-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O/S1lSEjcAk+jyxMbpmOhz06SONCo2+/2QaIZSyz+OQgBy2v933bHShvoamsJFr+ gd5ZczOIMEX17frIn/BtMg== 0000054502-99-000005.txt : 19990518 0000054502-99-000005.hdr.sgml : 19990518 ACCESSION NUMBER: 0000054502-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K N ENERGY INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 480290000 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06446 FILM NUMBER: 99626892 BUSINESS ADDRESS: STREET 1: 370 VAN GORDON ST STREET 2: PO BOX 281304 CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 BUSINESS PHONE: 3039891740 MAIL ADDRESS: STREET 1: 370 VAN GORDON STREET STREET 2: P O BOX 281304 CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 FORMER COMPANY: FORMER CONFORMED NAME: KN ENERGY INC DATE OF NAME CHANGE: 19920430 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS NEBRASKA NATURAL GAS CO INC DATE OF NAME CHANGE: 19830403 10-Q 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 ------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ------------------ Commission File Number 1-6446 ------------------------------------------- K N ENERGY, INC. - ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Kansas 48-0290000 - ---------------------------------------------------------------- (State or other Jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 370 Van Gordon Street P.O. Box 281304, Lakewood, Colorado 80228-8304 - ----------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (303) 989-1740 - ---------------------------------------------------------------- (Registrant's telephone number, including area code) - ---------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $5 par value; authorized 150,000,000 shares; - ----------------------------------------------------------------- outstanding 70,840,522 shares as of April 30, 1999. - ----------------------------------------------------------------- 2 Form 10-Q K N ENERGY, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 1999 Contents
PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Page Number ----------- Consolidated Balance Sheets..................... 3 & 4 Consolidated Statements of Income............... 5 Consolidated Statements of Cash Flows........... 6 Notes to Consolidated Financial Statements...... 7 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 14 - 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 22 PART II OTHER INFORMATION Item 1. Legal Proceedings................................. 23 Item 6. Exhibits and Reports on Form 8-K.................. 23 SIGNATURE.................................................. 24
3 Form 10-Q PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (Unaudited) K N Energy, Inc. and Subsidiaries (Dollars in Thousands)
March 31 December 31 1999 1998 ------------- ------------- ASSETS: Current Assets: Cash and Cash Equivalents $ 21,404 $ 21,955 Restricted Deposits 7,431 9,096 U.S. Government Securities - 1,092,415 Accounts Receivable 598,400 693,044 Inventories 105,905 144,831 Gas Imbalances 90,403 85,349 Other 46,444 46,812 ---------- ---------- 869,987 2,093,502 ---------- ---------- Investments 268,634 252,543 ---------- ---------- Property, Plant and Equipment 7,781,145 7,767,332 Less Accumulated Depreciation and Amortization 786,610 744,156 ---------- ---------- 6,994,535 7,023,176 ---------- ---------- Deferred Charges and Other Assets 239,169 242,991 ---------- ---------- Total Assets $8,372,325 $9,612,212 ========== ==========
The accompanying notes are an integral part of these statements. 4 Form 10-Q CONSOLIDATED BALANCE SHEETS (Unaudited) K N Energy, Inc. and Subsidiaries (Dollars in Thousands)
March 31 December 31 1999 1998 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current Maturities of Long-Term Debt $ 7,167 $ 10,167 Notes Payable 622,236 297,000 Substitute Note - 1,394,846 Accounts Payable 407,108 489,414 Accrued Taxes 23,762 18,914 Gas Imbalances 68,760 74,857 Payable for Purchase of Thermo Companies 54,556 86,799 Other 212,263 247,465 ---------- ---------- 1,395,852 2,619,462 ---------- ---------- Other Liabilities and Deferred Credits: Deferred Income Taxes 1,701,734 1,699,072 Other 394,361 431,565 ---------- ---------- 2,096,095 2,130,637 ---------- ---------- Long-Term Debt 3,300,017 3,300,025 ---------- ---------- K N-Obligated Mandatorily Redeemable Preferred Capital Trust Securities of Subsidiary Trusts Holding Solely Debentures of K N 275,000 275,000 ---------- ---------- Minority Interests in Equity of Subsidiaries 63,056 63,267 ---------- ---------- Stockholders' Equity: Preferred Stock- Authorized - Class A, 200,000 Shares: Class B, 2,000,000 Shares, Without Par Value Redeemable Solely at Option of Company at $105 Per Share - Class A, $5.00 Cumulative Series; 70,000 Shares Outstanding 7,000 7,000 ---------- ---------- Common Stock- Authorized - 150,000,000 Shares, Par Value $5 Per Share Outstanding - 69,660,801 and 67,037,735 Shares, Respectively, After Deducting 55,485 and 27,008 Shares Held in Treasury 348,304 343,230 Additional Paid-in Capital 712,620 694,223 Retained Earnings 187,040 193,925 Other (12,659) (14,557) ---------- ---------- Total Common Stockholders' Equity 1,235,305 1,216,821 ---------- ---------- Total Stockholders' Equity 1,242,305 1,223,821 ---------- ---------- Total Liabilities and Stockholders' Equity $8,372,325 $9,612,212 ========== ==========
The accompanying notes are an integral part of these statements. 5 Form 10-Q CONSOLIDATED STATEMENTS OF INCOME (Unaudited) K N Energy, Inc. and Subsidiaries (In Thousands Except Per Share Amounts)
Three Months Ended March 31 -------------------------------- 1999 1998 ---- ---- Operating Revenues: Upstream Gathering and Processing $ 131,595 $ 139,099 Midstream Sales, Transportation and Storage 357,426 285,898 Downstream Retail and Marketing 695,838 828,539 Intersegment Eliminations (130,890) (87,014) ---------- ---------- Total Operating Revenues 1,053,969 1,166,522 ---------- ---------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 797,833 934,635 Operations and Maintenance 100,681 95,780 Depreciation and Amortization 53,520 41,820 Taxes, Other Than Income Taxes 14,183 12,148 Merger-related Costs 2,916 4,353 ---------- ---------- Total Operating Costs and Expenses 969,133 1,088,736 ---------- ---------- Operating Income 84,836 77,786 ---------- ---------- Other Income and (Deductions): Interest Expense, Net (70,450) (50,342) Minority Interests (5,267) (2,381) Other, Net 2,556 10,694 ---------- ---------- Total Other Income and (Deductions) (73,161) (42,029) ---------- ---------- Income Before Income Taxes 11,675 35,757 Income Taxes 4,553 13,249 ---------- ---------- Net Income 7,122 22,508 Less - Preferred Stock Dividends 88 88 ---------- ---------- Earnings Available For Common Stock $ 7,034 $ 22,420 ========== ========== Number of Shares Used in Computing Basic Earnings Per Common Share 69,486 52,635 ========== ========== Basic Earnings Per Common Share $ 0.10 $ 0.43 ========== ========== Number of Shares Used in Computing Diluted Earnings Per Common Share 69,578 53,429 ========== ========== Diluted Earnings Per Common Share $ 0.10 $ 0.42 ========== ========== Dividends Per Common Share $ 0.20 $ 0.19 ========== ==========
The accompanying notes are an integral part of these statements. 6 Form 10-Q CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) K N Energy, Inc. and Subsidiaries Increase (Decrease) in Cash and Cash Equivalents (In Thousands)
Three Months Ended March 31 ------------------------------ 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 7,122 $ 22,508 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization, Excluding Amortization of Gas Plant Acquisition Adjustment 25,887 21,645 Deferred Income Taxes 1,790 7,213 Deferred Purchased Gas Costs 3,296 17,414 Gain on Sale of Facilities (258) (8,252) Proceeds from Buyout of Contractual Gas Obligations - 27,500 Change in Gas in Underground Storage 47,532 2,214 Changes in Other Working Capital Items (Note 4) (22,752) 7,951 Changes in Deferred Revenues (4,394) (1,466) Other, Net (19,990) (5,704) ---------- ---------- NET CASH FLOWS FROM OPERATING ACTIVITIES 38,233 91,023 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (30,455) (81,163) Cash Paid for Acquisition of MidCon, Net of Cash Acquired - (2,139,752) Other Acquisitions (18,514) (9,137) Investments (2,056) (2,526) Sale of U.S. Government Securities 1,092,415 - Purchase of U.S. Government Securities - (884,223) Proceeds from Sales of Assets 853 25,152 ---------- ---------- NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,042,243 (3,091,649) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-Term Debt, Net (1,069,610) 55,800 Long-Term Debt - Issued - 2,362,000 Long-Term Debt - Retired (3,317) (20,662) Common Stock Issued in Public Offering - 650,000 Other Common Stock Issued 5,925 4,070 Treasury Stock, Issued 25 409 Treasury Stock , Acquired (43) - Cash Dividends, Common (13,919) (12,496) Cash Dividends, Preferred (88) (88) Minority Interests, Contributions - 13,311 Securities Issuance Costs - (45,891) ---------- ---------- NET CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,081,027) 3,006,453 ========== ========== Net Increase (Decrease) in Cash and Cash Equivalents (551) 5,827 Cash and Cash Equivalents at Beginning of Period 21,955 22,471 ---------- ---------- Cash and Cash Equivalents at End of Period $ 21,404 $ 28,298 ========== ==========
