-----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, J0TLyVItUEytYwDdcKUzzjWvvte4aYQF6s9ksqBf1+4U5D21cQ7UKrvduCnc3Fch 3bGN1vSXfAlJNUu5d86R1g== 0000950134-97-001715.txt : 19970312 0000950134-97-001715.hdr.sgml : 19970312 ACCESSION NUMBER: 0000950134-97-001715 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970311 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06446 FILM NUMBER: 97554720 BUSINESS ADDRESS: STREET 1: 370 VAN GORDON ST STREET 2: PO BOX 281304 CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 BUSINESS PHONE: 3037633318 MAIL ADDRESS: STREET 1: 370 VAN GORDON STREET STREET 2: P O BOX 281304 CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 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-K405 1 FORM 10-K405 FOR KN ENERGY, INC. 12-31-96 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, 1996 ------------------- 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. [X] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. $1,242,579,190 as of February 14, 1997 - -------------------------------------------------------------------------------- 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 30,645,962 shares as of February 14, 1997 - -------------------------------------------------------------------------------- List hereunder documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. 1997 Proxy Statement Part III ================================================================================ 2 K N ENERGY, INC. AND SUBSIDIARIES Documents Incorporated by Reference and Index
Page Number ----------- 1997 Proxy Included Statement Herein ---------- ------- PART I ------ ITEMS 1 & 2: BUSINESS AND PROPERTIES ................................................................. 3-14 ITEM 3: LEGAL PROCEEDINGS ....................................................................... 14-17 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 1996. EXECUTIVE OFFICERS OF THE REGISTRANT .................................................... 18-19 PART II ------- ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ..................................................................... 20 ITEM 6: SELECTED FINANCIAL DATA ................................................................. 21 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..................................................... 22-29 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Public Accountants ................................................ 30 Consolidated Statements of Income for the Three Years Ended December 31, 1996, 1995 and 1994 ......................................... 31 Consolidated Balance Sheets as of December 31, 1996 and 1995 ............................ 32 Consolidated Statements of Common Stockholders' Equity for the Three Years Ended December 31, 1996, 1995 and 1994 33 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1996, 1995 and 1994 ......................................... 34 Notes to Consolidated Financial Statements .............................................. 35-56 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 1996. PART III -------- ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 3-6*,7-18* ITEM 11: EXECUTIVE COMPENSATION .................................................................. 7-18* ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......................... 3-6*,17-18*,21-22* ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................................... 6-7* 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.................................................................. 63-65 List of Executive Compensation Plans and Arrangements.......................... 59-60 Exhibit 12 - Ratio of Earnings to Fixed Charges ............................... 66 Exhibit 13 - 1996 Annual Report to Shareholders** ............................. 67 Exhibit 21 - Subsidiaries of the Registrant.................................... 68 Exhibit 23 - Consent of Independent Public Accountants ........................ 69 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. ** Such report is being furnished for the information of the Securities and Exchange Commission ("SEC") only and is not to be deemed filed as a part of this annual report on Form 10-K. *** Included in SEC copy only. 2 3 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 21.) 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, butane, 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 an integrated energy services company with operations that include natural gas gathering, processing, marketing, field services, storage, transportation and energy commodity sales of natural gas and NGLs and power marketing. The Company also sells innovative products and services, such as its Simple Choice(sm) menu of products and call center services designed for consumers, utilities and commercial entities. In 1996, K N purchased a crude oil pipeline for conversion to natural gas service. This Pipeline, renamed the Pony Express Pipeline ("Pony Express"), runs from Lost Cabin, Wyoming, in central Wyoming to Freeman, Missouri, near Kansas City (See Transportation on page 8). On January 31, 1996, K N and Tom Brown, Inc. ("TBI") closed a transaction, effective January 1, 1996 , pursuant to which K N transferred its stock in K N Production Company ("KNPC") a wholly owned subsidiary of K N, to TBI in exchange for common and convertible preferred stock of TBI. In conjunction with this transaction, K N and TBI formed a limited liability company, named Wildhorse Energy Partners, LLC ("Wildhorse"), owned 55 percent by K N and 45 percent by TBI, which performs certain gathering, processing, field, marketing and storage services in the mid-continent region of the United States. 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. AOG is engaged in the business of gathering, processing, storing, transporting, marketing and selling natural gas and NGLs primarily in West Texas and the Texas Panhandle. 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 stock. All the outstanding shares of AOG common stock were converted into approximately 12.2 million shares of K N common stock. The merger was accounted for as a pooling of interests. 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. K N was incorporated in the State of Kansas on May 18, 1927. The Company employed 1,786 people at December 31, 1996. 3 4 (B) Narrative Description of Business (1) 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 9,500 miles of pipeline in seven states and operates 16 gas processing plants in five states and natural gas storage facilities in West Texas and on the Gulf Coast. This segment's total processing capacity is approximately 640 MMcf per day of natural gas and 33,000 Bbls per day of NGLs. In December 1996, K N and El Paso Energy Corporation placed in service the Coyote Gulch gas treating plant ("Coyote Gulch") in La Plata County, Colorado, which is part of the TransColorado pipeline project. Coyote Gulch is expected to eliminate the processing and pipeline constraints which currently exist in the northern portion of the San Juan basin and provide a platform from which the balance of the TransColorado pipeline can be built. Coyote Gulch is a 50-50 joint project between K N and El Paso Energy Corporation. It has an initial processing capacity of 120 MMcf per day. The plant is part of Phase I of the TransColorado project and included construction of 22.5 miles of 24-inch diameter pipe and 2.5 miles of 16-inch diameter pipe. The pipeline, which is regulated by the Federal Energy Regulatory Commission ("FERC"), begins at the outlet of Coyote Gulch and extends to Blanco, New Mexico. Revenues from this business segment's gathering, processing, storage, transporting, marketing and supply activities are generated in four ways. First, the Company performs a merchant function whereby the Company purchases gas at the wellhead, combines such gas with other supplies of gas, and markets the aggregated gas to consumers. Second, the Company gathers, transports and/or processes 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 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, storage, transporting, marketing and supply activities have expanded due to increased demand for gas and the result of FERC Order No. 636 ("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. The Company engages in price risk management activities in the energy financial instruments market to hedge its price and basis risk exposure in this business segment. The Company buys and sells gas and crude oil futures positions on the New York Mercantile Exchange and Kansas City Board of Trade 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 on page 7.) Natural Gas Sales. In 1996, this business segment sold natural gas to more than 4,000 customers in more than 20 states. These customers included local distribution companies, industrial, commercial and 4 5 agricultural end users, electric utilities, Company affiliates and other marketers located both on and off this segment's pipeline systems. The Company's gathering, processing and transportation assets primarily in West Texas and the Texas Panhandle (the "West Texas system") consist of over 6,900 miles of gathering, transmission and storage pipelines, six gas processing plants and two storage facilities. These assets are owned or operated primarily by three intrastate pipelines (Westar Transmission Company, AOG Gas Transmission Company, L.P. and Red River Pipeline, L.P.), a gathering company (American Gathering, L.P.), and a storage company (American Gas Storage, L.P.). The West Texas 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), and direct-sale customers such as electric utilities, industrial companies and agricultural end users. Within this business segment, the Company utilizes its high pressure transmission facilities to transport gas for third parties at negotiated fees. The West Texas system and the Company's 1,300 mile Wattenberg system, located in the Denver-Julesburg Basin in northeastern Colorado, offer both gathering and transportation services. Gas Gathering. As of December 31, 1996, the Company's subsidiaries in this business segment operated gathering systems in Colorado, Kansas, Nebraska, New Mexico, Texas and Wyoming with more than 5,000 miles of gathering lines. In September 1996, Wildhorse purchased gathering and processing assets of Williams Field Services in western Colorado and eastern Utah. Acquisition of these assets gives Wildhorse access to existing TBI production and to approximately 240,000 acres of undeveloped leasehold in the Piceance Basin, and will also provide gathering to undeveloped third-party acreage throughout the Piceance and Uinta basins. The assets acquired include approximately 955 miles of natural gas gathering lines, two processing plants, a carbon dioxide treatment plant and a dew point control plant. These facilities process and treat more than 55 MMcf of natural gas per day from more than 700 wells. Field Services. In January 1996, the Company formed a wholly owned subsidiary, K N Field Services, Inc. ("KNFS"), to provide field operations services to gas and oil industry customers who own production, gathering, plant and transportation assets. To the extent possible, KNFS uses the existing infrastructure and labor force employed in the Company's own systems to serve its clients. Services KNFS can provide include well tending, site services, corrosion monitoring, compression operations and maintenance, safety training, gathering and pipeline operations and maintenance, measurement, pressure and flow monitoring, water hauling and line locating. In August 1996, KNFS purchased Compressor Pump and Engine, Inc. ("CPE") located in Casper, Wyoming. CPE specializes in compressor maintenance, parts and overhauls, giving KNFS a foundation for expanding its services in the compression industry and to provide additional KNFS products to CPE customers. 5 6 In December 1994, the FERC approved the Company's application to transfer the Bowdoin gathering system from its wholly owned interstate pipeline subsidiary to a nonregulated gathering subsidiary. The transfer occurred in early 1995. Processing and NGLs Marketing. In 1996, this segment operated 16 natural gas processing plants located in Colorado, Kansas, Nebraska, Texas and Wyoming. The average combined inlet volume of all these plants for 1996 was approximately 418,000 MMBtus per day. In the same period, the total liquids produced, including condensate, averaged approximately 22,000 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 these plants. On December 13, 1996, K N signed a letter of intent to purchase several Enron Corp. subsidiaries that own the Bushton natural gas processing facility located in Ellsworth County, Kansas, and other Hugoton Basin gathering assets located primarily in Kansas. The Bushton facility processes approximately 825 MMcf of natural gas and produces approximately 1.2 million gallons of NGLs and approximately 1.7 MMcf of crude helium per day. The gathering assets gather approximately 475 MMcf per day of natural gas through approximately 2,200 miles of pipeline. The closing of the transaction is subject to execution of acceptable definitive agreements and receipt of appropriate regulatory approvals. Storage. American Gas Storage, L.P. owns a storage facility located in Gaines County, Texas, which was expanded to have a working storage capacity of 16.5 Bcf of natural gas in 1996. This facility had traditionally been used to meet peak day requirements of the West Texas system. In 1994, the Company began marketing storage services to third parties. Currently, the facility has a take-away peak day natural gas withdrawal capacity of 550 MMcf per day. This segment's lease rights in the Stratton Ridge facility located in Brazoria County, Texas, included a peak day natural gas withdrawal capacity of 100 MMcf per day in 1996. Approximately 6.5 Bcf of natural gas was cycled through storage for this segment at the Stratton Ridge facility in 1996. 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. Approximately 10.8 Bcf of cushion gas was produced from these fields during 1996. Gas Purchases and Supply. Natural gas is purchased by this segment from various sources, including gas producers, gas processing plants and pipeline interconnections. Because of prevailing industry conditions, most gas purchase 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 prepay for, or to receive, minimum quantities 6 7 of natural gas. At December 31, 1996, the amount of gas prepayments outstanding for this business segment (which does not include payments made under the Basket Agreement discussed below) was $1.3 million, an amount fully recoupable under the terms of the gas purchase contracts. The Company does, however, have exposure with regard to such claims under gas purchase contracts assumed in its acquisition of Westar Transmission Company 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 financial instruments to minimize its risk of price changes in the spot and fixed price natural gas and NGLs markets. Energy risk management products include 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 1996 and 1995 transactions were recorded as hedges. Power Marketing. 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 advantage in an increasingly competitive natural gas and NGLs market, the Company has developed partnerships for 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 geographic 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 increased 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 7 8 varying size, 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) regulatory changes that provide greater access to interstate markets by gas producers and marketers, (ii) the ability of certain markets to switch to alternative fuels at favorable prices, and (iii) 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, quality, reliability and types of services offered, security of supply and physical proximity of pipelines to customers. (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, 1996, the Company's interstate pipeline system provided transportation and storage services directly to utilities serving 289 communities, as follows:
Served By Colorado Kansas Nebraska Wyoming - ------------------- -------- ------ ----------- ------- Affiliated Entities 12 48 178 9 Other Utilities 5 10 27 -
As of December 31, 1996, the Company's interstate pipeline properties included over 6,000 miles of transmission and storage lines, a storage field and one products extraction plant. The Company's interstate pipeline operation is regulated by the FERC, which typically bases allowable returns on capital invested. However, the Company was the first pipeline to gain FERC approval for market-based rates when it did so in 1996 on its Buffalo Wallow pipeline in Texas. 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. In 1996, K N purchased a crude oil pipeline which runs from Lost Cabin, Wyoming in central Wyoming, to Freeman, Missouri near Kansas City, for conversion to natural gas service. The Company re-named the pipeline the Pony Express Pipeline and undertook efforts to prepare the line for transporting natural gas during 1996. Pony Express provides access to more than 6 trillion cubic feet of natural gas reserves. On November 26, 1996, the Company took assignment of two 20-year contracts to provide firm transportation capacity of 230 MMcf of natural gas per day to the Kansas City metropolitan area. The Company also announced construction of 36 miles of lateral facilities to serve these customers, which will interconnect with Pony Express and a third-party pipeline. The new contracts mean that the firm capacity of Pony Express is fully subscribed at 255 MMBtus per day. The Company is completing the certificate process with the FERC and anticipates receiving authorization for operations which are anticipated to begin in the second quarter of 1997. 8 9 In January 1996, the FERC granted the Company the authority to expand its pipeline system in Wyoming. This project is designed to increase the capacity of the Company's system to move gas from Wyoming to markets in the midwestern United States by nearly 35 MMBtus per day. These facilities went into full service in November 1996. Storage. The Company's interstate pipeline system provides storage services to its customers through its Huntsman Storage Field in Cheyenne County, Nebraska. The facility had a peak natural gas withdrawal capacity of 101 MMcf per day in 1996, and approximately 6.6 Bcf of natural gas was cycled through storage for all parties during the year. 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. Transportation Marketing. The Company is a one-third joint-venture partner in the TransColorado Gas Transmission Pipeline Co. ("TransColorado"). TransColorado's pipeline is expected to provide increased flexibility in accessing multiple natural gas basins in the Rocky Mountain region. Economics and levels of drilling activity should improve for Rocky Mountain gas producers who will gain new access to markets. In December 1996, the southernmost 25 miles of the pipeline were built and connected with gathering systems in southern Colorado. 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. The TransColorado pipeline will operate as an interstate pipeline system regulated by the FERC. In late September 1996, the FERC issued an order approving an extension of the original certificate that will allow the Company until September 1998 to build the north end of the TransColorado project. The FERC issued an order approving the first phase of the pipeline in September 1996. Competition. The interstate transportation pipeline and storage services business segment faces competition from other transporters. In addition, natural gas competes as an energy source with fuel oil, coal, propane and electricity in the areas served by the Company's interstate pipeline system. (3) 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. 9 10 Revenues from this business segment are derived primarily from regulated natural gas sales and transportation services. The Company's retail natural gas business served over 230,000 customers and approximately 300 communities in Colorado, Kansas, Nebraska and Wyoming through 8,600 miles of distribution pipelines as of December 31, 1996. In 1995, the Company opened a 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 addition, this business segment operated 1,500 miles of intrastate natural gas transmission, gathering and storage facilities as of December 31, 1996. These intrastate pipeline systems serve industrial customers and much of the Company's retail natural gas business in Colorado and Wyoming. The Company's underground storage facilities are used to provide natural gas for load balancing and peak system demand. Working gas owned by this business segment is stored in one facility owned and operated by the Company's interstate pipeline system, five facilities in Wyoming owned and operated by this business segment and one facility in Colorado owned and operated by Wildhorse. The peak day natural gas withdrawal capacity available for this segment in 1996 was 108 MMcf per day. This segment cycled approximately 7.5 Bcf of natural gas through storage in 1996. The Company'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 requirements 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. Unregulated Retail Services. In September 1996, the Company, through its subsidiary K N Services, Inc. ("KNS") began marketing its Simple Choice(sm) package of products and services. Under Simple Choice(sm), customers can order satellite TV, guaranteed stable natural gas bills, appliance protection, long-distance telephone service, wireless Internet access and other products and services with one call, paid for with one monthly payment, and backed by one service guarantee. Simple Choice(sm) was launched in Scottsbluff, Nebraska, where the Company also opened its first Simple Choice(sm) General Store. Also in 1996, the Company opened additional Simple Choice(sm) stores in Kearney, Nebraska; Laramie and Casper, Wyoming; and Montrose, Colorado. The Company plans to open 15 more stores in early 1997 and is engaged in efforts to create Simple Choice(sm) partnerships and licensing agreements with other utilities. On January 23, 1997, K N and PacifiCorp jointly formed en*able, LLC to market the Simple Choice(sm) brand to other utilities, as well as to Pacificorp's 1.4 million customers. An integral part of the Simple Choice(sm) package is outsourced billing and customer service for third-party utilities. To enhance this capability, early in 1997 KNS and PacifiCorp's subsidiary, PacificCorp Holdings, Inc. acquired Orcom Systems, Inc., the software development company that designed the billing system which supports the Simple Choice(sm) brand of products and services. 10 11 Gas Purchases and Supply. This business segment relies on the Company's interstate pipeline system, the intrastate pipeline systems it operates, and third-party 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 gas supply for the retail natural gas business segment comes primarily from basins in Kansas, Montana, Wyoming, Colorado and western Nebraska which include under-developed basins that represent significant proved reserves. The Company's gas supplies are strategically located with respect to existing and planned pipeline capacity, giving the Company access to gas for its retail customer base. Certain gas purchase contracts contain take-or-pay clauses which require 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, 1996, the amount of gas prepayments outstanding under take-or-pay provisions for this business segment was $10.8 million. All such payments are fully recoupable under the terms of the gas purchase contracts and the existing regulatory rules. 