<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 changes
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 31,461,818 shares as of October 31, 1997.
- ----------------------------------------------------------------
<PAGE> 2
Form 10-Q
K N ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
-----------
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 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 12 - 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................... 16
SIGNATURE............................................................ 17
</TABLE>
<PAGE> 3
Form 10-Q
CONSOLIDATED BALANCE SHEETS
K N Energy, Inc. and Subsidiaries
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents........................... $ 25,267 $ 17,005
Accounts Receivable................................. 192,523 304,942
Materials and Supplies.............................. 14,998 6,092
Gas in Underground Storage.......................... 23,660 43,511
Prepaid Gas......................................... 9,572 12,001
Other Prepaid Expenses.............................. 14,983 12,824
Gas Imbalances and Other............................ 70,995 65,319
---------- ----------
351,998 461,694
---------- ----------
Investments......................................... 75,197 50,538
---------- ----------
Property, Plant and Equipment, at Cost:
Gathering, Processing and Marketing Services........ 856,637 683,569
Interstate Transportation and Storage Services...... 583,475 447,557
Retail Natural Gas Services......................... 421,567 409,626
---------- ----------
1,861,679 1,540,752
Less Accumulated Depreciation and Amortization...... 542,905 518,451
---------- ----------
1,318,774 1,022,301
---------- ----------
Deferred Charges and Other Assets................... 106,488 95,187
---------- ----------
Total Assets $1,852,457 $1,629,720
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
Form 10-Q
CONSOLIDATED BALANCE SHEETS
K N Energy, Inc. and Subsidiaries
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt................ $ 19,055 $ 26,971
Notes Payable....................................... 285,000 129,300
Accounts Payable.................................... 173,070 241,187
Accrued Expenses.................................... 25,952 34,696
Accrued Taxes....................................... 26,673 16,045
Gas Imbalances and Other............................ 51,045 50,417
---------- ----------
580,795 498,616
---------- ----------
Deferred Liabilities, Credits and Reserves:
Deferred Income Taxes............................... 131,567 122,371
Other............................................... 26,628 31,930
---------- ----------
158,195 154,301
---------- ----------
Long-Term Debt...................................... 410,498 423,676
---------- ----------
K N-Obligated Mandatorily Redeemable
Capital Trust Pass-through Securities
of Subsidiary Trust............................. 100,000 --
---------- ----------
Minority Interests in Equity of Subsidiaries........ 31,160 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 - 31,446,326 and 30,295,792 Shares,
Respectively.................................... 157,232 151,479
Additional Paid-in Capital.......................... 252,030 228,902
Retained Earnings................................... 166,099 142,578
Deferred Compensation............................... (9,667) (2,908)
Treasury Stock, at Cost - 24,942 and 7,216 Shares,
Respectively....................................... (885) (257)
---------- ----------
Total Common Stockholders' Equity................... 564,809 519,794
---------- ----------
Total Stockholders' Equity.......................... 571,809 526,794
---------- ----------
Total Liabilities and Stockholders' Equity $1,852,457 $1,629,720
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
Form 10-Q
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
K N Energy, Inc. and Subsidiaries
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues:
Gathering, Processing and Marketing Services.................... $ 468,599 $ 264,894 $1,175,320 $ 788,719
Interstate Transportation and Storage Services.................. 5,223 6,092 17,648 17,619
Retail Natural Gas Services..................................... 41,315 32,647 169,489 158,882
--------- --------- ---------- ---------
Total Operating Revenues........................................ 515,137 303,633 1,362,457 965,220
--------- --------- ---------- ---------
Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales.......................... 416,656 210,935 1,060,884 693,006
Operations and Maintenance...................................... 46,771 44,384 146,109 130,316
Depreciation and Amortization................................... 13,110 13,602 41,101 38,432
Taxes, Other Than Income Taxes.................................. 6,218 4,555 18,144 15,449
--------- --------- ---------- ---------
Total Operating Costs and Expenses.............................. 482,755 273,476 1,266,238 877,203
--------- -------- ---------- ---------
Operating Income................................................ 32,382 30,157 96,219 88,017
--------- --------- ---------- ---------
Other Income and (Deductions):
Interest Expense................................................ (10,817) (9,321) (30,991) (26,209)
Minority Interests.............................................. (2,736) (581) (5,681) (2,246)
Other, Net...................................................... 7,798 1,141 14,979 3,012
--------- --------- ---------- ---------
