UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------
Commission File Number 1-6446
-----------------------------------------------------
K N ENERGY, INC.
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kansas 48-0290000
- ---------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Van Gordon Street
P.O. Box 281304, Lakewood, Colorado 80228-8304
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 989-1740
- ---------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, $5 par value; authorized 50,000,000 shares; outstanding
31,352,305 shares as of July 31, 1997.
1
Form 10-Q
K N ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page Number
<S> <C>
Consolidated Balance Sheets (Unaudited)...................... 3 & 4
Consolidated Statements of Income (Unaudited)................ 5
Consolidated Statements of Cash Flows (Unaudited)............ 6 & 7
Notes to Consolidated Financial Statements................... 8 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 11 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 15
Item 2. Changes in Securities.................................. 15
Item 5. Other Information...................................... 15
Item 6. Exhibit 27 - Financial Data Schedule*
SIGNATURE......................................................... 17
</TABLE>
*Included In SEC EDGAR Filing Only.
2
Form 10-Q
CONSOLIDATED BALANCE SHEETS
K N Energy, Inc. and Subsidiaries
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents............................................. $ 16,819 $ 17,005
Accounts Receivable................................................... 198,983 304,942
Materials and Supplies................................................ 15,013 6,092
Gas in Underground Storage............................................ 24,324 43,511
Prepaid Gas........................................................... 8,871 12,001
Other Prepaid Expenses................................................ 14,190 12,824
Gas Imbalances and Other.............................................. 68,594 65,319
---------- ----------
346,794 461,694
Investments: ---------- ----------
Investment in Tom Brown, Inc. ........................................ 45,146 44,331
Other................................................................. 22,947 6,207
---------- ----------
68,093 50,538
---------- ----------
Property, Plant and Equipment, at Cost:
Gathering, Processing and Marketing Services.......................... 822,768 683,569
Interstate Transportation and Storage Services........................ 519,751 447,557
Retail Natural Gas Services........................................... 408,204 409,626
---------- ----------
1,750,723 1,540,752
Less Accumulated Depreciation and Amortization........................ 528,620 518,451
---------- ----------
1,222,103 1,022,301
---------- ----------
Deferred Charges and Other Assets..................................... 97,181 95,187
---------- ----------
Total Assets $1,734,171 $1,629,720
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
Form 10-Q
CONSOLIDATED BALANCE SHEETS
K N Energy, Inc. and Subsidiaries
(Dollars in Thousands)
<TABLE>
<CAPTION> June 30 December 31
1997 1996
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Current Maturities of Long-Term Debt.................................. $ 19,055 $ 26,971
Notes Payable......................................................... 200,300 129,300
Accounts Payable...................................................... 157,283 241,187
Accrued Expenses...................................................... 29,250 34,696
Accrued Taxes......................................................... 17,090 16,045
Gas Imbalances and Other.............................................. 48,831 50,417
---------- ----------
471,809 498,616
---------- ----------
Deferred Liabilities, Credits and Reserves:
Deferred Income Taxes................................................. 128,392 122,371
Other................................................................. 35,579 31,930
---------- ----------
163,971 154,301
---------- ----------
Long-Term Debt........................................................ 412,912 423,676
---------- ----------
K N-Obligated Mandatorily Redeemable Capital
Trust Pass-through Securities of Subsidiary Trust................... 100,000 --
---------- ----------
Minority Interests in Equity of Subsidiaries.......................... 27,512 26,333
---------- ----------
Stockholders' Equity:
Preferred Stock-
Authorized - Class A, 200,000 Shares: Class B, 2,000,000 Shares,
Without Par Value
Redeemable Solely at Option of Company at $105 Per Share - Class A,
$5.00 Cumulative Series; 70,000 Shares.............................. 7,000 7,000
Common Stock- ---------- ----------
Authorized - 50,000,000 Shares, Par Value $5 Per Share
Outstanding - 31,343,368 and 30,295,792 Shares, Respectively......... 156,717 151,479
Additional Paid-in Capital............................................ 247,357 228,902
Retained Earnings..................................................... 156,852 142,578
Deferred Compensation................................................. (8,979) (2,908)
Treasury Stock, at Cost - 26,533 and 7,216 Shares, Respectively....... (980) (257)
---------- ----------
Total Common Stockholders' Equity..................................... 550,967 519,794
---------- ----------
Total Stockholders' Equity............................................ 557,967 526,794
---------- ----------
Total Liabilities and Stockholders' Equity $1,734,171 $1,629,720
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
Form 10-Q
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
K N Energy, Inc. and Subsidiaries
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues:
Gathering, Processing and Marketing Services..................... $ 311,058 $ 232,129 $ 706,721 $ 523,826
Interstate Transportation and Storage Services................... 4,116 5,066 12,425 11,527
Retail Natural Gas Services...................................... 42,673 39,204 128,174 126,235
--------- --------- --------- ---------
Total Operating Revenues......................................... 357,847 276,399 847,320 661,588
--------- --------- --------- ---------
Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales........................... 262,774 193,596 643,187 481,268
Operations and Maintenance....................................... 51,571 42,899 100,379 86,736
Depreciation and Amortization.................................... 13,691 12,631 27,991 24,830
Taxes, Other Than Income Taxes................................... 5,879 5,189 11,926 10,894
--------- --------- --------- ---------
Total Operating Costs and Expenses............................... 333,915 254,315 783,483 603,728
--------- --------- --------- ---------
Operating Income................................................. 23,932 22,084 63,837 57,860
--------- --------- --------- ---------
Other Income and (Deductions):
Interest Expense................................................. (10,518) (8,337) (20,174) (16,888)
Minority Interests............................................... (2,442) (1,119) (2,945) (1,665)
Other, Net....................................................... 4,867 1,196 7,181 1,871
--------- --------- --------- ---------
Total Other Income and (Deductions).............................. (8,093) (8,260) (15,938) (16,682)
--------- --------- --------- ---------
Income Before Income Taxes....................................... 15,839 13,824 47,899 41,178
Income Taxes..................................................... 4,967 4,976 16,669 14,823
--------- --------- --------- ---------
Net Income....................................................... 10,872 8,848 31,230 26,355
Less-Preferred Stock Dividends................................... 87 99 175 199
--------- --------- --------- ---------
Earnings Available For Common Stock.............................. $ 10,785 $ 8,749 $ 31,055 $ 26,156
========= ========= ========= =========
Number of Shares Used in Computing
Earnings Per Common Share....................................... 31,377 29,181 31,265 29,055
========= ========= ========= =========
Earnings Per Common Share........................................ $ 0.34 $ 0.30 $ 0.99 $ 0.90
========= ========= ========= =========
Dividends Per Common Share....................................... $ 0.27 $ 0.26 $ 0.54 $ 0.52
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
K N Energy, Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................................. $ 31,230 $ 26,355
Adjustments to Reconcile Net Income to Net Cash Flows From Operating
Activities:
Depreciation and Amortization............................................. 27,991 24,830
Deferred Income Taxes..................................................... 5,741 5,147
Deferred Purchased Gas Costs.............................................. (7,624) 7,844
Provisions for Losses on Accounts Receivable.............................. 133 123
Changes in Gas in Underground Storage..................................... 4,710 5,288
Changes in Other Working Capital Items.................................... 2,016 28,476
Changes in Deferred Revenues.............................................. (9,186) (14,194)
Other, Net................................................................ 5,742 (552)
-------- --------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES........................... 60,753 83,317
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures....................................................... (113,495) (36,967)
Acquisitions............................................................... (95,601) (7,439)
Investments................................................................ (9,725) (1,186)
Proceeds From Sales of Assets.............................................. 9,671 4,590
-------- --------
NET CASH FLOWS USED IN INVESTING ACTIVITIES................................ (209,150) (41,002)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt (Net)...................................................... 71,000 (15,500)
Long-Term Debt Retired..................................................... (18,708) (11,411)
Other Mandatorily Redeemable Securities Issued............................. 100,000 --
Common Stock Issued........................................................ 13,795 5,859
Treasury Stock Issued...................................................... 879 4,819
Treasury Stock Acquired.................................................... (1,602) (5,817)
Cash Dividends - Common.................................................... (16,781) (14,751)
- Preferred................................................. (175) (199)
Minority Interests Distributions........................................... (197) (2,275)
-------- --------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES.................. 148,211 (39,275)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents....................... (186) 3,040
Cash and Cash Equivalents at Beginning of Year............................. 17,005 22,571
-------- --------
Cash and Cash Equivalents at End of Period................................. $ 16,819 $ 25,611
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
K N Energy, Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------
1997 1996
---- ----
CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY
(Net of Effects from Acquisitions):
<S> <C> <C>
Accounts Receivable........................................................ $105,826 $ 33,477
Materials and Supplies..................................................... (3,346) 572
Other Current Assets....................................................... (1,511) (7,094)
Accounts Payable........................................................... (83,904) (11,995)
Other Current Liabilities.................................................. (15,049) 13,516
-------- --------
$ 2,016 $ 28,476
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest (Net of Amount Capitalized)...................................... $ 20,636 $ 16,902
======== ========
Income Taxes.............................................................. $ 15,635 $ 8,056
======== ========
</TABLE>
7
Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
-------
In the opinion of management, all adjustments necessary for a fair
statement of the results for the unaudited interim periods have been
made. These adjustments consist only of normal recurring accruals.