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 as an energy source in the areas served by the Company's retail natural gas business. Such competition is expected to increase as a result of implementation of Order 636 and state retail unbundling initiatives. Unbundling Retail Gas Services. Continuing regulatory change will provide energy consumers with increasing choices among their suppliers. The Company emerged as a leader in providing for customer choice by filing an application with the Wyoming Public Service Commission in September 1995 to allow 10,500 residential and commercial customers to choose their energy provider from a qualified list of suppliers. The proposal provided that the Company would continue to provide all other utility services. On February 16, 1996, the Wyoming Public Service Commission issued an order allowing the Company to bring competition to these 10,500 residential and commercial customers beginning in June 1996. Choosing from a menu of three competing suppliers, approximately 80% of the Company's customers chose to remain with the Company. The experience gave the Company early and valuable experience in competing in an unbundled environment and led to the development of new products and services that add value to the natural gas commodity. The innovative program was one of the first in the nation that allowed essentially all customers the opportunity to exercise energy choice for natural gas. (4) General (a) Federal and State Regulation 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 the FERC's jurisdiction, while facilities used for and operations involving interstate transmission are not exempt. However, the 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. 11 12 The 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, as well as state legislative bodies, have all expressed interest from time to time in asserting jurisdiction over gathering activities, and the Company is closely monitoring developments in this area. As part of its corporate reorganization, the Company requested, was granted authority and in 1994 transferred substantially all of its gathering facilities to a wholly owned subsidiary. The FERC determined that after the transfer, the gathering facilities would be nonjurisdictional, but the 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. 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. 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 the FERC under the Natural Gas Act and the Natural Gas Policy Act of 1978. The Company is also subject to the requirements of FERC Order Nos. 497, et seq., the Marketing Affiliate Rules, which prohibit preferential treatment by an interstate pipeline of its marketing affiliates and also govern the provision of information by an interstate pipeline to its marketing affiliates. In 1996, the FERC agreed that the Company lacked market power on the Buffalo Wallow system and approved the use of market-based rates for firm transportation service, the first such determination granted by the FERC. 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 have authority to review the Company's issuance of securities under some circumstances. In Nebraska, retail gas sales rates for residential and small commercial customers within a municipality are regulated by each municipality served. 12 13 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. (b) Environmental Regulation The Company's operations and properties are subject to extensive and evolving Federal, state and local laws and regulations governing the release or discharge of regulated 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, such as wetlands, playa lakes and intermittent streams. The Company has a limited number of 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 environmental regulatory 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 on certain classes of persons who are considered to have contributed to the release of a "hazardous substance" into the environment without regard to fault or the legality of the original conduct. 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, neighboring landowners and other third parties have the right 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. This Operating Permit Program requires 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 who manufacture, process, distribute, use or dispose of TSCA-regulated 13 14 substances, including such things as polychlorinated biphenyls ("PCBs"), asbestos, and lead-based paints. The Company has facilities which contain such TSCA-regulated substances. Compliance with Federal, state and local laws and regulations 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." (c) 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. (d) Other Amounts spent by the Company during 1996, 1995 and 1994 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 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 1996. 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 14 15 Protection Agency; Judicial Entry of Consent Decree, United States v. Dow Chemical Company, et al. (D. Wyo) USDC-WY-91CV1042B, Superfund Site Number 8T83, Natrona County, Wyoming; EPA Docket Number CERCLA-VIII.) 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; active remediation will begin in the summer of 1997. 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 ("Rockwell"), 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 $1.4 million for PCB remediation has been expended as of December 31, 1996. 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 on March 31, 1997. 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 15 16 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 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 K N Production Company ("KNPC") and K N Gas Gathering, Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts that the defendant 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 have illegally attempted to monopolize or to enhance or maintain an existing monopoly. Grynberg also asserts certain causes of action relating to a gas purchase contract. The Company's potential liability for monetary damages and the amount of such damages, if any, are subject to dispute between the parties; however, the Company believes it has a meritorious position in these matters and does not expect this lawsuit to have a material adverse effect on the Company's financial position or results of operations. In July 1996, the U. S. District Court, District of Colorado lifted its stay of this proceeding, and discovery is ongoing. This case is still pending, but no trial date has yet been set. (Grynberg v. K N, et al., Civil Action No. 92-2000, United States District Court for the District of Colorado.) Grynberg v. Alaska Pipeline Company, et al. On July 26, 1996 K N and Rocky Mountain Natural Gas Company ("RMNG") along with over 70 other natural gas pipeline companies, were served by Jack J. Grynberg, acting on behalf of the Government of the United States, with a Civil False Claims Act lawsuit alleging mismeasurement of the heating content and volume of natural gas resulting in underpayment of royalties to the federal government. The government, particularly officials from the Departments of Justice and Interior, reviewed the complaint and the evidence presented by Mr. Grynberg and declined to intervene in the action, allowing Mr. Grynberg to proceed on his own. No specific claims have been made against K N or RMNG, and no specific monetary damages have been claimed. No trial date has been set. The Company believes it has a meritorious position in this matter, and does not expect this lawsuit to have a material adverse effect on the Company's financial position or results of operations. (United States of America ex rel. Jack J. Grynberg v. Alaska Pipeline Company, et al., Civil Action No. 95-725-TF#, United States District Court for the District of Columbia.) 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. 16 17 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, 1996, 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. 17 18 EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification and Business Experience of Executive Officers Name Age Position and Business Experience - -------------------------- --- ------------------------------------------------ Morton C. Aaronson........ 38 Chief Marketing Officer since April 1996. Vice President since January 1996. Vice President, MCI/ NewsCorp. Business Development from May 1995 to January 1996. Vice President, Market Management, MCI Communications Corporation from August 1994 to May 1995. Vice President, Large Accounts and Global Markets, MCI Communications Corporation, from July 1993 to August 1994. Director, Major Accounts Marketing, MCI Communications Corporation from July 1992 to July 1993. Director, Sales - New York Metro Region, MCI Communications Corporation from December 1990 to July 1992. John N. DiNardo .......... 49 Vice President and General Manager since April 1996. Vice President - Gas Gathering and Processing from March 1994 to April 1996. General Manager, K N Gas Gathering, Inc. and K N Front Range Gathering Company from May 1993 to March 1994. Director of Project Development, K N Gas Gathering, Inc. from August 1991 to May 1993. Consultant to K N Gas Gathering, Inc. from 1989 to August 1991. Bradley P. Farnsworth ..... 43 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...... 47 Vice President and General Counsel since April 1996. Vice President, General Counsel and Secretary from April 1992 to April 1996. Vice President and General Counsel from January 1991 to April 1992. Larry D. Hall.............. 54 Chairman of the Board since April 1996. 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............. 49 Vice President since April 1996. Vice President, Marketing and Supply from May 1993 to April 1996. 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. Clyde E. McKenzie.......... 49 Vice President and Chief Financial Officer since April 1996. Vice President and Treasurer, Apache Corporation from 1988 to 1996. 18 19 Murray R. Smith............ 42 Vice President-Corporate Communications since August 1996. Senior Vice President, K N Services, Inc. from April to August 1996. Director of Field Communicates, Training and Sales Programs, MCI Communications Corporation from October 1995 to April 1996. Director of Field Marketing and Communication, WorldWide Sales, MCI Communications Corporation from October 1994 to October 1995. Director of Field Marketing - Business Services, MCI Communications Corporation from June 1992 to October 1994. Director of Marketing, Southern Division, MCI Communications Corporation from November 1990 to June 1992. H. Rickey Wells .......... 40 Vice President - Business Operations since April 1996. Vice President, Operations from June 1988 to April 1996. Martha B. Wyrsch.......... 39 Vice President, Deputy General Counsel and Secretary since April 1996. Deputy General Counsel from November 1995 to April 1996. Assistant General Counsel from June 1995 to November 1995. Senior Counsel from June 1993 to June 1995. Senior Attorney from June 1991 to June 1993. These officers generally serve until April of each year. (B) Involvement in Certain Legal Proceedings None. 19 20 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 14, 1997, there were 10,031 holders of record of the Company's common stock. Dividends paid and the price range of the Company's common stock by quarter for the last two years are provided below.
1996 1995 ---- ---- Market Price Data (Low-High-Close) Quarter Ended: March 31 $27.00 - $31.75 - $31.125 $20.25 - $24.75 - $24.00 June 30 $30.625 - $34.375 - $33.50 $23.75 - $27.00 - $25.375 September 30 $31.75 - $36.625 - $35.25 $23.875 - $28.75 - $27.25 December 31 $35.00 - $41.25 - $39.25 $25.25 - $30.25 - $29.125 Dividends Quarter Ended: March 31 $0.26 $0.25 June 30 $0.26 $0.25 September 30 $0.26 $0.25 December 31 $0.27 $0.26 Common Stockholders Year-end 9,794 9,485
20 21 ITEM 6: SELECTED FINANCIAL DATA FIVE-YEAR REVIEW K N ENERGY, INC. AND SUBSIDIARIES Selected Financial Data (In Thousands Except Per Share Amounts)
1996 1995 1994 ---- ---- ---- OPERATING REVENUES: Gathering, Processing and Marketing Services $1,193,984 $ 854,462 $ 838,474 Interstate Transportation and Storage Services 25,352 22,217 21,044 Retail Natural Gas Services 223,838 227,282 220,431 Gas and Oil Production - 7,437 11,328 ---------- ---------- ---------- Total Operating Revenues $1,443,174 $1,111,398 $1,091,277 ========== ========== ========== OPERATING INCOME $ 134,801 $ 115,362 $ 54,879 Other Income and (Deductions) (35,085) (33,790) (30,058) ---------- ---------- ---------- Income Before Income Taxes 99,716 81,572 24,821 Income Taxes 35,897 29,050 9,500 NET INCOME 63,819 52,522 15,321 Less - Preferred Stock Dividends 398 492 630 ---------- ---------- ---------- EARNINGS AVAILABLE FOR COMMON STOCK $ 63,421 $ 52,030 $ 14,691 ========== ========== ========== EARNINGS PER COMMON SHARE $ 2.14 $ 1.83 $ 0.52 ========== ========== ========== Dividends Per Common Share $ 1.05 $ 1.01 $ 0.76 ========== =========== ========== Number of Shares Used in Computing Earnings Per Common Share 29,624 28,360 28,044 ========== ========== ========== Total Assets $1,629,720 $1,257,457 $1,172,384 ========== ========== ========== Capital Expenditures $ 119,987 $ 79,313 $ 70,511 ========== ========== ========== Acquisitions $ 162,779 $ 35,897 $ 31,363 ========== ========== ========== CAPITALIZATION: Common Stockholders' Equity $ 519,794 55% $ 426,760 57% $ 393,686 54% Preferred Stock 7,000 1% 7,000 1% 7,000 1% Preferred Stock Subject to Mandatory Redemption - - 572 - 1,715 - Long-Term Debt 423,676 44% 315,564 42% 334,644 45% ---------- ---- ---------- ---- ---------- ---- Total Capitalization $ 950,470 100% $ 749,896 100% $ 737,045 100% ========== ==== ========== ==== ========== ==== BOOK VALUE PER COMMON SHARE $ 17.16 $ 15.19 $ 14.25 ========== ========== ========== 1993 1992 ---- ---- OPERATING REVENUES: Gathering, Processing and Marketing Services $ 730,895 $ 507,756 Interstate Transportation and Storage Services 99,838 127,611 Retail Natural Gas Services 212,905 196,025 Gas and Oil Production 5,321 4,710 ---------- ---------- Total Operating Revenues $1,048,959 $ 836,102 ========== ========== OPERATING INCOME $ 80,874 $ 83,961 Other Income and (Deductions) (31,406) (27,551) ---------- ---------- Income Before Income Taxes 49,468 56,410 Income Taxes 18,599 20,068 ---------- ---------- NET INCOME 30,869 36,342 Less - Preferred Stock Dividends 853 2,976 ---------- ---------- EARNINGS AVAILABLE FOR COMMON STOCK $ 30,016 $ 33,366 ========== ========== EARNINGS PER COMMON SHARE $ 1.09 $ 1.34 ========== ========== Dividends Per Common Share $ 0.51 $ 0.51 ========== ========== Number of Shares Used in Computing Earnings Per Common Share 27,424 24,828 ========== ========== Total Assets $1,169,275 $1,007,411 ========== ========== Capital Expenditures $ 100,780 $ 74,787 ========== ========== Acquisitions $ 65,172 $ 110,833 ========== ========== CAPITALIZATION: Common Stockholders' Equity $ 391,462 53% $ 347,738 51% Preferred Stock 7,000 1% 26,310 4% Preferred Stock Subject to Mandatory Redemption 2,858 - 4,500 1% Long-Term Debt 335,190 46% 303,224 44% ---------- ---- ---------- ---- Total Capitalization $ 736,510 100% $ 681,772 100% ========== ==== ========== ==== BOOK VALUE PER COMMON SHARE $ 14.39 $ 13.60 ========== ==========
21 22 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED EARNINGS Net income, the applicable earnings per common share and return on average common equity for the three years ended December 31, 1996 are set forth in the following table. Net income for 1994 excludes the effect of a third quarter pre-tax charge of $25.9 million for non-recurring costs related to the merger with American Oil and Gas Corporation ("AOG") and for the restructuring of the retail natural gas services segment. This charge reduced 1994 net income by $19.3 million, or $0.69 per common share.
1996 1995 1994 ----- ----- ----- Net Income (In Millions) $63.8 $52.5 $34.7 Earnings per Common Share $2.14 $1.83 $1.21 Return on Average Common Equity 13.4% 12.7% 8.7%
The 17 percent increase in 1996 earnings per share over 1995 was primarily attributable to business growth on the interstate pipeline system and on gathering and processing systems, higher prices for natural gas liquids ("NGLs"), expense savings due to the 1995 corporate restructuring, and sales of storage gas. Operating results for 1996 were adversely impacted by low demand for irrigation sales and transportation services due to abnormally heavy rainfall during the summer. The 51 percent increase in 1995 earnings over 1994 reflected benefits realized from the 1994 merger with AOG, year-to-year business growth, improved irrigation deliveries as a result of normal weather, higher NGLs prices, and the annualized impact of 1994 rate increases. RESULTS OF OPERATIONS A discussion of comparative operating results by business segment (excluding the $25.9 million 1994 non-recurring merger and restructuring charges), consolidated other income and (deductions) and income taxes follows. In January 1996, K N transferred its stock in its gas and oil subsidiary, K N Production Company, to Tom Brown, Inc. ("TBI") in exchange for common and convertible preferred stock of TBI. Accordingly, 1995 and 1994 operating results for the gas and oil segment are excluded from the following discussion; this segment reported an operating loss of $0.2 million in 1995 and operating income of $2.9 million in 1994. 22 23 Segment operating revenues, costs and expenses and volumetric data cited herein are before intersegment eliminations; dollar amounts are in millions.
GATHERING, PROCESSING AND MARKETING SERVICES 1996 1995 1994 -------- ------ ------ Operating Revenues - Gas Sales $ 976.5 $706.3 $720.3 Natural Gas Liquids 189.9 126.1 114.4 Gathering, Transportation and Other 92.8 67.2 51.2 -------- ------ ------ 1,259.2 899.6 885.9 -------- ------ ------ Operating Costs and Expenses - Gas Purchases and Other Costs of Sales 1,052.8 704.3 735.9 Operations and Maintenance 89.1 94.2 78.1 Depreciation and Amortization 31.7 26.5 27.0 Taxes, Other Than Income Taxes 11.1 10.0 7.2 -------- ------ ------ 1,184.7 835.0 848.2 -------- ------ ------ Operating Income $ 74.5 $ 64.6 $ 37.7 ======== ====== ====== Systems Throughput (Trillion Btus) - Gas Sales 430.1 407.8 353.0 Transportation and Gathering 326.0 306.0 286.8 -------- ------ ------ 756.1 713.8 639.8 ======== ====== ====== Natural Gas Liquids Sales (Million Gallons) 469.8 388.1 375.0 ======== ====== ======
The 15 percent increase in 1996 operating income over 1995 largely resulted from three factors - growth in volumes (principally due to acquisitions, the Wildhorse joint venture with TBI, and sales of storage gas), higher NGLs prices and expense savings accruing from the 1995 corporate restructuring. This segment did experience compression of margins during 1996 in all three of its principal activities (gas sales, NGLs sales and transportation and gathering services) due to competitive factors and significantly higher gas costs influenced by colder nation-wide weather. Average 1996 NGLs sales prices exceeded those realized in 1995 by approximately $0.08 per gallon; however, the impact of higher NGLs prices was offset by the effect of higher gas prices on shrink and fuel payments to producers under "keep whole" processing agreements. The expected 1995 benefits (cost reductions, improved operational efficiencies and new business opportunities) of the 1994 AOG merger were largely realized by this business segment, as 1995 operating income exceeded 1994 by $26.9 million. Additional factors contributing to the 1995 positive results were incremental earnings from gathering and processing facilities and transmission and storage assets acquired during 1995 and higher average NGLs prices than realized in 1994. 23 24
INTERSTATE TRANSPORTATION AND STORAGE SERVICES 1996 1995 1994 ------ ------ ------ Operating Revenues - Transportation and Storage $ 63.4 $ 58.6 $ 56.7 Other 8.4 5.8 3.9 ------ ------ ------ 71.8 64.4 60.6 ------ ------ ------ Operating Costs and Expenses - Gas Purchases and Other Costs of Sales 7.3 7.7 1.3 Operations and Maintenance 24.3 27.5 30.1 Depreciation and Amortization 8.0 7.8 8.6 Taxes, Other Than Income Taxes 2.8 3.4 4.1 ------ ------ ------ 42.4 46.4 44.1 ------ ------ ------ Operating Income $ 29.4 $ 18.0 $ 16.5 ====== ====== ====== Systems Throughput (Trillion Btus) 159.2 155.6 134.7 ====== ====== ======
This segment's 1996 results show substantial improvement over 1995. The Company has increased its throughput due to expansions of its Wyoming system which came on line in mid-year 1996. Lower 1996 operations and maintenance and payroll taxes resulted from expense savings due to the 1995 corporate restructuring. Operating results for 1995 were positively impacted by higher rates due to the 1994 Federal Energy Regulatory Commission ("FERC") rate case settlement. However, this positive was partially offset by lower 1995 customer requirements and lower rates for firm storage service accompanying the transfer of three storage fields to a nonjurisdictional subsidiary, and by increased gas costs due largely to the resolution of pre-Order 636 exchange imbalances.
RETAIL NATURAL GAS SERVICES 1996 1995 1994 ------ ------ ------ Operating Revenues - Gas Sales $190.0 $204.0 $206.9 Transportation and Other 35.4 28.3 19.1 ------ ------ ------ 225.4 232.3 226.0 ------ ------ ------ Operating Costs and Expenses - Gas Purchases and Other Costs of Sales 114.3 121.5 128.9 Operations and Maintenance 63.3 61.2 58.2 Depreciation and Amortization 11.5 11.0 10.7 Taxes, Other Than Income Taxes 5.4 5.6 4.5 ------ ------ ------ 194.5 199.3 202.3 ------ ------ ------ Operating Income $ 30.9 $ 33.0 $ 23.7 ====== ====== ====== Systems Throughput (Trillion Btus) - Gas Sales 34.7 39.0 40.8 Transportation 35.0 27.4 18.8 ------ ------ ------ 69.7 66.4 59.6 ====== ====== ======
Operating results for 1996 were adversely impacted by low demand for irrigation requirements due to abnormally heavy rainfall during the summer. Irrigation sales and transportation volumes in 1996 were 3.8 trillion Btus below the 1995 season; 1995 deliveries to irrigators of 12.6 trillion Btus essentially represented a normal year. This detriment to 1996 earnings was partially mitigated by increased customer requirements for grain drying and growth in transportation volumes on the Company's Rocky Mountain intrastate pipeline attributable, in part, to the fourth quarter acquisition of interconnected gathering and processing facilities. Operations and maintenance expenses were 3.4 percent higher than in 1995, as costs incurred in the 24 25 development of new marketing initiatives more than offset savings realized from the 1995 corporate restructuring. The significant improvement in 1995 operating income over 1994 resulted from increased deliveries (gas sales and transportation) to irrigation customers, the annualized impact of rate increases on the Rocky Mountain distribution system effective in 1994 and higher deliveries to customers for space heating requirements due to colder 1995 weather.