Total Other Income and (Deductions)............................. (5,755) (8,761) (21,693) (25,443)
--------- --------- ---------- ---------
Income Before Income Taxes...................................... 26,627 21,396 74,526 62,574
Income Taxes.................................................... 8,819 7,703 25,488 22,526
--------- --------- ---------- ---------
Net Income...................................................... 17,808 13,693 49,038 40,048
Less - Preferred Stock Dividends................................ 88 99 263 298
--------- --------- ---------- ---------
Earnings Available For Common Stock............................ $ 17,720 $ 13,594 $ 48,775 $ 39,750
========= ========= ========== =========
Number of Shares Used in Computing
Earnings Per Common Share...................................... 31,709 30,046 31,397 29,216
========= ========= ========== =========
Earnings Per Common Share....................................... $ 0.56 $ 0.46 $ 1.55 $ 1.36
========= ========= ========== =========
Dividends Per Common Share...................................... $ 0.27 $ 0.26 $ 0.81 $ 0.78
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
K N Energy, Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income......................................... $ 49,038 $ 40,048
Adjustments to Reconcile Net Income to
Net Cash Flows From Operating Activities:
Depreciation and Amortization..................... 41,101 38,432
Deferred Income Taxes............................. 8,781 7,823
Deferred Purchased Gas Costs...................... (14,736) 1,939
Provisions for Losses on Accounts Receivable...... 808 284
Changes in Gas in Underground Storage............. 5,409 (3,359)
Changes in Other Working Capital Items............ 30,418 15,591
Changes in Deferred Revenues...................... (11,699) (16,898)
Other, Net........................................ (6,721) (13,680)
-------- --------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES.... 102,399 70,180
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures............................... (213,320) (73,602)
Acquisitions....................................... (102,918) (64,234)
Investments........................................ (10,796) (3,320)
Proceeds From Sales of Assets...................... 9,938 5,016
-------- --------
NET CASH FLOWS USED IN INVESTING ACTIVITIES........ (317,096) (136,140)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt (Net).............................. 155,700 (73,000)
Long-Term Debt Issued.............................. -- 125,000
Long-Term Debt Retired............................. (21,136) (13,935)
Capital Trust Pass-through Securities Issued....... 100,000 --
Common Stock Issued................................ 15,802 52,685
Treasury Stock Issued.............................. 974 4,858
Treasury Stock Acquired............................ (1,602) (5,997)
Cash Dividends - Common............................ (25,254) (22,594)
- Preferred......................... (263) (298)
Minority Interests Contributions................... -- 21
Minority Interests Distributions................... -- (2,339)
Securities Issuance Costs.......................... (1,262) (938)
-------- --------
NET CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES....................................... 222,959 63,463
-------- --------
Net Increase (Decrease) in Cash
and Cash Equivalents............................. 8,262 (2,497)
Cash and Cash Equivalents
at Beginning of Year............................. 17,005 22,571
-------- --------
Cash and Cash Equivalents at End of Period......... $ 25,267 $ 20,074
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 7
Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
K N Energy, Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------
1997 1996
---- ----
<S> <C> <C>
CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY
(Net of Effects from Acquisitions):
Accounts Receivable................................ $113,822 $ 55,219
Materials and Supplies............................. (3,331) 2,533
Other Current Assets............................... (5,406) (26,980)
Accounts Payable................................... (68,117) (42,978)
Other Current Liabilities.......................... (6,550) 27,797
-------- --------
$ 30,418 $ 15,591
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest (Net of Amount Capitalized).............. $ 35,050 $ 25,939
======== ========
Income Taxes...................................... $ 15,496 $ 8,955
======== ========
</TABLE>
<PAGE> 8
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. Acquisitions
(A) Bushton
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
("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
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.
(B) Interenergy
On August 25, 1997, K N signed a binding agreement to acquire
Interenergy Corporation ("Interenergy"), a diversified energy
company involved with natural gas gathering, processing and
marketing in the Rocky Mountain and mid-continent states. K N
will exchange K N common stock and assume Interenergy's debt in
a transaction to be accounted for as a purchase. Interenergy's
assets to be acquired include approximately 615 miles of natural
gas gathering pipeline and two natural gas liquids processing
facilities - one in Wyoming and one 50 percent jointly owned in
North Dakota. Interenergy's gathering capacity is 53 million
cubic feet of natural gas per day, with plant capacity totaling
35 million cubic feet per day. Interenergy has its
headquarters in Denver and employs 65 people.
