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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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, 1995
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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
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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
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. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant.
$821,917,138 as of February 15, 1996
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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 28,232,687
shares as of February 15, 1996
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List hereunder documents incorporated by reference and the Part of the Form
10-K into which the document is incorporated.
1996 Proxy Statement Part III
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K N ENERGY, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
Page Number
--------------------------
1996 Proxy Included
Statement Herein
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PART I
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ITEMS 1 & 2: BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 -16
ITEM 3: LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-19
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 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . 19-21
PART II
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ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 6: SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . 24-31
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants . . . . . . . . . . . . . . . . 32
Consolidated Statements of Income for the Three
Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . 33
Consolidated Balance Sheets as of December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Common Stockholders' Equity
for the Three Years Ended December 31, 1995, 1994 and 1993 . . . . . . 35
Consolidated Statements of Cash Flows for the Three
Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . 36
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 37-55
Business Segment Information . . . . . . . . . . . . . . . . . . . . . . . 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 1995.
PART III
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ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . 2-8*,15*
ITEM 11: EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-19*
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . 4-8*, 18-19*, 25-27*
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . 8*
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 . . . . . . . . . . . . . . . . . . . . . . . . 63-64
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
(Exhibit 3(b) to the Annual Report on Form 10-K for
the year ended December 31, 1994)*
Exhibit 3(c) - Certificate of the Voting Powers,
Designation, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof,
of the Class B $8.30 Cumulative Preferred Stock,
Without Par Value (Exhibit 4.4, File No. 33-26314)*
Exhibit 4(a) - Indenture dated as of September 1,
1988, between K N Energy, Inc. and Continental
Illinois National Bank and Trust Company of 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)*
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K N ENERGY, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
Page Number
--------------------------
1996 Proxy Included
Statement Herein
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PART IV (Continued)
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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 instru-
ments to the Commission upon request.
Exhibit 10(a) - Form of Key Employee Severance
Agreement (Exhibit 10.2, Amendment No. 1 on Form 8
dated September 2, 1988 to the Annual Report on Form
10-K for the year ended December 31, 1987)*
Exhibit 10(b) - 1982 Stock Option Plan for Non-
employee Directors of the Company with Form of
Grant Certificate (Exhibit 10.3, Amendment No. 1
on Form 8 dated September 2, 1988 to the Annual
Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(c) - 1982 Incentive Stock Option Plan
for key employees of the Company (Exhibit 10.4,
Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(d) - 1986 Incentive Stock Option Plan
for key employees of the Company (Exhibit 10.5,
Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(e) - 1988 Incentive Stock Option Plan
for key employees of the Company (Exhibit 10.6,
Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(f) - Form of Grant Certificate for
Employee Stock Option Plans (Exhibit 10.7, Amend-
ment No. 1 on Form 8 dated September 2, 1988 to
the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(g) - Directors' Deferred Compensation
Plan Agreement (Exhibit 10.8, Amendment No. 1
on Form 8 dated September 2, 1988 to the Annual
Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(h) - 1987 Directors' Deferred Fee Plan, as Amended
(Attached hereto as Exhibit 10(h))**
Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee
Directors of the Company with Form of Grant Certificate
(Exhibit 4.1, File No. 33-46999)*
Exhibit 10(j) - K N Energy, Inc. 1994 Executive
Incentive Plan (Exhibit 10(k) to the Annual Report on
Form 10-K for the Year Ended December 31, 1993)*
Exhibit 10(k) - 1994 K N Energy, Inc. Long-Term Incentive Plan
(Attachment A to the K N Energy, Inc. 1994 Proxy Statement
on Schedule 14-A)*
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K N ENERGY, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
Page Number
--------------------------
1996 Proxy Included
Statement Herein
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PART IV (Continued)
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Exhibit 10(l) - K N Energy, Inc. 1996 Executive Incentive Plan
(Attached hereto as Exhibit 10(l))**
Exhibit 10(m) - 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(n) - 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(o) - 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(p) - Employment Agreement dated December 14, 1995
between K N Energy, Inc. and Morton C. Aaronson
(Attached hereto as Exhibit 10(p))**
Exhibit 10(q) - Letter Agreement dated December 4, 1995 between
K N Energy, Inc. and Charles W. Battey
(Attached hereto as Exhibit 10(q))**
Exhibit 10(r) - 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(s) - First Amendment to Amend 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(t) - 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
Form 8-A dated August 21, 1995)*
Exhibit 10(u) - K N Energy, Inc. Performance Incentive Plan (Attached
hereto as Exhibit 10(u))**
Exhibit 10(v) - K N Energy, Inc. 1995 Executive Incentive Plan (Exhibit
10(1) to the Annual Report on Form 10-K for the year ended December
31, 1994)*
Exhibit 12 - Ratio of Earnings to Fixed Charges . . . . . . . . . . . 65
Exhibit 13 - 1995 Annual Report to Shareholders*** . . . . . . . . . . 66
Exhibit 22 - Subsidiaries of the Registrant . . . . . . . . . . . . . 67
Exhibit 24 - Consent of Independent Public Accountants . . . . . . . . 68
Exhibit 27 - Financial Data Schedule****
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Note: Individual financial statements of the parent Company are
omitted pursuant to the provisions of Accounting Series Release No. 302.
* Incorporated herein by reference.
** Included in SEC and NYSE copies only.
*** Such report is being furnished for the information of the Securities
and Exchange Commission only and is not to be deemed filed as a part
of this annual report on Form 10-K.
**** 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 22.)
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, normal and 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 a natural gas energy products and services provider.
Services include: (1) gathering, processing, storing, transporting, selling and
marketing natural gas; and (2) processing, transporting, selling and marketing
NGLs.
On July 13, 1994, pursuant to the Agreement of Merger dated March 24,
1994, American Oil and Gas Corporation ("AOG") was merged into the Company. As
a result of the merger, each outstanding share of common stock of AOG was
converted into 0.47 of a share of common stock of K N and the right to receive
in cash the value of any fractional share 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. The merger was accounted for
as a pooling of interests. (As used in this report, the term "AOG" means
collectively American Oil and Gas Corporation and its subsidiaries, unless the
context requires a different meaning.) AOG is engaged in the business of
gathering, processing, storing, transporting, selling and marketing natural gas
and NGLs primarily in West Texas and the Texas Panhandle.
On January 30, 1996, the Company announced that it had entered into a
binding letter of intent with Amoco Pipeline Company to acquire a crude oil
pipeline which runs from Riverton, Wyoming to Freeman, Missouri, and to convert
the pipeline to natural gas service at an all-in project cost estimated to be
less than $150 million.
On January 31, 1996, the Company divested itself of its gas and oil
exploration and production subsidiary, K N Production Company ("KNPC"), through
the merger of that subsidiary into Tom Brown, Inc. ("TBI"), an independent gas
and oil company headquartered in Midland, Texas, whose common stock is traded
on the NASDAQ National Market, for convertible preferred and common stock of
TBI. In conjunction with this stock transaction, the Company and TBI formed a
limited liability company, Wildhorse Energy Partners, LLC, to perform certain
gathering, processing, field, marketing and storage services in the
Mid-Continent of the United States.
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In response to regulatory requirements, K N no longer operates as a
single business unit that purchases, gathers, processes, stores, transports and
sells natural gas at retail and wholesale. Instead, the Company restructured
its operations and now operates its interstate transmission pipeline and local
distribution operations as separate business units. Substantially all of the
gathering and processing facilities and a portion of the storage facilities
that were previously part of the Company's Federal Energy Regulatory Commission
("FERC") - regulated transmission operation are now operated by wholly owned
subsidiaries which either are not subject to FERC regulation, or, in the case
of the former storage properties, are allowed to sell gas at market-based
rates.
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. The Company was incorporated in the State of Kansas on May 18,
1927. The number of persons employed by the Company at December 31, 1995 was
1,599.
(B) Narrative Description of Business
(1) 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.
Revenues from this business segment are derived primarily from regulated
natural gas sales and transportation services.
The Company's retail natural gas business serves over 230,000 retail
customers and 301 communities in Colorado, Kansas, Nebraska and Wyoming through
distribution pipelines totaling approximately 8,400 miles at December 31, 1995.
In addition, this business segment operates intrastate natural gas
transmission, gathering and storage pipelines totaling approximately 1,500
miles at December 31, 1995. These intrastate pipeline systems serve industrial
customers and much of the Company's retail natural gas business in Colorado and
Wyoming.
Underground storage facilities are used to provide deliverabilities
for peak system demand. Working gas owned by this business segment is stored
in:
o one facility owned and operated by the Company's interstate pipeline
system;
o five facilities in Wyoming owned and operated by this business
segment; and
o one facility in Colorado owned and operated by Wildhorse Energy
Partners, LLC.
K N'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
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.
During 1995, K N opened its new 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 1996, the center will begin providing these services for
other parties.
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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 other 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 retail natural gas business unit's gas supply comes primarily from
the following areas:
o Anadarko Basin, including the Hugoton, Bradshaw and Panoma fields in
Kansas;
o Barton Arch area of central Kansas;
o Denver-Julesburg Basin in northeast Colorado, northwest Kansas, and
western Nebraska;
o Wind River Basin in central Wyoming;
o Bowdoin area in north central Montana; and
o Piceance Basin in western Colorado.
Certain gas purchase contracts contain a take-or-pay clause which
requires 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, 1995, the amount of gas prepayments
outstanding for this business segment was $5.2 million. All such payments are
fully recoupable under the terms of the gas purchase contracts and the existing
regulatory rules and regulations. 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 in the areas served by the Company's retail natural gas business.
In a few of the communities in which it has a franchise, the Company competes
with other local distribution systems for retail natural gas sales and
transportation services. Such competition is expected to increase as a result
of implementation of FERC Order 636, state retail unbundling initiatives and
the regulatory initiatives presently before the FERC to unbundle the electric
industry.
Unbundling Retail Gas Services. Throughout the United States, the
recent FERC actions are leading to an opening of a more competitive environment
for all gas services. K N is looking to be a leader in providing customers a
choice in services. In that regard, K N filed an application with the Wyoming
Public Service Commission in September 1995 to allow 10,000 residential and
commercial customers to choose their energy provider from a qualified list of
suppliers. K N will continue to provide all other utility services and will
manage the gas supplies for customers in the program. On February 16, 1996 the
Wyoming Public Service Commission issued an order allowing K N to bring
competition to these 10,000 residential and commercial customers beginning in
June 1996. The innovative program is one of the first in the nation that
proposes to allow essentially all customers the opportunity to exercise energy
choice for natural gas.
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(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, 1995, the Company's
interstate pipeline system provided transportation and storage services
directly to utilities serving 293 communities, as follows:
Served By Colorado Kansas Nebraska Wyoming
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Affiliated Entities 12 52 177 10
Other Utilities 5 10 27 -
Effective January 1, 1994, 1,691 miles of gathering lines and the
products extraction plant at Scott City, Kansas, were transferred to a gas
gathering subsidiary as part of the corporate reorganization. As of December
31, 1995, the interstate pipeline properties included transmission and storage
lines totaling over 6,000 miles, a storage field and one products extraction
plant.
The change from providing a merchant function to a FERC-regulated
transportation and storage service at cost of service-based rates has
substantially reduced this business segment's operating revenues and gas
purchase expenses. This has not, however, negatively impacted this business
segment's operating income since gas purchases were previously recoverable
dollar-for-dollar from customers as a result of purchased gas adjustment
clauses in the Company's tariffs. However, the transfer of gathering and
products extraction facilities described above has reduced this segment's
operating income. The use of straight fixed-variable rate design for
FERC-regulated services results in this business segment collecting a
significant portion of its revenues from customers through demand charges
collected evenly throughout the year. Accordingly, fluctuations in operating
revenues resulting from seasonal variations in weather conditions are reduced.
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.
On January 30, 1996, the Company announced that it had entered into a
binding letter of intent with Amoco Pipeline Company to acquire a crude oil
pipeline which runs from Riverton, Wyoming to Freeman, Missouri, and to convert
the pipeline to natural gas service at an all-in project cost anticipated to be
less than $150 million, including the pipeline expansion discussed below. The
new pipeline, Pony Express Pipeline, will be subject to FERC regulation and is
expected to be in service by early 1997.
In January 1996, FERC granted the Company the authority to expand its
pipeline system in Wyoming. This $14.9 million project is designed to increase
the capacity of the system to move gas from Wyoming to markets in the
midwestern United States by nearly 50 MMcf per day. The facilities are
expected to be in service by November 1996. This project is a natural fit with
the pipeline acquisition discussed above.
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Storage. The Company's interstate pipeline system provides storage
services to its customers through its Huntsman Storage Field in Cheyenne
County, Nebraska.
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. On the
interstate system, year-end working gas inventory owned by all parties totaled
4.9 Bcf. The approximate unused working gas capacity at December 31, 1995, was
3.1 Bcf.
Transportation Marketing. The Company is continuing its efforts to
increase its transportation business through expanded capacity and new
interconnects, as well as new transportation services. The Company has certain
strategic advantages that enable it to be a successful competitor, including
favorable geographic pipeline locations providing access to both major gas
supply areas and potential new markets. The Company will continue developing
its role as an operator of transportation hubs, facilitating market-center
services.
