-----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, an0GN8PPPqxfg0hjmaKO2jR3yucDmge1ujphWjfwpOlbzFYLqu7noRj24eEo0foC 1up3yjU/soruF3Fcs+IDoQ== 0000950134-94-001382.txt : 19941116 0000950134-94-001382.hdr.sgml : 19941116 ACCESSION NUMBER: 0000950134-94-001382 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06446 FILM NUMBER: 94559977 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-Q 1 FORM 10-Q (FOR THE PERIOD ENDED 09/30/94) 1 _______________________________________________________________________________ _______________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 1-6446 K N ENERGY, INC. (Exact name of registrant as specified in its charter) Kansas 48-0290000 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 370 Van Gordon Street P.O. Box 281304, Lakewood, Colorado 80228-8304 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (303) 989-1740 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $5 par value; authorized 50,000,000 shares; outstanding 27,614,756 shares as of October 31, 1994. _______________________________________________________________________________ _______________________________________________________________________________ 2 Form 10-Q K N ENERGY, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1994 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements
Page Number ----------- Consolidated Balance Sheets . . . . . . . . . . . . 3 & 4 Consolidated Statements of Income (Unaudited) . . . . . . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows (Unaudited) . . . . . . . . . . . . . . . . . . . 6 & 7 Notes to Consolidated Financial Statements . . . . . 8 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 11 - 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 15 - 16 Item 6. Exhibits and Reports on Form 8-K Exhibit 27 - Financial Data Schedule* Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 16 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
*Included in SEC EDGAR Filing Only. 2 3 Form 10-Q CONSOLIDATED BALANCE SHEETS K N Energy, Inc. and Subsidiaries
SEPTEMBER DECEMBER 30, 1994 31, 1993 - ----------------------------------------------------------------------------------------------------- (Unaudited) (In Thousands) ASSETS CURRENT ASSETS: Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . $ 11,151 $ 14,353 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . 114,398 177,146 Contract Demand Receivables . . . . . . . . . . . . . . . . . . . . . -- 38,732 Material and Supplies, at Average Cost. . . . . . . . . . . . . . . . 11,344 11,604 Gas in Underground Storage. . . . . . . . . . . . . . . . . . . . . . 33,096 20,853 Prepaid Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,239 11,689 Exchange Gas and Other. . . . . . . . . . . . . . . . . . . . . . . . 40,505 38,479 ---------- ---------- 223,733 312,856 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, AT COST: Gas Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261,322 1,208,965 Gas and Oil Production. . . . . . . . . . . . . . . . . . . . . . . . 62,500 34,381 ---------- ---------- 1,323,822 1,243,346 Less--Accumulated Depreciation, Deple- tion and Amortization. . . . . . . . . . . . . . . . . . . . . . . 459,609 427,642 ---------- ---------- 864,213 815,704 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS . . . . . . . . . . . . . . . . . . 26,829 39,288 ---------- ---------- $1,114,775 $1,167,848 ========== ==========
The accompanying notes are an integral part of these balance sheets. 3 4 Form 10-Q CONSOLIDATED BALANCE SHEETS K N Energy, Inc. and Subsidiaries
SEPTEMBER DECEMBER 30, 1994 31, 1993 - ------------------------------------------------------------------------------------------------------ (Unaudited) (In Thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current Maturities of Preferred Stock and Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . $ 29,095 $ 26,837 Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,570 47,000 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . 83,723 144,245 Accrued Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,035 10,474 Exchange Gas and Other . . . . . . . . . . . . . . . . . . . . . . 36,470 33,348 ---------- ---------- 284,893 261,904 ---------- ---------- DEFERRED LIABILITIES, CREDITS AND RESERVES: Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 87,988 89,831 Deferred Revenues . . . . . . . . . . . . . . . . . . . . . . . . . 43,198 43,692 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,448 22,136 ---------- ---------- 156,634 155,659 ---------- ---------- LONG-TERM DEBT: Sinking Fund Debentures . . . . . . . . . . . . . . . . . . . . . . 99,564 99,543 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,305 235,647 ---------- ---------- 262,869 335,190 ---------- ---------- MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES . . . . . . . . . . . 14,090 13,775 ---------- ---------- PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION . . . . . . . . . . 2,286 2,858 ---------- ---------- STOCKHOLDERS' EQUITY: Preferred Stock- Authorized - Class A, 200,000 Shares; Class B, 2,000,000 Shares, All Without Par Value Redeemable Solely at Option of Company at $105 Per Share - Class A, $5.00 Cumulative Series; 70,000 Shares . . . . . . . . . . . . . . . . . . . . . 7,000 7,000 ---------- ---------- Common Stockholders' Equity Common Stock- Authorized - 50,000,000 Shares, Par Value $5 Per Share, Outstanding 27,610,068 and 27,200,967 Shares, Respectively . . . . . . . . . . . . . . . . . . . . 138,050 136,005 Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . 170,865 164,427 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . 80,171 92,187 Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . (435) (1,157) ---------- ---------- 388,651 391,462 ---------- ---------- Treasury Stock, at Cost, (74,056 and 0 shares, Respectively) . . (1,648) -- ---------- ---------- Total Common Stockholders' Equity . . . . . . . . . . . . . . . . 387,003 391,462 ---------- ---------- Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 394,003 398,462 ---------- ---------- $1,114,775 $1,167,848 ========== ==========
4 5 Form 10-Q CONSOLIDATED STATEMENTS OF INCOME (Unaudited) K N Energy, Inc. and Subsidiaries
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------------------------- 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------- (In Thousands Except Per Share Amounts) OPERATING REVENUES: Gas Services . . . . . . . . . . . . . . . . . . . . . . . . . . $ 224,523 $ 233,621 $ 801,936 $ 734,311 Gas and Oil Production . . . . . . . . . . . . . . . . . . . . . 3,846 1,331 9,706 3,869 --------- --------- --------- --------- Total Operating Revenues . . . . . . . . . . . . . . . . . . . . 228,369 234,952 811,642 738,180 --------- --------- --------- --------- OPERATING COSTS AND EXPENSES: Gas Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . 153,288 168,560 584,283 519,737 Operations and Maintenance . . . . . . . . . . . . . . . . . . . 39,066 39,681 119,397 120,552 Depreciation, Depletion and Amortization . . . . . . . . . . . . 13,231 11,502 40,213 33,461 Taxes, Other Than Income Taxes . . . . . . . . . . . . . . . . . 4,467 3,848 13,082 11,604 Merger and Restructuring Costs . . . . . . . . . . . . . . . . . 25,945 -- 25,945 -- --------- --------- --------- --------- Total Operating Costs and Expenses . . . . . . . . . . . . . . . 235,997 223,591 782,920 685,354 --------- --------- --------- --------- OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . (7,628) 11,361 28,722 52,826 --------- --------- --------- --------- OTHER INCOME AND (DEDUCTIONS): Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . (8,079) (8,051) (22,769) (23,179) Minority Interests . . . . . . . . . . . . . . . . . . . . . . . (40) 93 (278) 290 Other, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . 501 1,530 2,221 2,538 --------- --------- --------- --------- Total Other Income and (Deductions) . . . . . . . . . . . . . . . (7,618) (6,428) (20,826) (20,351) --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . . . . . (15,246) 4,933 7,896 32,475 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (2,786) 2,202 5,487 12,059 --------- --------- --------- --------- NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . (12,460) 2,731 2,409 20,416 Less--Preferred Stock Dividends . . . . . . . . . . . . . . . . . 157 203 472 651 --------- --------- --------- --------- NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK . . . . . . . . . . $ (12,617) $ 2,528 $ 1,937 $ 19,765 ========= ========= ========= ========= NUMBER OF COMMON SHARES USED IN COMPUTING EARNINGS PER SHARE . . 28,153 27,435 28,035 27,366 ========= ========= ========= ========= EARNINGS (LOSS) PER COMMON SHARE . . . . . . . . . . . . . . . . $ (0.45) $ 0.10 $ 0.07 $ 0.73 ========= ========= ========= ========= DIVIDENDS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.13 $ 0.51 $ 0.38 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 5 6 Form 10-Q CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) K N Energy, Inc. and Subsidiaries
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,409 $ 20,416 Adjustments to Reconcile Net Income to Net Cash From Operating Activities: Depreciation, Depletion and Amortization. . . . . . . . . . . . . . . . . . . . . . . . 40,213 33,461 Minority Interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 (290) Asset Write-off Associated with Merger. . . . . . . . . . . . . . . . . . . . . . . . . 2,500 -- Provisions for Losses on Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . 675 1,015 (Gain) Loss on Sale of Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,357) 99 Resolution of Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . (514) (1,127) Executive Stock Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043 -- Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,317 7,844 Deferred Purchased Gas Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,979 (7,201) Other Funds Used During Construction. . . . . . . . . . . . . . . . . . . . . . . . . . (147) (186) Changes in Other Working Capital Items Net of Effects from Acquisitions . . . . . . . . . 