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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1993
________________________
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
_________________ ________________
Commission File Number 1-6446
_______________________________________________
K N ENERGY, INC.
_____________________________________________________________________________
(Exact name of registrant as specified in its charter)
Kansas 48-0290000
_____________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Van Gordon Street
P.O. Box 281304, Lakewood, Colorado 80228-8304
_____________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 989-1740
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
_______________________ ________________________
Common stock, par value
$5 per share New York Stock Exchange
_____________________________________________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Preferred stock, Class A $5 cumulative series
_____________________________________________________________________________
(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
________ _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. /x/
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant.
$359,218,093 as of March 15, 1994
_____________________________________________________________________________
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 25,000,000 shares; outstanding
_____________________________________________________________________________
15,276,897 shares as of March 15, 1994.
_________________________________________________________
List hereunder documents incorporated by reference and the Part of the Form
10-K into which the document is incorporated.
1993 Proxy Statement...............................................Part III
_____________________________________________________________________________
2
K N ENERGY, INC. AND SUBSIDIARIES
Documents Incorporated by Reference and Index
Page Number
------------------------
1994 Proxy Included
Statement Herein
__________ ________
PART I
______
ITEM 1:BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-16
ITEM 2:PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-18
ITEM 3:LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 18-20
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 1993.
EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . . . . . . . . . . . 20-21
PART II
_______
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. . . . . . . . . . . . . . . . . . . . . . 24-30
ITEM 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants. . . . . . . . . . . . . . 31
Consolidated Statements of Income for the Three Years
Ended December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Balance Sheets as of December 31, 1993
and 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Common Stockholders' Equity for
the Years Ended December 31, 1993, 1992 and 1991. . . . . . . . . 34
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 36-53
Selected Quarterly Financial Data (Unaudited) . . . . . . . . . . . 54
ITEM 9:CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no such matters during 1993.
PART III
________
ITEM 10:DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 2-3* 55
ITEM 11:EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 4-5*,8-10*, 12* and 13*
ITEM 12:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . 2-3*, 11*, 18-19*
ITEM 13:CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 4* 55-56
PART IV
_______
ITEM 14:EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1.Financial Statements
Reference is made to the listing of financial state-
ments and supplementary data under Item 8 in Part II
of this index.
2.Financial Statement Schedules
Schedule V - Property, Plant and Equipment for the
Three Years Ended December 31, 1993. . . . . . . . . . . . . . 60
Schedule VI - Accumulated Depreciation, Depletion
and Amortization for the Three Years Ended
December 31, 1993. . . . . . . . . . . . . . . . . . . . . . . 61
Schedule IX - Short-Term Borrowings for the Three
Years Ended December 31, 1993. . . . . . . . . . . . . . . . . 62
Schedule X - Supplementary Income Statement Informa-
tion for the Three Years Ended December 31, 1993 . . . . . . . 63
3
Page Number
-------------------------
1994 Proxy Included
Statement Herein
__________ ________
PART IV (Continued)
___________________
3.Exhibits
List of Executive Compensation Plans and Arrangements . . . . . 57-58
Exhibit 3(a) - Restated Articles of Incorporation
(Exhibit 3(a), Annual Report on Form 10-K for the
year ended December 31, 1988)*
Exhibit 3(b) - By-laws of the Company, as amended
(Exhibit 4.2, File No. 33-42698)*
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 A $8.50 Cumulative Preferred Stock,
Without Par Value (Exhibit 4.3, File No.
33-26314)*
Exhibit 3(d) - 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 Illinois
National Bank and Trust Company of Chicago (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)*
4
Page Number
-------------------------
1994 Proxy Included
Statement Herein
__________ ________
PART IV (Continued)
___________________
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
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)*
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. 1993 Executive
Incentive Plan (Exhibit 10(k) to the Annual Report on
Form 10-K for the Year Ended December 31, 1992)*
Exhibit 10(k) - K N Energy, Inc. 1994 Executive Incentive
Plan**
Exhibit 10(l) - 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 12 - Ratio of Earnings to Fixed Charges . . . . . . . . 64
Exhibit 13 - 1993 Annual Report to Shareholders***. . . . . . . 65
Exhibit 22 - Subsidiaries of the Registrant . . . . . . . . . . 66
Exhibit 24 - Consent of Independent Public
Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . 67
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 58
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
NOTE: Schedules I to XIII of this report, other than those listed above,
have been omitted as not applicable, not required, or the information
required is included in the financial statements or notes thereto.
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.
5
PART I
ITEM 1: BUSINESS
_________________
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.)
(A) General Development of Business
_______________________________
K N was incorporated in Kansas on May 18, 1927. The Company's
principal operations are the sale, marketing, transportation, processing
and gathering of natural gas and the exploration, development and
production of oil and natural gas. The Company has operated as a natural
gas pipeline and utility since 1937 and has been involved in oil and gas
exploration and development since 1951.
Since 1989, K N subsidiaries have engaged in nonregulated gas
marketing and gathering activities. This segment is experiencing
significant growth through acquisitions, joint ventures and the transfer
of substantially all of K N's existing gathering and processing facilities
to this nonregulated segment as part of its restructuring. (See
"Restructuring and Reorganization" below.)
On October 1, 1993, K N implemented its unbundling of pipeline
services in response to the Federal Energy Regulatory Commission's Order
No. 636 ("Order 636"). The Order is designed to stimulate competition in
the interstate transportation and sale of natural gas. Of the many
elements that make up Order 636, the central feature involves the
unbundling of gas sales and transportation services. Unbundling means that
traditional pipeline customers, such as wholesale customers, direct end-
users and shippers, have new options when contracting for various pipeline
services such as transportation and storage.
In response to Order 636, K N no longer operates its interstate
operations as a single entity that purchases, gathers, processes,
transports, stores and sells natural gas at retail and wholesale. Instead,
K N has restructured its operations and now operates its interstate
transmission pipeline as a separate subsidiary business unit, K N
Interstate Gas Transmission Co. ("KNI").
K N's local distribution operation is being operated as a separate
business unit ("K N Retail") within the parent company. K N also provides
retail natural gas services through two intrastate divisions, Rocky
Mountain Natural Gas in Colorado and Northern Gas of Wyoming.
Substantially all of the gathering and processing facilities that
were previously part of K N's regulated transmission operation are now
being operated as nonregulated facilities by K N Gas Gathering, Inc.
("KNGG"), a wholly-owned subsidiary which also operates a number of other
gathering and processing facilities acquired during the past two years.
On April 1, 1993, the Company completed the $48 million acquisition
of the Wattenberg natural gas gathering and transportation system. The
6
transmission segment of the system is a Federal Energy Regulatory
Commission ("FERC")-regulated interstate pipeline system operated by K N
Wattenberg Transmission Limited Liability Company ("KNWTLLC"), a second-
tier subsidiary of K N. The nonregulated gathering portion of the system
is operated by K N Front Range Gathering Company ("KNFRGC"), a wholly-owned
subsidiary of KNGG.
(B) Financial Information About Industry Segments
_____________________________________________
The Business Segment Information in Note 13 of Notes to
Consolidated Financial Statements of the 1993 Annual Report to Shareholders
as shown on pages 52 and 53 provides the operating profit, identifiable
assets and other information for each segment. The Consolidated Statements
of Income in the 1993 Annual Report to Shareholders as shown on page 32
show sales to unaffiliated customers (operating revenues) for each segment.
(C) Narrative Description of Business
_________________________________
(1) Regulated Gas Services
______________________
Markets and Sales
_________________
The Company's FERC-regulated interstate pipeline systems (operated
by KNI and KNWTLLC) provide transportation and storage services to K N
Retail and other local natural gas distribution utilities and shippers.
K N Retail provides retail natural gas services to residential, commercial,
agricultural and industrial customers in Kansas, Nebraska, Colorado and
Wyoming. Approximately 151,000 retail customers are served by K N Retail.
The interstate pipeline systems provide transportation and storage services
for a portion of the system supply of Public Service Company of Colorado
("PSCo"), Western Resources, Inc. and the City of Colorado Springs,
Colorado, as well as for other local utilities serving 92,000 gas consumers
in Colorado, Kansas and Nebraska.
As of December 31, 1993, the interstate systems provided
transportation and storage services to utilities serving 293 communities,
as follows:
Served By Colorado Kansas Nebraska Wyoming
_____________________________ ________ ______ ________ _______
K N Retail (1) 12 52 177 10
Other Utilities (2) 5 10 27 --
(1) Principal cities served by K N Retail include: Alliance, Chadron,
Holdrege, McCook, Ogallala, Scottsbluff, Sidney and a portion of Kearney,
Nebraska; Colby, Phillipsburg and Scott City, Kansas; Julesburg and Wray,
Colorado; and Douglas and Torrington, Wyoming.
(2) Principal cities served by other local distribution utilities
include: Grand Island, Hastings, Norfolk, North Platte, and Kearney,
Nebraska; Hays, Kansas; and Sterling and the metropolitan areas of Colorado
Springs and Denver, Colorado.
The Company operates intrastate gas pipeline systems serving
industrial customers and K N's distribution divisions in Wyoming and
Colorado. The Northern Gas of Wyoming Division of K N provides retail gas
7
service to approximately 50,000 customers in 25 communities in central,
south central and northeastern Wyoming. Principal cities served at retail
by the Wyoming intrastate system include Casper, Gillette, Lander, Laramie,
Rawlins and Riverton, Wyoming. The Rocky Mountain Natural Gas Division of
K N ("RMNG") serves approximately 31,500 retail customers in 26 communities
in western Colorado. Aspen, Delta, Glenwood Springs, Montrose, Snowmass
Village and Telluride are the principal cities served.
RMNG continues to experience significant growth in the resort areas
of Colorado. During 1993, the division experienced a six percent growth
in the number of residential and commercial customers.
Because of the demands of this continued growth, RMNG and an
affiliate, in conjunction with PSCo, have received a favorable order from
the Colorado Public Utilities Commission to build a 90-mile transmission
pipeline from Rifle to Avon, Colorado. The pipeline will connect natural
gas production areas near Rifle to K N's Colorado intrastate pipeline
system.
Agriculture is the dominant factor in the economies of the
Company's historical service areas. The Company supplies natural gas for
irrigation, crop drying, processing of agricultural products and the
manufacture of agriculture-related goods.
The following table sets forth the percentage of total natural gas
sales revenues for each class of customer for each of the three years in
the period ended December 31, 1993, as follows:
Type of Customer 1993 1992 1991
________________ ________ ________ ________
Residential and commercial . . . . . . . 70% 58% 53%
Agricultural and industrial. . . . . . . 8 10 18
Sales to other gas utilities (1) . . . . 22 32 29
---- ---- ----
100% 100% 100%
==== ==== ====
(1) Regulated sales of natural gas to other gas utilities ended on
September 30, 1993, due to the Company's implementation of Order 636.
Natural gas sales accounted for 51.6, 69.4 and 78.0 percent of
consolidated revenues for the years ended December 31, 1993, 1992 and 1991,
respectively.
The transfer of substantially all of K N's gathering and processing
facilities to KNGG effective January 1, 1994, will result in a significant
shift in operating revenues, expenses and operating income. The cessation
of the merchant function as a FERC-regulated service will substantially
reduce this segment's operating revenues and gas purchase expenses;
however, this will not impact operating income.
Results of this business segment have historically been seasonal
in nature due to fluctuating needs for natural gas for space heating and
irrigation. However, Order 636 mandated the use of straight fixed-variable
rate design ("SFV") for FERC-regulated services. This rate methodology
will result in this business segment collecting a significant portion of
8
its revenues from customers through demand charges collected evenly
throughout the year. Accordingly, fluctuations in operating revenues
resulting from seasonal variations in weather temperatures should be
reduced.
Transportation
______________
KNI, under its menu of services, provides not only firm and
interruptible transportation, but also storage and 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 services tariffs.
Under Order 636, the local distribution companies ("LDCs") and
other shippers may release their unused firm transportation capacity rights
to other shippers. It is anticipated that this released capacity will, to
a large extent, replace interruptible transportation on the Company's
system. Interruptible transportation is charged on the basis of volumes
shipped.
The Company's Wyoming and Colorado intrastate systems have blanket
certificates which allow them to transport gas to be delivered in
interstate commerce, and both systems also provide intrastate
transportation services.
Marketing
_________
The Company is continuing its efforts to expand its transportation
business through expanded capacity and new interconnects, as well as by
adding new transportation services. While there is considerable
competition for this business, the Company has certain strategic advantages
to enable it to be a successful competitor. These include 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 Project. This pipeline is expected
to provide increased flexibility in accessing multiple natural gas basins
in the Rocky Mountain region. TransColorado is in its final
preconstruction stage and regulatory work is nearing completion. To focus
marketing activities, the partner companies have opened a TransColorado
marketing office to secure supply and transportation commitments.
Construction is anticipated to begin in 1995.
Gas Supply
__________
With the implementation of Order 636, gas purchasing is now the
responsibility of each LDC. To meet this new responsibility, K N Retail
formed a new Gas Supply Department. K N Retail has contracted with KNI and
other pipelines for transportation and storage services required to serve
its markets. K N Retail's gas supply requirements are being met through
9
a combination of purchases from a wholly-owned subsidiary, K N Gas Supply
Services, Inc. ("KNGSSI"), and third party suppliers.
K N Retail's gas supply comes from five major geological areas, as
follows:
(1) Anadarko Basin, including the Hugoton, Bradshaw and Panoma
fields in Kansas;
(2) Barton Arch area of central Kansas;
(3) Denver-Julesburg Basin in northeast Colorado, northwest
Kansas and western Nebraska;
(4) Wind River Basin in central Wyoming; and
(5) Bowdoin area in north central Montana.
The Company's intrastate system in Wyoming purchases its gas supply
principally from producers in the Wind River Basin in central Wyoming. The
Company's Colorado intrastate system purchases approximately 12 percent of
its system supply from a K N oil and gas subsidiary and the remainder from
a number of western Colorado fields.
Underground storage facilities are used to provide deliverabilities
for peak system demand. Four underground storage facilities are located
on the interstate systems, five are on the Wyoming intrastate system and
one is on the Colorado intrastate system.
In connection with Order 636, K N received FERC approval to
reclassify, as of October 1, 1993, 54.9 billion cubic feet ("Bcf") of
working gas to cushion gas. As part of the corporate restructuring, all
cushion gas (88.1 Bcf) was transferred to KNI at that time. The remaining
working gas of 11.1 Bcf at October 1, 1993, was purchased in-place by K N's
former wholesale customers; K N Retail retained 4.3 Bcf of this working
gas. On the interstate systems, a net injection of 2.7 Bcf in 1993
increased the total year-end gas inventory owned by all parties to 95.1
Bcf. The approximate unused working gas capacity at December 31, 1993, was
9.7 Bcf.
On the Wyoming intrastate system, 11.3 Bcf of working gas was
available in storage at year-end after a net withdrawal of 2.5 Bcf during
the year. On the Colorado intrastate system, 2.3 Bcf of working gas was
available in storage at year-end after a net withdrawal of 98 million cubic
feet ("MMcf") during the year.