3. Sale of Kansas Distribution Properties
On October 1, 1997, K N entered into a letter of intent to sell
its retail natural gas distribution properties in Kansas to
Midwest Energy, Inc., a customer-owned cooperative based in
Hays, Kansas. K N will sell its natural gas distribution
systems in 58 Kansas communities, serving approximately 30,000
residential, commercial and industrial customers. The
transaction, expected to close by year end, is subject to final
approval by both companies, in addition to all applicable state
and federal regulatory authorities.
<PAGE> 9
Form 10-Q
4. 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 began free flow operations in
August 1997, and full service at its designated capacity of 255
MMcf per day is expected by early December 1997.
5. Financing
On October 27, 1997, the Company sold $150 million of 6.67%
debentures maturing on November 1, 2027. The debentures are
callable by the Company any time after November 1, 2004 and are
redeemable at the option of the registered holders on November
1, 2004. The Company used the net proceeds from the sale to
reduce short-term indebtedness.
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."
6. 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 of $11.3
million.
7. 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
owned and operated by en*able. Subsidiaries of K N and
PacifiCorp each own 50 percent of en*able.
8. 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
<PAGE> 10
Form 10-Q
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 Nine Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Share................ $ 0.56 $ 0.46 $ 1.58 $ 1.38
Diluted Earnings Per Share.............. $ 0.56 $ 0.46 $ 1.55 $ 1.36
</TABLE>
9. 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.
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.
<PAGE> 11
Form 10-Q
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.
<PAGE> 12
Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED FINANCIAL RESULTS
Consolidated net income for the third quarter of 1997 was $17.8
million, or $0.56 per common share after the payment of
preferred dividends, compared with 1996 third quarter net income
of $13.7 million, or $0.46 per common share. For the first nine
months of 1997, net income totaled $49.0 million or $1.55 per
common share, representing a 22 percent increase over the
comparable 1996 period's net income of $40.0 million or $1.36
per common share.
Third quarter 1997 earnings were positively impacted by
contributions from the Bushton-related assets acquired on April
1, 1997, earnings from the Company's equity investment in the
TransColorado Pipeline, income related to the sale of fifty
percent of en*able, the mid-August startup of the Pony Express
Pipeline, and tight expense controls. These positive factors
more than offset a loss incurred in power marketing, lower gas
margins (marketing, transportation and storage) due to
competitive pressures and low demand for wholesale irrigation
load resulting from heavy rainfall in the Texas intrastate
market area, and lower NGLs prices compared to 1996 prices. In
addition to the net third quarter positives, the improvement in
1997 year-to-date earnings reflects the favorable impact of
colder weather during the first four months of 1997 on the
Interstate Pipeline and Retail throughput, and a lower effective
income tax rate.
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>
Third Quarter First Nine Months
------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Gathering, Processing and Marketing Services
<S> <C> <C> <C> <C>
Operating Revenues -
Gas Sales $330.9 $212.8 $ 859.2 $649.3
Natural Gas Liquids Sales 67.7 42.3 202.5 124.5
Gathering, Transportation and Other 83.2 22.5 157.9 57.9
------- ------ ------- ------
481.8 277.6 1,219.6 831.7
------ ------ ------- ------
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 421.7 219.7 1,048.3 679.6
Operations and Maintenance 25.9 23.1 81.1 68.0
Depreciation and Amortization 8.0 8.3 26.0 23.7
Taxes, Other Than Income Taxes 3.8 3.2 10.9 8.8
------ ------ ------- ------
459.4 254.3 1,166.3 780.1
------ ------ ------- ------
Operating Income $ 22.4 $ 23.3 $ 53.3 $ 51.6
====== ====== ======= ======
Systems Throughput (Trillion Btus) -
Gas Sales 144.2 106.9 363.8 312.5
Transportation and Gathering 92.7 78.1 290.0 242.6
------ ------ ------- ------
236.9 185.0 653.8 555.1
====== ====== ======= ======
Natural Gas Liquids Sales (Million Gallons) -
Company-Owned and Processed 153.1 100.0 457.9 314.1
Third Party Marketed 29.3 8.5 67.7 32.0
------ ------ ------- ------
182.4 108.5 525.6 346.1
====== ====== ======= ======
</TABLE>
<PAGE> 13
Form 10-Q
The significant increases in 1997 operating revenues, costs and
expenses largely reflect the contributions of the Bushton-
related assets acquired on April 1, 1997, and power marketing
activities. The Bushton acquisition provided incremental 1997
third quarter and nine months operating revenues of $35.4
million and $71.5 million and operating income of $5.1 million
and $10.6 million, respectively. However, certain power
marketing transactions were structured in a way that was not in
compliance with the Company's risk management policies, and
losses of $4.0 million were incurred. Power marketing
activities have been suspended until the Company either owns,
or has a power marketing partner that owns, electric generating
assets.