OTHER INCOME AND (DEDUCTIONS) 1996 1995 1994 ------- ------- ------- Interest Expense $(35.9) $(34.2) $(31.6) Minority Interests and Other, Net 0.8 0.4 1.5 ------ ------ ------ $(35.1) $(33.8) $(30.1) ====== ====== ======
Increases in 1996 and 1995 interest expense reflect the issuance of long-term debt in 1996 and 1994 to fund capital expenditures and acquisitions. During 1996, the Company capitalized $1.3 million of interest costs in connection with the acquisition and construction costs of the Pony Express Pipeline. Minority Interests and Other, Net included a $1.5 million gain from the sale of a gathering system in 1994.
INCOME TAXES 1996 1995 1994 ----- ----- ----- Provisions $35.9 $29.1 $ 9.5 ===== ===== ===== Effective Tax Rate 36.0% 35.6% 38.3% ===== ===== =====
Refer to Note 7 of Notes to Consolidated Financial Statements for a reconciliation of statutory rates to effective rates. The 1994 effective tax rate reflects the non-deductibility of certain merger costs. LIQUIDITY AND CAPITAL RESOURCES During 1996 the primary sources of cash were from the public offerings of long-term debt and common stock, short-term borrowings and internally generated cash flows. Cash outflows funded capital expenditures and acquisitions, debt service, dividend payments, expenditures for the buy-out of above-market gas purchase contracts, mitigation of pricing disputes and take-or-pay requirements. CASH FLOWS FROM OPERATING ACTIVITIES Net operating cash flows for 1996 totaled $80.8 million, compared with $129.6 million and $91.2 million for 1995 and 1994, respectively. Excluding $41 million of proceeds from the sale of contract demand receivables and $18.1 million of expenditures for merger and restructuring costs, 1994 net operating cash flows aggregated $68.3 million. The decline in 1996's net cash flows from operations resulted from $8.2 million of expenditures to buy-out above market gas purchase contracts, to mitigate gas contract pricing disputes and for take-or-pay requirements. Additionally, 1996 cash flows were adversely impacted by high gas prices, increases in gas imbalance receivables and by significant increases in storage gas inventories in anticipation of high demand during the first quarter of 1997. All these factors reduced 1996 cash flows, but will benefit future cash flows via purchased gas adjustment filings, lower contractual prices, or as a source of gas supply already paid for. 25 26 CAPITAL EXPENDITURES AND COMMITMENTS Capital expenditures totaled $120.0 million, $79.3 million and $70.5 million for 1996, 1995 and 1994, respectively. The higher level of 1996 expenditures reflects construction costs associated with the Pony Express Pipeline. The 1997 capital expenditures budget totals $185 million with approximately 55 percent of these budgeted expenditures for the completion of construction of the Pony Express Pipeline including transmission facilities directly into the Kansas City metropolitan area. The Pony Express Pipeline is expected to begin transporting gas late in the second quarter of 1997; the actual timing depends upon the date FERC approval is received. During 1996, the Company expended $154.0 million on acquisitions, which included the purchase of the Pony Express Pipeline, the Williams Field Services gathering and processing assets in western Colorado and eastern Utah (through K N's Wildhorse Energy Partners joint venture) and two contracts under which the Company will provide firm transportation service to two natural gas distribution companies serving the Kansas City metropolitan area. In December 1996, K N signed a letter of intent to purchase several Enron Corp. subsidiaries that own the Bushton natural gas processing facility and other Hugoton Basin gathering assets located in Kansas and Oklahoma. The Bushton facility processes approximately 825 MMcf of natural gas and produces approximately 1.2 million gallons of natural gas liquids and approximately 1.7 MMcf of crude helium per day. The gathering assets gather approximately 475 MMcf per day of natural gas through approximately 2,200 miles of pipeline. The closing of the transaction is subject to execution of acceptable definitive agreements and receipt of appropriate regulatory approvals. The Company does not believe it has a material exposure related to gas purchase contract take-or-pay matters. Generally, amounts paid for take-or-pay are either fully recoupable under terms of the gas purchase contracts, or are recoverable from offsetting gas purchase obligations under certain contractual arrangements. At December 31, 1996, the balance of unrecouped take-or-pay payments was $12.0 million. CAPITAL RESOURCES At December 31, 1996, K N had a revolving credit agreement with seven banks to borrow or use as commercial paper support up to $200 million. On March 7, 1997, this agreement was amended to include a total of 11 banks and to increase the amount of the credit facility to $350 million. Additionally, under a 1996 shelf registration filing with the Securities and Exchange Commission, K N can issue up to approximately $245 million of debt or equity securities. At December 31, 1996 short-term borrowings were $129.3 million, compared with $88.0 million at December 31, 1995. At year-end 1996, the Company's long-term debt to capitalization ratio was 44 percent. K N expects to issue a combination of short-term debt and equity to fund completion of Pony Express construction and the acquisition of the Enron Corp. gathering and processing facilities. In July 1996, Standard & Poor's ("S&P") and Moody's Investors Service ("Moody's") lowered their ratings of K N's senior unsecured debt. S&P lowered its rating from A- to BBB+; Moody's lowered its rating from A2 to A3. Additionally, S&P affirmed its A-2 rating on K N's commercial paper, while Moody's lowered its rating of commercial paper from P-1 to P-2. These rating changes reflect the Company's strategic growth objectives in nonregulated businesses. 26 27 REGULATION Approximately 45 percent of the Company's assets and operating income, and 19 percent of operating revenues, are subject to regulation at either the federal, state or local level. In substantially all regulatory jurisdictions, rates are currently determined using cost-based regulations. At this time, 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. RISK MANAGEMENT To minimize the risk of price changes in the natural gas 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 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. Commodity-related 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 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. The Company's Treasury Department manages the Company's interest rate exposure. OUTLOOK/FORWARD-LOOKING INFORMATION GENERAL The statements contained in this section, "Outlook/Forward-Looking Information," include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that these statements are based upon reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements contained herein include, among other factors, the pace of deregulation of retail natural gas and electricity markets in the United States, federal and state regulatory developments, the timing and extent of changes in commodity prices for oil, gas, NGLs, electricity, certain agriculture products and interest rates, the extent of success in acquiring natural gas facilities, the timing and success of efforts to develop power, pipeline and other projects, political developments 27 28 in foreign countries and conditions of the capital markets and equity markets during the periods covered by the forward-looking statements. During 1996, K N realized significant benefit from consolidation and infrastructure reductions initiated during 1995. In 1997, the Company will continue to focus on implementing savings programs to provide the lowest-cost services to its customers. Part of this equation also involves increasing throughput volumes on its existing asset base, as well as acquiring adjacent properties where further economies of scale can be realized. Additionally, the Company expects significant earnings contributions from the Pony Express Pipeline, starting late in the second quarter, and from the sale of new products and services under its Simple Choice brand. In January 1997, K N and PacifiCorp announced the formation of an innovative joint venture that will provide other utility companies a single package of energy, communication and infotainment options under the Simple Choice brand. 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. 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 also leading to an opening of a more competitive environment for retail gas services. K N intends to be a leader in providing customers a choice in services. In 1996, the Company voluntarily allowed customers in 10 Wyoming communities to choose their gas supplier. K N will continue to provide all other utility services for customers in the program. The Company expects to implement similar programs in other communities it serves during 1997. The Company's vision is to be a world class provider of integrated energy services and solutions. During 1997, its strategies will be directed at - o Wrapping value added services around commodities; o Becoming the lowest-cost provider in the markets it serves; o Capturing additional market share; o Unbundling services to maximize margins; and o Forming alliances that create new opportunities or enhance existing operations. LITIGATION AND ENVIRONMENTAL 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 1997. The Company's overall potential environmental cost exposure for 1997 is estimated to be approximately $4.7 million. A substantial part of the Company's 1997 environmental costs are either recoverable through insurance and indemnification provisions, or have been previously expensed as part of ongoing business. 28 29 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 Historically, fluctuations in natural gas prices have had relatively little impact on the Company's earnings. During the first quarter of 1996, due to a significant increase in gas prices coupled with several heavy peak demand periods, the Company did experience a reduction in nonregulated margins tied to certain sales contracts. Terms of these contracts have been renegotiated to mitigate future occurrences. In the regulated retail natural gas services segment, the actual cost of gas incurred is recovered from customers. In the nonregulated gas sales area, the majority of the sales contracts are either supplied by fixed-price contracts or both the selling price and the supply price are 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. During 1996, NGLs prices reached a long-term high, averaging $0.41 per gallon. The Company expects average prices to be somewhat lower in 1997. Under current agreements with producers, a one cent change in average per gallon prices impacts the Company's pre-tax operating income by approximately $2.0 million. 29 30 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Denver, Colorado February 4, 1997 30 31 CONSOLIDATED STATEMENTS OF INCOME K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- 1996 1995 1994 ---- ---- ---- (In Thousands Except Per Share Amounts) OPERATING REVENUES: Gathering, Processing and Marketing Services $1,193,984 $ 854,462 $ 838,474 Interstate Transportation and Storage Services 25,352 22,217 21,044 Retail Natural Gas Services 223,838 227,282 220,431 Gas and Oil Production - 7,437 11,328 ---------- --------- --------- Total Operating Revenues 1,443,174 1,111,398 1,091,277 ---------- --------- --------- OPERATING COSTS AND EXPENSES: Gas Purchases and Other Costs of Sales 1,062,062 752,129 777,634 Operations and Maintenance 175,778 174,181 165,516 Depreciation, Depletion and Amortization 51,212 49,891 50,278 Taxes, Other Than Income Taxes 19,321 19,835 17,025 Merger and Restructuring Costs - - 25,945 ---------- --------- --------- Total Operating Costs and Expenses 1,308,373 996,036 1,036,398 ---------- --------- --------- OPERATING INCOME 134,801 115,362 54,879 ---------- --------- --------- OTHER INCOME AND (DEDUCTIONS): Interest Expense (35,933) (34,211) (31,605) Minority Interests (2,946) (905) (659) Other, Net 3,794 1,326 2,206 ---------- --------- --------- Total Other Income and (Deductions) (35,085) (33,790) (30,058) ---------- --------- --------- INCOME BEFORE INCOME TAXES 99,716 81,572 24,821 Income Taxes 35,897 29,050 9,500 ---------- --------- --------- NET INCOME 63,819 52,522 15,321 Less - Preferred Stock Dividends 398 492 630 ---------- --------- --------- EARNINGS AVAILABLE FOR COMMON STOCK $ 63,421 $ 52,030 $ 14,691 ========== ========= ========= EARNINGS PER COMMON SHARE $ 2.14 $ 1.83 $ 0.52 ========== ========= =========
The accompanying notes are an integral part of these statements. 31 32 CONSOLIDATED BALANCE SHEETS K N ENERGY, INC. AND SUBSIDIARIES
DECEMBER 31 ---------------------- 1996 1995 ---------- ---------- (In Thousands) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 17,005 $ 22,571 Accounts Receivable 298,072 214,963 Materials and Supplies 6,092 10,515 Gas in Underground Storage 43,511 13,534 Prepaid Gas 12,001 7,800 Other Prepaid Expenses 12,824 13,536 Gas Imbalances and Other 65,319 23,880 ---------- ---------- 454,824 306,799 ---------- ---------- INVESTMENTS: Investment in Tom Brown, Inc. 44,331 - Investment in Gas and Oil Properties, Net - 36,451 Other 6,207 15,784 ---------- ---------- 50,538 52,235 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET 1,029,171 859,203 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS 95,187 39,220 ---------- ---------- TOTAL ASSETS $1,629,720 $1,257,457 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current Maturities of Long-Term Debt $ 26,971 $ 28,197 Notes Payable 129,300 88,000 Accounts Payable 241,187 157,340 Accrued Taxes 16,045 5,423 Gas Imbalances and Other 85,113 50,878 ---------- ---------- 498,616 329,838 ---------- ---------- DEFERRED LIABILITIES, CREDITS AND RESERVES: Deferred Income Taxes 122,371 112,267 Deferred Revenues 6,940 20,823 Other 24,990 30,356 ---------- ---------- 154,301 163,446 ---------- ---------- LONG-TERM DEBT 423,676 315,564 ---------- ---------- MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 26,333 14,277 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 1, 5 AND 14) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION - 572 ---------- ---------- STOCKHOLDERS' EQUITY: Preferred Stock 7,000 7,000 ---------- ---------- Common Stock: Authorized - 50,000,000 Shares, Par Value $5 Per Share Outstanding - 30,295,792 and 28,097,749 Shares, Respectively 151,479 140,489 Additional Paid-in Capital 228,902 176,910 Retained Earnings 142,578 109,895 Deferred Compensation (2,908) (222) Treasury Stock, at Cost - 7,216 and 10,739 Shares, Respectively (257) (312) ---------- ---------- Total Common Stockholders' Equity 519,794 426,760 ---------- ---------- Total Stockholders' Equity 526,794 433,760 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,629,720 $1,257,457 ========== ==========
The accompanying notes are an integral part of these statements. 32 33 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY K N ENERGY, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK ADDITIONAL DEFERRED TREASURY STOCK ------------ PAID-IN RETAINED COMPEN - --------------- SHARES AMOUNT CAPITAL EARNINGS SATION SHARES AMOUNT ---------- -------- -------- -------- ------- ------- ------ (Dollars In Thousands) BALANCE, DECEMBER 31, 1993 27,200,967 $136,005 $164,427 $ 92,187 $(1,157) - $ - 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 2,858 27,805 633 Dividend Reinvestment and Stock Purchase Plans 181,069 905 2,676 19,379 444 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 27,617,531 138,088 170,932 86,032 (378) (44,417) (988) 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 20,738 104 394 80 2 Dividend Reinvestment and Stock Purchase Plans 97,979 490 1,444 106,098 2,633 Issuance of Common Shares as Executive Compensation 6,600 33 134 Amortization of Deferred Compensation 156 ---------- -------- -------- -------- ------- ------- ------ BALANCE, DECEMBER 31, 1995 28,097,749 140,489 176,910 109,895 (222) (10,739) (312) Net Income 63,819 Cash Dividends - Common, $1.05 Per Share (30,738) Preferred (398) Sale of Common Stock, Net 1,715,000 8,575 44,591 Redemption and Cancellation of Common Stock Warrants (7,420) Unrealized Holding Gains on Available-for-Sale Securities 5,735 Treasury Stock Acquired (220,178) (7,069) Acquisition of Businesses 1,648 33,765 1,183 Employee Stock Options 292,421 1,462 2,981 517 16 Dividend Reinvestment and Stock Purchase Plans 95,572 478 1,438 189,419 5,925 Issuance of Common Shares as Executive Compensation 95,050 475 3,019 (3,494) Amortization of Deferred Compensation 808 ---------- -------- -------- -------- ------- ------- ------ BALANCE, DECEMBER 31, 1996 30,295,792 $151,479 $228,902 $142,578 $(2,908) (7,216) $ (257) ========== ======== ======== ======== ======= ======= ======
The accompanying notes are an integral part of these statements. 33 34 CONSOLIDATED STATEMENTS OF CASH FLOWS K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- 1996 1995 1994 ---- ---- ---- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 63,819 $ 52,522 $ 15,321 Adjustments to Reconcile Net Income to Net Cash Flows From Operating Activities: Depreciation, Depletion and Amortization 51,212 49,891 50,278 Deferred Income Taxes 16,443 15,975 7,302 Deferred Purchased Gas Costs (8,109) (1,458) 1,601 Provision for Losses on Accounts Receivable 307 949 627 Loss (Gain) on Sale of Facilities 491 - (1,458) Asset Write-off Associated with Merger - - 2,500 Changes in Other Working Capital Items (27,561) 19,297 16,523 Changes in Deferred Revenues (13,883) (21,267) (1,602) Other, Net (1,890) 13,671 120 --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES 80,829 129,580 91,212 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (119,987) (79,313) (70,511) Acquisitions (154,007) (31,945) (31,231) Investments (2,142) (6,598) (3,906) Proceeds from Sale of Facilities 11,922 2,706 22,305 Collections (Payments) Under Basket Agreement 6 1,491 (306) --------- --------- --------- NET CASH FLOWS USED IN INVESTING ACTIVITIES (264,208) (113,659) (83,649) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-Term Debt, Net 41,300 28,000 13,000 Long-Term Debt - Issued 125,000 - 83,100 - Retired (18,170) (21,322) (79,078) Preferred Stock Redemption (572) (1,143) (1,643) Common Stock Issued 61,668 8,379 8,093 Redemption and Cancellation of Common Stock Warrants (7,420) - - Common Stock Issuance Costs (2,143) - - Treasury Stock - Issued 5,941 2,635 1,077 - Acquired (7,069) (1,959) (2,065) Cash Dividends - Common (30,738) (28,167) (20,846) - Preferred (398) (492) (630) Minority Interests - Contributions 13,586 2,906 1,163 - Distributions (2,182) (2,765) (2,183) Premium on Debt Re-acquisition and Issuance Costs (990) (35) (1,291) --------- --------- --------- NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES 177,813 (13,963) (1,303) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents (5,566) 1,958 6,260 Cash and Cash Equivalents at Beginning of Year 22,571 20,613 14,353 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 17,005 $ 22,571 $ 20,613 ========= ========= =========
The accompanying notes are an integral part of these statements. 34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Nature of Operations K N Energy, Inc. ("K N") is an energy services provider and has operations in nine states in the Rocky Mountain and Mid-Continent regions. Natural gas services include gathering, processing, storing, transporting and marketing natural gas, providing retail natural gas distribution services, providing field services to natural gas producers and marketing natural gas liquids. A branded package of consumer services and customer billing and call center services are also offered. 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 operations 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 ("SFAS") No. 71, Accounting for the Effects of Certain Types of Regulation, which prescribes the circumstances in which the application of generally accepted accounting principles is affected by the economic effect of regulation. 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 consolidated financial statements (in thousands): 35 36
DECEMBER 31 ----------- 1996 1995 ----- ----- REGULATORY ASSETS: Employee Benefit Costs $ 1,084 $ 923 Debt Refinancing Costs 3,100 3,514 Deferred Income Taxes 706 755 Purchased Gas Costs 28,814 15,254 Plant Acquisition Adjustments 454 454 Rate Regulation and Application Costs 830 1,401 ------- ------- Total Regulatory Assets 34,988 22,301 ------- ------- REGULATORY LIABILITIES: Deferred Income Taxes 4,218 4,621 Purchased Gas Costs 6,529 10,640 ------- ------- Total Regulatory Liabilities 10,747 15,261 ------- ------- NET REGULATORY ASSETS $24,241 $ 7,040 ======= =======
As of December 31, 1996, $32.5 million of the Company's regulated assets and $9.9 million of the Company's regulated liabilities were being recovered from or refunded to customers through rates over periods ranging from one to 17 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 29,624,000 in 1996, 28,360,000 in 1995 and 28,044,000 in 1994. (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. 36 37 (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 historical 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. Gains or losses are recognized upon retirement of nonutility property, plant and equipment. 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. (H) Depreciation, Depletion and Amortization Depreciation is computed based on the straight-line method over estimated useful lives ranging from 3 to 40 years 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) Accounting Pronouncements Issued But Not Yet Effective Effective January 1, 1997, the Company will adopt the provisions of Statement of Position ("SOP") No. 96-1, Environmental Remediation Liabilities. This Statement provides authoritative guidance for recognition, 37 38 measurement, display, and disclosure of environmental remediation liabilities in financial statements. The Company has recorded environmental remediation liabilities of $2.9 million at December 31, 1996. SOP 96-1 is not expected to have a material impact on the Company's financial position or results of operations upon adoption. (K) Reclassification of Prior Year Amounts Certain prior year amounts have been reclassified to conform with the 1996 presentation. (L) 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): CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY (NET OF ACQUISITION EFFECTS)
1996 1995 1994 --------- --------- -------- Accounts Receivable $ (82,903) $ (67,364) $ 24,685 Contract Demand Receivables - - 38,732 Materials and Supplies 4,761 2,172 (1,083) Gas in Underground Storage (29,977) 17,950 (10,842) Other Current Assets (45,498) 16,981 (16,329) Accounts Payable, Accrued Taxes and Other Current Liabilities 126,056 49,558 (18,640) --------- --------- -------- $ (27,561) $ 19,297 $ 16,523 ========= ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest (Net of Amount Capitalized) $ 31,748 $ 34,503 $ 28,721 ========= ========= ======== Income Taxes $ 14,156 $ 9,774 $ 12,763 ========= ========= ========