23,807 7,714 Changes in Other Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 9,864 16,154 -------- -------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . 84,067 77,899 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (63,743) (75,996) Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,598) (24,354) Other Funds Used During Construction . . . . . . . . . . . . . . . . . . . . . . . . . . 147 186 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (778) 76 Proceeds from Sale of Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,550 1,568 (Payments) Collections under Basket Agreement . . . . . . . . . . . . . . . . . . . . . . (199) 495 -------- -------- NET CASH FLOWS USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . (90,621) (98,025) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-Term Debt (Net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,570 22,500 Long-Term Debt - Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100 77,847 Long-Term Debt - Retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71,762) (72,205) Common Stock Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,990 6,042 Treasury Stock - Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 -- - Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,065) -- Cash Dividends - Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,953) (10,149) - Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (472) (651) Minority Interests Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,163 2,425 Minority Interests Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,636) (2,507) Premium on Debt Reacquisition and Issue Costs . . . . . . . . . . . . . . . . . . . . . . -- (3,577) -------- -------- NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . 3,352 19,725 -------- -------- Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . (3,202) (401) Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . 14,353 23,554 -------- -------- Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . . . . . . . $ 11,151 $ 23,153 ======== ========
The accompanying notes are an integral part of these statements. 6 7 Form 10-Q CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) K N Energy, Inc. and Subsidiaries
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1994 1993 - -------------------------------------------------------------------------------------------------- (In Thousands) CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY: Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . $ 62,073 $ 14,434 Contract Demand Receivables . . . . . . . . . . . . . . . . . . . . 38,732 -- Material and Supplies . . . . . . . . . . . . . . . . . . . . . . . 260 (1,586) Gas in Underground Storage . . . . . . . . . . . . . . . . . . . . (12,243) (12,595) Accounts Payable, Accrued Taxes and Other Current Liabilities . . . (61,271) 13,901 Exchange Gas, Net . . . . . . . . . . . . . . . . . . . . . . . . . 6,192 (3,728) Other Current Assets . . . . . . . . . . . . . . . . . . . . . . . (9,936) (2,712) -------- -------- $ 23,807 $ 7,714 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Year for: Interest (Net of Amount Capitalized) . . . . . . . . . . . . . . $ 24,799 $ 25,248 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,066 $ 7,781
7 8 Form 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General In the opinion of management, all adjustments necessary for a fair statement of the results for the unaudited interim periods have been made. These adjustments consist only of normal recurring accruals. 2. Merger On July 13, 1994, pursuant to the Agreement of Merger dated March 24, 1994, among K N, KNE Acquisition Corporation and American Oil and Gas Corporation ("AOG"), KNE Acquisition Corporation was merged with and into AOG. KNE Acquisition Corporation had been formed by K N in February 1994, as its wholly-owned subsidiary, for the purpose of participating in the merger. As a result of the merger, each outstanding share of common stock of AOG was converted into 0.47 of a share of common stock of K N and the right to receive in cash the value of any fractional share of K N. In connection with the merger, all the outstanding shares of AOG common stock were converted into approximately 12.2 million shares of K N stock, and the authorized number of shares of K N common stock was increased to 50 million shares. On July 13, 1994, the stockholders of K N approved the issuance of stock in connection with the merger, as well as certain other matters, and the shareholders of AOG approved the merger. The merger was accounted for as a pooling of interests, and accordingly the historical consolidated financial statements for periods prior to consummation of the merger have been restated as though the companies had been combined for all periods reported herein. The following table provides a reconciliation of revenues and earnings reported by K N to the combined amounts presented for the periods indicated (in thousands):