Restructuring and Reorganization
________________________________
As authorized by FERC, 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 KNI, a wholly-owned jurisdictional subsidiary of K N, and
substantially all of its gathering and processing facilities to KNGG, a
nonjurisdictional wholly-owned subsidiary of K N. In its May 5, 1993
order, FERC approved the transfer of K N's gathering, processing,
transmission and storage facilities to KNI effective October 1, 1993. On
10
November 1, 1993, FERC authorized the transfer of substantially all
gathering and processing facilities from KNI to KNGG.
Through discussions with its former wholesale customers, K N 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
Realignment ("GSR") cost recovery filings with FERC. As a part of its
action on K N's restructuring proposal, on January 13, 1994, FERC approved
the offer of settlement which implemented K N's GSR crediting mechanism.
Regulation
__________
KNI's and KNWTLLC's facilities for the transportation of natural
gas in interstate commerce, and in the case of KNI, for storage services
in interstate commerce, are subject to regulation by FERC. In addition,
KNI 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. The subsidiaries of K N
currently identified as marketing affiliates are K N Gas Marketing, Inc.
and KNGSSI.
The Company's distribution facilities and retail sales in Kansas,
Colorado 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 commercial customers are regulated by each municipality
served since there is no state utility commission.
In the incorporated communities in which K N sells natural gas at
retail, K N operates under franchises granted by the applicable municipal
authorities. K N is seeking to renew its franchises in: Casper and Laramie,
Wyoming; Eagle and Wellington, Colorado; and Atkinson and Gothenburg,
Nebraska. Sales are currently being made during the renewal process. In
Colorado, these franchises must also be approved by the state regulatory
commission. The duration of franchises varies with applicable law. In
unincorporated areas, K N's direct sales of natural gas are not subject to
franchise, but, in all states except Nebraska, are "certificated" by the
state regulatory commissions.
Regulatory Matters
__________________
See Note 3 of Notes to Consolidated Financial Statements of the
1993 Annual Report to Shareholders as shown on pages 39 and 40.
In March 1994, RMNG filed an application for a "make whole"
rate change with the Colorado Public Utilities Commission ("CPUC")
proposing to increase annual revenues $2.5 million effective April 2, 1994.
This matter is currently pending before the CPUC.
In February and March 1994, K N filed suits for injunctive relief
against 20 municipalities in Nebraska, seeking the Court to enjoin the
effectiveness of ordinances which attempt to make certain gas utility rates
retroactive for the period of October 1, 1990, through May 1, 1993. These
lawsuits are currently pending in the District Court of Lancaster County,
Nebraska.
11
Purchased Gas Adjustment Clauses
________________________________
K N Retail has gas supply cost adjustment clauses in its Kansas,
Colorado and Wyoming tariffs and in its rate ordinances for Nebraska
residential and commercial customers. These gas supply cost adjustment
clauses provide for the pass-on of increases or decreases in upstream
delivery costs and the recovery of under- or refund of over-collected
purchased gas costs (including carrying charges thereon in certain
jurisdictions) from prior periods. Order 636 eliminated the gas supply
cost adjustment clause in KNI's FERC tariff. K N's Wyoming and Colorado
intrastate regulated utilities' tariffs also contain purchased gas
adjustment clauses.
Competition
___________
The Company's pipeline systems face competition from other
transporters. In addition, natural gas competes with fuel oil, coal,
propane and electricity in the areas served by the Company's pipeline
systems and local distribution businesses.
(2) Gas Marketing and Gathering
___________________________
K N Gas Marketing, Inc. ("KNGM") was formed in March 1989 to
provide gas marketing and supply services to various natural gas resellers
and end-users on K N pipeline systems. KNGM works with producers and end-
users on the pipeline systems to arrange the purchase and transportation
of producers' excess or uncommitted gas to end-users, acting as shipper or
agent for the end-users, administering nominations and providing balancing
assistance when needed.
During 1993, KNGM continued efforts to expand its markets both on
and off K N's pipelines through the reorganization of its existing staff
and K N's former gas supply staff. These growth activities are expected
to continue under K N's post Order 636 reorganization activities.
KNGSSI began operations in September 1993 to facilitate K N's
transition from a provider of bundled pipeline sales service to a provider
of Order 636 restructured services. In performing this function, KNGSSI
buys gas from K N's former gas suppliers, aggregates these supplies and
sells gas to former wholesale customers.
K N Trading, Inc. ("KNTI"), another wholly-owned subsidiary of K N,
was formed in November 1991 to engage in risk management activities in the
gas commodities futures market. KNTI buys and sells gas commodity futures
positions on the New York Mercantile Exchange ("NYMEX") and through the use
of over-the-counter gas commodity derivatives for the purpose of reducing
adverse price exposure for gas supply costs or specific market margins.
KNGG was formed in November 1989 to provide gathering and mainline
connection services for existing and new gas supply customers. KNGG
operates gathering systems whose operations and rates of return are not
currently regulated by FERC.
12
Acquisitions and Capital Expenditures
_____________________________________
On April 1, 1993, the Company completed its acquisition of the
Wattenberg natural gas gathering and transportation system. KNFRGC is the
operator of the gathering portion of the system. This system gathers and
transports gas from approximately 1,800 receipt points in northeast
Colorado, and transports up to 250,000 million British thermal units
("MMBtus") of gas per day.
On June 1, 1993, Wind River Gathering Company acquired
approximately 110 miles of natural gas pipeline and facilities in Wyoming's
Wind River Basin. Wind River Gathering Company is a joint venture between
KNGG and a subsidiary of Tom Brown, Inc., a Wind River Basin producer.
This system connects area producers with major markets served by K N and
other interstate pipeline systems. KNGG manages the operations of the
gathering system. The system gathers and transports up to 30,000 MMBtus
of gas per day.
KNGM and KNGG incurred 1993 capital expenditures of $7.0 million.
1994 capital expenditures are budgeted at $4.7 million.
Restructuring and Reorganization
________________________________
In conjunction with its Order 636 reorganization filing, K N
applied for and received FERC permission to transfer substantially all of
its regulated gathering and processing assets to KNGG. This transfer was
effective January 1, 1994. The assets are located in K N's traditional gas
supply areas in Kansas, Wyoming, Colorado, Texas and Oklahoma.
Regulation
__________
To the extent the gas marketing subsidiaries make sales for resale
in interstate commerce, they are subject to FERC regulations and rulemaking
related to affiliated marketers.
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. 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.
Respecting facilities owned by noninterstate pipeline companies, such as
KNGG and KNFRGC's gathering facilities, FERC has historically distinguished
between these types of activities on a very fact-specific basis. FERC has
initiated a rulemaking to consider issues relating to gathering services
performed by interstate pipelines or their affiliates. FERC intends to use
information obtained to reevaluate the appropriateness of its traditional
gathering criteria in light of Order 636, and to establish consistent
policies for gathering rates and services for both interstate pipelines and
their affiliates. It is not possible at this time to predict the outcome
of this proceeding and its potential effect on KNGG and KNFRGC.
13
As part of its corporate reorganization, K N requested and was
granted authority to transfer substantially all of its gathering facilities
to KNGG. The Commission determined that after the transfer, the gathering
facilities would be nonjurisdictional, but FERC reserved the right to
reassert jurisdiction if KNGG was found to be operating the facilities in
an anti-competitive manner or contrary to open access principles.
Competition
___________
The gas marketing and gathering subsidiaries operate in a
competitive environment for the purchase, sale and gathering of natural
gas. The general availability of competitively priced gas supplies, the
availability and price of alternative fuels and the availability and price
of gathering and transportation services in their market areas all have an
impact on these subsidiaries' competitive position for new markets.
(3) Oil and Gas Production
______________________
K N owns and participates in the development and production of oil
and gas reserves through two wholly-owned subsidiaries, K N Production
Company ("KNPC") and GASCO, Inc. ("Gasco").
KNPC was formed in 1983 and currently owns oil and gas properties
mainly in Colorado, Oklahoma, Texas and Wyoming. All KNPC production is
sold either to unaffiliated purchasers or nonjurisdictional affiliated
purchasers. Gasco was formed in 1966 and acquired by K N in 1986. Gasco
owns properties in Colorado and Wyoming, selling much of its production to
affiliated purchasers.
During 1993, KNPC participated in the drilling and completion of
16 development wells in the Denver-Julesburg Basin, and in the drilling and
completion of one exploratory well in the Oklahoma panhandle. Gasco
participated in working over ten wells on the Western Slope and in the
drilling and completion of one development well in Colorado.
At December 31, 1993, KNPC had approximately 30,000 net undeveloped
acres under lease and owned interests in 84 producing wells (35 net), of
which it operated 20 (14 net). Gasco had approximately 140,000 net
undeveloped acres under lease and owned interests in 139 producing wells
(107 net), operating 117 (105 net). In addition to oil and gas properties,
Gasco owns the Wolf Creek gas storage field in Colorado, and also owns
interests in three small gathering systems, all in Colorado.
Acquisitions and Capital Expenditures
_____________________________________
In February 1994, KNPC and Gasco finalized the acquisition of gas
reserves and production from Fuel Resources Development Company, a wholly-
owned subsidiary of PSCo. The properties are located near existing K N
operations in western Colorado and in the Moxa Arch region of southwestern
Wyoming. Total net reserves approximate 50 billion cubic feet equivalent
of natural gas. The Company is discussing the possible sharing of
ownership interests and non-recourse financing with other parties.
The Company will continue to focus on the acquisition and
development of natural gas reserves in the Mid-Continent and Rocky Mountain
14
regions, emphasizing areas contiguous to current and future Company
pipeline operations.
Capital expenditures in 1993 were $4.8 million. Capital
expenditures for 1994 are budgeted at $6.7 million.
Regulation
__________
Oil and gas operations are primarily subject to the regulation of
the Minerals Management Service ("MMS") and the Bureau of Land Management
on the Federal level. Each state in which the Company's oil and gas
subsidiaries operate regulates the volume and manner of production of
natural gas in that state under laws directed toward conservation and the
prevention of waste of natural resources.
Competition
___________
Oil and gas exploration and development are subject to competition
from not only numerous other companies in the industry, but also from
alternative fuels, including coal and nuclear energy.
(4) General
_______
Gas Purchases
_____________
Prior to Order 636, gas was purchased by the interstate pipeline
for resale to its wholesale customers. As a result of the restructuring
and reorganization pursuant to Order 636, each LDC, including K N Retail,
now has the responsibility for its gas purchases. Under K N's Supply
Transition Program, KNGSSI administers purchases from a portfolio of gas
purchase contracts that existed prior to the reorganization. Order 636 has
not significantly impacted gas purchasing for K N's intrastate systems.
Gas purchase prices for certain categories of gas have been
deregulated over a period of time beginning January 1, 1985, pursuant to
the Natural Gas Policy Act of 1978 ("NGPA"). The final total deregulation
of all gas at the wellhead occurred on January 1, 1993, under terms of the
Natural Gas Wellhead Decontrol Act of 1989. The deregulation of gas at the
wellhead is intended to bring the prices paid for gas to a "market
clearing" level. Those contracts which have a deregulation clause allow
the purchaser to redetermine the price to a competitive level and the
Company has exercised these rights as deregulation has occurred.
The natural gas futures contract, actively traded on the NYMEX, has
brought significant price discovery to the natural gas market. Various
indices and regional natural gas hubs have changed the method of pricing
from long-term annual redeterminations to short-term, daily or monthly,
pricing of gas at current market levels. As such, gas prices now quickly
react to supply and demand as any other commodity market.
Gas purchase contracts also may contain a take-or-pay clause which
requires that a certain purchase level be attained each contract year, or
the purchaser must make a payment equal to the contract price multiplied
by the deficient volume. At December 31, 1993, the level of outstanding
payments was $11.7 million. All such payments are fully recoupable under
the terms of the gas purchase contracts and the existing regulatory rules
15
and regulations. To date, the Company has not made any buy-out or buy-down
payments relating to take-or-pay contracts.
Certain gas purchase contracts containing market-out clauses were
redetermined to a competitive price for 1993, reflecting an increase in gas
prices from the 1992 redetermined price.
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 (the "OPA") and
regulations promulgated thereunder by the MMS 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 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 currently is implementing 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 have recently been changed as a
result of the 1990 Amendments to the Clean Air Act. This affects 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 new regulations under the authority of the "Operating Permit Program"
under Title V of these 1990 Amendments. These Operating Permits will
require operators of certain facilities to obtain individual site-
specific air permits containing stricter operational and technological
16
standards of operation in order to achieve compliance with this section of
the 1990 Clean Air Act Amendments and associated state air regulations.
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 (the
"NGPSA"), as amended. 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 laws and regulations concerning
occupational health and safety.
Although the Company is unable to predict the ultimate cost of
compliance, it is not anticipated that the Company will be required in the
near future to expend material amounts to comply with these laws and
regulations.
Other
_____
Amounts spent by the Company during 1993, 1992 and 1991 on research
and development activities were not material.
Sales were not made to any individual customer in 1993 in an amount
which equaled ten percent or more of the Company's consolidated revenues.
At December 31, 1993, the Company had 1,735 employees.
(D) Financial Information About Foreign and Domestic Operations and
_______________________________________________________________
Export Sales
____________
All of the Company's operations are in the contiguous 48 states.
17
ITEM 2: PROPERTIES
___________________
(A) Location and Character of Property
__________________________________
The Registrant maintains its principal place of business in
Lakewood, Colorado. Other major offices are in: Hastings, Nebraska;
Phillipsburg, Kansas; Casper, Wyoming; and Glenwood Springs, Colorado. At
December 31, 1993, the principal properties of the Company were as set
forth below.
Gas Service
___________
As of December 31, 1993, the Company's gas service properties
included transmission, gathering and storage lines of 8,239 miles in the
interstate systems, 675 miles in the Wyoming intrastate system and 766
miles in the Colorado intrastate system. (Effective January 1, 1994, 1,691
miles of gathering lines were transferred to KNGG as part of the corporate
reorganization. See "Restructuring and Reorganization" on pages 9 and 10.)
Distribution lines totaling 6,159 miles were in the interstate system,
1,072 miles in the Wyoming intrastate system and 1,423 miles in the
Colorado intrastate system at December 31, 1993.
The Company has four underground gas storage facilities in
operation in the interstate systems, five in the Wyoming intrastate system
and one in the Colorado intrastate system. Its major interstate facilities
are the Huntsman Storage Field in Cheyenne County, Nebraska and the Big
Springs Storage Field in Deuel County, Nebraska.
The interstate systems also included two products extraction plants
and 185 compressor units with an aggregate 175,171 rated compressor
horsepower at December 31, 1993. (Effective January 1, 1994, 29 compressor
units with an aggregate 5,482 rated compressor horsepower and the Scott
City products extraction plant were transferred to KNGG as part of the
corporate reorganization.) The Wyoming intrastate system included eight
compressor units and the Colorado intrastate system included 13 compressor
units with aggregate rated compressor horsepower of 3,204 and 5,995,
respectively, at December 31, 1993. The Company's other gas service
properties include measuring and regulating stations, garages, warehouses
and other land and buildings necessary and useful in the conduct of its
business.