For supplemental cash flow information, see Note 4. The accompanying notes are an integral part of these statements. 7 Form 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General As used herein, "K N" or "the Company" refers to K N Energy, Inc. and its consolidated subsidiaries unless the context otherwise requires. In the opinion of Management, all adjustments necessary for a fair presentation of the results for the unaudited interim periods have been made. Except as explicitly noted, these adjustments consist solely of normal recurring accruals. Certain prior period amounts have been reclassified to conform with the current presentation. 2. Sempra Merger On February 22, 1999, Sempra Energy ("Sempra") and the Company announced that their respective boards of directors had unanimously approved a definitive agreement (the "Agreement") under which Sempra and the Company would combine in a stock-and- cash transaction valued in the aggregate at $6.0 billion. Sempra is an energy services holding company based in San Diego, California, serving 21 million customers through natural gas and electric distribution, as well as a broad range of energy-related products and services throughout the United States, Canada, Mexico and other countries in Latin America. This merger is conditioned, among other things, upon the approvals of shareholders of both companies, the Federal Energy Regulatory Commission and the state commissions of Colorado and Wyoming and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). Effective March 30, 1999, the Federal Trade Commission granted the Company's request for early termination of the waiting period under the HSR Act with respect to the merger. 3. Acquisitions, Investments and Sale (A) MidCon Corp. On January 30, 1998, pursuant to a definitive stock purchase agreement (the "MidCon Agreement"), the Company acquired all of the outstanding shares of capital stock of MidCon Corp. ("MidCon") from Occidental Petroleum Corporation ("Occidental") for $2.1 billion in cash and the assumption of a $1.4 billion note (the "Substitute Note"), at which time MidCon became a wholly owned subsidiary of K N Energy, Inc. (the "Acquisition"). The Substitute Note bore interest at 5.798% and was required to be collateralized by U.S. government securities, letters of credit or a combination thereof. The Substitute Note was paid in full on January 4, 1999. In conjunction with the Acquisition, K N also assumed MidCon's obligation to lease the MidCon Texas intrastate pipeline system under a 30-year operating lease, requiring average annual lease payments of approximately $30 million. The Acquisition was initially financed through a combination of credit agreements (see Note 6). The Acquisition was accounted for as a purchase for accounting purposes and, accordingly, the MidCon assets acquired and liabilities assumed have been recorded at their respective estimated fair market values as of the acquisition date. The allocation of purchase price has resulted in the recognition of a gas plant acquisition adjustment of approximately $3.9 billion, principally representing the excess of the assigned fair market value of the assets of Natural Gas Pipeline Company of America ("NGPL"), a wholly owned subsidiary of MidCon, over the historical cost for ratemaking purposes. This gas plant acquisition adjustment, none of which is currently being recognized for rate-making purposes, is being amortized over 36 years, approximately the estimated remaining useful life of NGPL's interstate pipeline system. For the quarters ended March 31, 1999 and 1998, approximately $27.2 million and $19.8 million of such amortization, respectively, was charged to expense. The assets, liabilities and results of operations of MidCon are included with those of the Company beginning with 8 Form 10-Q the January 30, 1998 acquisition date. Historical information for periods prior to January 30, 1998 does not reflect any impact associated with the MidCon acquisition. (B) Sale of Kansas Distribution Properties In March 1998, K N completed the sale of its Kansas retail natural gas distribution properties, located in 58 Kansas communities and serving approximately 30,000 residential, commercial and industrial customers, to Midwest Energy, Inc., a customer-owned cooperative based in Hays, Kansas. K N received approximately $24 million in cash in conjunction with the sale and recorded a pre-tax gain of approximately $8.5 million (approximately $5.2 million after tax or $0.08 per diluted share). Concurrently with the sale, K N received $27.5 million in cash in exchange for the release of the purchaser from certain contractual gas purchase obligations, which amount will be amortized as an offset to expense over a period of years as the associated volumes are sold. (C) Thermo Companies During the third quarter of 1998, K N completed its acquisition of interests in four independent power plants in Colorado from the Denver-based Thermo Companies ("Thermo"), representing approximately 380 megawatts of electric generation capacity and access to approximately 130 Bcf of natural gas reserves. These generating facilities are located in Ft. Lupton, Colorado (272 megawatts) and Greeley, Colorado (108 megawatts) and sell their power output to Public Service Company of Colorado under long- term agreements. Payments for these interests are being made over a two-year period, with the initial payment of 689,810 shares (1,034,715 shares adjusted for the December 1998 three-for-two stock split) of K N common stock having been made on October 21, 1998. Additional payments were made on January 4, 1999, consisting of 833,623 shares of K N common stock and $15 million in cash, and on April 20, 1999, consisting of 1,232,286 shares of K N common stock and $20 million in cash. The remaining payment in 2000 is expected to be made in a combination of cash and common stock as agreed to by K N and Thermo, with the default mix being 50% stock and 50% cash. This transaction has been accounted for as a purchase. (D) TransColorado Pipeline On March 31, 1999, the TransColorado Gas Transmission Company ("TransColorado"), an enterprise jointly owned by K N and Questar Corp., placed in service a 280-mile-long natural gas pipeline, which includes two compressor stations and extends from near Rangely, Colorado, to its southern terminus at the Blanco Hub near Aztec, New Mexico. The pipeline has a design transmission capacity of approximately 300 million cubic feet of natural gas per day. On October 14, 1998, TransColorado entered into a $200 million revolving credit agreement with a group of commercial banks. K N provides a corporate guarantee for one-half of all amounts borrowed under the agreement. (E) Thunder Creek Gathering System In March 1999, Thunder Creek Gas Services, LLC, a joint venture of K N and Devon Energy Corporation, began construction of a 126- mile-long-trunkline natural gas gathering system which will include carbon dioxide removal facilities and will extend from Glenrock, Wyoming to approximately 12 miles north of Gillette, Wyoming. The trunkline will have an initial capacity of 450 million cubic feet of natural gas per day. The gathering system is located in the Powder River Basin of northeast Wyoming and is expected to be operational by fall 1999. The expected total cost of the system is approximately $100 million. (F) Horizon Pipeline In May 1999, the Company announced plans to build the Horizon Pipeline, a 129-mile-long natural gas pipeline from Joliet, Illinois, to Hales Corners, Wisconsin. Construction is expected to start in spring 2001 and be completed by the fall of 2001. The estimated cost of the project is $150 million to $250 million, depending on shipper response and design capacity, expected to be from 630 million cubic feet up to 1.2 billion cubic feet per 9 Form 10-Q day. The Company plans to jointly own the pipeline with one or more other partners. An open season will begin in May 1999, which will allow potential shippers to express their interest in obtaining capacity on the pipeline. 4. Supplemental Cash Flow Information Changes in Other Working Capital Items Summary and Supplemental Disclosures of Cash Flow Information are as follows (in thousands):
Three Months Ended March 31 ---------------------------- 1999 1998 ---- ---- CHANGES IN OTHER WORKING CAPITAL ITEMS: (Net of Effects of Acquisitions and Sales) Accounts Receivable $ 93,913 $ 72,952 Materials and Supplies Inventory 1,297 (7,514) Other Current Assets (3,022) (11,796) Accounts Payable (82,306) (60,688) Other Current Liabilities (32,634) 14,997 ---------- ---------- $ (22,752) $ 7,951 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash Paid for: Interest (Net of Amount Capitalized) $ 120,097 $ 31,120 ========== ========== Income Taxes $ 349 $ (228) ========== ==========
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. "Other, Net", presented as a component of "Net Cash Flows from Operating Activities" in the accompanying interim Consolidated Statements of Cash Flows includes, among other things, the amortization of the gas plant acquisition adjustment recorded in conjunction with the acquisition of MidCon, undistributed equity in earnings of unconsolidated subsidiaries and joint ventures and other non-cash charges and credits to income. In the third quarter of 1998, K N purchased interests in four independent power plants in Colorado from the Thermo Companies. Payments for this purchase were made in October 1998 with K N common stock and in January and April 1999 with a combination of cash and K N common stock. The remaining payment is expected to be made with a combination of cash and K N common stock. A portion of K N's January 1998 acquisition of MidCon was made through the assumption of a note. For additional information on these transactions, see Notes 3(A) and 3(C). 5. Business Segments K N Energy, Inc. has adopted a strategy of extracting profit from the energy value stream, which extends from the purchase or production of the fuel through the sale of the energy to the end- user. Consistent with this strategy, K N manages its business and has segregated its activities into three business segments, "Upstream", "Midstream" and "Downstream", based on where in the value stream such activities are conducted. In general, these segments are also differentiated by the nature of their processes, their principal suppliers, and their target markets and customers. The Company's Upstream operations consist of (i) natural gas gathering, (ii) natural gas processing and (iii) natural gas liquids ("NGLs") extraction and marketing; Midstream operations consist of transportation, storage and bundled sales transactions for K N's interstate and intrastate pipelines; Downstream operations principally consist of energy marketing, regulated natural gas distribution and electric power generation and sales. 10 Form 10-Q The accounting policies applied in the generation of segment information are generally the same as those described in the summary of significant accounting policies in the Company's 1998 Report on Form 10-K. In general, items below the "Operating Income" line are either not allocated to business segments or are not considered by Management in its evaluation of business unit performance. In addition, certain items included in operating income (such as the merger-related costs incurred) are not allocated to individual business segments. With adjustment for these items, the Company currently evaluates business segment performance primarily based on operating income in relation to the level of capital employed. In general, intersegment sales are accounted for at market prices, while asset transfers are made at either market value or, in some instances, book value.
