-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U6yMD9yHw0VwyFkTueleuZNIq6DdZX+v1yrtAtYGEJgNf0Ax7PZW0Ez8BUsDBGny pTuILYiF/dfxwg307Flrnw== 0000950134-96-000688.txt : 19960312 0000950134-96-000688.hdr.sgml : 19960312 ACCESSION NUMBER: 0000950134-96-000688 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960311 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: K N ENERGY INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 480290000 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06446 FILM NUMBER: 96533677 BUSINESS ADDRESS: STREET 1: 370 VAN GORDON ST STREET 2: PO BOX 281304 CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 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 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 ----------------------- 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 Identification No.) incorporation or organization) 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 Preferred share purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Preferred stock, Class A $5 cumulative series - -------------------------------------------------------------------------------- (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. [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. $821,917,138 as of February 15, 1996 - -------------------------------------------------------------------------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common stock, $5 par value; authorized 50,000,000 shares; outstanding 28,232,687 shares as of February 15, 1996 - -------------------------------------------------------------------------------- List hereunder documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. 1996 Proxy Statement Part III - -------------------------------------------------------------------------------- 2 K N ENERGY, INC. AND SUBSIDIARIES Documents Incorporated by Reference and Index
Page Number -------------------------- 1996 Proxy Included Statement Herein --------- ------ PART I ------ ITEMS 1 & 2: BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 -16 ITEM 3: LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-19 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the last quarter of 1995. EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . 19-21 PART II ------- ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ITEM 6: SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . 24-31 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Public Accountants . . . . . . . . . . . . . . . . 32 Consolidated Statements of Income for the Three Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . 33 Consolidated Balance Sheets as of December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Consolidated Statements of Common Stockholders' Equity for the Three Years Ended December 31, 1995, 1994 and 1993 . . . . . . 35 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . 36 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 37-55 Business Segment Information . . . . . . . . . . . . . . . . . . . . . . . 56 Selected Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . 57 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no such matters during 1995. PART III -------- ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . 2-8*,15* ITEM 11: EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-19* ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . 4-8*, 18-19*, 25-27* ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . 8* PART IV ------- ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K (a) 1. Financial Statements Reference is made to the listing of financial statements and supplementary data under Item 8 in Part II of this index. 2. Financial Statement Schedules None 3. Exhibits Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 63-64 List of Executive Compensation Plans and Arrangements . . . . 60-61 Exhibit 3(a) - Restated Articles of Incorporation (Exhibit 3(a) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 3(b) - By-laws of the Company, as amended (Exhibit 3(b) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 3(c) - Certificate of the Voting Powers, Designation, Preferences and Relative, Participating, Optional or Other Special Rights, and Qualifications, Limitations or Restrictions Thereof, of the Class B $8.30 Cumulative Preferred Stock, Without Par Value (Exhibit 4.4, File No. 33-26314)* Exhibit 4(a) - Indenture dated as of September 1, 1988, between K N Energy, Inc. and Continental Illinois National Bank and Trust Company of Chicago (Exhibit 1.2, Current Report on Form 8-K Dated October 5, 1988)* Exhibit 4(b) - First supplemental indenture dated as of January 15, 1992, between K N Energy, Inc. and Continental Illinois National Bank and Trust Company of Chicago (Exhibit 4.2, File No. 33-45091)*
2 3 K N ENERGY, INC. AND SUBSIDIARIES Documents Incorporated by Reference and Index Page Number -------------------------- 1996 Proxy Included Statement Herein --------- ------ PART IV (Continued) ------------------- Exhibit 4(c) - Second supplemental indenture dated as of December 15, 1992, between K N Energy, Inc. and Continental Bank, National Association (Exhibit 1.2 Current Report on Form 8-K dated December 15, 1992)* Exhibit 4(d) - Indenture dated as of November 20, 1993, between K N Energy, Inc. and Continental Bank, National Association (Exhibit 4.1, File No. 33-51115)* Note - Copies of instruments relative to long-term debt in authorized amounts that do not exceed 10 percent of the consolidated total assets of the Company and its subsidiaries have not been furnished. The Company will furnish such instru- ments to the Commission upon request. Exhibit 10(a) - Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(b) - 1982 Stock Option Plan for Non- employee Directors of the Company with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(c) - 1982 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(d) - 1986 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(e) - 1988 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(f) - Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, Amend- ment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(g) - Directors' Deferred Compensation Plan Agreement (Exhibit 10.8, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(h) - 1987 Directors' Deferred Fee Plan, as Amended (Attached hereto as Exhibit 10(h))** Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* Exhibit 10(j) - K N Energy, Inc. 1994 Executive Incentive Plan (Exhibit 10(k) to the Annual Report on Form 10-K for the Year Ended December 31, 1993)* Exhibit 10(k) - 1994 K N Energy, Inc. Long-Term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)*
3 4 K N ENERGY, INC. AND SUBSIDIARIES Documents Incorporated by Reference and Index Page Number -------------------------- 1996 Proxy Included Statement Herein --------- ------ PART IV (Continued) ------------------- Exhibit 10(l) - K N Energy, Inc. 1996 Executive Incentive Plan (Attached hereto as Exhibit 10(l))** Exhibit 10(m) - K N Energy, Inc. Nonqualified Deferred Compensation Plan (Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(n) - K N Energy, Inc. Nonqualified Retirement Income Restoration Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(o) - K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan (Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(p) - Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (Attached hereto as Exhibit 10(p))** Exhibit 10(q) - Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Attached hereto as Exhibit 10(q))** Exhibit 10(r) - Amended and Restated Basket Agreement dated as of June 30, 1990, by and between American Pipeline Company ("APC"), Cabot and Cabot Transmission Corporation (Exhibit 10.5(a) to the Annual Report on Form 10-K for American Oil and Gas Corporation ("AOG") for the year ended December 31, 1993)* Exhibit 10(s) - First Amendment to Amend and Restated Omnibus Acquisition Agreement and Amended and Restated Basket Agreement dated as of March 31, 1992 by and among AOG, APC, Cabot and Cabot Transmission (Exhibit 10.5(d) to the Annual Report on Form 10-K for AOG for the year ended December 31, 1993)* Exhibit 10(t) - Rights Agreement between K N Energy, Inc. and the Bank of New York, as Rights Agent, dated as of August 21, 1995 (Exhibit 1 on Form 8-A dated August 21, 1995)* Exhibit 10(u) - K N Energy, Inc. Performance Incentive Plan (Attached hereto as Exhibit 10(u))** Exhibit 10(v) - K N Energy, Inc. 1995 Executive Incentive Plan (Exhibit 10(1) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 12 - Ratio of Earnings to Fixed Charges . . . . . . . . . . . 65 Exhibit 13 - 1995 Annual Report to Shareholders*** . . . . . . . . . . 66 Exhibit 22 - Subsidiaries of the Registrant . . . . . . . . . . . . . 67 Exhibit 24 - Consent of Independent Public Accountants . . . . . . . . 68 Exhibit 27 - Financial Data Schedule**** (b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Note: Individual financial statements of the parent Company are omitted pursuant to the provisions of Accounting Series Release No. 302. * Incorporated herein by reference. ** Included in SEC and NYSE copies only. *** Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this annual report on Form 10-K. **** Included in SEC copy only. 4 5 PART I ITEMS 1 and 2: BUSINESS and PROPERTIES As used in this report, the term "K N" means K N Energy, Inc. and the term "Company" means collectively K N Energy, Inc. and its subsidiaries, unless the context requires a different meaning. (See "Subsidiaries of the Registrant" in Exhibit 22.) All volumes of natural gas referred to herein are stated at a pressure base of 14.73 pounds per square inch absolute and at 60 degrees Fahrenheit and, in most instances, are rounded to the nearest major multiple. The term "Mcf" means thousand cubic feet, the term "MMcf" means million cubic feet, and the term "Bcf" means billion cubic feet. The term "MMBtus" means million British thermal units ("Btus"). "NGLs" refers to natural gas liquids, which consist of ethane, propane, normal and iso-butane, and natural gasoline. The term "Bbls" means barrels. As used herein, "throughput" refers to volumes of gas sold by the Company and gas transported on the Company's systems for third parties. (A) General Description The Company is a natural gas energy products and services provider. Services include: (1) gathering, processing, storing, transporting, selling and marketing natural gas; and (2) processing, transporting, selling and marketing NGLs. On July 13, 1994, pursuant to the Agreement of Merger dated March 24, 1994, American Oil and Gas Corporation ("AOG") was merged into the Company. As a result of the merger, each outstanding share of common stock of AOG was converted into 0.47 of a share of common stock of K N and the right to receive in cash the value of any fractional share of K N. In connection with the merger, all the outstanding shares of AOG common stock were converted into approximately 12.2 million shares of K N stock. The merger was accounted for as a pooling of interests. (As used in this report, the term "AOG" means collectively American Oil and Gas Corporation and its subsidiaries, unless the context requires a different meaning.) AOG is engaged in the business of gathering, processing, storing, transporting, selling and marketing natural gas and NGLs primarily in West Texas and the Texas Panhandle. On January 30, 1996, the Company announced that it had entered into a binding letter of intent with Amoco Pipeline Company to acquire a crude oil pipeline which runs from Riverton, Wyoming to Freeman, Missouri, and to convert the pipeline to natural gas service at an all-in project cost estimated to be less than $150 million. On January 31, 1996, the Company divested itself of its gas and oil exploration and production subsidiary, K N Production Company ("KNPC"), through the merger of that subsidiary into Tom Brown, Inc. ("TBI"), an independent gas and oil company headquartered in Midland, Texas, whose common stock is traded on the NASDAQ National Market, for convertible preferred and common stock of TBI. In conjunction with this stock transaction, the Company and TBI formed a limited liability company, Wildhorse Energy Partners, LLC, to perform certain gathering, processing, field, marketing and storage services in the Mid-Continent of the United States. 5 6 In response to regulatory requirements, K N no longer operates as a single business unit that purchases, gathers, processes, stores, transports and sells natural gas at retail and wholesale. Instead, the Company restructured its operations and now operates its interstate transmission pipeline and local distribution operations as separate business units. Substantially all of the gathering and processing facilities and a portion of the storage facilities that were previously part of the Company's Federal Energy Regulatory Commission ("FERC") - regulated transmission operation are now operated by wholly owned subsidiaries which either are not subject to FERC regulation, or, in the case of the former storage properties, are allowed to sell gas at market-based rates. The Company's executive offices are located at 370 Van Gordon Street, P.O. Box 281304, Lakewood, Colorado 80228-8304 and its telephone number is (303) 989-1740. The Company was incorporated in the State of Kansas on May 18, 1927. The number of persons employed by the Company at December 31, 1995 was 1,599. (B) Narrative Description of Business (1) Retail Natural Gas Services Overview. This business segment provides retail natural gas services to residential, commercial, agricultural and industrial customers for space heating, crop irrigation and drying, and processing of agricultural products. Revenues from this business segment are derived primarily from regulated natural gas sales and transportation services. The Company's retail natural gas business serves over 230,000 retail customers and 301 communities in Colorado, Kansas, Nebraska and Wyoming through distribution pipelines totaling approximately 8,400 miles at December 31, 1995. In addition, this business segment operates intrastate natural gas transmission, gathering and storage pipelines totaling approximately 1,500 miles at December 31, 1995. These intrastate pipeline systems serve industrial customers and much of the Company's retail natural gas business in Colorado and Wyoming. Underground storage facilities are used to provide deliverabilities for peak system demand. Working gas owned by this business segment is stored in: o one facility owned and operated by the Company's interstate pipeline system; o five facilities in Wyoming owned and operated by this business segment; and o one facility in Colorado owned and operated by Wildhorse Energy Partners, LLC. K N's retail operations in Kansas, Nebraska, Wyoming and northeast Colorado serve areas that are primarily rural and agriculturally based. In much of Kansas and Nebraska, the winter heating load is balanced by irrigation in summer months and grain drying in the fall. The economy in the western Colorado service territory continues to grow as a result of growth in mountain resort communities and development of retirement communities. During 1995, K N opened its new 24-hour Customer Service Center in Scottsbluff, Nebraska, centralizing customer service calls, service start-up and billing calls, service dispatch and remittance operations for the four-state region. In 1996, the center will begin providing these services for other parties. 6 7 Gas Purchases and Supply. This business segment relies on the Company's interstate pipeline system, the intrastate pipeline systems it operates, and other pipelines for transportation and storage services required to serve its markets. Its gas supply requirements are being met through a combination of purchases from wholly owned marketing subsidiaries and third-party suppliers. The retail natural gas business unit's gas supply comes primarily from the following areas: o Anadarko Basin, including the Hugoton, Bradshaw and Panoma fields in Kansas; o Barton Arch area of central Kansas; o Denver-Julesburg Basin in northeast Colorado, northwest Kansas, and western Nebraska; o Wind River Basin in central Wyoming; o Bowdoin area in north central Montana; and o Piceance Basin in western Colorado. Certain gas purchase contracts contain a take-or-pay clause which requires that a certain purchase level be attained each contract year, or the Company must make a payment equal to the contract price multiplied by the deficient volume. At December 31, 1995, the amount of gas prepayments outstanding for this business segment was $5.2 million. All such payments are fully recoupable under the terms of the gas purchase contracts and the existing regulatory rules and regulations. To date, no buy-out or buy-down payments relating to take-or-pay contracts have been made by this business segment. Competition. Natural gas competes with fuel oil, coal, propane and electricity in the areas served by the Company's retail natural gas business. In a few of the communities in which it has a franchise, the Company competes with other local distribution systems for retail natural gas sales and transportation services. Such competition is expected to increase as a result of implementation of FERC Order 636, state retail unbundling initiatives and the regulatory initiatives presently before the FERC to unbundle the electric industry. Unbundling Retail Gas Services. Throughout the United States, the recent FERC actions are leading to an opening of a more competitive environment for all gas services. K N is looking to be a leader in providing customers a choice in services. In that regard, K N filed an application with the Wyoming Public Service Commission in September 1995 to allow 10,000 residential and commercial customers to choose their energy provider from a qualified list of suppliers. K N will continue to provide all other utility services and will manage the gas supplies for customers in the program. On February 16, 1996 the Wyoming Public Service Commission issued an order allowing K N to bring competition to these 10,000 residential and commercial customers beginning in June 1996. The innovative program is one of the first in the nation that proposes to allow essentially all customers the opportunity to exercise energy choice for natural gas. 7 8 (2) Interstate Transportation and Storage Services Overview. The Company's interstate pipeline system provides transportation and storage services to affiliates, third-party natural gas distribution utilities and shippers. As of December 31, 1995, the Company's interstate pipeline system provided transportation and storage services directly to utilities serving 293 communities, as follows:
Served By Colorado Kansas Nebraska Wyoming - --------- -------- ------ -------- ------- Affiliated Entities 12 52 177 10 Other Utilities 5 10 27 -
Effective January 1, 1994, 1,691 miles of gathering lines and the products extraction plant at Scott City, Kansas, were transferred to a gas gathering subsidiary as part of the corporate reorganization. As of December 31, 1995, the interstate pipeline properties included transmission and storage lines totaling over 6,000 miles, a storage field and one products extraction plant. The change from providing a merchant function to a FERC-regulated transportation and storage service at cost of service-based rates has substantially reduced this business segment's operating revenues and gas purchase expenses. This has not, however, negatively impacted this business segment's operating income since gas purchases were previously recoverable dollar-for-dollar from customers as a result of purchased gas adjustment clauses in the Company's tariffs. However, the transfer of gathering and products extraction facilities described above has reduced this segment's operating income. The use of straight fixed-variable rate design for FERC-regulated services results in this business segment collecting a significant portion of its revenues from customers through demand charges collected evenly throughout the year. Accordingly, fluctuations in operating revenues resulting from seasonal variations in weather conditions are reduced. Transportation. This business segment provides not only firm and interruptible transportation, but also no-notice services to its customers. Under no-notice service, customers are able to meet their peak day requirements without making specific nominations as required by firm and interruptible transportation service tariffs. The local distribution companies and other shippers may release their unused firm transportation capacity rights to other shippers. It is the Company's experience that this released capacity has, to a large extent, replaced interruptible transportation on the Company's interstate pipeline system. Interruptible transportation is billed on the basis of volumes shipped. On January 30, 1996, the Company announced that it had entered into a binding letter of intent with Amoco Pipeline Company to acquire a crude oil pipeline which runs from Riverton, Wyoming to Freeman, Missouri, and to convert the pipeline to natural gas service at an all-in project cost anticipated to be less than $150 million, including the pipeline expansion discussed below. The new pipeline, Pony Express Pipeline, will be subject to FERC regulation and is expected to be in service by early 1997. In January 1996, FERC granted the Company the authority to expand its pipeline system in Wyoming. This $14.9 million project is designed to increase the capacity of the system to move gas from Wyoming to markets in the midwestern United States by nearly 50 MMcf per day. The facilities are expected to be in service by November 1996. This project is a natural fit with the pipeline acquisition discussed above. 8 9 Storage. The Company's interstate pipeline system provides storage services to its customers through its Huntsman Storage Field in Cheyenne County, Nebraska. Effective June 1, 1995, after receiving FERC approval the Company transferred three storage fields and approximately 45 Bcf of recoverable cushion gas held by its interstate pipeline system, to a newly created affiliate which is allowed to sell gas at market-based rates. On the interstate system, year-end working gas inventory owned by all parties totaled 4.9 Bcf. The approximate unused working gas capacity at December 31, 1995, was 3.1 Bcf. Transportation Marketing. The Company is continuing its efforts to increase its transportation business through expanded capacity and new interconnects, as well as new transportation services. The Company has certain strategic advantages that enable it to be a successful competitor, including favorable geographic pipeline locations providing access to both major gas supply areas and potential new markets. The Company will continue developing its role as an operator of transportation hubs, facilitating market-center services. A K N subsidiary is a one-third joint-venture partner in the TransColorado Gas Transmission Pipeline Co. ("TransColorado"). This pipeline is expected to provide increased flexibility in accessing multiple natural gas basins in the Rocky Mountain region. During 1995, El Paso Natural Gas Company purchased Public Service Company of Colorado's investment in TransColorado and has brought new synergies to the project. In 1996, the southernmost 22 miles of the pipeline are anticipated to be pre-built to connect with gathering systems in southern Colorado. This portion of the pipeline is expected to be in service in 1996. When fully completed, the TransColorado pipeline will cover 290 miles, from the Piceance Basin of Colorado to Blanco, New Mexico, with an initial capacity of 300,000 MMBtus per day, expandable to 600,000 MMBtus. Total capital cost is expected to be $190 million. The TransColorado pipeline will operate as an interstate pipeline system regulated by FERC. Competition. The interstate transportation pipeline and storage services business segment faces competition from other transporters. In addition, natural gas competes with fuel oil, coal, propane and electricity in the areas served by the Company's interstate pipeline system. (3) Gathering, Processing and Marketing Services Overview. This business segment provides natural gas gathering, processing, marketing and supply services, including transportation and storage to a variety of customers. Within this business segment, the Company owns and operates approximately 9,400 miles of pipeline in seven states, operating 16 gas processing plants and natural gas storage facilities in West Texas and on the Gulf Coast. This segment's total processing capacity is approximately 760 MMcf per day. Revenues from this business segment's gathering, processing, storage, transporting and marketing activities are generated in four different ways. First, the Company performs a merchant function whereby the Company purchases gas at the wellhead, aggregates such gas with other supplies of gas, and markets the aggregated gas to consumers. Second, the Company, for a fee, gathers, transports and may process gas for producers or other third parties who retain title to the gas. Third, the Company processes gas and markets NGLs. Fourth, the Company provides gas marketing and supply services including certain storage services, to various 9 10 natural gas resellers and end-users either on or connected to the Company's pipeline systems or on other pipeline facilities. The Company works with producers and end-users on the pipeline systems to provide a wide range of services. It arranges the purchase and transportation of producers' excess or uncommitted gas to end-users, acts as shipper or agent for the end-users, administers nominations and provides balancing assistance when needed. Services provided by the Company within the traditional gathering, processing, transporting and marketing activities have expanded due to increased demand for gas and the result of Order 636. Some of these services include variable pricing and variable or firm receipt/delivery of gas. Additionally, storage services and transportation balancing arrangements are being provided to assist markets in meeting peak demand needs and maximizing their use of capacity on interstate pipelines. This business segment also engages in price risk management activities in the energy financial instruments market. The Company buys and sells gas and crude oil futures positions on the New York Mercantile Exchange ("NYMEX") and Kansas City Board of Trade ("KCBT") and uses over-the-counter energy swaps and options for the purpose of reducing adverse price exposure for gas supply costs or specific market margins. (See "Price Risk Management" below.) Natural Gas Sales. In 1995, this business segment sold natural gas to over 4,000 customers in over 20 states. These customers included local distribution companies, industrial, commercial and agricultural end-users, electric utilities, Company affiliates and other marketers located both on-and off-system. Westar Transmission Company ("Westar Transmission") is the Company's principal intrastate pipeline system in West Texas and the Texas Panhandle. The Westar system consists of approximately 5,600 miles of gathering and transmission lines (of which approximately 4,300 miles comprise Westar Transmission) and is connected to the K N WesTex Gas Services, Inc. ("WesTex") storage facility. The Westar system has significant markets connected directly to its pipelines ("on-system markets"), including the largest local distribution company in West Texas and the Texas Panhandle, Energas Company, a division of Atmos Energy Corporation ("Energas"), and direct-sale customers such as electric utilities, industrial companies and agricultural end-users. The Company also owns a 75 percent operating interest in Red River Pipeline, a 372-mile intrastate gas pipeline extending from Hemphill County, Texas, near the Oklahoma state line to Pecos County in West Texas, and has entered into a letter of intent to acquire the remaining 25 percent. Within this business segment, the Company utilizes its high pressure transmission facilities to transport gas for third parties at negotiated fees. The Westar system offers combined gathering and transportation services, while Red River is solely a transportation system. The Company's Wattenberg system, located in the Denver-Julesburg Basin in northeastern Colorado, consists of approximately 1,300 miles of gathering and transmission lines and offers both gathering and transportation services. Energas, the Company's largest customer, accounted for more than 10 percent of the Company's consolidated revenues for 1995. In 1996, the Company and Energas renegotiated the existing sales contract extending the term through December 31, 2003, a five-year extension beyond the current contract expiration date. No other customer accounted for more than 10 percent of the Company's consolidated revenues in 1995. Pricing mechanisms under the Company's gas sales agreements vary, including gas sales at fixed margins over cost of gas, at fixed prices where the unit margin is a function of the sales price and cost of gas, and at 10 11 market sensitive prices where the unit margin fluctuates as a percentage of the market price of gas. A majority of the gas sales are made under agreements with terms of one year or less. Gas Gathering. As of December 31, 1995, the Company's subsidiaries in this business segment operated gathering systems in Colorado, Kansas, Nebraska, New Mexico, Texas and Wyoming with over 5,000 miles of gathering lines. In December 1994, FERC approved the Company's application to transfer the Bowdoin gathering system from its wholly-owned interstate pipeline facility to a gathering subsidiary. The transfer occurred in early 1995. Processing and NGLs Marketing. In 1995, the Company operated 16 gas processing plants located in Colorado, Kansas, Nebraska, New Mexico, Texas and Wyoming. The average total inlet volume for 1995 was approximately 451,000 MMBtus per day. In the same period, the total liquids produced, including condensate, averaged approximately 28,000 Bbls per day. NGLs from the gas processing plants are sold by the Company on a contractual basis to various NGLs pipelines, end-users and marketers at index prices. Gas purchases shown in the financial statements include fuel and shrink expenses incurred at the plants. Storage. The WesTex storage facility has recently been expanded to a working storage capacity of approximately 15.5 Bcf. The Company expanded the WesTex storage facility by leaching three caverns in a bedded salt formation. Upon completion, each cavern has approximately one Bcf of working gas capacity. Two have been completed, and the third cavern is scheduled to be completed in October 1996. In early 1994, the Company began marketing storage services to third parties who are interested in the storage facility due to its strategic geographic location (Gaines County, Texas) and multiple pipeline interconnects which provide access to a variety of markets and supply sources. The WesTex storage facility has traditionally been used to meet the peak demand requirements of the Westar system's customers