A K N subsidiary is a one-third joint-venture partner in the
TransColorado Gas Transmission Pipeline Co. ("TransColorado"). This pipeline
is expected to provide increased flexibility in accessing multiple natural gas
basins in the Rocky Mountain region. During 1995, El Paso Natural Gas Company
purchased Public Service Company of Colorado's investment in TransColorado and
has brought new synergies to the project.
In 1996, the southernmost 22 miles of the pipeline are anticipated to
be pre-built to connect with gathering systems in southern Colorado. This
portion of the pipeline is expected to be in service in 1996. 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. Total capital cost is expected
to be $190 million. The TransColorado pipeline will operate as an interstate
pipeline system regulated by FERC.
Competition. The interstate transportation pipeline and storage
services business segment faces competition from other transporters. In
addition, natural gas competes with fuel oil, coal, propane and electricity in
the areas served by the Company's interstate pipeline system.
(3) 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 9,400 miles of pipeline in seven states, operating 16
gas processing plants and natural gas storage facilities in West Texas and on
the Gulf Coast. This segment's total processing capacity is approximately 760
MMcf per day.
Revenues from this business segment's gathering, processing, storage,
transporting and marketing activities are generated in four different ways.
First, the Company performs a merchant function whereby the Company purchases
gas at the wellhead, aggregates such gas with other supplies of gas, and
markets the aggregated gas to consumers. Second, the Company, for a fee,
gathers, transports and may process 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
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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,
transporting and marketing activities have expanded due to increased demand for
gas and the result of 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.
This business segment also engages in price risk management activities
in the energy financial instruments market. The Company buys and sells gas and
crude oil futures positions on the New York Mercantile Exchange ("NYMEX") and
Kansas City Board of Trade ("KCBT") 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" below.)
Natural Gas Sales. In 1995, this business segment sold natural gas to
over 4,000 customers in over 20 states. These customers included local
distribution companies, industrial, commercial and agricultural end-users,
electric utilities, Company affiliates and other marketers located both on-and
off-system.
Westar Transmission Company ("Westar Transmission") is the Company's
principal intrastate pipeline system in West Texas and the Texas Panhandle.
The Westar system consists of approximately 5,600 miles of gathering and
transmission lines (of which approximately 4,300 miles comprise Westar
Transmission) and is connected to the K N WesTex Gas Services, Inc. ("WesTex")
storage facility. The Westar 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 ("Energas"), and direct-sale customers
such as electric utilities, industrial companies and agricultural end-users.
The Company also owns a 75 percent operating interest in Red River Pipeline, a
372-mile intrastate gas pipeline extending from Hemphill County, Texas, near
the Oklahoma state line to Pecos County in West Texas, and has entered into a
letter of intent to acquire the remaining 25 percent.
Within this business segment, the Company utilizes its high pressure
transmission facilities to transport gas for third parties at negotiated fees.
The Westar system offers combined gathering and transportation services, while
Red River is solely a transportation system. The Company's Wattenberg system,
located in the Denver-Julesburg Basin in northeastern Colorado, consists of
approximately 1,300 miles of gathering and transmission lines and offers both
gathering and transportation services.
Energas, the Company's largest customer, accounted for more than 10
percent of the Company's consolidated revenues for 1995. In 1996, the Company
and Energas renegotiated the existing sales contract extending the term
through December 31, 2003, a five-year extension beyond the current contract
expiration date. No other customer accounted for more than 10 percent of the
Company's consolidated revenues in 1995.
Pricing mechanisms under the Company's gas sales agreements vary,
including gas sales at fixed margins over cost of gas, at fixed prices where
the unit margin is a function of the sales price and cost of gas, and at
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market sensitive prices where the unit margin fluctuates as a percentage of the
market price of gas. A majority of the gas sales are made under agreements
with terms of one year or less.
Gas Gathering. As of December 31, 1995, the Company's subsidiaries
in this business segment operated gathering systems in Colorado, Kansas,
Nebraska, New Mexico, Texas and Wyoming with over 5,000 miles of gathering
lines.
In December 1994, FERC approved the Company's application to transfer
the Bowdoin gathering system from its wholly-owned interstate pipeline facility
to a gathering subsidiary. The transfer occurred in early 1995.
Processing and NGLs Marketing. In 1995, the Company operated 16 gas
processing plants located in Colorado, Kansas, Nebraska, New Mexico, Texas and
Wyoming. The average total inlet volume for 1995 was approximately 451,000
MMBtus per day. In the same period, the total liquids produced, including
condensate, averaged approximately 28,000 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 the
plants.
Storage. The WesTex storage facility has recently been expanded to a
working storage capacity of approximately 15.5 Bcf. The Company expanded the
WesTex storage facility by leaching three caverns in a bedded salt formation.
Upon completion, each cavern has approximately one Bcf of working gas capacity.
Two have been completed, and the third cavern is scheduled to be completed in
October 1996. In early 1994, the Company began marketing storage services to
third parties who are interested in the storage facility due to its strategic
geographic location (Gaines County, Texas) and multiple pipeline interconnects
which provide access to a variety of markets and supply sources. The WesTex
storage facility has traditionally been used to meet the peak demand
requirements of the Westar system's customers and to maintain purchases from
supply sources on the Westar system during periods of low demand. The WesTex
storage facility has a take-away peak day deliverability capacity of 550 MMcf
per day.
In February 1995, K N acquired a long-term lease on 10 Bcf of salt
cavern storage capacity at the Stratton Ridge facility in the Gulf Coast area
(see "Acquisitions"). This additional capacity gives K N the expanded ability
to provide comprehensive storage services at the Katy and Waha hubs.
Effective June 1, 1995, three gas storage facilities and approximately
45 Bcf of recoverable cushion gas were transferred to this business segment
from the Company's interstate pipeline system. This transfer improves the
Company's flexibility to utilize these assets more effectively.
Gas Purchases and Supply. Natural gas is purchased from various
sources, including gas producers, gas processing plants and from pipeline
interconnections. Because of prevailing industry conditions, most 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 take or pay for, or to receive, minimum
quantities of natural gas. At December 31, 1995, the amount of gas prepayments
outstanding for this business segment (which does not
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include payments made under the Basket Agreement discussed below) was $2.6
million, and is fully recoupable under the terms of the gas purchase contracts.
In addition, because of the Company's success in marketing excess gas under
contracts, for which it receives credit against minimum take requirements, the
Company believes that its exposure to potential take-or-pay or minimum take
claims is not material. The Company does, however, have exposure with regard
to such claims under gas purchase contracts assumed in its acquisition of the
Westar pipeline system 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 futures and swaps to
minimize its risk of price changes in the spot and fixed price natural gas,
crude oil and NGLs markets. Risk management instruments include crude oil and
natural gas 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 period the underlying physical transactions occur.
All 1995 transactions were recorded as hedges.
Total Energy Management. 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 competitive advantage in an
increasingly competitive gas and NGLs market, the Company has developed
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 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, increase 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 varying size,
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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) the
industry wide supply and demand imbalance that has existed since the early
1980's but which was substantially reduced during 1993 and 1994, (ii)
regulatory changes that provide greater access to interstate markets by gas
producers and marketers, (iii) the ability of certain markets to switch to
alternative fuels at favorable prices, and (iv) 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,
services offered, reliability, security of supply and physical proximity of
pipelines to customers.
(4) Gas and Oil Production
Overview. In 1995, the Company owned and participated in the
development and production of gas and oil reserves through a wholly-owned
subsidiary, KNPC. In December 1995 the Company agreed to merge the subsidiary
into Tom Brown, Inc. in return for convertible preferred and common stock in
Tom Brown, Inc., representing, on a fully diluted basis, approximately 11.3% of
that corporation's outstanding common stock. The transaction closed on January
31, 1996. As part of the alliance, K N and Tom Brown, Inc. formed Wildhorse
Energy Partners, LLC, a joint venture company 55 percent owned by K N and 45
percent owned by Tom Brown, Inc., designed to provide gathering, processing,
storage, field and marketing services in the Mid-Continent of the United
States.
Total net reserves for the gas and oil business segment at December
31, 1995, were approximately 35 Bcf equivalent of natural gas. The 1995
year-end net production was 14 MMcf per day compared with 16 MMcf per day at
year-end 1994. During 1995, this business segment participated in the
drilling and completion of six development wells in Wyoming, 12 development
wells in western Colorado and worked-over 11 wells on the Western Slope of
Colorado. At December 31, 1995, the Company had approximately 225,000 net
undeveloped acres under lease and owned interests in 624 producing wells (243
net), of which it operated 308 (190 net).
(5) General
Federal and State Regulation
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 may review the Company's issuance of securities.
In Nebraska, retail gas sales rates for residential and small commercial
customers are regulated by each municipality served.
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.
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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 FERC under the Natural Gas
Act and the Natural Gas Policy Act of 1978. In addition, the Company is
subject to the requirements of FERC Order Nos. 497, et al., the Marketing
Affiliate Rules, which govern the provision of information by an interstate
pipeline to its marketing affiliates.
Through agreements with its former wholesale customers, the Company
was able to formulate and implement a plan which resulted in the transition to
Order 636 services and which avoided the necessity of any gas supply cost
recovery filings with FERC. As a part of its action on the Company's
restructuring proposal, on January 13, 1994, FERC approved the offer of
settlement which implemented the Company's gas supply realignment crediting
mechanism.
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 FERC jurisdiction, while facilities used for and
operations involving interstate transmission are not exempt. However, 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. 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
have all expressed interest in asserting jurisdiction over gathering
activities, and the Company is closely monitoring developments in this area.
As part of its corporate reorganization, K N requested, was granted
authority and in 1994 transferred substantially all of its gathering facilities
to a wholly-owned subsidiary. FERC determined that after the transfer, the
gathering facilities would be nonjurisdictional, but 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.
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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.
Environmental Regulation
The Company's operations and properties are subject to extensive and
changing Federal, state and local laws and regulations governing the discharge
of 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, including wetlands, playa lakes and
intermittent streams. The Company has a limited number of oil and gas
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
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, without regard to fault or
the legality of the original conduct, on certain classes of persons who are
considered to have contributed to the release of a "hazardous substance" into
the environment. 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, it is not uncommon for neighboring landowners and other third
parties 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. These Operating
Permits require 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 or persons who manufacture,
process, distribute, use or dispose of TSCA-related chemicals, including such
things as polychlorinated biphenyls ("PCBs"), asbestos, and lead based paints.
The Company has facilities which contain such TSCA-related substances.
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Compliance with Federal, state and local provisions 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."
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.
Other
Amounts spent by the Company during 1995, 1994 and 1993 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
In 1989, 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"). A majority of the Company's
groundwater, soil and free phase petroleum cleanup occurred between 1990 and
1995. 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 Protection Agency; Judicial Entry of
Consent Decree, United States v.
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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, and no active remediation will occur until completion of
that assessment program. 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,
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 $1.2 million for PCB remediation has
been expended as of December 31, 1995. 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 merger, the Company and Cabot entered into a standstill
agreement pertaining to these and other matters, which AOG will expire in June
1996. 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 of
reserves established, such costs are not expected to have a material adverse
impact on the Company's financial position or results of
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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 KNPC and K N Gas Gathering, Inc., have violated federal and
state antitrust laws. In essence, Grynberg asserts that the companies have
engaged in an illegal exercise of monopoly power, have illegally denied him
economically feasible access to essential facilities to transport and
distribute gas produced from fewer than 20 wells located in northwest Colorado,
and illegally have attempted to monopolize or to enhance or maintain an
existing monopoly. Grynberg also asserts certain causes of action relating to
a gas purchase contract. No specific monetary damages have been claimed,
although Grynberg has requested that any actual damages awarded be trebled. In
addition, Grynberg has requested that the K N Entities be ordered to divest all
interests in natural gas exploration, development and production properties,
all interests in distribution and marketing operations, and all interests in
natural gas storage facilities, separating these interests from the Company's
natural gas gathering and transportation system in northwest Colorado. In an
unrelated transaction, K N's exploration, production and development properties
owned by KNPC, were transferred to a third party in January 1996. The Company
has indemnified the third party for any potential claims by Grynberg related to
this litigation. On August 13, 1993, the United States District Court,
District of Colorado, stayed this proceeding pending exhaustion of appeals in a
related state court action involving the same plaintiff. This case is still
pending. (Grynberg v. K N, et al., Civil Action No. 92-2000, United States
District Court for the District of Colorado.)
Westerman, et al. v. K N Energy, Inc., et al.
On December 8, 1994, K N and its wholly owned subsidiary K N Gas
Supply Services, Inc. ("KNGSS") were sued by gas producers in northeastern
Colorado in District Court, Dallas County, Texas under claims arising from two
gas purchase contracts covering gas purchases from wells in the Niobrara Field,
Colorado. The producers asserted take-or-pay claims for contract years 1993
and 1994 in the amount of $1,157,000 plus interest, as well as actual and
punitive damages in the amount of $156,000,000 for breaches of contractual and
fiduciary duties arising out of a January 1977 Farmout Agreement between the
producers and K N.
