EXHIBIT 10(w)
RESTRICTED STOCK AGREEMENT
AGREEMENT made this 19th day of August, 1996 between K N ENERGY, INC.,
a Kansas corporation (the "Company"), and ________________________________
("Employee").
1. AWARD.
(a) SHARES. Pursuant to the K N Energy, Inc. 1994
Long-Term Incentive Plan (the "Plan"), ____________ shares (the "Restricted
Shares") of the Company's common stock, par value $5.00 per share ("Stock"),
shall be issued as hereinafter provided in Employee's name subject to certain
restrictions thereon.
(b) ISSUANCE OF RESTRICTED SHARES. The Restricted Shares
shall be issued upon acceptance hereof by Employee and upon satisfaction of the
conditions of this Agreement.
(c) PLAN INCORPORATED. Employee acknowledges receipt of a
copy of the Plan, and agrees that this award of Restricted Shares shall be
subject to all of the terms and conditions set forth in the Plan, including
future amendments thereto, if any, pursuant to the terms thereof, which Plan is
incorporated herein by reference as a part of this Agreement.
2. RESTRICTED SHARES. Employee hereby accepts the Restricted
Shares when issued and agrees with respect thereto as follows:
(a) FORFEITURE RESTRICTIONS. The Restricted Shares may
not be sold, assigned, pledged, exchanged, hypothecated or otherwise
transferred, encumbered or disposed of to the extent then subject to the
Forfeiture Restrictions (as hereinafter defined). In the event of termination
of Employee's employment with the Company prior to the lapse of the Forfeiture
Restrictions as provided in (b) below, Employee shall, for no consideration,
forfeit to the Company all Restricted Shares to the extent then subject to the
Forfeiture Restrictions. The prohibition against transfer and the obligation to
forfeit and surrender Restricted Shares to the Company upon termination of
employment are herein referred to as "Forfeiture Restrictions." The Forfeiture
Restrictions shall be binding upon and enforceable against any transferee of
Restricted Shares.
(b) LAPSE OF FORFEITURE RESTRICTIONS. The Restricted
Shares shall be divided into equal [one-third] [one-fifth] increments to
correspond with each year of the [three-] [five-] year period following the
date of grant hereof (the "Increments") and the Forfeiture Restrictions shall
lapse as to a portion of the Restricted Shares in each Increment based on the
Company's compounded annual increase in earnings per share for the
corresponding year in accordance with the following schedule:
<PAGE> 2
<TABLE>
<CAPTION>
COMPOUNDED ANNUAL INCREASE PORTION OF INCREMENT WITH
IN EARNINGS PER SHARE LAPSE OF FORFEITURE RESTRICTIONS
--------------------- --------------------------------
<S> <C>
15% or more 100%
10% but less than 15% 50%
less than 10% 0%
</TABLE>
Notwithstanding the foregoing, the Forfeiture Restrictions shall lapse as to
all of the Restricted Shares on the earlier of (i) the occurrence of a Change
in Control (as such term is defined in the Plan), (ii) the date Employee's
employment with the Company is terminated by reason of death, disability (as
determined by the Committee) or normal retirement on or after age sixty-five,
or (iii) the tenth anniversary of the grant hereof.
(c) CERTIFICATES. One or more certificates evidencing the
Restricted Shares shall be issued by the Company in Employee's name, or at the
option of the Company, in the name of a nominee of the Company, pursuant to
which Employee shall have voting rights and shall be entitled to receive all
dividends unless and until the Restricted Shares are forfeited pursuant to the
provisions of this Agreement. Each certificate shall bear the following legend:
The shares evidenced by this certificate have been issued pursuant to
an agreement dated August 19, 1996, a copy of which is attached hereto
and incorporated herein, between the Company and the registered holder
of the shares, and are subject to forfeiture to the Company under
certain circumstances described in such agreement. The sale,
assignment, pledge or other transfer of the shares of stock evidenced
by this certificate is prohibited under the terms and conditions of
such agreement, and such shares may not be sold, assigned, pledged or
otherwise transferred except as provided in such agreement.