Three Months Ended March 31, 1999 -------------------------------------------------------------- Upstream Midstream Downstream Other Consolidated -------- --------- --------- ----- ----------- (dollars in millions) Revenues from External Customers $ 101.6 $ 298.7 $ 653.7 $1,054.0 Intersegment Revenues $ 30.0 $ 58.7 $ 42.2 $ 130.9 Operating Income (Loss) $ (3.4) $ 87.7 $ 3.4 $ (2.9) (1) $ 84.8 Other Income and (Deductions) (73.1) -------- Income Before Income Taxes $ 11.7 ======== Total Assets at March 31, 1999 $ 702.0 $6,535.3 $1,106.2 $ 28.8 (3) $8,372.3 Three Months Ended March 31, 1998 -------------------------------------------------------------- Upstream Midstream Downstream Other Consolidated -------- --------- ---------- ----- ----------- (dollars in millions) Revenues from External Customers $ 120.7 $ 212.6 $ 833.2 $1,166.5 Intersegment Revenues $ 18.4 $ 73.3 $ (4.7) $ 87.0 Operating Income (Loss) $ (4.1) $ 77.8 $ 8.5 $ (4.4) (2) $ 77.8 Other Income and (Deductions) (42.0) -------- Income Before Income Taxes $ 35.8 ======== (1) Represents costs related to the pending merger with Sempra (see Note 2). (2) Represents costs related to the MidCon Acquisition (see Note 3(A)). (3) Corporate assets represent cash and restricted deposits.
6. Financing The total amount of funds required by the Company to complete the acquisition of MidCon, pay related fees and expenses and to repay borrowings under the Company's existing credit facility was approximately $2.5 billion, financed through borrowings under credit agreements dated January 30, 1998 (the "Bank Facility") among K N, Morgan Guaranty Trust Company of New York and a syndicate of other lenders. A working capital facility replaced the revolving credit agreement previously in place (the "Pre- Acquisition Facility"). An acquisition facility was also part of the overall Bank Facility structure. See Note 7(A) of Notes to Consolidated Financial Statements on pages 42-43 of the Company's 1998 Annual Report on Form 10-K for additional information regarding the Bank Facility and the Pre-Acquisition Facility. In addition to the working capital and acquisition components of the Bank Facility described preceding, the Company assumed a short- term note for $1.4 billion due January 1999 (the "Substitute Note") which, pursuant to the MidCon Agreement, was initially collateralized by letters of credit issued under a commitment for that purpose within the Bank Facility. The acquisition facility was repaid in its entirety and cancelled on March 10, 1998. The Substitute Note was repaid on January 4, 1999. On January 5, 1999, K N cancelled the remaining letters of credit used to collateralize the Substitute Note. 11 Form 10-Q In March 1998, the Company received net proceeds of approximately $624.6 million from a public offering of 12.5 million shares (18.75 million shares after adjustment for the December 1998 three-for-two stock split) of K N common stock and approximately $2.34 billion from the concurrent public offerings of senior debt securities of varying maturities with principal totaling $2.35 billion. The net proceeds from these offerings were used to refinance borrowings under the Bank Facility and to purchase U.S. government securities to replace a portion of the letters of credit that collateralized the Substitute Note. In April 1998, the Company sold $175 million of 7.63% Capital Trust Securities (the "Capital Securities") maturing on April 15, 2028, in an underwritten public offering. The sale was effected through a wholly owned business trust, K N Capital Trust III. The Company used the net proceeds from the offering to purchase U.S. government securities to replace a portion of the letters of credit that collateralized the Substitute Note. In November 1998, the Company completed an underwritten public offering of $400 million of three-year senior notes (the "Senior Notes") bearing an interest rate of 6.45 percent. The net proceeds of approximately $397.4 million were used to retire a portion of K N's then-outstanding short-term borrowings. Concurrently with the Senior Notes offering, the Company sold $460 million principal amount of premium equity participating security units ("PEPS") in an underwritten public offering. The PEPS essentially are contracts (i) requiring the holders to purchase K N common stock at the end of a three-year period coinciding with the maturity of the Senior Notes and (ii) providing for payment of a contract fee of 2.375 percent to the PEPS holders by the Company during the three-year period. The net cash proceeds from the sale of the PEPS, together with additional funds provided by the Company, were used to purchase U.S. treasury securities on behalf of the PEPS owners. 7. Preferred Stock On April 13, 1999, the Company sent notice to holders of its Class A $5.00 Cumulative Preferred Stock, of its intent to redeem these shares on May 14, 1999. Holders of 70,000 preferred shares were advised that on April 13, 1999, funds were deposited with the First National Bank of Chicago to pay the redemption price of $105 per share plus accrued but unpaid dividends. Under the terms of the Company's Articles of Incorporation, upon deposit of funds to pay the redemption price, all rights of the preferred stockholders cease and terminate except the right to receive the redemption price upon surrender of their stock certificates. 8. Common Stock Split and Dividend Action On November 9, 1998, the Board of Directors of K N Energy, Inc. approved a 7.1 percent increase in the quarterly dividend and a three-for-two split of the Company's common stock. The quarterly dividend was declared at $0.30 per common share, an increase from $0.28 per common share. Giving effect to the stock split, the quarterly dividend is $0.20 per common share. The stock split was distributed and the increase in dividend was paid concurrently on December 31, 1998, to shareholders of record at the close of business on December 15, 1998. The par value of the stock did not change. Weighted-average shares outstanding and all per share amounts (except as otherwise noted) in the accompanying interim consolidated financial statements and these notes have been restated to reflect the stock split. 12 Form 10-Q 9. Regulatory Matters On January 23, 1998, K N Interstate Gas Transmission Co. ("KNI"), a wholly owned subsidiary of K N Energy, Inc., filed a general rate case with the Federal Energy Regulatory Commission ("FERC") requesting a $30.2 million increase in annual revenues. As a result of the FERC action, KNI was allowed to place its rates into effect on August 1, 1998, subject to refund, and provisions for refund have been recorded based on its expectation of ultimate resolution. By a subsequent order, the FERC required KNI to remove costs associated with the Pony Express project and to refund the associated dollars. The refund of approximately $11 million will be made during the third quarter of 1999. KNI has filed for rehearing of the FERC's order. A hearing on its proposed rates is currently anticipated to commence in December, 1999. On December 29, 1998, Rocky Mountain Natural Gas Company ("RMNG"), a wholly owned subsidiary of K N Energy, Inc., received a "show cause" order from the Colorado Public Utilities Commission (the "Commission"). The Commission has concluded that there is reason to believe that RMNG's rates may be excessive and may require further investigation. RMNG has entered into a Stipulation and Agreement with the Staff of the Commission and the Office of Consumer Counsel providing for an annual revenue reduction of approximately $0.9 million. The Stipulation and Agreement is awaiting Commission approval. 10. Comprehensive Income Statement of Financial Accounting Standards No. 130, Reporting of Comprehensive Income, effective for fiscal years beginning after December 15, 1997, requires that enterprises report a total for comprehensive income. Currently, the only difference between "net income" and "comprehensive income" for K N is the unrealized gain or loss on its investment in available-for-sale securities which is recorded directly to stockholders' equity. For the quarters ended March 31, 1999 and 1998, the respective unrealized after-tax investment gain was $1.1 million and $1.8 million, resulting in comprehensive income of $8.2 million and $24.3 million, respectively. 11. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (the "Statement"). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. If the derivatives meet these criteria, the Statement allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally designate a derivative as a hedge and document and assess the effectiveness of derivatives associated with transactions that receive hedge accounting. The Statement is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). The Statement cannot be applied retroactively. The Statement must be applied to (i) derivative instruments and (ii) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997, (and, at the company's election, before January 1, 1998). K N has not yet quantified the impacts of adopting the Statement on its financial position or results of operations and has not determined the timing of or method of adoption of the Statement. 13 Form 10-Q 12. Interest Expense, Net "Interest Expense, Net" as presented in the accompanying interim Consolidated Statements of Income is net of (i) the debt component of the allowance for funds used during construction ("AFUDC - Interest") and (ii) interest income related to government securities ("Interest Income"), as shown in the following table.