and to maintain purchases from supply sources on the Westar system during periods of low demand. The WesTex storage facility has a take-away peak day deliverability capacity of 550 MMcf per day. In February 1995, K N acquired a long-term lease on 10 Bcf of salt cavern storage capacity at the Stratton Ridge facility in the Gulf Coast area (see "Acquisitions"). This additional capacity gives K N the expanded ability to provide comprehensive storage services at the Katy and Waha hubs. Effective June 1, 1995, three gas storage facilities and approximately 45 Bcf of recoverable cushion gas were transferred to this business segment from the Company's interstate pipeline system. This transfer improves the Company's flexibility to utilize these assets more effectively. Gas Purchases and Supply. Natural gas is purchased from various sources, including gas producers, gas processing plants and from pipeline interconnections. Because of prevailing industry conditions, most agreements are for periods of one year or less, and many are for periods of 60 days or less. Various agreements permit the purchaser or the supplier to renegotiate the purchase price or discontinue the purchase under certain circumstances. Purchase volume obligations under many of the agreements utilized by this business segment are generally "best efforts" and do not have traditional take-or-pay provisions. However, certain agreements utilized within this business segment require the Company to take or pay for, or to receive, minimum quantities of natural gas. At December 31, 1995, the amount of gas prepayments outstanding for this business segment (which does not 11 12 include payments made under the Basket Agreement discussed below) was $2.6 million, and is fully recoupable under the terms of the gas purchase contracts. In addition, because of the Company's success in marketing excess gas under contracts, for which it receives credit against minimum take requirements, the Company believes that its exposure to potential take-or-pay or minimum take claims is not material. The Company does, however, have exposure with regard to such claims under gas purchase contracts assumed in its acquisition of the Westar pipeline system in 1989 from Cabot Corporation ("Cabot"), which claims are covered by an agreement with Cabot (the "Basket Agreement"). Under the Basket Agreement, Cabot and the Company equally share liability up to a certain amount, after which Cabot bears all such liabilities. The Company's maximum exposure under this arrangement is $20 million. The Company's estimated liability under the Basket Agreement is approximately $5.6 million, which was recorded in connection with the acquisition of the natural gas pipeline business from Cabot, and as such will not have a material adverse effect on the Company's financial position or results of operation. (See "Item 3: Legal Proceedings".) Price Risk Management. The Company uses energy futures and swaps to minimize its risk of price changes in the spot and fixed price natural gas, crude oil and NGLs markets. Risk management instruments include crude oil and natural gas commodity futures and options contracts, fixed price swaps, and basis swaps. Pursuant to its Board of Directors' approved guidelines, the Company is to engage in these activities only as a hedging mechanism against pre-existing or anticipated physical gas and condensate sales, gas purchases, system use, and storage in order to protect profit margins, and is prohibited from engaging in speculative trading. The activities of the risk management group are monitored by the Company's Risk Management Committee which is charged with the review and enforcement of the Board of Directors' risk management guidelines. All energy futures, swaps, and options are recorded at fair value. Gains and losses on hedging positions are deferred and recognized as gas purchases expenses in the period the underlying physical transactions occur. All 1995 transactions were recorded as hedges. Total Energy Management. The Company has filed for and received from the FERC certification as a Power Marketer. This is a first step in the process of marketing electricity to wholesale electric customers as well as developing opportunities for providing power to current wholesale and local distribution company customers. To gain competitive advantage in an increasingly competitive gas and NGLs market, the Company has developed specific products and services that include electricity. The Company has initially targeted utilities and municipalities for these power opportunities as part of a comprehensive energy package, primarily in areas the Company currently serves. Acquisitions. Effective February 1, 1995, the Company acquired, for $79 million, two West Texas intrastate pipeline systems, gas storage assets in the Houston area, and a joint-venture interest in a third West Texas intrastate pipeline, including certain strategic gas supply contracts and markets which complement and enhance the Company's West Texas assets. The acquired storage assets and lease rights near Houston, Texas, increase the Company's storage working gas capacity by 6.0 Bcf. In October 1995, the Company acquired a 32 MMbtu per day cryogenic NGLs processing plant and approximately 900 miles of gathering pipeline in the Texas Panhandle. Competition. The changes in the natural gas industry have provided this business segment with expanded marketing and transportation opportunities outside of its traditional on-system market base. This business segment competes in these markets with other pipeline companies, marketers and brokers of varying size, 12 13 resources and experience as well as with producers who are able to market gas directly to wholesale and end-use markets. Factors influencing the competitive environment include: (i) the industry wide supply and demand imbalance that has existed since the early 1980's but which was substantially reduced during 1993 and 1994, (ii) regulatory changes that provide greater access to interstate markets by gas producers and marketers, (iii) the ability of certain markets to switch to alternative fuels at favorable prices, and (iv) increased gas storage capacity in the United States. Principal competitive considerations affecting this business segment's ability to acquire and market natural gas include price, services offered, reliability, security of supply and physical proximity of pipelines to customers. (4) Gas and Oil Production Overview. In 1995, the Company owned and participated in the development and production of gas and oil reserves through a wholly-owned subsidiary, KNPC. In December 1995 the Company agreed to merge the subsidiary into Tom Brown, Inc. in return for convertible preferred and common stock in Tom Brown, Inc., representing, on a fully diluted basis, approximately 11.3% of that corporation's outstanding common stock. The transaction closed on January 31, 1996. As part of the alliance, K N and Tom Brown, Inc. formed Wildhorse Energy Partners, LLC, a joint venture company 55 percent owned by K N and 45 percent owned by Tom Brown, Inc., designed to provide gathering, processing, storage, field and marketing services in the Mid-Continent of the United States. Total net reserves for the gas and oil business segment at December 31, 1995, were approximately 35 Bcf equivalent of natural gas. The 1995 year-end net production was 14 MMcf per day compared with 16 MMcf per day at year-end 1994. During 1995, this business segment participated in the drilling and completion of six development wells in Wyoming, 12 development wells in western Colorado and worked-over 11 wells on the Western Slope of Colorado. At December 31, 1995, the Company had approximately 225,000 net undeveloped acres under lease and owned interests in 624 producing wells (243 net), of which it operated 308 (190 net). (5) General Federal and State Regulation Retail Natural Gas Services. The Company's intrastate pipelines, distribution facilities and retail sales in Colorado, Kansas and Wyoming are under the regulatory authority of each state's utility commission. The Wyoming and Colorado commissions also may review the Company's issuance of securities. In Nebraska, retail gas sales rates for residential and small commercial customers are regulated by each municipality served. In the incorporated communities in which the Company sells natural gas at retail, the Company operates under franchises granted by the applicable municipal authorities. Franchises in Colorado must also be approved by the state regulatory commission. The duration of franchises varies with applicable law. In unincorporated areas, the Company's direct sales of natural gas are not subject to franchise, but, in all states except Nebraska, are "certificated" by the state regulatory commissions. 13 14 Interstate Transportation and Storage Services. Facilities for the transportation of natural gas in interstate commerce and for storage services in interstate commerce are subject to regulation by FERC under the Natural Gas Act and the Natural Gas Policy Act of 1978. In addition, the Company is subject to the requirements of FERC Order Nos. 497, et al., the Marketing Affiliate Rules, which govern the provision of information by an interstate pipeline to its marketing affiliates. Through agreements with its former wholesale customers, the Company was able to formulate and implement a plan which resulted in the transition to Order 636 services and which avoided the necessity of any gas supply cost recovery filings with FERC. As a part of its action on the Company's restructuring proposal, on January 13, 1994, FERC approved the offer of settlement which implemented the Company's gas supply realignment crediting mechanism. Gathering, Processing and Marketing Services. Under the Natural Gas Act, facilities used for and operations involving the production and gathering of natural gas are exempt from FERC jurisdiction, while facilities used for and operations involving interstate transmission are not exempt. However, FERC's determination of what constitutes exempt gathering facilities as opposed to jurisdictional transmission facilities has evolved over time. Under current law, facilities which otherwise are classified as gathering may be subject to ancillary FERC rate and service jurisdiction when owned by an interstate pipeline company and used in connection with interstate transportation or jurisdictional sales. FERC has historically distinguished between facilities owned by noninterstate pipeline companies, such as the Company's gathering facilities, on a fact-specific basis. The Kansas Corporation Commission, New Mexico Public Service Commission, Texas Railroad Commission and Wyoming Public Service Commission have all expressed interest in asserting jurisdiction over gathering activities, and the Company is closely monitoring developments in this area. As part of its corporate reorganization, K N requested, was granted authority and in 1994 transferred substantially all of its gathering facilities to a wholly-owned subsidiary. FERC determined that after the transfer, the gathering facilities would be nonjurisdictional, but FERC reserved the right to reassert jurisdiction if the Company was found to be operating the facilities in an anti-competitive manner or contrary to open access principles. Because certain volumes of gas in interstate commerce are transported by the Company for third parties and by third parties on behalf of the Company, the operations of the Company's intrastate pipeline and marketing subsidiaries in Texas are affected by FERC rules and regulations issued pursuant to the Natural Gas Act and the Natural Gas Policy Act of 1978. Of particular importance are regulations which allow increased access to interstate transportation services by both interstate and intrastate pipeline and marketing companies, without the necessity of obtaining prior FERC authorization for each transaction. The most important element of the program is nondiscriminatory access, under which a participating pipeline must agree, if capacity is available, to transport gas for any party requesting such service. The interstate gas marketing activities of the Company's various marketing and pipeline subsidiaries are conducted either as unregulated first sales or pursuant to blanket certificate authority granted by the FERC under the Natural Gas Act. 14 15 The Colorado Public Utilities Commission, Kansas Corporation Commission, Texas Railroad Commission and the Wyoming Public Service Commission have authority to regulate the intrastate transportation, sale, delivery and pricing of natural gas by intrastate pipeline and distribution systems. Environmental Regulation The Company's operations and properties are subject to extensive and changing Federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. Moreover, the recent trends toward stricter standards in environmental legislation and regulation are likely to continue. The United States Oil Pollution Act of 1990 and regulations promulgated thereunder by the Minerals Management Service impose a variety of requirements on persons who are or may be responsible for oil spills in waters of the United States. The term "waters of the United States" has been broadly defined to include inland waterbodies, including wetlands, playa lakes and intermittent streams. The Company has a limited number of oil and gas facilities that could affect "waters of the United States." The Federal Water Pollution Control Act, also known as the Clean Water Act, and regulations promulgated thereunder, require containment of potential discharges of oil or hazardous substances and preparation of oil spill contingency plans. The Company has implemented programs that address containment of potential discharges and spill contingency planning. The failure to comply with ongoing requirements or inadequate cooperation during a spill event may subject a responsible party to civil or criminal enforcement actions. The Comprehensive Environmental Response, Compensation and Liability Act, as amended ("Superfund"), imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered to have contributed to the release of a "hazardous substance" into the environment. Under Superfund, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. Furthermore, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Federal and state regulations implementing the 1990 Amendments to the Clean Air Act, affect the Company's operations in several ways. Natural gas compressors for both gathering and transmission activity are now required to meet stricter air emission standards. Additionally, states in which the Company operates are adopting regulations under the authority of the "Operating Permit Program" under Title V of these 1990 Amendments. These Operating Permits require operators of certain facilities to obtain individual site-specific air permits containing stricter operational and technological standards of operation in order to achieve compliance with this section of the 1990 Clean Air Act Amendments and associated state air regulations. The Toxic Substances Control Act, as amended ("TSCA"), imposes certain operational and technical standards on persons or persons who manufacture, process, distribute, use or dispose of TSCA-related chemicals, including such things as polychlorinated biphenyls ("PCBs"), asbestos, and lead based paints. The Company has facilities which contain such TSCA-related substances. 15 16 Compliance with Federal, state and local provisions with respect to the protection of the environment has had no material effect upon capital expenditures, earnings, or the competitive position of the Company, except as described in Item 3, "Mystery Bridge Road Environmental Matters" and "Other Environmental Matters." Safety Regulation The operations of certain of the Company's gas pipelines are subject to regulation by the United States Department of Transportation (the "DOT") under the Natural Gas Pipeline Safety Act of 1968, as amended (the "NGPSA".) The NGPSA establishes safety standards with respect to the design, installation, testing, construction, operation and management of natural gas pipelines, and requires entities that own or operate pipeline facilities to comply with the applicable safety standards, to establish and maintain inspection and maintenance plans, and to comply with such plans. The NGPSA was amended by the Pipeline Safety Act of 1992 to require the DOT's Office of Pipeline Safety to consider, among other things, protection of the environment when developing minimum pipeline safety regulations. Management believes the Company's operations, to the extent they may be subject to the NGPSA, comply in all material respects with the NGPSA. The Company is also subject to state and federal laws and regulations concerning occupational health and safety. Other Amounts spent by the Company during 1995, 1994 and 1993 on research and development activities were not material. (D) Financial Information About Foreign and Domestic Operations and Export Sales All of the Company's operations are in the contiguous 48 states. ITEM 3: LEGAL PROCEEDINGS Mystery Bridge Road Environmental Matters In 1989, the Company was named as one of four potentially responsible parties ("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site known as the Mystery Bridge Road/U.S. Highway 20 site located near Casper, Wyoming (the "Brookhurst Subdivision"). A majority of the Company's groundwater, soil and free phase petroleum cleanup occurred between 1990 and 1995. The total remaining estimated cost is not expected to exceed $150,000. (United States of America v. Dow Chemical Company, Dowell Schlumberger, Inc., and K N Energy, Inc., Civil Action No. 91CV1042, United States District Court for the District of Wyoming; formerly reported as Administrative Orders for Removal Action on Consent, October 15, 1987, and Amendment to Administrative Order for Removal Order on Consent, October 10, 1989, Docket No. CERCLA VII-88-01, United States Environmental Protection Agency; Judicial Entry of Consent Decree, United States v. 16 17 Dow Chemical Company, et al. (D. Wyo) USDC-WY-91CV1042B, Superfund Site Number 8T83, Natrona County, Wyoming; EPA Docket Number CERCLA-VIII.) Other Environmental Matters In 1994, a mercury sampling program was initiated on the Company's systems in central and western portions of Kansas. The Company is working with the Kansas Department of Health and Environment pursuant to a five-year assessment program, and no active remediation will occur until completion of that assessment program. The costs are not expected to have any material adverse impact on the Company's financial position or results of operations. The cleanup program is not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas. The Company performed environmental audits in Colorado, Kansas and Nebraska which revealed that certain grease and lubricating oils used at various pipeline and facilities locations contained polychlorinated biphenyls ("PCBs"). The Company is working with the appropriate regulatory agencies to manage the cleanup and remediation of the pipelines and facilities. The Company filed suit against Rockwell International Corporation, manufacturer of the PCB-containing grease used in certain of the Company's pipelines and facilities, and two other related defendants for expenses and losses incurred by the Company for cleanup or mitigation. The Company settled with Rockwell in March 1994. (K N Energy, Inc. and Rocky Mountain Natural Gas Company v. Rockwell International Corp et al., United States District Court for the District of Colorado, Case No. 93-711.) At PCB sites with approved workplans, the Company estimates that the future cost of remediation, which will occur over a period of years, will be approximately $1.3 million, a substantial portion of which is recoverable under the Rockwell settlement. Approximately $1.2 million for PCB remediation has been expended as of December 31, 1995. The total potential remediation and cleanup costs at currently identified locations is not expected to have any material adverse impact on the Company's financial position or results of operations. The cleanup programs are not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas. Pursuant to certain acquisition agreements in 1989 and 1992, The Maple Gas Corporation and Cabot Corporation ("Cabot"), the Company's largest stockholder, indemnified the Company for certain environmental liabilities. Issues have arisen concerning Cabot's indemnification obligations; however, in conjunction with the merger, the Company and Cabot entered into a standstill agreement pertaining to these and other matters, which AOG will expire in June 1996. The Company believes it will be able to reach agreement with Cabot, and is unable to estimate its potential exposure for such liabilities at this time, but does not expect them to have a material adverse impact on the Company's financial position or results of operations. The Company acquired a 32 MMbtu per day cryogenic NGLs processing plant and approximately 900 miles of gathering pipeline located in the Texas Panhandle from Parker & Parsley Gas Processing Co. and its affiliates in October 1995. In connection with that acquisition, and for a reduction in the purchase price which included the estimated costs of remediation of $3.9 million, the Company agreed to accept all responsibility and liability for environmental matters associated with such properties. After consideration of reserves established, such costs are not expected to have a material adverse impact on the Company's financial position or results of 17 18 operations. The cleanup program, which will occur over a number of years, is not expected to interrupt or diminish the Company's operational ability to gather, process or transport natural gas. Grynberg v. K N, et al. On October 9, 1992, Jack J. Grynberg filed suit in the United States District Court for the District of Colorado against the Company, Rocky Mountain Natural Gas Company and GASCO, Inc. (the "K N Entities") alleging that the K N Entities as well as KNPC and K N Gas Gathering, Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts that the companies have engaged in an illegal exercise of monopoly power, have illegally denied him economically feasible access to essential facilities to transport and distribute gas produced from fewer than 20 wells located in northwest Colorado, and illegally have attempted to monopolize or to enhance or maintain an existing monopoly. Grynberg also asserts certain causes of action relating to a gas purchase contract. No specific monetary damages have been claimed, although Grynberg has requested that any actual damages awarded be trebled. In addition, Grynberg has requested that the K N Entities be ordered to divest all interests in natural gas exploration, development and production properties, all interests in distribution and marketing operations, and all interests in natural gas storage facilities, separating these interests from the Company's natural gas gathering and transportation system in northwest Colorado. In an unrelated transaction, K N's exploration, production and development properties owned by KNPC, were transferred to a third party in January 1996. The Company has indemnified the third party for any potential claims by Grynberg related to this litigation. On August 13, 1993, the United States District Court, District of Colorado, stayed this proceeding pending exhaustion of appeals in a related state court action involving the same plaintiff. This case is still pending. (Grynberg v. K N, et al., Civil Action No. 92-2000, United States District Court for the District of Colorado.) Westerman, et al. v. K N Energy, Inc., et al. On December 8, 1994, K N and its wholly owned subsidiary K N Gas Supply Services, Inc. ("KNGSS") were sued by gas producers in northeastern Colorado in District Court, Dallas County, Texas under claims arising from two gas purchase contracts covering gas purchases from wells in the Niobrara Field, Colorado. The producers asserted take-or-pay claims for contract years 1993 and 1994 in the amount of $1,157,000 plus interest, as well as actual and punitive damages in the amount of $156,000,000 for breaches of contractual and fiduciary duties arising out of a January 1977 Farmout Agreement between the producers and K N. On December 21, 1994, the lawsuit was removed from Texas state court to the United States District Court for the Northern District of Texas (Dallas). On January 12, 1995, K N and KNGSS filed a motion to dismiss for lack of personal jurisdiction, or, if jurisdiction is found to exist, a motion to transfer the cause of action to federal court in Colorado. On June 29, 1995, the United States District Court for the Northern District of Texas, Dallas Division, ruled that it has jurisdiction over K N and that venue is proper in that court. The court has not yet ruled on whether it has jurisdiction over KNGSS. Additional litigation was initiated on January 31, 1995, by KNGSS against the plaintiffs and others in federal court in Colorado. In this lawsuit, KNGSS asserts that contractual provisions require payment of refunds for gas purchased at above-market prices and, prospectively, for a reduction in gas prices paid under the contracts to market levels. On October 30, 1995, K N and KNGSS reached settlement with parties representing approximately two-thirds of the gas ownership interests held by the producers. This settlement resolves all disputes between these parties, including the lawsuit filed by K N and KNGSS in federal court in Colorado. The Company believes that this settlement will have no material adverse effect on the Company's financial position or results of operations. Settlement negotiations with the parties 18 19 representing the remaining one-third ownership interest under the disputed gas purchase contracts are continuing. The Company believes it has a meritorious position in these matters, and does not expect these lawsuits to have a material adverse effect on the Company's financial position or results of operations. (Westerman, et al. v. K N Energy, Inc. and K N Gas Supply Services, Inc., Civil Action No.:3:94-CV-2773-X, United States District Court for the Northern District of Texas, Dallas Division; K N Gas Supply Services, Inc. v. Westerman, et al., Civil Action No. 95-M-243, United States District Court for the District of Colorado.) Take-or-Pay Matters Certain of the companies acquired from Cabot when the Company acquired the Westar System were parties to a number of lawsuits or were subject to asserted claims by natural gas purchase contracts containing take-or-pay provisions, which require the purchaser either to take a minimum amount of gas or to pay for such minimum quantities. All of these lawsuits and most claims have been resolved under terms which the Company considers favorable. Most gas suppliers of the Company have entered into excess gas purchase contracts with one of the Company's gas marketing subsidiaries. These excess gas purchases contracts are generally credited against take-or-pay gas volumes, which minimizes take-or-pay exposure. The Basket Agreement between the Company and Cabot provides for an equal sharing of up to $40 million (any excess will be borne solely by Cabot) between the Company and Cabot of certain gas contract take-or-pay liabilities of the companies acquired from Cabot for periods prior to the closing date of the acquisition from Cabot and for certain other potential gas contract claims. (See "Items 1 and 2: Business and Properties"). The Company's maximum exposure under this arrangement is $20 million. The Company's estimated liability under the Basket Agreement is approximately $5.6 million, which was recorded in connection with the acquisition of the natural gas pipeline business from Cabot and, as such, the ultimate settlement of such liability will not have a material adverse effect on the Company's financial position or results of operation. As of December 31, 1995, the Company had made net payments of approximately $10.9 million. The Company is also involved in various disputes and litigation arising in the normal course of business including take-or-pay exposure not covered by the matters discussed above, including the Westerman litigation described in this Item 3. The Company believes that it has adequate defenses or insurance coverage relating to such litigation and that the outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's financial position or results of operations. The Company believes it has meritorious defenses to all lawsuits and legal proceedings in which it is a defendant and will vigorously defend against them. Based on its evaluation of the above matters, and after consideration of reserves established, the Company believes that the resolution of such matters will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 19 20 EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification and Business Experience of Executive Officers
Name Age Position and Business Experience - ---------------------------------- ----- --------------------------------------------------------- Morton C. Aaronson . . . . . . 37 Vice President since January 1996. Vice President, MCI/ NewsCorp. Business Development from May 1995 to January 1996. Vice President, Market Management, MCI Communications from August 1994 to May 1995. Vice President, Large Accounts and Global Markets, MCI Communications, from July 1993 to August 1994. Director, Major Accounts Marketing, MCI Communications from July 1992 to July 1993. Director, Sales-New York Metro Region, MCI Communications from December 1990 to July 1992. Judith A. Aden . . . . . . . . 54 Vice President and Assistant Treasurer since March 1995. Vice President and Treasurer from March 1991 to March 1995. Treasurer from January 1981 to March 1995. William E. Asbury . . . . . . . 43 Vice President, Gas Service since 1988. Charles W. Battey . . . . . . . 64 Chairman since January 1989. Chief Executive Officer from January 1989 to July 1994. Director since 1971. Richard M. Buxton . . . . . . . 47 Vice President, Strategic Planning and Financial Services since March 1991. David M. Carmichael . . . . . . 57 Vice Chairman and Director since July 1994. Chairman of the Board and Chief Executive Officer of AOG since 1986. President of AOG until October 1993. Samuel H.Charlton, III . . . . 51 Vice President, Marketing since January 1995. Sr. Vice President of certain K N subsidiaries since July 1994. Sr. Vice President - Gas Marketing and Supply for AOG from February 1994 to July 1994. Vice President Gas Marketing of AOG from April 1993 to February 1994. Vice President Marketing and Transportation for Wintershall Energy, a division of BASF Corporation from September 1990 to July 1992. John N. DiNardo . . . . . . . . 48 Vice President - Gas Gathering and Processing since March 1994. General Manager of K N Gas Gathering, Inc. and K N Front Range Gathering Company from May 1993 to March 1994. Director of Project Development for K N Gas Gathering, Inc. from August 1991 to May 1993. Consultant to K N Gas Gathering, Inc. from 1989 to August 1991.