The Company may cause the certificate or certificates to be delivered upon
issuance to the Secretary of the Company or to such other depository as may be
designated by the Committee as a depository for safekeeping until the
forfeiture occurs or the Forfeiture Restrictions lapse pursuant to the terms of
the Plan and this award. Upon request of the Committee, Employee shall deliver
to the Company a stock power, endorsed in blank, relating to the Restricted
Shares then subject to the Forfeiture Restrictions. Upon the lapse of the
Forfeiture Restrictions without forfeiture, the Company shall cause a new
certificate or certificates to be issued without legend in the name of Employee
in exchange for the certificate evidencing the Restricted Shares.
Notwithstanding any other provisions of this Agreement, the issuance or
delivery of any shares of Stock (whether subject to restrictions or
unrestricted) may be postponed for such period as may be required to comply
with applicable requirements of any national securities exchange or any
requirements under any law or regulation applicable to the issuance or delivery
of such shares. The Company shall not be obligated to issue or deliver any
shares of Stock if the issuance or delivery thereof shall constitute a
violation of any provision of any law or of any regulation of any governmental
authority or any national securities exchange.
3. WITHHOLDING OF TAX. To the extent that the receipt of the
Restricted Shares or the lapse of any Forfeiture Restrictions results in income
to Employee for federal, state, or local income
-2-
<PAGE> 3
tax purposes, Employee shall pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of any federal, state, or local
taxes of any kind required by law to be withheld with respect to such income.
The Committee may permit payment of such taxes to be made through the tender of
cash or Stock, the withholding of Stock out of shares otherwise distributable
or any other arrangement satisfactory to the Committee. The Company shall, to
the extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Employee.
4. STATUS OF STOCK. Employee agrees that the Restricted Shares
will not be sold or otherwise disposed of in any manner which would constitute
a violation of any applicable federal or state securities laws. Employee also
agrees (i) that the certificates representing the Restricted Shares may bear
such legend or legends as the Committee deems appropriate in order to assure
compliance with applicable securities laws, (ii) that the Company may refuse to
register the transfer of the Restricted Shares on the stock transfer records of
the Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to its transfer
agent, if any, to stop registration of the transfer of the Restricted Shares.
5. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement,
Employee shall be considered to be in the employment of the Company as long as
Employee remains an employee of either the Company, any successor corporation
or a parent or subsidiary corporation (as defined in section 424 of the Code)
of the Company or any successor corporation. Any question as to whether and
when there has been a termination of such employment, and the cause of such
termination, shall be determined by the Committee, and its determination shall
be final.
6. COMMITTEE'S POWERS. No provision contained in this Agreement
shall in any way terminate, modify or alter, or be construed or interpreted as
terminating, modifying or altering any of the powers, rights or authority
vested in the Committee pursuant to the terms of the Plan, including, without
limitation, the Committee's rights to make certain determinations and elections
with respect to the Restricted Shares.
7. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of any successors to the Company and all persons lawfully
claiming under Employee.
8. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Colorado.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by an officer thereunto duly authorized, and Employee has executed
this Agreement, all effective as of the date first above written.
K N ENERGY, INC.
By:
------------------------------
Name:
----------------------
----------------------
Title:
---------------------
---------------------------------
EMPLOYEE
-4-
<PAGE> 1
EXHIBIT 10(x)
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, is made and entered into this 21st day of
March, 1996, by and between K N Energy, Inc., a Kansas corporation (the
"Company") and Murray R. Smith ("Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to employ Executive and Executive wishes
to take advantage of the business opportunities offered by the Company; and
WHEREAS, the Company wishes to assure itself of the services of
Executive for the period provided in this Agreement, and Executive is willing
to serve in the employ of the Company for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, and intending to be
legally bound hereby, the parties hereto agree as follows:
-1-
<PAGE> 2
Section 1. Employment. The Company agrees to employ Executive, and
Executive agrees to be employed by the Company, for the period stated in
Section 3 herein and upon the other terms and conditions herein provided.