Three Months Ended March 31 ----------------------- (Dollars in Millions) 1999 1998 ---- ---- AFUDC - Interest $ 0.3 $ 0.4 Interest Income $ 0.5 $ 2.6
As discussed in Note 3(A), in conjunction with the January 30, 1998, acquisition of MidCon Corp., the Company was required by the MidCon Agreement to assume the Substitute Note for $1.4 billion and to collateralize the Substitute Note with bank letters of credit, a portfolio of U.S. government securities or a combination of the two. As a result, the Company has interest income associated with the issuance of the Substitute Note, which has been reported together with the related interest expense as described preceding. 13. Equity in Earnings of Equity Method Investments Equity in earnings of investments accounted for under the equity method totaling $5.3 million and $3.3 million for the three months ended March 31, 1999 and 1998, respectively, are included in operating revenues (within the appropriate business segment) in the accompanying interim Consolidated Statements of Income. 14. Accounts Receivable The caption "Accounts Receivable" in the accompanying Consolidated Balance Sheets is presented net of allowances for doubtful accounts of $11.3 million at March 31, 1999, and $10.8 million at December 31, 1998. 14 Form 10-Q Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The following discussion should be read in conjunction with the accompanying consolidated financial statements and related notes. As discussed in Note 3 to the accompanying consolidated financial statements, the Company has engaged in acquisition and divestiture transactions which may affect the comparison of results of operations between periods. All per share amounts following reflect the impact of the December 31, 1998, three-for- two common stock split as discussed in Note 8 to the accompanying consolidated financial statements. On February 22, 1999, Sempra Energy ("Sempra"), an energy services holding company based in San Diego, California, and the Company announced that their respective boards of directors had approved a definitive agreement under which Sempra and the Company would combine in a stock and cash transaction. This merger is conditioned, among other things, upon the approvals of shareholders of both companies as well as certain regulatory approvals, including approvals of the Federal Energy Regulatory Commission. For additional information, see Note 2 to the accompanying consolidated financial statements. Consolidated Financial Results
For the Three Months Ended March 31 ----------------------------------- (Dollars in Millions Except Per Share Amounts) 1999 1998 ---- ---- Operating Revenues $ 1,054.0 $ 1,166.5 Gross Margin 256.1 231.9 Operating Income 84.8 77.8 Net Income 7.1 22.5 Diluted Earnings Per Share $ 0.10 $ 0.42
In comparison to the corresponding period of 1998, the Company's results for the three months ended March 31, 1999 reflect (i) a decrease of 9.6 percent in operating revenues and (ii) increases of 10.4 percent in gross margin and 9.0 percent in operating income. Operating revenues, gross margin and operating income were positively impacted in 1999, relative to 1998, by (i) the fact that 1999 results include the operations of MidCon Corp. ("MidCon") for three months, while 1998 results include only two months, beginning with the January 30, 1998, MidCon acquisition date (see Note 3(A) to the accompanying consolidated financial statements), (ii) cost savings realized subsequent to the MidCon acquisition and (iii) the inclusion of $4.4 million of expense related to the acquisition of MidCon in 1998 results, compared to $2.9 million of expense in 1999 related to the pending merger with Sempra. The operating revenues, gross margin and operating income associated with each of the Company's business segments were negatively affected in 1999, relative to 1998, by (i) low natural gas liquids ("NGLs") prices and associated reduced processing margins and (ii) reduced pipeline basis differentials reflecting, in part, weather-related reduction in demand as further described within the individual segment discussions which follow. There was a significant increase in interest expense in 1999 largely resulting from the additional month's financing of MidCon, a decrease in other income and an increase in the effective tax rate - see "Other Income and (Deductions)" and "Income Taxes" elsewhere herein. Earnings per diluted share for 1999 declined by 76.2 percent from 1998 reflecting, in addition to the decline in 1999 net income, an increase of 30.2 percent in the number of diluted shares used to calculate earnings per share. This increase in shares was largely due to the 15 Form 10-Q March 1998 common stock issuance associated with the acquisition of MidCon (see Note 6 to the accompanying consolidated financial statements). Results of Operations Reflecting the Company's strategy of extracting margins from the various segments of the energy value stream, the Company has segregated its results of operations into "Upstream," "Midstream" and "Downstream" components. The Company's Upstream operations consist of (i) natural gas gathering, (ii) natural gas processing and (iii) NGLs extraction and marketing activities. Midstream operations consist of transportation, storage and bundled sales transactions for K N's interstate and intrastate pipelines. Downstream activities principally consist of energy marketing, regulated natural gas distribution and electric power generation and sales. The following segment data are before intersegment eliminations, and exclude expenses of the Sempra merger and MidCon acquisition.
Three Months Ended March 31 ------------------------------------------------- (Dollars in Millions Except Per Gallon Amounts) Increase Upstream Gathering and Processing 1999 1998 (Decrease) ---- ---- ---------- Operating Revenues Gas Sales $ 52.5 $ 50.3 $ 2.2 Natural Gas Liquids Sales 44.9 55.8 (10.9) Gathering, Transportation and Other 34.2 33.0 1.2 ------- ------- ------- 131.6 139.1 (7.5) ------- ------- ------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 98.9 103.3 (4.4) Operations and Maintenance 26.7 30.3 (3.6) Depreciation and Amortization 6.8 6.3 0.5 Taxes, Other Than Income Taxes 2.6 3.3 (0.7) ------- ------- ------- 135.0 143.2 (8.2) ------- ------- ------- Operating Loss $ (3.4) $ (4.1) $ 0.7 ======= ======= ======= System Throughput (Trillion Btus): Gas Sales 32.6 24.8 7.8 Gathering and Transportation 84.4 85.9 (1.5) ------- ------- ------- 117.0 110.7 6.3 ------- ------- ------- Natural Gas Liquids: Sales (Million Gallons) 194.0 180.1 13.9 ======= ======= ======= Average Sales Price/Gallon $ 0.23 $ 0.31 $ (0.08) ======= ======= =======
Upstream's operating loss declined by $0.7 million from $4.1 million in the first quarter of 1998 to $3.4 million in the corresponding period of 1999. The Upstream segment was negatively impacted in 1999, relative to 1998, by approximately $10 million due to lower NGLs prices. The negative impact of NGLs prices was more than offset by a combination of positive factors, including (i) approximately $4.6 million of positive impact from lower natural gas prices, (ii) approximately $3.3 of positive impact from higher gathering rates, (iii) positive results from the 1998 expansion of the Red Cedar gathering assets, (iv) the fact that 1998 results included operating losses associated with certain gas processing facilities that were sold in the fourth quarter of 1998 and (v) reduced 1999 operating expenses. 16 Form 10-Q
Three Months Ended March 31 ----------------------------------- (Dollars in Millions) Increase Midstream Sales, Transportation and Storage 1999 1998 (Decrease) ---- ---- ---------- Operating Revenues Transportation and Storage $ 179.7 $ 136.5 $ 43.2 Gas Sales 178.5 145.2 33.3 Other (0.8) 4.2 (5.0) ------- ------- ------- 357.4 285.9 71.5 ------- ------- ------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 159.6 126.4 33.2 Operations and Maintenance 57.0 43.1 13.9 Depreciation and Amortization 43.2 31.9 11.3 Taxes, Other Than Income Taxes 9.9 6.7 3.2 ------- ------- ------- 269.7 208.1 61.6 ------- ------- ------- Operating Income $ 87.7 $ 77.8 $ 9.9 ======= ======= ======= Systems Throughput (Trillion Btus) 669.6 468.3 201.3 ======= ======= =======
Midstream operating income increased from $77.8 million in the first quarter of 1998 to $87.7 million in the corresponding period of 1999, an increase of $9.9 million (12.7%). This increase in operating income, as well as the increases in operating revenues, operating expenses and throughput shown in the preceding table, was largely attributable to the inclusion of three months of operations of MidCon in 1999, while 1998 results include only two months. The Midstream segment was, however, negatively impacted in 1999, relative to 1998, by a 13.3 percent reduction in margin per unit of throughput, principally attributable to weather-related demand factors. These negative margin impacts were partially offset by expense savings realized subsequent to the acquisition of MidCon.