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 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. 38 39 3. MERGER AND ACQUISITIONS (A) Pony Express Pipeline In 1996, K N purchased a 900-mile crude oil pipeline owned by Amoco Pipeline Company for conversion to natural gas service. In May, one of K N's regulated interstate pipeline subsidiaries, K N Interstate Gas Transmission Co. ("KNI"), filed with the FERC requesting authority to purchase from K N the portion of the line, renamed the Pony Express Pipeline, from Lost Cabin, Wyoming in central Wyoming to Freeman, Missouri near Kansas City. KNI also requested authority to convert the pipeline to natural gas service, install compression and construct additional pipeline facilities. The pipeline is expected to begin limited operations late in the second quarter of 1997; the actual timing depends upon the date FERC approval is received. On November 27, 1996, KNI took assignment of two contracts to provide firm transportation capacity of 230 MMcf per day to the Kansas City metropolitan area part of which will be transported through the Pony Express Pipeline. KNI will also construct approximately 36 miles of lateral facilities to connect the new markets with the Pony Express Pipeline and a third party pipeline. These facilities are expected to be in service by September 1997. (B) Gas and Oil Properties On January 31, 1996, K N and Tom Brown, Inc. ("TBI") closed a transaction pursuant to which K N transferred its stock in K N Production Company ("KNPC"), a wholly owned subsidiary of K N, to TBI in exchange for common and convertible preferred stock of TBI. The transaction represents a non-monetary exchange (valued at $38.6 million) of oil and gas assets for accounting purposes. The common shares are considered available-for-sale securities and, as a result, unrealized holding gains totaling $5.7 million are included in additional paid-in capital in the consolidated Balance Sheet at December 31, 1996. In conjunction with this transaction, K N and TBI formed Wildhorse Energy Partners, LLC, owned 55 percent by K N and 45 percent by TBI, which performs certain gathering, processing, field, marketing and storage services in a defined area of mutual interest. (C) Gathering Assets In September 1996, Wildhorse Energy Partners, LLC executed a definitive agreement to purchase Williams Field Services' gathering and processing assets in western Colorado and eastern Utah. The assets acquired include 955 miles of gathering lines and related facilities and two natural gas processing plants. (D) Transmission and Storage Systems In February 1995, the Company acquired certain 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 purchase price was $79 million. The Company utilized an operating lease and short-term debt financing arrangements to fund the acquisition. 39 40 (E) TransColorado Project During 1996, an agreement was executed providing for the construction and operation of a new unregulated gas treating plant in southwestern Colorado owned by affiliates of K N and El Paso Natural Gas Company. The treating plant is connected to Phase I (New Mexico pre-build) of the TransColorado pipeline. On September 30, 1996, the FERC approved TransColorado Gas Transmission Company's application to construct Phase I of the project which consists of 22.5 miles of 24-inch pipeline and 2.5 miles of 16-inch lateral pipeline. Both the pipeline and plant, which have a combined capital cost of approximately $30 million and a design capacity to handle up to 120,000 MMBtu per day, were placed in service in December 1996. (F) Processing Assets On December 13, 1996, K N signed a letter of intent to purchase several Enron Corp. subsidiaries that own the Bushton natural gas processing facility located in Ellsworth County, Kansas, and other Hugoton Basin gathering assets located in Kansas and Oklahoma. The Bushton facility processes approximately 825 MMcf of natural gas and produces approximately 1.2 million gallons of natural gas liquids and approximately 1.7 MMcf of crude helium per day. The gathering assets gather approximately 475 MMcf per day of natural gas through approximately 2,200 miles of pipeline. The closing of the transaction is subject to execution of acceptable definitive agreements and receipt of appropriate regulatory approvals. 4. REGULATORY MATTERS On February 16, 1996, the Wyoming Public Service Commission issued an order authorizing K N to implement a program to allow approximately 10,500 residential and commercial customers to choose their energy provider from a qualified list of suppliers. This new service commenced on June 1, 1996. K N continues to provide all other utility services and manages the gas supplies for customers in the program. 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. 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, Nebraska storage facilities, which remain as jurisdictional facilities and continue to provide storage services. Jurisdictional rates were restated to reflect this transfer. KNNG began selling gas at market rates from the three storage facilities which were transferred, effective June 1, 1995. In December 1994, KNI sought authority from the FERC to install 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. KNI has constructed $8.7 million of facilities which increase westend system capacity by 35 MMBtus per day and is holding in abeyance construction of the rest of the authorized facilities pending action by the FERC on its Pony Express Pipeline application. 40 41 K N's retail natural gas services business segment received rate increases from the Colorado Public Utilities Commission during 1994 as summarized below:
ENTITY REQUESTING APPROVED ANNUALIZED EFFECTIVE DATE INCREASE REVENUE INCREASE OF NEW RATES -------- ---------------- ------------ (In Millions) RMNGD* $ 1.5 4-2-94 RMNGD* 0.5 9-1-94
*Rocky Mountain Natural Gas Division of K N 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 1996. The total remaining estimated cost is not expected to exceed $150,000. 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; active remediation will begin in the summer of 1997. 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 ("Rockwell"), 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 $1.4 million for PCB remediation has been expended as of December 31, 1996. The total potential remediation and cleanup costs at currently identified locations is not expected to have a 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 on March 31, 1997. 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. 41 42 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 natural 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 defendant 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 have illegally attempted to monopolize or to enhance or maintain an existing monopoly. Grynberg also asserts certain causes of action relating to a gas purchase contract. The Company's potential liability for monetary damages and the amount of such damages, if any, are subject to dispute between the parties; however, the Company believes it has a meritorious position in these matters and does not expect this lawsuit to have a material adverse effect on the Company's financial position or results of operations. In July 1996, the U. S. District Court, District of Colorado lifted its stay of this proceeding, and discovery is ongoing. This case is still pending, but no trial date has yet been set. On July 26, 1996 K N and Rocky Mountain Natural Gas Company ("RMNG") along with over 70 other natural gas pipeline companies, were served by Jack J. Grynberg, acting on behalf of the Government of the United States, with a Civil False Claims Act lawsuit alleging mismeasurement of the heating content and volume of natural gas resulting in underpayment of royalties to the federal government. The government, particularly officials from the Departments of Justice and Interior, reviewed the complaint and the evidence presented by Mr. Grynberg and declined to intervene in the action, allowing Mr. Grynberg to proceed on his own. No specific claims have been made against K N or RMNG, and no specific monetary damages have been claimed. No trial date has been set. The Company believes it has a meritorious position in this matter, and does not expect this lawsuit 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. 42 43 6. PROPERTY, PLANT AND EQUIPMENT Investment in property, plant and equipment, at cost, and accumulated depreciation and amortization ("Accumulated D&A"), detailed by business segment, are as follows (in thousands):
DECEMBER 31, 1996 ----------------- PROPERTY, PLANT ACCUMULATED AND EQUIPMENT D&A NET ------------- ----------- ---------- Gathering, Processing and Marketing Services $ 683,569 $ 212,926 $ 470,643 Interstate Transportation and Storage Services 454,427 156,358 298,069 Retail Natural Gas Services 409,626 149,167 260,459 ---------- ---------- ---------- $1,547,622 $ 518,451 $1,029,171 ========== ========== ========== DECEMBER 31, 1995 ----------------- PROPERTY, PLANT ACCUMULATED AND EQUIPMENT D&A NET ------------- ----------- ---------- Gathering, Processing and Marketing Services $ 663,754 $ 205,702 $ 458,052 Interstate Transportation and Storage Services 315,686 149,267 166,419 Retail Natural Gas Services 369,576 134,844 234,732 ---------- ---------- ---------- $1,349,016 $ 489,813 $ 859,203 ========== ========== ==========
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of Long- Lived Assets and Long-Lived Assets to be Disposed Of. This statement imposes a stricter criterion for both nonregulated and regulated long-lived assets by requiring that such assets be probable of future recovery at each balance sheet date. Based on the current regulatory structure in which the Company operates, this conclusion may change in the future as competitive factors influence wholesale and retail pricing in the industry. Adoption of this standard had no impact on the Company's financial position or results of operations. 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. 43 44 Components of the income tax provision applicable to federal and state income taxes are as follows (in thousands):
1996 1995 1994 ---- ---- ---- TAXES CURRENTLY PAYABLE: Federal $17,685 $11,069 $ 5,992 State 1,769 2,006 (3,794) ------- ------- ------- Total 19,454 13,075 2,198 ------- ------- ------- TAXES DEFERRED: Federal 15,601 15,672 4,081 State 842 303 3,221 ------- ------- ------- Total 16,443 15,975 7,302 ------- ------- ------- TOTAL TAX PROVISION $35,897 $29,050 $ 9,500 ======= ======= ======= EFFECTIVE TAX RATE 36.0% 35.6% 38.3% ======= ======= =======
The difference between the statutory federal income tax rate and the Company's effective income tax rate is summarized as follows:
1996 1995 1994 ---- ---- ---- FEDERAL INCOME TAX RATE 35.0% 35.0% 35.0% INCREASE (DECREASE) AS A RESULT OF: State Income Tax, Net of Federal Benefit 1.7% 1.8% (1.5%) Nonconventional Fuels Credit - (1.0%) (3.0%) Nondeductible Merger Costs - - 7.8% Other (0.7%) (0.2%) - ---- ---- ---- EFFECTIVE TAX RATE 36.0% 35.6% 38.3% ==== ==== ====
44 45 The Company has recorded deferred regulatory assets of $0.7 million and $0.8 million, and deferred regulatory liabilities of $4.2 million and $4.6 million at December 31, 1996 and 1995, respectively, which are expected to result in cost-of-service adjustments. These amounts reflect the "gross of tax" presentation required under SFAS No. 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 ----------- 1996 1995 ---- ---- DEFERRED TAX ASSETS: Unbilled Revenue $ 925 $ 2,113 Vacation Accrual 1,599 1,577 State Taxes 4,438 4,358 Capitalized Overhead Adjustment 1,858 2,069 Operating Reserves 1,155 772 Stock Investments - 1,425 Deferred Revenues - 1,525 Alternative Minimum Tax Credits 10,164 10,011 Other 4,339 5,327 -------- -------- TOTAL DEFERRED TAX ASSETS 24,478 29,177 -------- -------- DEFERRED TAX LIABILITIES: Liberalized Depreciation 131,192 129,048 Rate Matters 6,757 4,574 Prepaid Pension 2,735 3,988 Stock Investments 3,457 - Other 2,708 3,834 -------- -------- TOTAL DEFERRED TAX LIABILITIES 146,849 141,444 -------- -------- NET DEFERRED TAX LIABILITIES $122,371 $112,267 ======== ======== DEFERRED ACCOUNTS FOR RATE REGULATED ENTITIES: Assets $ 706 $ 755 ======== ======== Liabilities $ 4,218 $ 4,621 ======== ========
8. FINANCING (A) Notes Payable At December 31,1996, K N had a revolving credit agreement with seven banks to borrow for general corporate purposes, including commercial paper support, up to a total of $200 million. On March 7, 1997, this agreement was amended to include a total of 11 banks and to increase the amount of the credit facility to $350 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 both 1996 and 1995 were $0.2 million. The amended credit agreement expires March 7, 2002. At December 31, 1996, $40 million was outstanding under this credit agreement, compared with $10 million at December 31, 1995 under other agreements that were not renewed during 1996. Commercial paper issued by K N represents unsecured short-term notes with maturities not to exceed 270 days from the date of issue. During 1996, all commercial paper was redeemed within 63 days, with interest rates ranging from 5.15 to 6.63 percent. Commercial paper outstanding at December 31, 1996 and 1995, respectively, were $89.3 and $78.0 million. The weighted average interest rates on short-term borrowings outstanding at December 31, 1996 and 1995, respectively, were 6.93 percent and 6.01 percent. 45 46 Average short-term borrowings outstanding during 1996 and 1995 were $60.8 million and $47.8 million, respectively. During 1996 and 1995, the weighted average interest rates on short-term borrowings outstanding were 5.62 percent and 6.01 percent, respectively. (B) Long-Term Debt
DECEMBER 31 ----------- 1996 1995 ---- ---- (In Thousands) DEBENTURES: 6.5% Series, Due 2013 $ 50,000 $ 50,000 7.85% Series, Due 2022 27,545 28,434 8.75% Series, Due 2024 75,000 75,000 7.35% Series, Due 2026 125,000 - 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 (1,013) (1,069) SENIOR NOTES: 7.27%, Due 1997-2002 30,000 32,500 11.846% (AOG), Due 1997-1999 18,661 25,446 Medium-Term Notes, 10.07% Average Rate, Due 1997-1999 8,000 12,500 $25 Million Subordinated Revolving Credit Note (AOG) with Cabot Corporation, Interest at the London Interbank Offered Rate ("LIBOR") Plus 0.925% at December 31, 1996 and 1995, (6.425% and 6.8625%, Respectively), Due 1997 10,916 11,142 8.5% Note Payable of Red River Pipeline, L.P., Due 1997-1998 6,538 9,808 Current Maturities of Long-Term Debt (26,971) (28,197) -------- -------- Total Long-Term Debt $423,676 $315,564 ======== ========
Maturities of long-term debt for the five years ending December 31, 2001, are as follows (in thousands):
YEAR AMOUNT - ---- ------ 1997 $26,971 1998 19,055 1999 13,089 2000 5,000 2001 6,000
On May 23, 1996, K N filed a universal shelf registration statement with the Securities and Exchange Commission ("SEC") for common stock and unsecured debt securities up to an aggregate initial offering of $300 million. On July 26, 1996, K N sold publicly $125 million of 30-year 7.35% debentures at an all-in cost to the Company of 7.40 percent. This debt was issued from the $200 million shelf registration filed with the SEC in 46 47 November 1993. Net proceeds from this financing were used to reduce short-term indebtedness and fund capital expenditures, including costs of acquiring the Pony Express Pipeline (See Note 3(A)). At December 31, 1996 and 1995, the carrying amount of the Company's long-term debt was $451.7 million and $344.8 million, respectively, and the estimated fair value was $471.6 million and $383.2 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. (C) Common Stock On August 6, 1996, K N sold publicly 1,715,000 million shares of its common stock at $32.25 per share, less offering expenses. The stock was sold from the $300 million shelf registration filed with the SEC in May 1996. K N applied approximately $7.4 million of the net proceeds from the offering to redeem and cancel outstanding warrants to purchase a total of 545,200 shares of K N's common stock. The balance of the net proceeds from the offering were used in the same manner as the net proceeds from the debt financing described above in Note 9(B). In connection with the sale of K N common stock described above, Cabot Corporation sold 1,850,000 shares of K N common stock. K N did not receive any of the proceeds from the sale of K N common stock by Cabot Corporation. After the sale, Cabot Corporation owned 2,990,186 shares, or 9.9 percent of the common stock of K N, including 642,232 shares of common stock underlying warrants expiring on September 30, 1999. 9. PREFERRED STOCK
DECEMBER 31 ----------- 1996 1995 ---- ---- (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 at December 31, 1995 $ - $ 572 ======= ======
(A) 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. (B) Class B $8.30 Preferred Stock The remaining 5,720 shares of K N Class B $8.30 Preferred Stock subject to mandatory redemption were redeemed by the Company in 1996. In each of the years 1995 and 1994, the Company redeemed 5,714 shares subject to mandatory redemption, and an additional 5,714 shares at $100 per share. 47 48 (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. (D) Fair Value The Company redeemed all shares of preferred stock subject to mandatory redemption during 1996. The carrying amount and estimated fair value of the Company's outstanding preferred stock subject to mandatory redemption at December 31, 1995 was $0.6 million. The fair value of the Company's preferred stock was 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 and NGLs markets. Energy risk management products include 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 1996 and 1995 transactions were recorded as hedges. As of December 31, 1996 the Company had deferred net gains of $1.8 million, representing the difference between the current market value and the original physical contracts' value, associated with hedging activities, of which $1.6 million of losses relate to commodity contracts and $3.4 million of gains relate to over-the-counter swaps and options. The deferrals will be offset by the corresponding underlying physical transactions and are reflected as net deferred charges in the accompanying consolidated financial statements. At December 31, 1996 the Company held notional long volumetric positions of 21.4 Bcf of gas, of which 1.7 were 48 49 held in gas commodity positions and 19.7 were held in over-the-counter swaps and options. Of the 21.4 notional total, associated physical transactions of 17.2 Bcf are expected to occur in 1997 and 4.2 Bcf in 1998. A change of plus or minus 10 percent of the fair market prices of the above financial instruments would have the approximate effect of reducing or increasing the deferrals by $4.3 million, which would be offset by corresponding increases or decreases in the value of the underlying physical transactions. (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 terminated in 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 the Employee Retirement Income Security Act. 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):
1996 1995 1994 ---- ---- ---- Service Cost - Benefits Earned During the Period $ 3,289 $ 3,332 $ 2,721 Interest Cost on Projected Benefit Obligation 6,756 6,372 5,986 Actual Return on Assets (18,243) (17,569) 565 Net Amortization and Deferral 8,896 8,415 (9,166) -------- -------- -------- Net Periodic Pension Cost $ 698 $ 550 $ 106 ======== ======== ========
As a result of restructuring activities, curtailment gains of $.07 million are reflected in the net amortization and deferral component of net periodic pension cost for 1995. 49 50 The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated financial statements at December 31, 1996 and 1995 (in thousands):
DECEMBER 31 ----------- 1996 1995 ---- ---- Actuarial Present Value of Benefit Obligations: Vested Benefit Obligation $ (84,861) $ (77,490) ========= ========= Accumulated Benefit Obligation $ (90,779) $ (82,937) ========= ========= Projected Benefit Obligation $ (97,182) $ (90,046) Plan Assets at Fair Value 123,736 111,084 --------- --------- Plan Assets in Excess of Projected Benefit Obligation 26,554 21,038 Unrecognized Net Gain (16,023) (9,678) Prior Service Cost Not Yet Recognized in Net Periodic Pension Costs 155 171 Unrecognized Net Asset at January 1 (1,282) (1,429) --------- --------- Prepaid Pension Cost $ 9,404 $ 10,102 ========= =========
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 both 1996 and 1995. The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5 percent for both 1996 and 1995. In 1996, a maximum of 10 percent of eligible employee compensation was contributed to the Employees Retirement Fund Trust Profit Sharing Plan (the "Profit Sharing Plan"), a defined contribution plan. The Company's contribution was determined by comparing actual 1996 results to a predetermined graduated scale of annual operating income goals. Prior to 1996 the Company contributed the lesser of 10 percent of the Company's net income or 10 percent of eligible employee compensation to the Profit Sharing Plan. Contributions by the Company were $6.6 million, $5.6 million and $2.3 million for 1996, 1995 and 1994, 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. The Company funds 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. Net postretirement benefit cost includes the following components (in thousands):
1996 1995 1994 ---- ---- ---- Service Cost - Benefits Earned During the Period $ 324 $ 378 $ 321 Interest Cost on APBO 1,392 1,381 1,307 Actual Return on Assets (114) (156) 7 Net Amortization and Deferral 894 884 805 ------- ------- ------- Net Periodic Postretirement Benefit Cost $ 2,496 $ 2,487 $ 2,440 ======= ======= =======
50 51 The following table sets forth the plan's funded status and the amounts recognized in the Company's consolidated financial statements as follows (in thousands):
DECEMBER 31 ----------- 1996 1995 ---- ---- Accumulated Postretirement Benefit Obligation: Retirees $(15,578) $(13,138) Eligible Active Plan Participants (1,549) (3,524) Ineligible Active Plan Participants (2,294) (2,751) -------- -------- Total APBO (19,421) (19,413) Plan Assets at Fair Value 3,192 2,623 -------- -------- Accumulated Postretirement Benefit Obligation in Excess of Plan Assets (16,229) (16,790) Unrecognized Net Gain (1,179) (649) Prior Service Cost Not Yet Recognized in Net Periodic Postretirement Benefit Cost - - Unrecognized Transition Obligation 14,865 15,794 -------- -------- Accrued Postretirement Benefit Cost $ (2,543) $ (1,645) ======== ========
The weighted average discount rate used in determining the actuarial present value of the APBO was 7.5 percent for both 1996 and 1995. The assumed health care cost trend rate was seven percent for 1996 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 1996 net periodic postretirement benefit cost by approximately $16,000 and would have increased the APBO as of December 31, 1996, by approximately $204,000. K N's retail distribution business in 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 No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. In addition, KNI has received approval from the FERC for similar regulatory treatment. At both December 31, 1996 and 1995, no SFAS 106 costs were deferred as regulatory assets. (C) Other Postemployment Benefits On January 1, 1994, the Company adopted SFAS No. 112, Employers' Accounting for Postemployment Benefits, 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 $1.1 million and $0.9 million at December 31, 1996 and 1995, respectively. 12. COMMON STOCK OPTION AND PURCHASE PLANS The Company has the following stock option plans: The 1982 Incentive Stock Option Plan ("the 1982 Plan"), the 1982 Stock Option Plan for Non-Employee Directors ("the 1982 Directors' Plan"), the 1986 Incentive Option Plan ("the 1986 Plan"), the 1988 Incentive Stock Option Plan ("the 1988 Plan"), the 1992 Stock Option Plan for Non-Employee Directors ("the 1992 Directors' Plan"), the 1994 K N Energy, Inc. Long-Term Incentive Plan ("the LTIP Plan") and the American Oil and Gas Corporation Stock Incentive Plan ("the AOG Plan"). The Company also has an employee stock purchase plan ("the ESP Plan"). 51 52 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 was amortized over the vesting period. The Company accounts for its plans under Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. The Company recorded compensation expense totaling $0.8 million, $0.2 million and $1.3 million for 1996, 1995 and 1994, respectively, relating to restricted stock grants awarded under the plans. Had compensation cost for these plans been determined consistent with SFAS No. 123, Accounting for Stock- Based Compensation, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands except per share amounts):
1996 1995 ---- ---- NET INCOME: As Reported $63,819 $52,522 ======= ======= Pro Forma $62,497 $52,101 ======= ======= EARNINGS PER SHARE: As Reported $ 2.14 $ 1.83 ======= ======= Pro Forma $ 2.10 $ 1.82 ======= =======
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Additionally, the pro forma amounts include $0.4 million and $0.3 million related to the purchase discount offered under the ESP Plan for 1996 and 1995, respectively. The Company may sell up to 600,000 shares of stock to its eligible employees under the ESP Plan. Employees purchased 87,615 shares and 95,572 shares in 1996 and 1995, respectively, and have purchased 484,599 shares through December 31, 1996. Employees purchase shares through voluntary payroll deductions at a 15 percent discount from the market value of the common stock, as defined in the plan. The fair value per share of shares purchased in 1996 and 1995 was $6.45 and $5.35, respectively.