On December 21, 1994, the lawsuit was removed from Texas state court
to the United States District Court for the Northern District of Texas
(Dallas). On January 12, 1995, K N and KNGSS filed a motion to dismiss for lack
of personal jurisdiction, or, if jurisdiction is found to exist, a motion to
transfer the cause of action to federal court in Colorado. On June 29, 1995,
the United States District Court for the Northern District of Texas, Dallas
Division, ruled that it has jurisdiction over K N and that venue is proper in
that court. The court has not yet ruled on whether it has jurisdiction over
KNGSS. Additional litigation was initiated on January 31, 1995, by KNGSS
against the plaintiffs and others in federal court in Colorado. In this
lawsuit, KNGSS asserts that contractual provisions require payment of refunds
for gas purchased at above-market prices and, prospectively, for a reduction in
gas prices paid under the contracts to market levels. On October 30, 1995, K N
and KNGSS reached settlement with parties representing approximately two-thirds
of the gas ownership interests held by the producers. This settlement resolves
all disputes between these parties, including the lawsuit filed by K N and
KNGSS in federal court in Colorado. The Company believes that this settlement
will have no material adverse effect on the Company's financial position or
results of operations. Settlement negotiations with the parties
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representing the remaining one-third ownership interest under the disputed gas
purchase contracts are continuing. The Company believes it has a meritorious
position in these matters, and does not expect these lawsuits to have a
material adverse effect on the Company's financial position or results of
operations. (Westerman, et al. v. K N Energy, Inc. and K N Gas Supply
Services, Inc., Civil Action No.:3:94-CV-2773-X, United States District Court
for the Northern District of Texas, Dallas Division; K N Gas Supply Services,
Inc. v. Westerman, et al., Civil Action No. 95-M-243, United States District
Court for the District of Colorado.)
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.
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, 1995, 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
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EXECUTIVE OFFICERS OF THE REGISTRANT
(A) Identification and Business Experience of Executive Officers
Name Age Position and Business Experience
- ---------------------------------- ----- ---------------------------------------------------------
Morton C. Aaronson . . . . . . 37 Vice President since January 1996. Vice President, MCI/
NewsCorp. Business Development from May 1995 to
January 1996. Vice President, Market Management, MCI
Communications from August 1994 to May 1995. Vice
President, Large Accounts and Global Markets, MCI
Communications, from July 1993 to August 1994. Director,
Major Accounts Marketing, MCI Communications from
July 1992 to July 1993. Director, Sales-New York
Metro Region, MCI Communications from December
1990 to July 1992.
Judith A. Aden . . . . . . . . 54 Vice President and Assistant Treasurer since March 1995.
Vice President and Treasurer from March 1991 to March
1995. Treasurer from January 1981 to March 1995.
William E. Asbury . . . . . . . 43 Vice President, Gas Service since 1988.
Charles W. Battey . . . . . . . 64 Chairman since January 1989. Chief Executive Officer
from January 1989 to July 1994. Director since 1971.
Richard M. Buxton . . . . . . . 47 Vice President, Strategic Planning and Financial
Services since March 1991.
David M. Carmichael . . . . . . 57 Vice Chairman and Director since July 1994. Chairman
of the Board and Chief Executive Officer of AOG since
1986. President of AOG until October 1993.
Samuel H.Charlton, III . . . . 51 Vice President, Marketing since January 1995.
Sr. Vice President of certain K N subsidiaries
since July 1994. Sr. Vice President - Gas
Marketing and Supply for AOG from
February 1994 to July 1994. Vice President Gas
Marketing of AOG from April 1993 to February 1994.
Vice President Marketing and Transportation for
Wintershall Energy, a division of BASF Corporation
from September 1990 to July 1992.
John N. DiNardo . . . . . . . . 48 Vice President - Gas Gathering and Processing since
March 1994. General Manager of K N Gas Gathering, Inc.
and K N Front Range Gathering Company from May 1993
to March 1994. Director of Project Development for K N
Gas Gathering, Inc. from August 1991 to May 1993.
Consultant to K N Gas Gathering, Inc. from 1989 to August
1991.
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Bradley P. Farnsworth . . . . . 42 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. . . . . 46 Vice President, General Counsel and Secretary since
April 1992. Vice President and General Counsel from
January 1991 to April 1992.
Larry D. Hall . . . . . . . . . 53 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 . . . . . . . . 48 Vice President, Marketing and Supply since May 1993.
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.
John W. Simonton . . . . . . . 50 Vice President, Administration and Human Resources
since May 1988.
H. Rickey Wells . . . . . . . . 39 Vice President, Operations since June 1988.
These officers generally serve until April of each year.
(B) Involvement in Certain Legal Proceedings
None.
21
22
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 15, 1996, there were 9,485 holders
of record of the Company's common stock. Dividends paid and the price range of
the Company's common stock by quarters for the last two years, are provided
below.
1995 1994
---- ----
Market Price Data
(Low-High-Close)
Quarter Ended:
March 31 $20.25 -$24.75 -$24.00 $22.00 -$25.50 -$22.50
June 30 23.75 - 27.00 - 25.375 21.25 - 23.75 - 22.25
September 30 23.875- 28.75 - 27.25 22.00 - 26.875- 26.125
December 31 25.25 - 30.25 - 29.125 20.75 - 26.125- 23.75
Dividends
Quarter Ended:
March 31 $0.25 $0.133*
June 30 0.25 0.133*
September 30 0.25 0.24
December 31 0.26 0.25
Common Stockholders
Year-end 9,485 8,933
* Pre-merger dividend rate reflects the effect of pooling of
interests accounting. AOG did not pay a dividend on common
stock.
22
23
ITEM 6: SELECTED FINANCIAL DATA
FIVE-YEAR REVIEW
K N ENERGY, INC. AND SUBSIDIARIES
Selected Financial Data (In Thousands Except Per Share Amounts)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
OPERATING REVENUES:
Retail Natural Gas Services $ 217,762 $ 212,218 $ 204,999 $ 188,193 $223,567
Interstate Transportation and
Storage Services 22,335 21,044 99,838 127,611 130,821
Gathering, Processing and
Marketing Services 855,855 838,474 730,895 507,756 424,586
Gas and Oil Production 7,437 11,328 5,321 4,710 3,053
---------- ---------- ---------- ---------- --------
Total Operating Revenues $1,103,389 $1,083,064 $1,041,053 $ 828,270 $782,027
========== ========== ========== ========== ========
OPERATING INCOME $ 113,724 $ 54,175 $ 80,204 $ 83,757 $ 81,490
Other Income and (Deductions) (32,152) (29,354) (30,736) (27,347) (23,134)
---------- ---------- ---------- ---------- --------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES 81,572 24,821 49,468 56,410 58,356
Income Taxes 29,050 9,500 18,599 20,068 21,282
---------- ---------- ---------- ---------- --------
INCOME FROM CONTINUING
OPERATIONS 52,522 15,321 30,869 36,342 37,074
Loss from Discontinued
Operations - - - - (17,250)
---------- ---------- ---------- ---------- --------
NET INCOME 52,522 15,321 30,869 36,342 19,824
Less - Preferred Stock
Dividends 492 630 853 2,976 4,808
---------- ---------- ---------- ---------- --------
EARNINGS AVAILABLE FOR
COMMON STOCK $ 52,030 $ 14,691 $ 30,016 $ 33,366 $ 15,016
========== ========== ========== ========== =========
EARNINGS PER COMMON SHARE:
Continuing Operations $ 1.83 $ 0.52 $ 1.09 $ 1.34 $ 1.45
Discontinued Operations - - - - (0.77)
---------- ---------- ---------- ---------- --------
Total Earnings Per Common
Share $ 1.83 $ 0.52 $ 1.09 $ 1.34 $ 0.68
========== ========== ========== ========== ========
DIVIDENDS PER COMMON SHARE $ 1.01 $ 0.76 $ 0.51 $ 0.51 $ 0.51
========== ========== ========== ========== ========
NUMBER OF SHARES USED IN
COMPUTING EARNINGS PER
COMMON SHARE 28,360 28,044 27,424 24,828 22,320
========== ========== ========== ========== ========
TOTAL ASSETS $1,257,457 $1,172,384 $1,169,275 $1,007,411 $816,514
========== ========== ========== ========== ========
CAPITAL EXPENDITURES $ 79,418 $ 70,596 $ 100,780 $ 74,787 $ 69,080
========== ========== ========== ========== ========
ACQUISTIONS $ 35,897 $ 31,363 $ 65,172 $ 110,833 $ 1
========== ========== ========== ========== ========
CAPITALIZATION:
Common Stockholders' Equity $ 426,760 57% $ 393,686 54% $ 391,462 53% $ 347,738 51% $256,605 50%
Preferred Stock 7,000 1% 7,000 1% 7,000 1% 26,310 4% 31,360 6%
Preferred Stock Subject to
Mandatory Redemption 572 - 1,715 - 2,858 - 4,500 1% 6,643 1%
Long-Term Debt 315,564 42% 334,644 45% 335,190 46% 303,224 44% 222,850 43%
========== ---- ---------- ---- ---------- ---- ---------- ---- -------- ----
Total Capitalization $ 749,896 100% $ 737,045 100% $ 736,510 100% $ 681,772 100% $517,458 100%
========== ==== ========== ==== ========== ==== ========== ==== ======== ====
BOOK VALUE PER COMMON SHARE $ 15.19 $ 14.25 $ 14.39 $ 13.60 $ 11.60
========== ========== ========== ========== ========
23
24
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED EARNINGS
The Company reported 1995 net income of $52.5 million, or $1.83 per
common share after payment of preferred dividends. This reflects a significant
improvement over 1994 (excluding the effect of merger and restructuring costs)
and 1993 net income of $34.7 million and $30.9 million, respectively. After
payment of preferred dividends, the respective 1994 and 1993 earnings per share
were $1.21 and $1.09.
The 51 percent increase in 1995 earnings over 1994 was
attributable to five principal factors:
o benefits from the 1994 merger with American Oil and Gas Corporation
("AOG");
o year-to-year business growth;
o improved irrigation deliveries as a result of normal weather;
o higher natural gas liquids ("NGLs") prices; and
o the annualized impact of 1994 rate increases.
The 1994 earnings improvement over 1993 resulted from rate increases
in both retail and interstate jurisdictions, higher deliveries to irrigation
customers and expense reductions resulting from the merger of AOG into K N.
Mild fourth quarter 1994 weather and lower prices for NGLs partially offset the
1994 positive factors. Additionally, 1993 net income was reduced by a $4.5
million (pre-tax) write-down of an investment.
In the third quarter of 1994, the Company expensed $25.9 million of
non-recurring costs related to the merger and to the restructuring of the
retail natural gas services segment. These costs reduced 1994 net income by
$19.3 million, or $0.69 per common share.
RESULTS OF OPERATIONS
Comparative operating results by business segment, excluding the $25.9
million 1994 non-recurring merger and restructuring charges, and consolidated
other income and (deductions) and income taxes are reviewed below. As the
Company's interstate pipeline segment was not a separate business unit until
the Company's October 1, 1993 implementation of Federal Energy Regulatory
Commission ("FERC") Order No. 636 ("Order 636"), operating results of the
retail natural gas services segment and the interstate transportation and
storage services segment have been combined to provide more meaningful
comparison of 1994 with 1993. The segment operating revenues, gas purchases,
operations and maintenance expenses and volumetric data which follow are before
intersegment eliminations (dollars in millions).
24
25
RETAIL NATURAL GAS SERVICES 1995 1994
---- ----
Operating Revenues -
Gas Sales $204.0 $206.8
Transportation and Other 18.8 10.9
------ ------
222.8 217.7
------ ------
Operating Costs and Expenses -
Gas Purchases 114.9 123.0
Operations and Maintenance 57.6 54.9
Depreciation, Depletion and Amortization 12.6 12.1
Taxes, Other Than Income Taxes 6.4 5.2
------ ------
191.5 195.2
------ ------
Operating Income $ 31.3 $ 22.5
====== ======
Systems Throughput (Trillion Btus) -
Gas Sales 39.0 40.8
Transportation 27.4 18.8
------ ------
66.4 59.6
====== ======
System-Wide Heating Degree Days 6,491 6,123
====== ======
The significant improvement in 1995 operating income over 1994
primarily reflects increased deliveries (gas sales and transportation) to
irrigation customers, and the annualized impact of rate increases on the Rocky
Mountain distribution system during the latter part of 1994. Irrigation
deliveries in 1995 exceeded the previous year by 2.5 trillion Btus, as 1995
summer temperatures and rainfall approximated normal weather patterns. 1995
deliveries to customers for space-heating requirements exceeded 1994 volumes
by 1.4 trillion Btus as 1995 temperatures, although milder than normal, were
colder than 1994. This segment's 1995 operations and maintenance expenses
include profit-sharing provisions $2.8 million higher than 1994 due to
improved earnings and the impact of the merger-related cost reductions and
efficiencies on 1994 operating results. Additionally, 1994 operations and
maintenance expenses were reduced by $1.7 million resulting from favorable
resolutions of certain regulatory and environmental matters. Excluding these
items, and despite increased systems throughput, 1995 operations and
maintenance expenses were relatively flat with 1994 as the Company implemented
cost reduction initiatives to further enhance its competitive position.