Gas Marketing and Gathering
___________________________
The Company's gas marketing and gathering properties are discussed
in Item 1 (C)(2). As of December 31, 1993, KNGG and its subsidiaries
operated gathering systems with 2,918 miles of gathering lines and 75
compressors with an aggregate 43,150 rated compressor horsepower.
(Effective January 1, 1994, 1,691 miles of gathering lines, 29 compressor
units with an aggregate 5,482 rated compressor horsepower and the Scott
City products extraction plant were transferred to KNGG as part of the
corporate reorganization.) For additional information relating to gas
marketing and gathering properties see Notes 1(H), 2, 4 and 13 of Notes to
Consolidated Financial Statements of the 1993 Annual Report to Shareholders
as shown on pages 37, 39, 40-41 and 52-53.
18
Oil and Gas Production
______________________
The Company's oil and gas producing properties are discussed in
Item 1(C)(3). For additional information relating to oil and gas
production properties see Notes 1(I), 4 and 13 of Notes to Consolidated
Financial Statements of the 1993 Annual Report to Shareholders as shown on
pages 37, 40-41 and 52-53.
(B) Oil and Gas Reserves, Properties and Activities
_______________________________________________
Not material.
ITEM 3: LEGAL PROCEEDINGS
__________________________
Mystery Bridge Road Environmental Matters
_________________________________________
K N is named as one of four potentially responsible parties
("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site,
pursuant to Superfund. The site is known as the Mystery Bridge Road/U.S.
Highway 20 site located near Casper, Wyoming (the "Brookhurst
Subdivision"). The EPA's remedy consists of two parts, "Operating Unit
One," which addresses the groundwater cleanup and "Operating Unit Two,"
which addresses cleanup procedures for the soil and free-phase petroleum
product.
A Consent Decree between the Company, the EPA and another PRP was
entered on October 2, 1991, in the Wyoming Federal District Court.
Groundwater cleanup under Operating Unit One has been proceeding since
1990. On September 14, 1993, the EPA certified that the remedial action
for Operating Unit One was "operational and functional." This is the last
step in the Superfund process prior to remedy completion.
In July 1992, the EPA approved the Company's Operating Unit Two
workplan and the Company received an EPA "Statement of Work." The work
required to be performed for Operating Unit Two commenced during the third
quarter of 1992 and is expected to continue through 1995. (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. Dow Chemical Company,
______________________________________
et al. (D. Wyo) USDC-WY-91CV1042B, Superfund Site Number 8T83, Natrona
_________________________________
County, Wyoming; EPA Docket Number CERCLA-VIII.)
With regard to this same Superfund site, in 1987 the State of
Wyoming filed suit against several parties (including K N) for injunctive
relief, penalties and unquantified damages claimed to have resulted from
alleged pollution of groundwater and soils in the Brookhurst Subdivision.
On April 1, 1993, the Wyoming District Court dismissed the lawsuit, finding
that K N had diligently remedied the alleged pollution. (Wyoming v. Little
_________________
America Refining Co., K N Energy, Inc. and Dowell Schlumberger, Civil
______________________________________________________________
Action No. 62325, Wyoming District Court [Natrona County].)
19
On October 20, 1989, a lawsuit was filed against the Company and
18 other defendants on behalf of a group of 268 individuals who reside or
resided in the Brookhurst Subdivision, seeking damages for alleged releases
of certain chemicals to the soil, groundwater and air. On February 5,
1993, the Company reached agreement to settle the above-described dispute.
The settlement, which was approved by the Wyoming District Court, resolved
all disputes between the parties and closed the lawsuit. A reserve for the
settlement amount and related matters had been established in the Company's
financial statements prior to 1993 and, accordingly, such settlement did
not have any material adverse impact on the Company's financial position
or results of operations. (Albertson, et al., v. Dow Chemical Co., K N
___________________________________________
Energy, Inc., et al., Civil Action No. 65212, 7th Judicial District,
____________________
Natrona County District Court, State of Wyoming.)
On November 30, 1990, the Company initiated an action against a
number of its insurance carriers for a declaration of the carriers'
contractual obligations to provide insurance coverage for all sums
associated with the alleged losses under the state, Federal and toxic tort
claims related to the Brookhurst Subdivision. The Company entered into
formal settlements with all of the defendants in the lawsuit in 1993, and
received settlement proceeds associated therewith. (K N v. Allianz
______________
Insurance Company, et al., Civil Action No. 90CV301-J, United States
________________________
District Court for the District of Wyoming.)
Other Environmental Matters
___________________________
An environmental audit performed by the Company in autumn 1991
revealed that a grease known as Rockwell 860 had been used as a valve
sealant at several of the Company's locations in Nebraska. Rockwell 860
is a solid clay-like material which does not easily spill into the
environment, but contains approximately ten percent polychlorinated
biphenyls ("PCBs"). Based on the Company's initial studies, the PCBs are
contained within the pipeline and valves at the subject locations. PCBs
are regulated by the EPA under the Toxic Substances Control Act. On March
31, 1993, the Company filed suit against Rockwell International Corporation
manufacturer of the valve sealant; and two other related defendants,
claiming under contractual, statutory, tort and strict liability theories
that the defendants share responsibility for the Company's environmental
expenses and commercial losses resulting from any EPA or state required PCB
cleanup or mitigation. The Company reached a settlement in principal with
Rockwell, et al. in March 1994.
The Company submitted a proposed PCB remediation plan to the EPA
in November 1991. To date, no enforcement action or penalties have been
issued or discussed by the EPA. The Company currently cannot estimate the
extent of the remediation nor costs, though such costs are not expected to
exceed the settlement amounts or to have any material adverse impact on the
Company's financial position or results of operations. The PCB cleanup
program is not expected to interrupt or diminish K N's operational ability
to gather or transport natural gas.
Certain used pipe reclaimed at the Company's Holdrege, Nebraska
pipeyard was wrapped with asphalt-saturated asbestos felt, which was
commonly removed in accordance with Company practices. The removed wrap
contains friable asbestos fibers above the regulatory standard. The
Nebraska Department of Environmental Control ("DEC"), the agency having
20
jurisdiction over this matter, was notified and approved the Company's
remediation plan. Remediation is effectively complete, at a total cost not
to exceed $600,000. The asbestos cleanup program did not interrupt or
diminish K N's operational ability to gather 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 (the "K N Entities") alleging
that the K N Entities as well as KNPC and KNGG, 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.
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. (Grynberg v. K N, et al.,
_______________________
Civil Action No. 92-2000, United States District Court for the District of
Colorado.)
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
____________________________________________________________
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
____________________________________
(A) Identification and Business Experience of Executive Officers
____________________________________________________________
Name Age Position and Business Experience
__________________________ _____ _________________________________
Charles W. Battey. . . . . 62 Chairman and Chief Executive Offi-
cer since January 1989 and Director
since 1971.
Larry D. Hall. . . . . . . 51 President and Chief Operating Offi-
cer since May 1988 and Director
since 1984.
Leland L. Hurst. . . . . . 63 Senior Vice President since May
1993. Previously Senior Vice
President, Operations from June
1988 to May 1993.
21
Judith A. Aden . . . . . . 52 Vice President and Treasurer since
March 1991, Treasurer since January
1981 and Assistant Secretary since
March 1989.
William E. Asbury. . . . . 41 Vice President, Gas Service since
1988.
Eugene B. Bade . . . . . . 47 Vice President and Controller since
May 1993. Previously Vice Pres-
ident K N Gas Marketing from
January 1990 to May 1993, Vice
President from April 1989 to
January 1990 and Director of
Internal Audit from November 1985
to April 1989.
Richard M. Buxton. . . . . 45 Vice President, Strategic Planning
and Financial Services since March
1991. Director, Financial Services
from 1986 to March 1991.
William S. Garner, Jr. . . 44 Vice President, General Counsel and
Secretary since April 1992. Vice
President and General Counsel since
January 1991. Previously Vice Pres-
ident and Deputy General Counsel
from September 1989 through 1990
and Vice President, Law from June
1988 to September 1989.
S. Wesley Haun . . . . . . 46 Vice President, Marketing and
Supply since May 1993. Previously
Vice President, Gas Supply from
March 1990 to May 1993 and Vice
President, Gas Acquisition from
November 1988 to March 1990.
E. Wayne Lundhagen . . . . 57 Vice President, Finance and
Accounting since May 1988.
Arnold R. Madigan. . . . . 55 Vice President, Interstate
Transportation since May 1993.
Previously Vice President,
Marketing and Transportation from
September 1989 to May 1993 and Vice
President and General Counsel from
June 1988 to September 1989.
John W. Simonton . . . . . 48 Vice President, Administration and
Human Resources since May 1988.
H. Rickey Wells. . . . . . 37 Vice President, Operations since
June 1988.
These officers generally serve until March of each year.
(B) Involvement in Certain Legal Proceedings
________________________________________
None.
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. Dividends paid and the price range
of the Company's common stock by quarters for the last two years, restated
for an October 1993 three-for-two stock split, are provided below.
1993 1992
____ ____
Market Price Data
(Low-High-Close)
Quarter Ended:
March 31 $18.67-$24.67-$23.50 $15.17-$18.33-$16.00
June 30 22.17- 24.67- 24.33 13.83- 16.58- 16.17
September 30 23.33- 26.83- 26.67 15.83- 20.00- 18.92
December 31 24.75- 30.00- 25.75 17.17- 19.33- 18.75
Dividends
Quarter Ended:
March 31 $.22 $.207
June 30 .22 .207
September 30 .24 .22
December 31 .24 .22
Price/Earnings Ratio
Low-High-Close 11.9-19.1-16.4 10.8-15.6-14.6
Common Stockholders
Year-end 9,210 8,849
23
ITEM 6: SELECTED FINANCIAL DATA
________________________________
FIVE-YEAR REVIEW
Selected Financial Data (Dollars in Thousands Except Per Share Amounts)
1993 1992 1991 1990 1989
___________________________________________________________________________________________________________
Operating Revenues:
Gas Service $310,136 $315,683 $351,547 $338,679 $322,113
Other 183,213 76,136 43,792 28,448 16,674
-------- -------- -------- -------- --------
Total Operating Revenues $493,349 $391,819 $395,339 $367,127 $338,787
======== ======== ======== ======== ========
Operating Income $ 58,618 $ 50,370 $ 51,269 $ 47,505 $ 43,054
Other Income (Deductions) (19,964) (18,974) (15,987) (17,610) (14,364)
-------- -------- -------- -------- --------
Income from Continuing Opera-
tions Before Income Taxes 38,654 31,396 35,282 29,895 28,690
Income Taxes 14,379 11,803 13,682 11,249 11,183
-------- -------- -------- -------- --------
Income from Continuing Opera-
tions 24,275 19,593 21,600 18,646 17,507
Income (Loss) from Discon-
tinued Operations -- -- (17,250) 320 (2,754)
-------- -------- -------- -------- --------
Income Before Extra-
ordinary Item 24,275 19,593 4,350 18,966 14,753
Extraordinary Item -- -- -- 25,654 --
-------- -------- -------- -------- --------
Net Income 24,275 19,593 4,350 44,620 14,753
Less - Preferred Stock Dividends 810 989 1,382 1,561 1,742
-------- -------- -------- -------- --------
Net Income Available for
Common Stock $ 23,465 $ 18,604 $ 2,968 $ 43,059 $ 13,011
======== ======== ======== ======== ========
Earnings Per Common Share (1):
Continuing Operations $ 1.57 $ 1.28 $ 1.40 $ 1.20 $ 1.13
Discontinued Operations -- -- (1.19) 0.02 (0.20)
Extraordinary Item -- -- -- 1.80 --
-------- -------- -------- -------- --------
$ 1.57 $ 1.28 $ 0.21 $ 3.02 $ 0.93
======== ======== ======== ======== ========
Dividends Per Common Share (1) $ 0.92 $ 0.85 $ 0.79 $ 0.71 $ 0.67
======== ======== ======== ======== ========
Average Common Shares Out-
standing (1) (Thousands) 14,913 14,580 14,459 14,264 13,944
======== ======== ======== ======== ========
Total Assets $731,269 $618,947 $559,656 $560,785 $550,749
======== ======== ======== ======== ========
Capital Expenditures - Continu-
ing Operations:
Constructed $ 63,068 $ 60,117 $ 59,394 $ 42,319 $ 31,354
Acquired 26,755 10,810 -- -- --
-------- -------- -------- -------- --------
Total Capital Expenditures $ 89,823 $ 70,927 $ 59,394 $ 42,319 $ 31,354
======== ======== ======== ======== ========
Capitalization:
Common Stockholders' Equity $201,556 45% $184,869 44% $175,164 50% $181,815 54% $147,229 48%
Preferred Stock 7,000 2% 7,000 2% 7,000 2% 7,000 2% 7,000 2%
Preferred Stock Subject to
Mandatory Redemption 2,858 1% 4,500 1% 6,643 2% 11,286 3% 13,429 5%
Long-Term Debt 231,881 52% 220,009 53% 158,585 46% 140,652 41% 138,084 45%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total Capitalization $443,295 100% $416,378 100% $347,392 100% $340,753 100% $305,742 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Book Value Per Common Share (1) $ 13.41 $ 12.62 $ 12.09 $ 12.70 $ 10.44
======== ======== ======== ======== ========
(1) Restated to reflect a three-for-two common stock split in 1993.
24
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
________________________________________________________________________
RESULTS OF OPERATIONS
_____________________
CONSOLIDATED FINANCIAL RESULTS
Continuing Operations
Income from continuing operations and the applicable earnings per
share and return on beginning of year common equity for the three years ended
December 31, 1993, were as follows:
1993 1992 1991
_____ _____ _____
Income From Continuing
Operations (Dollars in Millions) $24.3 $19.6 $21.6
===== ===== =====
Earnings Per Share, Continuing
Operations $1.57 $1.28 $1.40
===== ===== =====
Return on Common Equity 12.7% 10.6% 11.1%
===== ===== =====
Earnings per share for 1993 exceeded 1992 results by 23 percent,
despite the negative effects of record low gas sales to irrigation customers.
The impact of lower irrigation sales was more than offset by positive
contributions from acquisitions of natural gas facilities, expense controls,
favorable resolution of rate cases, and insurance settlements. In addition,
1993 first quarter gas sales, transportation and natural gas liquids revenues
were significantly greater than those in the first quarter of 1992 due to
colder weather.
The decline in 1992 earnings, in comparison with 1991, reflected the
impact of unfavorable weather on natural gas sales and natural gas liquids
revenues, and higher interest expense which resulted, in part, from reduced
operating cash flows. These negative earnings factors were partially offset
by increased transportation revenues, rate increases, lower operating costs
as a result of expense controls and reduced litigation expense provisions.
Discontinued Operations
In 1991, the Company recorded an after-tax loss of $17.3 million
resulting from the sale of its coal subsidiaries and the discontinuance of
this business segment.
RESULTS OF CONTINUING OPERATIONS
Discussion of operating results by business segment and consolidated
other income and (deductions) and income taxes follows. Segment operating
revenues, gas purchases, operations and maintenance expenses, and volumetric
data cited here are before intersegment eliminations (dollars in millions).