Certain prior year amounts have been reclassified to conform with the
1997 presentation.
2. Acquisition
-----------
In March 1997, K N completed its purchase of several Enron Corporation
subsidiaries that owned or operated 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 Company assumed operation of
these facilities effective April 1, 1997.
A wholly owned subsidiary of K N leases the processing facilities at
Bushton under operating leases requiring semi-annual payments averaging
$23.1 million per annum for the remaining term of the leases. Under the
terms of these leases, the lessee has the option of terminating the
leases and/or buying the assets at any time after November 2003, and
extending the leases beyond May 2012, the scheduled termination date. In
addition, the lessee may purchase the processing facilities upon
termination of the leases.
3. 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 1996, one
of K N's regulated interstate pipeline subsidiaries, K N Interstate Gas
Transmission Co. ("KNI"), filed with the Federal Energy Regulatory
Commission ("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. On May 30, 1997,
the FERC issued an order granting KNI's requested authority to proceed with
the project. The pipeline is expected to begin free flow operations in the
third quarter of 1997, and full-flow service in October 1997.
4. Financing
---------
On April 24, 1997, the Company sold $100 million of 8.56% Capital Trust
Pass-through Securities (the "Capital Securities") maturing on April 15,
2027. The sale was effected through a wholly owned business trust named
K N Capital Trust I (the "Trust"). The Company used the net proceeds
from the sale to reduce short-term indebtedness.
The financial statements of the Trust are consolidated into the
Company's consolidated financial statements, with the Capital Securities
treated as a minority interest and shown in the Company's consolidated
balance sheet as "K N-Obligated Mandatorily Redeemable Capital Trust
Pass-through Securities of Subsidiary Trust."
8
Form 10-Q
5. Common Stock Issuance
---------------------
On June 11, 1997, Cabot Corporation exercised warrants held by it and
purchased, in an unregistered offering, 642,232 shares of K N's
Common Stock which were issued to Cabot Specialty Chemicals, Inc., in
exchange for Cabot's payment price of $11.3 million.
6. Joint Venture
-------------
In January 1997, K N and PacifiCorp formed a joint venture named en*able,
L.L.C. ("en*able") that provides a broad portfolio of branded products
and services that local utilities can offer to their customers under the
Simple Choice(SM) brand. All Simple Choice(SM) products and services are
supported through a customer service center in Scottsbluff, Nebraska.
Subsidiaries of K N and PacifiCorp each own 50 percent of en*able.
7. Accounting Pronouncements Issued But Not Yet Effective
------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
Per Share. This new statement is effective December 15, 1997; early
adoption is not permitted. SFAS 128 provides computation, presentation
and disclosure requirements for earnings per share. When adopted, the
Company will restate reported earnings per share for all prior periods
presented. Had this standard been effective for the periods presented
herein, the following earnings per share would have been reported:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Share.......... $ 0.35 $ 0.31 $ 1.01 $ 0.92
Diluted Earnings Per Share........ $ 0.34 $ 0.30 $ 0.99 $ 0.90
</TABLE>
8. 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 natural gas
liquids ("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
9
Form 10-Q
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.