Third quarter 1997 operating results were also adversely
impacted by lower gas marketing and transportation and storage
margins due to the impact of abundant rainfall on wholesale
irrigation loads in the Texas intrastate market area. Gas
margins were also impacted by increasing competitive pressures
prevalent in the gas marketing industry. Finally, NGLs prices
during the 1997 third quarter averaged $0.035 per gallon below
the comparable 1996 quarter. Offsetting these circumstances,
tight expense control initiatives implemented earlier in the
year are now fully functional. Contrasting the first nine
months of 1997 with 1996, the positive contributions from the
Bushton acquisition have more than offset reduced margins
resulting from a combination of unfavorable weather and
competitive pressures, and the power marketing loss.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Interstate Transportation and Storage Services
<S> <C> <C> <C> <C>
Operating Revenues -
Transportation and Storage $18.3 $15.5 $53.3 $46.1
Other 0.7 2.3 5.4 5.8
----- ----- ----- -----
19.0 17.8 58.7 51.9
----- ----- ----- -----
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 0.6 2.6 5.1 6.6
Operations and Maintenance 8.0 6.6 23.3 18.9
Depreciation and Amortization 2.1 2.7 6.1 6.5
Taxes, Other Than Income Taxes 0.6 0.6 2.7 2.3
----- ----- ----- -----
11.3 12.5 37.2 34.3
----- ----- ----- -----
Operating Income $ 7.7 $ 5.3 $21.5 $17.6
===== ===== ===== =====
Systems Throughput (Trillion Btus) 38.7 34.5 126.8 122.1
===== ===== ===== =====
</TABLE>
Operating results for the third quarter of 1997 were positively
impacted by the startup of the Pony Express Pipeline and an
irrigation load that was somewhat higher than the 1996 third
quarter in the areas served by the Interstate system. In mid-
August 1997, the Pony Express Pipeline commenced transporting
volumes on a "free-flow" basis; transport volumes totaled 3.1
Trillion Btus during the third quarter. The decline in third
quarter 1997 other operating revenues and gas purchases and
other cost of sales results from the transfer of the Casper
processing plant, effective August 31, 1997, to an unregulated
subsidiary included in the Gathering, Processing and Marketing
segment. In addition to the third quarter's contributions, the
nine months 1997 operating results exceed the comparable period
in 1996 due to shippers' conversion from lower priced
interruptible service to firm service. The results from
implementation of expense controls in this segment were
substantially offset by the additional costs of the Pony
Express Pipeline.
<PAGE> 14
Form 10-Q
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Retail Natural Gas Services
<S> <C> <C> <C> <C>
Operating Revenues -
Gas Sales $ 32.3 $ 22.6 $143.5 $136.0
Transportation and Other 9.4 10.3 27.2 23.9
------ ------ ------ ------
41.7 32.9 170.7 159.9
------ ------ ------ ------
Operating Costs and Expenses -
Gas Purchases and Other Costs of Sales 21.3 13.4 93.5 84.5
Operations and Maintenance 13.3 14.6 42.3 44.1
Depreciation and Amortization 3.0 2.7 9.0 8.2
Taxes, Other Than Income Taxes 1.8 0.7 4.5 4.3
------ ------ ------ ------
39.4 31.4 149.3 141.1
------ ------ ------ ------
Operating Income $ 2.3 $ 1.5 $ 21.4 $ 18.8
====== ====== ====== ======
Systems Throughput (Trillion Btus) -
Gas Sales 7.2 4.8 29.0 24.5
Transportation 9.1 10.7 25.9 25.0
------ ------ ------ ------
16.3 15.5 54.9 49.5
====== ====== ====== ======
</TABLE>
Although the Retail segment's third quarter 1997 irrigation
deliveries were below normal customer requirements for the
season (due to abundant rainfall), throughput volumes to
irrigators did exceed 1996 deliveries by 0.8 Trillion Btus.