OPTION SHARES GRANTED SHARES SUBJECT THROUGH EXPIRATION PLAN NAME TO THE PLAN DECEMBER 31, 1996 VESTING PERIOD PERIOD - --------- ----------- ----------------- -------------- ------ 1982 Plan 888,525 888,525 Immediate 10 years 1982 Directors' Plan 124,393 124,393 Three years 10 years 1986 Plan 412,500 412,500 Immediate 10 years 1988 Plan 412,500 408,665 Immediate 10 years 1992 Directors' Plan 350,000 83,250 Immediate 10 years LTIP Plan 2,200,000 1,425,800 0 - 5 years 5 - 10 years AOG Plan 517,000 517,000 Three years 10 years
52 53 Under all plans, except the LTIP 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 LTIP Plan options may be granted at less than 100 percent of the market value of the stock at the date of grant. At December 31, 1996, 135 employees, officers and directors of the Company held options under the plans. A summary of the status of the Company's stock option plans at December 31, 1996 and 1995, and changes during the years then ended is presented in the table and narrative below:
1996 1995 ---------------------------- ---------------------------- WTD AVG WTD AVG EXERCISE EXERCISE SHARES PRICE SHARES PRICE ---------- --------- ---------- --------- OUTSTANDING AT BEGINNING OF YEAR 1,164,510 $ 21.25 1,214,024 $ 18.49 Granted 925,126 $ 31.61 348,200 $ 25.87 Exercised (329,574) $ 15.88 (373,423) $ 16.54 Forfeited (33,575) $ 23.69 (24,291) $ 21.80 ---------- --------- ---------- --------- OUTSTANDING AT END OF YEAR 1,726,487 $ 27.78 1,164,510 $ 21.25 ========== ========= ========== ========= EXERCISABLE AT END OF YEAR 604,962 $ 24.52 584,902 $ 18.16 ========== ========= ========== ========= WEIGHTED AVERAGE FAIR VALUE OF OPTIONS GRANTED $ 9.53 $ 4.71 ========== ==========
200,626 of the 1,726,487 options outstanding December 31, 1996 have exercise prices between $0 and $16.79 with a weighted average exercise price of $7.70 and a weighted average remaining contractual life of 6.22 years. 104,076 of these options are exercisable; their weighted average exercise price is $14.85. 797,944 options have exercise prices between $21.68 and $31.75 with a weighted average exercise price of $25.36 and a weighted average remaining contractual life of 7.55 years. 424,644 of these options are exercisable; their weighted average exercise price is $24.87. The remaining 727,917 options have exercise prices between $32.13 and $38.50 with a weighted average exercise price of $35.96 and a weighted average remaining contractual life of 9.63 years. Of these options 76,242 are exercisable; their weighted average exercise price is $35.81. The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following assumptions: risk-free interest rates of 5.5 percent, expected weighted average lives of 4 years and expected volatility of 20 percent for grants in both 1996 and 1995; and expected dividend yields of 2.5 and 3.5 percent for grants in 1996 and 1995, respectively. Option balances and option price ranges per share for 1994 under APB 25 were as follows: beginning balance of 983,628 shares at $8.96 to $28.99, options granted of 309,500 shares at $0.00 to $24.00, options exercised of 67,093 shares at $0.00 to $23.04 and options forfeited of 12,011 shares at $15.08 to $23.01. 13. COMMON STOCK WARRANTS At December 31, 1996 and 1995, warrants to purchase 642,232 and 1,187,432 shares of the Company's common stock were outstanding, respectively. The warrants are exercisable at $17.55 per warrant and expire on September 30, 1999. In August 1996, warrants for 545,200 shares were redeemed and cancelled at a total cost of $7.4 million. 53 54 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(D)). A portion of these assets has been funded through 10-year operating leases. 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 $22.3 million in 1996, $16.2 million in 1995 and $9.6 million in 1994. Future minimum commitments under major operating leases are as follows (in thousands):
YEAR ENDING DECEMBER 31 AMOUNT - ----------- ------ 1997 $ 17,126 1998 13,400 1999 12,707 2000 12,042 2001 11,103 Thereafter 98,594 -------- Total Commitments $164,972 ========
(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, 1996 and 1995, the Company's estimated net liability was $5.5 million and $5.6 million, respectively. The Company had made net payments of $10.9 million as of December 31, 1996 and 1995. 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 1997. (C) Guarantees of Unconsolidated Subsidiaries' Debt The Company executed guarantees of two unconsolidated subsidiaries' revolving credit agreements with Credit Lyonnais, effective July 19, 1996. One guarantee is for TransColorado Gas Transmission Company ("TransColorado") for a maximum of $7.5 million due by December 31, 1999 and another guarantee is for Coyote Gas Treating, LLC ("Coyote") for a maximum of $10 million due by December 31, 1999. As of December 31, 1996, $3.1 and $7.2 million, respectively, represent the guaranteed amounts by the Company borrowed against the TransColorado and Coyote agreements. 54 55 (D) Capital Expenditure Budget The consolidated capital expenditure budget for 1997 is approximately $185 million, excluding acquisitions. Approximately $9.4 million had been committed for the purchase of plant and equipment at December 31, 1996. 15. MAJOR CUSTOMER Atmos Energy Corporation and affiliates comprised 10 percent of consolidated revenues in 1995 and 11 percent in 1994. 16. BUSINESS SEGMENT INFORMATION The Company is a natural gas energy products and services provider engaged in the following activities: o gathering, processing, marketing, storing and transporting natural gas; providing field services to natural gas producers; and marketing natural gas liquids (Gathering, Processing and Marketing Services); o interstate storing and transporting natural gas (Interstate Transportation and Storage Services); o providing retail natural gas sales and transportation services (Retail Natural Gas Services). The Company was involved in developing and producing natural gas and crude oil in 1995 and 1994 (Gas and Oil Production). 55 56 BUSINESS SEGMENT INFORMATION (Before Intersegment Eliminations)
1996 1995 1994 - ---------------------------------------------------------------------------------------------- (In Thousands) OPERATING REVENUES: Gathering, Processing and Marketing Services $ 1,259,171 $ 899,581 $ 885,949 Interstate Transportation and Storage Services 71,769 64,405 60,562 Retail Natural Gas Services 225,432 232,317 225,960 Gas and Oil Production - 10,721 14,128 Intersegment Eliminations (113,198) (95,626) (95,322) ----------- ----------- ----------- $ 1,443,174 $ 1,111,398 $ 1,091,277 =========== =========== =========== OPERATING INCOME: Gathering, Processing and Marketing Services $ 74,460 $ 64,623 $ 21,716 Interstate Transportation and Storage Services 29,460 17,933 16,503 Retail Natural Gas Services 30,881 32,995 13,752 Gas and Oil Production - (189) 2,908 ----------- ----------- ----------- OPERATING INCOME 134,801 115,362 54,879 Other Income and (Deductions) (35,085) (33,790) (30,058) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES $ 99,716 $ 81,572 $ 24,821 =========== =========== =========== IDENTIFIABLE ASSETS: Gathering, Processing and Marketing Services $ 869,141 $ 685,023 $ 574,280 Interstate Transportation and Storage Services 315,503 178,882 216,753 Retail Natural Gas Services 419,415 328,166 304,065 Gas and Oil Production - 36,451 43,932 Corporate * 25,661 28,935 33,354 ----------- ----------- ----------- $ 1,629,720 $ 1,257,457 $ 1,172,384 =========== =========== =========== DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE: Gathering, Processing and Marketing Services $ 31,654 $ 26,510 $ 26,933 Interstate Transportation and Storage Services 8,078 7,767 8,628 Retail Natural Gas Services 11,480 11,006 10,718 Gas and Oil Production - 4,608 3,999 ----------- ----------- ----------- $ 51,212 $ 49,891 $ 50,278 =========== =========== =========== CAPITAL EXPENDITURES AND ACQUISITIONS: Gathering, Processing and Marketing Services $ 96,486 $ 67,774 $ 26,521 Interstate Transportation and Storage Services 157,510 11,200 16,424 Retail Natural Gas Services 28,770 30,080 23,673 Gas and Oil Production - 6,156 35,256 ----------- ----------- ----------- $ 282,766 $ 115,210 $ 101,874 =========== =========== ===========
* Principally cash and investments 56 57 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) K N ENERGY, INC. AND SUBSIDIARIES QUARTERLY OPERATING RESULTS FOR 1996 AND 1995 (In Thousands Except Per Share Amounts)
1996 ---- FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Operating Revenues $385,851 $277,148 $304,317 $475,858 Operating Income 35,776 22,084 30,157 46,784 Net Income 17,507 8,848 13,693 23,771 Preferred Dividends 100 99 99 100 Earnings Available for Common Stock $ 17,407 $ 8,749 $ 13,594 $ 23,671 ======== ======== ======== ======== Number of Common Shares Used In Computing Earnings Per Share 28,945 29,181 30,046 30,875 ======== ======== ======== ======== Earnings Per Common Share $ 0.60 $ 0.30 $ 0.46 $ 0.78 ======== ======== ======== ======== 1995 ---- FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Operating Revenues $294,058 $238,105 $248,976 $330,259 Operating Income 31,781 19,266 25,973 38,342 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 ======== ======== ======== ========
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no such matters during 1996. 57 58 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification of Directors For information regarding the Directors, see pages 3-6 of the 1997 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 6 of the 1997 Proxy Statement. (E) Business Experience See Executive Officers of the Registrant under Part I. For business experience of the Directors, see pages 3-6 of the 1997 Proxy Statement. (F) Involvement in Certain Legal Proceedings None. (G) Promoters and Control Persons None. ITEM 11: EXECUTIVE COMPENSATION See "Director Compensation," "Report of the Compensation Committee in Executive Compensation," "Executive Compensation," "Stock Options," "Performance Graph," "Pension and Supplemental Benefits" and "Severance and Other Agreements" on pages 7-20 of the 1997 Proxy Statement. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the following pages of the 1997 Proxy Statement: (i) Pages 3-6 relating to common stock owned by directors; (ii) page 18, "Executive Stock Ownership;" and (iii) page 21, "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 pages 6-7 of the 1997 Proxy Statement. (B) Certain Business Relationships See "Relationship Between Certain Directors and the Company" on pages 6-7 of the 1997 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 As Amended and Form of Participation Agreement regarding the Plan (Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1995)* 1992 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* 1994 K N Energy, Inc. Long-Term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)* 60 61 K N Energy, Inc. 1996 Executive Incentive Plan (Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1995)* 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 (Exhibit 10(p) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Exhibit 10(q) to the Annual Report on Form 10-K for the year ended December 31, 1995)* K N Energy, Inc. Performance Incentive Plan (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Form of Change of Control Severance Agreement (Attached hereto as Exhibit 10(u))** Form of Incentive Stock Option Agreement (Attached hereto as Exhibit 10(v))** Form of Restricted Stock Agreement (Attached hereto as Exhibit 10(w))** Employment Agreement dated March 21, 1996 between K N Energy, Inc. and Murray R. Smith (Attached hereto as Exhibit 10(x))** (b) Reports on Form 8-K On January 23, 1997, a Current Report on Form 8-K was filed to report that on that date K N and PacifiCorp announced the formation of a joint venture, called enable, which will provide a broad portfolio of products and services under the Simple Choice(sm) brand. Simple Choice(sm) offers to utilities a single package of energy, home-oriented, communication and infotainment products and services which can be marketed under a licensee's own corporate name. On January 28, 1997, a Current Report on Form 8-K was filed to report that on that date K N and Enron Corp. announced the execution of a letter of intent providing for the purchase by K N of several Enron Corp. subsidiaries which own the Bushton, Kansas natural gas processing facility and other Hugoton Basin gathering assets, located primarily in Kansas. * 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, 1997 By /s/ Clyde E. McKenzie --------------------- Clyde E. McKenzie Vice President and Chief Financial Officer 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 Director - ------------------------------- Charles W. Battey /s/ Stewart A. Bliss Director - ------------------------------- Stewart A. Bliss /s/ David W. Burkholder Director - ------------------------------- David W. Burkholder /s/ David M. Carmichael Director - ------------------------------- David M. Carmichael /s/ Robert H. Chitwood Director - ------------------------------- Robert H. Chitwood /s/ Howard P. Coghlan Director - ------------------------------- Howard P. Coghlan /s/ Jordan L. Haines Director - ------------------------------- Jordan L. Haines /s/ Larry D. Hall Chairman, President, Chief Executive Officer - ------------------------------- and Director (Principal Executive Officer) Larry D. Hall /s/ William J. Hybl Director - ------------------------------- William J. Hybl /s/ Clyde E. McKenzie Vice President and Chief Financial Officer - ------------------------------- (Principal Financial and Accounting Officer) Clyde E. McKenzie /s/ Edward Randall, III Director - ------------------------------- Edward Randall, III /s/ R. Gordon Shearer Director - ------------------------------- R. Gordon Shearer /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 (Attached hereto as Exhibit 3(b))** 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)* 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 instruments 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)*
63 64 Exhibit Index
Page Number ----------- Exhibit 10(f) - 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)* 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 and Form of Participation Agreement regarding the Plan (Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1995)* 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) - 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(k) - K N Energy, Inc. 1996 Executive Incentive Plan (Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(l) - 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(m) - 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(n) - 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(o) - Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (Exhibit 10(p) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(p) - Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Exhibit 10(q) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(q) - 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(r) - 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(s) - 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
64 65 Exhibit Index
Page Number ----------- Form 8-A dated August 21, 1995)* Exhibit 10(t) - K N Energy, Inc. Performance Incentive Plan (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(u) - Form of Change of Control Severance Agreement (Attached hereto as Exhibit 10(u))** Exhibit 10(v) - Form of Incentive Stock Option Agreement (Attached hereto as Exhibit 10(v))** Exhibit 10(w) - Form of Restricted Stock Agreement (Attached hereto as Exhibit 10(w))** Exhibit 10(x) - Employment Agreement dated March 21, 1996 between K N Energy, Inc. and Murray R. Smith (Attached hereto as Exhibit 10(x))** Exhibit 12 - Ratio of Earnings to Fixed Charges .............. 66 Exhibit 13 - 1996 Annual Report to Shareholders*** ........... 67 Exhibit 21 - Subsidiaries of the Registrant .................. 68 Exhibit 23 - Consent of Independent Public Accountants ....... 69 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. 65 66 EXHIBIT 12 K N ENERGY, INC. AND SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31 ----------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollars in Thousands) Earnings: Income From Continuing Operations per Statements of Income $ 63,819 $ 52,522 $ 15,321 $ 30,869 $ 36,342 Add: Interest and Debt Expense 37,760 34,316 32,009 31,478 27,608 Income Taxes 35,897 29,050 9,500 18,599 20,068 Portion of Rents Representative of the Interest Factor 7,417 5,082 3,492 2,863 1,901 -------- -------- -------- -------- -------- Income as Adjusted $144,893 $120,970 $ 60,322 $ 83,809 $ 85,919 ======== ======== ======== ======== ======== Fixed Charges: Interest and Debt Expense per Statements of Income (Includes Amortization of Debt Discount, Premium and Expense) $ 35,933 $ 34,211 $ 31,815 $ 30,909 $ 27,090 Add: Interest Capitalized 1,827 105 338 965 842 Portion of Rents Representative of the Interest Factor 7,417 5,082 3,492 2,863 1,901 Preferred Stock Dividends of Subsidiary - - - 69 3,084 -------- -------- -------- -------- -------- Fixed Charges $ 45,177 $ 39,398 $ 35,645 $ 34,806 $ 32,917 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 3.21 3.07 1.69 2.41 2.61 ======== ======== ======== ======== ========
66 67 EXHIBIT 13 K N ENERGY, INC. 1996 ANNUAL REPORT TO SHAREHOLDERS Interested persons may receive a copy of the Company's 1996 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. 67 68 EXHIBIT 21 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 Compressor Pump & Engine Machine, Inc. ..................... Wyoming K N Field Services, Inc. ................................... Colorado K N Gas Gathering, Inc. .................................... Colorado K N Gas Supply Services, Inc. .............................. Colorado K N Interstate Gas Transmission Co. ........................ Colorado K N Marketing, Inc. ........................................ Colorado K N Marketing, L.P. ........................................ Texas K N Natural Gas, Inc. ...................................... Colorado K N Services, Inc. ......................................... Colorado 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. ................................... Texas Rocky Mountain Natural Gas Company ......................... Colorado Westar Transmission Company ................................ Delaware Wildhorse Energy Partners, LLC ............................. Delaware
All of the subsidiaries named above are included in the consolidated financial statements of the Registrant included herein. 68 69 EXHIBIT 23 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, 33-33018, 33-54403, 33-54443, 33-54555, 333-08059 and 333-08087; and (iii) Registration Statements on Form S-3, Files Nos. 2-84910, 33-26314, 33-23880, 33-42698, 33-44871, 33-45091, 33-46999, 33-54317, 33-69432 and 333-04385 of our report dated February 4, 1997, on the consolidated financial statements of K N Energy, Inc. and subsidiaries for the year ended December 31, 1996. /s/ Arthur Andersen LLP Denver, Colorado March 11, 1997 69 EX-3.B 2 BY LAWS 1 EXHIBIT 3(b) K N ENERGY, INC. (Formerly Kansas-Nebraska Natural Gas Company, Inc.) ---ooOoo--- B Y - L A W S As Amended to August 20, 1996 Effective August 20, 1996 ---ooOoo--- ARTICLE I OFFICES Section 1. Offices. The registered office shall be at 205 F Street in the City of Phillipsburg, County of Phillips, State of Kansas. The Company's principal executive office shall be at 370 Van Gordon Street, Lakewood, Colorado 80228-8304 (mailing address: Post Office Box 281304, Lakewood, Colorado 80228-8304). Section 2. Additional Offices. The corporation may also have offices at such other places both within and without the State of Kansas as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETING OF STOCKHOLDERS Section 1. Time and Place. The annual meeting of the shareholders for the election of directors and all special meetings of shareholders for that or for any other purpose may be held at such time and place within or without the State of Kansas 2 as shall be stated in the notice of the meeting, or in a duly executed waiver of notice thereof. Section 2. Annual Meeting. The annual meeting of the shareholders shall be held each year at a time to be determined by the Board of Directors, at which meeting the shareholders shall elect a Board of Directors, and transact such other business as may be properly brought before the meeting. Section 3. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute may be called by the Chairman of the Board, if any, the President or the Board of Directors, and shall be called by the President or the Secretary at the request in writing of a majority of the directors, or at the request in writing of shareholders owning at least fifty-one percent (51%) in amount of the shares of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 4. Notice. Written notice of the place, date and hour of any annual or special meeting of shareholders shall be given personally or by mail to each shareholder entitled to vote thereat, not less than ten (10) nor more than fifty (50) days prior to the meeting. 2 3 The notice shall state in addition, the purpose or purposes for which the meeting is called, and by, or at whose direction it is being issued. Section 5. Quorum. Except as otherwise provided by the Articles of Incorporation, the holders of a majority of the shares of the Corporation issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be necessary to and shall constitute a quorum for the transaction of business at all meetings of the shareholders. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat present in person or represented by proxy shall have power to adjourn the meeting from time to time, but not for more than thirty (30) days, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Section 6. Voting. At any meeting of the shareholders every shareholder having the right to vote shall be entitled to vote in person, or by proxy. Except as otherwise provided by law or the Articles of Incorporation, each shareholder of record shall be entitled, as to each proposal, to one vote for each share of stock standing in his name on the books of the Corporation on the date fixed as the record date for the 3 4 determination of its shareholders entitled to vote. All elections of directors shall be by written ballot and shall be determined by a plurality vote, and, except as otherwise provided by law or the Articles of Incorporation, all other matters shall be determined by vote of a majority of the shares present or represented at such meeting and voting on such questions. Section 7. Proxies. Every proxy must be executed in writing by the shareholder or by his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except in those cases where an irrevocable proxy is permitted by law. Section 8. Consents. Whenever by any provision of law or of the Articles of Incorporation, the vote of shareholders at a meeting thereof is required or permitted to be taken in connection with any corporate action, the meeting and vote of shareholders may be dispensed with, if all the shareholders who would have been entitled to vote upon the action if such meeting were held, shall consent in writing to such corporate action being taken. Section 9. Presiding Officer. Meetings of the shareholders shall be presided over by the Chairman of the Board, if any, or if he is not present, by the President, or, if he is not present, 4 5 by a Vice President or, if neither the Chairman of the Board, the President nor a Vice President is present, by a chairman to be chosen at the meeting. The Secretary of the Company or, if he is not present, an Assistant Secretary of the Company or, if neither the Secretary nor an Assistant Secretary is present, a secretary to be chosen at the meeting, shall act as secretary of the meeting. Section 10. Notice of Shareholder Business. At an annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the meeting (a) by or at the direction of the Board of Directors or (b) by a shareholder who is a shareholder of record at the time of giving such notice, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 40 days prior to the meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at 5 6 the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Nothwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder with respect to the matters set forth in this Section. ARTICLE III DIRECTORS Section 1. Number and Tenure. The whole Board of Directors of the Corporation shall consist of fourteen members. The 6 7 directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, which were first approved at the annual meeting of shareholders in 1975; Class I shall consist of three directors whose initial term of office shall expire in 1994, Class II shall consist of four directors whose initial term of office shall expire in 1995, and Class III shall consist of three directors whose initial term of office shall expire in 1996. Each director shall hold office until his successor is duly elected and qualified or until his resignation in writing has been filed with the corporation. At each annual election, the successors of the class of directors whose terms shall expire that year shall be elected to hold office for a term of three years, so that the term of office of one class of directors shall expire in each year, except where the Board of Directors determines that a newly elected director shall be elected by the shareholders to fill a vacancy of a directorship created subsequent to the previous annual meeting, such director shall be elected to hold office for the balance of the term of the class of directors of which he is to be a member, as determined by the Board of Directors, and until his successor is elected and qualified. Section 2. Vacancies. A vacancy on the Board of Directors or a newly created directorship may be filled by a majority of the remaining directors, though less than a quorum, or by the 7 8 sole director, by election of a new director, who at the time of his election shall be designated as a member of one of the classes of directors and shall hold office until the next election of the class of which he has become a member, unless his term of office is terminated by death, resignation, or otherwise. Section 3. Resignation, Retirement; Removal. Any director may resign at any time. Any director who experiences a change in his personal or business circumstances or principal employment shall immediately tender his resignation as a director of the Corporation to the Executive Committee of the Board of Directors. Any director who is not an employee of the Corporation shall retire his position as a director at the annual meeting of the shareholders of the Corporation next occurring after such director attains the age of 72 years. The Board of Directors may by unanimous vote of other directors then in office, remove a director with or without cause. The shareholders entitled to vote for the election of directors may remove a director, with cause as provided in the Articles of Incorporation. Section 4. Advisory Directors and Directors Emeritus. The Board of Directors by a vote of a majority of the directors present and entitled to vote, at any regular or special meeting at which a quorum is present, may designate such number of persons as it may from time to time determine, as an "Advisory Director" or may designate a former member of the Board as a 8 9 "Director Emeritus," if such former member is willing to so serve. Each Advisory Director and each Director Emeritus shall serve, subject to the pleasure of the regular Board of Directors, until the next succeeding annual meeting of the regular Board of Directors, following the annual meeting of the stockholders, at which such regular directors are elected, unless he shall have resigned. Each Advisory Director and each Director Emeritus shall be notified of all regular or special meetings of the regular Board of Directors, shall be entitled to attend and participate therein, but shall not be entitled to vote. Each Advisory Director and each Director Emeritus shall be reimbursed for any necessary expenses of attending directors' meetings. Section 5. Nomination of Director Candidates. (a) Eligibility to Make Nominations. Nominations of candidates for election as directors of the Corporation at any meeting of shareholders called for election of directors, in whole or in part (an "Election Meeting"), may be made by the Board of Directors or by any shareholder who is a shareholder of record at the time of giving notice, who shall be entitled to vote at such Election Meeting and who complies with the notice procedures set forth in this Section. (b) Procedure for Nominations by Shareholders. Nominations, other than those made by the Board of Directors, shall be made pursuant to timely notice in writing to the 9 10 Secretary. To be timely, shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 40 days prior to the date of the Election Meeting. Such shareholder's notice shall set forth (i) the name, age, business address and residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of capital stock of the Corporation which are beneficially owned by each such nominee and (iv) such other information concerning each such nominee as would be required, under the rules of the SEC, in a proxy statement soliciting proxies for the election of such nominees. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such nominee. Such notice shall also set forth as to the shareholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder. (c) Meeting Procedures. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 5, and 10 11 if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (d) Substitution of Nominees. In the event that a person is validly designated as a nominee to the Board and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee. (e) Securities Exchange Act of 1934. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder with respect to the matters set forth in this Section. ARTICLE IV MEETINGS OF THE BOARD OF DIRECTORS Section 1. Place. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Kansas. Section 2. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 3. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, if any, 11 12 or by the President on two days' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the Chairman, President or Secretary in like manner and on like notice on the written request of two directors. Section 4. Quorum. At all meetings of the Board of Directors a majority of the entire Board shall be necessary to and constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time until a quorum shall be present. Notice of such adjournment shall be given to any directors who were not present and, unless announced at the meeting, to the other directors. Section 5. Consents. Unless otherwise restricted by the Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or of such committee as the case may be, consent thereto in writing and such written consent is filed with the minutes of the Board or committee. Such consents may be in 12 13 counterpart so that each member will have signed a consent, but all members need not sign the same document. Section 6. Compensation. Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board of Directors an annual fee, plus a fee and expenses for attendance at meetings may be allowed, provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 7. Presiding Officer. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or, if he is not present, by the President or, if he is not present, by a chairman to be chosen at the meeting. The Secretary of the Company, or, if he is not present, an Assistant Secretary of the Company, or, if neither the Secretary nor an Assistant Secretary is present, a secretary to be chosen at the meeting, shall act as secretary of the meeting. ARTICLE V COMMITTEES OF DIRECTORS Section 1. Designation. The Board of Directors, by resolution adopted by a majority of the whole Board, may designate from among its members one or more committees, each consisting of two or more directors, each of which, to the extent 13 14 provided in such resolution, shall have and may exercise the powers of the Board of Directors in the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee. Section 2. Tenure; Reports. Each such committee shall serve at the pleasure of the Board. It shall keep minutes of its meetings and report the same to the Board. ARTICLE VI EXECUTIVE COMMITTEE Section 1. Appointment and Authority. The Board of Directors may by resolution or resolutions passed by a majority of the whole Board create and designate an Executive Committee consisting of the officer who is designated as Chief Executive Officer and two or more other directors of the Company who shall hold office subject to the pleasure of the Board of Directors, and the Board shall have the power at any time to remove any of the members of the Executive Committee and to appoint to the Committee other directors in lieu of the directors so removed. The Chief Executive Officer shall serve as Chairman of the Executive Committee. During the intervals between the meetings 14 15 of the Board of Directors the Executive Committee shall possess and may exercise the powers delegated by the Board of Directors, including the power to authorize the seal of the Company to be affixed to all papers which may require it, to authorize the payment of dividends, to authorize the issuance of stock, to serve as a nominating committee for the Board of Directors and to approve resolutions necessary for the day-to-day operations of the Company; provided, however, that the Executive Committee shall not have power to amend these By-Laws or to fill vacancies on the Board of Directors or to fill vacancies in, or to change the membership of, said Committee. The Executive Committee shall also have and may exercise all the powers of the Board of Directors except as aforesaid whenever a quorum of the Board shall fail to be present at any meeting of the Board. Section 2. Report of Action Taken. All action of the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board, provided that no rights of third parties shall be affected by any such revision or alteration. Regular minutes of the proceedings of the Executive Committee shall be kept in a book provided for that purpose. Section 3. Quorum and Procedure. A majority of the members of the Executive Committee shall be necessary to constitute a quorum, and, in every case, an affirmative vote of a majority of 15 16 the members shall be necessary for the passage of any resolution. It shall fix its own rules of procedure and shall meet as provided by such rules or by resolution of the Board, and it shall also meet at the call of the Chairman or of any two members of the Committee. Should the Executive Committee fail to fix its own rules therefor, the provisions of these By-Laws, pertaining to the calling of meetings and conduct of business by the Board of Directors, shall apply as nearly as may be. Section 4. Consent. Unless otherwise restricted by statute, the Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Executive Committee thereof may be taken without a meeting, if a written consent thereto is signed by each member of the Executive Committee, and such written consent is filed with the minutes of proceedings of the Executive Committee. Such consents may be in counterpart so that each member will have signed a consent but all members need not sign the same document. ARTICLE VII NOTICES Section 1. Form; Delivery. Notices to directors and shareholders shall be in writing and delivered personally or mailed to the directors or shareholders at their addresses appearing on the books of the Corporation. Notice by mail shall 16 17 be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram. Section 2. Waiver. Whenever any notice is required to be given under the provisions of the statutes or of the Articles of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. In addition, any shareholder attending a meeting of shareholders in person or by proxy without protesting at the beginning of the meeting the lack of notice thereof to him, and any director attending a meeting of the Board of Directors without protesting prior to the meeting or at its commencement such lack of notice shall be conclusively deemed to have waived notice of such meeting. ARTICLE VIII OFFICERS Section 1. Executive Officers. The executive officers of the Corporation shall be a President and one or more Vice Presidents, a Secretary, a Treasurer and may include a Chairman of the Board. Section 2. Designation; Term of Office; Removal. All officers shall be elected by the Board of Directors and shall hold office for such term as may be prescribed by the Board or 17 18 until their successors are chosen and qualified or until their resignation is filed in the office of the Secretary, whichever first occurs. Any officer elected by the Board may be removed with or without cause at any time by the Board. Section 3. Authority and Duties. All officers, as between themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in these By-Laws, or, to the extent not so provided, by the Board of Directors. Section 4. Compensation. The compensation of all officers of the Corporation shall be fixed by the Board of Directors and the compensation of agents shall either be so fixed or shall be fixed by officers thereunto duly authorized. Section 5. Vacancies. If an office becomes vacant for any reason, the Board of Directors shall fill such vacancy. Any officer so elected by the Board shall serve only until such time as the unexpired term of his predecessor shall have expired unless re-elected or reappointed by the Board. Section 6. The Chairman of the Board. The Chairman of the Board of Directors, if there be a Chairman, shall preside at all meetings of the shareholders and directors and shall have such other powers and duties as may from time to time be assigned by the Board including designation as Chief Executive Officer if the President is not so designated. 18 19 Section 7. The President. The President shall be the Chief Executive Officer of the Corporation unless the Chairman of the Board is so designated, in which event the President shall be Chief Operating Officer of the Corporation. In the absence of the Chairman of the Board, or if there be no Chairman, he shall preside at all meetings of the shareholders and directors. The Chief Executive Officer, whether the Chairman of the Board or the President, shall be ex officio a member of all standing committees, shall have general and active management and control of the business and affairs of the Corporation subject to the control of the Board of Directors, and shall see that all orders and resolutions of the Board are carried into effect. Section 8. Vice Presidents. The Vice Presidents in the order of their seniority or in any other order determined by the Board, shall in the absence or disability of the President, perform the duties and exercise the powers of the President, and shall generally assist the President and perform such other duties as the Board of Directors or the President shall prescribe. Section 9. The Secretary. The Secretary shall attend all meetings of the Board and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be 19 20 given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall act. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary or Assistant Treasurer. He shall keep in safe custody the certificate books and shareholder records and such other books and records as the Board may direct and shall perform all other duties incident to the office of the Secretary. Section 10. Assistant Secretaries. The Assistant Secretaries, if any, in order of their seniority or in any other order determined by the Board shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Directors or the Secretary shall prescribe. Section 11. The Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the 20 21 Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. He shall establish and execute programs for the provision of the capital required by the Company, including negotiating the procurement of capital and maintaining the required financial arrangements. He shall establish and maintain an adequate market for the Company's securities and, in connection therewith, maintain adequate liaison with investment bankers, financial analysts and shareholders. He shall maintain adequate sources for the Company's current borrowings from commercial banks and other lending institutions. He shall maintain banking arrangements to receive, have custody of and disburse the Company's moneys and securities. He shall invest the Company's funds as required and establish and coordinate policies for investment in pension and other similar trusts. Section 12. Assistant Treasurers. The Assistant Treasurers, if any, in the order of their seniority or in any other order determined by the Board, shall in the absence or disability of the Treasurer, perform the duties and exercise the 21 22 power of the Treasurer and shall perform such other duties as the Board of Directors or the Treasurer shall prescribe. ARTICLE IX CERTIFICATE OF SHARES Section 1. Form; Signature. The certificates for shares of the Corporation shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each certificate shall exhibit the registered holder's name and the number and class of shares, and shall be signed by the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, and shall bear the seal of the Corporation or a facsimile thereof. Where any such certificate is countersigned by a transfer agent or by a registrar other than the Corporation, the signature of any such officer may be a facsimile signature. In case any officer who signed, or whose facsimile signature or signatures were placed on any such certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 2. Lost Certificates. The Board of Directors may direct a new share certificate or certificates to be issued in 22 23 place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 3. Registration of Transfer. Upon surrender to the Corporation or any transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation, or such transfer agent to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Registered Shareholders. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends or other distributions, and to vote as such owner, and to hold liable for calls a person 23 24 registered on its books as the owner of shares, and shall not be bound to recognize any equitable or legal claim to or interest in such share or shares on the part of any other person. Section 5. Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action affecting the interests of shareholders, the Board of Directors may fix, in advance, a record date. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting, nor more than sixty (60) days prior to any other action. In each such case, except as otherwise provided by law, only such persons as shall be shareholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to express such consent or dissent, or to receive payment of such dividend, or such allotment of rights, or otherwise to be recognized as shareholders for the related purpose, notwithstanding any registration of transfer of shares on the books of the Corporation after any such record date so fixed. 24 25 ARTICLE X GENERAL PROVISIONS Section 1. Dividends. Subject to the provisions of the Articles of Incorporation, if any, dividends upon the outstanding shares of the Corporation may be declared by the Board of Directors at any regular or special meeting, pursuant to law and may be paid in cash, in property, or in shares of the Corporation. Section 2. Reserves. Before payment of any dividends, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 3. Annual Statement. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 25 26 Section 4. Instruments Under Seal. All deeds, bonds, mortgages, contracts, and other instruments requiring a seal may be signed in the name of the Corporation by the President or by any other officer authorized to sign such instrument by the President or the Board of Directors. Section 5. Checks. All checks or demands for money and notes or other instrument evidencing indebtedness or obligation of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 6. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January of each year and shall end on the thirty-first day of December following. Section 7. Seal. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Kansas 1927." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE XI AMENDMENTS Section 1. These By-Laws may be altered or repealed at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors if notice of such alteration or repeal be contained in the notice of such special meeting. 