Nine Months Ended Nine Months Ended September 30, 1994 September 30, 1993 --------------------------------- -------------------------------- K N AOG* TOTAL K N AOG TOTAL -------- -------- -------- -------- -------- -------- Operating Revenues $541,767 $269,875 $811,642 $334,828 $403,352 $738,180 ======== ======== ======== ======== ======== ======== Net Income (Loss) $ (204)** $ 2,613 $ 2,409 $ 12,864 $ 7,552 $ 20,416 ======== ======== ======== ======== ======== ========
* Represents revenues and earnings of AOG prior to the July 13, 1994 merger. ** Includes merger and restructuring costs totaling $19.3 million after taxes. 3. Merger and Restructuring Costs The Company has recorded merger and restructuring costs totaling $25.9 million in the third quarter of 1994. Total cash expenditures relating 8 9 Form 10-Q to these charges through September 30, 1994, were $15.9 million; $7.5 million of the charges remained unspent at that date. Merger expenses include $12.4 million in investment bankers and other professional fees, $7.7 million for severance and employee benefit costs for approximately 230 employees terminated through consolidation of administrative and operational staff, and $4.6 million in costs to eliminate duplicative space requirements and equipment and to write-off certain information systems costs as a result of the merger. Costs related to the formal restructuring plan of the Company's retail distribution operations total $1.2 million, representing severance and employee benefit costs for terminating approximately 90 retail distribution employees as a result of the restructuring and centralization of customer service functions. The restructuring is expected to be completed in the third quarter of 1995. 4. Rate Matters In March 1994, Rocky Mountain Natural Gas Division of K N Energy, Inc. ("RMNGD") filed an application for a "make whole" rate increase of $2.5 million on an annual basis with the Colorado Public Utilities Commission ("CPUC"). Settlement was reached with all parties on all issues. RMNGD received a $2.0 million annual rate increase under terms of the settlement; $1.5 million effective April 2, 1994, and the remainder effective September 1, 1994. 5. Acquisition On February 1, 1994, the Company's gas and oil development subsidiaries, K N Production Company ("KNPC") and GASCO, Inc.("GASCO"), 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. On October 17, 1994, KNPC and GASCO entered into a joint development agreement with Genesis Gas and Oil, L.L.C., ("Genesis"), and sold to Genesis a 50 percent interest in substantially all the acquired properties. 6. Financing In October 1994, K N sold publicly $75 million of 30-year, 8.75% debentures at an all-in-cost to the Company of 8.91 percent. This debt was issued from the $200 million shelf registration filed with the Securities and Exchange Commission in November 1993. Proceeds from this financing were used to fund capital expenditures and to reduce short-term borrowing incurred in July 1994 to retire the Senior Revolving Credit and Term Note Facility of AOG. 9 10 Form 10-Q 7. 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. 8. 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. The Company adopted SFAS 112 on January 1, 1994. Implementation of SFAS 112 had no material effect on the Company's financial position or results of operations. 9. Commitments and Contingent Liabilities See Notes 5, 8 and 11 of Notes to Consolidated Financial Statements on Pages 41-43, 46, 47 and 51 of the 1993 Annual Report on Form 10-K, and Notes 5, 8, and 12 of Notes to Consolidated Financial Statements on pages 38-40, 44-46, 50 and 51 of Form 10-K/A, Amendment No. 2. There have been no material changes to these disclosures except as disclosed in Notes 2, 3 and 5, above. 10. Reclassification of 1993 Amounts Certain 1993 amounts have been reclassified to conform to the 1994 presentation. 10 11 Form 10-Q Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MERGER On July 13, 1994, K N completed the merger with American Oil and Gas Corporation (AOG). The merger was accounted for as a pooling of interests, and accordingly the following historical financial information has been restated as though the companies had been combined from inception. CONSOLIDATED FINANCIAL RESULTS Third quarter 1994 net income, excluding one-time merger and restructuring costs, was $6.9 million, or $0.24 per common share, after payment of preferred dividends. Net income and earnings per share were more than double the comparable 1993 reported net income of $2.7 million and earnings per share of $0.10. The improvement in 1994 third quarter ongoing operations resulted from increased gas deliveries to irrigation customers in 1994 compared to 1993, and from continued positive performance of the Company's nonregulated gas gathering and processing operations. In addition, the 1994 third quarter earnings reflected improvement over 1993 as