Three Months Ended March 31 ----------------------------------- (Dollars in Millions) Increase Downstream Retail and Marketing 1999 1998 (Decrease) ---- ---- ---------- Operating Revenues Gas Sales $ 672.3 $ 819.9 $ (147.6) Transportation and Other 23.5 8.6 14.9 ------- ------- -------- 695.8 828.5 (132.7) ------- ------- -------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 667.7 791.2 (123.5) Operations and Maintenance 19.5 23.1 (3.6) Depreciation and Amortization 3.5 3.6 (0.1) Taxes, Other Than Income Taxes 1.7 2.1 (0.4) ------- ------- -------- 692.4 820.0 (127.6) ------- ------- -------- Operating Income $ 3.4 $ 8.5 $ (5.1) ======= ======= ======== Gas Sales (Trillion Btus) 361.4 337.5 23.9 ======= ======= ========
Downstream operating income decreased from $8.5 million in the first quarter of 1998 to $3.4 million in the corresponding period of 1999, a decline of $5.1 million (60.0%). Downstream results were negatively impacted by (i) 1998 earnings contributions that included (a) approximately $3.4 million in margins from sales of storage gas, (b) approximately $2.1 million related to the favorable resolution of certain "above market" gas purchase contracts and (c) approximately $1.2 million of operating income from the Company's 17 Form 10-Q Kansas gas distribution properties, which were sold on March 31, 1998, (ii) a reduction of approximately $2.2 million in 1999 commodity marketing gas sales margins, largely due to weather- related reductions in per-unit margins and (iii) weather-related reductions in 1999 sales volumes for retail natural gas distribution. These negative factors were partially offset by (i) approximately $2.4 million of 1999 operating income from Thermo, which was acquired in the third quarter of 1998 (see Note 3(C) to the accompanying consolidated financial statements) and (ii) reduced 1999 operating expenses.
Three Months Ended March 31 --------------------------------------- (In Millions) Earnings Increase Other Income and (Deductions) 1999 1998 (Decrease) ---- ---- ----------- Interest Expense, Net $ (70.5) $ (50.3) $ (20.2) Minority Interests (5.3) (2.4) (2.9) Other, Net 2.6 10.7 (8.1) ------- ------- ------- $ (73.2) $ (42.0) $ (31.2) ======= ======= =======
The increase of $20.2 million in "Interest Expense, Net" from 1998 to 1999 was principally due to incremental debt associated with the MidCon acquisition (see Note 6 to the accompanying consolidated financial statements). The increase in net expense associated with "Minority Interests" in 1999, relative to 1998, was principally due to the dividend requirements associated with the $175 million of Capital Trust Securities issued in April 1998 (see Note 6 to the accompanying consolidated financial statements). The decrease in "Other, Net" from 1998 to 1999 was principally due to the fact that 1998 results included an $8.5 million gain from the sale of the Company's Kansas natural gas distribution properties (see Note 3(B) to the accompanying consolidated financial statements).
Three Months Ended March 31 --------------------------------------- (Dollars In Millions) Increase Income Taxes 1999 1998 (Decrease) ----- ----- ---------- Provision $ 4.6 $ 13.2 $ (8.6) ====== ====== ====== Effective Tax Rate 39.0% 37.1% 1.9% ====== ====== ======
The $8.6 million net decrease in income tax expense from 1998 to 1999 reflected a decrease of approximately $8.9 million attributable to a decrease in 1999 pre-tax income and an increase of approximately $0.3 million attributable to an increase in the 1999 effective tax rate. This increased 1999 effective tax rate was principally due to an increase in 1999 effective state tax provisions attributable to the addition of the results of operations of MidCon. 18 Form 10-Q Liquidity and Capital Resources The following table illustrates the sources of the Company's invested capital. The balances at December 31, 1998, reflect the incremental capital associated with the acquisition of MidCon, including the post-acquisition refinancings completed in 1998 (see Notes 3(A) and 6 to the accompanying consolidated financial statements).
March 31 December 31 -------------------------- --------------------------------------- (Dollars in Thousands) 1999 1998 1998 1997 1996 Long-Term Debt $3,300,017 $ 2,894,864 $ 3,300,025 $ 553,816 $ 423,676 Common Equity 1,235,305 1,249,018 1,216,821 606,132 519,794 Preferred Stock 7,000 7,000 7,000 7,000 7,000 Capital Trust Securities 275,000 100,000 275,000 100,000 - ---------- ----------- ----------- ----------- ----------- Capitalization 4,817,322 4,250,882 4,798,846 1,266,948 950,470 Short-Term Debt 629,403 1,798,901 (1) 1,702,013 (1) 359,951 156,271 ---------- ----------- ----------- ----------- ----------- Invested Capital $5,446,725 $ 6,049,783 $ 6,500,859 $ 1,626,899 $ 1,106,741 ========== =========== =========== =========== =========== Capitalization: Long-Term Debt 68.5% 68.1% 68.8% 43.7% 44.6% Common Equity 25.6% 29.4% 25.4% 47.8% 54.7% Preferred Stock 0.2% 0.2% 0.1% 0.6% 0.7% Capital Trust Securities 5.7% 2.3% 5.7% 7.9% - Invested Capital: Total Debt 72.1% 77.6% 76.9% 56.2% 52.4% Equity, Including Capital Trust Securities 27.9% 22.4% 23.1% 43.8% 47.6% (1) Includes the $1,394,846 Substitute Note assumed in conjunction with the acquisition of MidCon, which was repaid in January 1999.
The following discussion of cash flows should be read in conjunction with the accompanying Consolidated Statements of Cash Flows and related supplemental disclosures. Net Cash Flows From Operating Activities "Net Cash Flows From Operating Activities" decreased from $91.0 million in the first quarter of 1998 to $38.2 million in the corresponding period of 1999, a decrease of $52.8 million or 58.0 percent. This decrease was principally attributable to the net impact of (i) a decrease in 1999 earnings before non-cash charges and credits, (ii) the fact that 1998 results included $27.5 million of proceeds from the buyout of certain contractual gas purchase obligations, (iii) an increase in cash used in 1999 to make interest payments, reflecting the increased average debt balance outstanding and (iv) increased 1999 cash from changes in gas in underground storage. Net Cash Flows From Investing Activities The net cash inflow from investing activities in the first quarter of 1999 consisted principally of (i) $1.1 billion of proceeds from the sale of U.S. government securities, which proceeds were used, together with additional short-term borrowings, to repay the Substitute Note (see "Net Cash Flows From Financing Activities" following) and (ii) $49.0 million of capital expenditures and acquisitions. The net cash outflow from investing activities in the first quarter of 1998 consisted principally of (i) $2.1 billion in cash paid to Occidental for the purchase of MidCon, (ii) the purchase of $0.9 billion of U.S. government securities as collateral for the Substitute Note, also in conjunction with the acquisition of MidCon and (iii) capital expenditures and other acquisitions of $90.3 million. 19 Form 10-Q Net Cash Flows From Financing Activities "Net Cash Flows From Financing Activities" was a net inflow of $3.0 billion in the first quarter of 1998 and a net outflow of $1.1 billion in the first quarter of 1999. The net cash outflow in 1999 was principally attributable to the January 4, 1999 repayment of the Substitute Note (see Notes 3(A) and 6 to the accompanying consolidated financial statements). The note was repaid using the proceeds of approximately $1.1 billion from the sale of U.S. government securities which had been held as collateral, with the balance of the funds provided by an increase in short-term borrowings. In addition, first quarter 1999 cash flows include the payment of $14.0 million of common and preferred dividends. The net cash inflow of $3.0 billion in the first quarter of 1998 was principally the result of financing activities in conjunction with the purchase of MidCon (see Notes 3(A) and 6 to the accompanying consolidated financial statements). In March 1998, K N issued 12.5 million shares (18.75 million shares after adjustment for the December 1998 three-for-two stock split) of common stock in an underwritten public offering, receiving net proceeds of approximately $624.6 million. Also in March 1998, K N issued $2.35 billion principal amount of debt securities of varying maturities and interest rates in an underwritten public offering, receiving net proceeds of approximately $2.34 billion. The net proceeds from these two offerings were used to refinance borrowings under the MidCon acquisition financing arrangements and to purchase U.S. government securities to collateralize a portion of the Substitute Note. In addition, 1998 results include the payment of $12.6 million of common and preferred dividends and $13.3 million of minority interest contributions. The Company's principal sources of short-term liquidity are its $1 billion revolving bank facilities. At March 31, 1999, the Company had $622.2 million of commercial paper issued and outstanding (which is backed by the bank facilities). As described in the Company's 1998 report on Form 10-K, the Company's bank facilities and certain of its operating lease arrangements contain covenants related to the Company's ratio of debt to total capitalization, consolidated net worth and debt ratings. Regulation On January 23, 1998, K N Interstate Gas Transmission Co. ("KNI"), a wholly owned subsidiary of K N Energy, Inc., filed a general rate case with the Federal Energy Regulatory Commission ("FERC") requesting a $30.2 million increase in annual revenues. As a result of the FERC action, KNI was allowed to place its rates into effect on August 1, 1998, subject to refund, and provisions for refund have been recorded based on its expectation of ultimate resolution. By a subsequent order, the FERC required KNI to remove costs associated with the Pony Express project and to refund the associated dollars. The refund of approximately $11 million will be made during the third quarter of 1999. KNI has filed for rehearing of the FERC's order. A hearing on its proposed rates is currently anticipated to commence in December, 1999. On December 29, 1998, Rocky Mountain Natural Gas Company ("RMNG"), a wholly owned subsidiary of K N Energy, Inc., received a "show cause" order from the Colorado Public Utilities Commission (the "Commission"). The Commission has concluded that there is reason to believe that RMNG's rates may be excessive and may require further investigation. RMNG has entered into a Stipulation and Agreement with the Staff of the Commission and the Office of Consumer Counsel providing for an annual revenue reduction of approximately $0.9 million. The Stipulation and Agreement is awaiting Commission approval. 