20 21 Bradley P. Farnsworth . . . . . 42 Vice President and Controller since August 1995. Director, Gas Transaction Services, Coastal Gas Marketing Company from July 1988 to August 1995. William S. Garner, Jr. . . . . 46 Vice President, General Counsel and Secretary since April 1992. Vice President and General Counsel from January 1991 to April 1992. Larry D. Hall . . . . . . . . . 53 President and Chief Executive Officer since July 1994. President and Chief Operating Officer from May 1988 to July 1994. Director since 1984. S. Wesley Haun . . . . . . . . 48 Vice President, Marketing and Supply since May 1993. Vice President, Gas Supply from March 1990 to May 1993. E. Wayne Lundhagen . . . . . . 59 Vice President and Treasurer since March 1995. Vice President, Finance and Accounting from May 1988 to March 1995. John W. Simonton . . . . . . . 50 Vice President, Administration and Human Resources since May 1988. H. Rickey Wells . . . . . . . . 39 Vice President, Operations since June 1988.
These officers generally serve until April of each year. (B) Involvement in Certain Legal Proceedings None. 21 22 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed for trading on the New York Stock Exchange under the symbol KNE. On February 15, 1996, there were 9,485 holders of record of the Company's common stock. Dividends paid and the price range of the Company's common stock by quarters for the last two years, are provided below.
1995 1994 ---- ---- Market Price Data (Low-High-Close) Quarter Ended: March 31 $20.25 -$24.75 -$24.00 $22.00 -$25.50 -$22.50 June 30 23.75 - 27.00 - 25.375 21.25 - 23.75 - 22.25 September 30 23.875- 28.75 - 27.25 22.00 - 26.875- 26.125 December 31 25.25 - 30.25 - 29.125 20.75 - 26.125- 23.75 Dividends Quarter Ended: March 31 $0.25 $0.133* June 30 0.25 0.133* September 30 0.25 0.24 December 31 0.26 0.25 Common Stockholders Year-end 9,485 8,933
* Pre-merger dividend rate reflects the effect of pooling of interests accounting. AOG did not pay a dividend on common stock. 22 23 ITEM 6: SELECTED FINANCIAL DATA FIVE-YEAR REVIEW K N ENERGY, INC. AND SUBSIDIARIES Selected Financial Data (In Thousands Except Per Share Amounts)
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- OPERATING REVENUES: Retail Natural Gas Services $ 217,762 $ 212,218 $ 204,999 $ 188,193 $223,567 Interstate Transportation and Storage Services 22,335 21,044 99,838 127,611 130,821 Gathering, Processing and Marketing Services 855,855 838,474 730,895 507,756 424,586 Gas and Oil Production 7,437 11,328 5,321 4,710 3,053 ---------- ---------- ---------- ---------- -------- Total Operating Revenues $1,103,389 $1,083,064 $1,041,053 $ 828,270 $782,027 ========== ========== ========== ========== ======== OPERATING INCOME $ 113,724 $ 54,175 $ 80,204 $ 83,757 $ 81,490 Other Income and (Deductions) (32,152) (29,354) (30,736) (27,347) (23,134) ---------- ---------- ---------- ---------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 81,572 24,821 49,468 56,410 58,356 Income Taxes 29,050 9,500 18,599 20,068 21,282 ---------- ---------- ---------- ---------- -------- INCOME FROM CONTINUING OPERATIONS 52,522 15,321 30,869 36,342 37,074 Loss from Discontinued Operations - - - - (17,250) ---------- ---------- ---------- ---------- -------- NET INCOME 52,522 15,321 30,869 36,342 19,824 Less - Preferred Stock Dividends 492 630 853 2,976 4,808 ---------- ---------- ---------- ---------- -------- EARNINGS AVAILABLE FOR COMMON STOCK $ 52,030 $ 14,691 $ 30,016 $ 33,366 $ 15,016 ========== ========== ========== ========== ========= EARNINGS PER COMMON SHARE: Continuing Operations $ 1.83 $ 0.52 $ 1.09 $ 1.34 $ 1.45 Discontinued Operations - - - - (0.77) ---------- ---------- ---------- ---------- -------- Total Earnings Per Common Share $ 1.83 $ 0.52 $ 1.09 $ 1.34 $ 0.68 ========== ========== ========== ========== ======== DIVIDENDS PER COMMON SHARE $ 1.01 $ 0.76 $ 0.51 $ 0.51 $ 0.51 ========== ========== ========== ========== ======== NUMBER OF SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE 28,360 28,044 27,424 24,828 22,320 ========== ========== ========== ========== ======== TOTAL ASSETS $1,257,457 $1,172,384 $1,169,275 $1,007,411 $816,514 ========== ========== ========== ========== ======== CAPITAL EXPENDITURES $ 79,418 $ 70,596 $ 100,780 $ 74,787 $ 69,080 ========== ========== ========== ========== ======== ACQUISTIONS $ 35,897 $ 31,363 $ 65,172 $ 110,833 $ 1 ========== ========== ========== ========== ======== CAPITALIZATION: Common Stockholders' Equity $ 426,760 57% $ 393,686 54% $ 391,462 53% $ 347,738 51% $256,605 50% Preferred Stock 7,000 1% 7,000 1% 7,000 1% 26,310 4% 31,360 6% Preferred Stock Subject to Mandatory Redemption 572 - 1,715 - 2,858 - 4,500 1% 6,643 1% Long-Term Debt 315,564 42% 334,644 45% 335,190 46% 303,224 44% 222,850 43% ========== ---- ---------- ---- ---------- ---- ---------- ---- -------- ---- Total Capitalization $ 749,896 100% $ 737,045 100% $ 736,510 100% $ 681,772 100% $517,458 100% ========== ==== ========== ==== ========== ==== ========== ==== ======== ==== BOOK VALUE PER COMMON SHARE $ 15.19 $ 14.25 $ 14.39 $ 13.60 $ 11.60 ========== ========== ========== ========== ========
23 24 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED EARNINGS The Company reported 1995 net income of $52.5 million, or $1.83 per common share after payment of preferred dividends. This reflects a significant improvement over 1994 (excluding the effect of merger and restructuring costs) and 1993 net income of $34.7 million and $30.9 million, respectively. After payment of preferred dividends, the respective 1994 and 1993 earnings per share were $1.21 and $1.09. The 51 percent increase in 1995 earnings over 1994 was attributable to five principal factors: o benefits from the 1994 merger with American Oil and Gas Corporation ("AOG"); o year-to-year business growth; o improved irrigation deliveries as a result of normal weather; o higher natural gas liquids ("NGLs") prices; and o the annualized impact of 1994 rate increases. The 1994 earnings improvement over 1993 resulted from rate increases in both retail and interstate jurisdictions, higher deliveries to irrigation customers and expense reductions resulting from the merger of AOG into K N. Mild fourth quarter 1994 weather and lower prices for NGLs partially offset the 1994 positive factors. Additionally, 1993 net income was reduced by a $4.5 million (pre-tax) write-down of an investment. In the third quarter of 1994, the Company expensed $25.9 million of non-recurring costs related to the merger and to the restructuring of the retail natural gas services segment. These costs reduced 1994 net income by $19.3 million, or $0.69 per common share. RESULTS OF OPERATIONS Comparative operating results by business segment, excluding the $25.9 million 1994 non-recurring merger and restructuring charges, and consolidated other income and (deductions) and income taxes are reviewed below. As the Company's interstate pipeline segment was not a separate business unit until the Company's October 1, 1993 implementation of Federal Energy Regulatory Commission ("FERC") Order No. 636 ("Order 636"), operating results of the retail natural gas services segment and the interstate transportation and storage services segment have been combined to provide more meaningful comparison of 1994 with 1993. The segment operating revenues, gas purchases, operations and maintenance expenses and volumetric data which follow are before intersegment eliminations (dollars in millions). 24 25
RETAIL NATURAL GAS SERVICES 1995 1994 ---- ---- Operating Revenues - Gas Sales $204.0 $206.8 Transportation and Other 18.8 10.9 ------ ------ 222.8 217.7 ------ ------ Operating Costs and Expenses - Gas Purchases 114.9 123.0 Operations and Maintenance 57.6 54.9 Depreciation, Depletion and Amortization 12.6 12.1 Taxes, Other Than Income Taxes 6.4 5.2 ------ ------ 191.5 195.2 ------ ------ Operating Income $ 31.3 $ 22.5 ====== ====== Systems Throughput (Trillion Btus) - Gas Sales 39.0 40.8 Transportation 27.4 18.8 ------ ------ 66.4 59.6 ====== ====== System-Wide Heating Degree Days 6,491 6,123 ====== ======
The significant improvement in 1995 operating income over 1994 primarily reflects increased deliveries (gas sales and transportation) to irrigation customers, and the annualized impact of rate increases on the Rocky Mountain distribution system during the latter part of 1994. Irrigation deliveries in 1995 exceeded the previous year by 2.5 trillion Btus, as 1995 summer temperatures and rainfall approximated normal weather patterns. 1995 deliveries to customers for space-heating requirements exceeded 1994 volumes by 1.4 trillion Btus as 1995 temperatures, although milder than normal, were colder than 1994. This segment's 1995 operations and maintenance expenses include profit-sharing provisions $2.8 million higher than 1994 due to improved earnings and the impact of the merger-related cost reductions and efficiencies on 1994 operating results. Additionally, 1994 operations and maintenance expenses were reduced by $1.7 million resulting from favorable resolutions of certain regulatory and environmental matters. Excluding these items, and despite increased systems throughput, 1995 operations and maintenance expenses were relatively flat with 1994 as the Company implemented cost reduction initiatives to further enhance its competitive position.
INTERSTATE TRANSPORTATION AND STORAGE SERVICES 1995 1994 ---- ---- Operating Revenues - Transportation and Storage $ 58.6 $ 56.7 Natural Gas Liquids and Other 5.9 3.9 ------ ------ 64.5 60.6 ------ ------ Operating Costs and Expenses - Gas Purchases 6.5 1.2 Operations and Maintenance 29.8 31.0 Depreciation, Depletion and Amortization 7.4 8.4 Taxes, Other Than Income Taxes 3.1 3.7 ------ ------ 46.8 44.3 ------ ------ Operating Income $ 17.7 $ 16.3 ====== ====== Systems Throughput (Trillion Btus) 155.6 134.7 ====== ====== Natural Gas Liquids (Millions of Gallons) 16.9 12.9 ====== ======
25 26 Operating results for 1995 were positively impacted by higher rates due to the late 1994 FERC rate case settlement which provided for an $8.7 million annual increase in revenues. However, this positive was partially offset by lower 1995 customer nominations for firm storage service and reduced rates, effective June 1, 1995, accompanying the transfer of three storage fields to a nonjurisdictional subsidiary. The increase in 1995 gas purchases costs results from increased NGLs recoveries and the resolution of pre-Order 636 exchange imbalances.
CONDENSED RETAIL NATURAL GAS SERVICES AND INTERSTATE TRANSPORTATION AND STORAGE SERVICES 1994 1993 ---- ---- Operating Revenues $243.8 $315.5 Operating Costs and Expenses 205.0 267.6 ------ ------ Operating Income $ 38.8 $ 47.9 ====== ====== Systems Throughput (Trillion Btus) 152.7 155.6 ====== ====== Natural Gas Liquids (Millions of Gallons) 12.9 81.3 ====== ====== System-Wide Heating Degree Days 6,123 7,054 ====== ======
Implementation of Order 636, effective October 1, 1993, and the January 1, 1994 transfer of the interstate pipeline's principal gas processing plant and substantially all of its gathering facilities to the gathering, processing and marketing services segment, has resulted in significant reductions in this combined business segment's operating revenues, costs and expenses. As a result of Order 636, merchant services to wholesale customers subsequent to September 30, 1993 were converted to transportation and storage services. The decline in this combined segment's 1994 operating income and NGLs sales gallons results from the January 1, 1994 property transfer to the gathering, processing and marketing services segment.
GATHERING, PROCESSING AND MARKETING SERVICES 1995 1994 1993 ---- ---- ---- Operating Revenues - Gas Sales $706.3 $720.3 $638.5 Transportation and Gathering 46.7 45.2 32.3 Natural Gas Liquids and Other 138.8 120.5 89.4 ------ ------ ------ 891.8 886.0 760.2 ------ ------ ------ Operating Costs and Expenses - Gas Purchases 692.0 726.6 636.7 Operations and Maintenance 100.1 88.3 67.6 Depreciation, Depletion and Amortization 25.3 25.8 20.0 Taxes, Other Than Income Taxes 9.5 6.9 4.9 ------ ------ ------ 826.9 847.6 729.2 ------ ------ ------ Operating Income $ 64.9 $ 38.4 $ 31.0 ====== ====== ====== Systems Throughput (Trillion Btus) - Gas Sales 407.8 353.0 290.3 Transportation and Gathering 306.0 286.8 222.3 ------ ------ ------ 713.8 639.8 512.6 ====== ====== ====== Natural Gas Liquids (Millions of Gallons) 388.1 375.0 241.0 ====== ====== ======
26 27 The expected 1995 benefits (cost reductions, improved operational efficiencies and new business opportunities) of the 1994 merger were realized primarily by this business segment, as 1995 operating income exceeded 1994 by $26.5 million. In addition to the realized merger benefits, 1995 acquisitions of gas transmission and storage assets in February and a processing plant and gathering facilities in October contributed incremental operating income of $4.0 million. The increases in 1995 gas sales volumes over 1994, reflecting improved irrigation requirements and electric generation load, positively impacted 1995 transportation and gathering volumes. Finally, 1995 average NGLs prices were $0.02 per gallon above 1994 average prices. The business segment's 1994 operating results were positively impacted by the January 1, 1994 transfer of processing and gathering properties from the interstate pipeline. In addition, 1994 revenues, expenses and operating income reflect the full year contribution of the April 1993 Wattenberg gathering and transmission system and the June 1993 acquisition of Wind River gathering facilities. Operating results for 1994, compared to 1993, were adversely impacted by declining NGLs prices and lower gas sales margins due to unfavorable weather.
GAS AND OIL PRODUCTION 1995 1994 1993 ---- ---- ---- Operating Revenues $10.7 $14.1 $8.5 Operating Costs and Expenses 10.9 11.2 7.2 ----- ----- ---- Operating Income (Loss) $(0.2) $ 2.9 $1.3 ===== ===== ==== Gas and Oil Production (Equivalent Bcf) 5.6 6.6 3.7 ===== ===== ====
Operating results for 1995 were adversely impacted by low natural gas prices and shut-in production. 1994 results included production from gas and oil reserves acquired in February 1994; in October 1994, the Company sold a 50 percent interest in these properties. In January 1996, Tom Brown, Inc. acquired the Company's gas and oil subsidiary. In exchange for the stock of the gas and oil subsidiary, K N received 0.9 million shares of Tom Brown common stock and 1.0 million shares of 7% convertible preferred stock.
OTHER INCOME AND (DEDUCTIONS) 1995 1994 1993 ---- ---- ---- Interest Expense $(34.2) $(31.6) $(30.5) Minority Interests and Other, Net 2.0 2.2 (0.2) ------ ------ ------ $(32.2) $(29.4) $(30.7) ====== ====== ======
Increases in interest expense primarily resulted from the issuance of long-term debt in 1994 and 1993 to fund capital expenditures and acquisitions. The impact of these financings was partially mitigated by the 1993 refunding of $35 million of higher coupon debt. "Minority Interests and Other, Net" in 1994 included a $1.5 million gain from the sale of a Texas gathering system.
INCOME TAXES 1995 1994 1993 ---- ---- ---- Provisions $29.0 $ 9.5 $18.6 ===== ===== ===== Effective Tax Rate 35.6% 38.3% 37.6% ===== ===== =====
The 1995 effective tax rate reflects tax credits on production from gas wells qualifying for non-conventional fuel credit under Section 29 of the Internal Revenue Code, and lower state income taxes 27 28 provisions resulting from changes in apportionment factors. The 1994 effective tax rate reflects the non-deductibility of certain merger costs. LIQUIDITY AND CAPITAL RESOURCES During 1995, the primary sources of cash were generated from operations, short-term borrowings and the issuance of common stock for dividend reinvestment and employee benefit plans. Non-operating cash outflows primarily included capital expenditures and acquisitions, redemptions of long-term debt and preferred stock, and interest and dividend payments. CASH FLOWS FROM OPERATING ACTIVITIES Net cash flows from 1995 operations totaled $129.6 million, compared with $91.2 million and $67.9 million for 1994 and 1993, respectively. Net operating cash flows for 1994, excluding $41 million of proceeds from the sale of contract demand receivables and expenditures of $18.1 million related to the merger and restructuring, aggregated $68.3 million. The substantial improvement in 1995 net operating cash flows was largely attributable to the factors resulting in the 51 percent increase in earnings. Additionally, 1995 net operating cash flows benefited from enhanced receivable collection efforts, lower gas prepayments and greater sourcing of gas supplies from storage. CAPITAL EXPENDITURES AND COMMITMENTS Capital expenditures, excluding acquisitions, totaled $79.4 million in 1995, compared with expenditures of $70.6 million in 1994 and $100.8 million in 1993. The significantly higher level of 1993 capital expenditures resulted from measurement facilities and systems required for implementation of Order 636 and the construction of a new corporate office. The 1996 capital expenditures budget totals $81 million, excluding acquisitions. In January 1996, K N entered into a letter of intent to acquire a major midwest crude oil pipeline owned by Amoco Pipeline Company. The 850- mile pipeline extends from Riverton, Wyoming, southeast through portions of Colorado, Nebraska and Kansas, terminating south of Kansas City, Missouri. K N plans to convert the pipeline for transmission of natural gas from supply-rich Wyoming to midwest markets. Conversion of the pipeline requires approval from the FERC. Total cost of this project, including the acquisition price and conversion to natural gas services is expected to be less than $150 million. The pipeline is expected to be in service in early 1997. In 1996, K N and El Paso Natural Gas Company expect to construct the southernmost 22 miles of the TransColorado pipeline to connect with existing gathering systems in southern Colorado. Total costs of this phase of the project are estimated at $30 million with K N's share of 1996 capital spending totaling $15 million. The Company does not believe it has a material exposure related to take-or-pay matters. Generally, all amounts paid by the Company for take-or-pay are either fully recoupable under the terms of the gas purchase contracts, or are recoverable from offsetting gas purchase obligations under certain contractual arrangements. Take-or-pay obligations, including payments of above-market prices incurred with respect to the Company's retail distribution operations, are recoverable through purchased gas adjustment clauses in existing tariffs. At December 31, 1995, the cumulative amount of take-or-pay payments was $7.8 million. 28 29 CAPITAL RESOURCES The Company has credit agreements with 10 banks to either borrow or use as commercial paper support up to $225 million. Additionally, $125 million of debt securities are issuable under K N's 1993 shelf registration statement filed with the Securities and Exchange Commission. Short-term borrowings were $88.0 million and $60.0 million at year-end 1995 and 1994, respectively. At December 31, 1995, the Company had $434 million of equity capital and a long-term debt to capitalization ratio of 42 percent. In September 1995, Standard & Poor's ("S & P") affirmed its "A" rating of K N's senior unsecured debt and preferred stock and its commercial paper rating of "A-1". However, to reflect its perception of a more competitive environment for the Company and the industry, S & P revised its ratings outlook for K N from stable to negative. Excluding the cash requirements associated with the acquisition and conversion costs of the crude oil pipeline and the 1996 phase of the TransColorado pipeline project discussed previously, the Company expects that 1996 cash requirements for debt service, preferred stock redemptions, dividends and capital expenditures will be provided, primarily, by internal cash flows. K N is currently evaluating financing alternatives, which may include a combination of long-term debt and equity, to fund the acquisition and conversion of the crude oil pipeline and the TransColorado project. REGULATION Approximately 45 percent of the Company's assets, operating revenues and income are subject to regulation at either the federal, state or local level. In all of these regulatory jurisdictions, rates are currently determined using cost-based regulations. The Company does not expect a significant change in the manner in which rates are set by regulators. Thus far, the primary impact of competition on the Company's regulated businesses has resulted in conversion of services from the "bundled" merchant and transportation function to transportation services only. The cost of gas component in the bundled service rate recovers only the actual gas costs incurred. The Company anticipates the conversion to transportation service will continue and become more prevalent at the retail level. In September 1995, K N filed an application with the Wyoming Public Service Commission to permit K N to open its system in nine communities to competition from alternative gas suppliers. This program is expected to go into effect in the spring of 1996. RISK MANAGEMENT To minimize the risk of price changes in the natural gas, crude oil and NGLs markets, and interest rate fluctuations, the Company uses certain financial instruments for hedging purposes only. These instruments include energy products traded on the New York Mercantile Exchange, the Kansas City Board of Trade and over-the-counter markets, including crude oil and natural gas futures and options contracts, fixed price and basis swaps, and interest rate swaps and caps. Pursuant to its Board of Directors' approved guidelines, the Company is to engage in these activities only as a hedging mechanism against pre-existing or anticipated physical gas and condensate sales, gas purchases, system use and storage in order to protect profit margins, and is not to engage in speculative trading. The activities of the risk management group are monitored by the Company's Risk Management Committee which is charged with the review and enforcement of the Board of Directors' risk management guidelines. The Risk Management Committee reviews the pricing and hedging of all commodity 29 30 transactions, the types of hedging instruments used, contract limits and approval levels. All energy futures, swaps and options are recorded at fair value. Gains and losses on hedging positions are deferred and recognized as gas purchases expenses in the periods the underlying physical transactions occur. OUTLOOK/FORWARD-LOOKING INFORMATION GENERAL The Company's vision is to be a world-class provider of integrated energy services and solutions. The 1994 merger with AOG better positions K N to be a major player in the natural gas industry by providing the Company with critical mass and access to new markets. During 1995, K N realized considerable benefit from the integration of assets and reduction in expenses. K N expects additional economic benefits from additional consolidation and infrastructure reductions initiated during 1995. By year-end 1995, the Company had reduced its workforce by approximately 25 percent; annual savings of approximately $8 million are expected in 1996. During 1996, the Company's strategy will be directed at: o Providing customers with choice and superior services; o Improving systems utilization and optimizing existing assets while achieving growth via internal opportunities and prudent acquisitions; o Forming alliances that create new opportunities or enhance existing operations; and o Focusing on new projects that strengthen K N's competitive position within its traditional Rocky Mountain and Mid-Continent regions. In regulatory proceedings similar to the proceedings under Order 636 which unbundled natural gas services, the FERC has determined the need to unbundle the electric industry, and bring competition to electric rates under a proposed rulemaking. During 1995, the Company began the development of a power marketing business to take advantage of the opportunities to offer both gas and electric energy services to customers. K N is following the progress of the FERC's proposed rulemaking in order to properly position its power marketing business to be successful in the unregulated electric environment. Another regulatory matter affecting the electric industry, retail wheeling, is being closely monitored by the Company. Retail wheeling would bring competition to the distribution of electric services, eliminating the monopoly power of electric utilities in their service territories. Throughout the United States, the recent FERC actions are leading to an opening of a more competitive environment for all gas services. K N is looking to be a leader in providing customers a choice in services. In that regard, K N filed an application with the Wyoming Public Service Commission in September 1995 to allow 10,000 residential and commercial customers to choose their energy provider from a qualified list of suppliers. K N will continue to provide all other utility services and will manage the gas supplies for customers in the program. In addition, K N is asking that Wyoming markets not currently served by K N be allowed competitive choice. The innovative program is one of the first in the nation that proposes to allow essentially all customers the opportunity to exercise energy choice for natural gas. 30 31 LITIGATION AND ENVIRONMENTAL As discussed in Note 5 of Notes to Consolidated Financial Statements, in 1994, the Company was sued in Dallas County, Texas, by Westerman, et al., for breach of contractual and fiduciary duties, including take-or-pay claims, covering properties in Colorado. In a separate lawsuit filed in federal court in Colorado, the Company sued the plaintiffs and others asserting that contractual provisions require payment of refunds for gas purchased at above-market prices and, prospectively, for a reduction in gas prices paid under the contracts to market levels. The actual damages claimed by Westerman, et al., totaled $1.5 million and the punitive damages claimed totaled $156 million. During 1995, the Company reached settlement with parties representing approximately two-thirds of the gas ownership interests held by the producers. This settlement resolves all disputes between these parties, including the lawsuit filed by the Company in Colorado. Although substantial claims remain, the Company believes it has a meritorious position in this matter, and does not expect this lawsuit to have a material adverse impact on the Company's results of operations or financial position. As discussed in Note 5 of Notes to Consolidated Financial Statements, the Company has reported certain environmental liabilities assumed as a result of the July 13, 1994 merger. Included in these liabilities were certain environmental matters related to the Company's acquisition of various assets from the Cabot Corporation in 1989. While the Cabot Corporation agreed to indemnify the Company against certain of these liabilities, the Company may be responsible for certain costs associated with remediation in the future. The Company is presently unable to determine what, if any, dollar amount is associated with this contingency. However, any potential exposure is not expected to have a material adverse impact on the Company's results of operations or financial position. The Company expects to resolve this matter in 1996. The Company's overall potential environmental cost exposure for 1996 is estimated to be approximately $2.5 million. A substantial part of the Company's 1996 environmental costs are either recoverable through insurance and indemnification provisions, or have been previously expensed as part of ongoing business. Refer to Note 5 of Notes to Consolidated Financial Statements for additional information on the Company's pending litigation and environmental matters. Company management believes it has established adequate reserves such that resolution of pending litigation and environmental matters will not have a material adverse impact on the Company's financial position or results of operations. SIGNIFICANT OPERATING VARIABLES Fluctuations in natural gas prices have relatively little impact on the Company's earnings. To the extent that the Company retains its merchant role in the retail natural gas services segment, the actual cost of gas is recovered from customers. In the nonregulated gas sales arena, the majority of the sales contracts are either supported by fixed-cost supplies or tied to indices where the margin is, in effect, locked-in. Additionally, where price fluctuation exposure exists with respect to sales contracts or NGLs feedstock, this risk is mitigated by hedging instruments. As part of the processing business, NGLs are extracted from the raw natural gas stream and sold. During 1995, NGLs prices recovered from significant declines experienced in late 1993 and the first half of 1994. The Company expects no material price changes during 1996. However, a one cent change in average NGLs prices impacts the Company's pre-tax operating income by approximately $2.2 million. 31 32 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To K N Energy, Inc.: We have audited the accompanying consolidated balance sheets of K N Energy, Inc. (a Kansas corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of K N Energy, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As explained in Note 11 of Notes to Consolidated Financial Statements, the Company changed its method of accounting for postemployment benefits effective January 1, 1994. /s/ Arthur Andersen LLP Denver, Colorado February 14, 1996 32 33 CONSOLIDATED STATEMENTS OF INCOME K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- 1995 1994 1993 ---- ---- ---- (In Thousands Except Per Share Amounts) OPERATING REVENUES: Retail Natural Gas Services $ 217,762 $ 212,218 $ 204,999 Interstate Transportation and Storage Services 22,335 21,044 99,838 Gathering, Processing and Marketing Services 855,855 838,474 730,895 Gas and Oil Production 7,437 11,328 5,321 ---------- ---------- ---------- Total Operating Revenues 1,103,389 1,083,064 1,041,053 ---------- ---------- ---------- OPERATING COSTS AND EXPENSES: Gas Purchases 732,072 762,358 730,984 Operations and Maintenance 187,867 173,283 169,525 Depreciation, Depletion and Amortization 49,891 50,278 44,644 Taxes, Other Than Income Taxes 19,835 17,025 15,696 Merger and Restructuring Costs - 25,945 - ---------- ---------- ---------- Total Operating Costs and Expenses 989,665 1,028,889 960,849 ---------- ---------- ---------- OPERATING INCOME 113,724 54,175 80,204 ---------- ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Interest Expense (34,211) (31,605) (30,513) Minority Interests (905) (659) 292 Other, Net 2,964 2,910 (515) ---------- ---------- ---------- Total Other Income and (Deductions) (32,152) (29,354) (30,736) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 81,572 24,821 49,468 Income Taxes 29,050 9,500 18,599 ---------- ---------- ---------- NET INCOME 52,522 15,321 30,869 Less - Preferred Stock Dividends 492 630 853 ---------- ---------- ---------- EARNINGS AVAILABLE FOR COMMON STOCK $ 52,030 $ 14,691 $ 30,016 ========== ========== ========== EARNINGS PER COMMON SHARE $ 1.83 $ 0.52 $ 1.09 ========== ========== ==========