INTERSTATE TRANSPORTATION AND STORAGE SERVICES 1995 1994
---- ----
Operating Revenues -
Transportation and Storage $ 58.6 $ 56.7
Natural Gas Liquids and Other 5.9 3.9
------ ------
64.5 60.6
------ ------
Operating Costs and Expenses -
Gas Purchases 6.5 1.2
Operations and Maintenance 29.8 31.0
Depreciation, Depletion and Amortization 7.4 8.4
Taxes, Other Than Income Taxes 3.1 3.7
------ ------
46.8 44.3
------ ------
Operating Income $ 17.7 $ 16.3
====== ======
Systems Throughput (Trillion Btus) 155.6 134.7
====== ======
Natural Gas Liquids (Millions of Gallons) 16.9 12.9
====== ======
25
26
Operating results for 1995 were positively impacted by higher rates
due to the late 1994 FERC rate case settlement which provided for an $8.7
million annual increase in revenues. However, this positive was partially
offset by lower 1995 customer nominations for firm storage service and reduced
rates, effective June 1, 1995, accompanying the transfer of three storage
fields to a nonjurisdictional subsidiary. The increase in 1995 gas purchases
costs results from increased NGLs recoveries and the resolution of pre-Order
636 exchange imbalances.
CONDENSED RETAIL NATURAL GAS SERVICES AND
INTERSTATE TRANSPORTATION AND STORAGE SERVICES 1994 1993
---- ----
Operating Revenues $243.8 $315.5
Operating Costs and Expenses 205.0 267.6
------ ------
Operating Income $ 38.8 $ 47.9
====== ======
Systems Throughput (Trillion Btus) 152.7 155.6
====== ======
Natural Gas Liquids (Millions of Gallons) 12.9 81.3
====== ======
System-Wide Heating Degree Days 6,123 7,054
====== ======
Implementation of Order 636, effective October 1, 1993, and the
January 1, 1994 transfer of the interstate pipeline's principal gas processing
plant and substantially all of its gathering facilities to the gathering,
processing and marketing services segment, has resulted in significant
reductions in this combined business segment's operating revenues, costs and
expenses. As a result of Order 636, merchant services to wholesale customers
subsequent to September 30, 1993 were converted to transportation and storage
services. The decline in this combined segment's 1994 operating income and
NGLs sales gallons results from the January 1, 1994 property transfer to the
gathering, processing and marketing services segment.
GATHERING, PROCESSING AND MARKETING SERVICES 1995 1994 1993
---- ---- ----
Operating Revenues -
Gas Sales $706.3 $720.3 $638.5
Transportation and Gathering 46.7 45.2 32.3
Natural Gas Liquids and Other 138.8 120.5 89.4
------ ------ ------
891.8 886.0 760.2
------ ------ ------
Operating Costs and Expenses -
Gas Purchases 692.0 726.6 636.7
Operations and Maintenance 100.1 88.3 67.6
Depreciation, Depletion and Amortization 25.3 25.8 20.0
Taxes, Other Than Income Taxes 9.5 6.9 4.9
------ ------ ------
826.9 847.6 729.2
------ ------ ------
Operating Income $ 64.9 $ 38.4 $ 31.0
====== ====== ======
Systems Throughput (Trillion Btus) -
Gas Sales 407.8 353.0 290.3
Transportation and Gathering 306.0 286.8 222.3
------ ------ ------
713.8 639.8 512.6
====== ====== ======
Natural Gas Liquids (Millions of Gallons) 388.1 375.0 241.0
====== ====== ======
26
27
The expected 1995 benefits (cost reductions, improved operational
efficiencies and new business opportunities) of the 1994 merger were realized
primarily by this business segment, as 1995 operating income exceeded 1994 by
$26.5 million. In addition to the realized merger benefits, 1995 acquisitions
of gas transmission and storage assets in February and a processing plant and
gathering facilities in October contributed incremental operating income of
$4.0 million. The increases in 1995 gas sales volumes over 1994, reflecting
improved irrigation requirements and electric generation load, positively
impacted 1995 transportation and gathering volumes. Finally, 1995 average NGLs
prices were $0.02 per gallon above 1994 average prices.
The business segment's 1994 operating results were positively impacted
by the January 1, 1994 transfer of processing and gathering properties from the
interstate pipeline. In addition, 1994 revenues, expenses and operating income
reflect the full year contribution of the April 1993 Wattenberg gathering and
transmission system and the June 1993 acquisition of Wind River gathering
facilities. Operating results for 1994, compared to 1993, were adversely
impacted by declining NGLs prices and lower gas sales margins due to
unfavorable weather.
GAS AND OIL PRODUCTION 1995 1994 1993
---- ---- ----
Operating Revenues $10.7 $14.1 $8.5
Operating Costs and Expenses 10.9 11.2 7.2
----- ----- ----
Operating Income (Loss) $(0.2) $ 2.9 $1.3
===== ===== ====
Gas and Oil Production (Equivalent Bcf) 5.6 6.6 3.7
===== ===== ====
Operating results for 1995 were adversely impacted by low natural gas
prices and shut-in production. 1994 results included production from gas and
oil reserves acquired in February 1994; in October 1994, the Company sold a 50
percent interest in these properties.
In January 1996, Tom Brown, Inc. acquired the Company's gas and oil
subsidiary. In exchange for the stock of the gas and oil subsidiary, K N
received 0.9 million shares of Tom Brown common stock and 1.0 million shares of
7% convertible preferred stock.
OTHER INCOME AND (DEDUCTIONS) 1995 1994 1993
---- ---- ----
Interest Expense $(34.2) $(31.6) $(30.5)
Minority Interests and Other, Net 2.0 2.2 (0.2)
------ ------ ------
$(32.2) $(29.4) $(30.7)
====== ====== ======
Increases in interest expense primarily resulted from the issuance of
long-term debt in 1994 and 1993 to fund capital expenditures and acquisitions.
The impact of these financings was partially mitigated by the 1993 refunding of
$35 million of higher coupon debt. "Minority Interests and Other, Net" in 1994
included a $1.5 million gain from the sale of a Texas gathering system.
INCOME TAXES 1995 1994 1993
---- ---- ----
Provisions $29.0 $ 9.5 $18.6
===== ===== =====
Effective Tax Rate 35.6% 38.3% 37.6%
===== ===== =====
The 1995 effective tax rate reflects tax credits on production from
gas wells qualifying for non-conventional fuel credit under Section 29 of the
Internal Revenue Code, and lower state income taxes
27
28
provisions resulting from changes in apportionment factors. The 1994 effective
tax rate reflects the non-deductibility of certain merger costs.
LIQUIDITY AND CAPITAL RESOURCES
During 1995, the primary sources of cash were generated from
operations, short-term borrowings and the issuance of common stock for dividend
reinvestment and employee benefit plans. Non-operating cash outflows primarily
included capital expenditures and acquisitions, redemptions of long-term debt
and preferred stock, and interest and dividend payments.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash flows from 1995 operations totaled $129.6 million, compared
with $91.2 million and $67.9 million for 1994 and 1993, respectively. Net
operating cash flows for 1994, excluding $41 million of proceeds from the sale
of contract demand receivables and expenditures of $18.1 million related to the
merger and restructuring, aggregated $68.3 million. The substantial
improvement in 1995 net operating cash flows was largely attributable to the
factors resulting in the 51 percent increase in earnings. Additionally, 1995
net operating cash flows benefited from enhanced receivable collection efforts,
lower gas prepayments and greater sourcing of gas supplies from storage.
CAPITAL EXPENDITURES AND COMMITMENTS
Capital expenditures, excluding acquisitions, totaled $79.4 million in
1995, compared with expenditures of $70.6 million in 1994 and $100.8 million in
1993. The significantly higher level of 1993 capital expenditures resulted
from measurement facilities and systems required for implementation of Order
636 and the construction of a new corporate office.
The 1996 capital expenditures budget totals $81 million, excluding
acquisitions. In January 1996, K N entered into a letter of intent to acquire
a major midwest crude oil pipeline owned by Amoco Pipeline Company. The 850-
mile pipeline extends from Riverton, Wyoming, southeast through portions of
Colorado, Nebraska and Kansas, terminating south of Kansas City, Missouri. K N
plans to convert the pipeline for transmission of natural gas from supply-rich
Wyoming to midwest markets. Conversion of the pipeline requires approval from
the FERC. Total cost of this project, including the acquisition price and
conversion to natural gas services is expected to be less than $150 million.
The pipeline is expected to be in service in early 1997.
In 1996, K N and El Paso Natural Gas Company expect to construct the
southernmost 22 miles of the TransColorado pipeline to connect with existing
gathering systems in southern Colorado. Total costs of this phase of the
project are estimated at $30 million with K N's share of 1996 capital spending
totaling $15 million.
The Company does not believe it has a material exposure related to
take-or-pay matters. Generally, all amounts paid by the Company for
take-or-pay are either fully recoupable under the terms of the gas purchase
contracts, or are recoverable from offsetting gas purchase obligations under
certain contractual arrangements. Take-or-pay obligations, including payments
of above-market prices incurred with respect to the Company's retail
distribution operations, are recoverable through purchased gas adjustment
clauses in existing tariffs. At December 31, 1995, the cumulative amount of
take-or-pay payments was $7.8 million.
28
29
CAPITAL RESOURCES
The Company has credit agreements with 10 banks to either borrow or
use as commercial paper support up to $225 million. Additionally, $125 million
of debt securities are issuable under K N's 1993 shelf registration statement
filed with the Securities and Exchange Commission. Short-term borrowings were
$88.0 million and $60.0 million at year-end 1995 and 1994, respectively. At
December 31, 1995, the Company had $434 million of equity capital and a
long-term debt to capitalization ratio of 42 percent.
In September 1995, Standard & Poor's ("S & P") affirmed its "A" rating
of K N's senior unsecured debt and preferred stock and its commercial paper
rating of "A-1". However, to reflect its perception of a more competitive
environment for the Company and the industry, S & P revised its ratings outlook
for K N from stable to negative.
Excluding the cash requirements associated with the acquisition and
conversion costs of the crude oil pipeline and the 1996 phase of the
TransColorado pipeline project discussed previously, the Company expects that
1996 cash requirements for debt service, preferred stock redemptions, dividends
and capital expenditures will be provided, primarily, by internal cash flows.
K N is currently evaluating financing alternatives, which may include a
combination of long-term debt and equity, to fund the acquisition and
conversion of the crude oil pipeline and the TransColorado project.
REGULATION
Approximately 45 percent of the Company's assets, operating revenues
and income are subject to regulation at either the federal, state or local
level. In all of these regulatory jurisdictions, rates are currently
determined using cost-based regulations. 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. In September
1995, K N filed an application with the Wyoming Public Service Commission to
permit K N to open its system in nine communities to competition from
alternative gas suppliers. This program is expected to go into effect in the
spring of 1996.
RISK MANAGEMENT
To minimize the risk of price changes in the natural gas, crude oil
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 crude oil and natural
gas 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. 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.
The Risk Management Committee reviews the pricing and hedging of all commodity
29
30
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.
OUTLOOK/FORWARD-LOOKING INFORMATION
GENERAL
The Company's vision is to be a world-class provider of integrated
energy services and solutions. The 1994 merger with AOG better positions K N to
be a major player in the natural gas industry by providing the Company with
critical mass and access to new markets. During 1995, K N realized
considerable benefit from the integration of assets and reduction in expenses.
K N expects additional economic benefits from additional consolidation and
infrastructure reductions initiated during 1995. By year-end 1995, the Company
had reduced its workforce by approximately 25 percent; annual savings of
approximately $8 million are expected in 1996.
During 1996, the Company's strategy will be directed at:
o Providing customers with choice and superior services;
o Improving systems utilization and optimizing existing assets while
achieving growth via internal opportunities and prudent acquisitions;
o Forming alliances that create new opportunities or enhance existing
operations; and
o Focusing on new projects that strengthen K N's competitive position
within its traditional Rocky Mountain and Mid-Continent regions.
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. During 1995, the Company began the development of a power
marketing business to take advantage of the opportunities to offer both gas and
electric energy services to customers. K N is following the progress of the
FERC's proposed rulemaking in order to properly position its power marketing
business to be successful in the unregulated electric environment. 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 leading to
an opening of a more competitive environment for all gas services. K N is
looking to be a leader in providing customers a choice in services. In that
regard, K N filed an application with the Wyoming Public Service Commission in
September 1995 to allow 10,000 residential and commercial customers to choose
their energy provider from a qualified list of suppliers. K N will continue
to provide all other utility services and will manage the gas supplies for
customers in the program. In addition, K N is asking that Wyoming markets not
currently served by K N be allowed competitive choice. The innovative program
is one of the first in the nation that proposes to allow essentially all
customers the opportunity to exercise energy choice for natural gas.