20 Form 10-Q Readiness for Year 2000 The following is a discussion of the Year 2000 problem and its potential impact on the Company. The Securities and Exchange Commission ("SEC") has issued specific guidelines for public companies regarding their disclosure of the Year 2000 problem. The guidelines require more detailed disclosure of each company's analysis of and approach to the Year 2000 problem. As a result, the Company is providing the following disclosure; however, the length and detail contained in this disclosure, relative to the other disclosures contained herein, is not an indication of the Company's view of the relative risk of the Year 2000 problem to the Company. Some computers and programs, and some devices containing computer chips ("embedded chips") store or process dates containing the Year 2000 as "00." This can result in inaccurate date-related calculations. It is expected that once the Year 2000 arrives, computers, computer programs and devices with embedded chips that have not been modified to correct this problem will not function normally. The Company relies on a number of automated systems to conduct its operations and to transact its business, as is common among large diversified energy companies. In addition, certain of the Company's pipelines and processing equipment and related systems contain electric controls or other devices containing embedded chips. These controls may also be adversely affected by this problem. In 1997, the Audit Committee of the Company's Board of Directors (the "Audit Committee") established a Year 2000 project to address the Year 2000 problem. In that year, the Company established a Year 2000 Executive Steering Committee (the "Year 2000 Committee") and a Year 2000 Project Management Office (the "Year 2000 Project Management Office"). The Year 2000 project is an ongoing effort monitored by the Audit Committee. The Audit Committee has adopted a Year 2000 Plan (the "Plan") and will oversee its implementation by receiving periodic reports from the Year 2000 Committee and directly from management. The Audit Committee is prepared to require management to make additional efforts, including amending the Plan as necessary, to fulfill the Audit Committee's goal of taking reasonable steps to minimize injury to people, damage to property, disruption to the Company's delivery of products and services, supporting systems and business operations, and other risks associated with the Year 2000 problem. The Year 2000 Committee is charged with directing the implementation of the Plan in accordance with resolutions of the Audit Committee and under the direction of the Company's designated senior executives. The Year 2000 Committee oversees the Year 2000 Project Management Office, headed by the Year 2000 Project Coordinator. The Year 2000 Committee keeps the Audit Committee informed of the Company's progress in implementing the Plan and of significant updates that are made to the Plan. The Year 2000 Committee communicates the Audit Committee's directives concerning the Plan to management and executives, and oversees the implementation of those directives. The Year 2000 Project Management Office works closely with the Company's Readiness Teams comprised of members of the Company's operating units. The teams have been organized to further implement the Plan throughout the Company. The Project Management Office, among other things, promotes exchange of information about Year 2000 problems and solutions, assists in disseminating information about the Company's policies governing communications concerning Year 2000 issues and serves as a conduit between the various Readiness Teams and the Year 2000 Committee. 21 Form 10-Q The aim of the Plan is to take reasonable steps to prevent the Company's mission critical functions from being impaired due to the Year 2000 problem. "Mission critical" describes those systems, devices, functions and external entities that are of material importance to maintaining the Company's capacity to deliver and account for products and services without interruption, and to maintain the Company's supporting business operations with no material disruption or diminution in quality. Each of the Company's operating units is in various stages of implementing the Plan to address the Year 2000 problem. These efforts include: an assessment of potential problems; an inventory of systems and areas which may need to be corrected; remediation and implementation, with priority given to mission critical items; the testing of such systems and devices; and developing contingency plans in case the Company cannot correct the problem in time, or in the event certain facets of the Year 2000 problem go undetected or do not manifest themselves until after January 1, 2000. Specifically, the Company is in the process of correcting programmable code, replacing non-Year 2000-ready embedded chips, installing Year 2000-ready releases of certain vendor-supplied computer systems and, in some cases, replacing existing systems with new internally or externally developed software in advance of December 31, 1999. The Company has completed an inventory of affected items in the non-information technology area and is assessing the results. The Company has begun testing and currently has found very few items that are likely to suffer adverse effects from the Year 2000 problem. The Company expects testing and remediation of mission critical items to be substantially completed by mid-1999. For the Company's Plan to be successful, the Company must rely for some purposes on outside contractors. There is a risk that those contractors will not complete their work prior to the Year 2000. The Company is developing alternative ways to conduct its business if such deadlines are not met. However, any alternative may involve additional expense and may not be implemented in time to avoid the Year 2000 problem. Ultimately, these alternatives may not be successful. The Company also relies on suppliers, business partners and other external entities which may or may not be addressing their own problems associated with the Year 2000 problem. The Company has sent out questionnaires to external entities to determine what steps they have taken to correct any Year 2000 problems they may have. The Company has no control over such external entities' efforts, so the Company has developed contingency plans in case such external entities do not complete their efforts before the Year 2000. The Company estimates that the direct costs the Company has incurred or will incur in 1998, 1999 and 2000 associated with assessing, inventorying, remediating and testing internally developed computer applications, hardware and equipment, including embedded chip systems and third-party developed software, to be between $5 million and $7 million. In addition, as part of the integration of the Company's systems with the systems of MidCon, the Company has begun modifying certain of its computer systems for the combined company or purchasing computer systems from third parties. These computer systems will address the Year 2000 problem and are expected to be operational prior to December 31, 1999. The costs for these computer systems are expected to be between $23 million and $25 million, the majority of which will be capitalized. 22 Form 10-Q The SEC's guidelines also require the Company to address the most reasonably likely worst case scenarios resulting from the Year 2000 problem. As a result of the Year 2000 problem, the Company may be faced with: failure of electrical, gas and similar services and supplies from utilities, disruption of telecommunications facilities, interruptions in the nation's transportation systems and failure of a substantial number of the Company's mission critical hardware and software systems. In addition, the Company's key suppliers or customers may experience their own Year 2000 problems in a way that materially adversely affects the Company's ability to do business without interruption or disruption. As a result of the cumulative impact of these events, the Company's business may be materially adversely affected. The adverse impact of these events occurring can not be quantified at this time. The Company is in the process of developing contingency plans to address issues associated with the reasonably likely worst case scenarios. The Company expects to have such contingency plans substantially completed by the end of June 1999. The Company will then refine and update its contingency plans for the remainder of 1999. The Company does not believe that the direct costs associated with the Year 2000 problem will be material to its business, financial position or results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk exposures that would affect the quantitative and qualitative disclosures presented as of December 31, 1998, in the "Risk Management" section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 25 of the Company's 1998 Annual Report on Form 10-K. 23 Form 10-Q PART II - OTHER INFORMATION Item 1. Legal Proceedings On July 26, 1996, the Company and RMNG, along with over 70 other natural gas 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 Company and the other named companies filed a motion to dismiss the lawsuit on grounds of improper joinder and lack of jurisdiction. The motion was granted in 1997, but the court gave Mr. Grynberg leave to refile this action in a court with proper jurisdiction. Mr. Grynberg appealed the dismissal of the action based on improper joinder, and the D.C. Court of Appeals affirmed the joinder decision in October 1998. Mr. Grynberg has filed a new case, modified somewhat from his original action, in Federal District Court, District of Colorado. The Department of Justice decided to not intervene in these cases in support of Grynberg's complaint. The Company has not yet been served in this action. 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 business, financial position or results of operations. On April 16, 1999, Consumer Services Association, Inc. and Midwest United Energy, L.L.C. filed suit in the U.S. District Court for the District of Colorado, claiming that the Company has violated Section 1 and Section 2 of the Sherman Act federal antitrust laws. These allegations assert various claims regarding the operation of the Company's "Choice" programs in Nebraska. Service of process has only recently occurred and no further activity has taken place in the lawsuit. The Company's potential liability and the amount of such damages, if any, are subject to dispute; however, 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 business, 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 business, financial position or results of operations. Item 6. Exhibits (A) Exhibits 3 - By-Laws of the Company, as amended on March 9, 1999 27- Financial Data Schedule (B) Reports on Form 8-K Current Report on Form 8-K dated February 23, 1999, to report the entering into an Agreement and Plan of Merger with Sempra Energy, whereby K N will be merged with and into Cardinal Acquisition Corp., a wholly owned subsidiary of Sempra Energy. 24 Form 10-Q SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. K N ENERGY, INC. (Registrant) May 17, 1999 /s/ Clyde E. McKenzie ------------------------- Clyde E. McKenzie Vice President and Chief Financial Officer (On Behalf of the Registrant and as Principal Financial and Accounting Officer) EX-27 2
5 1000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 21,404 0 609,689 11,289 105,905 869,987 7,781,145 786,610 8,372,325 1,395,852 3,300,017 0 7,000 348,304 887,001 8,372,325 1,053,969 1,053,969 797,833 969,133 0 731 70,450 11,675 4,553 7,122 0 0 0 7,122 0.10 0.10