This benefit, combined with the implementation of effective
expense controls, caused third quarter 1997 operating income to
exceed 1996's third quarter operating income by $0.8 million.
Year-to-date 1997 earnings were 14 percent above the comparable
1996, due principally to colder winter weather during the first
four months of 1997.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Income and (Deductions)
Interest Expense $(10.8) $ (9.3) $(31.0) $(26.2)
Minority Interests and Other, Net 5.0 0.5 9.3 0.8
------ ------ ------ ------
$( 5.8) $ (8.8) $(21.7) $(25.4)
====== ====== ====== ======
</TABLE>
The increase in 1997 interest expense, net of capitalized
interest costs of $2.2 million in the 1997 third quarter and
$5.9 million for the 1997 nine month period, reflects higher
levels of borrowings to fund construction of the Pony Express
Pipeline and acquisitions. During the third quarter of 1997,
as a result of the decision to proceed with the construction of
Phase II of the TransColorado Pipeline Project, K N and its
TransColorado partner elected to capitalize financing costs
retroactive to the date of the formation of the joint venture.
K N's share of capitalized financing costs totaled approximately
$4.0 million. Phase II construction is expected to commence in
early 1998. Also, income related to the sale of fifty percent of the
Company's one hundred percent interest in en*able, recognized
in the 1997 third quarter and first six months, is included in
Minority Interest and Other, Net.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Taxes
Provisions $ 8.8 $ 7.7 $ 25.5 $ 22.5
===== ===== ====== ======
Effective Tax Rate 34.2% 36.0%
====== ======
</TABLE>
The lower 1997 effective tax rate results from resolution of
certain issues from prior years' income tax filings.
<PAGE> 15
Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operations, for the nine months ended
September 30, 1997, aggregated $102.4 million compared with
$70.2 million during the first nine months of 1996. In
addition to the impact of improved operating results in 1997,
net cash flows were positively impacted by a significant
improvement in the management of accounts receivable; the
Company has adjusted billings and payment dates to more closely
align the timing of collections with the payment for the
related commodity.
Short-term debt was $285.0 million at the end of the 1997 third
quarter, compared to $129.3 million and $15.0 million at
December 31, 1996 and September 30, 1996, respectively. On
October 27, 1997, K N publicly sold $150 million of 30-year
debentures with a coupon rate of 6.67%. Net proceeds of this
financing were used to reduce short-term borrowings.
<PAGE> 16
Form 10-Q
OTHER INFORMATION
Item 1. Legal Proceedings
Cabot Environmental Matters
As reported in the Company's 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 arose concerning Cabot's indemnification obligations,
however, in conjunction with the AOG merger, the Company and
Cabot entered into a standstill agreement pertaining to these
environmental and certain other matters. This Standstill
Agreement was last extended to November 3, 1997. The Company
engaged in mediated settlement discussions with Cabot but was
unable to reach agreement with Cabot. Consequently, on November
3, 1997, the Company filed suit against Cabot in State District
Court in Potter County, Texas alleging breaches of contractual
obligations and seeking recovery for costs incurred or to be
incurred in connection with environmental remediation of the
properties acquired pursuant to the 1989 and 1992 agreements. The
Company believes it has a meritorious position in this matter,
and does not expect the outcome of this lawsuit to have a
material adverse impact on the Company's financial position or
results of operations.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 - Financial Data Schedule
(B) Reports on Form 8-K
On October 27, 1997, a Current Report on Form 8-K was filed to
report that on that date K N Energy, Inc. sold $150 million of
its 6.67% debentures due November 1, 1997 pursuant to an
underwritten public offering.
<PAGE> 17
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)
November 12, 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)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,267
<SECURITIES> 0
<RECEIVABLES> 192,523
<ALLOWANCES> 0
<INVENTORY> 38,658
<CURRENT-ASSETS> 351,998
<PP&E> 1,861,679
<DEPRECIATION> 542,905
<TOTAL-ASSETS> 1,852,457
<CURRENT-LIABILITIES> 580,795
<BONDS> 410,498
0
7,000
<COMMON> 157,232
<OTHER-SE> 407,577
<TOTAL-LIABILITY-AND-EQUITY> 1,852,457
<SALES> 1,362,457
<TOTAL-REVENUES> 1,362,457
<CGS> 1,060,884
<TOTAL-COSTS> 1,266,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,991
<INCOME-PRETAX> 74,526
<INCOME-TAX> 25,488
<INCOME-CONTINUING> 49,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,038
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 0
</TABLE>