25
Gas Service 1993 1992 1991
______ ______ ______
Operating Revenues -
Gas Sales and Transportation $285.1 $289.0 $322.2
Natural Gas Liquids and Other 35.7 31.6 33.4
------ ------ ------
320.8 320.6 355.6
------ ------ ------
Operating Costs and Expenses -
Gas Purchases 132.9 150.9 178.0
Operations and Maintenance 106.0 91.1 99.5
Depreciation, Depletion and
Amortization 21.8 20.9 19.7
Taxes, Other Than Income Taxes 10.0 9.4 7.8
------ ------ ------
270.7 272.3 305.0
------ ------ ------
Operating Income $ 50.1 $ 48.3 $ 50.6
====== ====== ======
Systems Throughput (Bcf) -
Gas Sales 59.6 69.1 78.3
Transportation 100.1 81.7 68.2
------ ------ ------
159.7 150.8 146.5
====== ====== ======
Natural Gas Liquids
(Millions of Gallons) 81.3 74.4 76.9
====== ====== ======
Revenues and expenses of the Federal Energy Regulatory Commission
("FERC")-regulated Wattenberg transmission system, acquired on April 1, 1993,
are included in this segment's 1993 operating results.
The decline in gas sales and transportation revenues (and related gas
purchases) primarily reflects FERC Order No. 636 ("Order 636") implementation
and the resultant elimination of the gas cost component from FERC-regulated
service revenues. An additional cause for the decline in 1993 gas sales and
transportation revenues was the record low sales to irrigation customers due
to the abnormally wet summer. Irrigation sales were 3.1 Bcf below 1992
volumes. However, revenues from the Wattenberg transmission system, rate
increases in essentially all K N retail jurisdictions (including resolution
of the 1990 rate case in Nebraska), and increases in 1993 residential and
commercial sales volumes (4.3 Bcf above 1992 due to colder weather)
substantially offset the decline in irrigation sales.
Greater systems throughput, costs and expenses of the Wattenberg
transmission system and higher costs related to increased natural gas liquids
recoveries impacted 1993 operations and maintenance expenses. These
increases were partially mitigated by insurance settlements related to the
Brookhurst Subdivision Superfund site near Casper, Wyoming.
26
Gas service's 1992 operating revenues were ten percent below 1991 as
a result of unfavorable weather. Most notably impacted by the adverse 1992
weather were gas sales to irrigation customers, which were 7.2 Bcf below
1991. Gas sales revenues were positively affected in 1992 by rate increases,
including $3.8 million collected in prior years but reserved from earnings
for the 1990 eastern and central Nebraska rate case. Transportation revenues
in 1992 were $3.4 million higher than 1991 as off-system transport volumes
increased by 13.3 Bcf. Natural gas liquids revenues in 1992 were $2.9
million below 1991 as the unfavorable weather affected both prices and
volumes.
Operating costs and expenses for 1992 were 11 percent below 1991 due
principally to reduced on-system throughput and expense controls. Gas
purchases declined significantly as a result of lower 1992 gas sales and
processing of volumes for natural gas liquids recoveries. In addition, 1992
operations and maintenance expenses were affected by lower provisions for
litigation issues. The increase in 1992 taxes, other than income taxes,
primarily results from state property tax legislation in Nebraska.
Gas Marketing and Gathering 1993 1992 1991
______ _____ _____
Operating Revenues -
Gas Sales $173.5 $64.5 $42.1
Other 33.8 7.1 0.2
------ ----- -----
207.3 71.6 42.3
------ ----- -----
Operating Costs and Expenses -
Gas Purchases 157.6 58.9 35.7
Operations and Maintenance 40.3 11.1 6.1
Depreciation, Depletion and
Amortization 1.0 0.2 --
Taxes, Other Than Income Taxes 1.2 0.1 --
------ ----- -----
200.1 70.3 41.8
------ ----- -----
Operating Income $ 7.2 $ 1.3 $ 0.5
====== ===== =====
Gas Sales and Gathered Volumes (Bcf) 157.8 37.9 19.7
====== ===== =====
Natural Gas Liquids(Millions of Gallons) 64.1 16.1 --
====== ===== =====
In addition to continued growth in nonregulated gas marketing
activities, this segment's 1993 and 1992 operating results reflect the
Douglas gathering and processing acquisition beginning in October 1992 and
the Wattenberg gathering facilities acquisition beginning in April 1993.
Additionally, with Order 636 restructuring effective October 1, 1993, this
segment assumed the gas sales function previously provided by K N for its
wholesale customers as part of its bundled services.
27
Oil and Gas Production 1993 1992 1991
____ ____ ____
Operating Revenues -
Oil and Gas Sales $7.2 $5.3 $3.3
Other 1.3 1.8 1.4
---- ---- ----
8.5 7.1 4.7
---- ---- ----
Operating Costs and Expenses -
Operations and Maintenance 3.2 2.6 2.5
Depreciation, Depletion and
Amortization 3.3 3.1 1.6
Taxes, Other Than Income Taxes 0.7 0.6 0.4
---- ---- ----
7.2 6.3 4.5
---- ---- ----
Operating Income $1.3 $0.8 $0.2
==== ==== ====
Oil and Gas Production (Equivalent Bcf) 3.7 2.6 1.8
==== ==== ====
The increases in 1993 and 1992 oil and gas revenues and production
result from the July 1992 acquisition of producing properties in western
Colorado and successful drilling in the Denver-Julesburg Basin in
northeastern Colorado.
Other Income and (Deductions) 1993 1992 1991
______ ______ ______
Interest Expense $(21.2) $(19.4) $(17.2)
Other, Net 1.2 0.4 1.2
------ ------ ------
$(20.0) $(19.0) $(16.0)
====== ====== ======
The increase in interest expense primarily reflects the Company's
issuance of $195 million of long-term debt during the last three years. The
majority of the net proceeds from these debt issues were used to fund capital
expenditures and acquisitions; however, $65 million was used to refund higher
coupon debt in 1993 and 1992. As a result, the Company's year end 1993
weighted-average embedded cost of long-term debt was 8.3 percent compared
with a cost of 9.6 percent at December 31, 1990.
Income Taxes 1993 1992 1991
_____ _____ _____
Applicable to Continuing Operations $14.4 $11.8 $13.7
===== ===== =====
Effective Tax Rate 37.2% 37.6% 38.8%
===== ===== =====
The effect of the one percent increase in the Federal tax rate,
resulting from enactment of the Revenue Reconciliation Act of 1993, was more
than offset by increased 1993 tax credits on gas production from wells
qualifying for non-conventional fuel credit under Section 29 of the Internal
Revenue Code. The 1991 effective tax rate reflects higher state income tax
provisions.
28
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during 1993 included cash generated from
operations, short-term borrowings and the issuance of long-term debt.
Principal cash outflows were capital expenditures and acquisitions,
redemptions of long-term debt and preferred stock, and payment of interest
and dividends.
Cash Flows from Operating Activities
Net cash flows from continuing operations were $43.3 million, $33.2
million and $72.1 million for 1993, 1992 and 1991, respectively. In addition
to the factors discussed previously, which affect cash generation as well as
operating results, net cash flows have been impacted by litigation
settlements (including recoupable take-or-pay payments) and environmental
costs. In both 1993 and 1992, actual cash disbursements exceeded expense
provisions for litigation and environmental issues. Net operating cash flows
for 1993 were also reduced by repayments to gas service customers for
previous years' over-recovery of gas costs.
Capital Expenditures and Commitments
Excluding acquisitions, 1993 capital expenditures were $63.1 million
compared with expenditures of $60.1 million in 1992 and $59.4 million in
1991. (Refer to Note 13 of Notes to Consolidated Financial Statements for
business segment expenditures.) The increased 1993 spending includes
approximately $9.0 million of Order 636 transition costs (measurement
facilities and systems) and $11.0 million for construction of a new corporate
office building. The regulated portion of the Wattenberg system and the
Company's portion of the Wind River gathering system primarily account for
the $26.8 million of capital expenditures for acquisitions in 1993.
Consolidated 1994 capital expenditures are budgeted at $54.5 million,
excluding acquisitions. This includes $7.6 million for the first phase of
the Rifle to Avon pipeline being jointly constructed by the Company's
subsidiary, Rocky Mountain Natural Gas Company, and Public Service Company of
Colorado. The second phase of this pipeline will be constructed in 1995; the
Company's portion of estimated costs is approximately $5.0 million. In
February 1994, K N's oil and gas subsidiaries completed the acquisition of
gas reserves and production in western Colorado and southwestern Wyoming.
During the first half of 1994, the Company plans to bring in one or more
partners to participate in this acquisition and to assist in further
development of the properties.
The Company has no substantial disagreements related to take-or-pay
matters. The Company monitors contractual obligations, including obligations
to pay above-market prices under certain contracts, and at the end of each
contract year pays those producers to whom take-or-pay amounts are payable.
All amounts paid by the Company for take-or-pay are fully recoupable from
future gas production.
Statement of Financial Accounting Standards No. 112 ("SFAS 112"),
"Employers' Accounting for Postemployment Benefits," 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. SFAS 112 is effective for fiscal years beginning after
December 15, 1993. Implementation of SFAS 112 is not expected to have a
material effect on the Company's financial position or results of operations.
29
Capital Resources
Short-term debt was $47.0 million at December 31, 1993, compared with
$2.0 million of borrowings at December 31, 1992. The Company has credit
agreements with eight banks to either borrow or use as commercial paper
support up to $90 million. In November 1993, K N filed a shelf registration
statement with the Securities and Exchange Commission for the sale of $200
million of debt securities in anticipation of long-term financing needs over
the next three years.
In January 1994, the Company received $41.0 million from the sale of
contract demand receivables to a financial institution. The demand
receivables resulted from gas sales contracts between some of K N's former
wholesale customers and a K N subsidiary. Proceeds were used to reduce
short-term debt.
The Company expects that 1994 cash requirements for debt service,
preferred stock redemptions, dividends and capital expenditures will be
provided by internal cash flows, short-term borrowings, and the issuance of
common stock for dividend reinvestment and employee benefit plans.
OUTLOOK
Restructuring and Reorganization
The Company's implementation of Order 636 and the related corporate
reorganization are discussed in other sections of this annual report. This
discussion will focus on the expected 1994 financial implications of these
events. As a result of recent acquisitions and the transfer of substantially
all of K N interstate's gathering and processing facilities to a nonregulated
subsidiary, the composition of 1994's operating income will differ
significantly from the past. Historically, the Company's gas service segment
has accounted for more than 90 percent of consolidated operating income. The
expectation for 1994 is that this segment will account for approximately 65
to 70 percent of operating income.
Secondly, Order 636 mandated the use of SFV rate design for FERC-
regulated services. Accordingly, fluctuations in operating revenues
resulting from significant variations in weather temperatures should be
reduced. Revenues from the Company's important summer irrigation load will
remain vulnerable to abnormal weather patterns, such as those experienced in
1993 and 1992.
Finally, the effect of both of the above items is expected to change
the Company's historical quarterly earnings distribution. The 1994 first and
fourth quarters will account for a smaller percentage of annual earnings,
while the second and third quarters will be higher.
Gas Service
The Company's Order 636 implementation and reorganization will
significantly impact this business segment's future operating results. The
transfer of substantially all of K N interstate's gathering facilities and
the principal processing plant to a subsidiary within the gas marketing and
gathering segment will result in a significant shift in operating revenues,
expenses and operating income. Additionally, with the elimination of the
merchant function from FERC-regulated services, this segment's operating
revenues and gas purchases will be substantially lower than prior periods;
however, this elimination should not impact operating income.
30
Operating results for 1994 should benefit from a full year's
operation of the Wattenberg transmission system and from rate increases
placed into effect during 1993.
As a result of the unbundling and the diverse services offered under
the post-Order 636 environment, competition will increase. The Company
believes that its interstate and intrastate systems are well-positioned to
capitalize on opportunities resulting from future development of natural gas
reserves in the Rocky Mountain region. The Company expects continued
moderate growth in its retail distribution operations due, principally, to
the continued customer additions being realized by its Colorado intrastate
system.
Gas Marketing and Gathering
On January 1, 1994, substantially all of the gathering facilities and
the principal processing plant, which were previously a part of the K N
interstate system, were transferred to a subsidiary within the gas marketing
and gathering business segment. This segment's 1993 operating results
included only partial year activity of the Wattenberg nonregulated gathering
system and the Wind River gas gathering joint venture. Accordingly, this
segment's 1994 operating revenues, expenses and operating income are expected
to be significantly higher than in 1993.
Oil and Gas Production
The February 1994 acquisition of producing properties and undeveloped
gas reserves in western Colorado and southwestern Wyoming is expected to have
a positive impact on 1994 operating results of this business segment. The
Company also believes that its involvement in oil and gas development and
production provides opportunities to enhance the value of its associated gas
service, gathering and processing businesses.
Litigation
During the last three years, the Company has resolved or settled four
major cases or environmental matters -- three cases related to the Brookhurst
Subdivision Superfund site near Casper, Wyoming, and long-standing litigation
with FM Properties Inc. and other parties. Refer to Note 5 of Notes to
Consolidated Financial Statements for additional information on the Company's
pending litigation. Management believes it has established adequate reserves
such that resolution of pending litigation or environmental matters will not
have a material adverse effect on the Company's financial position or results
of operations.
INFLATION
Current ratemaking practices allow the Company to recover through
revenues the historical cost, rather than the current replacement cost, of
utility plant and equipment. In the past three years, the rate of inflation
has not had a material impact on the Company's costs.
31
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, 1993
and 1992, 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, 1993. 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, 1993 and 1992, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As explained in Notes 1(D) and 9 of Notes to Consolidated Financial
Statements, the Company changed its method of accounting for income taxes
effective January 1, 1992, and its method of accounting for postretirement
benefits other than pensions effective January 1, 1993.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the
index of financial statements are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as
a whole.
Denver, Colorado,
February 10, 1994.
32
CONSOLIDATED STATEMENTS OF INCOME
K N Energy, Inc. and Subsidiaries
Years Ended December 31
________________________________
1993 1992 1991
___________________________________________________________________________
(Dollars in Thousands
Except Per Share Amounts)
Operating Revenues:
Gas Service -
Natural Gas Sales $254,427 $271,967 $308,555
Other 55,709 43,716 42,992
-------- -------- --------
Total Gas Service Revenues 310,136 315,683 351,547
Gas Marketing and Gathering 177,892 71,426 40,739
Oil and Gas Production 5,321 4,710 3,053
-------- -------- --------
Total Operating Revenues 493,349 391,819 395,339
-------- -------- --------
Operating Costs and Expenses:
Gas Purchases 260,520 208,147 211,391
Operations 128,560 91,746 95,705
Maintenance 7,661 7,264 7,364
Depreciation, Depletion and
Amortization 26,156 24,187 21,361
Taxes, Other Than Income Taxes 11,834 10,105 8,249
-------- -------- --------
Total Operating Costs and Expenses 434,731 341,449 344,070
-------- -------- --------
Operating Income 58,618 50,370 51,269
-------- -------- --------
Other Income and (Deductions):
Interest Expense (21,200) (19,373) (17,169)
Other, Net 1,236 399 1,182
-------- -------- --------
Total Other Income and (Deductions) (19,964) (18,974) (15,987)
-------- -------- --------
Income from Continuing Operations
Before Income Taxes 38,654 31,396 35,282
Income Taxes 14,379 11,803 13,682
-------- -------- --------
Income from Continuing Operations 24,275 19,593 21,600
Loss from Discontinued Operations,
Net of Income Taxes -- -- (17,250)
-------- -------- --------
Net Income 24,275 19,593 4,350
Less - Preferred Stock Dividends 810 989 1,382
-------- -------- --------
Net Income Available for Common Stock $ 23,465 $ 18,604 $ 2,968
======== ======== ========
Earnings Per Common Share:
Continuing Operations $ 1.57 $ 1.28 $ 1.40
Discontinued Operations -- -- (1.19)
-------- -------- --------
$ 1.57 $ 1.28 $ 0.21
======== ======== ========
The accompanying notes are an integral part of these statements.