a result of the change in timing of 1994 revenues caused by the straight fixed-variable rate design implemented with the unbundling of interstate pipeline services effective October 1, 1993. For the first nine months of 1994, net income, excluding the one-time merger and restructuring expenses, was $21.8 million, or $0.76 per common share, compared with 1993 nine months net income of $20.4 million, or $0.73 per common share. In the third quarter of 1994, the Company expensed $25.9 million of one-time costs related to the merger of AOG into K N on July 13, 1994, and to the formal restructuring of the Company's retail gas distribution operations. These costs, primarily professional fees, severance-related expenses and the write-off of certain information systems costs, reduced earnings by $19.3 million, or $0.69 per common share. Including the effect of the one-time charges, the Company reported a third quarter 1994 net loss of $12.5 million, or $0.45 per common share, and 1994 nine months ended net income of $2.4 million, or $0.07 per common share. RESULTS OF OPERATIONS The following is a discussion of operating results by business segment and consolidated other income and (deductions) and income taxes, exclusive of the one-time merger and restructuring costs and the related income tax effect. Segment operating revenues, gas purchases, operations and maintenance expenses, and volumetric data cited below are before intersegment eliminations (dollars in millions). 11 12 Form 10-Q
Third Quarter First Nine Months ------------------ ----------------- GAS SERVICES 1994 1993 1994 1993 ------ ------ ------ ------ Operating Revenues Gas Sales and Transportation . . . . . . . . . . . $196.7 $206.9 $719.5 $650.8 Natural Gas Liquids and Other . . . . . . . . . . . 28.2 26.8 82.9 83.6 ------ ------ ------ ------ 224.9 233.7 802.4 734.4 ------ ------ ------ ------ Operating Costs and Expenses Gas Purchases . . . . . . . . . . . . . . . . . . . 153.8 169.1 586.4 521.3 Operations and Maintenance. . . . . . . . . . . . . 37.7 39.2 115.6 119.1 Depreciation, Depletion, and Amortization . . . . . 11.4 10.5 35.0 30.9 Taxes, Other Than Income Taxes . . . . . . . . . . 4.1 3.7 12.1 11.1 ------ ------ ------ ------ 207.0 222.5 749.1 682.4 ------ ------ ------ ------ Operating Income . . . . . . . . . . . . . . . . . $ 17.9 $ 11.2 $ 53.3 $ 52.0 ====== ====== ====== ====== Systems Throughput (Trillion Btus) Gas Sales . . . . . . . . . . . . . . . . . . . . 84.2 81.6 277.6 242.3 Transportation . . . . . . . . . . . . . . . . . 86.5 87.3 266.9 240.5 ------ ------ ------ ------ 170.7 168.9 544.5 482.8 ====== ====== ====== ====== Natural Gas Liquids Sales (Millions of Gallons) . . . . . . . . . . . . . . 95.7 80.7 284.5 236.8 ====== ====== ====== ======
K N's interstate pipeline unbundled its services on October 1, 1993, per Federal Energy Regulatory Commission Order No. 636, and consequently no longer offers a merchant function service. Third quarter 1994 gas sales and transportation revenues and gas purchases compared to the 1993 third quarter reflect this elimination of the merchant function. The elimination of this merchant function is not as apparent in the year-to-date revenues and gas purchases due to growth in 1994 nonregulated gas sales volumes. Third quarter 1994 gas deliveries to irrigation customers totaled 14.5 trillion Btus compared to 10.1 trillion Btus in the 1993 third quarter. Irrigation deliveries in 1993 were adversely impacted by an abnormally wet summer. The decline in 1994 third quarter and first nine month operations and maintenance expenses compared with 1993 periods primarily reflects staff and expense reductions resulting from the merger. Future periods' operations and maintenance expenses will reflect additional savings as the full impact of the merger (staff reductions and consolidation) and the retail gas service restructuring become effective. 12 13 Form 10-Q
Third Quarter First Nine Months ----------------- ----------------- GAS AND OIL PRODUCTION 1994 1993 1994 1993 ------ ------ ------ ------ Operating Revenues Gas and Oil Sales . . . . . . . . . . . . . . . . $ 4.3 $ 1.8 $ 11.0 $ 5.3 Other. . . . . . . . . . . . . . . . . . . . . . . 0.4 0.3 1.6 0.9 ------ ------ ------ ------ 4.7 2.1 12.6 6.2 ------ ------ ------ ------ Operating Costs and Expenses Operations and Maintenance . . . . . . . . . . . . 2.1 0.8 5.0 2.3 Depreciation, Depletion and Amortization. . . . . . . . . . . . . . . . . . . 1.8 1.0 5.2 2.6 Taxes, Other Than Income Taxes. . . . . . . . . . . . . . . . . . . 0.4 0.1 1.0 0.5 ------ ------ ------ ------ 4.3 1.9 11.2 5.4 ------ ------ ------ ------ Operating Income. . . . . . . . . . . . . . . . . . $ 0.4 $ 0.2 $ 1.4 $ 0.8 ====== ====== ====== ====== Gas and Oil Production (Equivalent Bcf) . . . . . . . . . . . . . . . . . 2.2 0.9 5.9 2.6 ====== ====== ====== ======
Higher 1994 operating revenues, costs and expenses, operating income and production result from the February 1994 acquisition of gas reserves and production.