Section 2. Position and Duties. During the period of Executive's
employment hereunder and except for temporary illness and vacation periods in
accordance with the Company's policies for executive employees as modified by
this Agreement, Executive shall devote all of the Executive's business time,
attention, skill, and efforts to the faithful performance of Executive's duties
hereunder. Executive shall be an executive officer of K N Energy Services,
Inc., a wholly owned subsidiary of the Company, and shall use his best efforts
to perform such duties as are necessary to carry out Executive's
responsibilities as Senior Vice President - Communications and Marketing for K
N Energy Services, Inc., a wholly owned subsidiary of the Company, including
such duties as may be assigned to Executive from time to time by the President
and Chief Operating Officer of K N Energy, Services, Inc. Executive shall have
responsibility, and commensurate authority for development of communications
tools, strategies and services and marketing of products and services in
various business segments of the Company including retail consumer and total
energy management. Executive shall also have such communications, marketing
and other responsibilities as requested by the President and Chief Operating
Officer of K N Energy Services, Inc.
-2-
<PAGE> 3
Section 3. Term of Employment. The period of Executive's employment
under this Agreement shall commence as of April 1, 1996. It shall continue,
subject to the other provisions of this Agreement, until April 1, 1998.
Section 4. Base Salary. For all services rendered by Executive in
any capacity during Executive's employment under this Agreement, including,
without limitation, services as an executive, officer, director, or member of
any committee of the Company or of any subsidiary, affiliate or division
thereof, the Company shall pay Executive a base salary at the annual rate of
not less than $160,000. Such base salary shall be payable in accordance with
the customary executive payroll practices of the Company, but in no event less
frequently than monthly; provided, however, that Executive shall not be
entitled to any salary while receiving payments under any written policy with
respect to disability which may be adopted by the Company and then in effect.
Executive's base salary shall be reviewed on November 1, 1996, and thereafter
at the same time and in the same manner as other officers of the Company and
may be increased from time to time if the Company determines that an increase
is appropriate in its sole discretion.
Section 5. Benefits. Executive shall receive such sick leave,
disability pay, retirement benefits, savings plans, 401(k) plans, health
insurance and other benefits in addition to salary and bonuses as are provided
to, and on the same basis, as the other executive management employees of the
Company.
-3-
<PAGE> 4
Section 6. Vacation. Executive shall receive four weeks of paid
vacation per year.
Section 7. Reimbursement of Expenses. The Company shall pay or
reimburse Executive for all reasonable, ordinary and necessary travel and other
expenses incurred by Executive in the performance of Executive's obligations
under this Agreement, in accordance with the Company's travel and expense
reimbursement policies for executive management employees.
Section 8. Relocation Costs. Executive shall receive the Company's
standard relocation allowance in an amount equal to 20% of Executive's Base
Salary, pursuant to the Company's Relocation Policy. In addition, Executive
shall receive a housing allowance and other relocation benefits in accordance
with the Company's relocation policies for executive management employees,
specifically including all costs associated with the move of the Executive's
personal and household belongings, temporary housing allowance for a period not
to exceed three months, all title, legal, appraisal, survey and related costs
relating to the sale at Executive's current residence and purchase of a new
residence, reimbursement of the cost of Executive and his spouse making not
more than two house hunting trips and the cost of transportation and lodging
for the Executive and his family members during the actual time of the move.
Each of the foregoing amounts, including the relocation allowance, will be
"grossed up" assuming a combined state and federal tax rate of 35%. To the
extent
-4-
<PAGE> 5
Executive is unable to sell his existing residence in Alpharetta, Georgia prior
to April 1, 1996, the Company shall purchase or cause to be purchased, for cash
such residence at the higher of (i) Executive's cost of such residence or (ii)
the average of two appraisals of such residence. The purchase will be closed,
and the purchase price paid to Executive in immediately available funds, on a
date to be agreed to between the parties not later than May 31, 1996.
Following completion of Executive's move, Executive will not be required to
relocate without Executive's consent.