33
CONSOLIDATED BALANCE SHEETS
K N Energy, Inc. and Subsidiaries
December 31
______________________
1993 1992
_____________________________________________________________________
(Dollars in Thousands)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 4,760 $ 7,962
Accounts Receivable 88,491 57,839
Contract Demand Receivables (See Note 1(L)) 38,732 --
Material and Supplies, at Average Cost 8,603 7,445
Gas in Underground Storage 5,836 665
Prepaid Gas 11,689 14,404
Exchange Gas and Other 28,707 43,288
-------- --------
186,818 131,603
-------- --------
Property, Plant and Equipment, at Cost:
Natural Gas Utility Plant 830,254 730,519
Gas Marketing and Gathering 12,384 6,461
Oil and Gas Production 34,381 31,758
-------- --------
877,019 768,738
Less--Accumulated Depreciation, Deple-
tion and Amortization 369,957 313,662
-------- --------
507,062 455,076
-------- --------
Deferred Charges and Other Assets 37,389 32,268
-------- --------
$731,269 $618,947
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Preferred Stock
and Long-Term Debt $ 3,500 $ 5,000
Notes Payable 47,000 2,000
Accounts Payable 73,713 52,926
Accrued Taxes 10,299 9,515
Exchange Gas and Other 27,447 51,421
-------- --------
161,959 120,862
-------- --------
Deferred Liabilities, Credits and
Reserves:
Deferred Income Taxes 60,444 49,252
Deferred Revenues (See Note 1(L)) 43,692 --
Other 21,879 32,455
-------- --------
126,015 81,707
-------- --------
Long-Term Debt 231,881 220,009
-------- --------
Commitments and Contingent Liabilities
(Notes 5 and 11)
Preferred Stock Subject to Mandatory
Redemption 2,858 4,500
-------- --------
Stockholders' Equity:
Preferred Stock 7,000 7,000
-------- --------
Common Stock:
Authorized - 25,000,000 Shares, Par
Value $5 Per Share
Outstanding - 15,035,301 and 9,763,592
Shares, Respectively 75,177 48,818
Additional Paid-in Capital 28,907 48,287
Retained Earnings 97,472 87,764
-------- --------
Total Common Stockholders' Equity 201,556 184,869
-------- --------
Total Stockholders' Equity 208,556 191,869
-------- --------
$731,269 $618,947
======== ========
The accompanying notes are an integral part of these balance sheets.
34
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Years Ended December 31, 1993, 1992 and 1991
K N Energy, Inc. and Subsidiaries
Additional
Common Stock Treasury Stock Paid-In Retained
____________________ __________________
Shares Amount Shares Amount Capital Earnings
____________________________________________________________________________________________________________________
(Dollars in Thousands)
Balance, December 31, 1990 9,540,817 $47,704 (54,455) $(1,359) $44,847 $90,623
Net Income 4,350
Cash Dividends -
Common, $0.79 Per Share (11,359)
Preferred (1,382)
Loss on Redemption of Preferred Stock (53)
Treasury Stock Acquired (236,100) (5,794)
Employee Stock Options 5,083 26 24,482 613 53 (252)
Employee Benefit Plans 112,799 564 82,495 1,934 1,961 (17)
Dividend Reinvestment and Stock Purchase Plans 2 -- 118,808 2,879 -- (174)
---------- ------- ------- ------- ------- -------
Balance, December 31, 1991 9,658,701 48,294 (64,770) (1,727) 46,861 81,736
Net Income 19,593
Cash Dividends -
Common, $0.85 Per Share (12,417)
Preferred (989)
Treasury Stock Acquired (48,833) (1,306)
Employee Stock Options 46,593 233 -- -- 423 --
Employee Benefit Plans 3,943 20 31,070 830 87 (51)
Dividend Reinvestment and Stock Purchase Plans 54,355 271 82,533 2,203 916 (108)
---------- ------- ------- ------- ------- -------
Balance, December 31, 1992 9,763,592 48,818 -- -- 48,287 87,764
Net Income 24,275
Cash Dividends -
Common, $0.92 Per Share (13,757)
Preferred (810)
Common Stock Split 4,997,984 24,990 -- -- (25,024) --
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 --
---------- ------- ------- ------- ------- -------
Balance, December 31, 1993 15,035,301 $75,177 -- $ -- $28,907 $97,472
========== ======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements.
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
K N Energy, Inc. and Subsidiaries
Years Ended December 31
_____________________________
1993 1992 1991
____________________________________________________________________________________________________
(Dollars in Thousands)
Cash Flows From Operating Activities:
Income from Continuing Operations $24,275 $19,593 $21,600
Adjustments to Reconcile Income from Continuing Operations to
Net Cash from Operating Activities:
Depreciation, Depletion and Amortization 26,156 24,187 21,361
Provisions for Losses on Accounts Receivable 875 251 510
Gain on Sale of Facilities -- (188) --
Deferred Income Taxes 7,606 4,387 (8,088)
Deferred Purchased Gas Costs (11,925) -- 11,575
Other Funds Used During Construction 516 203 337
Changes in Other Working Capital Items (18,373) (10,933) 17,640
Changes in Other Assets and Liabilities 14,184 (4,273) 7,186
------- ------- -------
Net Cash Flows from Continuing Operations 43,314 33,227 72,121
Net Cash Flows from Discontinued Operations -- -- (11,157)
------- ------- -------
Net Cash Flows Provided By Operating Activities 43,314 33,227 60,964
------- ------- -------
Cash Flows From Investing Activities:
Capital Expenditures - Continuing Operations (63,068) (60,117) (59,394)
- Discontinued Operations -- -- (1,983)
Acquisitions (Net of Cash Acquired of $1,535,000 in 1992) (25,660) (8,715) --
Other Funds Used During Construction (516) (203) (337)
Investments (150) (1,059) (2,100)
Proceeds from Sale of Facilities 220 281 43
Proceeds from Sale of Discontinued Operations -- -- 7,224
------- ------- -------
Net Cash Flows Used In Investing Activities (89,174) (69,813) (56,547)
------- ------- -------
Cash Flows From Financing Activities:
Short-Term Debt (Net) 45,000 2,000 (6,000)
Long-Term Debt- Issued 50,000 100,000 45,000
- Retired (39,014) (56,945) (17,467)
Preferred Stock Redemption (2,143) (2,143) (4,696)
Common Stock Issued 6,979 1,791 2,161
Treasury Stock- Issued -- 3,033 5,426
- Acquired -- (1,306) (5,794)
Cash Dividends- Common (13,757) (12,417) (11,359)
- Preferred (810) (989) (1,382)
Premium on Debt Reacquisition and Issue Costs (3,597) (2,557) (481)
------- ------- -------
Net Cash Flows Provided By Financing Activities 42,658 30,467 5,408
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents (3,202) (6,119) 9,825
Cash and Cash Equivalents at Beginning of Year 7,962 14,081 4,256
------- ------- -------
Cash and Cash Equivalents at End of Year $ 4,760 $ 7,962 $14,081
======= ======= =======
The accompanying notes are an integral part of these statements.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
(A) Principles of Consolidation
The consolidated financial statements include the accounts of
K N Energy, Inc. ("K N") and all of its subsidiaries (the "Company").
All material intercompany items and transactions have been eliminated.
(B) Basis of Accounting
The accounting policies of the Company conform to generally
accepted accounting principles. For the regulated public utilities
in the Company, these accounting principles are applied in accordance
with Statement of Financial Accounting Standards No. 71, which
prescribes the circumstances in which the application of generally
accepted accounting principles is affected by the economic effect of
regulation.
(C) Gas Service Revenues
Natural gas revenues are recorded on the basis of gas delivered
to customers to the end of each accounting period. This includes
unbilled revenues representing the estimated amount customers will be
billed for gas delivered from the time meters were last read to the
end of the accounting period, net of cost of gas where applicable.
Gas transportation revenues are recorded on the basis of capacity
reserved on and gas transported through the pipeline systems. The
Company receives a fee for its transportation services; however, there
are no purchased gas expenses associated with the transportation
function.
(D) Income Taxes
The Company implemented Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes,"
effective as of January 1, 1992. SFAS 109 requires recognition of
deferred income tax assets and liabilities 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, more
likely than not, is expected to not be realized. The adoption of SFAS
109 had an insignificant effect on the Company's financial position
and results of operations, since the Company had already adopted the
liability method of accounting under Statement of Financial Accounting
Standards No. 96.
(E) Earnings Per Share
Earnings per share are computed based on the monthly weighted
average number of common shares outstanding during the periods. There
are no other securities or common stock equivalents which have a
material dilutive effect on earnings per share. On August 10, 1993,
K N's Board of Directors declared a three-for-two common stock split
37
which was distributed on October 4, 1993, to common shareholders of
record on September 15, 1993. The par value of the common stock did
not change. All weighted average and per share amounts in the
accompanying financial statements have been restated to reflect the
stock split. The weighted average number of common shares outstanding
was 14,913,000 in 1993, 14,580,000 in 1992 and 14,459,000 in 1991.
(F) Nonutility Gas Marketing Subsidiaries
Gas marketing subsidiaries' revenues are included in "Gas
Marketing and Gathering," and their gas purchase costs are included
in "Gas Purchases."
(G) Prepaid Gas
Prepaid gas represents payments made in lieu of taking delivery
of (and purchasing) natural gas under the take-or-pay provisions of
the Company's gas purchase contracts, net of any subsequent
recoupments in kind from producers. All 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.
(H) Property, Plant and Equipment
Utility plant is stated at the original cost of construction,
which includes indirect costs such as payroll taxes, fringe benefits,
administrative and general costs and an allowance for funds used
during construction.
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.
(I) Exploration and Development Costs
K N's oil and gas subsidiaries follow the "successful efforts"
method of accounting. Under this method, acquisition costs,
successful exploration costs and development costs are capitalized and
unsuccessful exploration costs, lease rentals and evaluation costs are
expensed.
(J) Depreciation, Depletion and Amortization
Depreciation is computed based on the straight-line method over
the estimated useful life for most utility property, plant and
equipment. The unit-of-production method is used for computing
depreciation, depletion and amortization for oil and gas properties.
38
(K) Gas in Underground Storage
K N's regulated interstate retail distribution business and
Northern Gas Company record storage injections at the average cost of
purchased gas for the year. Storage withdrawals are priced on the
last-in first-out ("LIFO") method. K N Gas Supply Services, Inc.,
a nonjurisdictional subsidiary, prices storage injections at the
average cost of purchased gas each month. Storage withdrawals are
priced at the average cost of storage gas at the beginning of each
month. Rocky Mountain Natural Gas Company prices storage injections
at the average cost of purchased gas for the year. Storage
withdrawals are priced on 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.
(L) Deferred Revenues
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. The Company is deferring revenues from
certain gas sales agreements associated with these receivables pending
final disposition of related gas purchase contracts.
(M) Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform
with the 1993 presentation.
(N) 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, Supplemental
Disclosures of Cash Flow Information and Supplemental Schedule of
Noncash Investing and Financing Activities are as follows:
1993 1992 1991
__________________________________________________________________________________________________________________
(Dollars in Thousands)
Changes in Other Working Capital Items
Summary (Net of Acquisition Effects):
Accounts Receivable $(31,527) $(14,502) $17,458
Material and Supplies (1,158) 806 (809)
Gas in Underground Storage (581) 10 (670)
Accounts Payable, Accrued Taxes and Other Current Liabilities 21,845 6,985 11,991
Exchange Gas, Net (471) 1,440 (7,623)
Other Current Assets (6,481) (5,672) (2,707)
-------- -------- -------
$(18,373) $(10,933) $17,640
======== ======== =======
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest (Net of Amount Capitalized) $ 21,131 $ 18,088 $15,079
======== ======== =======
Income Taxes $ 7,031 $ 5,264 $ 9,647
======== ======== =======
39
Supplemental Schedule of Noncash Investing and Financing Activities
(A) The Company purchased all of the capital stock of two corporations,
each of which owned gas distribution systems, for $5,248,000 in 1992. In
conjunction with the acquisitions, liabilities were assumed as follows:
Fair Value of Assets Acquired $ 7,200
Cash Paid for the Capital Stock (5,248)
--------
Liabilities Assumed $ 1,952
========
(B) In connection with the exchange and lease of gathering and processing
facilities described in Note 4(D), the Company exchanged its interest in
the Tyrone Gas Gathering system as a portion of the consideration.
2. Restructuring and Reorganization
On April 8, 1992, the Federal Energy Regulatory Commission
("FERC") issued Order No. 636 ("Order 636") which requires a
fundamental restructuring of interstate natural gas pipelines.
A separate restructuring docket was established for each
interstate pipeline, including K N (Docket No. RS92-19-000). On
November 2, 1992, K N made its compliance filing reflecting K N's
proposal for its restructured services to implement Order 636. K N's
proposal was revised in response to subsequent FERC orders. As
authorized by FERC, K N implemented Order 636 restructured services on
October 1, 1993. As a part of its action on K N's restructuring
proposal, FERC approved implementation of K N's gas supply realignment
("GSR") crediting mechanism.
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. In its
May 5, 1993 order, FERC approved the transfer of K N's interstate gas
transmission and storage facilities to KNI effective October 1, 1993.
On November 1, 1993, FERC authorized the transfer of gathering and
processing facilities from KNI to KNGG. The transfer was effective
January 1, 1994, and included approximately $70 million of gross
property, plant and equipment.
Order 636 required pipelines to unbundle sales and
transportation services. KNI has complied with FERC's directive to
mitigate its GSR costs caused by this restructuring. KNI's GSR process
allows for the assignment of its above-market contracts. Under KNI's
tariff, every shipper has a right to take assignment of these above-
market contracts. Shippers may either take assignment of these above-
market contracts or enter into a negotiated exit fee. This should
obviate the need to make any GSR cost recovery filing with FERC.
3. Regulatory Matters
On December 30, 1993, KNI made a rate filing with FERC
requesting a $12.0 million annual increase in revenues. The new rates
will become effective July 1, 1994, subject to refund.
In February 1992, K N filed a rate restatement with FERC
pursuant to FERC's purchased gas adjustment regulations. The filing
40
proposed no change in K N's current rates. K N submitted an offer of
Settlement and Stipulation ("Settlement") in August 1993. FERC
approved the Settlement on November 17, 1993. Terms of the Settlement
did not have a material effect on K N's financial position or results
of operations.