The accompanying notes are an integral part of these statements. 33 34 CONSOLIDATED BALANCE SHEETS K N ENERGY, INC. AND SUBSIDIARIES
DECEMBER 31 ----------- 1995 1994 ---- ---- (In Thousands) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 22,571 $ 20,613 Accounts Receivable 214,963 151,834 Material and Supplies, at Average Cost 10,515 12,687 Gas in Underground Storage 9,762 31,695 Prepaid Gas 7,800 12,456 Other Prepaid Expenses 13,536 12,976 Gas Imbalances and Other 23,880 37,053 ---------- ---------- 303,027 279,314 ---------- ---------- INVESTMENT IN GAS AND OIL PROPERTIES, NET (NOTE 3(A)) 36,451 - ---------- ---------- INVESTMENTS 15,784 9,186 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 6) 862,975 850,649 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS 39,220 33,235 ---------- ---------- $1,257,457 $1,172,384 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current Maturities of Long-Term Debt $ 28,197 $ 30,384 Notes Payable 88,000 60,000 Accounts Payable 157,340 108,755 Accrued Taxes 5,423 6,197 Gas Imbalances and Other 50,878 50,434 ---------- ---------- 329,838 255,770 ---------- ---------- DEFERRED LIABILITIES, CREDITS AND RESERVES: Deferred Income Taxes 112,267 96,054 Deferred Revenues (Note 1(I)) 20,823 42,090 Other 30,356 28,194 ---------- ---------- 163,446 166,338 ---------- ---------- LONG-TERM DEBT 315,564 334,644 ---------- ---------- MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 14,277 13,231 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 1, 5 AND 14) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION 572 1,715 ---------- ---------- STOCKHOLDERS' EQUITY: Preferred Stock 7,000 7,000 ---------- ---------- Common Stock: Authorized - 50,000,000 Shares, Par Value $5 Per Share Outstanding - 28,097,749 and 27,617,531 Shares, Respectively 140,489 138,088 Additional Paid-in Capital 176,910 170,932 Retained Earnings 109,895 86,032 Deferred Compensation (222) (378) Treasury Stock, at Cost (10,739 and 44,417 Shares, Respectively) (312) (988) ---------- ---------- Total Common Stockholders' Equity 426,760 393,686 ---------- ---------- Total Stockholders' Equity 433,760 400,686 ---------- ---------- $1,257,457 $1,172,384 ========== ==========
The accompanying notes are an integral part of these balance sheets. 34 35 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY K N ENERGY, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
COMMON STOCK TREASURY STOCK ADDITIONAL DEFERRED ------------ -------------- PAID-IN COMPEN- RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL SATION EARNINGS ------ ------ ------ ------ ------- ------ -------- (Dollars In Thousands) BALANCE, DECEMBER 31, 1992 17,047,066 $ 85,235 - $ - $186,575 $ - $ 75,928 Net Income 30,869 Cash Dividends - Common, $0.51 Per Share (13,757) Preferred (853) Common Stock Split 8,639,721 43,199 (43,233) Employee Stock Options 81,416 407 949 Employee Benefit Plans 20,717 104 560 Dividend Reinvestment and Stock Purchase Plans 171,592 858 4,135 Conversion of AOG 9% Cumulative Convertible Preferred Stock 1,141,755 5,709 13,601 Issuance of Common Shares as Executive Compensation 94,000 470 1,867 (1,420) Amortization of Deferred Compensation 263 Other, Net 4,700 23 (27) ---------- -------- ------- ------- -------- ------- -------- BALANCE, DECEMBER 31, 1993 27,200,967 136,005 - - 164,427 (1,157) 92,187 Net Income 15,321 Cash Dividends - Common, $0.76 Per Share (20,846) Preferred (630) Treasury Stock Acquired (91,601) (2,065) Employee Stock Options 59,492 298 466 Employee Benefit Plans 136,922 685 27,805 633 2,858 Dividend Reinvestment and Stock Purchase Plans 181,069 905 19,379 444 2,676 Exercise of Common Stock Warrants 19,081 95 111 Issuance of Common Shares as Executive Compensation 20,000 100 394 (322) Amortization of Deferred Compensation 1,101 ---------- -------- ------- ------- -------- ------- -------- BALANCE, DECEMBER 31, 1994 27,617,531 138,088 (44,417) (988) 170,932 (378) 86,032 Net Income 52,522 Cash Dividends - Common, $1.01 Per Share (28,167) Preferred (492) Treasury Stock Acquired (72,500) (1,959) Employee Stock Options 354,901 1,774 4,006 Employee Benefit Plans 20,738 104 80 2 394 Dividend Reinvestment and Stock Purchase Plans 97,979 490 106,098 2,633 1,444 Issuance of Common Shares as Executive Compensation 6,600 33 134 Amortization of Deferred Compensation 156 ---------- -------- ------- ------- -------- ------- -------- BALANCE, DECEMBER 31, 1995 28,097,749 $140,489 (10,739) $ (312) $176,910 $ (222) $109,895 ========== ======== ======= ======= ======== ======= ========
The accompanying notes are an integral part of these statements. 35 36 CONSOLIDATED STATEMENTS OF CASH FLOWS K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- 1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 52,522 $ 15,321 $ 30,869 Adjustments to Reconcile Net Income to Net Cash From Operating Activities: Depreciation, Depletion and Amortization 49,891 50,278 44,644 Deferred Income Taxes 15,975 7,302 9,748 Deferred Purchased Gas Costs (1,458) 1,601 (11,925) Provision for Losses on Accounts Receivable 949 627 1,197 Gain on Sale of Facilities - (1,458) (902) Asset Write-off Associated with Merger - 2,500 - Write-down of Investment in WellTech, Inc. - - 4,513 Changes in Other Working Capital Items 23,069 16,523 (25,287) Changes in Deferred Revenues (21,267) (1,602) 4,960 Other, Net 9,899 120 10,126 -------- ------- -------- NET CASH FLOWS FROM OPERATING ACTIVITIES 129,580 91,212 67,943 -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (79,418) (70,596) (100,780) Acquisitions (31,945) (31,231) (47,521) Investments (6,598) (3,906) (150) Proceeds from Sale of Facilities 2,706 22,305 7,206 (Payments) Collections Under Basket Agreement 1,491 (306) 1,760 Other Funds Used During Construction 105 85 516 -------- ------- -------- NET CASH FLOWS USED IN INVESTING ACTIVITIES (113,659) (83,649) (138,969) -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-Term Debt (Net) 28,000 13,000 45,000 Long-Term Debt - Issued - 83,100 113,347 - Retired (21,322) (79,078) (81,401) Preferred Stock Redemption (1,143) (1,643) (2,143) Common Stock Issued 8,379 8,093 7,020 Treasury Stock - Issued 2,635 1,077 - - Acquired (1,959) (2,065) - Cash Dividends - Common (28,167) (20,846) (13,757) - Preferred (492) (630) (1,217) Minority Interests - Contributions 2,906 1,163 2,306 - Distributions (2,765) (2,183) (3,733) Premium on Debt Re-acquisition and Issue Costs (35) (1,291) (3,597) -------- ------- -------- NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES (13,963) (1,303) 61,825 -------- ------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 1,958 6,260 (9,201) Cash and Cash Equivalents at Beginning of Year 20,613 14,353 23,554 -------- ------- -------- Cash and Cash Equivalents at End of Year $ 22,571 $20,613 $ 14,353 ======== ======= ========
The accompanying notes are an integral part of these statements. 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Nature of Operations K N Energy, Inc. ("K N") is a natural gas services company and has operations in eight states in the Rocky Mountain and Mid-Continent regions. The primary services provided include gas gathering, processing, marketing, storage, transportation and retail gas distribution services. The Company's operations are divided between regulated and nonregulated sectors. (B) Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from these estimates. The consolidated financial statements include the accounts of K N and its majority-owned subsidiaries (the "Company"). Investments in jointly owned gas pipeline systems in which the Company has 20 to 50 percent ownership are accounted for under the equity method. All material intercompany items and transactions have been eliminated. (C) Accounting for Regulatory Activities The Company's regulated public utilities are accounted for in accordance with the provisions of Statement of Financial Accounting Standards No. 71, which prescribes the circumstances in which the application of generally accepted accounting principles is effected by the economic effect of regulation. 37 38 Regulatory assets and liabilities represent probable future revenues or expenses to the Company associated with certain charges and credits which will be recovered from or refunded to customers through the ratemaking process. The following regulatory assets and liabilities are reflected in the accompanying financial statements (in thousands):
DECEMBER 31 ----------- 1995 1994 ---- ---- Regulatory Assets: Employee Benefit Costs $ 923 $ 795 Debt Refinancing Costs 3,514 3,918 Deferred Income Taxes 755 1,272 Purchased Gas Costs 15,254 10,936 Plant Acquisition Adjustments 454 1,253 Rate Regulation and Application Costs 1,401 2,216 ------- ------- Total Regulatory Assets 22,301 20,390 ------- ------- Regulatory Liabilities: Deferred Income Taxes 4,621 5,212 Purchased Gas Costs 10,640 4,858 ------- ------- Total Regulatory Liabilities 15,261 10,070 ------- ------- Net Regulatory Assets $ 7,040 $10,320 ======= =======
As of December 31, 1995, $20.3 million of the Company's regulated assets and $14.4 million of the Company's regulated liabilities were being recovered from or refunded to customers through rates over periods ranging from one to 18 years. (D) Earnings Per Share Primary earnings per share are computed based on the monthly weighted average number of common shares outstanding during the periods and the assumed exercise of dilutive common stock equivalents (stock options and warrants) using the treasury stock method. The number of common shares used in computing earnings per share was 28,360,000 in 1995, 28,044,000 in 1994 and 27,424,000 in 1993. (E) Gas in Underground Storage K N's regulated retail distribution business and Northern Gas Company account for gas in underground storage using the last-in, first-out ("LIFO") method. K N Gas Supply Services, Inc., K N Marketing, Inc., and K N Natural Gas, Inc., wholly owned subsidiaries of K N, value gas in underground storage at average cost. AOG Gas Transmission Company, L.P., K N Marketing, L.P., Rocky Mountain Natural Gas Company and Westar Transmission Company, wholly owned subsidiaries of K N, use the first-in, first-out ("FIFO") method. The Company also maintains gas in its underground storage facilities on behalf of certain third parties. The Company receives a fee for its storage services but does not reflect the value of third party gas in the accompanying financial statements. 38 39 (F) Prepaid Gas Prepaid gas represents payments made in lieu of taking delivery of (and purchasing) natural gas under the take-or-pay provisions of certain of the Company's gas purchase contracts, net of any subsequent recoupments in kind from producers. Funds paid by the Company for take-or-pay are fully recoupable from future production and are recorded as an asset (Prepaid Gas). When recoupment is made in kind in a subsequent contract year, natural gas purchase expense is recorded and the asset is reduced. (G) Property, Plant and Equipment Property, plant and equipment is stated at cost which, for constructed plant, includes indirect costs such as payroll taxes, fringe benefits, and administrative and general costs. Expenditures which increase capacities or extend useful lives are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred. The cost of depreciable utility property, plant and equipment retired, plus the cost of removal less salvage, is deducted from accumulated depreciation with no effect on current period earnings. Gains or losses are recognized upon retirement of nonutility property, plant and equipment. (H) Depreciation, Depletion and Amortization Depreciation is computed based on the straight-line method over the estimated useful life for most property, plant and equipment. (I) Deferred Revenues In conjunction with the Federal Energy Regulatory Commission ("FERC") Order No. 636 ("Order 636") restructuring activities, the Company negotiated new gas sales agreements with its former wholesale customers. As a result, the Company is now responsible for performance under, or to otherwise dispose of, certain pre-Order 636 gas purchase contracts. These gas sales agreements provide for such customers to pay fixed demand charges over the agreement term, and to purchase gas from a subsidiary of the Company at negotiated commodity rates. The demand portion of the gas sales agreements was recorded as deferred revenues in 1993. Commodity charges are recorded as deferred revenues as gas is delivered under these agreements. Gas purchase, gathering, transportation and contract administration costs are recorded as a reduction to the related revenues. In addition, margins on sales of excess gas supplies under the previously described contracts to affiliates at market clearing or contracted rates are recorded in deferred revenues. Subsequent margins earned on these sales by the affiliates are recognized as income when the gas is delivered. Company management believes that the revenues being collected and deferred under these agreements will be sufficient to offset future costs associated with the gas purchase contracts, and will not have a material adverse effect on the Company's financial position or results of operations. In January 1994, contract demand receivables with a face amount of $41 million were sold to a financial institution. No gain or loss was recorded on the sale. (J) Reclassification of Prior Year Amounts Certain prior year amounts have been reclassified to conform with the 1995 presentation. 39 40 (K) Cash Flow Information The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents. Changes in Other Working Capital Items Summary and Supplemental Disclosures of Cash Flow Information are as follows (in thousands):
1995 1994 1993 ---- ---- ---- CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY (NET OF ACQUISITION EFFECTS) Accounts Receivable $(67,364) $ 24,685 $(35,314) Contract Demand Receivables - 38,732 - Material and Supplies 2,172 (1,083) (1,042) Gas in Underground Storage 21,722 (10,842) (4,292) Accounts Payable, Accrued Taxes and Other Current Liabilities 49,558 (18,640) 22,460 Other Current Assets 16,981 (16,329) (7,099) -------- -------- -------- $ 23,069 $ 16,523 $(25,287) ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Year for: Interest (Net of Amount Capitalized) $ 34,503 $ 28,721 $ 30,383 ======== ======== ======== Income Taxes $ 9,774 $ 12,763 $ 7,386 ======== ======== ========
2. AOG MERGER On July 13, 1994, pursuant to the Agreement of Merger dated March 24, 1994, American Oil & Gas Corporation ("AOG") was merged into the Company. As a result of the merger, each outstanding share of common stock of AOG was converted into 0.47 of a share of common stock of K N. In connection with the merger, all the outstanding shares of AOG common stock were converted into approximately 12.2 million shares of K N stock, and the authorized number of shares of K N common stock was increased to 50 million shares. The merger was accounted for as a pooling of interests. The Company recorded merger and restructuring costs totaling $25.9 million in the third quarter of 1994 relating to the merger and the formal restructuring plan of the Company's retail distribution operations. The restructuring plan was completed during 1995. Total cash expenditures related to these charges were $23.4 million. 3. MERGER AND ACQUISITIONS (A) Gas and Oil Properties On January 31, 1996, K N and Tom Brown, Inc. ("TBI") closed a transaction pursuant to which the parties merged a newly formed subsidiary corporation of TBI with and into K N Production Company ("KNPC"), a wholly owned subsidiary of K N and pursuant to which TBI issued to K N (i) 1,000,000 shares of 7% Convertible Preferred Stock of TBI (the "Convertible Preferred Stock") and (ii) 918,367 shares of Common Stock of TBI. For the two-year period from and after the third anniversary of the issuance of the Convertible Preferred Stock, TBI may convert any or all shares of the Convertible Preferred Stock into 1.666 shares of common stock per share of Convertible Preferred Stock of TBI, if the then current market price of TBI stock is 40 41 above $18.375 per common share. In conjunction with this transaction, K N and TBI formed a limited liability company, owned 55 percent by K N and 45 percent by TBI which will perform certain gathering, processing, field, marketing and storage services in the Mid-Continent region of the United States. As a result of this transaction, K N transferred its stock in KNPC to TBI in exchange for the Convertible Preferred Stock and Common Stock of TBI. The transaction represents a non-monetary exchange (valued at approximately $36.3 million) of oil and gas assets for accounting purposes. The common shares will be considered available for sale securities and, as a result, unrealized holding gains and losses will be included as a component of stockholders' equity. (B) Transmission and Storage Systems On February 16, 1995, the Company acquired additional natural gas transmission pipeline and storage assets in Texas. The assets include two West Texas pipeline systems, comprised of 347 miles of pipeline and related facilities, which are connected to K N's core pipeline system. In addition, surface facilities, lease rights and approximately 10.3 Bcf of natural gas in storage in a leased, Gulf Coast storage field were acquired. K N also acquired the remaining 50 percent interest it did not previously own in a 90-mile joint venture pipeline near Midland, Texas. The total price was $79 million. The Company utilized an operating lease and short-term debt financing arrangements to fund the acquisition. (C) Gathering and Transmission System On April 1, 1993, the Company completed the $48 million acquisition of the Wattenberg natural gas gathering and transmission system, located in northeastern Colorado. The system has both regulated and nonregulated components. The regulated transmission segment, approximately $18 million of the acquisition, was financed with corporate funds, and the balance of the system was financed through an operating lease. 4. REGULATORY MATTERS (A) Restructuring and Reorganization On April 8, 1992, the FERC issued Order 636 which requires a fundamental restructuring of interstate natural gas pipelines. K N implemented Order 636 restructured services on October 1, 1993. K N requested FERC approval, as a result of Order 636, to transfer all of its interstate transmission and storage facilities to K N Interstate Gas Transmission Co. ("KNI"), a wholly owned jurisdictional subsidiary of K N, and substantially all of its gathering and processing facilities to K N Gas Gathering, Inc. ("KNGG"), a nonjurisdictional wholly owned subsidiary of K N. The FERC approved the transfer of K N's interstate gas transmission and storage facilities to KNI effective October 1, 1993. The FERC authorized the transfer of certain additional gathering and processing facilities from KNI to KNGG effective January 1, 1994. KNI's only remaining gathering system was transferred to KNGG in early 1995. AOG's assets and facilities were not a part of this reorganization. In January 1995, as a result of an agreement reached with its customers, the Company filed an application with the FERC to transfer three storage fields, including approximately 45 Bcf of cushion gas held by KNI, to a newly created affiliate, K N Natural Gas, Inc. ("KNNG"). On May 2, 1995, the FERC issued an order approving the storage reorganization filing. With the approval of this transfer, KNI owns only the Huntsman, 41 42 Nebraska storage facilities, which will remain as jurisdictional facilities and continue to provide storage services. Jurisdictional rates were restated to reflect this transfer. KNNG began marketing its gas at market rates from the three storage facilities which were transferred, effective June 1, 1995. (B) Rate Matters KNI made a rate filing with the FERC in December 1993 which became effective July 1, 1994, subject to refund. The Stipulation and Agreement approved by the FERC in January 1995 provides for an $8.7 million annual increase in revenues. Revenues collected above the settlement rates were refunded to customers in early 1995. K N's retail natural gas services business segment received rate increases from a number of jurisdictions during 1994 and 1993, as summarized below:
ENTITY REQUESTING APPROVED ANNUALIZED EFFECTIVE DATE INCREASE JURISDICTION REVENUE INCREASE OF NEW RATES -------- ------------ ---------------- ------------ (In Millions) RMNGD* Colorado $1.5 4-2-94 RMNGD* Colorado 0.5 9-1-94 K N Kansas 2.4 10-1-93 K N All Nebraska Communities 1.4 5-2-93 K N Wyoming 1.1 5-1-93
*Rocky Mountain Natural Gas Division of K N Additionally, in connection with a 1990 Nebraska rate case, $1.6 million of previously deferred revenues were recorded as revenue in 1993. (C) Other In December 1994, KNI sought authority from the FERC to install $14.9 million of pipeline and compressor facilities in the vicinity of Casper, Wyoming which would increase KNI's mainline capacity by 47.5 MMBtus per day. By an order dated January 18, 1996, the FERC granted the requested authority. The facilities are expected to be in service by November 1996. K N filed an application with the Wyoming Public Service Commission in September 1995 to allow 10,000 residential and commercial customers to choose their energy provider from a qualified list of suppliers. K N will continue to provide all other utility services and will manage the gas supplies for customers in the program. 5. LEGAL MATTERS The Company was named as one of four potentially responsible parties ("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site known as the Mystery Bridge Road/U.S. Highway 20 site located near Casper, Wyoming (the "Brookhurst Subdivision") in 1989. A majority of the Company's groundwater, soil and free phase petroleum cleanup occurred between 1990 and 1995. The total remaining estimated cost is not expected to exceed $150,000. 42 43 In 1994, a mercury sampling program was initiated on the Company's systems in central and western portions of Kansas. The Company is working with the Kansas Department of Health and Environment pursuant to a five-year assessment program, and no active remediation will occur until completion of that assessment program. The costs are not expected to have any material adverse impact on the Company's financial position or results of operations. The cleanup program is not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas. The Company performed environmental audits in Colorado, Kansas and Nebraska which revealed that certain grease and lubricating oils used at various pipeline and facilities locations contained polychlorinated biphenyls ("PCBs"). The Company is working with the appropriate regulatory agencies to manage the cleanup and remediation of the pipelines and facilities. The Company filed suit against Rockwell International Corporation, manufacturer of the PCB-containing grease used in certain of the Company's pipelines and facilities, and two other related defendants for expenses and losses incurred by the Company for cleanup or mitigation. The Company settled with Rockwell in March 1994. At PCB sites with approved workplans, the Company estimates that the future cost of remediation, which will occur over a period of years, will be approximately $1.3 million, a substantial portion of which is recoverable under the Rockwell settlement. Approximately $1.2 million for PCB remediation has been expended as of December 31, 1995. The total potential remediation and cleanup costs at currently identified locations is not expected to have any material adverse impact on the Company's financial position or results of operations. The cleanup programs are not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas. Pursuant to certain acquisition agreements in 1989 and 1992, The Maple Gas Corporation and Cabot Corporation ("Cabot"), the Company's largest stockholder, indemnified the Company for certain environmental liabilities. Issues have arisen concerning Cabot's indemnification obligations; however, in conjunction with the AOG merger, the Company and Cabot entered into a standstill agreement pertaining to these and other matters, which will expire in June 1996. The Company believes it will be able to reach agreement with Cabot, and is unable to estimate its potential exposure for such liabilities at this time, but does not expect them to have a material adverse impact on the Company's financial position or results of operations. The Company acquired a 32 MMBtu per day cryogenic NGLs processing plant and approximately 900 miles of gathering pipeline located in the Texas Panhandle from Parker & Parsley Gas Processing Co. and its affiliates in October 1995. In connection with that acquisition, and for a reduction in the purchase price, which included the estimated costs of remediation of $3.9 million, the Company agreed to accept all responsibility and liability for environmental matters associated with such properties. After consideration of reserves established, such costs are not expected to have a material adverse impact on the Company's financial position or results of operations. The cleanup program, which will occur over a number of years, is not expected to interrupt or diminish the Company's operational ability to gather, process or transport natual gas. On October 9, 1992, Jack J. Grynberg filed suit in the United States District Court for the District of Colorado against the Company, Rocky Mountain Natural Gas Company and GASCO, Inc. (the "K N Entities") alleging that the K N Entities as well as KNPC and K N Gas Gathering, Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts that the companies have engaged in an illegal exercise of monopoly power, have illegally denied him economically feasible access to essential facilities to transport and distribute gas produced from fewer than 20 wells located in northwest Colorado, and illegally have attempted to monopolize or 43 44 to enhance or maintain an existing monopoly. Grynberg also asserts certain causes of action relating to a gas purchase contract. No specific monetary damages have been claimed, although Grynberg has requested that any actual damages awarded be trebled. In addition, Grynberg has requested that the K N Entities be ordered to divest all interests in natural gas exploration, development and production properties, all interests in distribution and marketing operations, and all interests in natural gas storage facilities, separating these interests from the Company's natural gas gathering and transportation system in northwest Colorado. In an unrelated transaction, K N's exploration, production and development properties owned by KNPC were transferred to a third party in January 1996. The Company has indemnified the third party for any potential claims by Grynberg related to this litigation. On August 13, 1993, the United States District Court, District of Colorado, stayed this proceeding pending exhaustion of appeals in a related state court action involving the same plaintiff. This case is still pending. On December 8, 1994, K N and its wholly owned subsidiary K N Gas Supply Services, Inc. ("KNGSS") were sued by gas producers in northeastern Colorado in District Court, Dallas County, Texas under claims arising from two gas purchase contracts covering gas purchases from wells in the Niobrara Field, Colorado. The producers asserted take-or-pay claims for contract years 1993 and 1994 in the amount of $1,157,000 plus interest, as well as actual and punitive damages in the amount of $156,000,000 for breaches of contractual and fiduciary duties arising out of a January 1977 Farmout Agreement between the producers and K N. On December 21, 1994, the lawsuit was removed from Texas state court to the United States District Court for the Northern District of Texas (Dallas). On January 12, 1995, K N and KNGSS filed a motion to dismiss for lack of personal jurisdiction, or, if jurisdiction is found to exist, a motion to transfer the cause of action to federal court in Colorado. On June 29, 1995, the United States District Court for the Northern District of Texas, Dallas Division, ruled that it has jurisdiction over K N and that venue is proper in that court. The court has not yet ruled on whether it has jurisdiction over KNGSS. Additional litigation was initiated on January 31, 1995, by KNGSS against the plaintiffs and others in federal court in Colorado. In this lawsuit, KNGSS asserts that contractual provisions require payment of refunds for gas purchased at above-market prices and, prospectively, for a reduction in gas prices paid under the contracts to market levels. On October 30, 1995, K N and KNGSS reached settlement with parties representing approximately two-thirds of the gas ownership interests held by the producers. This settlement resolves all disputes between these parties, including the lawsuit filed by K N and KNGSS in federal court in Colorado. The Company believes that this settlement will have no material adverse effect on the Company's financial position or results of operations. Settlement negotiations with the parties representing the remaining one-third ownership interest under the disputed gas purchase contracts are continuing. The Company believes it has a meritorious position in these matters, and does not expect these lawsuits to have a material adverse effect on the Company's financial position or results of operations. The Company believes it has meritorious defenses to all lawsuits and legal proceedings in which it is a defendant and will vigorously defend against them. Based on its evaluation of the above matters, and after consideration of reserves established, the Company believes that the resolution of such matters will not have a material adverse effect on the Company's financial position or results of operations. 44 45 6. PROPERTY, PLANT AND EQUIPMENT Investment in property, plant and equipment, at cost, and accumulated depreciation, depletion and amortization ("Accumulated DD&A"), detailed by business segment, are as follows (in thousands):