30
31
LITIGATION AND ENVIRONMENTAL
As discussed in Note 5 of Notes to Consolidated Financial Statements,
in 1994, the Company was sued in Dallas County, Texas, by Westerman, et al.,
for breach of contractual and fiduciary duties, including take-or-pay claims,
covering properties in Colorado. In a separate lawsuit filed in federal court
in Colorado, the Company sued the plaintiffs and others asserting that
contractual provisions require payment of refunds for gas purchased at
above-market prices and, prospectively, for a reduction in gas prices paid
under the contracts to market levels. The actual damages claimed by
Westerman, et al., totaled $1.5 million and the punitive damages claimed
totaled $156 million. During 1995, the Company reached settlement with parties
representing approximately two-thirds of the gas ownership interests held by
the producers. This settlement resolves all disputes between these parties,
including the lawsuit filed by the Company in Colorado. Although substantial
claims remain, the Company believes it has a meritorious position in this
matter, and does not expect this lawsuit to have a material adverse impact on
the Company's results of operations or financial position.
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 1996.
The Company's overall potential environmental cost exposure for 1996
is estimated to be approximately $2.5 million. A substantial part of the
Company's 1996 environmental costs are either recoverable through insurance and
indemnification provisions, or have been previously expensed as part of ongoing
business.
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
Fluctuations in natural gas prices have relatively little impact on
the Company's earnings. To the extent that the Company retains its merchant
role in the retail natural gas services segment, the actual cost of gas is
recovered from customers. In the nonregulated gas sales arena, the majority of
the sales contracts are either supported by fixed-cost supplies or 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.
As part of the processing business, NGLs are extracted from the raw
natural gas stream and sold. During 1995, NGLs prices recovered from
significant declines experienced in late 1993 and the first half of 1994. The
Company expects no material price changes during 1996. However, a one cent
change in average NGLs prices impacts the Company's pre-tax operating income by
approximately $2.2 million.
31
32
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, 1995
and 1994, 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, 1995. 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, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As explained in Note 11 of Notes to Consolidated Financial Statements,
the Company changed its method of accounting for postemployment benefits
effective January 1, 1994.
/s/ Arthur Andersen LLP
Denver, Colorado
February 14, 1996
32
33
CONSOLIDATED STATEMENTS OF INCOME
K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31
-----------------------
1995 1994 1993
---- ---- ----
(In Thousands Except Per Share Amounts)
OPERATING REVENUES:
Retail Natural Gas Services $ 217,762 $ 212,218 $ 204,999
Interstate Transportation and Storage Services 22,335 21,044 99,838
Gathering, Processing and Marketing Services 855,855 838,474 730,895
Gas and Oil Production 7,437 11,328 5,321
---------- ---------- ----------
Total Operating Revenues 1,103,389 1,083,064 1,041,053
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Gas Purchases 732,072 762,358 730,984
Operations and Maintenance 187,867 173,283 169,525
Depreciation, Depletion and Amortization 49,891 50,278 44,644
Taxes, Other Than Income Taxes 19,835 17,025 15,696
Merger and Restructuring Costs - 25,945 -
---------- ---------- ----------
Total Operating Costs and Expenses 989,665 1,028,889 960,849
---------- ---------- ----------
OPERATING INCOME 113,724 54,175 80,204
---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS):
Interest Expense (34,211) (31,605) (30,513)
Minority Interests (905) (659) 292
Other, Net 2,964 2,910 (515)
---------- ---------- ----------
Total Other Income and (Deductions) (32,152) (29,354) (30,736)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 81,572 24,821 49,468
Income Taxes 29,050 9,500 18,599
---------- ---------- ----------
NET INCOME 52,522 15,321 30,869
Less - Preferred Stock Dividends 492 630 853
---------- ---------- ----------
EARNINGS AVAILABLE FOR
COMMON STOCK $ 52,030 $ 14,691 $ 30,016
========== ========== ==========
EARNINGS PER COMMON SHARE $ 1.83 $ 0.52 $ 1.09
========== ========== ==========
The accompanying notes are an integral part of these statements.
33
34
CONSOLIDATED BALANCE SHEETS
K N ENERGY, INC. AND SUBSIDIARIES
DECEMBER 31
-----------
1995 1994
---- ----
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 22,571 $ 20,613
Accounts Receivable 214,963 151,834
Material and Supplies, at Average Cost 10,515 12,687
Gas in Underground Storage 9,762 31,695
Prepaid Gas 7,800 12,456
Other Prepaid Expenses 13,536 12,976
Gas Imbalances and Other 23,880 37,053
---------- ----------
303,027 279,314
---------- ----------
INVESTMENT IN GAS AND OIL PROPERTIES, NET (NOTE 3(A)) 36,451 -
---------- ----------
INVESTMENTS 15,784 9,186
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 6) 862,975 850,649
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 39,220 33,235
---------- ----------
$1,257,457 $1,172,384
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt $ 28,197 $ 30,384
Notes Payable 88,000 60,000
Accounts Payable 157,340 108,755
Accrued Taxes 5,423 6,197
Gas Imbalances and Other 50,878 50,434
---------- ----------
329,838 255,770
---------- ----------
DEFERRED LIABILITIES, CREDITS AND RESERVES:
Deferred Income Taxes 112,267 96,054
Deferred Revenues (Note 1(I)) 20,823 42,090
Other 30,356 28,194
---------- ----------
163,446 166,338
---------- ----------
LONG-TERM DEBT 315,564 334,644
---------- ----------
MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 14,277 13,231
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
(NOTES 1, 5 AND 14)
PREFERRED STOCK SUBJECT TO MANDATORY
REDEMPTION 572 1,715
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock 7,000 7,000
---------- ----------
Common Stock:
Authorized - 50,000,000 Shares, Par Value $5 Per Share
Outstanding - 28,097,749 and 27,617,531 Shares, Respectively 140,489 138,088
Additional Paid-in Capital 176,910 170,932
Retained Earnings 109,895 86,032
Deferred Compensation (222) (378)
Treasury Stock, at Cost (10,739 and 44,417 Shares, Respectively) (312) (988)
---------- ----------
Total Common Stockholders' Equity 426,760 393,686
---------- ----------
Total Stockholders' Equity 433,760 400,686
---------- ----------
$1,257,457 $1,172,384
========== ==========
The accompanying notes are an integral part of these balance sheets.
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35
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
COMMON STOCK TREASURY STOCK ADDITIONAL DEFERRED
------------ -------------- PAID-IN COMPEN- RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION EARNINGS
------ ------ ------ ------ ------- ------ --------
(Dollars In Thousands)
BALANCE, DECEMBER 31, 1992 17,047,066 $ 85,235 - $ - $186,575 $ - $ 75,928
Net Income 30,869
Cash Dividends -
Common, $0.51 Per Share (13,757)
Preferred (853)
Common Stock Split 8,639,721 43,199 (43,233)
Employee Stock Options 81,416 407 949
Employee Benefit Plans 20,717 104 560
Dividend Reinvestment and
Stock Purchase Plans 171,592 858 4,135
Conversion of AOG 9% Cumulative
Convertible Preferred Stock 1,141,755 5,709 13,601
Issuance of Common Shares as
Executive Compensation 94,000 470 1,867 (1,420)
Amortization of Deferred
Compensation 263
Other, Net 4,700 23 (27)
---------- -------- ------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1993 27,200,967 136,005 - - 164,427 (1,157) 92,187
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 27,805 633 2,858
Dividend Reinvestment and
Stock Purchase Plans 181,069 905 19,379 444 2,676
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 (44,417) (988) 170,932 (378) 86,032
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 80 2 394
Dividend Reinvestment and
Stock Purchase Plans 97,979 490 106,098 2,633 1,444
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 (10,739) $ (312) $176,910 $ (222) $109,895
========== ======== ======= ======= ======== ======= ========
The accompanying notes are an integral part of these statements.
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36
CONSOLIDATED STATEMENTS OF CASH FLOWS
K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31
-----------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 52,522 $ 15,321 $ 30,869
Adjustments to Reconcile Net Income to
Net Cash From Operating Activities:
Depreciation, Depletion and Amortization 49,891 50,278 44,644
Deferred Income Taxes 15,975 7,302 9,748
Deferred Purchased Gas Costs (1,458) 1,601 (11,925)
Provision for Losses on Accounts Receivable 949 627 1,197
Gain on Sale of Facilities - (1,458) (902)
Asset Write-off Associated with Merger - 2,500 -
Write-down of Investment in WellTech, Inc. - - 4,513
Changes in Other Working Capital Items 23,069 16,523 (25,287)
Changes in Deferred Revenues (21,267) (1,602) 4,960
Other, Net 9,899 120 10,126
-------- ------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES 129,580 91,212 67,943
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (79,418) (70,596) (100,780)
Acquisitions (31,945) (31,231) (47,521)
Investments (6,598) (3,906) (150)
Proceeds from Sale of Facilities 2,706 22,305 7,206
(Payments) Collections Under Basket Agreement 1,491 (306) 1,760
Other Funds Used During Construction 105 85 516
-------- ------- --------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (113,659) (83,649) (138,969)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt (Net) 28,000 13,000 45,000
Long-Term Debt - Issued - 83,100 113,347
- Retired (21,322) (79,078) (81,401)
Preferred Stock Redemption (1,143) (1,643) (2,143)
Common Stock Issued 8,379 8,093 7,020
Treasury Stock - Issued 2,635 1,077 -
- Acquired (1,959) (2,065) -
Cash Dividends - Common (28,167) (20,846) (13,757)
- Preferred (492) (630) (1,217)
Minority Interests - Contributions 2,906 1,163 2,306
- Distributions (2,765) (2,183) (3,733)
Premium on Debt Re-acquisition and Issue Costs (35) (1,291) (3,597)
-------- ------- --------
NET CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES (13,963) (1,303) 61,825
-------- ------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 1,958 6,260 (9,201)
Cash and Cash Equivalents at Beginning of Year 20,613 14,353 23,554
-------- ------- --------
Cash and Cash Equivalents at End of Year $ 22,571 $20,613 $ 14,353
======== ======= ========
The accompanying notes are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Nature of Operations
K N Energy, Inc. ("K N") is a natural gas services company and has
operations in eight states in the Rocky Mountain and Mid-Continent regions.
The primary services provided include gas gathering, processing, marketing,
storage, transportation and retail gas distribution services. 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
gas pipeline systems 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
No. 71, which prescribes the circumstances in which the application of
generally accepted accounting principles is effected by the economic effect of
regulation.
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38
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 financial statements (in thousands):
DECEMBER 31
-----------
1995 1994
---- ----
Regulatory Assets:
Employee Benefit Costs $ 923 $ 795
Debt Refinancing Costs 3,514 3,918
Deferred Income Taxes 755 1,272
Purchased Gas Costs 15,254 10,936
Plant Acquisition Adjustments 454 1,253
Rate Regulation and Application Costs 1,401 2,216
------- -------
Total Regulatory Assets 22,301 20,390
------- -------
Regulatory Liabilities:
Deferred Income Taxes 4,621 5,212
Purchased Gas Costs 10,640 4,858
------- -------
Total Regulatory Liabilities 15,261 10,070
------- -------
Net Regulatory Assets $ 7,040 $10,320
======= =======
As of December 31, 1995, $20.3 million of the Company's regulated
assets and $14.4 million of the Company's regulated liabilities were being
recovered from or refunded to customers through rates over periods ranging from
one to 18 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 28,360,000 in 1995, 28,044,000 in 1994 and 27,424,000 in
1993.
(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.
38
39
(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 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.
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. Gains or losses are
recognized upon retirement of nonutility property, plant and equipment.
(H) Depreciation, Depletion and Amortization
Depreciation is computed based on the straight-line method over the
estimated useful life 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) Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform with the
1995 presentation.
39
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(K) 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):
1995 1994 1993
---- ---- ----
CHANGES IN OTHER WORKING CAPITAL
ITEMS SUMMARY (NET OF ACQUISITION EFFECTS)
Accounts Receivable $(67,364) $ 24,685 $(35,314)
Contract Demand Receivables - 38,732 -
Material and Supplies 2,172 (1,083) (1,042)
Gas in Underground Storage 21,722 (10,842) (4,292)
Accounts Payable, Accrued Taxes and
Other Current Liabilities 49,558 (18,640) 22,460
Other Current Assets 16,981 (16,329) (7,099)
-------- -------- --------
$ 23,069 $ 16,523 $(25,287)
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest (Net of Amount Capitalized) $ 34,503 $ 28,721 $ 30,383
======== ======== ========
Income Taxes $ 9,774 $ 12,763 $ 7,386
======== ======== ========
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 the third quarter of 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.