The differences between the current market value and the original physical
contracts' value, associated with hedging activities, are reflected,
depending on maturity, as deferred charges or credits and other current
assets or liabilities in the accompanying consolidated balance sheets.
These deferrals will be offset by the corresponding underlying physical
transactions.
In the event energy financial instruments do not meet the criteria for
hedge accounting, the deferred gains or losses associated with the
corresponding financial instruments would be included in the results of
operations in the current period.
In the event energy financial instruments are terminated prior to the
period of physical delivery of the items being hedged, the gains or
losses on the energy financial instruments at the time of termination
remain deferred until the period of physical delivery unless both the
energy financial instruments and the items being hedged result in a
loss. If this occurs, the loss is recorded immediately.
(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.
10
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED FINANCIAL RESULTS
Consolidated net income for the second quarter of 1997 was $10.9
million, or $0.34 per common share after payment of preferred dividends,
compared with 1996 second quarter net income of $8.8 million, or $0.30
per common share. For the first six months of 1997, net income totaled
$31.2 million ($0.99 per common share), an increase of 18 percent over
the 1996 first six months' net income of $26.4 million ($0.90 per common
share). Shares used in computing earnings per share increased by 7.5
percent for the three month comparison and by 7.6 percent for the year
to date.
The improvement in 1997 second quarter earnings was attributable to
contributions from the acquisition of the Bushton processing complex and
Hugoton Basin gathering assets which was effective April 1, 1997, colder
weather positively impacting Interstate Pipeline and Retail throughput,
earnings from the Company's en*able joint venture, and lower effective
income tax rates. These positive factors more than offset the impact of
lower margins from gas marketing activities, reduced pipeline throughput
on the Texas intrastate system due to unfavorable basin differentials
and low demand for wholesale irrigation deliveries in Texas due to heavy
rainfall. Comparing the six month earnings for 1997 and 1996, the
improvement in 1997 results also reflect higher prices for NGLs and
sales of storage gas.
RESULTS OF OPERATIONS
Operating results by business segment, consolidated other income and
(deductions) and income taxes are discussed below. Segment operating
revenues, gas purchases, operations and maintenance expenses and
volumetric data cited below are before intersegment eliminations
(dollars in millions).
<TABLE>
<CAPTION>
Second Quarter First Six Months
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gathering, Processing and Marketing Services
Operating Revenues -
Gas Sales $204.6 $186.1 $528.3 $436.6
Natural Gas Liquids Sales 70.4 41.6 134.8 82.2
Gathering, Transportation and Other 42.9 17.9 74.7 35.3
------ ------ ------ ------
317.9 245.6 737.8 554.1
------ ------ ------ ------
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 262.9 198.0 626.6 459.9
Operations and Maintenance 30.1 23.3 55.2 44.9
Depreciation and Amortization 8.7 7.9 18.0 15.4
Taxes, Other Than Income Taxes 3.7 2.4 7.1 5.6
------ ------ ------ ------
305.4 231.6 706.9 525.8
------ ------ ------ ------
Operating Income $ 12.5 $ 14.0 $ 30.9 $ 28.3
====== ====== ====== ======
Systems Throughput (Trillion Btus) -
Gas Sales 95.7 89.9 219.6 205.6
Transportation and Gathering 119.8 78.8 197.3 164.5
------ ------ ------ ------
215.5 168.7 416.9 370.1
====== ====== ====== ======
Natural Gas Liquids Sales (Million
Gallons) -
Company-Owned and Processed 165.9 110.7 304.8 214.1
Third Party Marketed 26.9 10.9 38.4 23.5
------ ------ ------ ------
192.8 121.6 343.2 237.6
====== ====== ====== ======
</TABLE>
11
Form 10-Q
The significant increases in second quarter 1997 operating revenues,
costs and expenses result from the acquisition of the Bushton processing
complex and Hugoton Basin gathering assets at the end of March; this
acquisition contributed incremental revenues of $36.1 million and
operating costs and expenses of $30.6 million; 1997 second quarter gathering
and NGLs volumes include 39.1 trillion Btus and 54.1 million gallons,
respectively, from these facilities. The decline in this segment's
second quarter 1997 operating income is attributable to lower gas
marketing margins resulting from low wholesale irrigation demand and
reduced sales to electric plants on the southern system. Second quarter
1997 transportation and storage revenues were adversely impacted by
these reduced sales loads and by unfavorable price differentials between
supply basins. Comparing the 1997 and 1996 six months periods, the
positive contribution from the Bushton and Hugoton acquisition and
slightly higher NGLs prices were partially offset by reduced 1997
margins, resulting in part from unfavorable weather, and by price
differentials.