In February 1993, K N filed general rate applications in all
177 retail Nebraska communities it serves, requesting an increase in
aggregate annual revenues of $2.2 million. Pursuant to Nebraska
statute, the new rates became effective May 2, 1993, subject to refund.
An agreement was reached in August 1993, between the Company and
representatives of the 10 rate areas in Nebraska. Under the terms of
the agreement, K N received a $1.4 million annual rate increase.
Revenues collected above the settlement rates were refunded to the
customers in December 1993.
In June 1990, K N filed general rate applications in 147
central and eastern Nebraska communities requesting an increase in
aggregate annual revenues of $6.7 million. Pursuant to Nebraska
statute, the new rates were put into effect on October 1, 1990, subject
to refund. The majority of the communities adopted a lower rate
increase. K N filed for injunctions against these communities. On
August 27, 1993, the Nebraska Supreme Court ruled that natural gas
rates placed into effect by K N as interim rates on October 1, 1990,
were properly justified and should be allowed to stand. In 1992, K N
reduced the deferred portion of the increased revenues resulting from
these rate applications and recorded as revenue $3.8 million of
amounts previously deferred in 1990 and 1991. The remaining deferred
revenues relating to this matter, totaling $1.6 million, were recorded
as revenue in 1993.
In June 1992, K N filed an application for a "make whole" rate
increase with the Colorado Public Utilities Commission ("CPUC"). The
new rates, which resulted in increased annual revenues of $0.7 million,
were approved by the CPUC and became effective August 1, 1992.
In December 1992, K N filed an application with the Wyoming
Public Service Commission ("WPSC") for an annualized general rate
increase of $1.2 million. In April 1993, the WPSC issued an order
granting K N a $1.1 million annual rate increase effective May 1, 1993.
In March 1993, K N filed an application with the Kansas
Corporation Commission ("KCC") for an annualized general rate increase
of $3.3 million. On October 28, 1993, the KCC issued an order
approving a settlement agreement between K N and the interested parties
which granted K N a $2.4 million annual rate increase effective October
1, 1993.
4. Acquisitions
(A) Wattenberg
On April 1, 1993, the Company completed the $48 million
acquisition of the Wattenberg natural gas gathering and transmission
system. The system has both regulated and nonregulated components.
The regulated transmission segment, approximately $18 million of the
41
acquisition, was financed with corporate funds, and the balance of the
system was financed through an operating lease. The system gathers and
transports gas from approximately 1,800 receipt points in northeastern
Colorado.
(B) Oil and Gas Reserve Acquisition
On February 1, 1994, the Company's oil and gas development
subsidiaries, K N Production Company and GASCO, Inc., acquired gas
reserves and production properties located near existing K N operations
in western Colorado and in the Moxa Arch region of southwestern Wyoming
for a total purchase price of approximately $30 million. The acquired
properties have total net reserves of approximately 50 billion cubic
feet equivalent of natural gas. The Company is discussing the possible
sharing of ownership interests and non-recourse financing with other
parties.
(C) Wind River
Effective June 1, 1993, Wind River Gathering Company acquired
approximately 110 miles of natural gas pipeline and facilities in
Wyoming's Wind River Basin. Wind River Gathering Company is a joint
venture between KNGG and a subsidiary of Tom Brown, Inc., a Wind River
Basin producer. KNGG manages the operations of the gathering system.
KNGG paid approximately $2 million for its interest in the joint
venture.
(D) Exchange and Lease of Gathering and Processing Facilities
On October 1, 1992, K N exchanged its Tyrone gas gathering
system located in the Oklahoma panhandle for a natural gas processing
plant and gathering system located near Douglas, Wyoming. KNGG is
operator of the Douglas system, and entered into an operating lease for
the facilities with a financial institution.
(E) Distribution Systems
On March 31, 1992, K N acquired the stock of two corporations
for $3.7 million in net cash. The acquired corporations owned two gas
utility distribution systems serving approximately 7,000 customers,
mainly in northeastern Wyoming. The acquisition was accounted for as
a purchase, and the corporations were merged into K N effective
April 1, 1992.
5. Litigation
K N is named as one of four potentially responsible parties
("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund
site, pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund"). The site is known as the
Mystery Bridge Road/U.S. Highway 20 site located near Casper, Wyoming
(the "Brookhurst Subdivision"). The EPA's remedy consists of two
parts, "Operating Unit One," which addresses the groundwater cleanup
and "Operating Unit Two," which addresses cleanup procedures for the
soil and free-phase petroleum product.
42
A Consent Decree between the Company, the EPA and another PRP
was entered on October 2, 1991, in the Wyoming Federal District Court.
Groundwater cleanup under Operating Unit One has been proceeding since
1990. On September 14, 1993, the EPA certified that the remedial
action for Operating Unit One was "operational and functional." This
is the last step in the Superfund process prior to remedy completion.
In July 1992, the EPA approved the Company's Operating Unit Two
workplan and the Company received an EPA "Statement of Work." The work
required to be performed for Operating Unit Two commenced during the
third quarter of 1992 and is expected to continue through 1995 at a
total cost estimated not to be more than $1.0 million.
With regard to this same Superfund site, in 1987 the State of
Wyoming filed suit against several parties (including K N) for
injunctive relief, penalties and unquantified damages claimed to have
resulted from alleged pollution of groundwater and soils in the
Brookhurst Subdivision. On April 1, 1993, the Wyoming District Court
dismissed the lawsuit, finding that K N had diligently remedied the
alleged pollution.
On October 20, 1989, a lawsuit was filed against the Company
and 18 other defendants on behalf of a group of 268 individuals who
reside or resided in the Brookhurst Subdivision, seeking damages for
alleged releases of certain chemicals to the soil, groundwater and air.
On February 5, 1993, the Company reached agreement to settle the above-
described dispute. The settlement, which was approved by the Wyoming
District Court, resolved all disputes between the parties and closed
the lawsuit. A reserve for the settlement amount and related matters
had been established in the Company's financial statements prior to
1993 and, accordingly, such settlement did not have any material
adverse impact on the Company's financial position or results of
operations.
On November 30, 1990, the Company initiated an action against
a number of its insurance carriers for a declaration of the carriers'
contractual obligations to provide insurance coverage for all sums
associated with the alleged losses under the state, Federal and toxic
tort claims related to the Brookhurst Subdivision. The Company entered
into formal settlements with all of the defendants in the lawsuit in
1993, and received settlement proceeds associated therewith.
On October 9, 1992, Jack J. Grynberg filed suit in the United
States District Court for the District of Colorado against the Company,
Rocky Mountain Natural Gas Company and GASCO, Inc. (the "K N
Entities") alleging that the K N Entities as well as K N Production
Company and KNGG, 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.
43
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.
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.
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, management
believes that the resolution of such matters will not have a material
adverse effect on the Company's financial position or results of
operations.
6. Income Taxes
See Note 1(D) regarding the method of accounting for income
taxes.
Components of the income tax provision applicable to Federal
and state income taxes are as follows (in thousands):
1993 1992 1991
__________________________________________________________________________________________
Taxes Currently Payable:
Federal $ 4,312 $ 6,728 $ 1,290
State 2,461 688 1,185
------- ------- -------
Total 6,773 7,416 2,475
------- ------- -------
Taxes Deferred:
Federal 7,573 2,993 (7,631)
State 33 1,394 (457)
------- ------- -------
Total 7,606 4,387 (8,088)
------- ------- -------
Total Tax Provision 14,379 11,803 (5,613)
Less Tax Effect of:
Discontinued Coal Mining Operations -
Loss from Operations -- -- (351)
Loss on Sale -- -- (18,944)
------- ------- -------
Total Tax Provision on Income from Continuing Operations $14,379 $11,803 $13,682
======= ======= =======
Effective Tax Rate on Income from Continuing Operations 37.2% 37.6% 38.8%
======= ======= =======
The difference between the statutory Federal income tax rate and
the Company's effective income tax rate is summarized as follows:
1993 1992 1991
__________________________________________________________________________________________
Federal Income Tax Rate 35.0% 34.0% 34.0%
Increase (Decrease) as a Result of -
State Income Tax, Net of Federal Benefit 4.2% 4.4% 5.0%
Other (2.0%) (0.8%) (0.2%)
----- ----- -----
Effective Tax Rate 37.2% 37.6% 38.8%
===== ===== =====
44
The Company has recorded deferred regulatory assets of $1.5
million and $2.1 million, and deferred regulatory liabilities of $4.4
million and $7.3 million at December 31, 1993 and 1992, respectively,
which are expected to result in cost-of-service adjustments. These
amounts reflect the "gross of tax" presentation required under SFAS
109. T he Company reduced its deferred regulatory liability by $2.2
million as a result of the Federal tax rate increase from 34 percent to
35 percent. The deferred tax assets and liabilities and deferred
regulatory assets and liabilities for rate-regulated entities computed
according to SFAS 109 at December 31, 1993 and 1992 result from the
following (in thousands):
December 31
__________________
1993 1992
_______________________________________________________________________________
Deferred Tax Assets:
Unbilled Revenue $ 2,454 $ 1,599
Vacation Accrual 1,443 1,215
State Taxes 2,652 2,454
Capitalized Overhead Adjustment 3,388 3,526
Operating Reserves 1,497 2,378
Rate Matters (PGA) -- 1,387
Deferred Revenues 1,526 --
Other 3,351 2,148
Revenue Subject to Refund -- 456
------- -------
Total Deferred Tax Assets 16,311 15,163
------- -------
Deferred Tax Liabilities:
Liberalized Depreciation 65,098 56,581
Rate Matters 6,104 3,936
Prepaid Pension 3,432 3,000
Other 2,121 898
------- -------
Total Deferred Tax Liabilities 76,755 64,415
------- -------
Net Deferred Tax Liabilities $60,444 $49,252
======= =======
SFAS 109 Deferred Accounts for Rate Regulated Entities:
Liabilities $ 4,379 $ 7,305
======= =======
Assets $(1,455) $(2,148)
======= =======
7. Financing
(A) Notes Payable
The Company has credit agreements with eight banks to either
borrow or use as commercial paper support, up to a total of $90.0
million at December 31, 1993. At December 31, 1993, $10.0 million was
outstanding under the credit agreements at an interest rate of 3.27
percent. No amounts were outstanding under the credit agreements at
December 31, 1992. Borrowings are made at prime or a rate less than
prime negotiated on the borrowing date and for a term of not more than
one year. The Company pays the banks a fee of one quarter of one
percent per annum of the unused commitment.
Commercial paper issued by the Company represents unsecured
short-term notes with maturities up to 270 days from the date of issue.
Rates at which commercial paper was issued during the year ranged from
3.2 percent to 3.7 percent. At December 31, 1993 and 1992, $37.0
million and $2.0 million of commercial paper, respectively, were
outstanding.
45
(B)Long-Term Debt
Long-term debt at December 31, 1993 and 1992 was as follows (in
thousands):
December 31
____________________
1993 1992
________________________________________________________________________________
Debentures:
6.5% Series, Due 2013 $ 50,000 $ --
7.85% Series, Due 2022 29,985 30,000
Sinking Fund Debentures:
10 3/4% Series, Due 2008 -- 35,000
9.95% Series, Due 2020 20,000 20,000
9 5/8% Series, Due 2021 45,000 45,000
8.35% Series, Due 2022 35,000 35,000
Unamortized Debt Discount (604) (491)
Senior Notes:
7.27%, Due 1995-2002 35,000 35,000
Medium-Term Notes:
9.96% Average Rate, Due 1994-1999 20,500 24,500
Current Maturities of Long-Term Debt (3,000) (4,000)
-------- --------
Total Long-Term Debt $231,881 $220,009
======== ========
Maturities of long-term debt for the five years ending December
31, 1998, are as follows (in thousands):
Year Ending
December 31 Amount
_____________________________________________________________________
1994 $3,000
1995 7,500
1996 7,000
1997 6,000
1998 9,000
In September 1993, K N sold $50 million of 6.5% debentures at
an all-in cost to K N of 6.61 percent. The principal of each debenture
is payable annually in equal installments of ten percent of the
original principal amount beginning in September 2004, and K N has an
option to increase such installments by up to ten percent of the
original principal amount. Proceeds from the debt financing were used
to redeem K N's 10 3/4% sinking fund debentures and to fund capital
expenditures.
In September 1992, K N sold publicly $65 million of debentures
in two separate offerings at a combined all-in cost to the Company of
8.38 percent. One offering consisted of $35 million of 8.35% sinking
fund debentures due September 2022, with mandatory annual sinking fund
payments commencing in September 2003. The other offering consisted of
$30 million of 7.85% debentures due September 2022. In December 1992,
K N sold $35 million of 7.27% senior notes. Final maturity of this
debt is December 2002, with note maturities commencing in December
1995. Proceeds from these debt financings were used to refund the
8 1/2%, 9% and 9 7/8% sinking fund debentures, reduce short-term debt,
and fund capital expenditures.
On November 30, 1993, the Securities and Exchange Commission
approved a shelf registration for the sale of $200 million in debt
securities in anticipation of future long-term financing needs. No
funds have been drawn under this shelf registration.
46
At December 31, 1993 and 1992, the carrying amount of K N's
long-term debt was $235.5 million and $224.5 million, respectively, and
the estimated fair value was $253.3 million and $234.7 million,
respectively. The fair value of K N'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 K N for debt of the same remaining
maturation.
8. Preferred Stock
Preferred stock at December 31, 1993 and 1992 was as follows
(in thousands):
December 31
________________
1993 1992
_____________________________________________________________________________________________
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 A, $8.50 Cumulative Series, 5,000 Shares in 1993 and
15,000 Shares in 1992 $ 500 $1,500
Class B, $8.30 Cumulative Series, 28,576 Shares in 1993 and
40,004 Shares in 1992 2,858 4,000
Current Sinking Fund Requirements (500) (1,000)
------ ------
Total Preferred Stock Subject to Mandatory Redemption $2,858 $4,500
====== ======
(A) Class A $8.50 Preferred Stock
The Class A $8.50 Preferred Stock is subject to mandatory
redemption through a sinking fund (at $100 per share, plus accrued and
unpaid dividends) of $500,000 in 1994. At the option of the Company,
this stock is redeemable, in whole or in part, at $100.85 per share
during 1994. In each of the years 1993 and 1992, the Company redeemed
10,000 shares subject to mandatory redemption. In 1991, the Company
redeemed 10,000 shares subject to mandatory redemption and an
additional 25,000 shares at $102.13 per share.
(B) 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 $571,400 annually from 1995 through 1998 and
$572,000 in 1999. At the option of the Company, this stock is
redeemable, in whole or in part, at $101.74 per share prior to January
2, 1995; such redemption price is reduced annually thereafter until
January 2, 1998, when it becomes $100 per share. Also, at the option
of the Company, 5,714 shares of this stock may be redeemed in each of
the years 1994 through 1998, inclusive, at $100 per share. In each of
the years 1993, 1992 and 1991, the Company redeemed 5,714 shares
subject to mandatory redemption, and an additional 5,714 shares at $100
per share.
(C) 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
47
$105 per share plus accrued dividends. This series has no sinking fund
requirements.
(D) 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.
