-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, F/wMtCrUsQOnHpV4o5H9G7LDg2gEYT/dNq5oun2fmEtQjLH0EGHOMmOsO/oIhn/1 cLsOWrCBVqy9gLK9T1sD+Q== 0000950129-94-000476.txt : 19940614 0000950129-94-000476.hdr.sgml : 19940614 ACCESSION NUMBER: 0000950129-94-000476 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940609 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K N ENERGY INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: 4923 IRS NUMBER: 480290000 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-06446 FILM NUMBER: 94533524 BUSINESS ADDRESS: STREET 1: P O BOX 281304 STREET 2: 12055 WEST 2ND PLACE CITY: LAKEWOOD STATE: CO ZIP: 80228 BUSINESS PHONE: 3039891740 FORMER COMPANY: FORMER CONFORMED NAME: KN ENERGY INC DATE OF NAME CHANGE: 19920430 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS NEBRASKA NATURAL GAS CO INC DATE OF NAME CHANGE: 19830403 10-K/A 1 AMENDMENT TO FORM 10-K -- K N ENERGY, INC. 1 _______________________________________________________________________________ _______________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (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. 1994 Proxy Statement...............................................Part III _______________________________________________________________________________ _______________________________________________________________________________ 2 K N ENERGY, INC. AND SUBSIDIARIES Documents Incorporated by Reference and Index
Page Number ------------------------ 1994 Proxy Included Statement in 10-K ---------- ---------- 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
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Page Number ------------------------- 1994 Proxy Included Statement in 10-K ---------- ---------- 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)*
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Page Number ------------------------- 1994 Proxy Included Statement in 10-K ---------- ---------- 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 . . . . . . . . . . . . . . . . . . . . . . . . . 69 (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. 4 5 PART I 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). 5 6
1993 1992 1991 ------ ------ ------ GAS SERVICE 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. 6 7 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.
1993 1992 1991 ------ ----- ----- GAS MARKETING AND GATHERING 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. 7 8 The combined impact on the Company's Gas Services and Gas Marketing and Gathering activities from the Wattenberg, Douglas and Wind River transactions were as follows:
1993 1992 ---- ---- Operating Revenues $47.4 $7.8 Operating Costs and Expenses 38.8 6.7 ----- ---- Operating Income $ 8.6 $1.1 ===== ==== 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.
1993 1992 1991 ------ ------ ------ OTHER INCOME AND (DEDUCTIONS) 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.
1993 1992 1991 ----- ----- ----- INCOME TAXES Applicable to Continuing Operations $14.4 $11.8 $13.7 ===== ===== ===== Effective Tax Rate 37.2% 37.6% 38.8% ===== ===== =====
8 9 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. 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 under the terms of the gas purchase contracts under K N's Supply Transition Program administered by K N Gas Supply Services, Inc., a wholly-owned subsidiary of K N, or the existing state and local regulatory rules and 9 10 regulations for K N Retail, K N's local distribution company. As a result, the Company has experienced no losses due to unfavorable pricing and none are anticipated. At December 31, 1993, the level of outstanding payments was $11.7 million. 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. 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. 10 11 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. 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. 11 12 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. 12 13 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. /s/ Arthur Andersen & Co. Denver, Colorado, February 10, 1994. 13 14 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. 14 15 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 -------- --------
15 16 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. 16 17 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 K N ENERGY, INC. AND SUBSIDIARIES
COMMON STOCK TREASURY STOCK ADDITIONAL -------------------- ------------------ 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 PurchasePlans 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. 17 18 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 Deferred Revenues 4,960 -- -- Changes in Other Assets and Liabilities 9,224 (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. 18 19 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 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 19 20 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. 20 21 (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 ======== ======== =======
21 22 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 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 22 23 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 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 23 24 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. 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 24 25 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. 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. 25 26 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% ----- ----- ----- ----- ----- -----
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. The 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): 26 27
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. During 1993 all borrowings were made for terms of approximately one month. 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 not to exceed 270 days from the date of issue. During 1993 all commercial paper issued was redeemed within 90 days, with interest rates ranging 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. 27 28 (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 - - ----------------------------------------------- [S] [C] 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 declared effective, pursuant to Section 8(a) of the Securities Act of 1933, 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. 28 29 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 $105 per share plus accrued dividends. This series has no sinking fund requirements. 29 30 (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. 30 31 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 funding policy is to 31 32 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 $0.1 million and would have increased the APBO as of December 31, 1993, by $0.1 million. 32 33 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. 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. 33 34 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. 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) ========
34 35 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. 35 36 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 ======== ======== ========
36 37 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. 37 38 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) June 9, 1994 By /s/ E. Wayne Lundhagen ______________________________________ E. Wayne Lundhagen Vice President - Finance and Accounting 38 39 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. During 1993 all borrowings were made for terms of approximately one month. 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 not to exceed 270 days from the date of issue. During 1993 all commercial paper issued was redeemed within 90 days, with interest rates ranging 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. 39 40 Index to Exibits
Description Page ----------- ---------- (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
41
Description Page ----------- ---------- 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)*
42
Description Page ----------- ---------- 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 . . . . . . . . . . . . . . . . . . . . . . . . . 69
* 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. -----END PRIVACY-ENHANCED MESSAGE-----