26 27 ARTICLE XII SPECIAL MANAGEMENT PROVISIONS Section 1. General. The provisions of this Article XII of the By-Laws have been adopted by the Board of Directors of the Corporation pursuant to that certain Agreement of Merger by and between the Corporation, KNE Acquisition Corporation, a Delaware corporation, and American Oil and Gas Corporation, a Delaware corporation dated March 24, 1994 (the "Merger Agreement"). Capitalized terms used in this Article XII not otherwise defined herein shall have the meaning ascribed to them in the Merger Agreement. The provisions of this Article XII shall be effective from and after the Effective Time notwithstanding any other provisions of these By-Laws to the contrary. In the event of a conflict between the provisions of this Article XII and other provisions of the By-Laws, the provisions of this Article XII shall control. Section 2. Cabot Director. For so long as Cabot Corporation shall continue to own beneficially (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission) 10% or more of the issued and outstanding voting stock of the Corporation, Cabot Corporation shall have the right to designate one person to serve as an advisory director of the Corporation. In the event beneficial ownership of Cabot 27 28 Corporation of the issued and outstanding voting stock of the Corporation falls below 10% but constitutes more than 5%, the Board of Directors shall appoint the Cabot Corporation advisory director as a full director, to serve the then remaining term of a Class II director. For so long as Cabot Corporation continues to own beneficially less than 10% but more than 5% of the issued and outstanding voting stock of the Corporation, the Board of Directors shall nominate a Cabot Corporation designee (provided that such nominee is otherwise qualified as required by these By-Laws) for election by the Corporation's stockholders as a director. The Corporation shall at all times during which Cabot Corporation shall beneficially own in excess 10% of the issued and outstanding voting stock of the Corporation, maintain a vacancy on its Board of Directors for such Cabot designee. Section 3. Vacancies in Certain Offices. Any vacancy arising following the Effective Time and prior to the Corporation's Annual Meeting of Stockholders in 1996, in the offices of the Chairman of the Board, Vice-Chairman of the Board, President, Chief Executive Officer or Chief Operating Officer, or on the Management Committee or the Chairman of the Management Committee, shall be filled by the Board of Directors upon recommendation by a Special Nominating Committee of the Board of Directors. The Board of Directors shall by majority vote establish a Special Nominating Committee in the event of a 28 29 vacancy in any of the foregoing positions. The Special Nominating Committee shall consist of four directors, two of whom shall be designated by the Board of Directors from the directors of the Corporation who served as a director prior to the Effective Time, and two of whom shall be designated by the directors designated by American Oil and Gas Corporation in the Merger Agreement. Section 4. Continuation of Retirement Policy. The Corporation shall continue its present retirement policy that officers of the Corporation (including the Chairman of the Board, Vice-Chairman of the Board, President and Chief Executive Officer or Chief Operating Officer) shall be ineligible and cease to serve as an officer of the Corporation as of the first of the month coincident with or next following his or her 65th birthday. Section 5. Super-Majority Vote. For purposes of this Article XII, the term "Super-Majority Vote" shall mean the affirmative vote of at least 12 of a 14-member Board of Directors; at least 11 of a 13-member Board of Directors; at least 10 of a 12-member Board of Directors; at least 9 of an 11-member Board of Directors; or in all other cases, the affirmative vote of a number of directors equal to at least 85% of the total number of directors. A Super-Majority Vote shall be required for the following actions to be taken by the Board of Directors; (i) amendment, modification or revocation of any provision of this 29 30 Article XII; (ii) amendment, modification or revocation of the current retirement policy of the Corporation; and (iii) any increase in the number of members to serve on the Board of Directors; provided that, no Super-Majority Vote shall be required for any such action taken by the Board of Directors from and after the date of the annual stockholders meeting for 1997. I hereby certify that the foregoing are the By-Laws of K N Energy, Inc. as the same were adopted at the meeting of the Board of Directors on May 20, 1975, and subsequently amended at meetings of the Board of Directors on November 20, 1975, November 8, 1978, August 5, 1983, November 11, 1983, November 16, 1984, January 9, 1988, March 24, 1989, August 10, 1989, January 20, 1991, November 10, 1993, June 24, 1994, July 13, 1994, April 11, 1996 and are still in force and effect on this 20th day of August, 1996. --------------------------------------- Martha B. Wyrsch Secretary 30 EX-10.U 3 CHANGE OF CONTROL SEVERANCE AGREEMENT 1 EXHIBIT 10(u) CHANGE OF CONTROL SEVERANCE AGREEMENT AGREEMENT between K N ENERGY, INC. , a Kansas corporation (the "COMPANY"), and ________________________ (EXECUTIVE"), W I T N E S S E T H : WHEREAS, the Company desires to retain certain key employee personnel and, accordingly, the Board of Directors of the Company (the "BOARD") has approved the Company entering into a severance agreement with Executive in order to encourage his continued service to the Company; and WHEREAS, Executive is prepared to commit such services in return for specific arrangements with respect to severance compensation and other benefits; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the Company and Executive agree as follows: 1. DEFINITIONS. (a) "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company. (b) "CHANGE IN DUTIES" shall mean the occurrence, within two years after the date upon which a Change in Control occurs, of any one or more of the following: (i) A significant reduction in the nature, scope of authority or duties of Executive from those applicable to him immediately prior to the date on which a Change in Control occurs; (ii) A substantial reduction in Executive's annual base salary or bonus opportunity under any applicable bonus or incentive compensation plan from that provided to him immediately prior to the date on which a Change in Control occurs; (iii) Receipt of employee benefits (including but not limited to medical, dental, life insurance, accidental, death, and dismemberment, and long-term disability plans) and perquisites by Executive that are materially inconsistent with the employee benefits and perquisites provided by the Company to executives with comparable duties; or (iv) A substantial change in the location of Executive's principal place of employment by the Company by more than 50 miles from the location where he was principally employed immediately prior to the date on which a Change in Control occurs. (c) "CHANGE IN CONTROL" means the occurrence of one or more of the following events: 2 (i) any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years (not including any period prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in (i), (iii) or (iv) of this Paragraph) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (b) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason other than normal retirement, death or disability to constitute at least a majority thereof; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other person, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities for the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger in which no "person" (as defined above) acquires more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPANY'S INDUSTRY" shall mean (i) the energy industry, including without limitation the acquisition, development, transportation, distribution, and provision of electric and natural gas sources and services; and (ii) any other nature or type of business or industry in which, at the time of Executive=s termination, the Company is engaged or involved or has plans to engage or become involved within one year thereafter. (f) "COMPENSATION" shall mean the greater of: (i) Executive's base salary immediately prior to the date on which a Change in Control occurs plus the amount of any cash incentive bonus to be paid to Executive pursuant to the Company's annual incentive plan based on the maximum of the -2- 3 current year's target; or (ii) Executive's base salary at the time of his Involuntary Termination plus the amount of any cash incentive bonus to be paid to Executive pursuant to the Company's annual incentive plan based on the maximum of the current year=s target. (g) "COMPENSATION COMMITTEE" shall mean the Compensation Committee of the Board of Directors. (h) "CONFIDENTIAL INFORMATION" shall include all information relating to (i) the Company's Customers, Prospective Customers, providers, suppliers, and other business affiliates; (ii) the Company's policies, practices, operating information, financial information, business plans, and market approaches; and (iii) other information, techniques or approaches used by the Company and not generally known in the Company's Industry. The Company believes that some or all of this information constitutes trade secrets; however, the "Confidential Information" covered by the Restrictive Covenants set forth in Paragraph 6 hereof need not satisfy the legal definition or requirements of a "trade secret" to be protected from disclosure thereunder. (i) "CUSTOMER" shall include any person or entity to whom electricity, natural gas, or services are sold by the Company, and any person or entity with whom the Company has established strategic marketing, services or other alliances. (j) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (k) "INVOLUNTARY TERMINATION" shall mean any termination of Executive's employment with the Company which: (i) does not result from a resignation by Executive (other than a resignation pursuant to clause (ii) of this subparagraph (k)); or (ii) results from a resignation by Executive on or before the date which is sixty days after the date upon which Executive receives notice of a Change in Duties; provided, however, the term "INVOLUNTARY TERMINATION" shall not include a Termination for Cause or any termination as a result of death, disability under circumstances entitling him to benefits under the Company's long-term disability plan, or Retirement. (l) "PROSPECTIVE CUSTOMER" shall include any person or entity toward whom the Company has directed efforts to establish a Customer relationship or strategic alliance and with whom the Company has a reasonable expectation of establishing such a relationship or alliance. (m) "RETIREMENT" shall mean Executive's resignation on or after the date he reaches age sixty-five. -3- 4 (n) "SEVERANCE AMOUNT" shall mean an amount equal to [one (1)/two (2)/three (3)] times Executive's Compensation. (o) "TERMINATION FOR CAUSE" shall mean termination of Executive's employment by the Company (or its subsidiaries) by reason of Executive's (i) gross negligence in the performance of his duties, (ii) willful failure to perform his duties or (iii) willful engagement in conduct which is injurious to the Company or its subsidiaries (monetarily or otherwise). (p) "WELFARE BENEFIT COVERAGES" shall mean the medical, dental, life insurance and accidental death and dismemberment coverages provided by the Company to its active employees. 2. SERVICES. Executive agrees that he will render services to the Company (as well as any subsidiary thereof or successor thereto) during the period of his employment to the best of his ability and in a prudent and businesslike manner and that he will devote substantially the same time, efforts and dedication to his duties as heretofore devoted. 3. SEVERANCE BENEFITS. If Executive's employment by the Company or any subsidiary thereof or successor thereto shall be subject to an Involuntary Termination which occurs within two years after the date upon which a Change in Control occurs, then Executive shall be entitled to receive, as additional compensation for services rendered to the Company (including its subsidiaries), the following severance benefits: (a) A lump sum cash payment in an amount equal to Executive's Severance Amount. (b) Executive shall be entitled to continue the Welfare Benefit Coverages for himself and, where applicable, his eligible dependents following his Involuntary Termination for up to [twelve (12)/twenty-four (24)/thirty-six (36)] months. Such benefit rights shall apply only to those Welfare Benefit Coverages which the Company has in effect from time to time for active employees. Welfare Benefit Coverage(s) shall immediately end upon Executive's obtainment of new employment and eligibility for reasonably comparable Welfare Benefit Coverage(s) (with Executive being obligated hereunder to promptly report such eligibility to the Company). Nothing herein shall be deemed to adversely affect in any way the additional rights, after consideration of this extension period, of Executive and his eligible dependents to health care continuation coverage as required pursuant to Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended. (c) The severance payments under this Agreement shall be paid to an Executive on or before the 10th business day after the last day of Executive's employment with the Company. Any severance benefits paid pursuant to this Paragraph will be deemed to be a severance payment and not compensation for purposes of determining benefits under the Company's qualified plans and shall be subject to any required tax withholding. (d) Notwithstanding anything to the contrary in this or any other agreement, upon a Change in Control, Executive's stock options or restricted stock granted and outstanding -4- 5 under all K N Energy, Inc. stock plans shall become immediately exercisable and all restrictions thereon shall be removed. 4. INTEREST ON LATE BENEFIT PAYMENTS. If any payment provided for in Paragraph 3(a) hereof is not made when due, the Company shall pay to Executive interest on the amount payable from the date that such payment should have been made under such paragraph until such payment is made, which interest shall be calculated at the prime or base rate of interest announced by Citibank, N.A. (or any successor thereto) at its principal office in New York, New York and shall change when and as any such change in such prime or base rate shall be announced by such bank. 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. Notwithstanding anything to the contrary in this Agreement, in the event that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional payment (a "Gross-up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed on any Gross-up Payment, Executive retains an amount of the Gross-up Payment equal to the Excise Tax imposed upon the Payments. The Company and Executive shall make an initial determination as to whether a Gross-up Payment is required and the amount of any such Gross-up Payment. Executive shall notify the Company immediately in writing of any claim by the Internal Revenue Service which, if successful, would require the Company to make a Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially determined by the Company and Executive) within five days of the receipt of such claim. The Company shall notify Executive in writing at least five days prior to the due date of any response required with respect to such claim if it plans to contest the claim. If the Company decides to contest such claim, Executive shall cooperate fully with the Company in such action; provided, however, the Company shall bear and pay directly or indirectly all costs and expenses (including additional interest and penalties) incurred in connection with such action and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of the Company's action. If, as a result of the Company's action with respect to a claim, Executive receives a refund of any amount paid by the Company with respect to such claim, Executive shall promptly pay such refund to the Company. If the Company fails to timely notify Executive whether it will contest such claim or the Company determines not to contest such claim, then the Company shall immediately pay to Executive the portion of such claim, if any, which it has not previously paid to Executive. 6. RESTRICTIVE COVENANTS. Executive is a member of the Company's executive and management personnel whose duties include the formulation, administration, and execution of Company policies, and high-level contact with and responsibility for the Company's Customers and Prospective Customers. In addition, Executive is provided with extensive information regarding the Company's policies, practices, operating information, financial information, business plans, market approaches, and Customers. The Noncompetition and Nondisclosure Covenants -5- 6 contained in this Paragraph 6 are each reasonable and necessary for the protection of the Company's legitimate business interests, relations with Customers and Prospective Customers, Confidential Information and trade secrets in the event of Executive's separation from employment. These Restrictive Covenants constitute material consideration to the Company for the rights and benefits provided to Executive in this Agreement; and the availability of such rights and benefits constitutes good and sufficient consideration to Executive for his agreement to these Restrictive Covenants, regardless of whether such rights are ever exercised or such benefits are ever realized by Executive. (a) NONCOMPETITION COVENANT. During the time that Executive is employed by the Company and for a period of one (1) year thereafter, and within the states of Colorado, Kansas, Missouri, Nebraska, Oklahoma, Texas, Utah and Wyoming, Executive shall not, directly or indirectly, individually or as an employee, officer, director, independent contractor, consultant, or agent, or as a venturer, partner, member, shareholder, or other beneficial holder of any interest in any sole proprietorship, joint venture, partnership, limited liability company, corporation, or other entity or business organization: (i) engage in or be involved in any way in the Company's Industry; or (ii) solicit the business of or seek to enter into a business relationship with any Customer or Prospective Customer of the Company in areas of the Company's Industry. However, this Noncompetition Covenant shall not apply or be enforceable if Executive is terminated by the Company without cause (as "cause" is defined in Paragraph 1(o) hereof) and if there has not been a Change in Duties for Executive. (b) NONDISCLOSURE COVENANT. During the time that Executive is employed by the Company and for a period of two years thereafter (regardless of the reason or cause for termination), Executive shall not, directly or indirectly, (i) use or apply any Confidential Information, alone or with any other person or entity; or (ii) disclose or provide any Confidential Information to any person or entity not authorized by the Company to receive such Confidential Information. (c) REMEDIES. In the event of the breach or threatened breach of any provision of these Restrictive Covenants by Executive, the Company shall be entitled to all appropriate legal and equitable relief, including without limitation temporary restraining orders, preliminary and permanent injunctions, and monetary damages. (d) SURVIVAL AND INDEPENDENCE. These Restrictive Covenants shall be construed as independent of any other agreements between the parties and, except as provided in Paragraph 6(a) hereof, shall survive the termination of employment of Executive for any reason. The existence of any claim or cause of action of Executive against the Company or its successors or assigns, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such Covenants. (e) SEVERABILITY. If any provision of these Restrictive Covenants as applied to any party or to any circumstances is adjudged by a court to be unreasonable, invalid or unenforceable as written, the parties agree that the court making such a determination shall have the power to reduce or alter the duration, area, nature or scope of the subject provision, and in its reduced or altered form such provision will then be enforceable and will be enforced. -6- 7 7. GENERAL. This Agreement shall supersede and replace any prior agreement between the Company and Executive providing for severance benefits in the event of a change in control of the Company. (a) TERM. The effective date of this Agreement is October 18, 1996. The initial term of this Agreement shall be the period beginning on said effective date and ending on the one-year anniversary of said effective date. Within sixty days after the expiration of the initial term hereof and within sixty days after each successive one-year period of time thereafter that this Agreement is in effect, the Company shall have the right to review this Agreement, and in its sole discretion either continue and extend this Agreement, terminate this Agreement, and/or offer Executive a different agreement. The Compensation Committee (excluding any member of the Compensation Committee who is covered by this Agreement or by a similar agreement with the Company) will vote on whether to so extend, terminate, and/or offer Executive a different agreement and will notify Executive of such action within sixty days following the expiration of each one-year period of time that this Agreement is in effect. This Agreement shall remain in effect until so terminated and/or modified by the Company. Failure of the Compensation Committee to take any action within sixty days following the expiration of each one-year period of time that this Agreement is in effect shall be considered as an extension of this Agreement for an additional one-year period of time. Notwithstanding anything to the contrary contained in this "SUNSET PROVISION," it is agreed that if a Change in Control occurs while this Agreement is in effect, then this Agreement shall not be subject to termination or modification under this "SUNSET PROVISION," and shall remain in force for a period of two years after such Change in Control, and if within said two years the contingency factors occur which would entitle Executive to the benefits as provided herein, this Agreement shall remain in effect in accordance with its terms. If, within such two years after a Change in Control, the contingency factors that would entitle Executive to said benefits do not occur, thereupon this one-year "SUNSET PROVISION" shall again be applicable with the sixty-day time period for Compensation Committee action to thereafter commence at the expiration of said two years after such Change in Control and on each one-year anniversary date thereafter. (b) INDEMNIFICATION. If Executive shall obtain any money judgment or otherwise prevail with respect to any litigation brought by Executive or the Company to enforce or interpret any provision contained herein, the Company, to the fullest extent permitted by applicable law, hereby indemnifies Executive for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agrees (i) to pay in full all such fees and disbursements and (ii) to pay prejudgment interest on any money judgment obtained by Executive from the earliest date that payment to him should have been made under this Agreement until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Citibank, N.A. (or any successor thereto) at its principal office in New York, New York and shall change when and as any such change in such prime or base rate shall be announced by such bank. (c) PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation to pay (or cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any cir- -7- 8 cumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company (including its subsidiaries) may have against him or anyone else. All amounts payable by the Company (including its subsidiaries hereunder) shall be paid without notice or demand. Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and, except as provided in Paragraph 3(b) hereof, the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make (or cause to be made) the payments and arrangements required to be made under this Agreement. Notwithstanding anything to the contrary in this Agreement, in the event the Company should acquire knowledge of conduct of Executive that would be defined as "cause" in Paragraph 1(o) hereof after Executive's termination of employment, but before any severance payments are paid hereunder, the Company shall have the right to withhold payment of all or a portion of such severance payments. (d) SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company, by merger or otherwise. This Agreement shall also be binding upon and inure to the benefit of Executive and his estate. If Executive shall die prior to full payment of amounts accrued pursuant to this Agreement, such amounts shall be payable pursuant to the terms of this Agreement to his estate. (e) SEVERABILITY. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction by reason of 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. (f) NON-ALIENATION. Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution. (g) NOTICES. Any notices or other communications provided for in this Agreement shall be sufficient if in writing. In the case of Executive, such notices or communications shall be effectively delivered if hand delivered to Executive at his principal place of employment or if sent by registered or certified mail to Executive at the last address he has filed with the Company. In the case of the Company, such notices or communications shall be effectively delivered if sent by registered or certified mail to the Company at its principal executive offices. (h) CONTROLLING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Colorado. (i) RELEASE. As a condition to the receipt of any benefit under Paragraph 3 hereof, Executive shall first execute a release, in the form established by the Company, releasing the Company, its shareholders, partners, officers, directors, employees and agents from any and all claims and from any and all causes of action of any kind or character, including but not limited to all claims or causes of action arising out of Executive's employment with the Company or the termination of such employment. -8- 9 (j) FULL SETTLEMENT. If Executive is entitled to and receives the benefits provided hereunder, performance of the obligations of the Company hereunder will constitute full settlement of all claims the Executive might or could otherwise assert against the Company on account of his employment or termination of employment. (k) UNFUNDED OBLIGATION. The obligation to pay amounts under this Agreement is an unfunded obligation of the Company (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 the Company (including its subsidiaries). (l) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (a) the right of the Company (or its subsidiaries) to discharge Executive at will or (b) the terms and conditions of any other agreement between the Company and Executive except as provided herein. (m) 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. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the ______ day of ________________, 1996. "EXECUTIVE" --------------------------------------- "COMPANY" K N ENERGY, INC. By: ----------------------------------- Name: ------------------------------ Title: ----------------------------- -9- EX-10.V 4 INCENTIVE STOCK OPTION AGREEMENT 1 EXHIBIT 10(v) INCENTIVE STOCK OPTION AGREEMENT AGREEMENT made this 19th day of August, 1996, between K N ENERGY, INC., a Kansas corporation (the "Company"), and ______________ ("Employee"). To carry out the purposes of the 1994 K N ENERGY, INC. LONG-TERM INCENTIVE PLAN (the "Plan"), by affording Employee the opportunity to purchase shares of the common stock of the Company ("Stock"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree as follows: 1. GRANT OF OPTION. The Company hereby irrevocably grants to Employee the right and option ("Option") to purchase all or any part of an aggregate of ______ shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. This Option is intended to constitute an incentive stock option, within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $________ per share, which has been determined to be not less than the fair market value of the Stock at the date of grant of this Option. For all purposes of this Agreement, fair market value of Stock shall be determined in accordance with the provisions of the Plan. 3. EXERCISE OF OPTION. Subject to the remaining provisions of this Paragraph and the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Chief Executive Officer at any time and from time to time after the date of grant hereof. The aggregate number of shares offered by this Option shall be divided into equal [one-third] [one-fifth] increments to correspond with each year of the [three-] [five-] year period following the grant hereof (the "Increments") and a portion of the shares in each Increment shall be exercisable based on the Company's compounded annual increase in earnings per share for the corresponding year in accordance with the following schedule: -1- 2
COMPOUNDED ANNUAL INCREASE PORTION OF SHARES IN INCREMENT IN EARNINGS PER SHARE THAT MAY BE PURCHASED -------------------------------------------------------------- 15% or more 100% 10% but less than 15% 50% less than 10% 0%
Notwithstanding anything in this Agreement to the contrary, this Option shall be fully exercisable with respect to the aggregate number of shares offered by the Option as of the earlier of: (a) the occurrence of a Change in Control of the Company (as such term is defined in the Plan) or (b) nine years and six months after the date of grant hereof. This Option may be exercised only while Employee remains an employee of the Company and will terminate and cease to be exercisable upon Employee's termination of employment with the Company, except that: 4. If Employee's employment with the Company terminates by reason of disability (within the meaning of section 22(e)(3) of the Code), this Option may be exercised in full by Employee (or Employee's estate or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) at any time during the period of one year following such termination. 5. If Employee dies while in the employ of the Company, Employee's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee, may exercise this Option in full at any time during the period of one year following the date of Employee's death. 6. If Employee's employment with the Company terminates for any reason other than as described in (a) or (b) above, this Option may be exercised by Employee at any time during the period of three months following such termination, or by Employee's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) during a period of one year following Employee's death if Employee dies during such three-month period, but in each case only as to the number of shares Employee was entitled to purchase hereunder as of the date Employee's employment so terminates unless such termination was by reason of normal retirement at or after age sixty-five in which case this Option shall be exercisable in full. This Option shall not be exercisable in any event after the expiration of ten years from the date of grant hereof. Except as provided in Paragraph 4, the purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (a) in cash (including check, bank draft or money order payable to the order of the Company), (b) by delivering to the Company shares of Stock having a fair market value equal to the purchase price, (c) any combination of cash or Stock or (d) any other arrangement satisfactory to the Committee. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the purchase price thereof; rather, Employee shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Employee, Employee (or the person permitted to exercise this Option in the event of Employee's death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option. -2- 3 7. WITHHOLDING OF TAX. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Employee for federal, state, or local income tax purposes, Employee shall pay to the Company, or make arrangements satisfactory to the Committee regarding payment of any federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Committee may permit payment of such taxes to be made through the tender of cash or Stock, the withholding of Stock out of the shares distributable upon the exercise or any other arrangement satisfactory to the Committee. The Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Employee. 8. STATUS OF STOCK. The Company has registered for issuance under the Securities Act of 1933, as amended (the "Act") the shares of Stock acquirable upon exercise of this Option, and intends to keep such registration effective throughout the period this Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use its best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Employee (or the person permitted to exercise this Option in the event of Employee's death or incapacity), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws. Employee agrees that the shares of Stock which Employee may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. Employee also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities laws and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option. 9. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company, or a corporation or a parent or subsidiary of such corporation assuming or substituting a new option for this Option. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee and its determination shall be final. 10. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee. -3- 4 11. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Colorado. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all effective as of the day and year first above written. K N ENERGY, INC. BY: ----------------------------------- -------------------------------------- EMPLOYEE -4- EX-10.W 5 RESTRICTED STOCK AGREEMENT 1 EXHIBIT 10(w) RESTRICTED STOCK AGREEMENT AGREEMENT made this 19th day of August, 1996 between K N ENERGY, INC., a Kansas corporation (the "Company"), and ________________________________ ("Employee"). 1. AWARD. (a) SHARES. Pursuant to the K N Energy, Inc. 1994 Long-Term Incentive Plan (the "Plan"), ____________ shares (the "Restricted Shares") of the Company's common stock, par value $5.00 per share ("Stock"), shall be issued as hereinafter provided in Employee's name subject to certain restrictions thereon. (b) ISSUANCE OF RESTRICTED SHARES. The Restricted Shares shall be issued upon acceptance hereof by Employee and upon satisfaction of the conditions of this Agreement. (c) PLAN INCORPORATED. Employee acknowledges receipt of a copy of the Plan, and agrees that this award of Restricted Shares shall be subject to all of the terms and conditions set forth in the Plan, including future amendments thereto, if any, pursuant to the terms thereof, which Plan is incorporated herein by reference as a part of this Agreement. 2. RESTRICTED SHARES. Employee hereby accepts the Restricted Shares when issued and agrees with respect thereto as follows: (a) FORFEITURE RESTRICTIONS. The Restricted Shares may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of to the extent then subject to the Forfeiture Restrictions (as hereinafter defined). In the event of termination of Employee's employment with the Company prior to the lapse of the Forfeiture Restrictions as provided in (b) below, Employee shall, for no consideration, forfeit to the Company all Restricted Shares to the extent then subject to the Forfeiture Restrictions. The prohibition against transfer and the obligation to forfeit and surrender Restricted Shares to the Company upon termination of employment are herein referred to as "Forfeiture Restrictions." The Forfeiture Restrictions shall be binding upon and enforceable against any transferee of Restricted Shares. (b) LAPSE OF FORFEITURE RESTRICTIONS. The Restricted Shares shall be divided into equal [one-third] [one-fifth] increments to correspond with each year of the [three-] [five-] year period following the date of grant hereof (the "Increments") and the Forfeiture Restrictions shall lapse as to a portion of the Restricted Shares in each Increment based on the Company's compounded annual increase in earnings per share for the corresponding year in accordance with the following schedule: 2
COMPOUNDED ANNUAL INCREASE PORTION OF INCREMENT WITH IN EARNINGS PER SHARE LAPSE OF FORFEITURE RESTRICTIONS --------------------- -------------------------------- 15% or more 100% 10% but less than 15% 50% less than 10% 0%
Notwithstanding the foregoing, the Forfeiture Restrictions shall lapse as to all of the Restricted Shares on the earlier of (i) the occurrence of a Change in Control (as such term is defined in the Plan), (ii) the date Employee's employment with the Company is terminated by reason of death, disability (as determined by the Committee) or normal retirement on or after age sixty-five, or (iii) the tenth anniversary of the grant hereof. (c) CERTIFICATES. One or more certificates evidencing the Restricted Shares shall be issued by the Company in Employee's name, or at the option of the Company, in the name of a nominee of the Company, pursuant to which Employee shall have voting rights and shall be entitled to receive all dividends unless and until the Restricted Shares are forfeited pursuant to the provisions of this Agreement. Each certificate shall bear the following legend: The shares evidenced by this certificate have been issued pursuant to an agreement dated August 19, 1996, a copy of which is attached hereto and incorporated herein, between the Company and the registered holder of the shares, and are subject to forfeiture to the Company under certain circumstances described in such agreement. The sale, assignment, pledge or other transfer of the shares of stock evidenced by this certificate is prohibited under the terms and conditions of such agreement, and such shares may not be sold, assigned, pledged or otherwise transferred except as provided in such agreement. The Company may cause the certificate or certificates to be delivered upon issuance to the Secretary of the Company or to such other depository as may be designated by the Committee as a depository for safekeeping until the forfeiture occurs or the Forfeiture Restrictions lapse pursuant to the terms of the Plan and this award. Upon request of the Committee, Employee shall deliver to the Company a stock power, endorsed in blank, relating to the Restricted Shares then subject to the Forfeiture Restrictions. Upon the lapse of the Forfeiture Restrictions without forfeiture, the Company shall cause a new certificate or certificates to be issued without legend in the name of Employee in exchange for the certificate evidencing the Restricted Shares. Notwithstanding any other provisions of this Agreement, the issuance or delivery of any shares of Stock (whether subject to restrictions or unrestricted) may be postponed for such period as may be required to comply with applicable requirements of any national securities exchange or any requirements under any law or regulation applicable to the issuance or delivery of such shares. The Company shall not be obligated to issue or deliver any shares of Stock if the issuance or delivery thereof shall constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange. 3. WITHHOLDING OF TAX. To the extent that the receipt of the Restricted Shares or the lapse of any Forfeiture Restrictions results in income to Employee for federal, state, or local income -2- 3 tax purposes, Employee shall pay to the Company, or make arrangements satisfactory to the Committee regarding payment of any federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Committee may permit payment of such taxes to be made through the tender of cash or Stock, the withholding of Stock out of shares otherwise distributable or any other arrangement satisfactory to the Committee. The Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Employee. 4. STATUS OF STOCK. Employee agrees that the Restricted Shares will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable federal or state securities laws. Employee also agrees (i) that the certificates representing the Restricted Shares may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the Restricted Shares on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the Restricted Shares. 5. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of either the Company, any successor corporation or a parent or subsidiary corporation (as defined in section 424 of the Code) of the Company or any successor corporation. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, and its determination shall be final. 6. COMMITTEE'S POWERS. No provision contained in this Agreement shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Committee pursuant to the terms of the Plan, including, without limitation, the Committee's rights to make certain determinations and elections with respect to the Restricted Shares. 7. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee. 8. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Colorado. -3- 4 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and Employee has executed this Agreement, all effective as of the date first above written. K N ENERGY, INC. By: ------------------------------ Name: ---------------------- ---------------------- Title: --------------------- --------------------------------- EMPLOYEE -4- EX-10.X 6 EMPLOYMENT AGREEMENT -- SMITH 1 EXHIBIT 10(x) EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, is made and entered into this 21st day of March, 1996, by and between K N Energy, Inc., a Kansas corporation (the "Company") and Murray R. Smith ("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: -1- 2 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. 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 K N Energy Services, Inc., a wholly owned subsidiary of the Company, and shall use his best efforts to perform such duties as are necessary to carry out Executive's responsibilities as Senior Vice President - Communications and Marketing for 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 Operating Officer of K N Energy, Services, Inc. Executive shall have responsibility, and commensurate authority for development of communications tools, strategies and services and marketing of products and services in various business segments of the Company including retail consumer and total energy management. Executive shall also have such communications, marketing and other responsibilities as requested by the President and Chief Operating Officer of K N Energy Services, Inc. -2- 3 Section 3. Term of Employment. The period of Executive's employment under this Agreement shall commence as of April 1, 1996. It shall continue, subject to the other provisions of this Agreement, until April 1, 1998. 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 $160,000. 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 on November 1, 1996, and thereafter at the same time and in the same manner as other officers of the Company 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, retirement benefits, savings plans, 401(k) plans, 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. -3- 4 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 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 in an amount equal to 20% of Executive's Base Salary, pursuant to the Company's Relocation Policy. In addition, Executive shall receive a housing allowance and other relocation benefits in accordance with the Company's relocation policies for executive management employees, specifically including all costs associated with the move of the Executive's personal and household belongings, temporary housing allowance for a period not to exceed three months, all title, legal, appraisal, survey and related costs relating to the sale at Executive's current residence and purchase of a new residence, reimbursement of the cost of Executive and his spouse making not more than two house hunting trips and the cost of transportation and lodging for the Executive and his family members during the actual time of the move. Each of the foregoing amounts, including the relocation allowance, will be "grossed up" assuming a combined state and federal tax rate of 35%. To the extent -4- 5 Executive is unable to sell his existing residence in Alpharetta, Georgia prior to April 1, 1996, the Company shall purchase or cause to be purchased, for cash such residence 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 a date to be agreed to between the parties not later than May 31, 1996. Following completion of Executive's move, Executive will not be required to relocate without Executive's consent. 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 III Benefits with a midpoint base salary comparison of $200,000, all subject to approval of the Compensation Committee of the Board of Directors. During the first year of this Agreement, Executive shall be paid at the maximum rate allowable under Level III of the Executive Incentive Plan and such payment shall not be pro- rated for service in 1996. The Executive Incentive Plan Level III Benefits provisions shall not be modified as they apply to Executive in any manner materially detrimental to Executive except for modifications that apply similarly to all executives of the Company who participate in the Company's Executive Incentive Plan based on Level III Benefits. -5- 6 Section 10. Restricted Stock. On April 1, 1996 Executive shall be issued 3,000 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 1,000 shares on April 1, 1996 and 1,000 shares each April 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. Withholding taxes on compensation earned through the vesting of the 3,000 shares shall be paid by the Company and held as a receivable payable to Executive, on a full recourse basis. The taxes will be invoiced to Executive when the shares are distributed. Section 11. Stock Options. On April 1, 1996 the Company shall grant to Executive 10,000 Incentive Stock Options pursuant to the Company's Long Term Incentive Compensation Plan. Vesting will accrue at the rate of 2,000 shares on April 1, 1996 and 2,000 shares each April 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. The option price shall be the fair market value of the stock on the date such options are granted. Section 12. Signing Bonus. The Company shall award to Executive a signing bonus of $27,000 payable on April 1, 1996. -6- 7 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, provided, however, that if the failure of the Company to renew this Agreement pursuant to Section 14(b) occurs as a result of a change in control of the Company, as that term is defined in the Company's Articles of Incorporation, such failure shall be deemed a termination for purposes of the Key Employee Severance Plan. -7- 8 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) Mutual. Either party may terminate this Agreement effective at the end of the initial two-year term by written notice to the other delivered on or before the date two weeks prior to the end of such initial 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, the Company shall have no further obligations to Executive, except as set forth in Section 14(e) hereof. In the event Executive materially -8- 9 breaches any of his obligations under Section 15 hereof the Company shall be entitled to discontinue such benefits. (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 -9- 10 Company or; (c) interfere with the contractual relationship between the Company and any customer of the 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 -10- 11 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 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. -11- 12 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. 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, -12- 13 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 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. -13- 14 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. 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 -14- 15 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 ---------------------------------- Morton C. Aaronson Vice President EXECUTIVE ------------------------------------ Murray R. Smith -15- EX-27 7 FINANCIAL DATA SCHEDULE
5 0000054502 K N ENERGY, INC. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 17,005 0 298,072 0 49,603 454,824 1,547,622 518,451 1,629,720 498,616 423,676 0 7,000 151,479 368,315 1,629,720 1,443,174 1,443,174 1,602,062 1,308,373 0 0 35,933 99,716 35,897 63,819 0 0 0 63,819 2.14 0
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