<TABLE>
<CAPTION>
Second Quarter First Six Months
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interstate Transportation and Storage Services
Operating Revenues -
Transportation and Storage $15.8 $14.3 $35.0 $30.6
Other 2.1 1.5 4.7 3.5
----- ----- ----- -----
17.9 15.8 39.7 34.1
----- ----- ----- -----
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 1.2 2.0 4.5 4.0
Operations and Maintenance 6.9 5.5 15.3 12.3
Depreciation and Amortization 2.0 1.9 4.0 3.8
Taxes, Other Than Income Taxes 1.2 0.9 2.1 1.7
----- ----- ----- -----
11.3 10.3 25.9 21.8
----- ----- ----- -----
Operating Income $ 6.6 $ 5.5 $13.8 $12.3
===== ===== ===== =====
Systems Throughput (Trillion Btus) 38.5 34.1 88.1 87.6
===== ===== ===== =====
</TABLE>
Second quarter 1997 operating results and systems throughput volumes were
significantly higher than 1996 due principally to colder weather in the
geographic areas served by the pipeline. Additionally, second quarter
results were impacted by improved controls over shippers who deliver
less volumes into the system than nominated; 1997 second quarter gas
costs were favorably impacted by these actions. The increases in 1997
second quarter and six months operations and maintenance expenses reflect
higher infrastructure costs due to the Pony Express Pipeline. Six months
1997 operating results reflect a 12 percent increase over 1996 due
primarily to increased shippers' conversion from lower priced interruptible
service to firm service.
12
Form 10-Q
<TABLE>
<CAPTION>
Second Quarter First Six Months
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retail Natural Gas Services
Operating Revenues -
Gas Sales $ 34.9 $ 32.6 $111.2 $113.4
Transportation and Other 8.3 7.2 17.8 13.6
------ ------ ------ ------
43.2 39.8 129.0 127.0
------ ------ ------ ------
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 19.7 18.3 71.2 70.7
Operations and Maintenance 14.7 14.2 30.0 29.8
Depreciation and Amortization 3.0 2.8 6.0 5.6
Taxes, Other Than Income Taxes 1.0 1.9 2.7 3.6
------ ------ ------ ------
38.4 37.2 109.9 109.7
------ ------ ------ ------
Operating Income $ 4.8 $ 2.6 $ 19.1 $ 17.3
====== ====== ====== ======
Systems Throughput (Trillion Btus) -
Gas Sales 6.9 4.9 21.8 19.7
Transportation 8.6 7.4 16.8 14.3
------ ------ ------ ------
15.5 12.3 38.6 34.0
====== ====== ====== ======
</TABLE>
Second quarter 1997 operating results were positively impacted by
increased sales and transport deliveries resulting from colder weather
than the 1996 period; second quarter 1997 heating degree days in the
markets served were 19 percent higher than 1996. Additionally, 1997 operating
results were favorably impacted by higher seasonal demand fees received
from irrigators. First quarter 1997 operating results were essentially flat
with the comparable 1996 quarter.
<TABLE>
<CAPTION>
Second Quarter First Six Months
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Income and (Deductions)
Interest Expense $(10.5) $ (8.3) $(20.2) $(16.9)
Minority Interests and Other, Net 2.4 - 4.3 0.2
------ ------ ------ ------
$ (8.1) $ (8.3) $(15.9) $(16.7)
====== ====== ====== ======
</TABLE>
Higher 1997 interest expense results from increased levels of short and
long-term debt incurred to finance acquisitions and to construct the
Pony Express Pipeline. During the first six months of 1997, the Company
capitalized $3.7 million of interest costs and $2.2 million of equity
financing costs (included in Minority Interests and Other, Net)
primarily related to the Pipeline construction. In addition to the
capitalization of equity financing costs, Minority Interests and Other,
Net includes the Company's 50 percent interest in the earnings of en*able
and of Orcom Systems - two joint venture investments.