EX-3 3 1 K N ENERGY, INC. (Formerly Kansas-Nebraska Natural Gas Company, Inc.) ---ooOoo--- B Y - L A W S As Amended to March 9, 1999 Effective March 9, 1999 ---ooOoo--- ARTICLE I OFFICES Section 1. Offices. The registered office shall be at 205 ------- F Street in the City of Phillipsburg, County of Phillips, State of Kansas. The Company's principal executive office shall be at 370 Van Gordon Street, Lakewood, Colorado 80228-8304 (mailing address: Post Office Box 281304, Lakewood, Colorado 80228-8304). Section 2. Additional Offices. The corporation may also ------------------ have offices at such other places both within and without the State of Kansas as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETING OF STOCKHOLDERS Section 1. Time and Place. The annual meeting of the -------------- shareholders for the election of directors and all special 2 meetings of shareholders for that or for any other purpose may be held at such time and place within or without the State of Kansas as shall be stated in the notice of the meeting, or in a duly executed waiver of notice thereof. Section 2. Annual Meeting. The annual meeting of the -------------- shareholders shall be held each year at a time to be determined by the Board of Directors, at which meeting the shareholders shall elect a Board of Directors, and transact such other business as may be properly brought before the meeting. Section 3. Special Meetings. Special meetings of the ---------------- shareholders, for any purpose or purposes, unless otherwise prescribed by statute may be called by the Chairman of the Board, if any, the President or the Board of Directors, and shall be called by the President or the Secretary at the request in writing of a majority of the directors, or at the request in writing of shareholders owning at least fifty-one percent (51%) in amount of the shares of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 4. Notice. Written notice of the place, date and ------ hour of any annual or special meeting of shareholders shall be given personally or by mail to each shareholder entitled to vote thereat, not less than ten (10) nor more than fifty (50) days prior to the meeting. 3 The notice shall state in addition, the purpose or purposes for which the meeting is called, and by, or at whose direction it is being issued. Section 5. Quorum. Except as otherwise provided by the ------ Articles of Incorporation, the holders of a majority of the shares of the Corporation issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be necessary to and shall constitute a quorum for the transaction of business at all meetings of the shareholders. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat present in person or represented by proxy shall have power to adjourn the meeting from time to time, but not for more than thirty (30) days, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Section 6. Voting. At any meeting of the shareholders ------ every shareholder having the right to vote shall be entitled to vote in person, or by proxy. Except as otherwise provided by law or the Articles of Incorporation, each shareholder of record shall be entitled, as to each proposal, to one vote for each share of stock standing in his name on the books of the Corporation on the date fixed as the record date for the 4 determination of its shareholders entitled to vote. All elections of directors shall be by written ballot and shall be determined by a plurality vote, and, except as otherwise provided by law or the Articles of Incorporation, all other matters shall be determined by vote of a majority of the shares present or represented at such meeting and voting on such questions. Section 7. Proxies. Every proxy must be executed in ------- writing by the shareholder or by his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except in those cases where an irrevocable proxy is permitted by law. Section 8. Consents. Whenever by any provision of law or -------- of the Articles of Incorporation, the vote of shareholders at a meeting thereof is required or permitted to be taken in connection with any corporate action, the meeting and vote of shareholders may be dispensed with, if all the shareholders who would have been entitled to vote upon the action if such meeting were held, shall consent in writing to such corporate action being taken. Section 9. Presiding Officer. Meetings of the shareholders ----------------- shall be presided over by the Chairman of the Board, if any, or if he is not present, by the President, or, if he is not present, 5 by a Vice President or, if neither the Chairman of the Board, the President nor a Vice President is present, by a chairman to be chosen at the meeting. The Secretary of the Company or, if he is not present, an Assistant Secretary of the Company or, if neither the Secretary nor an Assistant Secretary is present, a secretary to be chosen at the meeting, shall act as secretary of the meeting. Section 10. Notice of Shareholder Business. At an annual ------------------------------ meeting of shareholders, only such business shall be conducted as shall have been properly brought before the meeting (a) by or at the direction of the Board of Directors or (b) by a shareholder who is a shareholder of record at the time of giving such notice, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 40 days prior to the meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at 6 the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Nothwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder with respect to the matters set forth in this Section. ARTICLE III DIRECTORS Section 1. Number and Tenure. The whole Board of Directors ----------------- of the Corporation shall consist of fifteen members. The 7 directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, which were first approved at the annual meeting of shareholders in 1975; Class I shall consist of three directors whose initial term of office shall expire in 1994, Class II shall consist of four directors whose initial term of office shall expire in 1995, and Class III shall consist of three directors whose initial term of office shall expire in 1996. Each director shall hold office until his successor is duly elected and qualified or until his resignation in writing has been filed with the corporation. At each annual election, the successors of the class of directors whose terms shall expire that year shall be elected to hold office for a term of three years, so that the term of office of one class of directors shall expire in each year, except where the Board of Directors determines that a newly elected director shall be elected by the shareholders to fill a vacancy of a directorship created subsequent to the previous annual meeting, such director shall be elected to hold office for the balance of the term of the class of directors of which he is to be a member, as determined by the Board of Directors, and until his successor is elected and qualified. Section 2. Vacancies. A vacancy on the Board of Directors --------- or a newly created directorship may be filled by a majority of the remaining directors, though less than a quorum, or by the 8 sole director, by election of a new director, who at the time of his election shall be designated as a member of one of the classes of directors and shall hold office until the next election of the class of which he has become a member, unless his term of office is terminated by death, resignation, or otherwise. Section 3. Resignation, Retirement; Removal. Any director -------------------------------- may resign at any time. Any director who experiences a change in his personal or business circumstances or principal employment shall immediately tender his resignation as a director of the Corporation to the Executive Committee of the Board of Directors. From and after the annual meeting of shareholders held in the year 2000, any director who is not an employee of the Corporation shall retire his position as a director at the annual meeting of the shareholders of the Corporation next occurring after such director attains the age of 72 years. The Board of Directors may by unanimous vote of other directors then in office, remove a director with or without cause. The shareholders entitled to vote for the election of directors may remove a director, with cause as provided in the Articles of Incorporation. Section 4. Advisory Directors and Directors Emeritus. The ----------------------------------------- Board of Directors by a vote of a majority of the directors present and entitled to vote, at any regular or special meeting at which a quorum is present, may designate such number of persons as it may from time to time determine, as an "Advisory 9 Director" or may designate a former member of the Board as a "Director Emeritus," if such former member is willing to so serve. Each Advisory Director and each Director Emeritus shall serve, subject to the pleasure of the regular Board of Directors, until the next succeeding annual meeting of the regular Board of Directors, following the annual meeting of the stockholders, at which such regular directors are elected, unless he shall have resigned. Each Advisory Director and each Director Emeritus shall be notified of all regular or special meetings of the regular Board of Directors, shall be entitled to attend and participate therein, but shall not be entitled to vote. Each Advisory Director and each Director Emeritus shall be reimbursed for any necessary expenses of attending directors' meetings. Section 5. Nomination of Director Candidates. --------------------------------- (a) Eligibility to Make Nominations. Nominations of ------------------------------- candidates for election as directors of the Corporation at any meeting of shareholders called for election of directors, in whole or in part (an "Election Meeting"), may be made by the Board of Directors or by any shareholder who is a shareholder of record at the time of giving notice, who shall be entitled to vote at such Election Meeting and who complies with the notice procedures set forth in this Section. (b) Procedure for Nominations by Shareholders. ----------------------------------------- Nominations, other than those made by the Board of Directors, 10 shall be made pursuant to timely notice in writing to the Secretary. To be timely, shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 40 days prior to the date of the Election Meeting. Such shareholder's notice shall set forth (i) the name, age, business address and residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of capital stock of the Corporation which are beneficially owned by each such nominee and (iv) such other information concerning each such nominee as would be required, under the rules of the SEC, in a proxy statement soliciting proxies for the election of such nominees. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such nominee. Such notice shall also set forth as to the shareholder giving the notice (i) the name and address, as they appear on the Corpora- tion's books, of such shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder. (c) Meeting Procedures. No person shall be eligible for ------------------ election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in 11 accordance with the procedures prescribed by this Section 5, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (d) Substitution of Nominees. In the event that a person ------------------------ is validly designated as a nominee to the Board and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee. (e) Securities Exchange Act of 1934. Notwithstanding the ------------------------------- foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder with respect to the matters set forth in this Section. ARTICLE IV MEETINGS OF THE BOARD OF DIRECTORS Section 1. Place. The Board of Directors of the ----- Corporation may hold meetings, both regular and special, either within or without the State of Kansas. Section 2. Regular Meetings. Regular meetings of the Board ---------------- of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. 