Section 9. Incentive Bonus. On an annual basis, the Compensation
Committee of the Board of Directors of the Company shall review Executive's
performance, the results of the Company for the prior year and such other
factors as are deemed to be appropriate from time to time and determine what
incentive bonus, if any, is appropriate to be paid to Executive. Such
incentive bonus shall be awarded in accordance with the terms of the Company's
Executive Incentive Plan and shall be based on the Level III Benefits with a
midpoint base salary comparison of $200,000, all subject to approval of the
Compensation Committee of the Board of Directors. During the first year of
this Agreement, Executive shall be paid at the maximum rate allowable under
Level III of the Executive Incentive Plan and such payment shall not be pro-
rated for service in 1996. The Executive Incentive Plan Level III Benefits
provisions shall not be modified as they apply to Executive in any manner
materially detrimental to Executive except for modifications that apply
similarly to all executives of the Company who participate in the Company's
Executive Incentive Plan based on Level III Benefits.
-5-
<PAGE> 6
Section 10. Restricted Stock. On April 1, 1996 Executive shall be
issued 3,000 shares of Restricted Stock, subject to performance-based criteria
set forth in a restricted stock agreement to be agreed to by Executive and the
Company. Vesting will accrue at the rate of 1,000 shares on April 1, 1996 and
1,000 shares each April 1 thereafter for the next two years. Any dividends
upon restricted stock which has not vested shall be held by the Company until
the stock vests. Withholding taxes on compensation earned through the vesting
of the 3,000 shares shall be paid by the Company and held as a receivable
payable to Executive, on a full recourse basis. The taxes will be invoiced to
Executive when the shares are distributed.
Section 11. Stock Options. On April 1, 1996 the Company shall grant
to Executive 10,000 Incentive Stock Options pursuant to the Company's Long Term
Incentive Compensation Plan. Vesting will accrue at the rate of 2,000 shares
on April 1, 1996 and 2,000 shares each April 1 thereafter for the next four
years. Any of such options that are not qualified Incentive Stock Options for
federal income tax purposes will be covered by a separate option agreement.
The option price shall be the fair market value of the stock on the date such
options are granted.
Section 12. Signing Bonus. The Company shall award to Executive a
signing bonus of $27,000 payable on April 1, 1996.
-6-
<PAGE> 7
Section 13. Severance Agreement. Executive shall execute a Key
Employee Severance Agreement similar to such agreements signed by other
executive management employees of the Company, provided, however, that if the
failure of the Company to renew this Agreement pursuant to Section 14(b) occurs
as a result of a change in control of the Company, as that term is defined in
the Company's Articles of Incorporation, such failure shall be deemed a
termination for purposes of the Key Employee Severance Plan.
-7-
<PAGE> 8
Section 14. Termination.
(a) For cause. The Company may at any time, in its sole
discretion, terminate the employment of Executive hereunder, for cause, by
written notice to Executive. For purposes hereof, "cause" shall mean (i) a
material breach of this Agreement by Executive which causes material harm to
the Company (ii) gross negligence or willful misconduct by Executive in the
performance of his duties under this Agreement which causes material harm to
the Company (iii) conviction of a felony; or (iv) conviction of a misdemeanor
involving moral turpitude.
(b) Mutual. Either party may terminate this Agreement
effective at the end of the initial two-year term by written notice to the
other delivered on or before the date two weeks prior to the end of such
initial term.
(c) Obligations following termination for cause. In the
event of termination of Executive's employment by the Company pursuant to
paragraph 14(a) neither party shall have any further obligations to the other
under this Agreement except the Company's obligations under paragraph 14(e),
obligations that accrued prior to the date of termination and Executive's
obligations under Section 15 hereof.
(d) Obligations following non-renewal. Upon a
termination of Executive's employment by the Company at the end of the initial
term, the Company shall have no further obligations to Executive, except as set
forth in Section 14(e) hereof. In the event Executive materially
-8-
<PAGE> 9
breaches any of his obligations under Section 15 hereof the Company shall be
entitled to discontinue such benefits.
