<PAGE>   1

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                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

================================================================================
<PAGE>   2
                          

                       K N ENERGY, INC. AND SUBSIDIARIES
                 Documents Incorporated by Reference and Index

<TABLE>
<CAPTION>
                                                                                                               Page Number
                                                                                                               -----------
                                                                                                        1997 Proxy        Included
                                                                                                        Statement          Herein 
                                                                                                        ----------        ------- 
<S>           <C>                   <C>                                                                  <C>                <C>   
                                    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   
</TABLE>   



     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


<PAGE>   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
<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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:


<TABLE>
<CAPTION>
<S>                  <C>       <C>     <C>          <C>
Served By            Colorado  Kansas     Nebraska  Wyoming
-------------------  --------  ------  -----------  -------
Affiliated Entities   12        48         178         9
Other Utilities        5        10          27         -
</TABLE>


     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


<PAGE>   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


<PAGE>   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
<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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
<PAGE>   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


<PAGE>   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.


<TABLE>
<CAPTION>
                                 1996                          1995
                                 ----                          ----
 <S>                  <C>                            <C>
 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
</TABLE>



                                       20
<PAGE>   21
ITEM 6:      SELECTED FINANCIAL DATA

FIVE-YEAR REVIEW
K N ENERGY, INC. AND SUBSIDIARIES

Selected Financial Data (In Thousands Except Per Share Amounts)

<TABLE>
<CAPTION>
                                         1996                  1995                      1994                  
                                         ----                  ----                      ----                  
<S>                                  <C>                    <C>                       <C>                      
                                                                                                               
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               
                                     ==========             ==========                ==========               
                                                                                                               
<CAPTION>                                                                                                      
                                        1993                    1992                                           
                                        ----                    ----                                           
<S>                                  <C>                    <C>                                                
                                                                                                               
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                                         
                                     ==========             ==========                                         
</TABLE>





                                      21
<PAGE>   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.


<TABLE>
<CAPTION>
                                               1996   1995   1994
                                               -----  -----  -----
              <S>                              <C>    <C>    <C>
              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%
</TABLE>


     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


<PAGE>   23


     Segment operating revenues, costs and expenses and volumetric data cited
herein are before intersegment eliminations; dollar amounts are in millions.


<TABLE>
<CAPTION>
     GATHERING, PROCESSING AND MARKETING SERVICES     1996    1995    1994
                                                   --------  ------  ------
     <S>                                           <C>       <C>     <C>
     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
                                                   ========  ======  ======
</TABLE>


     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


<PAGE>   24



<TABLE>
<CAPTION>
     INTERSTATE TRANSPORTATION AND STORAGE SERVICES   1996    1995    1994
                                                     ------  ------  ------
     <S>                                             <C>     <C>     <C>
     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
                                                     ======  ======  ======
</TABLE>


     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.


<TABLE>
<CAPTION>
     RETAIL NATURAL GAS SERVICES               1996    1995    1994
                                              ------  ------  ------
     <S>                                      <C>     <C>     <C>
     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
                                              ======  ======  ======
</TABLE>


     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


<PAGE>   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.


<TABLE>
<CAPTION>
     OTHER INCOME AND (DEDUCTIONS)       1996     1995     1994
                                        -------  -------  -------
     <S>                                <C>      <C>      <C>
     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)
                                        ======   ======   ====== 
</TABLE>


     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.


<TABLE>
<CAPTION>
     INCOME TAXES        1996    1995  1994
                         -----  -----  -----
     <S>                 <C>    <C>    <C>
     Provisions          $35.9  $29.1  $ 9.5
                         =====  =====  =====
     Effective Tax Rate   36.0%  35.6%  38.3%
                         =====  =====  =====
</TABLE>


     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


<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   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


<PAGE>   31



CONSOLIDATED STATEMENTS OF INCOME
K N ENERGY, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31
                                                         -----------------------
                                                   1996            1995             1994
                                                   ----            ----             ----       
                                                  (In Thousands Except Per Share Amounts)
<S>                                             <C>                <C>              <C>
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      
                                                ==========        =========        =========
</TABLE>




The accompanying notes are an integral part of these statements.

                                       31


<PAGE>   32


CONSOLIDATED BALANCE SHEETS
K N ENERGY, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                       DECEMBER 31
                                                                  ----------------------
                                                                     1996        1995
                                                                  ----------  ----------
                                                                      (In Thousands)
<S>                                                               <C>         <C>
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
                                                                  ==========  ==========
</TABLE>

The accompanying notes are an integral part of these statements.