(E) Combined Aggregate Redemption Requirements
The combined aggregate amount of mandatory redemption
requirements for all preferred issues for the five years ending
December 31, 1998, are as follows (in thousands):
Year Ending
December 31 Amount
_____________________________________________________________________
1994 $500
1995-1998 571
(F) Fair Value
At December 31, 1993, both the carrying amount and the estimated
fair value of K N's outstanding preferred stock subject to mandatory
redemption were $3.4 million, compared with $5.5 million and $5.6
million, respectively, at December 31, 1992. The fair value of K N's
preferred stock is estimated based on an evaluation made by an
independent security analyst.
9. 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 and
equity funds.
48
Net pension cost for 1993, 1992 and 1991 included the following
components (in thousands):
1993 1992 1991
__________________________________________________________________________________
Service Cost - Benefits Earned During the Period $ 2,579 $ 2,712 $ 2,467
Interest Cost on Projected Benefit Obligation 5,698 5,153 4,888
Actual Return on Assets (14,976) (5,486) (15,550)
Net Amortization and Deferral 6,714 (2,598) 8,610
------- ------- -------
Net Periodic Pension Cost $ 15 $ (219) $ 415
======= ======= =======
The following table sets forth the plans' funded status and
amounts recognized in the Company's financial statements at December
31, 1993 and 1992 (in thousands):
December 31
___________________
1993 1992
___________________________________________________________________________________________
Actuarial Present Value of Benefit Obligations:
Vested Benefit Obligation $(71,914) $(65,367)
======== ========
Accumulated Benefit Obligation $(73,005) $(66,792)
======== ========
Projected Benefit Obligation $(81,554) $(74,765)
Plan Assets at Fair Value 101,457 89,739
-------- --------
Plan Assets in Excess of Projected Benefit Obligation 19,903 14,974
Unrecognized Net Gain (9,504) (5,235)
Prior Service Cost Not Yet Recognized in Net Periodic Pension Costs 236 256
Unrecognized Net Asset at January 1 (1,675) (1,817)
-------- --------
Prepaid Pension Cost $ 8,960 $ 8,178
======== ========
The rate of increase in future compensation and the expected
long-term rate of return on assets were 4.5 percent and 8.5 percent,
respectively, for 1993, and 5.0 percent and 9.25 percent, respectively,
for 1992 and 1991. The weighted average discount rate used in
determining the actuarial present value of the projected benefit
obligation was 7.5 percent for all three periods.
The Company also contributes the lesser of ten percent of the
Company's net income or ten percent of normal employee compensation to
the Employees Retirement Fund Trust Profit Sharing Plan (a defined
contribution plan). Contributions by the Company were $2,588,000,
$2,090,000 and $464,000 for 1993, 1992 and 1991, 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 ten 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
49
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.
Net postretirement benefit cost for the defined benefit plan in
1993 included the following components (in thousands):
1993
____________________________________________________________________
Service Cost - Benefits Earned During the Period $ 379
Interest Cost on APBO 1,349
Actual Return on Assets (14)
Net Amortization and Deferral 953
------
Net Periodic Postretirement Benefit Cost $2,667
======
Prior to 1993, the cost of providing medical care benefits to
retired employees was recognized as expense as claims were paid, and
the cost of life insurance benefits for retirees was not accrued.
Instead, life insurance claims were paid from a trust fund resulting
from termination of third party coverage. The Company's net cost of
medical care claims for retirees was approximately $1.2 million and
$1.1 million in 1992 and 1991, respectively. In 1993, the incremental
effect on postretirement cost as a result of adopting SFAS 106 was a
$1.3 million increase.
The following table sets forth the plan's funded status and the
amounts recognized in the Company's financial statements at December
31, 1993(in thousands):
December 31
___________
1993
__________________________________________________________________________________________________
Accumulated Postretirement Benefit Obligation:
Retirees $(13,920)
Active Plan Participants (5,197)
--------
Total APBO (19,117)
Plan Assets at Fair Value 924
--------
Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (18,193)
Unrecognized Net Gain (6)
Prior Service Cost Not Yet Recognized in Net Periodic Postretirement Benefit Cost --
Unrecognized Transition Obligation 17,847
--------
Accrued Postretirement Benefit Cost $ (352)
========
The weighted average discount rate used in determining the
actuarial present value of the APBO was 7.5 percent; the assumed
health care cost trend rate was 11 percent for 1993, nine percent for
1994 and 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 1993 net periodic postretirement benefit cost by
50
$0.1 million and would have increased the APBO as of December 31, 1993,
by $0.1 million.
K N's interstate retail distribution business, in connection
with rate filings described in Note 3 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 requested similar
regulatory treatment from FERC in connection with its rate filing, also
described in Note 3. At December 31, 1993, no SFAS 106 costs were
deferred as regulatory assets.
(C) Other Postemployment Benefits
In November 1992, FASB issued 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. SFAS 112 is effective for
fiscal years beginning after December 15, 1993. Implementation of SFAS
112 is not expected to have a material effect on the Company's
financial position or results of operations.
10. Common Stock Option and Purchase Plans
The Company has incentive stock option plans for key employees
and nonqualified stock option plans for its nonemployee directors.
Under the plans, options are granted at not less than 100 percent of
the market value of the stock at the date of grant. Pursuant to
amendments to the plans' provisions, options granted after 1989 vest
over three to five years and expire ten years after date of grant.
Under earlier grants, all options vested immediately or within three
years and are exercisable for ten years from date of grant.
At December 31, 1993, 91 employees, officers and directors held
options under the plans. The changes in stock options outstanding
during 1993, 1992 and 1991 are as follows, restated to reflect the
three-for-two common stock split described in Note 1(E):
Number of Option Price
Shares Per Share
_______________________________________________________________________________
Outstanding at December 31, 1990 480,416 $ 5.28-$16.79
Granted 99,590 $15.08-$16.04
Exercised (64,505) $10.29-$14.75
Expired (2,252) $ 6.08-$14.75
-------
Outstanding at December 31, 1991 513,249 $ 5.28-$16.79
Granted 25,492 $16.46
Exercised (92,790) $ 5.28-$15.08
-------
Outstanding at December 31, 1992 445,951 $ 5.28-$16.79
Granted 123,000 $23.04-$28.00
Exercised (135,522) $ 5.28-$16.79
Expired (6,751) $ 6.72-$23.04
-------
Outstanding at December 31, 1993 426,678 $ 8.96-$28.00
(207,039 shares exercisable) =======
Unexercised options outstanding at December 31, 1993, expire at
various dates between 1994 and 2003.
51
Effective April 1, 1990, and for each succeeding year, the
Company established an Employee Stock Purchase Plan under which
eligible employees may purchase the Company'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.
Under the Company's Stock Option, Dividend Reinvestment,
Employee Stock Purchase and Employee Benefit Plans, 2,111,299 shares
were reserved for issuance at December 31, 1993.
11. Commitments and Contingent Liabilities
(A) Leases
In 1993, K N Front Range Gathering Company began to lease gas
gathering equipment and facilities under a ten-year operating lease.
Also in 1993, K N and certain subsidiaries began to lease various
furniture, fixtures and vehicles under various operating leases with
terms from three to seven years. In 1992, KNGG began to lease gas
gathering facilities and processing equipment under a seven-year
operating lease. All of these operating leases contain purchase
options at the end of their lease terms.
Payments made under operating leases were $5.2 million in 1993,
$2.4 million in 1992 and $1.9 million in 1991.
Future minimum commitments under major operating leases for the
five years ending December 31, 1998 and thereafter are as follows (in
thousands):
Year Ending
December 31 Amount
_____________________________________________________________________
1994 $ 5,136
1995 4,915
1996 4,319
1997 3,879
1998 3,767
Thereafter 34,202
-------
Total Commitments $56,218
=======
(B) Capital Expenditure Budget
The consolidated capital expenditure budget for 1994 is
approximately $54.5 million, excluding acquisitions. Approximately
$2.0 million had been committed for the purchase of plant and equipment
at December 31, 1993.
12. Discontinued Operations
On June 1, 1991, K N sold its wholly-owned coal mining
subsidiaries, Wyoming Fuel Company and North Central Energy Company.
The Company received cash proceeds of $7.2 million, and receives a
royalty interest on all future coal mined and sold from the southern
Colorado properties.
52
The results of operations of the coal mining subsidiaries have
been accounted for as discontinued operations in the financial
statements. Following is a summary of revenues, loss from operations
and loss on sale of this discontinued business (in thousands):
1991
_____________________________________________________________________________
Revenues $ 5,956
========
Loss from Operations, Net of Income Tax Benefit of $351,000 $ (614)
Loss on Sale, Net of Income Tax Benefit of $18,944,000 (16,636)
--------
Total Loss from Discontinued Operations $(17,250)
========
13. Business Segment Information
The Company's principal operations are the sale and
transportation of natural gas ("Gas Service"), nonregulated gas
marketing and gathering ("Gas Marketing and Gathering") and
exploration, development and production of oil and gas ("Oil and Gas
Production").
Total revenues by segment include sales to unaffiliated
customers. General corporate income and expenses, interest expense and
income taxes are not included in the computation of operating income.
Identifiable assets by segment are those assets used in the Company's
operations in each segment. Corporate assets are principally cash and
investments.
53
BUSINESS SEGMENT INFORMATION
1993 1992 1991
_______________________________________________________________________
(Dollars in Thousands)
Operating Revenues:
Gas Service $320,854 $320,557 $355,563
Gas Marketing and Gathering 207,242 71,585 42,272
Oil and Gas Production 8,462 7,119 4,690
Intersegment Eliminations (43,209) (7,442) (7,186)
-------- -------- --------
$493,349 $391,819 $395,339
======== ======== ========
Operating Income:
Gas Service $ 50,140 $ 48,304 $ 50,612
Gas Marketing and Gathering 7,229 1,263 504
Oil and Gas Production 1,249 803 153
-------- -------- --------
Operating Income 58,618 50,370 51,269
Other Income and (Deductions) - Net (19,964) (18,974) (15,987)
-------- -------- --------
Income from Continuing Operations
Before Income Taxes $ 38,654 $ 31,396 $ 35,282
======== ======== ========
Identifiable Assets:
Gas Service $568,311 $562,325 $513,948
Gas Marketing and Gathering 124,501 18,316 7,890
Oil and Gas Production 25,365 22,153 18,366
Corporate 13,092 16,153 19,452
-------- -------- --------
$731,269 $618,947 $559,656
======== ======== ========
Depreciation, Depletion and
Amortization Expense:
Gas Service $ 21,824 $ 20,876 $ 19,689
Gas Marketing and Gathering 977 218 38
Oil and Gas Production 3,355 3,093 1,634
-------- -------- --------
$ 26,156 $ 24,187 $ 21,361
======== ======== ========
Capital Expenditures:
Gas Service $ 78,110 $ 58,702 $ 51,638
Gas Marketing and Gathering 6,956 2,828 844
Oil and Gas Production 4,757 9,397 6,912
-------- -------- --------
$ 89,823 $ 70,927 $ 59,394
======== ======== ========
54
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY OPERATING RESULTS FOR 1993 AND 1992
(Dollars in Thousands Except Per Share Amounts)
1993
_______________________________________________________________________________________
First Second Third Fourth
_______________________________________________________________________________________
Operating Revenues $152,228 $92,600 $92,654 $155,867
Operating Income 27,020 3,335 5,910 22,353
Net Income (Loss) 13,306 (1,000) 558 11,411
Earnings (Loss) Per Common Share (1) $ 0.88 $ (0.08) $ 0.02 $ 0.75
======== ======= ======= ========
1992
_______________________________________________________________________________________
First Second Third Fourth
_______________________________________________________________________________________
Operating Revenues $124,103 $67,168 $65,345 $135,203
Operating Income 23,549 2,116 2,049 22,656
Net Income (Loss) 11,656 (1,477) (768) 10,182
Earnings (Loss) Per Common Share (1) $ 0.79 $ (0.12) $ (0.07) $ 0.68
======== ======= ======= ========
(1) Restated to reflect a three-for-two common stock split in 1993.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
_____________________________________________________________________
AND FINANCIAL DISCLOSURE
________________________
There were no such matters during 1993.
55
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
____________________________________________________________
(A) Identification of Directors
___________________________
For information regarding the Directors, see pages 2-3 of the
1994 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
____________________
None.
(E) Business Experience
___________________
See Executive Officers of the Registrant under Part I.
(F) Involvement in Certain Legal Proceedings
________________________________________
See Executive Officers of the Registrant under Part I.
(G) Promoters and Control Persons
_____________________________
None.
ITEM 11: EXECUTIVE COMPENSATION
________________________________
See "Executive Compensation", "Stock Options", "Pension
Benefits" and "Director Compensation" on pages 4-5, 8-10, 12 and 13 of
the 1994 Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
________________________________________________________________________
See the following pages of the 1994 Proxy Statement: (i) pages
2-3 relating to common stock owned by directors; (ii) page 11,
"Executive Stock Ownership"; and (iii) pages 18-19, "Principal
Shareholders".
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
________________________________________________________
(A) Transactions with Management and Others
_______________________________________
See "Relationship Between Certain Directors and the Company"
on page 4 of the 1994 Proxy Statement.
(B) Certain Business Relationships
______________________________
See "Relationship Between Certain Directors and the Company"
on page 4 of the 1994 Proxy Statement.
56
(C) Indebtedness of Management
__________________________
None.
(D) Transactions with Promoters
___________________________
Not applicable.
57
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, financial statement schedules 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)*
58
K N Energy, Inc. 1993 Executive Incentive Plan (Exhibit
10(k) to the Annual Report on Form 10-K for the Year
Ended December 31, 1992)*
K N Energy, Inc. 1994 Executive Incentive Plan (attached
hereto as 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)*
(b) Reports on Form 8-K
On February 3, 1994, the Company filed a Form 8-K which
disclosed that on February 1, 1994, K N's gas reserves
development subsidiaries, K N Production Company and
GASCO, Inc., acquired gas reserves and production
properties located near existing K N operations in
western Colorado and in the Moxa Arch region of
southwestern Wyoming from Fuel Resources Development Co.,
a subsidiary of Public Service Co. of Colorado.*
* Incorporated herein by reference.
** Included in SEC and NYSE copies only.
59
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 23, 1994 By /s/ E. Wayne Lundhagen
______________________________________
E. Wayne Lundhagen
Vice President - Finance and Accounting
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 dates indicated.