Third Quarter First Nine Months ----------------- ----------------- OTHER INCOME AND DEDUCTIONS 1994 1993 1994 1993 ------ ------ ------ ------ Interest Expense . . . . . . . . . . . . . . . . . $ (8.1) $ (8.0) $(22.8) $(23.2) Minority Interests and Other, Net . . . . . . . . . . . . . . . . . . . . 0.5 1.6 2.0 2.8 ------ ------ ------ ------ $ (7.6) $ (6.4) $(20.8) $(20.4) ====== ====== ====== ======
Despite higher levels of 1994 short- and long-term borrowings, interest expense in 1994 compared to 1993 was favorably impacted by lower interest rates, including the effect of the September 1993 refunding of $35 million of high coupon (10-3/4%) sinking fund debentures.
Third Quarter First Nine Months ----------------- ----------------- 1994 1993 1994 1993 ------ ------ ------ ------ INCOME TAXES . . . . . . . . . . . . . . . . . . . $ 3.8 $ 2.2 $ 12.1 $ 12.1 ====== ====== ====== ====== Effective Tax Rate . . . . . . . . . . . . . . . . 35.7% 37.1% ====== ======
The lower 1994 effective tax rate reflects greater tax credits on gas production from wells qualifying for non-conventional fuel credit under Section 29 of the Internal Revenue Code. 13 14 Form 10-Q LIQUIDITY AND CAPITAL RESOURCES At September 30, 1994, short-term debt was $129.6 million compared with short-term borrowings of $24.5 million and $47.0 million at September 30, 1993, and December 31, 1993, respectively. On the effective date of the merger, the Company retired through short-term borrowings $57 million of long-term debt under AOG's revolving credit bank loan facility. In October 1994, the Company sold publicly $75 million of 8.75% debentures due in 2024 with an all-in-cost of 8.91 percent. Proceeds from the debenture sale and from the October 1994 sale of a 50 percent interest in certain gas reserves and production were used to fund capital expenditures and reduce short-term borrowings. Excluding the $41 million of proceeds received from the January 1994 sale of contract demand receivables and the cash requirements of the merger and restructuring costs, net cash flows from operating activities were $66.5 million for the first nine months of 1994 compared with $77.9 for the 1993 period. The decline in 1994 net operating cash flows primarily results from higher income tax and prepaid gas payments. ENVIRONMENTAL MATTERS As discussed more fully in Part II Item 1 of this Form 10-Q, the Company is reporting two new environmental matters. One concerns potential mercury remediation costs resulting from the Company's ongoing mercury sampling program in Kansas, the first phase of which was conducted in July 1994. The other concerns use of a PCB-containing lubricating oil in the Company's Scott City, Kansas helium recovery plant which was discovered in May 1994. The Company does not expect the costs of remediation in either matter to have a material adverse impact on its financial position or results of operations. 14 15 Form 10-Q PART II OTHER INFORMATION Item 1. Legal Proceedings Environmental Matters As reported in the Company's 1993 Annual Report on Form 10-K, as amended on Form 10-K/A, Amendment No. 2 and in the Company's Quarterly Reports on Form 10-Q for the period ended March 31, 1994, environmental audits performed by the Company revealed that a grease known as Rockwell 860 had been used as a valve sealant at several of the Company's locations in Nebraska and Colorado. Rockwell 860 is a solid clay-like material which does not easily spill into the environment, but contains approximately ten percent polychlorinated biphenyls ("PCBs"). Based on the Company's studies, the PCBs are contained within the pipeline and valves at the subject locations. In March 1993, the Company filed suit against Rockwell International Corporation, manufacturer of the valve sealant, and two other related defendants, reaching final settlement with Rockwell, et al. in March 1994. The Company currently estimates the total cost of remediation to be approximately $1.7 million, a substantial portion of which is recoverable under the Rockwell settlement. The unrecoverable amount will not have a material adverse impact on the Company's financial position or results of operations. The PCB cleanup program is not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas, and