                                       32


<PAGE>   33




CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                                                  
                                           COMMON STOCK         ADDITIONAL               DEFERRED        TREASURY STOCK
                                           ------------          PAID-IN     RETAINED     COMPEN -       ---------------
                                       SHARES        AMOUNT      CAPITAL     EARNINGS     SATION       SHARES       AMOUNT
                                     ----------     --------    --------     --------     -------      -------      ------
                                                                      (Dollars In Thousands)
                                                                                                               
<S>               <C> <C>            <C>            <C>         <C>           <C>         <C>                       <C>   
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)
                                     ==========     ========    ========     ========     =======      =======      ======
</TABLE>


The accompanying notes are an integral part of these statements.


                                      33
<PAGE>   34


CONSOLIDATED STATEMENTS OF CASH FLOWS
K N ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31
                                                            -----------------------
                                                        1996          1995         1994
                                                        ----          ----         ----
                                                               (IN THOUSANDS)
<S>                                                    <C>          <C>          <C>      
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
                                                       =========    =========    =========
</TABLE>



The accompanying notes are an integral part of these statements.


                                      34

<PAGE>   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

<PAGE>   36
<TABLE>
<CAPTION>
                                            DECEMBER 31
                                            -----------
                                           1996     1995
                                           -----    -----
<S>                                      <C>      <C>
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
                                         =======  =======
</TABLE>


     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


<PAGE>   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


<PAGE>   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)


<TABLE>
<CAPTION>
                                                      1996       1995       1994
                                                   ---------  ---------  --------
<S>                                                <C>        <C>        <C>

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
                                                   =========  =========  ========
</TABLE>


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


<PAGE>   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


<PAGE>   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


<PAGE>   41
         K N's retail natural gas services business segment received rate
increases from the Colorado Public Utilities Commission during 1994 as
summarized below:

<TABLE>
<CAPTION>
           ENTITY REQUESTING       APPROVED ANNUALIZED          EFFECTIVE DATE
              INCREASE              REVENUE INCREASE             OF NEW RATES
              --------              ----------------             ------------
                                     (In Millions)

<S>                                     <C>                         <C> <C>
               RMNGD*                   $ 1.5                       4-2-94
               RMNGD*                     0.5                       9-1-94
</TABLE>

         *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
<PAGE>   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
<PAGE>   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):

<TABLE>
<CAPTION>
                                                              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
                                                   ==========     ==========     ==========

<CAPTION>

                                                             DECEMBER 31, 1995
                                                             -----------------
                                                 PROPERTY, PLANT   ACCUMULATED
                                                  AND EQUIPMENT       D&A            NET
                                                  -------------   -----------    ----------
<S>                                                <C>            <C>            <C>       
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
                                                   ==========     ==========     ==========
</TABLE>

         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
<PAGE>   44


         Components of the income tax provision applicable to federal and state
income taxes are as follows (in thousands):

<TABLE>
<CAPTION>
                               1996         1995         1994
                               ----         ----         ----
<S>                          <C>          <C>          <C>    
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%
                             =======      =======      =======
</TABLE>

         The difference between the statutory federal income tax rate and the
Company's effective income tax rate is summarized as follows:

<TABLE>
<CAPTION>
                                                  1996      1995       1994
                                                  ----      ----       ----

<S>                                              <C>        <C>        <C>  
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%
                                                 ====       ====       ====
</TABLE>






                                      44
<PAGE>   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):
<TABLE>
<CAPTION>
                                                      DECEMBER 31
                                                      -----------
                                                  1996         1995
                                                  ----         ----
<S>                                              <C>        <C>     
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
                                                 ========   ========
</TABLE>

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
<PAGE>   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

<TABLE>
<CAPTION>
                                                            DECEMBER 31
                                                            -----------
                                                          1996        1995
                                                          ----        ----
                                                            (In  Thousands)
<S>                                                    <C>          <C>     
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
                                                       ========     ========
</TABLE>

         Maturities of long-term debt for the five years ending December 31,
2001, are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR                                                            AMOUNT
----                                                            ------
<C>                                                            <C>    
1997                                                           $26,971
1998                                                            19,055
1999                                                            13,089
2000                                                             5,000
2001                                                             6,000
</TABLE>

         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
<PAGE>   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

<TABLE>
<CAPTION>
                                                           DECEMBER 31
                                                           -----------
                                                          1996     1995
                                                          ----     ----
                                                         (In Thousands)
<S>                                                     <C>       <C>   
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
                                                        =======   ======
</TABLE>

(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
<PAGE>   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
<PAGE>   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):

<TABLE>
<CAPTION>
                                                     1996        1995         1994
                                                     ----        ----         ----

<S>                                                <C>         <C>         <C>     
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
                                                   ========    ========    ========
</TABLE>

         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
<PAGE>   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):

<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                             -----------
                                                           1996        1995
                                                           ----        ----
<S>                                                     <C>          <C>       
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
                                                        =========    =========
</TABLE>

         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):

<TABLE>
<CAPTION>
                                                     1996      1995        1994
                                                     ----      ----        ----
<S>                                                <C>        <C>        <C>    
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
                                                   =======    =======    =======
</TABLE>


                                      50
<PAGE>   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):

<TABLE>
<CAPTION>
                                                        DECEMBER 31
                                                        -----------
                                                     1996         1995
                                                     ----         ----
<S>                                                <C>         <C>      
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)
                                                   ========    ========
</TABLE>

         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
<PAGE>   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):

<TABLE>
<CAPTION>
                                             1996              1995  
                                             ----              ----  
<S>                                        <C>               <C>     
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 
                                           =======           ======= 

</TABLE>

         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.