<TABLE>
<CAPTION>
Second Quarter First Six Months
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Taxes
Provisions $ 5.0 $ 5.0 $16.7 $14.8
===== ===== ===== =====
Effective Tax Rate 34.8% 36.0%
===== =====
</TABLE>
The lower 1997 effective tax rate results from closure on certain issues
in prior years'income tax filings.
13
Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES
For the six month period ended June 30, 1997, net cash flows from
operations totaled $60.8 million, compared with $83.3 million for the
1996 period. A material cause of the decline in 1997 operating cash
flows is higher incurred costs of gas than that currently being collected
in rates in the Company's Retail gas services segment. The Company has
or will be making revised purchased gas cost adjustment filings in all
of its jurisdictions to recover these gas costs.
In March 1997, the Company completed the purchase of the Bushton
processing complex and Hugoton Basin gathering assets. The cash portion
of the purchase was initially funded by short-term debt. In April 1997,
the Company sold $100 million of Capital Trust Pass-through Securities,
bearing an annual distribution rate of 8.56 percent, callable in ten years and
maturing in 2027. The proceeds of this financing were used to reduce
short-term borrowings. Depending on market conditions and need, the
Company may issue long-term debt during the second half of 1997.
14
Form 10-Q
OTHER INFORMATION
Item 1. Legal Proceedings
Cabot Environmental Matters
- ---------------------------
As reported in the Company's Annual Report on Form 10-K, pursuant to
certain acquisition agreements in 1989 and 1992, The Maple Gas
Corporation and Cabot Corporation (collectively, "Cabot"), the Company's
largest stockholder, indemnified the Company for certain environmental
liabilities. Contractual and procedural 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. This Standstill Agreement has been extended to
August 15, 1997 and settlement discussions are ongoing. 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.
For information relating to other legal proceedings, see Note 5 of Notes
to Consolidated Financial Statements on pages 33-34 of the 1996 Annual
Report on Form 10-K and the subsection entitled "Litigation and
Environmental" on pages 24-25 of the 1996 Annual Report on Form 10-K.
Item 2. Changes in Securities
On June 11, 1997, Cabot Corporation exercised warrants held by it and
purchased, in an unregistered offering, 642,232 shares of K N's
Common Stock which were issued to Cabot Specialty Chemicals, Inc., in
exchange for Cabot's payment price of $11.3 million.
Item 5. Other Information
TransColorado
- -------------
On June 30, 1997, the Company, El Paso Energy Corporation and Questar
Corporation announced the restructuring of TransColorado Gas
Transmission Co. This venture was an equal one-third partnership among
affiliates of each of these corporations for Phase I of the project;
whereas, Phase II of the project will become an equal one-half
partnership between affiliates of the Company and of Questar
Corporation.
Front Runner Pipeline
- ---------------------
On August 5, 1997, K N Wattenberg Transmission Limited Liability Company
("Wattenberg"), a wholly owned subsidiary of K N, announced plans to
construct a natural gas pipeline that would extend approximately 100
miles from the Rockport Hub, a confluence of several pipelines south of
Cheyenne, Wyoming to just north of the Denver International Airport.
The pipeline will access additional natural gas supplies directly north
of Denver, Colorado, near the Wyoming border. The pipeline is expected
to be in service for the late 1998-1999 heating season, and will carry up
to 250 million cubic feet of natural gas per day.
Wattenberg announced an open season for firm capacity on this pipeline
for the period August 5 - 31, 1997, and expects to file for approval of
this project with the FERC by the end of August 1997.
15
Form 10-Q
Item 6. Exhibits
27 - Financial Data Schedule
16
Form 10-Q
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K N ENERGY, INC.
(Registrant)
August 14, 1997 /s/ Clyde E. McKenzie
-------------------------------------------
Clyde E. McKenzie
Vice President and Chief Financial Officer
(On Behalf of the Registrant and as
Principal Financial and Accounting Officer)
17
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