(e) Insurance and Stock. Upon any termination of
Executive's employment hereunder, the Company shall (i) permit Executive to
continue insurance benefits at Executive's expense in accordance with the terms
of the Company's benefit plans and insurance policies, and applicable law; (ii)
deliver to Executive certificates representing shares of the Company's stock to
which Executive's rights under any restricted stock plan or agreement vested
prior to the date of termination, and (iii) allow Executive to exercise, in
accordance with the terms of applicable stock option plans and agreements, any
stock options which vested prior to the date of termination.
Section 15. Non-Competition Covenant. Executive shall not, during the
term of Executive's employment by the Company and for the one-year period
immediately following termination of Executive's employment by the Company
pursuant to paragraphs 14(a) or by either party pursuant to paragraph 14(b),
(a) act as an officer, director, employee, partner, or agent of, or invest in
or lend money to, or own, directly or indirectly, any interest in, or
participate in the control of, any corporation, partnership, joint venture or
other business organization which is engaged in the provision of any product or
services which may be offered or sold by the Company from time to time in the
future prior to the end of Executive's employment; (b) solicit from any
employee or consultant of the Company, or supply to any person, information
pertaining to any customer or customer prospect of the
-9-
<PAGE> 10
Company or; (c) interfere with the contractual relationship between the Company
and any customer of the Company. For purposes of this Agreement, "Customer"
shall refer, in addition to those persons to which services are sold by the
Company, to those persons with which the Company has established strategic
marketing, services or other alliances.
Notwithstanding anything to the contrary in clause (a) of the first
sentence of this Section 15, Executive shall be permitted, at any time after
any termination of Executive's employment with the Company:
(i) to invest in and own not more than 1% of the outstanding stock
of any publicly traded corporation;
(ii) to have any of the relationships described in clause (a) with
any business organization engaged primarily in the
telecommunications business;
(iii) to have any of the relationships described in clause (a) with
any business that is not primarily a utility that is pursuing
a strategy to integrate services; and
(iv) to have any of the relationships described in clause (a) with
any business organization that is not marketing to consumers
in the same geographic areas where the Company offers and
sells products and services to consumers as of the effective
date of termination of Executive's employment under this
Agreement.
Executive (i) recognizes the significance of the provisions of this
Section 15 and that they are required for the protection of legitimate business
interests of the Company; (ii) that the Company
-10-
<PAGE> 11
would not, in the absence of such provisions, employ Executive or entrust to
Executive the significant management responsibilities and customer development
and customer satisfaction responsibilities for major customers of the Company
which will be entrusted to Executive; (iii) there will be no practical way to
separate the portions of the Company's information which is confidential
information (as hereinafter defined) created by the Company's investment and
that information which is discernible from other sources; (iv) acknowledges
that the provisions of this Section 15 are reasonable in terms or duration,
geography, and types and limits of activities; and (v) acknowledges that the
Company will be making major investments based to a considerable degree upon
Executive's advice in reliance upon Executive's covenant not to compete
contained in this Section 15. If the covenant not to compete in this Section
15 is found by any court to be overly-broad in extent, as to the time period or
as to the geographic area designated, the parties agree that it shall
nevertheless be effective, but it shall be deemed to be amended to the extent
determined by such court to be reasonable and enforceable to the greatest
possible extent, and as so amended, shall be fully enforced.
Section 16. Confidential Information. Executive shall not, except in
the performance of Executive's duties hereunder and for the benefit of the
Company, disclose or reveal to any unauthorized person any confidential
information of the Company relating to the Company, to its subsidiaries or
affiliates, or to any of the businesses operated by them, and Executive
confirms that such information constitutes the exclusive property of the
Company.
-11-
<PAGE> 12
Section 17. Company's Remedies Upon Breach. Executive acknowledges
that the Company's remedy at law for a breach by Executive of the provisions of
Sections 15 and 16 hereof will be inadequate. Accordingly, in the event of the
breach or threatened breach by Executive of any of Sections 15 and 16 hereof,
the Company shall be entitled to injunctive relief in addition to any other
remedy to which it may be entitled.