DECEMBER 31, 1995 ----------------- PROPERTY, PLANT ACCUMULATED AND EQUIPMENT DD&A NET --------------- ----------- -------- Retail Natural Gas Services $ 373,347 $134,844 $238,503 Interstate Transportation and Storage Services 315,686 149,267 166,419 Gathering, Processing and Marketing Services 663,754 205,701 458,053 ---------- -------- -------- $1,352,787 $489,812 $862,975 ========== ======== ========
DECEMBER 31, 1994 ----------------- PROPERTY, PLANT ACCUMULATED AND EQUIPMENT DD&A NET --------------- ----------- -------- Retail Natural Gas Services $ 358,337 $133,781 $224,556 Interstate Transportation and Storage Services 371,253 159,591 211,662 Gathering, Processing and Marketing Services 533,226 154,391 378,835 Gas and Oil Production 49,578 13,982 35,596 ---------- -------- -------- $1,312,394 $461,745 $850,649 ========== ======== ========
7. INCOME TAXES Deferred income tax assets and liabilities are recognized based on enacted tax laws for all temporary differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets are reduced by a valuation allowance for the amount of any tax benefit that is not expected to be realized. Components of the income tax provision applicable to federal and state income taxes are as follows (in thousands):
1995 1994 1993 ---- ---- ---- Taxes Currently Payable: Federal $11,069 $ 5,992 $ 6,272 State 2,006 (3,794) 2,579 ------- ------- ------- Total 13,075 2,198 8,851 ------- ------- ------- Taxes Deferred: Federal 15,672 4,081 9,920 State 303 3,221 (172) ------- ------- ------- Total 15,975 7,302 9,748 ------- ------- ------- Total Tax Provision $29,050 $ 9,500 $18,599 ======= ======= ======= Effective Tax Rate 35.6% 38.3% 37.6% ======= ======= =======
The difference between the statutory federal income tax rate and the Company's effective income tax rate is summarized as follows:
1995 1994 1993 ---- ---- ---- Federal Income Tax Rate 35.0% 35.0% 35.0% Increase (Decrease) as a Result of - State Income Tax, Net of Federal Benefit 1.8% (1.5%) 3.1% Nonconventional Fuels Credit (1.0%) (3.0%) (2.0%) Nondeductible Merger Costs - 7.8% - Other (0.2%) - 1.5% ---- ---- ---- Effective Tax Rate 35.6% 38.3% 37.6% ==== ==== ====
45 46 The Company has recorded deferred regulatory assets of $0.8 million and $1.3 million, and deferred regulatory liabilities of $4.6 million and $5.2 million at December 31, 1995 and 1994, respectively, which are expected to result in cost-of-service adjustments. These amounts reflect the "gross of tax" presentation required under Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". The deferred tax assets and liabilities and deferred regulatory assets and liabilities for rate-regulated entities computed according to SFAS 109 result from the following (in thousands):
DECEMBER 31 ----------- 1995 1994 ---- ---- Deferred Tax Assets: Unbilled Revenue $ 2,113 $ 2,128 Vacation Accrual 1,577 1,556 State Taxes 4,358 4,252 Capitalized Overhead Adjustment 2,069 1,958 Operating Reserves 772 968 WellTech, Inc. Investment 1,425 1,436 Deferred Revenues 1,525 4,866 Net Operating Loss ("NOL") Carryforwards - 1,894 Alternative Minimum Tax ("AMT") Credits 10,011 15,410 Other 5,327 3,458 -------- -------- Total Deferred Tax Assets 29,177 37,926 -------- -------- Deferred Tax Liabilities: Liberalized Depreciation 129,048 119,912 Rate Matters 4,574 8,301 Prepaid Pension 3,988 3,438 Other 3,834 2,329 -------- -------- Total Deferred Tax Liabilities 141,444 133,980 -------- -------- Net Deferred Tax Liabilities $112,267 $ 96,054 ======== ======== Deferred Accounts for Rate Regulated Entities: Liabilities $ 4,621 $ 5,212 ======== ======== Assets $ 755 $ 1,272 ======== ========
8. FINANCING (A) Notes Payable On December 1, 1994, K N entered into a credit agreement with eight banks to borrow for general corporate purposes, including commercial paper support, up to a total of $200 million. Borrowings are made at rates negotiated on the borrowing date and for a term of no more than 360 days. Under the credit agreement, K N agrees to pay a facility fee based on the total commitment, at rates which vary based on the financial rating of K N's long-term debt. Facility fees paid in 1995 were $0.2 million. There were no fees paid in 1994. The credit agreement expires December 1, 1999. K N also has credit agreements with two banks to either borrow or use for commercial paper support up to a total of $25 million. Borrowings are made at rates negotiated on the borrowing date and for a term of not more than one year. Under these agreements, K N pays a commitment fee on the unused commitment. At December 31, 1995, $10 million was outstanding under these credit agreements. Commercial paper issued by K N represents unsecured short-term notes with maturities not to exceed 270 days from the date of issue. During 1995, all commercial paper issued was redeemed within 43 days, with interest rates ranging from 5.40 percent to 6.45 percent. At December 31, 1995 and 1994, $78.0 million and $60.0 million of commercial paper, respectively, were outstanding at rates ranging from 5.90 percent to 6.15 percent 46 47 and from 5.87 percent to 6.30 percent, respectively. The weighted average interest rates on short-term borrowings outstanding were 5.96 percent and 6.09 percent as of December 31, 1995 and 1994, respectively. Average short-term borrowings outstanding during 1995 and 1994 were $45.6 million and $42.7 million, respectively. During 1995 and 1994, the weighted average interest rates on short-term borrowings outstanding were 5.98 percent and 4.58 percent, respectively. (B) Long-Term Debt
DECEMBER 31 ----------- 1995 1994 ---- ---- (In Thousands) Debentures: 6.5% Series, Due 2013 $ 50,000 $ 50,000 7.85% Series, Due 2022 28,434 28,866 8.75% Series, Due 2024 75,000 75,000 Sinking Fund Debentures: 9.95% Series, Due 2020 20,000 20,000 9.625% Series, Due 2021 45,000 45,000 8.35% Series, Due 2022 35,000 35,000 Unamortized Debt Discount (1,069) (1,124) Senior Notes: 7.27%, Due 1996-2002 32,500 35,000 11.846% (AOG), Due 1996-1999 25,446 33,928 Medium-Term Notes: 10.03% Average Rate, Due 1996-1999 12,500 17,500 $25 Million Subordinated Revolving Credit Note (AOG) with Cabot Corporation, Interest at the London Interbank Offered Rate ("LIBOR") Plus 0.925% at December 31, 1995 and 1994, (6.8625% and 6.9875%, Respectively), Due 1996 11,142 12,829 8.5% Note Payable of Red River Pipeline, L.P., 75%-owned by the Company, Guaranteed by Partners, Due 1996-1998 9,808 13,029 Current Maturities of Long-Term Debt (28,197) (30,384) -------- -------- Total Long-Term Debt $315,564 $334,644 ======== ========
Maturities of long-term debt for the five years ending December 31, 2000, are as follows (in thousands):
YEAR AMOUNT - ---- ------ 1996 $28,197 1997 16,055 1998 19,055 1999 13,089 2000 5,000
In October 1994, K N sold publicly $75 million of 30-year, 8.75% debentures at an all-in cost to the Company of 8.91 percent. This debt was issued from the Company's $200 million shelf registration statement 47 48 which the Securities and Exchange Commission declared effective in November 1993. Proceeds from this financing were used to fund capital expenditures and to reduce short-term borrowings incurred in July 1994 to retire certain debt of AOG. As discussed more fully in Note 10, in 1993, AOG entered into two interest-rate swap agreements and, in 1994, the Company entered into four interest rate cap agreements covering $35 million of notional principal. At December 31, 1995 and 1994, the carrying amount of the Company's long-term debt was $344.8 million and $366.2 million, respectively, and the estimated fair value was $383.2 million and $355.2 million, respectively. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturity. 9. PREFERRED STOCK
DECEMBER 31 ----------- 1995 1994 ---- ----- (In Thousands) Authorized - Class A, 200,000 Shares; Class B, 2,000,000 Shares, All Without Par Value- Redeemable Solely at Option of Company - Class A, $5.00 Cumulative Series, 70,000 Shares $7,000 $7,000 ====== ====== Subject to Mandatory Redemption at $100 Per Share - Class B, $8.30 Cumulative Series, 5,720 Shares and 17,148 Shares at December 31, 1995 and 1994, Respectively $ 572 $1,715 ====== ======
(A) Class B $8.30 Preferred Stock The Class B $8.30 Preferred Stock is subject to mandatory redemption through a sinking fund (at $100 per share, plus accrued and unpaid dividends) of $572,000 in 1997. In each of the years 1995, 1994 and 1993, the Company redeemed 5,714 shares subject to mandatory redemption, and an additional 5,714 shares at $100 per share. (B) Class A $5.00 Preferred Stock The Class A $5.00 Preferred Stock is redeemable, in whole or in part, at the option of the Company at any time on 30 days' notice at $105 per share plus accrued dividends. This series has no sinking fund requirements. (C) Rights of Preferred Shareholders All outstanding series of preferred stock have voting rights. If, for any class of preferred stock, the Company (i) is in arrears on dividends, (ii) has failed to pay or set aside any amounts required to be paid or set aside for all sinking funds, or (iii) is in default on any of its redemption obligations, then no dividends shall be paid or declared on any junior stock nor shall any junior stock be purchased or redeemed by the Company. Also, if dividends on any class of preferred stock are sufficiently in arrears, the holders of that stock may elect one-third of the Company's Board of Directors. 48 49 (D) Fair Value At December 31, 1995, both the carrying amount and the estimated fair value of the Company's outstanding preferred stock subject to mandatory redemption were $0.6 million. The comparable amounts at December 31, 1994, were $1.7 million and $1.6 million, respectively. The fair value of the Company's preferred stock is estimated based on an evaluation made by an independent security analyst. 10. RISK MANAGEMENT The Company uses two types of risk management instruments - energy financial instruments and interest rate swaps - which are discussed below. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments, but does not expect any counterparties to fail to meet their obligations given their existing credit ratings. The fair value of these risk management instruments reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses on open contracts. Market quotes are available for substantially all instruments used by the Company. (A) Energy Financial Instruments The Company uses energy financial instruments to minimize its risk of price changes in the spot and fixed price natural gas, crude oil and NGLs markets. Energy risk management products include crude oil and natural gas commodity futures and options contracts, fixed price swaps and basis swaps. Pursuant to its Board of Directors' approved guidelines, the Company is to engage in these activities only as a hedging mechanism against pre-existing or anticipated physical gas and condensate sales, gas purchases, system use, and storage in order to protect profit margins, and is prohibited from engaging in speculative trading. The activities of the risk management group are monitored by the Company's Risk Management Committee which is charged with the review and enforcement of the Board of Directors' risk management guidelines. All energy futures, swaps and options are recorded at fair value. Gains and losses on hedging positions are deferred and recognized as gas purchases expenses in the periods the underlying physical transactions occur. All 1995 transactions were recorded as hedges. As of December 31, 1995, the Company had deferred $12.7 million, representing the difference between the current market value and the original physical contracts' value, associated with its hedging activities, of which $1.2 million in gains relate to futures contracts and $13.9 million in losses relate to over-the-counter swaps and options. The deferrals will be offset by corresponding underlying physical transactions and are reflected as deferred charges in the accompanying financial statements. At December 31, 1995, the Company held notional long volumetric positions of 41.5 Bcf of gas, of which 19.7 Bcf were held in gas futures positions and 21.8 Bcf were held in over-the-counter swaps and options. Of the 41.5 Bcf notional total, associated physical transactions of 30.8 Bcf are expected to occur in 1996, 7.4 Bcf in 1997, and 3.3 Bcf in 1998 and beyond. A change of plus or minus 10 percent in the fair market prices of the above financial instruments would have the approximate effect of reducing or increasing the above deferrals by $9.0 million, which would be offset by corresponding increases or decreases in the value of the underlying physical transactions. 49 50 (B) Interest Rate Swaps The Company has entered into various interest rate swap and cap agreements for the purpose of managing interest rate exposure. Settlement amounts payable or receivable under these agreements are recorded as interest expense or income in the accounting period they are incurred. In February 1993, AOG entered into a three-year interest rate swap agreement covering $25 million of notional principal whereby it pays LIBOR, which is reset every six months in arrears, in exchange for a fixed rate of 5.07 percent. This agreement terminates March 1996. In September 1993, AOG entered into a second three-year interest rate swap agreement covering $10 million of notional principal at a LIBOR rate, which is reset every 12 months in arrears, in exchange for a fixed rate of 5.27 percent. In August 1994, the counterparty to this second agreement exercised its rights to extend this agreement by one additional year, with the agreement now terminating in September 1997. In 1994, the Company entered into four interest rate cap agreements which effectively cap the LIBOR rate to be paid by the Company under these swap agreements at 7.5 percent for the terms of the original swap agreements. 11. EMPLOYEE BENEFITS (A) Retirement Plans The Company has defined benefit pension plans covering substantially all full-time employees. These plans provide pension benefits that are based on the employees' compensation during the period of employment. These plans are tax qualified subject to the minimum funding requirements of ERISA. The Company's funding policy is to contribute annually the recommended contribution using the actuarial cost method and assumptions used for determining annual funding requirements. Plan assets consist primarily of pooled fixed income, equity, bond and money market funds. Net pension cost includes the following components (in thousands):
1995 1994 1993 ---- ---- ---- Service Cost - Benefits Earned During the Period $ 3,332 $ 2,721 $ 2,579 Interest Cost on Projected Benefit Obligation 6,372 5,986 5,698 Actual Return on Assets (17,569) 565 (14,976) Net Amortization and Deferral 8,415 (9,166) 6,714 -------- ------- ------ Net Periodic Pension Cost $ 550 $ 106 $ 15 ======== ======= =======
As a result of restructuring activities, curtailment gains of $716,886 are reflected in the net amortization and deferral component of net periodic pension cost for 1995. 50 51 The following table sets forth the plans' funded status and amounts recognized in the Company's financial statements at December 31, 1995 and 1994 (in thousands):
DECEMBER 31 ----------- 1995 1994 ---- ---- Actuarial Present Value of Benefit Obligations: Vested Benefit Obligation $(77,490) $(68,229) ======== ======= Accumulated Benefit Obligation $(82,937) $(70,682) ======== ======== Projected Benefit Obligation $(90,046) $(78,660) Plan Assets at Fair Value 111,084 96,724 -------- -------- Plan Assets in Excess of Projected Benefit Obligation 21,038 18,064 Unrecognized Net Gain (9,678) (7,894) Prior Service Cost Not Yet Recognized in Net Periodic Pension Costs 171 217 Unrecognized Net Asset at January 1 (1,429) (1,533) -------- -------- Prepaid Pension Cost $ 10,102 $ 8,854 ======== ========
The rate of increase in future compensation and the expected long-term rate of return on assets were 3.5 and 8.5 percent, respectively, for 1995, 4.5 and 8.5 percent, respectively, for 1994 and 4.5 and 9.25 percent, respectively, for 1993. The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5 percent for 1995, 8.25 percent for 1994 and 7.5 percent for 1993. The Company also contributes the lesser of 10 percent of K N's net income or 10 percent of normal employee compensation to the Employees Retirement Fund Trust Profit Sharing Plan (a defined contribution plan). Contributions by the Company were $5.6 million, $2.3 million and $2.6 million for 1995, 1994 and 1993, respectively. (B) Other Postretirement Employee Benefits The Company has a defined benefit postretirement plan providing medical care benefits upon retirement for all eligible employees with at least five years of credited service as of January 1, 1993, and their eligible dependents. Retired employees are required to contribute monthly amounts which depend upon the retired employee's age, years of service upon retirement and date of retirement. This plan also provides life insurance benefits upon retirement for all employees with at least 10 years of credited service who are age 55 or older when they retire. The Company pays for a portion of the life insurance benefit; employees may, at their option, increase the benefit by making contributions from age 55 until age 65 or retirement, whichever is earlier. In 1993, the Company began funding the future expected postretirement benefit costs under the plan by making payments to Voluntary Employee Benefit Association trusts. The Company's funding policy is to contribute amounts within the deductible limits imposed on Internal Revenue Code Sec. 501(c)(9) trusts. Plan assets consist primarily of pooled fixed income funds. Effective January 1, 1993, the Company prospectively adopted Statement of Financial Accounting Standards No. 106 ("SFAS 106") which requires the accrual of the expected costs of postretirement benefits other than pensions during the years that employees render service. The Accumulated Postretirement Benefit Obligation ("APBO") of the plan at January 1, 1993, was approximately $18.8 million. The Company has elected to amortize this transition obligation to expense over a 20-year period. 51 52 Net postretirement benefit cost includes the following components (in thousands):
1995 1994 1993 ---- ---- ---- Service Cost - Benefits Earned During the Period $ 378 $ 321 $ 379 Interest Cost on APBO 1,381 1,307 1,349 Actual Return on Assets (156) 7 (14) Net Amortization and Deferral 884 805 953 ------ ------ ------ Net Periodic Postretirement Benefit Cost $2,487 $2,440 $2,667 ====== ====== ======
The following table sets forth the plan's funded status and the amounts recognized in the Company's financial statements as follows (in thousands):
DECEMBER 31 ----------- 1995 1994 ---- ---- Accumulated Postretirement Benefit Obligation: Retirees $(13,138) $(13,106) Eligible Active Plan Participants (3,524) (3,411) Ineligible Active Plan Participants (2,751) (1,768) -------- -------- Total APBO (19,413) (18,285) Plan Assets at Fair Value 2,623 1,867 -------- -------- Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (16,790) (16,418) Unrecognized Net Gain (649) (1,066) Prior Service Cost Not Yet Recognized in Net Periodic Postretirement Benefit Cost - - Unrecognized Transition Obligation 15,794 16,750 -------- -------- Accrued Postretirement Benefit Cost $ (1,645) $ (734) ======== ========
The weighted average discount rate used in determining the actuarial present value of the APBO was 7.5 percent for both 1995 and 1994. The assumed health care cost trend rate was seven percent for 1995 and beyond. A one-percentage-point increase in the assumed health care cost trend rate for each future year would have increased the aggregate of the service and interest cost components of the 1995 net periodic postretirement benefit cost by approximately $16,000 and would have increased the APBO as of December 31, 1995, by approximately $208,000. K N's interstate retail distribution business, in connection with rate filings described in Note 4(B) for Kansas, Nebraska and Wyoming, has received regulatory approval to include in the cost-of-service component of its rates the cost of postretirement benefits as measured by application of SFAS 106. In addition, KNI has received approval from the FERC for similar regulatory treatment in connection with its rate filing, also described in Note 4(B). At both December 31, 1995 and 1994, no SFAS 106 costs were deferred as regulatory assets. (C) Other Postemployment Benefits On January 1, 1994, the Company adopted SFAS 112, which establishes standards of financial accounting and reporting for the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. Implementation of SFAS 112 had no material effect on the Company's financial position or results of operations. SFAS 112 costs deferred as regulatory assets were $0.9 million and $0.8 million at December 31, 1995 and 1994, respectively. 52 53 12. COMMON STOCK OPTION AND PURCHASE PLANS K N has incentive stock option plans for key employees and nonqualified stock option plans for its nonemployee directors and employees. In 1994, the Company's shareholders approved an expanded stock-based awards plan for key employees which allows for the granting of both nonqualified and incentive options, restricted stock awards, stock appreciation rights and other stock-based awards. Under all plans, except the 1994 plan and the AOG plan, options are granted at not less than 100 percent of the market value of the stock at the date of grant. Under the 1994 plan, options may be granted at less than 100 percent of the market value of the stock at the date of grant. Options granted under these plans vest immediately or up to five years and expire no later than 10 years after date of grant. During 1993, AOG issued to its chief executive officer 50,000 shares of restricted AOG common stock (23,500 shares of K N common stock) which vest 50 percent per year. AOG also sold 150,000 shares of AOG common stock (70,500 shares of K N common stock) to its president and chief operating officer for $0.04 per share of AOG common stock ($0.0851 per share of K N common stock). One-half of these shares was fully vested and nonforfeitable upon issuance, and the remainder became fully vested upon consummation of the merger described in Note 2. The market value of these AOG shares issued was approximately $2.3 million based on the average market price per share of AOG common stock on the date of issuance. The market value of the restricted shares was reflected as deferred compensation and is being amortized over the vesting period. The Company recorded compensation expense totaling $0.2 million and $1.3 million for 1995 and 1994, respectively, relating to restricted stock grants awarded under the plans. At December 31, 1995, 113 employees, officers and directors of the Company held options under the plans. The changes in stock options outstanding during 1995, 1994 and 1993 are as follows:
NUMBER OF OPTION PRICE SHARES $ PER SHARE ------ ----------- Outstanding at December 31, 1992 814,901 5.28-28.99 Granted 311,000 21.68-28.00 Exercised (135,522) 8.28-16.79 Expired (6,751) 6.72-23.04 --------- Outstanding at December 31, 1993 983,628 8.96-28.99 Granted 309,500 0.00-24.00 Exercised (67,093) 0.00-23.04 Expired (12,011) 15.08-23.01 --------- Outstanding at December 31, 1994 1,214,024 0.00-28.99 Granted 348,200 0.00-28.63 Exercised (373,423) 0.00-23.04 Expired (24,291) 13.25-23.04 --------- OUTSTANDING AT DECEMBER 31, 1995 1,164,510 0.00-28.99 ========= EXERCISABLE AT DECEMBER 31, 1995 584,902 =========
Unexercised options outstanding at December 31, 1995, expire at various dates between 1996 and 2005. K N has an Employee Stock Purchase Plan under which eligible employees may purchase K N's common stock through voluntary payroll deductions at a 15 percent discount from the market value of the common stock, as defined in the plan. 53 54 Under K N's Stock Option, Dividend Reinvestment, Employee Stock Purchase and Employee Benefit Plans, 4,477,156 shares were reserved for issuance at December 31, 1995. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 will be effective for the year 1996 and recommends a fair value based method of accounting for employee stock compensation, including stock options. However, companies may choose to account for stock compensation using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and provide pro forma disclosures of net income and earnings per share as if the fair value based method had been applied. The Company anticipates it will continue to account for stock compensation using the intrinsic value based method, and thus SFAS 123 will not have any impact on reported operating results. The Company's pro forma disclosures will be primarily affected by stock options granted to employees and the Employee Stock Purchase Plan described above. 13. COMMON STOCK WARRANTS At both December 31, 1995 and 1994, warrants to purchase 1,187,432 shares of the Company's common stock were outstanding. The warrants are exercisable at $17.55 per warrant and expire on September 30, 1999. 14. COMMITMENTS AND CONTINGENT LIABILITIES (A) Leases On February 16, 1995, AOG Gas Transmission Company, L.P., a wholly owned subsidiary of K N, acquired natural gas transmission pipeline and storage assets in Texas. (See Note 3(B)). A portion of these assets has been funded through 10-year operating leases. In 1993, K N Front Range Gathering Company, a wholly owned subsidiary of K N, began to lease gas gathering equipment and facilities under a 10-year operating lease. These operating leases contain purchase options at the end of their lease terms. The Company also leases certain office space, properties and equipment under operating leases. Payments made under operating leases were $16.2 million in 1995, $9.6 million in 1994 and $8.3 million in 1993. Future minimum commitments under major operating leases are as follows (in thousands):