Chairman, Chief Executive
Officer and Director
/s/ Charles W. Battey (Principal Executive Officer) March 23, 1994
___________________________
Charles W. Battey
/s/ Stewart A. Bliss Director March 23, 1994
___________________________
Stewart A. Bliss
/s/ David W. Burkholder Director March 23, 1994
___________________________
David W. Burkholder
/s/ Robert H. Chitwood Director March 23, 1994
___________________________
Robert H. Chitwood
/s/ Howard P. Coghlan Director March 23, 1994
___________________________
Howard P. Coghlan
/s/ Robert B. Daugherty Director March 23, 1994
___________________________
Robert B. Daugherty
/s/ Jordan L. Haines Director March 23, 1994
___________________________
Jordan L. Haines
/s/ Larry D. Hall Director March 23, 1994
___________________________
Larry D. Hall
/s/ William J. Hybl Director March 23, 1994
___________________________
William J. Hybl
Vice President - Finance
and Accounting (Principal
Financial and Accounting
/s/ E. Wayne Lundhagen Officer) March 23, 1994
___________________________
E. Wayne Lundhagen
/s/ H. A. True, III Director March 23, 1994
___________________________
H. A. True, III
60
K N ENERGY, INC. AND SUBSIDIARIES SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
THREE YEARS ENDED DECEMBER 31, 1993
Balance Retirements Transfers
Beginning or Sales and Balance
Description of Period Additions at Cost Adjustments End of Period
___________ ________________________________________________________________
(Dollars in Thousands)
Year Ended December 31, 1993:
Natural Gas Utility Plant
Plant in Service
Intangibles . . . . . . . . . . . . . $ 557 $ 1,401 $ -- $ 2,717 $ 4,675
Production. . . . . . . . . . . . . . 10,498 1,783 (320) 923 12,884
Gathering . . . . . . . . . . . . . . 96,578 2,634 (2,519) (1,458) 95,235
Underground storage . . . . . . . . . 26,010 1,024 (29) -- 27,005
Transmission. . . . . . . . . . . . . 287,942 32,231 (1,836) 19,526 337,863
Distribution. . . . . . . . . . . . . 149,107 10,315 (755) 11,303 169,970
General . . . . . . . . . . . . . . . 54,018 24,930 (2,176) 1,335 78,107
Work in Progress. . . . . . . . . . . . 27,283 3,315 -- -- 30,598
Gas Plant Acquired. . . . . . . . . . . -- 477 -- (477) --
Gas Stored Underground - Noncurrent . . 68,813 6,059 -- (10,649) 64,223
Utility Plant Acquisition Adjustment. . 9,713 -- -- (19) 9,694
-------- ------- -------- -------- --------
Total Natural Gas Utility Plant . . . 730,519 84,169 (7,635) 23,201 830,254
Gas Marketing and Gathering . . . . . . . 6,461 6,956 (2,976) 1,943 12,384
Oil and Gas Production. . . . . . . . . . 31,758 4,757 (260) (1,874) 34,381
-------- ------- -------- -------- --------
$768,738 $95,882 $(10,871) $ 23,270 $877,019
======== ======= ======== ======== ========
Year Ended December 31, 1992:
Natural Gas Utility Plant
Plant in Service
Intangibles . . . . . . . . . . . . . $ 557 $ -- $ -- $ -- $ 557
Production. . . . . . . . . . . . . . 10,708 516 (7) (719) 10,498
Gathering . . . . . . . . . . . . . . 124,484 2,878 (11,751) (19,033) 96,578
Underground storage . . . . . . . . . 23,371 3,518 (572) (307) 26,010
Transmission. . . . . . . . . . . . . 249,194 18,729 (477) 20,496 287,942
Distribution. . . . . . . . . . . . . 133,765 9,138 (1,060) 7,264 149,107
General . . . . . . . . . . . . . . . 49,068 7,577 (2,742) 115 54,018
Work in Progress. . . . . . . . . . . . 17,554 9,729 -- -- 27,283
Gas Plant Acquired. . . . . . . . . . . -- 6,617 -- (6,617) --
Gas Stored Underground - Noncurrent . . 68,823 (10) -- -- 68,813
Utility Plant Acquisition Adjustment. . 9,240 -- -- 473 9,713
-------- ------- -------- -------- --------
Total Natural Gas Utility Plant . . . 686,764 58,692 (16,609) 1,672 730,519
Gas Marketing and Gathering . . . . . . . 1,074 2,828 -- 2,559 6,461
Oil and Gas Production. . . . . . . . . . 24,296 9,397 (637) (1,298) 31,758
-------- ------- -------- -------- --------
$712,134 $70,917 $(17,246) $ 2,933 $768,738
======== ======= ======== ======== ========
Year Ended December 31, 1991:
Natural Gas Utility Plant
Plant in Service
Intangibles . . . . . . . . . . . . . $ 556 $ -- $ -- $ 1 $ 557
Production. . . . . . . . . . . . . . 9,187 412 (191) 1,300 10,708
Gathering . . . . . . . . . . . . . . 123,020 2,918 (1,413) (41) 124,484
Underground storage . . . . . . . . . 22,114 1,905 (52) (596) 23,371
Transmission. . . . . . . . . . . . . 219,997 31,589 (1,111) (1,281) 249,194
Distribution. . . . . . . . . . . . . 128,024 5,891 (643) 493 133,765
General . . . . . . . . . . . . . . . 41,713 9,256 (1,725) (176) 49,068
Work in Progress. . . . . . . . . . . . 17,887 (333) -- -- 17,554
Gas Stored Underground - Noncurrent . . 68,151 670 -- 2 68,823
Utility Plant Acquisition Adjustment. . 9,240 -- -- -- 9,240
-------- ------- -------- -------- --------
Total Natural Gas Utility Plant . . . 639,889 52,308 (5,135) (298) 686,764
Gas Marketing and Gathering . . . . . . . 152 844 -- 78 1,074
Oil and Gas Production. . . . . . . . . . 17,500 6,912 (226) 110 24,296
-------- ------- -------- -------- --------
$657,541 $60,064 $ (5,361) $ (110) $712,134
======== ======= ======== ======== ========
61
SCHEDULE VI
K N ENERGY, INC. AND SUBSIDIARIES
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
THREE YEARS ENDED DECEMBER 31, 1993
Additions
----------------------
Charged to Salvage
Balance Clearing and Retirements Less Balance
Beginning Charged to Other or Sales Cost of End of
Description of Period Income Accounts at Cost Removal Transfers Period
___________ _________ ________________________________________________________________
(Dollars in Thousands)
Year Ended December 31, 1993:
Natural Gas Utility Plant. . . . . . . . . . . $302,154 $21,774 $1,961 $(6,203) $34,625 $ 495 $354,806
Gas Marketing and Gathering. . . . . . . . . . 267 977 -- (136) -- -- 1,108
Oil and Gas Production . . . . . . . . . . . . 11,241 3,574 -- (168) -- (604) 14,043
-------- ------- ------ ------- ------- ------- --------
Total Accumulated Depreciation, Depletion
and Amortization . . . . . . . . . . . . . $313,662 $26,325 $1,961 $(6,507) $34,625 $ (109) $369,957
======== ======= ====== ======= ======= ======= ========
Year Ended December 31, 1992:
Natural Gas Utility Plant. . . . . . . . . . . $291,584 $20,473 $1,625 $(6,062) $ (121) $(5,345) $302,154
Gas Marketing and Gathering. . . . . . . . . . 50 217 -- -- -- -- 267
Oil and Gas Production . . . . . . . . . . . . 8,065 3,418 -- 501 -- (743) 11,241
-------- ------- ------ ------- ------- ------- --------
Total Accumulated Depreciation, Depletion
and Amortization . . . . . . . . . . . . . $299,699 $24,108 $1,625 $(5,561) $ (121) $(6,088) $313,662
======== ======= ====== ======= ======= ======= ========
Year Ended December 31, 1991:
Natural Gas Utility Plant. . . . . . . . . . . $276,194 $19,286 $1,484 $(5,183) $ (197) $ -- $291,584
Gas Marketing and Gathering. . . . . . . . . . 13 38 -- -- -- (1) 50
Oil and Gas Production . . . . . . . . . . . . 6,062 1,657 -- 467 -- (121) 8,065
-------- ------- ------ ------- ------- ------- --------
Total Accumulated Depreciation, Depletion
and Amortization . . . . . . . . . . . . . $282,269 $20,981 $1,484 $(4,716) $ (197) $ (122) $299,699
======== ======= ====== ======= ======= ======= ========
62
SCHEDULE IX
K N ENERGY, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
THREE YEARS ENDED DECEMBER 31, 1993
The Company has credit agreements with eight banks to either borrow or
use as commercial paper support, up to a total of $90.0 million at December
31, 1993. Borrowings are made at prime or a rate less than prime negotiated
on the borrowing date and for a term of not more than one year. The Company
pays the banks a fee of one-quarter of one percent per annum of the unused
commitment.
Commercial paper issued by the Company represents unsecured short-term
notes with maturities up to 270 days from the date of issue. Rates at which
commercial paper was issued during the year ranged from 3.2 percent to 3.7
percent.
Amounts outstanding during the year and at year-end, and related
interest rates, were as follows:
Maximum Average
Weighted Amount Amount Weighted Average
Balance Average Outstanding Outstanding Interest Rate
Category of Aggregate End of Interest During the During the During the
Short-Term Borrowings Period Rate Period Period (A) Period (B)
___________________________________ ________ ________ ___________ ___________ ________________
(Dollars in Thousands)
Year Ended December 31, 1993:
Bank Loans. . . . . . . . . . . . $ 10,000 3.3% $ 10,000 $ 5,060 3.5%
Commercial Paper. . . . . . . . . 37,000 3.5 59,500 8,829 3.3
Year Ended December 31, 1992:
Bank Loans. . . . . . . . . . . . $ -- --% $ 10,000 $ 6,329 3.8%
Commercial Paper. . . . . . . . . 2,000 3.7 43,000 10,847 3.6
Year Ended December 31, 1991:
Bank Loans. . . . . . . . . . . . $ -- --% $ -- $ -- --%
Commercial Paper. . . . . . . . . -- -- 15,600 1,368 6.8
(A) The average borrowings were determined based on the total of daily
outstanding principal balances divided by the number of days in the year.
(B) The weighted average interest rates during the period were computed by
dividing the actual interest expense by the average short-term debt
outstanding.
63
SCHEDULE X
K N ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
THREE YEARS ENDED DECEMBER 31, 1993
The amounts of depreciation and amortization of intangible
assets, preoperating costs and similar deferrals, and advertising costs
are not considered to be significant. The amount of taxes, other than
payroll and income taxes, maintenance and repairs, and royalties for
1993, 1992 and 1991, are as follows:
Charged to Costs and Expenses
-----------------------------
Item 1993 1992 1991
____ ______ ______ ______
(Dollars in Thousands)
Taxes, other than payroll and income
taxes
Ad valorem. . . . . . . . . . . . $6,527 $4,812 $3,154
Other . . . . . . . . . . . . . . 1,714 2,015 1,924
------ ------ ------
$8,241 $6,827 $5,078
====== ====== ======
Maintenance and repairs . . . . . . . $7,661 $7,264 $7,364
====== ====== ======
Royalties . . . . . . . . . . . . . . $2,771 $2,896 $3,431
====== ====== ======
64
EXHIBIT 12
K N ENERGY, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31
___________________________________________________
1993 1992 1991 1990 1989
___________________________________________________
(Dollars in Thousands)
Earnings:
Income From Continuing Operations
Before Extraordinary Item
per Statements of Income . . . . . . . . . $24,275 $19,593 $21,600 $18,646 $17,507
Add:
Interest and Debt Expense. . . . . . . . . 21,769 19,891 17,376 17,104 18,690
Income Taxes . . . . . . . . . . . . . . . 14,379 11,803 13,682 11,249 11,183
Portion of Rents Representative of the
Interest Factor. . . . . . . . . . . . . 1,754 790 579 502 565
------- ------- ------- ------- -------
Income as Adjusted . . . . . . . . . . . . . $62,177 $52,077 $53,237 $47,501 $47,945
======= ======= ======= ======= =======
Fixed Charges:
Interest and Debt Expense per Statements
of Income (Includes Amortization of Debt
Discount, Premium and Expense) . . . . . . $21,200 $19,373 $17,169 $16,695 $18,643
Add:
Interest Capitalized . . . . . . . . . . . 569 518 207 409 47
Portion of Rents Representative of the
Interest Factor. . . . . . . . . . . . . 1,754 790 579 502 565
------- ------- ------- ------- -------
Fixed Charges. . . . . . . . . . . . . . . . $23,523 $20,681 $17,955 $17,606 $19,255
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges . . . . . . 2.64 2.52 2.97 2.70 2.49
======= ======= ======= ======= =======
65
EXHIBIT 13
K N ENERGY, INC.
________________
1993 ANNUAL REPORT TO SHAREHOLDERS
__________________________________
Interested persons may receive a copy of the Company's 1993
Annual Report to Shareholders without charge by forwarding a written
request to: K N Energy, Inc., Securities Services Department, P. O. Box
281304, Lakewood, Colorado 80228-8304.
66
EXHIBIT 22
K N ENERGY, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
State of
Name of Company Incorporation
__________________________________________________ _____________
Colorado Gasmark, Inc. (inactive). . . . . . . . . Colorado
GASCO, Inc.. . . . . . . . . . . . . . . . . . . . Colorado
KNE Acquisition Corporation. . . . . . . . . . . . Delaware
K N Dakota Company (inactive). . . . . . . . . . . Colorado
K N Front Range Operating Company. . . . . . . . . Colorado
K N Gas Gathering, Inc.. . . . . . . . . . . . . . Colorado
*K N Front Range Gathering Company . . . . . . . Colorado
K N Gas Marketing, Inc.. . . . . . . . . . . . . . Colorado
K N Gas Supply Services, Inc.. . . . . . . . . . . Colorado
K N Interstate Gas Transmission Co.. . . . . . . . Colorado
K N Optima Company (inactive). . . . . . . . . . . Colorado
K N Production Company . . . . . . . . . . . . . . Delaware
K N Trading, Inc.. . . . . . . . . . . . . . . . . Delaware
K N TransColorado, Inc.. . . . . . . . . . . . . . Colorado
K N Wattenberg Company . . . . . . . . . . . . . . Colorado
*K N Wattenberg Transmission Limited Liability
Company . . . . . . . . . . . . . . . . . . . . Colorado
Midlands Transportation Company. . . . . . . . . . Kansas
Northern Gas Company . . . . . . . . . . . . . . . Wyoming
R M N G Gathering Co.. . . . . . . . . . . . . . . Colorado
Rocky Mountain Natural Gas Company . . . . . . . . Colorado
*T C P Gathering Co. . . . . . . . . . . . . . . Colorado
Slurco Corporation . . . . . . . . . . . . . . . . Colorado
Slurco, Inc. (inactive). . . . . . . . . . . . . . Kansas
Sunflower Pipeline Company . . . . . . . . . . . . Kansas
Wyoming Gasmark, Inc. (inactive) . . . . . . . . . Delaware
*Second tier subsidiary of K N; subsidiary of entity listed directly
above.
All of the subsidiaries named above are included in the consolidated
financial statements of the Registrant included herein.
67
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
_________________________________________
As independent public accountants, we hereby consent to the
incorporation by reference in (i) Registration Statements on Form S-16,
File Nos. 2-51894, 2-55664, 2-63470 and 2-75654; (ii) Registration
Statements on Form S-8, File Nos. 2-77752, 33-10747, 33-24934 and 33-
33018; and (iii) Registration Statements on Form S-3, File Nos. 2-84910,
33-26314, 33-23880, 33-42698, 33-44871, 33-45091, 33-46999 and 33-51115
of our report dated February 10, 1994, on the consolidated financial
statements of K N Energy, Inc. and subsidiaries and on supplemental
Schedules V, VI, IX and X included in this Form 10-K for the year ended
December 31, 1993.
/s/ Arthur Andersen & Co.
Denver, Colorado.
March 23, 1994.