<TABLE>
<CAPTION>
                                        OPTION SHARES
                                           GRANTED
                        SHARES SUBJECT     THROUGH                          EXPIRATION
PLAN NAME                 TO THE PLAN  DECEMBER 31, 1996   VESTING PERIOD    PERIOD
---------                 -----------  -----------------   --------------    ------
<S>                        <C>           <C>               <C>               <C>     
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
</TABLE>



                                      52
<PAGE>   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:

<TABLE>
<CAPTION>
                                               1996                            1995
                                    ----------------------------    ----------------------------
                                                       WTD AVG                          WTD AVG
                                                       EXERCISE                        EXERCISE
                                      SHARES            PRICE         SHARES             PRICE
                                   ----------         ---------     ----------         ---------
<S>                                 <C>               <C>            <C>               <C>      
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
                                   ==========                       ==========
</TABLE>

         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
<PAGE>   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):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31                                                        AMOUNT
-----------                                                        ------
<C>                                                                <C>     
1997                                                               $ 17,126
1998                                                                 13,400
1999                                                                 12,707
2000                                                                 12,042
2001                                                                 11,103
Thereafter                                                           98,594
                                                                   --------
Total Commitments                                                  $164,972
                                                                   ========
</TABLE>

(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
<PAGE>   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
<PAGE>   56








BUSINESS SEGMENT INFORMATION
(Before Intersegment Eliminations)

<TABLE>
<CAPTION>
                                                       1996            1995           1994
----------------------------------------------------------------------------------------------
                                                                   (In Thousands)

<S>                                                 <C>            <C>            <C>        
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
                                                    ===========    ===========    ===========
</TABLE>


* Principally cash and investments



                                      56
<PAGE>   57








QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
K N ENERGY, INC. AND SUBSIDIARIES
QUARTERLY OPERATING RESULTS FOR 1996 AND 1995

(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
                                                      1996
                                                      ----
                                       FIRST      SECOND      THIRD     FOURTH
                                       -----      ------      -----     ------

<S>                                   <C>        <C>        <C>        <C>     
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
                                      ========   ========   ========   ========

<CAPTION>
                                                      1995
                                                      ----
                                       FIRST      SECOND      THIRD     FOURTH
                                       -----      ------      -----     ------
<S>                                   <C>        <C>        <C>        <C>     
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
                                      ========   ========   ========   ========
</TABLE>


ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

                  There were no such matters during 1996.



                                      57
<PAGE>   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
<PAGE>   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
<PAGE>   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
<PAGE>   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

<PAGE>   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
<PAGE>   63








                                 Exhibit Index
<TABLE>
<CAPTION>
                                                                Page Number
                                                                -----------
<S>                                                               <C>
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)*
</TABLE>





                                      63
<PAGE>   64

                                 Exhibit Index

<TABLE>
<CAPTION>
                                                                Page Number
                                                                -----------
<S>                                                               <C>

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
</TABLE>




                                      64

<PAGE>   65
                                 Exhibit Index

<TABLE>
<CAPTION>
                                                                Page Number
                                                                -----------
<S>                                                               <C>
  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****
</TABLE>




*        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
<PAGE>   66

                                                                     EXHIBIT 12

                       K N ENERGY, INC. AND SUBSIDIARIES
                       RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31
                                                           -----------------------
                                                 1996      1995        1994      1993       1992
                                                 ----      ----        ----      ----       ----
                                                             (Dollars in Thousands)
<S>                                            <C>        <C>        <C>        <C>        <C>     
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
                                               ========   ========   ========   ========   ========
</TABLE>



                                       66
<PAGE>   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
<PAGE>   68
                                                                     EXHIBIT 21
                       K N ENERGY, INC. AND SUBSIDIARIES
                         SUBSIDIARIES OF THE REGISTRANT



<TABLE>
<CAPTION>
NAME OF COMPANY                                       STATE OF INCORPORATION
---------------                                       ----------------------
<S>                                                         <C>
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
</TABLE>

All of the subsidiaries named above are included in the consolidated financial
statements of the Registrant included herein.



                                     68
<PAGE>   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