3. MERGER AND ACQUISITIONS
(A) Gas and Oil Properties
On January 31, 1996, K N and Tom Brown, Inc. ("TBI") closed a
transaction pursuant to which the parties merged a newly formed subsidiary
corporation of TBI with and into K N Production Company ("KNPC"), a wholly
owned subsidiary of K N and pursuant to which TBI issued to K N (i) 1,000,000
shares of 7% Convertible Preferred Stock of TBI (the "Convertible Preferred
Stock") and (ii) 918,367 shares of Common Stock of TBI. For the two-year
period from and after the third anniversary of the issuance of the Convertible
Preferred Stock, TBI may convert any or all shares of the Convertible Preferred
Stock into 1.666 shares of common stock per share of Convertible Preferred
Stock of TBI, if the then current market price of TBI stock is
40
41
above $18.375 per common share. In conjunction with this transaction, K N and
TBI formed a limited liability company, owned 55 percent by K N and 45 percent
by TBI which will perform certain gathering, processing, field, marketing and
storage services in the Mid-Continent region of the United States.
As a result of this transaction, K N transferred its stock in KNPC to
TBI in exchange for the Convertible Preferred Stock and Common Stock of TBI.
The transaction represents a non-monetary exchange (valued at approximately
$36.3 million) of oil and gas assets for accounting purposes. The common
shares will be considered available for sale securities and, as a result,
unrealized holding gains and losses will be included as a component of
stockholders' equity.
(B) Transmission and Storage Systems
On February 16, 1995, the Company acquired additional 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 price was $79 million. The
Company utilized an operating lease and short-term debt financing arrangements
to fund the acquisition.
(C) Gathering and Transmission System
On April 1, 1993, the Company completed the $48 million acquisition of
the Wattenberg natural gas gathering and transmission system, located in
northeastern Colorado. The system has both regulated and nonregulated
components. The regulated transmission segment, approximately $18 million of
the acquisition, was financed with corporate funds, and the balance of the
system was financed through an operating lease.
4. REGULATORY MATTERS
(A) Restructuring and Reorganization
On April 8, 1992, the FERC issued Order 636 which requires a
fundamental restructuring of interstate natural gas pipelines. K N implemented
Order 636 restructured services on October 1, 1993.
K N requested FERC approval, as a result of Order 636, to transfer all
of its interstate transmission and storage facilities to K N Interstate Gas
Transmission Co. ("KNI"), a wholly owned jurisdictional subsidiary of K N,
and substantially all of its gathering and processing facilities to K N Gas
Gathering, Inc. ("KNGG"), a nonjurisdictional wholly owned subsidiary of K N.
The FERC approved the transfer of K N's interstate gas transmission and storage
facilities to KNI effective October 1, 1993. The FERC authorized the transfer
of certain additional gathering and processing facilities from KNI to KNGG
effective January 1, 1994. KNI's only remaining gathering system was
transferred to KNGG in early 1995. AOG's assets and facilities were not a part
of this reorganization.
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,
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42
Nebraska storage facilities, which will remain as jurisdictional facilities and
continue to provide storage services. Jurisdictional rates were restated to
reflect this transfer. KNNG began marketing its gas at market rates from the
three storage facilities which were transferred, effective June 1, 1995.
(B) Rate Matters
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.
K N's retail natural gas services business segment received rate
increases from a number of jurisdictions during 1994 and 1993, as summarized
below:
ENTITY REQUESTING APPROVED ANNUALIZED EFFECTIVE DATE
INCREASE JURISDICTION REVENUE INCREASE OF NEW RATES
-------- ------------ ---------------- ------------
(In Millions)
RMNGD* Colorado $1.5 4-2-94
RMNGD* Colorado 0.5 9-1-94
K N Kansas 2.4 10-1-93
K N All Nebraska Communities 1.4 5-2-93
K N Wyoming 1.1 5-1-93
*Rocky Mountain Natural Gas Division of K N
Additionally, in connection with a 1990 Nebraska rate case, $1.6
million of previously deferred revenues were recorded as revenue in 1993.
(C) Other
In December 1994, KNI sought authority from the FERC to install $14.9
million of 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.
The facilities are expected to be in service by November 1996.
K N filed an application with the Wyoming Public Service Commission in
September 1995 to allow 10,000 residential and commercial customers to choose
their energy provider from a qualified list of suppliers. K N will continue
to provide all other utility services and will manage the gas supplies for
customers in the program.
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
1995. The total remaining estimated cost is not expected to exceed $150,000.
42
43
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, and no active remediation will occur until completion of
that assessment program. 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,
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 $1.2 million for PCB remediation has
been expended as of December 31, 1995. 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
in June 1996. 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 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 natual 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 companies have
engaged in an illegal exercise of monopoly power, have illegally denied him
economically feasible access to essential facilities to transport and
distribute gas produced from fewer than 20 wells located in northwest Colorado,
and illegally have attempted to monopolize or
43
44
to enhance or maintain an existing monopoly. Grynberg also asserts certain
causes of action relating to a gas purchase contract. No specific monetary
damages have been claimed, although Grynberg has requested that any actual
damages awarded be trebled. In addition, Grynberg has requested that the K N
Entities be ordered to divest all interests in natural gas exploration,
development and production properties, all interests in distribution and
marketing operations, and all interests in natural gas storage facilities,
separating these interests from the Company's natural gas gathering and
transportation system in northwest Colorado. In an unrelated transaction,
K N's exploration, production and development properties owned by KNPC were
transferred to a third party in January 1996. The Company has indemnified the
third party for any potential claims by Grynberg related to this litigation.
On August 13, 1993, the United States District Court, District of Colorado,
stayed this proceeding pending exhaustion of appeals in a related state court
action involving the same plaintiff. This case is still pending.
On December 8, 1994, K N and its wholly owned subsidiary K N Gas
Supply Services, Inc. ("KNGSS") were sued by gas producers in northeastern
Colorado in District Court, Dallas County, Texas under claims arising from two
gas purchase contracts covering gas purchases from wells in the Niobrara Field,
Colorado. The producers asserted take-or-pay claims for contract years 1993
and 1994 in the amount of $1,157,000 plus interest, as well as actual and
punitive damages in the amount of $156,000,000 for breaches of contractual and
fiduciary duties arising out of a January 1977 Farmout Agreement between the
producers and K N.
On December 21, 1994, the lawsuit was removed from Texas state court
to the United States District Court for the Northern District of Texas
(Dallas). On January 12, 1995, K N and KNGSS filed a motion to dismiss for
lack of personal jurisdiction, or, if jurisdiction is found to exist, a motion
to transfer the cause of action to federal court in Colorado. On June 29,
1995, the United States District Court for the Northern District of Texas,
Dallas Division, ruled that it has jurisdiction over K N and that venue is
proper in that court. The court has not yet ruled on whether it has
jurisdiction over KNGSS. Additional litigation was initiated on January 31,
1995, by KNGSS against the plaintiffs and others in federal court in Colorado.
In this lawsuit, KNGSS asserts that contractual provisions require payment of
refunds for gas purchased at above-market prices and, prospectively, for a
reduction in gas prices paid under the contracts to market levels. On October
30, 1995, K N and KNGSS reached settlement with parties representing
approximately two-thirds of the gas ownership interests held by the producers.
This settlement resolves all disputes between these parties, including the
lawsuit filed by K N and KNGSS in federal court in Colorado. The Company
believes that this settlement will have no material adverse effect on the
Company's financial position or results of operations. Settlement negotiations
with the parties representing the remaining one-third ownership interest under
the disputed gas purchase contracts are continuing. The Company believes it has
a meritorious position in these matters, and does not expect these lawsuits 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.
44
45
6. PROPERTY, PLANT AND EQUIPMENT
Investment in property, plant and equipment, at cost, and accumulated
depreciation, depletion and amortization ("Accumulated DD&A"), detailed by
business segment, are as follows (in thousands):
DECEMBER 31, 1995
-----------------
PROPERTY, PLANT ACCUMULATED
AND EQUIPMENT DD&A NET
--------------- ----------- --------
Retail Natural Gas Services $ 373,347 $134,844 $238,503
Interstate Transportation and Storage Services 315,686 149,267 166,419
Gathering, Processing and Marketing Services 663,754 205,701 458,053
---------- -------- --------
$1,352,787 $489,812 $862,975
========== ======== ========
DECEMBER 31, 1994
-----------------
PROPERTY, PLANT ACCUMULATED
AND EQUIPMENT DD&A NET
--------------- ----------- --------
Retail Natural Gas Services $ 358,337 $133,781 $224,556
Interstate Transportation and Storage Services 371,253 159,591 211,662
Gathering, Processing and Marketing Services 533,226 154,391 378,835
Gas and Oil Production 49,578 13,982 35,596
---------- -------- --------
$1,312,394 $461,745 $850,649
========== ======== ========
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.
Components of the income tax provision applicable to federal and state
income taxes are as follows (in thousands):
1995 1994 1993
---- ---- ----
Taxes Currently Payable:
Federal $11,069 $ 5,992 $ 6,272
State 2,006 (3,794) 2,579
------- ------- -------
Total 13,075 2,198 8,851
------- ------- -------
Taxes Deferred:
Federal 15,672 4,081 9,920
State 303 3,221 (172)
------- ------- -------
Total 15,975 7,302 9,748
------- ------- -------
Total Tax Provision $29,050 $ 9,500 $18,599
======= ======= =======
Effective Tax Rate 35.6% 38.3% 37.6%
======= ======= =======
The difference between the statutory federal income tax rate and the
Company's effective income tax rate is summarized as follows:
1995 1994 1993
---- ---- ----
Federal Income Tax Rate 35.0% 35.0% 35.0%
Increase (Decrease) as a Result of -
State Income Tax, Net of Federal Benefit 1.8% (1.5%) 3.1%
Nonconventional Fuels Credit (1.0%) (3.0%) (2.0%)
Nondeductible Merger Costs - 7.8% -
Other (0.2%) - 1.5%
---- ---- ----
Effective Tax Rate 35.6% 38.3% 37.6%
==== ==== ====
45
46
The Company has recorded deferred regulatory assets of $0.8 million
and $1.3 million, and deferred regulatory liabilities of $4.6 million and $5.2
million at December 31, 1995 and 1994, respectively, which are expected to
result in cost-of-service adjustments. These amounts reflect the "gross of
tax" presentation required under Statement of Financial Accounting Standards
No. 109 ("SFAS 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):
DECEMBER 31
-----------
1995 1994
---- ----
Deferred Tax Assets:
Unbilled Revenue $ 2,113 $ 2,128
Vacation Accrual 1,577 1,556
State Taxes 4,358 4,252
Capitalized Overhead Adjustment 2,069 1,958
Operating Reserves 772 968
WellTech, Inc. Investment 1,425 1,436
Deferred Revenues 1,525 4,866
Net Operating Loss ("NOL") Carryforwards - 1,894
Alternative Minimum Tax ("AMT") Credits 10,011 15,410
Other 5,327 3,458
-------- --------
Total Deferred Tax Assets 29,177 37,926
-------- --------
Deferred Tax Liabilities:
Liberalized Depreciation 129,048 119,912
Rate Matters 4,574 8,301
Prepaid Pension 3,988 3,438
Other 3,834 2,329
-------- --------
Total Deferred Tax Liabilities 141,444 133,980
-------- --------
Net Deferred Tax Liabilities $112,267 $ 96,054
======== ========
Deferred Accounts for Rate Regulated Entities:
Liabilities $ 4,621 $ 5,212
======== ========
Assets $ 755 $ 1,272
======== ========
8. FINANCING
(A) Notes Payable
On December 1, 1994, K N entered into a credit agreement with eight
banks to borrow for general corporate purposes, including commercial paper
support, up to a total of $200 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 1995 were $0.2 million. There were no
fees paid in 1994. The credit agreement expires December 1, 1999. K N also
has credit agreements with two banks to either borrow or use for commercial
paper support up to a total of $25 million. Borrowings are made at rates
negotiated on the borrowing date and for a term of not more than one year.
Under these agreements, K N pays a commitment fee on the unused commitment. At
December 31, 1995, $10 million was outstanding under these credit agreements.
Commercial paper issued by K N represents unsecured short-term notes
with maturities not to exceed 270 days from the date of issue. During 1995,
all commercial paper issued was redeemed within 43 days, with interest rates
ranging from 5.40 percent to 6.45 percent. At December 31, 1995 and 1994,
$78.0 million and $60.0 million of commercial paper, respectively, were
outstanding at rates ranging from 5.90 percent to 6.15 percent
46
47
and from 5.87 percent to 6.30 percent, respectively. The weighted average
interest rates on short-term borrowings outstanding were 5.96 percent and 6.09
percent as of December 31, 1995 and 1994, respectively.
Average short-term borrowings outstanding during 1995 and 1994 were
$45.6 million and $42.7 million, respectively. During 1995 and 1994, the
weighted average interest rates on short-term borrowings outstanding were 5.98
percent and 4.58 percent, respectively.