YEAR ENDING DECEMBER 31 AMOUNT - ----------- ------ 1996 $ 15,467 1997 14,091 1998 12,153 1999 22,498 2000 10,192 Thereafter 94,792 -------- Total Commitments $169,193 ========
54 55 (B) Basket Agreement Under terms of an agreement (the "Basket Agreement") entered into with Cabot as part of AOG's acquisition of Cabot's natural gas pipeline business, AOG and Cabot equally share net payments made in settlement of certain liabilities related to operations of the acquired business prior to the acquisition date. At December 31, 1995 and 1994, the Company's estimated net liability was $5.6 million and $6.0 million, respectively. The Company had made net payments of $10.9 million as of December 31, 1995 and $12.4 million as of December 31, 1994. The difference between net payments made by the Company and its estimated liability is reflected in current assets and consists of (i) the present value of Cabot's share of net payments and (ii) future recoveries from customers. The Basket Agreement is expected to be settled in 1996. (C) Capital Expenditure Budget The consolidated capital expenditure budget for 1996 is approximately $81 million, excluding acquisitions. Approximately $3.9 million had been committed for the purchase of plant and equipment at December 31, 1995. 15. MAJOR CUSTOMER Energas Company and affiliates comprised 10 percent of consolidated revenues in 1995, 11 percent in 1994 and 12 percent in 1993. 16. BUSINESS SEGMENT INFORMATION The Company is a natural gas energy products and services provider engaged in the following activities: o providing natural gas sales and transportation services at retail (Retail Natural Gas Services); o interstate storing and transporting natural gas (Interstate Transportation and Storage Services); o gathering, processing, marketing, storing and transporting natural gas (Gathering, Processing and Marketing Services); and o developing and producing natural gas and crude oil (Gas and Oil Production). 55 56 BUSINESS SEGMENT INFORMATION
1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- (In Thousands) OPERATING REVENUES: Retail Natural Gas Services $ 222,797 $ 217,747 $ 205,870 Interstate Transportation and Storage Services 64,523 60,562 118,026 Gathering, Processing and Marketing Services 891,849 885,949 760,245 Gas and Oil Production 10,721 14,128 8,462 Intersegment Eliminations (86,501) (95,322) (51,550) ---------- ---------- ---------- $1,103,389 $1,083,064 $1,041,053 ========== ========== ========== OPERATING INCOME: Retail Natural Gas Services $ 31,341 $ 12,540) Interstate Transportation and } $ 47,927 Storage Services 17,672 16,347) Gathering, Processing and Marketing Services 64,900 22,380 31,028 Gas and Oil Production (189) 2,908 1,249 ---------- ---------- ---------- OPERATING INCOME 113,724 54,175 80,204 Other Income and (Deductions) (32,152) (29,354) (30,736) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES $ 81,572 $ 24,821 $ 49,468 ========== ========== ========== IDENTIFIABLE ASSETS: Retail Natural Gas Services $ 328,166 $ 304,065) Interstate Transportation and } $ 545,424 Storage Services 178,882 216,753) Gathering, Processing and Marketing Services 685,023 574,280 575,423 Gas and Oil Production 36,451 43,932 25,743 Corporate * 28,935 33,354 22,685 ---------- ---------- ---------- $1,257,457 $1,172,384 $1,169,275 ========== ========== ========== DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE: Retail Natural Gas Services $ 12,590 $ 12,111) Interstate Transportation and } $ 21,271 Storage Services 7,437 8,338) Gathering, Processing and Marketing Services 25,256 25,830 20,018 Gas and Oil Production 4,608 3,999 3,355 ---------- ---------- ---------- $ 49,891 $ 50,278 $ 44,644 ========== ========== ========== CAPITAL EXPENDITURES AND ACQUISITIONS: Retail Natural Gas Services $ 30,080 $ 23,673) Interstate Transportation and } $ 56,782 Storage Services 11,305 16,509) Gathering, Processing and Marketing Services 67,774 26,521 104,219 Gas and Oil Production 6,156 35,256 4,951 ---------- ---------- ---------- $ 115,315 $ 101,959 $ 165,952 ========== ========== ==========
* Principally cash and investments 56 57 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) QUARTERLY OPERATING RESULTS FOR 1995 AND 1994
(In Thousands Except Per Share Amounts) 1995 ---- FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Operating Revenues $292,707 $236,149 $246,724 $327,809 Operating Income 31,492 18,913 25,949 37,370 Net Income 14,518 6,922 11,829 19,253 Preferred Dividends 123 123 123 123 Earnings Available for Common Stock $ 14,395 $ 6,799 $ 11,706 $ 19,130 ======== ======== ======== ======== Number of Common Shares Used In Computing Earnings Per Share 28,144 28,353 28,472 28,649 ======== ======== ======== ======== Earnings Per Common Share $ 0.51 $ 0.24 $ 0.41 $ 0.67 ======== ======== ======== ========
1994 ---- FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Operating Revenues $346,872 $235,803 $231,256 $269,133 Operating Income (Loss) 25,940 10,410 (7,628) 25,453 Net Income (Loss) 11,959 2,910 (12,460) 12,912 Preferred Dividends 157 158 157 158 Earnings (Loss) Available for Common Stock $ 11,802 $ 2,752 $(12,617) $ 12,754 ======== ======== ======== ======== Number of Common Shares Used In Computing Earnings Per Share 27,718 27,855 28,153 28,149 ======== ======== ======== ======== Earnings (Loss) Per Common Share $ 0.42 $ 0.10 $ (0.45)* $ 0.45 ======== ======== ======== ========
*Includes merger and restructuring costs totaling $19.3 million after taxes, or $0.69 per common share. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no such matters during 1995. 57 58 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification of Directors For information regarding the Directors, see pages 2-8 of the 1996 Proxy Statement. (B) Identification of Executive Officers See Executive Officers of the Registrant under Part I. (C) Identification of Certain Significant Employees None. (D) Family Relationships See "Election of Directors" on page 8 of the 1996 Proxy Statement. (E) Business Experience See Executive Officers of the Registrant under Part I. For business experience of the Directors, see pages 2-8 of the 1996 Proxy Statement. (F) Involvement in Certain Legal Proceedings None. (G) Promoters and Control Persons None. The information regarding compliance with Section 16 of the Securities and Exchange Act of 1934 is set forth in the Proxy Statement and is hereby incorporated by reference. ITEM 11: EXECUTIVE COMPENSATION See "Director Compensation", "Report of the Compensation Committee in Executive Compensation", "Executive Compensation", "Stock Options", "Performance Graph", "Pension Benefits" and "Severance and Other Agreements" on pages 9- 22 of the 1996 Proxy Statement. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the following pages of the 1996 Proxy Statement: (i) Pages 4-7 relating to common stock owned by directors; (ii) pages 18-19, "Executive Stock Ownership"; and (iii) pages 25-27, "Principal Shareholders". 58 59 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (A) Transactions with Management and Others See "Relationship Between Certain Directors and the Company" on page 8 of the 1996 Proxy Statement. (B) Certain Business Relationships See "Relationship Between Certain Directors and the Company" on page 8 of the 1996 Proxy Statement. (C) Indebtedness of Management None. (D) Transactions with Promoters Not applicable. 59 60 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) See the index for a listing and page numbers of financial statements and exhibits included herein or incorporated by reference. Executive Compensation Plans and Arrangements Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1982 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1982 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1986 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1988 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Directors' Deferred Compensation Plan Agreement (Exhibit 10.8, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1987 Directors' Deferred Fee Plan and Form of Participation Agreement regarding the Plan (Exhibit 10.9, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1992 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* K N Energy, Inc. 1995 Executive Incentive Plan (Exhibit 10(k) to the Annual Report on Form 10-K for the year ended December 31, 1994)* 1995 K N Energy, Inc. Long-Term Incentive Plan (Attachment A to the K N Energy, Inc. 1995 Proxy Statement on Schedule 14-A)* K N Energy, Inc. 1996 Executive Incentive Plan (attached hereto as Exhibit 10(l))** 60 61 K N Energy, Inc. Nonqualified Deferred Compensation Plan (Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994)* K N Energy, Inc. Nonqualified Retirement Income Restoration Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended December 31, 1994)* K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan (Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (attached hereto as Exhibit 10(p))** Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (attached hereto as Exhibit 10(q))** K N Energy, Inc. Performance Incentive Plan (attached hereto as Exhibit 10(u))** (b) Reports on Form 8-K On December 18, 1995, a Current Report on Form 8-K was filed to report that on December 14, 1995, K N announced its proposed merger of K N's wholly-owned gas and oil subsidiary, K N Production Company, into Tom Brown, Inc., as well as the joint formation of a new gas services company.* * Incorporated herein by reference. ** Included in SEC and NYSE copies only. 61 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. K N ENERGY, INC. (Registrant) March 11, 1996 By /s/ E. Wayne Lundhagen ----------------------------------- E. Wayne Lundhagen Vice President and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Edward H. Austin, Jr. Director - ------------------------------------- Edward H. Austin, Jr. /s/ Charles W. Battey Chairman and Director - ------------------------------------- Charles W. Battey /s/ Stewart A. Bliss Director - ------------------------------------- Stewart A. Bliss /s/ David W. Burkholder Director - ------------------------------------- David W. Burkholder /s/ David M. Carmichael Vice Chairman and Director - ------------------------------------- David M. Carmichael /s/ Robert H. Chitwood Director - ------------------------------------- Robert H. Chitwood /s/ Howard P. Coghlan Director - ------------------------------------- Howard P. Coghlan /s/ Robert B. Daugherty Director - ------------------------------------- Robert B. Daugherty /s/ Jordan L. Haines Director - ------------------------------------- Jordan L. Haines /s/ Larry D. Hall President, Chief Executive Officer and - ------------------------------------- Director (Principal Executive Officer) Larry D. Hall /s/ William J. Hybl Director - ------------------------------------- William J. Hybl /s/ E. Wayne Lundhagen Vice President and Treasurer - ------------------------------------- (Principal Financial and Accounting Officer) E. Wayne Lundhagen /s/ Edward Randall, III Director - ------------------------------------- Edward Randall, III /s/ James C. Taylor Director - ------------------------------------- James C. Taylor /s/ H. A. True, III Director - ------------------------------------- H. A. True, III
62 63 Exhibit Index
Page Number ----------- List of Executive Compensation Plans and Arrangements . . . . . . . . . . . . . . . 60-61 Exhibit 3(a) - Restated Articles of Incorporation (Exhibit 3(a) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 3(b) - By-laws of the Company, as amended (Exhibit 3(b) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 3(c) - Certificate of the Voting Powers, Designation, Preferences and Relative, Participa- ting, Optional or Other Special Rights, and Quali- fications, Limitations or Restrictions Thereof, of the Class B $8.30 Cumulative Preferred Stock, Without Par Value (Exhibit 4.4, File No. 33-26314)* Exhibit 4(a) - Indenture dated as of September 1, 1988, between K N Energy, Inc. and Continental Illinois National Bank and Trust Company of Chi- cago (Exhibit 1.2, Current Report on Form 8-K Dated October 5, 1988)* Exhibit 4(b) - First supplemental indenture dated as of January 15, 1992, between K N Energy, Inc. and Continental Illinois National Bank and Trust Company of Chicago (Exhibit 4.2, File No. 33-45091)* Exhibit 4(c) - Second supplemental indenture dated as of December 15, 1992, between K N Energy, Inc. and Continental Bank, National Association (Exhibit 1.2 Current Report on Form 8-K dated December 15, 1992)* Exhibit 4(d) - Indenture dated as of November 20, 1993, between K N Energy, Inc. and Continental Bank, National Association (Exhibit 4.1, File No. 33-51115)* Note - Copies of instruments relative to long-term debt in authorized amounts that do not exceed 10 percent of the consolidated total assets of the Company and its subsidiaries have not been furnished. The Company will furnish such instru- ments to the Commission upon request. Exhibit 10(a) - Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(b) - 1982 Stock Option Plan for Non- employee Directors of the Company with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(c) - 1982 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(d) - 1986 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(e) - 1988 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(f) - Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, Amend- ment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(g) - Directors' Deferred Compensation
63 64 Exhibit Index (Continued)
Page Number ----------- Plan Agreement (Exhibit 10.8, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(h) - 1987 Directors' Deferred Fee Plan, as Amended (Attached hereto as Exhibit 10(h))** Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* Exhibit 10(j) - K N Energy, Inc. 1994 Executive Incentive Plan (Exhibit 10(k) to the Annual Report on Form 10-K for the Year Ended December 31, 1993)* Exhibit 10(k) - 1994 K N Energy, Inc. Long-Term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)* Exhibit 10(l) - K N Energy, Inc. 1996 Executive Incentive Plan (Attached hereto as Exhibit 10(l))** Exhibit 10(m) - K N Energy, Inc. Nonqualified Deferred Compensation Plan (Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(n) - K N Energy, Inc. Nonqualified Retirement Income Restoration Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(o) - K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan (Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(p) - Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (Attached hereto as Exhibit 10(p))** Exhibit 10(q) - Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Attached hereto as Exhibit 10(q))** Exhibit 10(r) - Amended and Restated Basket Agreement dated as of June 30, 1990, by and between American Pipeline Company ("APC"), Cabot and Cabot Transmission Corporation (Exhibit 10.5(a) to the Annual Report on Form 10-K for American Oil and Gas Corporation ("AOG") for the year ended December 31, 1993)* Exhibit 10(s) - First Amendment to Amended and Restated Omnibus Acquisition Agreement and Amended and Restated Basket Agreement dated as of March 31, 1992 by and among AOG, APC, Cabot and Cabot Transmission (Exhibit 10.5(d) to the Annual Report on Form 10-K for AOG for the year ended December 31, 1993)* Exhibit 10(t) - Rights Agreement between K N Energy, Inc. and the Bank of New York, as Rights Agent, dated as of August 21, 1995 (Exhibit 1 on Form 8-A dated August 21, 1995)* Exhibit 10(u) - K N Energy, Inc. Performance Incentive Plan (Attached hereto as Exhibit 10(u))** Exhibit 10(v) - K N Energy, Inc. 1995 Executive Incentive Plan (Exhibit 10(1) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 12 - Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . . 65 Exhibit 13 - 1995 Annual Report to Shareholders*** . . . . . . . . . . . . . . . . . 66 Exhibit 22 - Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . 67 Exhibit 24 - Consent of Independent Public Accountants . . . . . . . . . . . . . . . 68 Exhibit 27 - Financial Data Schedule****
* Incorporated herein by reference. ** Included in SEC and NYSE copies only. *** Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this annual report on Form 10-K. **** Included in SEC copy only. 64 EX-10.H 2 1987 DIRECTOR'S DEFERRED FEE PLAN 1 EXHIBIT 10(h) K N ENERGY, INC. 1987 DIRECTORS' DEFERRED FEE PLAN AS AMENDED ARTICLE I PURPOSE The purpose of the K N Energy, Inc. 1987 Directors' Deferred Fee Plan (hereinafter referred to as the "Plan") is to provide funds upon termination of service or death for Directors (and their beneficiaries ) of K N Energy, Inc., and its subsidiaries. It is intended that the Plan will aid in attracting and retaining Directors of exceptional ability by providing such Directors with a means to supplement their standard of living. ARTICLE II DEFINITIONS For the purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise: 2.1 Beneficiary. "Beneficiary" means the person, persons or entity designated by the Participant, or as provided in Article VIII, to receive any benefits payable under the Plan. Any Participant Beneficiary designation shall be made in a written instrument filed with the Committee and shall become effective only when received in writing by the Committee. 2.2 Board. "Board" means the Board of Directors of K N Energy, Inc. 2.3 Committee. "Committee" means the Compensation Committee of the Company. 2.4 Company. "Company" means K N Energy, Inc. and its subsidiaries. 2.5 Declared Rate. "Declared Rate" means the average of the composite yield on Moody's Seasoned Corporate Bond Yield Index for the twelve months beginning April 1 of the preceding year and ending March 31 of the following year, as determined from Moody's Bond Record published by Moody's Investors Services, Inc. (or any successor thereto). If such monthly yield is no longer published, a substantially similar average shall be selected by the Company. The Committee shall establish the Declared Rate effective as of May 1, of each Plan Year. Such Declared Rate, once established, shall be used for all interest determinations during such Plan Year. 1 2 2.6 Deferral Benefit. "Deferral Benefit" means the benefit payable to a Participant or Participant's Beneficiary on Participant's death or termination of service as a Director, as calculated in Article VII hereof. 2.7 Deferred Benefit Account. "Deferred Benefit Account" means the account maintained on the books of account of the Company for each Participant pursuant to Article VI. A separate Deferred Benefit Account shall be maintained for each Participant. A Participant's Deferred Benefit Account shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan. A Participant's Deferred Benefit Account shall not constitute or be treated as a trust fund of any kind. 2.8 Deferred Fees. "Deferred Fees" means Fees that are credited to a Deferred Benefit Account in the form of cash, Memo Stock, or the equivalency of dividends paid on memo stock. 2.9 Determination Date. "Determination Date" means the date on which the amount of a Participate's Deferred Benefit Account is determined as provided in Article VI hereof. The last day of each calendar month shall be a Determination Date. 2.10 Director. "Director" means an active member of the Board of Directors of the Company. 2.11 Fee. "Fee" or "Fees" means the compensation paid to a Director for services performed as a Director during a Plan Year which the Director chooses to defer. 2.12 Participant. "Participant" means any Director who elects to participate by filing a Participation Agreement as provided in Article IV. 2.13 Participation Agreement. "Participation Agreement" means the agreement filed by a Participant prior to the beginning of the first period for which the Participant's Fees are to be deferred pursuant to the Plan. A form of Participation Agreement is attached hereto. 2.14 Plan Year. "Plan Year" means a twelve month period commencing May 1 and ending the following April 30. The first Plan Year shall commence May 1, 1987. For 1995 the Plan Year shall be from May 1 to December 31. Thereafter a Plan Year shall be from January 1, to December 31. 2.15 Spouse. "Spouse" means a Participate's wife or husband who was lawfully married to the Participant at the time of the Participant's death or a determination of Participant's incompetency. 2.16 Memo Stock. "Memo Stock" means those Fees which are credited to a Participant's Deferred Benefit Account as if such Fees were used to purchase the equivalent amount of Company common shares. The Memo Stock shall be priced at the average of the highest and lowest market trades on the date Fees are payable. Memo Stock will not be credited in partial shares. 2 3 ARTICLE III ADMINISTRATION 3.1 Committee; Duties. This Plan shall be administered by the Committee. The Committee shall also have the authority to make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions, including interpretations of this Plan, as may arise in connection with the Plan. 3.2 Binding Effect of Decisions. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan, unless an appeal is received by the Committee within 60 days of the disputed action. The appeal will be reviewed by the Committee and its decision shall be final, conclusive and binding on the Participant and on all persons claiming by, through or under the Participant. ARTICLE IV PARTICIPATION 4.1 Participation. Participation in the Plan shall be limited to Directors of the Company who elect to participate in the Plan by filing a Participation Agreement with the Committee. A Participation Agreement must be filed prior to the December 15th immediately preceding the Plan Year in which the Participant's participation under the agreement will commence. The election to participate shall be effective on the first day of the Plan Year following receipt by the Committee of a properly completed and executed Participation Agreement. With respect to the first Plan Year of the Plan or with respect to an individual becoming a Director during a Plan Year who thereby becomes eligible to participate herein, an initial Participation Agreement may be filed within 30 days of the Committee's notification of eligibility to participate. Such election to participate shall be effective on the first day of the month following the Committee's receipt thereof, except that elections not received by the Committee prior to the 15th day of any calendar month shall be effective no earlier than the first day of the second month following the month of receipt. 4.2 Amount of Deferral and Length of Participation. A Participant may elect in a Participation Agreement to defer a dollar amount or Memo Stock equal to 100% of the Fees which are expected by the Participant at the time of election to be earned over a deferral period of one Plan Year, and thereafter for each subsequent deferral period of one Plan Year until the Participant's termination of service on the Board or until the election to defer is amended. (a) The deferral percentages elected in the Participation Agreement shall be applied to the Participant's Deferred Fees as they are payable during the deferral period. 3 4 Deferrals shall commence with the Plan Year immediately following the Plan Year in which the respective Participation Agreement is filed; provided, however, that an initial Participation Agreement which is effective other than on May 1 of a Plan Year shall apply to the remainder of that Plan Year and to the following Plan Years as set forth above. (b) A Participant's election to defer Fees shall be irrevocable upon the filing of the respective Participation Agreement; provided, however, that the deferral of Fees under the Participation Agreement may be amended as provided in paragraphs 7.3, 9.1 or as further described in this paragraph. A Participant may amend a deferral election with respect to deferrals in subsequent Plan Years by filing a new Participation Agreement with the Committee in the manner provided in paragraph 4.3. The new agreement may commence or discontinue deferrals. The date benefits are to commence from prior deferrals may not be changed. 4.3 Additional Participation Agreement. A Participant may enter into a new Participation Agreement by filing a Participation Agreement with the Committee prior to December 15 of any calendar year, stating the amount that the Participant elects to have deferred. A new agreement shall be effective only as to Deferred Fees credited in Plan Years beginning after the last day of the Plan Year in which the respective agreement is filed with the Committee. A new Participation Agreement is subject to all of the provisions and requirements set forth in paragraph 4.2. ARTICLE V DEFERRED FEES 5.1 Elective Deferred Fees. The amount of Deferred Fees that a Participant elects to defer in a Participation Agreement executed by the Participant with respect to each Plan Year of participation in the Plan shall be credited by the Company to the Participant's Deferred Benefit Account throughout each Plan Year as the Participant's Fees are payable. The amount or Memo Stock credited to a Participant's Deferred Benefits Account shall equal the amount deferred. To the extent that the Company is required to withhold any taxes or other amounts from the Directors' Deferred Fees pursuant to any state, federal or local law, such amounts shall be taken out of the Participant's Deferred Fees. 5.2 Vesting of Deferred Benefit Account. A Participant shall be 100% vested in the Deferred Benefit Account. 4 5 ARTICLE VI DEFERRED BENEFIT ACCOUNT 6.1 Determination of Account. Each Participant's Deferred Benefit Account as of each Determination Date shall consist of the balance of the Participant's Deferred Benefit Account as of the immediately preceding Determination Date, plus the Participant's elective Deferred Fees withheld since the immediately preceding Determination Date pursuant to paragraph 5.1. The Deferred Benefit Account of each Participant shall be reduced by the amount of all distributions, if any, made from such Deferred Benefit Account since the preceding Determination Date. 6.2 Crediting of Account. As of each Determination Date, the Participant's Deferred Benefit Account shall be increased by the amount of interest earned and dividends paid since the preceding Determination Date. Interest shall be based upon the Declared Rate as defined in paragraph 2.5. Interest shall be credited on the mean average of the balances of the Deferred Benefit Account on the Determination Date and on the last preceding Determination Date, but after the Deferred Benefit Account has been adjusted for any contributions or distributions to be credited or deducted for each such day. The dividend credit shall be equivalent to the dividend rate per share paid by the Company multiplied by the amount of Memo Stock held in a Participant's Deferred Benefit Account. 6.3 Statement of Accounts. The Company shall submit to each Participant, within 120 days after the close of each Plan Year, a statement in such form as the Company deems desirable, setting forth the balance to the credit of each Participant's Deferred Benefit Account as of the last day of the preceding Plan Year. ARTICLE VII BENEFITS 7.1 Termination of Service as Director. Subject to paragraph 7.3 below, upon retirement from the Board or any termination of service of the Participant for reasons other than death, the Company shall pay to the Participant's Deferred Benefit Account determined under paragraphs 6.1 and 6.2 hereof. 