will occur over a period of years. As reported in the Company's 1993 Annual Report on Form 10-K, as amended on Form 10-K/A, Amendment No. 2, certain used pipe reclaimed at the Company's Holdrege, Nebraska pipeyard was wrapped with asphalt-saturated asbestos felt, which was commonly removed in accordance with Company practices. The removed wrap contains friable asbestos fibers above the regulatory standard. The Nebraska Department of Environmental Control, the agency having jurisdiction over this matter, was notified and approved the Company's remediation plan. Remediation is effectively complete, and the total cost is not expected to exceed $700,000. The asbestos cleanup program did not interrupt or diminish the Company's operational ability to gather or transport natural gas. In the spring of 1994, the Kansas Department of Health and Environment ("KDHE") notified a number of pipeline companies operating in Kansas, including K N, that residual elemental mercury might be present in the soils adjacent to certain natural gas metering facilities. In July 1994, the Company initiated a voluntary mercury sampling program on its systems in central and western portions of Kansas, pursuant to a five year assessment program which has been approved by the KDHE and will require that 20 percent (135) of the 675 sites be tested each year. The sampling for the first year has been completed, however, no determination regarding remediation has been reached at this time. The Company currently cannot estimate the extent of the remediation nor the costs, although the Company believes all or a portion of such costs will be recoverable from insurance carriers. Such costs are not expected to have any material adverse impact on the Company's financial position or results of operations. The mercury cleanup program is not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas. 15 16 Form 10-Q In May 1994, the Company discovered that use of a PCB-containing lubricating oil has caused contamination in certain equipment, soils and liquids at the Company's Scott City, Kansas helium extraction facility. PCB's are regulated by the U.S. Environmental Protection Agency ("EPA") under the Toxic Substances Control Act. A Site Assessment Report has been submitted to the EPA for its review, and no response has yet been received. The Company's investigation of this situation is ongoing, and a workplan is being developed for EPA review. The Company estimates the total cost for remediation to be approximately $600,000, which is not expected to have a material adverse impact on the Company's financial position or results of operations. The PCB cleanup program is not expected to interrupt or diminish the Company's operational ability at the helium facility. For information relating to other legal proceedings, see Notes 2, 3, 4 and 5 of Notes to Consolidated Financial Statements on Pages 39-43 of the 1993 Annual Report on Form 10-K; Notes 3, 4 and 5 of Notes to Consolidated Financial Statements on Pages 36-40 of Form 10-K/A, Amendment No. 2; Item 3: Legal Proceedings on Pages 18-20 of the 1993 Form 10-K; and Item 3: Legal Proceedings on Pages 15-17 of the Form 10-K/A, Amendment No. 2. Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K On October 7, 1994, the Company filed a Form 8-K which reported the unaudited post-merger combined operations for K N Energy, Inc. and AOG for the one-month period ended August 31, 1994. On October 18, 1994, the Company filed a Form 8-K which disclosed that K N Energy, Inc. sold $75 million of its 8.75% Debentures due October 15, 2024 pursuant to an underwritten public offering. 16 17 Form 10-Q SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. K N ENERGY, INC. (Registrant) November 14, 1994 /s/ E. Wayne Lundhagen E. Wayne Lundhagen Vice President - Finance and Accounting (On Behalf of the Registrant and as Principal Financial and Accounting Officer) 17 18 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1994 SEP-30-1994 11,151 0 114,398 0 44,440 223,733 1,323,822 459,609 1,114,775 284,893 262,869 138,050 2,286 7,000 248,953 1,114,775 811,642 811,642 584,283 782,920 0 0 22,769 7,896 5,487 2,409 0 0 0 2,409 0.07 0
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