(B) Long-Term Debt
DECEMBER 31
-----------
1995 1994
---- ----
(In Thousands)
Debentures:
6.5% Series, Due 2013 $ 50,000 $ 50,000
7.85% Series, Due 2022 28,434 28,866
8.75% Series, Due 2024 75,000 75,000
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 (1,069) (1,124)
Senior Notes:
7.27%, Due 1996-2002 32,500 35,000
11.846% (AOG), Due 1996-1999 25,446 33,928
Medium-Term Notes:
10.03% Average Rate, Due 1996-1999 12,500 17,500
$25 Million Subordinated Revolving
Credit Note (AOG) with Cabot
Corporation, Interest at the
London Interbank Offered Rate
("LIBOR") Plus 0.925%
at December 31, 1995 and 1994,
(6.8625% and 6.9875%,
Respectively), Due 1996 11,142 12,829
8.5% Note Payable of Red River Pipeline, L.P.,
75%-owned by the Company, Guaranteed
by Partners, Due 1996-1998 9,808 13,029
Current Maturities of Long-Term Debt (28,197) (30,384)
-------- --------
Total Long-Term Debt $315,564 $334,644
======== ========
Maturities of long-term debt for the five years ending December 31,
2000, are as follows (in thousands):
YEAR AMOUNT
- ---- ------
1996 $28,197
1997 16,055
1998 19,055
1999 13,089
2000 5,000
In October 1994, K N sold publicly $75 million of 30-year, 8.75%
debentures at an all-in cost to the Company of 8.91 percent. This debt was
issued from the Company's $200 million shelf registration statement
47
48
which the Securities and Exchange Commission declared effective in November
1993. Proceeds from this financing were used to fund capital expenditures and
to reduce short-term borrowings incurred in July 1994 to retire certain debt of
AOG.
As discussed more fully in Note 10, in 1993, AOG entered into two
interest-rate swap agreements and, in 1994, the Company entered into four
interest rate cap agreements covering $35 million of notional principal.
At December 31, 1995 and 1994, the carrying amount of the Company's
long-term debt was $344.8 million and $366.2 million, respectively, and the
estimated fair value was $383.2 million and $355.2 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.
9. PREFERRED STOCK
DECEMBER 31
-----------
1995 1994
---- -----
(In Thousands)
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
and 17,148 Shares at December 31, 1995 and 1994, Respectively $ 572 $1,715
====== ======
(A) Class B $8.30 Preferred Stock
The Class B $8.30 Preferred Stock is subject to mandatory redemption
through a sinking fund (at $100 per share, plus accrued and unpaid dividends)
of $572,000 in 1997. In each of the years 1995, 1994 and 1993, the Company
redeemed 5,714 shares subject to mandatory redemption, and an additional 5,714
shares at $100 per share.
(B) 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.
(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.
48
49
(D) Fair Value
At December 31, 1995, both the carrying amount and the estimated fair
value of the Company's outstanding preferred stock subject to mandatory
redemption were $0.6 million. The comparable amounts at December 31, 1994, were
$1.7 million and $1.6 million, respectively. The fair value of the Company's
preferred stock is 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, crude oil and NGLs
markets. Energy risk management products include crude oil and natural gas
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 1995 transactions were
recorded as hedges.
As of December 31, 1995, the Company had deferred $12.7 million,
representing the difference between the current market value and the original
physical contracts' value, associated with its hedging activities, of which
$1.2 million in gains relate to futures contracts and $13.9 million in losses
relate to over-the-counter swaps and options. The deferrals will be offset by
corresponding underlying physical transactions and are reflected as deferred
charges in the accompanying financial statements. At December 31, 1995, the
Company held notional long volumetric positions of 41.5 Bcf of gas, of which
19.7 Bcf were held in gas futures positions and 21.8 Bcf were held in
over-the-counter swaps and options. Of the 41.5 Bcf notional total, associated
physical transactions of 30.8 Bcf are expected to occur in 1996, 7.4 Bcf in
1997, and 3.3 Bcf in 1998 and beyond. A change of plus or minus 10 percent in
the fair market prices of the above financial instruments would have the
approximate effect of reducing or increasing the above deferrals by $9.0
million, which would be offset by corresponding increases or decreases in the
value of the underlying physical transactions.
49
50
(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 terminates 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 ERISA. The
Company's funding policy is to contribute annually the recommended contribution
using the actuarial cost method and assumptions used for determining annual
funding requirements. Plan assets consist primarily of pooled fixed income,
equity, bond and money market funds.
Net pension cost includes the following components (in thousands):
1995 1994 1993
---- ---- ----
Service Cost - Benefits Earned During the Period $ 3,332 $ 2,721 $ 2,579
Interest Cost on Projected Benefit Obligation 6,372 5,986 5,698
Actual Return on Assets (17,569) 565 (14,976)
Net Amortization and Deferral 8,415 (9,166) 6,714
-------- ------- ------
Net Periodic Pension Cost $ 550 $ 106 $ 15
======== ======= =======
As a result of restructuring activities, curtailment gains of $716,886
are reflected in the net amortization and deferral component of net periodic
pension cost for 1995.
50
51
The following table sets forth the plans' funded status and amounts
recognized in the Company's financial statements at December 31, 1995 and 1994
(in thousands):
DECEMBER 31
-----------
1995 1994
---- ----
Actuarial Present Value of Benefit Obligations:
Vested Benefit Obligation $(77,490) $(68,229)
======== =======
Accumulated Benefit Obligation $(82,937) $(70,682)
======== ========
Projected Benefit Obligation $(90,046) $(78,660)
Plan Assets at Fair Value 111,084 96,724
-------- --------
Plan Assets in Excess of Projected Benefit Obligation 21,038 18,064
Unrecognized Net Gain (9,678) (7,894)
Prior Service Cost Not Yet Recognized in Net Periodic
Pension Costs 171 217
Unrecognized Net Asset at January 1 (1,429) (1,533)
-------- --------
Prepaid Pension Cost $ 10,102 $ 8,854
======== ========
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 1995, 4.5
and 8.5 percent, respectively, for 1994 and 4.5 and 9.25 percent, respectively,
for 1993. The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5 percent for 1995,
8.25 percent for 1994 and 7.5 percent for 1993.
The Company also contributes the lesser of 10 percent of K N's net
income or 10 percent of normal employee compensation to the Employees
Retirement Fund Trust Profit Sharing Plan (a defined contribution plan).
Contributions by the Company were $5.6 million, $2.3 million and $2.6 million
for 1995, 1994 and 1993, 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. In
1993, the Company began funding the future expected postretirement benefit
costs under the plan by making payments to Voluntary Employee Benefit
Association trusts. The Company's funding policy is to contribute amounts
within the deductible limits imposed on Internal Revenue Code Sec. 501(c)(9)
trusts. Plan assets consist primarily of pooled fixed income funds.
Effective January 1, 1993, the Company prospectively adopted Statement
of Financial Accounting Standards No. 106 ("SFAS 106") which requires the
accrual of the expected costs of postretirement benefits other than pensions
during the years that employees render service. The Accumulated Postretirement
Benefit Obligation ("APBO") of the plan at January 1, 1993, was approximately
$18.8 million. The Company has elected to amortize this transition obligation
to expense over a 20-year period.
51
52
Net postretirement benefit cost includes the following components (in
thousands):
1995 1994 1993
---- ---- ----
Service Cost - Benefits Earned During the Period $ 378 $ 321 $ 379
Interest Cost on APBO 1,381 1,307 1,349
Actual Return on Assets (156) 7 (14)
Net Amortization and Deferral 884 805 953
------ ------ ------
Net Periodic Postretirement Benefit Cost $2,487 $2,440 $2,667
====== ====== ======
The following table sets forth the plan's funded status and the
amounts recognized in the Company's financial statements as follows (in
thousands):
DECEMBER 31
-----------
1995 1994
---- ----
Accumulated Postretirement Benefit Obligation:
Retirees $(13,138) $(13,106)
Eligible Active Plan Participants (3,524) (3,411)
Ineligible Active Plan Participants (2,751) (1,768)
-------- --------
Total APBO (19,413) (18,285)
Plan Assets at Fair Value 2,623 1,867
-------- --------
Accumulated Postretirement Benefit Obligation in
Excess of Plan Assets (16,790) (16,418)
Unrecognized Net Gain (649) (1,066)
Prior Service Cost Not Yet Recognized in Net
Periodic Postretirement Benefit Cost - -
Unrecognized Transition Obligation 15,794 16,750
-------- --------
Accrued Postretirement Benefit Cost $ (1,645) $ (734)
======== ========
The weighted average discount rate used in determining the actuarial
present value of the APBO was 7.5 percent for both 1995 and 1994. The assumed
health care cost trend rate was seven percent for 1995 and beyond. A
one-percentage-point increase in the assumed health care cost trend rate for
each future year would have increased the aggregate of the service and interest
cost components of the 1995 net periodic postretirement benefit cost by
approximately $16,000 and would have increased the APBO as of December 31,
1995, by approximately $208,000.
K N's interstate retail distribution business, in connection with rate
filings described in Note 4(B) for Kansas, Nebraska and Wyoming, has received
regulatory approval to include in the cost-of-service component of its rates
the cost of postretirement benefits as measured by application of SFAS 106. In
addition, KNI has received approval from the FERC for similar regulatory
treatment in connection with its rate filing, also described in Note 4(B). At
both December 31, 1995 and 1994, no SFAS 106 costs were deferred as regulatory
assets.
(C) Other Postemployment Benefits
On January 1, 1994, the Company adopted SFAS 112, which establishes
standards of financial accounting and reporting for the estimated cost of
benefits provided by an employer to former or inactive employees after
employment but before retirement. 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 $0.9 million and $0.8 million at
December 31, 1995 and 1994, respectively.
52
53
12. COMMON STOCK OPTION AND PURCHASE PLANS
K N has incentive stock option plans for key employees and
nonqualified stock option plans for its nonemployee directors and employees. In
1994, the Company's shareholders approved an expanded stock-based awards plan
for key employees which allows for the granting of both nonqualified and
incentive options, restricted stock awards, stock appreciation rights and other
stock-based awards. Under all plans, except the 1994 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 1994 plan, options may be granted at less
than 100 percent of the market value of the stock at the date of grant. Options
granted under these plans vest immediately or up to five years and expire no
later than 10 years after date of grant.
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 is being amortized over the vesting period. The
Company recorded compensation expense totaling $0.2 million and $1.3 million
for 1995 and 1994, respectively, relating to restricted stock grants awarded
under the plans.
At December 31, 1995, 113 employees, officers and directors of the
Company held options under the plans. The changes in stock options outstanding
during 1995, 1994 and 1993 are as follows:
NUMBER OF OPTION PRICE
SHARES $ PER SHARE
------ -----------
Outstanding at December 31, 1992 814,901 5.28-28.99
Granted 311,000 21.68-28.00
Exercised (135,522) 8.28-16.79
Expired (6,751) 6.72-23.04
---------
Outstanding at December 31, 1993 983,628 8.96-28.99
Granted 309,500 0.00-24.00
Exercised (67,093) 0.00-23.04
Expired (12,011) 15.08-23.01
---------
Outstanding at December 31, 1994 1,214,024 0.00-28.99
Granted 348,200 0.00-28.63
Exercised (373,423) 0.00-23.04
Expired (24,291) 13.25-23.04
---------
OUTSTANDING AT DECEMBER 31, 1995 1,164,510 0.00-28.99
=========
EXERCISABLE AT DECEMBER 31, 1995 584,902
=========
Unexercised options outstanding at December 31, 1995, expire at
various dates between 1996 and 2005.
K N has an Employee Stock Purchase Plan under which eligible employees
may purchase K N's common stock through voluntary payroll deductions at a 15
percent discount from the market value of the common stock, as defined in the
plan.
53
54
Under K N's Stock Option, Dividend Reinvestment, Employee Stock
Purchase and Employee Benefit Plans, 4,477,156 shares were reserved for
issuance at December 31, 1995.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 will be effective for the
year 1996 and recommends a fair value based method of accounting for employee
stock compensation, including stock options. However, companies may choose to
account for stock compensation using the intrinsic value based method as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and provide pro forma disclosures of net income and
earnings per share as if the fair value based method had been applied. The
Company anticipates it will continue to account for stock compensation using
the intrinsic value based method, and thus SFAS 123 will not have any impact on
reported operating results. The Company's pro forma disclosures will be
primarily affected by stock options granted to employees and the Employee Stock
Purchase Plan described above.
13. COMMON STOCK WARRANTS
At both December 31, 1995 and 1994, warrants to purchase 1,187,432
shares of the Company's common stock were outstanding. The warrants are
exercisable at $17.55 per warrant and expire on September 30, 1999.
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(B)). A portion of these assets has been funded
through 10-year operating leases. In 1993, K N Front Range Gathering Company,
a wholly owned subsidiary of K N, began to lease gas gathering equipment and
facilities under a 10-year operating lease. 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 $16.2 million in 1995, $9.6
million in 1994 and $8.3 million in 1993.