7.2 Death. Upon the death of a Participant, Participant's Beneficiary shall receive the balance in Participant's Deferred Benefit Account. The Deferral Benefit shall be payable as provided for in paragraph 7.3. The Deferral Benefit provided above shall be in lieu of all other benefits under this Plan. 5 6 7.3 Form of Benefit Payment. (a) Upon the happening of an event described in paragraphs 7.1 or 7.2 above, the Company shall pay to the Participant, or Participant's Beneficiary, the balance in Participant's Deferred Benefit Account in one of the following forms as elected in the Participation Agreement filed by the Participant: (1) A lump sum payment. (2) A monthly payment of a fixed amount which shall amortize the Deferred Benefit Account balance in equal monthly payments of principal and interest over a period from 2 to 180 months. For purposes of determining the amount of the monthly payment, the rate of interest during the amortization period shall be the average of the Declared Rate for the shorter of (i) the last five (5) Plan Years preceding the initial monthly installment payment, or (ii) the actual number of Plan Years of participation by the Participant. (b) Alternatively, in the case of Memo Stock, Participant may elect to receive a lump sum distribution of common shares of the Company equivalent to the amount of Participant's Memo Stock with any cash balance in Participant's Deferred Benefit Account paid pursuant to 7.1(a) (1) or (2) above. (c) A Participant may change the form in which benefits shall be paid by filing a new Participation Agreement indicating such change any time prior to the date payments are to commence. Such new Participation Agreement may not change the provisions of any previous Participation Agreement to which it relates for purposes of complying with the provisions of paragraphs 4.2 and 4.3 relating to the amount of deferrals and duration of the Participation Agreement. No such new Participation Agreement shall change the amount elected to be deferred in any previous Participation Agreement, nor the time elected for commencement of benefit payments. 7.4 Commencement of Payments. Commencement of payments under this Plan shall begin within 60 days following receipt of notice by the Committee of an event which entitles a Participant (or a Beneficiary) to payments under this Plan, or at such earlier date as may be determined by the Company. All payments shall be made as of the first day of the month. 6 7 ARTICLE VIII BENEFICIARY DESIGNATION 8.1 Beneficiary Designation. Each Participant shall have the right, at any time, to designate any person or persons as Beneficiary or Beneficiaries (both primary as well as contingent) to whom payment under this Plan shall be made in the event of Participant's death prior to complete distribution of the benefits due Participant under the Plan. 8.2 Amendments. Any Beneficiary designation may be changed by a Participant by the written filing of such change on a form prescribed by the Committee. The filing of a new Beneficiary Designation form will cancel all Beneficiary designations previously filed. 8.3 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant, then the Participant's designated Beneficiary shall be deemed to be the person or persons surviving Participant in the first of the following classes in which there is a survivor, share and share alike: (a) The surviving Spouse; (b) The Participant's children, except that if any of the children predecease the Participant but leave issue surviving, then such issue shall take by right of representation the share their parent would have taken if living; (c) The Participant's personal representative (executor or administrator). 8.4 Effect of Payment. The payment to the deemed Beneficiary shall completely discharge the Company's obligations under this Plan. ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1 Amendment. The Board may at any time amend the Plan in whole or in part; provided, however, that no amendment shall be effective to decrease or restrict any Deferred Benefit Account or scheduled payment therefrom at the time of such amendment. In the event the Plan is amended, the Participation Agreement shall be subject to the provisions of such amendment as if set forth in full therein, without further action or amendment to the Participation Agreement. The Parties shall be bound by, and have the benefit of, each and every provision of the Plan, as amended from time to time. 9.2 Company's Right to Terminate. The Board may at any time terminate the Plan with respect to new elections to defer if, in its judgment, the continuance of the Plan, the tax, accounting, or other effects thereof, or potential payments thereunder would not be in the best 7 8 interests of the Company. The Board may also terminate the Plan in its entirety at any time. Upon any such termination, all Participants under the Plan shall be paid the balance in their Deferred Benefit Account in a limp sum, or over such period of time as determined by the Company. ARTICLE X MISCELLANEOUS 10.1 Unsecured General Creditor. Participants and their Beneficiaries shall have no legal or equitable rights, interest or claims in any property or assets of the Company, nor shall they be Beneficiaries of, or have any rights, claims or interest in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by the Company ("Policies"). Such Policies or other assets of the Company shall not be held under any trust for the benefit of Participants or their Beneficiaries or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company's assets and Policies shall be, and remain, the general, unpledged and unrestricted assets of Company. Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. 10.2 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 10.3 Protective Provisions. A Participant will cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, by taking such physical examinations as the Company may deem necessary, and by taking such other action as may be requested by the Company. 10.4 Governing Law. The provisions of this Plan shall be construed and interpreted according to the laws of the State of Colorado. 10.5 Effective Date. This Plan shall become effective as of May 1, 1987, as amended on November 14, 1995. 10.6 Incompetent. In the event that it shall be found upon evidence satisfactory to the Committee that any Participant or Beneficiary to whom a benefit is payable under this Plan is unable to care for Participant's or a Beneficiary's affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly authorized guardian 8 9 or other legal representative) may be paid, upon appropriate indemnification of the Company, to the Spouse or other person deemed by the Committee to have incurred expense for such Participant or a Beneficiary. Any such payment shall be a payment for the account of the Participant or a Beneficiary and shall be a complete discharge of any liability of the Company therefor. AMENDED AND RESTATED pursuant to resolution of the Board of Directors this 14 day of November, 1995. K N ENERGY, INC. By ------------------------------ President By ------------------------------ Secretary 9 EX-10.L 3 1996 EXECUTIVE INCENTIVE PLAN 1 EXHIBIT 10(l) K N Energy, Inc. 1996 EXECUTIVE INCENTIVE PLAN March 1, 1996 I. PLAN PURPOSE - To enhance K N's ability to achieve stated goals through at risk compensation that is contingent on accomplishment of primary corporate and division/personal objectives and subject to the absolute discretion of the Compensation Committee of the Board of Directors. II. PLAN ADMINISTRATION A. The Plan shall be administered by the Compensation Committee of the Board of Directors appointed from among its own number (hereafter called the "Committee"). Membership of the Committee is governed by Board provisions. No member of the Committee shall be eligible for Plan participation while serving upon the Committee. B. The Committee shall have full power to construe and interpret this Plan, and to establish and amend rules for its administration. Similarly the determination of officers who may participate under the Plan, and the amount of awards to such participants shall rest in the absolute discretion of the Committee. This Plan is administered for non-officer participants by the Incentive Plan Committee as appointed by CEO. C. This Plan is administered without regard to race, color, religion, sex, national origin, age, disability, Vietnam Era Veteran, disabled veteran status, or citizenship status. III. PARTICIPATION A. Prior to April 15, 1996, the Committee designates officer participants for the next year. The CEO designates non-officer participants. Participation in one year will not guarantee participation in following years. B. Participants will be assigned to level of eligibility, based on degree of responsibility for corporate-wide results. Level I: Responsible for K N-wide results Level II: Responsible for multiple major segments 2 Level III: Responsible for major support segment(s) within K N and selected key contributors Level IV: Responsible for major segment(s) within K N and selected key contributors Level V: Responsible for important segment(s) within K N and selected key contributors IV. BASIS OF AWARDS A. Awards are to be based on a combination of corporate and division/personal goals and the extent to which superior personal performance contributed to goal achievement. The mix between such goals will depend on participant level. Level I: 90% corporate/10% personal. Level II: Vary by participant with a minimum 80% corporate. The mix will be determined at the beginning of a Plan year. Level III: Vary by participant with a minimum 70% corporate. The mix will be determined at the beginning of a Plan year and should consider the relative impact such participant has on a specific business segment/key contribution area versus the corporate results. Level IV: Vary by participant with a minimum 60% corporate. The mix will be determined at the beginning of a Plan year and should consider the relative impact such participant has on a specific business segment/key contribution area versus the corporate results. Level V: Vary by participant with a minimum 60% corporate. The mix will be determined at the beginning of a Plan year and should consider the relative impact such participant has on a specific business segment versus the corporate results. B. Specific target objectives will be established each year for corporate performance and for division/personal performance. 1. Up to four corporate objectives may be established to focus on attainment of primary goals. 2 3 2. Up to four division/personal objectives may be established and assigned appropriate weightings. 3. Prior to the start of each Plan year threshold, target and optimum performance levels will be defined for each objective. Particular emphasis will be placed on performance oriented objectives, financial measures, cost control measures and other measures linked to strategic objectives designed to improve existing performance, management effectiveness, productivity, safety, cost control, service levels and efficiencies to clearly benefit customers and thereby shareholders. 4. When individual performance objectives and annual financial results are available following the conclusion of each year, the Compensation Committee shall review the performance relative to all objectives of Level I participants (CEO reviews all other participants) and rate the level of contribution as follows:
PERFORMANCE LEVEL GUIDELINE DEFINITION ----------- -------------------- Maximum Superior results produced -significantly above target. Target Overall results fully meet desired level of performance, which represented a "stretch" for the participant. Threshold Overall results fall somewhat short of Target performance in the absence of any significant external business conditions. Minimum Unacceptable progress toward achieving performance objectives.
C. Corporate Goals for 1996 1. Achieve primary objective of net operating income per share excluding effect of new equity issued during the year:
1996 ---- Threshold = 1.93 Target = 2.04 Maximum = 2.14
3 4 2. Achieve consolidated return on average equity excluding new equity issued during the year:
1996 ---- Threshold = 13.10% Target = 13.80% Maximum = 14.50%
3. Achieve annual operating income:
1996 ---- Threshold = $120.0 million Target = 125.0 million Maximum = 130.0 million
4. Achieve the objectives consistent with our corporate values without compromising employee or public safety, or the investments that will serve as the foundation for future growth. V. SIZE OF INCENTIVE PAYMENTS A. The corporate incentive and the division/personal incentive are entirely separate and not contingent on the performance level of the other. However, each is reviewed based on the extent to which superior personal performance contributed to goal achievement. B. The 1996 incentive targets, expressed as a percent of the officer participant's 1996 salary range midpoint are:
Level I Level II Level III Level IV Level V ---------------------------------------------------- Strategic Team Officers Threshold 10% 10% 10% 5% Target 30% 20% 15% 10% Maximum 45% 30% 20% 15%
These targets require adjustment to reflect the appropriate corporate and division/personal allocation; for instance, a Level IV participant with a 60% corporate and 40% division/personal goal allocation would have incentive potential of:
Division/ Corporate Personal Combined ---------------------------------------------- Threshold 6% 4% 10% Target 9% 6% 15% Maximum 12% 8% 20%
4 5 C. Incentive amounts may be prorated based on performance between the stated Threshold, Target and Maximum levels. No payment will be made for performance below the Threshold level. D. Non-officer participant incentive targets are based on above percents and applied to the participant's ending annualized 1996 salary. VI. DISCRETIONARY AWARDS - In addition to the incentive award established above, the Committee, in its sole discretion, may grant an additional award to any or all participants to recognize exceptional contribution not anticipated at the time the annual objectives were developed. The amount of this award would not exceed 10% of the salary of the participant receiving the award. VII. TIMING OF PAYMENTS A. At risk, contingent compensation will be paid, in cash, as soon as practical after individual performance has been reviewed and fiscal results are available following the end of the year to participants who are active employees as of the last day of the year. Payments will be prorated for participants who become totally disabled or retire during the year, based on the portion of the year that they were active employees. Incentive payments will be paid to the estate of a deceased participant. B. Participants may elect, before the beginning of a year, to defer all or a portion of their awards earned, if any. Amounts deferred shall accrue interest at a rate to be determined at the time the deferral is designated. Participants electing to defer will be unsecured creditors of K N, with respect to such deferrals. VIII. PLAN EFFECTIVE DATE A. The Plan shall be effective for 1996 if ratified by the Board of directors prior to April 15, 1996. B. The Plan shall remain in effect for 1996, subject to modifications by the Board. IX. OTHER ITEMS A. Not a Contract of Employment. This Plan shall not be deemed to constitute a contract of employment, nor shall 5 6 any provision hereof restrict the right of K N Energy, Inc. (or its subsidiaries) to discharge a participant(s) at will. B. Controlling Law. This Plan and its provisions shall be governed by, and construed in accordance with, the Laws of the State of Colorado. C. Number and Gender. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. D. Unfunded obligation. The obligation to pay amounts under this Plan is an unfunded obligation of K N Energy, Inc. (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of K N Energy, Inc. (including its subsidiaries). E. Non-Alienation. Participant(s) shall not have any right to pledge, hypothecate, anticipate or assign this Plan or the rights hereunder, except by will or the laws of descent and distribution. F. Severability. Any provision in this Plan that is prohibited or unenforceable in any jurisdiction under applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 6 EX-10.P 4 MORTON AARONSON EMPLOYMENT AGREEMENT 1 EXHIBIT 10(p) EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, is made and entered into this 14th day of December, 1995, by and between K N Energy, Inc., a Kansas corporation (the "Company") and Morton C. Aaronson ("Executive"). W I T N E S S E T H: WHEREAS, the Company wishes to employ Executive and Executive wishes to take advantage of the business opportunities offered by the Company; and WHEREAS, the Company wishes to assure itself of the services of Executive for the period provided in this Agreement, and Executive is willing to serve in the employ of the Company for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, and intending to be legally bound hereby, the parties hereto agree as follows: Section 1. Employment. The Company agrees to employ Executive, and Executive agrees to be employed by the Company, for the period stated in Section 3 herein and upon the other terms and conditions herein provided. -1- 2 Section 2. Position and Duties. During the period of Executive's employment hereunder and except for temporary illness and vacation periods in accordance with the Company's policies for executive employees as modified by this Agreement, Executive shall devote all of the Executive's business time, attention, skill, and efforts to the faithful performance of Executive's duties hereunder. Executive shall be an executive officer of the Company and shall perform such duties as are necessary to carry out Executive's responsibilities as a corporate Vice President of the Company, and President of K N Energy Services, Inc., a wholly owned subsidiary of the Company, including such duties as may be assigned to Executive from time to time by the President and Chief Executive Officer of the Company. Executive shall have responsibility, and commensurate authority for development of new products and services and marketing of products and services in various business segments of the Company including retail consumer and agribusiness. Executive shall also have such marketing and other responsibilities as requested by the President and Chief Executive Officer (e.g. assisting with development of investor relations programs, communication with customers and acquisitions). Section 3. Term of Employment. The period of Executive's employment under this Agreement shall commence as of January 1, 1996. It shall continue, subject to the other provisions of this Agreement, until January 1, 1998 and thereafter for one successive one-year period unless earlier terminated pursuant to Section 14. Subsequent to completion of the one year term extension, if the term is extended and Executive's employment is not then terminated pursuant to Section 14(b), this Agreement shall be deemed terminated and of no further force or effect. -2- 3 Section 4. Base Salary. For all services rendered by Executive in any capacity during Executive's employment under this Agreement, including, without limitation, services as an executive, officer, director, or member of any committee of the Company or of any subsidiary, affiliate or division thereof, the Company shall pay Executive a base salary at the annual rate of not less than $202,000, which amount includes a car allowance of $12,000 per year. Such base salary shall be payable in accordance with the customary executive payroll practices of the Company, but in no event less frequently than monthly; provided, however, that Executive shall not be entitled to any salary while receiving payments under any written policy with respect to disability which may be adopted by the Company and then in effect. Executive's base salary shall be reviewed annually and may be increased from time to time if the Company determines that an increase is appropriate in its sole discretion. Section 5. Benefits. Executive shall receive such sick leave, disability pay, health insurance and other benefits in addition to salary and bonuses as are provided to, and on the same basis, as the other executive management employees of the Company with a prior service credit of one year. With regard to health benefits, the Company shall provide a waiver for a preexisting condition related to the pregnancy of Executive's spouse. Section 6. Vacation. Executive shall receive four weeks of paid vacation per year. Section 7. Reimbursement of Expenses. The Company shall pay or reimburse Executive for all reasonable, ordinary and necessary travel and other expenses incurred by -3- 4 Executive in the performance of Executive's obligations under this Agreement, in accordance with the Company's travel and expense reimbursement policies for executive management employees. Section 8. Relocation Costs. Executive shall receive the Company's standard relocation allowance, which shall include an amount to cover taxes which will be equal to two months base salary, payable on January 4, 1996.. In addition, Executive shall receive a housing allowance in accordance with the Company's housing relocation policies for executive management employees. The Company shall purchase or cause to be purchased, for cash, Executive's existing residence in Atlanta, Georgia at the higher of (i) Executive's cost of such residence or (ii) the average of two appraisals of such residence. The purchase will be closed, and the purchase price paid to Executive in immediately available funds, on or before January 2, 1996. Section 9. Incentive Bonus. On an annual basis, the Compensation Committee of the Board of Directors of the Company shall review Executive's performance, the results of the Company for the prior year and such other factors as are deemed to be appropriate from time to time and determine what incentive bonus, if any, is appropriate to be paid to Executive. Such incentive bonus shall be awarded in accordance with the terms of the Company's Executive Incentive Plan and shall be based on the Level II Benefits with a midpoint base salary comparison of $250,000. The Executive Incentive Plan Level II Benefits provisions shall not be modified as they apply to Executive in any manner materially detrimental to Executive except for -4- 5 modifications that apply similarly to all executives of the Company who participate in the Company's Executive Incentive Plan based on Level II Benefits. Section 10. Restricted Stock. On January 4, 1996 Executive shall be issued 7,500 shares of Restricted Stock, subject to performance-based criteria set forth in a restricted stock agreement to be agreed to by Executive and the Company. Vesting will accrue at the rate of 2,500 shares on January 4, 1996 and 2,500 shares each January 1 thereafter for the next two years. Any dividends upon restricted stock which has not vested shall be held by the Company until the stock vests. Section 11. Stock Options. On January 4, 1996 the Company shall grant to Executive 20,000 Incentive Stock Options pursuant to the Company's Incentive Compensation Plan. Vesting will accrue at the rate of 4000 shares on January 4, 1996 and 4000 shares each January 1 thereafter for the next four years. Any of such options that are not qualified Incentive Stock Options for federal income tax purposes will be covered by a separate option agreement. Section 12. Signing Bonus. The Company shall award to Executive a signing bonus of $50,000 payable on January 4, 1996. Section 13. Severance Agreement. Executive shall execute a Key Employee Severance Agreement similar to such agreements signed by other executive management employees of the Company. -5- 6 Section 14. Termination. (a) For cause. The Company may at any time, in its sole discretion, terminate the employment of Executive hereunder, for cause, by written notice to Executive. For purposes hereof, "cause" shall mean (i) a material breach of this Agreement by Executive which causes material harm to the Company (ii) gross negligence or willful misconduct by Executive in the performance of his duties under this Agreement which causes material harm to the Company (iii) conviction of a felony; or (iv) conviction of a misdemeanor involving moral turpitude. (b) Non-renewal. Either party may terminate this Agreement effective at the end of the initial two-year term or at the end of the subsequent one-year renewal term by written notice to the other delivered on or before the date two weeks prior to the end of such initial or renewal term. (c) Obligations following termination for cause. In the event of termination of Executive's employment by the Company pursuant to paragraph 14(a) neither party shall have any further obligations to the other under this Agreement except the Company's obligations under paragraph 14(e), obligations that accrued prior to the date of termination and Executive's obligations under Section 15 hereof. (d) Obligations following non-renewal. Upon a termination of Executive's employment by the Company at the end of the initial term or during the renewal term hereof pursuant to paragraph 14(b), the Company shall continue to pay to Executive, in addition to accrued unpaid amounts, Executive's base monthly salary for a period of one year following the termination and Executive shall comply with all of the obligations of Executive under -6- 7 Section 15 hereof. In the event Executive materially breaches any of his obligations under Section 15 hereof during such one year period, the Company shall be entitled to discontinue such payments. Following any such termination, the Company shall perform the obligations set forth in paragraph 14(e). (e) Insurance and Stock. Upon any termination of Executive's employment hereunder, the Company shall (i) permit Executive to continue insurance benefits at Executive's expense in accordance with the terms of the Company's benefit plans and insurance policies, and applicable law; (ii) deliver to Executive certificates representing shares of the Company's stock to which Executive's rights under any restricted stock plan or agreement vested prior to the date of termination, and (iii) allow Executive to exercise, in accordance with the terms of applicable stock option plans and agreements, any stock options which vested prior to the date of termination. Section 15. Non-Competition Covenant. Executive shall not, during the term of Executive's employment by the Company and for the one-year period immediately following termination of Executive's employment by the Company pursuant to paragraphs 14(a) or by either party pursuant to paragraph 14(b), (a) act as an officer, director, employee, partner, or agent of, or invest in or lend money to, or own, directly or indirectly, any interest in, or participate in the control of, any corporation, partnership, joint venture or other business organization which is engaged in the provision of any product or services which may be offered or sold by the Company from time to time in the future prior to the end of Executive's employment; (b) solicit from any employee or consultant of the Company, or supply to any person, information pertaining to any customer or customer prospect of the Company or; (c) interfere with the contractual relationship between the Company and any customer of the -7- 8 Company. For purposes of this Agreement, "Customer" shall refer, in addition to those persons to which services are sold by the Company, to those persons with which the Company has established strategic marketing, services or other alliances. Notwithstanding anything to the contrary in clause (a) of the first sentence of this Section 15, Executive shall be permitted, at any time after any termination of Executive's employment with the Company: (i) to invest in and own not more than 1% of the outstanding stock of any publicly traded corporation; (ii) to have any of the relationships described in clause (a) with any business organization engaged primarily in the telecommunications business; (iii) to have any of the relationships described in clause (a) with any business that is not primarily a utility that is pursuing a strategy to integrate services; and (iv) to have any of the relationships described in clause (a) with any business organization that is not marketing to consumers in the same geographic areas where the Company offers and sells products and services to consumers as of the effective date of termination of Executive's employment under this Agreement. Executive (i) recognizes the significance of the provisions of this Section 15 and that they are required for the protection of legitimate business interests of the Company; (ii) that the Company would not, in the absence of such provisions, employ Executive or entrust to Executive the significant management responsibilities and customer development and customer satisfaction responsibilities for major customers of the Company which will be entrusted to Executive; (iii) there will be no practical way to separate the portions of the Company's information which is confidential information (as hereinafter defined) created by the Company's investment and that -8- 9 information which is discernible from other sources; (iv) acknowledges that the provisions of this Section 15 are reasonable in terms or duration, geography, and types and limits of activities; and (v) acknowledges that the Company will be making major investments based to a considerable degree upon Executive's advice in reliance upon Executive's covenant not to compete contained in this Section 15. If the covenant not to compete in this Section 15 is found by any court to be overly-broad in extent, as to the time period or as to the geographic area designated, the parties agree that it shall nevertheless be effective, but it shall be deemed to be amended to the extent determined by such court to be reasonable and enforceable to the greatest possible extent, and as so amended, shall be fully enforced. Section 16. Confidential Information. Executive shall not, except in the performance of Executive's duties hereunder and for the benefit of the Company, disclose or reveal to any unauthorized person any confidential information of the Company relating to the Company, to its subsidiaries or affiliates, or to any of the businesses operated by them, and Executive confirms that such information constitutes the exclusive property of the Company. Section 17. Company's Remedies Upon Breach. Executive acknowledges that the Company's remedy at law for a breach by Executive of the provisions of Sections 15 and 16 hereof will be inadequate. Accordingly, in the event of the breach or threatened breach by Executive of any of Sections 15 and 16 hereof, the Company shall be entitled to injunctive relief in addition to any other remedy to which it may be entitled. -9- 10 Section 18. Tax Withholding. The Company may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. Section 19. Nonassignability. This Agreement shall inure to the benefit of, and be binding upon, Executive and Executive's personal or legal representatives, executives, administrators, successors, heirs, distributees, devisees and legatees, and the Company, and its successors and assignees, provided, however, that neither Company nor Executive may assign any of Executive's or its rights or benefits hereunder without the prior written consent of the other. Section 20. No Attachment. Except as required by law, the right to receive payments under this Agreement shall not be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void ab initio and of no effect. Section 21. Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. Section 22. No Implied Waiver. No forbearance from enforcing any right hereunder shall be deemed to be a waiver of such right. No provision of this Agreement shall be deemed to have been waived, nor shall there by any estoppel against the enforcement of any provision of -10- 11 this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or conditions waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. Section 23. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when received in fact. Section 24. Severability; Enforceability. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid, and each such other provision shall to the full extent consistent with law continue in full force and effect. If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provision not held so invalid, and the rest of such provision, together with all other provision of this Agreement, shall to the full extent consistent with law continue in full force and effect. Section 25. Headings. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. -11- 12 Section 26. Governing Law This Agreement has been executed and delivered in the State of Colorado, is intended to be performed primarily within such State, and its validity, interpretation, performance, and enforcement shall be governed by the laws of such State. Section 27. Entire Agreement. This instrument contains the entire agreement of the parties with respect to the subject matter hereof and shall supersede all other prior written or oral representations and agreements, if any, between the parties with respect thereto; and neither party is relying upon such prior representations or agreements in entering into this Agreement. Section 28. Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary and convenient, and by the different parties on separate counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company and Executive have caused this Agreement to be executed as of the day and year first above written. K N ENERGY, INC. By /s/ LARRY D. HALL ---------------------------------------- President and Chief Executive Officer EXECUTIVE /s/ MORTON C. AARONSON ---------------------------------------- Morton C. Aaronson -12- EX-10.Q 5 CHARLES W. BATTEY LETTER AGREEMENT 1 EXHIBIT 10(q) LETTER AGREEMENT December 4, 1995 Mr. Charles W. Battey K N Energy, Inc. P.O. Box 281304 Lakewood, Colorado 80228-8304 Dear Chuck: By mutual agreement, your employment will terminate effective as of the close of business on April 11, 1996. As used in this Agreement, the term "K N" means collectively K N Energy, Inc., a Kansas corporation, its divisions and affiliates. For purposes of this Agreement, the term "affiliates" shall have the same definition as the term "affiliated group" in Section 1504(a) of the Internal Revenue Code of 1986, as amended from time to time. K N hereby makes the following offer for the purpose of making a full and final compromise adjustment and settlement of any and all claims, disputed or otherwise, on account of our past employment relationship and termination therefrom, both pending and unknown. Simply stated, this offer is for the expressed purpose of precluding any further or additional claims arising out of the employment relationship. Based upon such understandings, the parties agree as follows: 1. Executive Cash Incentive. For your 1994 executive compensation incentive, you shall receive $100,000, subject to applicable taxes and authorized payroll deductions, payable upon your demand. 2. Consulting Services. After April 11, 1996, and until April 15, 1998, you shall provide consulting services, as an independent contractor, to K N. Such services shall be at the direction of the Chief Executive Officer. As compensation for said services, you shall receive a gross payment of $300,000 payable in four equal $75,000 installments on October 1, 1996, April 1, 1997, October 1, 1997, and April 1, 1998, all of which are subject to applicable taxes. 3. Retirement Benefits. After the effective termination date, you will be eligible to continue certain welfare benefit coverages pursuant to COBRA, subject to COBRA's rules and 2 Charles W. Battey December 4, 1995 Page 2 provisions. You specifically understand that K N expressly reserves the right to change or terminate the welfare benefit plan coverages, including medical and dental, at any time for any reason. Any such change shall be solely at the discretion of K N and shall apply to all similarly-situated employees. It is specifically understood and agreed that the above-mentioned payments will not increase the amount payable under any present benefit plan adopted or sponsored by K N; as examples, there will be no further retirement benefit contributions paid by K N to any plan on your behalf, vacation accruals or holidays paid after April 11, 1996. You may receive the account balances of any profit sharing and 401(k) plans presently credited to your account(s). You also will retain your vested interest in the pension plan, payable in accordance with the plan's provisions, and continue your eligibility to receive certain supplemental pension payments as a direct obligation of K N under K N's nonqualified supplemental retirement plan. Amounts paid to K N's employee stock purchase plan will be promptly refunded with interest as described in the plan document. It is understood and agreed that all of your unvested shares of K N stock available under the K N stock option plan(s) will become fully vested on April 11, 1996, and the exercise date for all your stock option shares will be extended to April 11, 1998. 4. Release. On or about April 11, 1996, you shall deliver to K N a general release in substantially the form of Exhibit 1 attached hereto. This general release and waiver shall include, but not be limited to, all claims or actions arising out of, or relating in any way to, your employment and severance of your employment with K N. You further agree to execute necessary resignations as an officer of K N Energy, Inc., and its affiliates. Nothing in this Agreement, including the payment of any sum by K N, constitutes an admission by K N of any legal wrong prohibited by local, state and federal law, contract or tort, rule or regulation in connection with your past employment and separation therefrom. 3 Charles W. Battey December 4, 1995 Page 3 5. Voluntary Resignation. Your separation from employment shall be treated as voluntary and explained as voluntary to any person making inquiry. 6. K N Directorship. You shall retain your position as a K N Director for the remainder of your term. Your outside Director's retainer fee for 1996 shall be prorated from April 11, 1996. 7. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. (b) This Agreement is contractual and not a mere recital. This Agreement constitutes the entire contract between you and K N. No provisions of this Agreement ma be modified, waived or discharged by any party unless it is in writing and signed by duly authorized representatives of both parties hereto. (c) This Agreement is binding upon and inures to the benefit of the heirs, personal representatives, successors and assigns of both parties hereto. (d) You specifically acknowledge that this Agreement is freely and voluntarily executed by you, knowingly and voluntarily, after careful consideration. (e) You specifically acknowledge that this Agreement is intended to be a valid legal instrument, and no provision of this Agreement which shall be deemed unenforceable shall in any way invalidate any other provision of this Agreement, all of which remains in full force and effect. (f) The headings of this Agreement are intended for convenience of reference and shall not control or affect its meaning or construction of any provision hereof. 8. Attorney Review. We encourage you to have an attorney of your choosing review this Agreement prior to your signature. By voluntarily executing this Agreement, you confirm that you are relying upon your own judgment and advice of your attorneys, and not upon the representation of K N, its directors, officers, employees and agents. 9. Consideration Period. You have three weeks to accept K N's offer after its presentation, and, if you choose to accept it within said period, another seven days thereafter to revoke that acceptance should you change your mind. 4 Charles W. Battey December 4, 1995 Page 4 10. Non-Disclosure of this Agreement. Except as to your present spouse or as required by law, the parties, including your spouse, agree not to disclose or publicize the term of this Agreement or to assist others to disclose or publicize the terms of this Agreement. This non-disclosure agreement applies to the parties' attorneys, agents, officials, managers, employees and spouses as well as to the named parties. If the foregoing is satisfactory and meets with your approval, please so indicate in the space provided below on the attached copy of this letter and return it to me. Very truly yours, /s/ LARRY D. HALL Larry D. Hall President and Chief Executive Officer Agreed to and Accepted this 4th day of December, 1995. /s/ CHARLES W. BATTEY - --------------------------- Charles W. Battey 5 EXHIBIT 1 GENERAL RELEASE Charles W. Battey (hereinafter referred to as "Mr. Battey"), in consideration of the execution and delivery of the Letter Agreement of _______________, 1995, by K N Energy, Inc. ("the Company") and for and in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration received from or paid on behalf of the Company, the receipt whereof is hereby acknowledged, has remised, released, and forever discharged, and by these presents does, for himself and for his respective representatives and assigns, remise, release, and forever discharge the Company, its present and former parents, subsidiaries and affiliates, and its respective successors, officers, employees, agents, directors, attorneys and assigns, from all actions, including those under Title VII of the Civil Rights Act of 1964, as amended, Section 1981 of the Civil Rights Act of 1866, the Age Discrimination in Employment Act of 1967, the Vietnam Era Veterans Readjustment Assistance Act, the Rehabilitation Act of 1973, the Americans With Disabilities Act of 1990, the Civil Rights Act of 1991, or any other State, Federal, or local law concerning age, race, religion, national origin, disability, or any other law or regulation, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, grievances and demands whatsoever, in law or equity, which Mr. Battey, or any person or entity referred to in the next succeeding paragraph, ever had from the beginning of time, now has, or which he or his personal representatives or assigns hereafter can, shall, or may have against any parties or persons referred to above for, upon or by reason of any matter, cause, or thing arising out of his employment with and termination from the Company, excepting only the obligations of the Company under the above-mentioned Agreement. This Release shall extend to and include (but not be limited to) all claims, grievances, and demands, and all other matters referred to above, which Mr. Battey might assert personally or in a representative capacity on behalf of any other person or entity, or in any other capacity whatsoever, including, without limiting the generality of the foregoing, in the capacity of an employee, or former employee (or dependent or personal representative thereof). Mr. Battey covenants that he will not 6 sue on, nor commence any proceedings relating to, any claim which would be released by this Release. Mr. Battey further represents and agrees as follows: 1. Mr. Battey has been encouraged to seek independent legal advice from an attorney with respect to the advisability of making the releases provided for herein and with respect to the advisability of executing this Release; 2. Except for covenants expressly set forth in this Release and the above-referenced Agreement, no person, firm or entity (whether or not a signatory hereto) ("Person") has made any statement, representation or promise to Mr. Battey regarding a fact relied upon by Mr. Battey, and Mr. Battey has not relied upon any statement, representation, or promise of any Person in executing this release or in making the agreements provided for herein; 3. Mr. Battey has made such investigation of the facts pertaining to the claims and this General Release and of all matters pertaining hereto as are deemed necessary or desirable; and 4. Mr. Battey has the full right, capacity, and authority to enter into and perform this Release. IN WITNESS WHEREOF, Mr. Battey has executed this Release on the date stated below, at Lakewood, Colorado. Date:________________ __________________________ Charles W. Battey EX-10.U 6 PERFORMANCE INCENTIVE PLAN 1 EXHIBIT 10(u) K N ENERGY, INC. PERFORMANCE INCENTIVE PLAN I. PLAN PURPOSE: The K N Energy, Inc., Performance Incentive Plan has been designed to support and encourage achievement of our business strategy of improved customer focus and value for the shareholders. The Plan is designed to work in combination with the Profit Sharing Plan, whereby attainment of annual corporate goals will trigger a contribution to the Profit Sharing Plan. The realization of quarterly regional financial goals will make possible distributions from the Performance Incentive Plan. Combined with the Profit Sharing Plan, this Plan is intended to accomplish the following objectives: - Link employees variable compensation to the operational realities financial, customer, operating/process and growth objectives of the Company; - Support the evolving organizational culture; - Enhance employees' awareness of customer satisfaction by reinforcing K N's customer intimacy focus; - Have profit and loss knowledge alive and driving informed action throughout the Company; and - Clarify that incentives are not available until after corporate and business unit/ process objectives have been achieved. II. PARTICIPATION: A. To be a participant, an employee must be assigned to assume full-time duties in an established Company classification as of the last day of a calendar quarter. "Full-Time" is defined as: a position with a normally established work schedule of at least 40 hours per work week. Employees will receive a pro-rated share if they work less than a full quarter. B. This plan is intended to cover all full-time employees. Bargaining unit employees shall be covered only if they have bargained to be covered by this plan. C. Employees currently participating in one of the Company's other incentive compensation program may be excluded from participating in this program. Employees 2 participating in this Performance Incentive Plan are eligible for Special Recognition Awards not related to this plan. such as Extra Mile, Spot Awards and Project Incentives. III. BASIS OF AWARDS: A. Incentive payments to Plan participants are based on the degree of success achieved in meeting the Company's goals. The degree to which the objectives are achieved is subject to determination that the results were achieved without compromising the safety of employees or the public, or the investments which serve as the foundation for future growth. B. The operating income is key to our business success. Business unit/process business plans are subject to review and modification. The business plans guide our operations and identify major 1996 objectives, as described in Attachment A. C. At the business unit/process level, Incentive Awards will be determined based on the achievement of financial, safety, operational, customer satisfaction and growth goals. Details about those specific goals are outlined in Attachment B. At the corporate level, Incentive Awards will be adjusted based exclusively on financial performance. IV. SIZE OF INCENTIVE OPPORTUNITY PAYMENTS: A. The potential range of incentive targets, expressed as a percent of an eligible participant's earnings (base pay plus any overtime) for each quarter, is between 0% and 10%. B. After the attainment of quarterly regional financial goals, a determination will be made about whether a particular business unit has achieved its other goals for the quarter. The distribution for any given quarter will be as follows:
% of Pay -------- Business Unit Financial: 0-2% Customer Satisfaction: 0 or 1% Operating: 0 or 1% Growth: 0 or 1%
The financial component will be pro-rated based on actual results versus goal, with no payment if results were not at least 90% of goal ("Threshold" level). (The financial goals for the processes will be the average of the business units' financial performance.) The other factors will not be pro-rated, i.e., the goal is either accomplished or not. 2 3 C. After a particular quarter's Incentive Award has been determined, it will be multiplied by a factor based on the corporate financial results for the quarter. The multiplier will be 0.5 if corporate financial results have not been achieved or 2.0 if they have been achieved. D. The Performance Incentive Plan Administrators review and recommend Incentive Awards to the Management Committee of K N Energy, Inc. Final determination of actual awards is made by the Management Committee of K N Energy, Inc. E. Incentive amounts will be pro-rated based on regional financial performance between the stated Threshold, Target, and Maximum levels. No payment will be made for performance below the Threshold level. The corporate financial objective will be the 1996 operating income goal (excluding one time positive or negative events as recognized by GAAP accounting) as approved by the Board of Directors in the 1996 budget plan. In 1997 a second corporate financial goal of Return on Assets" will be added to the plan. V. TIMING OF PAYMENTS A. The Incentive payment for each quarter depends on the performance level achieved through the end of that quarter as measured on March 31, June 30, September 30 and December 31. Results will be communicated to eligible participants by the middle of the month following the close of financial records. B. Incentive payments will be paid in a separate paycheck (with standard payroll tax withholdings) by the end of the second month following the quarter in which the incentive was earned. Payments for this Plan do not apply toward eligible earnings for any other employee benefit or employee welfare plans that may be established by the Company. C. The following table shows anticipated announcements of results and payments under the Plan, subject to when financial and other performance data are available for measuring and reporting results, and then earned payments can be processed by payroll:
Month Ending The Month During which Quarter In Which Announcement of Incentive Payment Incentive Is Earned Incentive Results Would Be Received - ------------------- ----------------- ----------------- March May May* June August August* September November November* December February February*
*Approximately end of the month 3 4 D. Earned Incentive payments will be paid to the estate of a deceased participant on a prorated basis of days worked during the quarter, as previously described in Section II. VI. PLAN ADMINISTRATION: A. The Plan shall be administered by the business units/processes. It is suggested that the business units/processes convene a cross functional team within their respective groups to work on the development of goals and the determination of performance against those goals. B. The Plan Administrators shall have full power to construe and interpret this Plan within the established rules for its administration which are contained in this document. C. This Plan is administered without regard to race, color, religion, sex, national origin, age, disability, Vietnam Era Veteran, disabled Veteran status, or citizenship status. VII. PLAN EFFECTIVE DATE: A. The Plan shall be effective January 1, 1996. B. The Company presently intends to continue this plan. However, each Plan year is unique and stands on its own with regard to the existence of a plan, objectives and payout opportunity levels. VIII. OTHER ITEMS A. Not a contract of employment. This Plan shall not be deemed to constitute a contract of employment, nor shall any provision hereof restrict the right of K N Energy, Inc. (or its subsidiaries) to terminate an "at will" participant. B. Controlling law. This Plan and its provisions shall be governed by, and construed in accordance with, the Laws of the State of Colorado. C. Number and gender. Wherever appropriate herein, words used in the singular shall include the plural and the plural shall include the singular. The masculine gender where appearing herein shall be deemed to include the feminine gender. D. Unfunded obligation. The obligation to pay amounts under this Plan is an unfunded obligation of K N Energy, Inc. (including its subsidiaries), and no such obligation shall create a trust or be deemed to be secured by a pledge or encumbrance on any property of K N Energy, Inc. (including its subsidiaries). 4 5 E. Non-alienation. Participants shall not have any right to pledge, hypothecate, anticipate or assign this Plan or the rights hereunder, except by will, or the laws of descent and distribution. F. Severability Any provision in this Plan that is prohibited or is found to be unenforceable in any jurisdiction under applicable law shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability in any jurisdiction and shall not invalidate or render unenforceable such provision in any other jurisdiction. 5 EX-12 7 RATIO OF EARNINGS 1 EXHIBIT 12 K N ENERGY, INC. AND SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31 ----------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (Dollars in Thousands) Earnings: Income From Continuing Operations per Statements of Income $ 52,522 $15,321 $30,869 $36,342 $37,074 Add: Interest and Debt Expense 34,316 32,009 31,478 27,608 24,298 Income Taxes 29,050 9,500 18,599 20,068 21,282 Portion of Rents Representative of the Interest Factor 5,082 3,492 2,863 1,901 1,542 -------- ------- ------- ------- ------- Income as Adjusted $120,970 $60,322 $83,809 $85,919 $84,196 ======== ======= ======= ======= ======= Fixed Charges: Interest and Debt Expense per Statements of Income (Includes Amortization of Debt Discount, Premium and Expense) $ 34,211 $31,815 $30,909 $27,090 $24,091 Add: Interest Capitalized 105 338 965 842 207 Portion of Rents Representative of the Interest Factor 5,082 3,492 2,863 1,901 1,542 Preferred Stock Dividends of Subsidiary - - 69 3,084 5,393 -------- ------- ------- ------- ------- Fixed Charges $ 39,398 $35,645 $34,806 $32,917 $31,233 ======== ======= ======= ======= ======= Ratio of Earnings to Fixed Charges 3.07 1.69 2.41 2.61 2.70 ======== ======= ======= ======= =======
65 EX-13 8 1995 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 K N ENERGY, INC. 1995 ANNUAL REPORT TO SHAREHOLDERS Interested persons may receive a copy of the Company's 1995 Annual Report to Shareholders without charge by forwarding a written request to: K N Energy, Inc., Investor Relations Department, P. O. Box 281304, Lakewood, Colorado 80228-8304. 66 EX-22 9 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 22 K N ENERGY, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT
Name of Company State of Incorporation - --------------- ---------------------- AOG Gas Transmission Company, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas American Gas Storage, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas American Gathering, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas American Oil & Gas Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware American Pipeline Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware American Processing, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Caprock Pipeline Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware K N Energy Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado K N Gas Gathering, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado K N Marketing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado K N Marketing, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware K N Natural Gas, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado K N Gas Supply Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado K N Interstate Gas Transmission Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado K N Production Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware K N Trading, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware K N Wattenberg Transmission Limited Liability Company . . . . . . . . . . . . . . . . . . . Colorado K N WesTex Gas Service Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Northern Gas Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wyoming Red River Pipeline, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Rocky Mountain Natural Gas Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado Westar Transmission Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
All of the subsidiaries named above are included in the consolidated financial statements of the Registrant included herein. 67 EX-24 10 CONSENT OF ACCOUNTANTS 1 EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in (i) Registration Statements on Form S-16, File Nos. 2-51894, 2-55664, 2-63470 and 2-75654; (ii) Registration Statements on Form S-8, File Nos. 2-77752, 33-10747, 33-24934 and 33-33018, 33-54403, 33-54443 and 33-54555; and (iii) Registration Statements on Form S-3, Files Nos. 2-84910, 33-26314, 33-23880, 33-42698, 33-44871, 33-45091, 33-46999, 33-51115, 33-54317 and 33-69432 of our report dated February 14, 1996, on the consolidated financial statements of K N Energy, Inc. and subsidiaries for the year ended December 31, 1995. /s/ Arthur Andersen LLP Denver, Colorado March 11, 1996 68 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 22,571 0 214,963 0 20,277 303,027 1,352,787 489,812 1,257,457 329,838 315,564 140,489 572 7,000 286,271 1,257,457 1,103,389 1,103,389 732,072 989,665 0 0 34,211 81,572 29,050 52,522 0 0 0 52,522 1.83 0
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