Section 18. Tax Withholding. The Company may withhold from any
benefits payable under this Agreement all federal, state, city or other taxes
as shall be required pursuant to any law or governmental regulation or ruling.
Section 19. Nonassignability. This Agreement shall inure to the
benefit of, and be binding upon, Executive and Executive's personal or legal
representatives, executives, administrators, successors, heirs, distributees,
devisees and legatees, and the Company, and its successors and assignees,
provided, however, that neither Company nor Executive may assign any of
Executive's or its rights or benefits hereunder without the prior written
consent of the other.
Section 20. No Attachment. Except as required by law, the right to
receive payments under this Agreement shall not be subject to anticipation,
commutation, alienation, sale, assignment,
-12-
<PAGE> 13
encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy
or similar process or assignment by operation of law, and any attempt,
voluntary or involuntary, to effect any such action shall be null, void ab
initio and of no effect.
Section 21. Amendment of Agreement. This Agreement may not be
modified or amended except by an instrument in writing signed by the parties
hereto.
Section 22. No Implied Waiver. No forbearance from enforcing any
right hereunder shall be deemed to be a waiver of such right. No provision of
this Agreement shall be deemed to have been waived, nor shall there by any
estoppel against the enforcement of any provision of this Agreement, except by
written instrument of the party charged with such waiver or estoppel. No such
written waiver shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the specific term or
conditions waived and shall not constitute a waiver of such term or condition
for the future or as to any act other than that specifically waived.
Section 23. Notice. For the purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when received in fact.
-13-
<PAGE> 14
Section 24. Severability; Enforceability. If, for any reason, any
provision of this Agreement is held invalid, such invalidity shall not affect
any other provision of this Agreement not held so invalid, and each such other
provision shall to the full extent consistent with law continue in full force
and effect. If any provision of this Agreement shall be held invalid in part,
such invalidity shall in no way affect the rest of such provision not held so
invalid, and the rest of such provision, together with all other provision of
this Agreement, shall to the full extent consistent with law continue in full
force and effect.
Section 25. Headings. The headings of sections and paragraphs herein
are included solely for convenience of reference and shall not control the
meaning or interpretation of any of the provisions of this Agreement.
Section 26. Governing Law This Agreement has been executed and
delivered in the State of Colorado, is intended to be performed primarily
within such State, and its validity, interpretation, performance, and
enforcement shall be governed by the laws of such State.
Section 27. Entire Agreement. This instrument contains the entire
agreement of the parties with respect to the subject matter hereof and shall
supersede all other prior written or oral
-14-
<PAGE> 15
representations and agreements, if any, between the parties with respect
thereto; and neither party is relying upon such prior representations or
agreements in entering into this Agreement.
Section 28. Counterparts. This Agreement may be executed in as many
counterparts as may be deemed necessary and convenient, and by the different
parties on separate counterparts, each of which shall be deemed an original but
all of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Executive have caused this
Agreement to be executed as of the day and year first above written.
K N ENERGY, INC.
By
----------------------------------
Morton C. Aaronson
Vice President
EXECUTIVE
------------------------------------
Murray R. Smith
-15-
<TABLE> <S> <C>
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<NAME> K N ENERGY, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,005
<SECURITIES> 0
<RECEIVABLES> 298,072
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<INVENTORY> 49,603
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<PP&E> 1,547,622
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<TOTAL-ASSETS> 1,629,720
<CURRENT-LIABILITIES> 498,616
<BONDS> 423,676
0
7,000
<COMMON> 151,479
<OTHER-SE> 368,315
<TOTAL-LIABILITY-AND-EQUITY> 1,629,720
<SALES> 1,443,174
<TOTAL-REVENUES> 1,443,174
<CGS> 1,062,062
<TOTAL-COSTS> 1,308,373
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<INTEREST-EXPENSE> 35,933
<INCOME-PRETAX> 99,716
<INCOME-TAX> 35,897
<INCOME-CONTINUING> 63,819
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