Future minimum commitments under major operating leases are as follows
(in thousands):
YEAR ENDING
DECEMBER 31 AMOUNT
- ----------- ------
1996 $ 15,467
1997 14,091
1998 12,153
1999 22,498
2000 10,192
Thereafter 94,792
--------
Total Commitments $169,193
========
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55
(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, 1995 and 1994, the Company's estimated net
liability was $5.6 million and $6.0 million, respectively. The Company had
made net payments of $10.9 million as of December 31, 1995 and $12.4 million as
of December 31, 1994. 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 1996.
(C) Capital Expenditure Budget
The consolidated capital expenditure budget for 1996 is approximately
$81 million, excluding acquisitions. Approximately $3.9 million had been
committed for the purchase of plant and equipment at December 31, 1995.
15. MAJOR CUSTOMER
Energas Company and affiliates comprised 10 percent of consolidated
revenues in 1995, 11 percent in 1994 and 12 percent in 1993.
16. BUSINESS SEGMENT INFORMATION
The Company is a natural gas energy products and services provider
engaged in the following activities:
o providing natural gas sales and transportation services at
retail (Retail Natural Gas Services);
o interstate storing and transporting natural gas (Interstate
Transportation and Storage Services);
o gathering, processing, marketing, storing and transporting
natural gas (Gathering, Processing and Marketing Services);
and
o developing and producing natural gas and crude oil (Gas and
Oil Production).
55
56
BUSINESS SEGMENT INFORMATION
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands)
OPERATING REVENUES:
Retail Natural Gas Services $ 222,797 $ 217,747 $ 205,870
Interstate Transportation and
Storage Services 64,523 60,562 118,026
Gathering, Processing and Marketing Services 891,849 885,949 760,245
Gas and Oil Production 10,721 14,128 8,462
Intersegment Eliminations (86,501) (95,322) (51,550)
---------- ---------- ----------
$1,103,389 $1,083,064 $1,041,053
========== ========== ==========
OPERATING INCOME:
Retail Natural Gas Services $ 31,341 $ 12,540)
Interstate Transportation and } $ 47,927
Storage Services 17,672 16,347)
Gathering, Processing and Marketing Services 64,900 22,380 31,028
Gas and Oil Production (189) 2,908 1,249
---------- ---------- ----------
OPERATING INCOME 113,724 54,175 80,204
Other Income and (Deductions) (32,152) (29,354) (30,736)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES $ 81,572 $ 24,821 $ 49,468
========== ========== ==========
IDENTIFIABLE ASSETS:
Retail Natural Gas Services $ 328,166 $ 304,065)
Interstate Transportation and } $ 545,424
Storage Services 178,882 216,753)
Gathering, Processing and Marketing Services 685,023 574,280 575,423
Gas and Oil Production 36,451 43,932 25,743
Corporate * 28,935 33,354 22,685
---------- ---------- ----------
$1,257,457 $1,172,384 $1,169,275
========== ========== ==========
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE:
Retail Natural Gas Services $ 12,590 $ 12,111)
Interstate Transportation and } $ 21,271
Storage Services 7,437 8,338)
Gathering, Processing and Marketing Services 25,256 25,830 20,018
Gas and Oil Production 4,608 3,999 3,355
---------- ---------- ----------
$ 49,891 $ 50,278 $ 44,644
========== ========== ==========
CAPITAL EXPENDITURES AND ACQUISITIONS:
Retail Natural Gas Services $ 30,080 $ 23,673)
Interstate Transportation and } $ 56,782
Storage Services 11,305 16,509)
Gathering, Processing and Marketing Services 67,774 26,521 104,219
Gas and Oil Production 6,156 35,256 4,951
---------- ---------- ----------
$ 115,315 $ 101,959 $ 165,952
========== ========== ==========
* Principally cash and investments
56
57
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY OPERATING RESULTS FOR 1995 AND 1994
(In Thousands Except Per Share Amounts)
1995
----
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Operating Revenues $292,707 $236,149 $246,724 $327,809
Operating Income 31,492 18,913 25,949 37,370
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
======== ======== ======== ========
1994
----
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Operating Revenues $346,872 $235,803 $231,256 $269,133
Operating Income (Loss) 25,940 10,410 (7,628) 25,453
Net Income (Loss) 11,959 2,910 (12,460) 12,912
Preferred Dividends 157 158 157 158
Earnings (Loss) Available for Common Stock $ 11,802 $ 2,752 $(12,617) $ 12,754
======== ======== ======== ========
Number of Common Shares Used In
Computing Earnings Per Share 27,718 27,855 28,153 28,149
======== ======== ======== ========
Earnings (Loss) Per Common Share $ 0.42 $ 0.10 $ (0.45)* $ 0.45
======== ======== ======== ========
*Includes merger and restructuring costs totaling $19.3 million after taxes, or
$0.69 per common share.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no such matters during 1995.
57
58
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) Identification of Directors
For information regarding the Directors, see pages 2-8 of the 1996
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 8 of the 1996 Proxy Statement.
(E) Business Experience
See Executive Officers of the Registrant under Part I. For business
experience of the Directors, see pages 2-8 of the 1996 Proxy Statement.
(F) Involvement in Certain Legal Proceedings
None.
(G) Promoters and Control Persons
None.
The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is set forth in the Proxy Statement and is hereby
incorporated by reference.
ITEM 11: EXECUTIVE COMPENSATION
See "Director Compensation", "Report of the Compensation Committee in
Executive Compensation", "Executive Compensation", "Stock Options",
"Performance Graph", "Pension Benefits" and "Severance and Other Agreements" on
pages 9- 22 of the 1996 Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the following pages of the 1996 Proxy Statement: (i) Pages 4-7
relating to common stock owned by directors; (ii) pages 18-19, "Executive
Stock Ownership"; and (iii) pages 25-27, "Principal Shareholders".
58
59
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) Transactions with Management and Others
See "Relationship Between Certain Directors and the Company" on page 8
of the 1996 Proxy Statement.
(B) Certain Business Relationships
See "Relationship Between Certain Directors and the Company" on page 8
of the 1996 Proxy Statement.
(C) Indebtedness of Management
None.
(D) Transactions with Promoters
Not applicable.
59
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 and Form of Participation
Agreement regarding the Plan (Exhibit 10.9, Amendment No. 1 on Form 8 dated
September 2, 1988 to the Annual Report on Form 10-K for the year ended December
31, 1987)*
1992 Stock Option Plan for Nonemployee Directors of the
Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)*
K N Energy, Inc. 1995 Executive Incentive Plan (Exhibit 10(k)
to the Annual Report on Form 10-K for the year ended December 31, 1994)*
1995 K N Energy, Inc. Long-Term Incentive Plan (Attachment A
to the K N Energy, Inc. 1995 Proxy Statement on Schedule 14-A)*
K N Energy, Inc. 1996 Executive Incentive Plan (attached
hereto as Exhibit 10(l))**
60
61
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 (attached hereto as Exhibit 10(p))**
Letter Agreement dated December 4, 1995 between K N Energy,
Inc. and Charles W. Battey (attached hereto as Exhibit 10(q))**
K N Energy, Inc. Performance Incentive Plan (attached hereto
as Exhibit 10(u))**
(b) Reports on Form 8-K
On December 18, 1995, a Current Report on Form 8-K was filed to report
that on December 14, 1995, K N announced its proposed merger of K N's
wholly-owned gas and oil subsidiary, K N Production Company, into Tom Brown,
Inc., as well as the joint formation of a new gas services company.*
* Incorporated herein by reference.
** Included in SEC and NYSE copies only.
61
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, 1996 By /s/ E. Wayne Lundhagen
-----------------------------------
E. Wayne Lundhagen
Vice President and Treasurer
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 Chairman and Director
- -------------------------------------
Charles W. Battey
/s/ Stewart A. Bliss Director
- -------------------------------------
Stewart A. Bliss
/s/ David W. Burkholder Director
- -------------------------------------
David W. Burkholder
/s/ David M. Carmichael Vice Chairman and Director
- -------------------------------------
David M. Carmichael
/s/ Robert H. Chitwood Director
- -------------------------------------
Robert H. Chitwood
/s/ Howard P. Coghlan Director
- -------------------------------------
Howard P. Coghlan
/s/ Robert B. Daugherty Director
- -------------------------------------
Robert B. Daugherty
/s/ Jordan L. Haines Director
- -------------------------------------
Jordan L. Haines
/s/ Larry D. Hall President, Chief Executive Officer and
- ------------------------------------- Director (Principal Executive Officer)
Larry D. Hall
/s/ William J. Hybl Director
- -------------------------------------
William J. Hybl
/s/ E. Wayne Lundhagen Vice President and Treasurer
- ------------------------------------- (Principal Financial and Accounting Officer)
E. Wayne Lundhagen
/s/ Edward Randall, III Director
- -------------------------------------
Edward Randall, III
/s/ James C. Taylor Director
- -------------------------------------
James C. Taylor
/s/ H. A. True, III Director
- -------------------------------------
H. A. True, III
62
63
Exhibit Index
Page Number
-----------
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
(Exhibit 3(b) to the Annual Report on Form 10-K
for the year ended December 31, 1994)*
Exhibit 3(c) - Certificate of the Voting Powers,
Designation, Preferences and Relative, Participa-
ting, Optional or Other Special Rights, and Quali-
fications, Limitations or Restrictions Thereof,
of the Class B $8.30 Cumulative Preferred Stock,
Without Par Value (Exhibit 4.4, File No.
33-26314)*
Exhibit 4(a) - Indenture dated as of September 1,
1988, between K N Energy, Inc. and Continental
Illinois National Bank and Trust Company of Chi-
cago (Exhibit 1.2, Current Report on Form 8-K
Dated October 5, 1988)*
Exhibit 4(b) - First supplemental indenture dated
as of January 15, 1992, between K N Energy, Inc.
and Continental Illinois National Bank and Trust
Company of Chicago (Exhibit 4.2, File No. 33-45091)*
Exhibit 4(c) - Second supplemental indenture dated
as of December 15, 1992, between K N Energy, Inc.
and Continental Bank, National Association (Exhibit
1.2 Current Report on Form 8-K dated December 15,
1992)*
Exhibit 4(d) - Indenture dated as of November 20, 1993,
between K N Energy, Inc. and Continental 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 instru-
ments to the Commission upon request.
Exhibit 10(a) - Form of Key Employee Severance
Agreement (Exhibit 10.2, Amendment No. 1 on Form 8
dated September 2, 1988 to the Annual Report on Form
10-K for the year ended December 31, 1987)*
Exhibit 10(b) - 1982 Stock Option Plan for Non-
employee Directors of the Company with Form of
Grant Certificate (Exhibit 10.3, Amendment No. 1
on Form 8 dated September 2, 1988 to the Annual
Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(c) - 1982 Incentive Stock Option Plan
for key employees of the Company (Exhibit 10.4,
Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(d) - 1986 Incentive Stock Option Plan
for key employees of the Company (Exhibit 10.5,
Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(e) - 1988 Incentive Stock Option Plan
for key employees of the Company (Exhibit 10.6,
Amendment No. 1 on Form 8 dated September 2, 1988
to the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(f) - Form of Grant Certificate for
Employee Stock Option Plans (Exhibit 10.7, Amend-
ment No. 1 on Form 8 dated September 2, 1988 to
the Annual Report on Form 10-K for the year ended
December 31, 1987)*
Exhibit 10(g) - Directors' Deferred Compensation
63
64
Exhibit Index (Continued)
Page Number
-----------
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
(Attached hereto as Exhibit 10(h))**
Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee
Directors of the Company with Form of Grant Certificate
(Exhibit 4.1, File No. 33-46999)*
Exhibit 10(j) - K N Energy, Inc. 1994 Executive
Incentive Plan (Exhibit 10(k) to the Annual Report on
Form 10-K for the Year Ended December 31, 1993)*
Exhibit 10(k) - 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(l) - K N Energy, Inc. 1996 Executive Incentive Plan
(Attached hereto as Exhibit 10(l))**
Exhibit 10(m) - 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(n) - 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(o) - 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(p) - Employment Agreement dated December 14, 1995
between K N Energy, Inc. and Morton C. Aaronson
(Attached hereto as Exhibit 10(p))**
Exhibit 10(q) - Letter Agreement dated December 4, 1995 between
K N Energy, Inc. and Charles W. Battey
(Attached hereto as Exhibit 10(q))**
Exhibit 10(r) - 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(s) - 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(t) - 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
Form 8-A dated August 21, 1995)*
Exhibit 10(u) - K N Energy, Inc. Performance Incentive Plan (Attached
hereto as Exhibit 10(u))**
Exhibit 10(v) - K N Energy, Inc. 1995 Executive Incentive Plan (Exhibit 10(1)
to the Annual Report on Form 10-K for the year ended December 31, 1994)*
Exhibit 12 - Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . . 65
Exhibit 13 - 1995 Annual Report to Shareholders*** . . . . . . . . . . . . . . . . . 66
Exhibit 22 - Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . 67
Exhibit 24 - Consent of Independent Public Accountants . . . . . . . . . . . . . . . 68
Exhibit 27 - Financial Data Schedule****
* 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.
64