12 Section 3. Special Meetings. Special meetings of the Board ---------------- of Directors may be called by the Chairman of the Board, if any, or by the President on two days' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the Chairman, President or Secretary in like manner and on like notice on the written request of two directors. Section 4. Quorum. At all meetings of the Board of ------ Directors a majority of the entire Board shall be necessary to and constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time until a quorum shall be present. Notice of such adjournment shall be given to any directors who were not present and, unless announced at the meeting, to the other directors. Section 5. Consents. Unless otherwise restricted by the -------- Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or of such committee as the case may be, consent thereto in writing and such written consent is filed with 13 the minutes of the Board or committee. Such consents may be in counterpart so that each member will have signed a consent, but all members need not sign the same document. Section 6. Compensation. Directors, as such, shall not ------------ receive any stated salary for their services, but, by resolution of the Board of Directors an annual fee, plus a fee and expenses for attendance at meetings may be allowed, provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 7. Presiding Officer. Meetings of the Board of ----------------- Directors shall be presided over by the Chairman of the Board, if any, or, if he is not present, by the President or, if he is not present, by a chairman to be chosen at the meeting. The Secretary of the Company, or, if he is not present, an Assistant Secretary of the Company, or, if neither the Secretary nor an Assistant Secretary is present, a secretary to be chosen at the meeting, shall act as secretary of the meeting. ARTICLE V COMMITTEES OF DIRECTORS Section 1. Designation. The Board of Directors, by ----------- resolution adopted by a majority of the whole Board, may designate from among its members one or more committees, each 14 consisting of two or more directors, each of which, to the extent provided in such resolution, shall have and may exercise the powers of the Board of Directors in the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee. Section 2. Tenure; Reports. Each such committee shall --------------- serve at the pleasure of the Board. It shall keep minutes of its meetings and report the same to the Board. ARTICLE VI EXECUTIVE COMMITTEE Section 1. Appointment and Authority. The Board of ------------------------- Directors may by resolution or resolutions passed by a majority of the whole Board create and designate an Executive Committee consisting of the officer who is designated as Chief Executive Officer and two or more other directors of the Company who shall hold office subject to the pleasure of the Board of Directors, and the Board shall have the power at any time to remove any of the members of the Executive Committee and to appoint to the Committee other directors in lieu of the directors so removed. The Chief Executive Officer shall serve as Chairman of the 15 Executive Committee. During the intervals between the meetings of the Board of Directors the Executive Committee shall possess and may exercise the powers delegated by the Board of Directors, including the power to authorize the seal of the Company to be affixed to all papers which may require it, to authorize the payment of dividends, to authorize the issuance of stock, to serve as a nominating committee for the Board of Directors and to approve resolutions necessary for the day-to-day operations of the Company; provided, however, that the Executive Committee shall not have power to amend these By-Laws or to fill vacancies on the Board of Directors or to fill vacancies in, or to change the membership of, said Committee. The Executive Committee shall also have and may exercise all the powers of the Board of Directors except as aforesaid whenever a quorum of the Board shall fail to be present at any meeting of the Board. Section 2. Report of Action Taken. All action of the ---------------------- Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board, provided that no rights of third parties shall be affected by any such revision or alteration. Regular minutes of the proceedings of the Executive Committee shall be kept in a book provided for that purpose. Section 3. Quorum and Procedure. A majority of the members -------------------- of the Executive Committee shall be necessary to constitute a 16 quorum, and, in every case, an affirmative vote of a majority of the members shall be necessary for the passage of any resolution. It shall fix its own rules of procedure and shall meet as provided by such rules or by resolution of the Board, and it shall also meet at the call of the Chairman or of any two members of the Committee. Should the Executive Committee fail to fix its own rules therefor, the provisions of these By-Laws, pertaining to the calling of meetings and conduct of business by the Board of Directors, shall apply as nearly as may be. Section 4. Consent. Unless otherwise restricted by ------- statute, the Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Executive Committee thereof may be taken without a meeting, if a written consent thereto is signed by each member of the Executive Committee, and such written consent is filed with the minutes of proceedings of the Executive Committee. Such consents may be in counterpart so that each member will have signed a consent but all members need not sign the same document. ARTICLE VII NOTICES Section 1. Form; Delivery. Notices to directors and -------------- shareholders shall be in writing and delivered personally or mailed to the directors or shareholders at their addresses 17 appearing on the books of the Corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram. Section 2. Waiver. Whenever any notice is required to be ------ given under the provisions of the statutes or of the Articles of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. In addition, any shareholder attending a meeting of shareholders in person or by proxy without protesting at the beginning of the meeting the lack of notice thereof to him, and any director attending a meeting of the Board of Directors without protesting prior to the meeting or at its commencement such lack of notice shall be conclusively deemed to have waived notice of such meeting. ARTICLE VIII OFFICERS Section 1. Executive Officers. The executive officers of ------------------ the Corporation shall be a President and one or more Vice Presidents, a Secretary, a Treasurer and may include a Chairman of the Board. Section 2. Designation; Term of Office; Removal. All ------------------------------------ officers shall be elected by the Board of Directors and shall 18 hold office for such term as may be prescribed by the Board or until their successors are chosen and qualified or until their resignation is filed in the office of the Secretary, whichever first occurs. Any officer elected by the Board may be removed with or without cause at any time by the Board. Section 3. Authority and Duties. All officers, as between -------------------- themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in these By-Laws, or, to the extent not so provided, by the Board of Directors. Section 4. Compensation. The compensation of all officers ------------ of the Corporation shall be fixed by the Board of Directors and the compensation of agents shall either be so fixed or shall be fixed by officers thereunto duly authorized. Section 5. Vacancies. If an office becomes vacant for any --------- reason, the Board of Directors shall fill such vacancy. Any officer so elected by the Board shall serve only until such time as the unexpired term of his predecessor shall have expired unless re-elected or reappointed by the Board. Section 6. The Chairman of the Board. The Chairman of the ------------------------- Board of Directors, if there be a Chairman, shall preside at all meetings of the shareholders and directors and shall have such other powers and duties as may from time to time be assigned by 19 the Board including designation as Chief Executive Officer if the President is not so designated. Section 7. The President. The President shall be the Chief ------------- Executive Officer of the Corporation unless the Chairman of the Board is so designated, in which event the President shall be Chief Operating Officer of the Corporation. In the absence of the Chairman of the Board, or if there be no Chairman, he shall preside at all meetings of the shareholders and directors. The Chief Executive Officer, whether the Chairman of the Board or the President, shall be ex officio a member of all standing committees, shall have general and active management and control of the business and affairs of the Corporation subject to the control of the Board of Directors, and shall see that all orders and resolutions of the Board are carried into effect. Section 8. Vice Presidents. The Vice Presidents in the --------------- order of their seniority or in any other order determined by the Board, shall in the absence or disability of the President, perform the duties and exercise the powers of the President, and shall generally assist the President and perform such other duties as the Board of Directors or the President shall prescribe. Section 9. The Secretary. The Secretary shall attend all ------------- meetings of the Board and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to 20 be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall act. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary or Assistant Treasurer. He shall keep in safe custody the certificate books and shareholder records and such other books and records as the Board may direct and shall perform all other duties incident to the office of the Secretary. Section 10. Assistant Secretaries. The Assistant --------------------- Secretaries, if any, in order of their seniority or in any other order determined by the Board shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Directors or the Secretary shall prescribe. Section 11. The Treasurer. The Treasurer shall have the ------------- custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and 21 other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. He shall establish and execute programs for the provision of the capital required by the Company, including negotiating the procurement of capital and maintaining the required financial arrangements. He shall establish and maintain an adequate market for the Company's securities and, in connection therewith, maintain adequate liaison with investment bankers, financial analysts and shareholders. He shall maintain adequate sources for the Company's current borrowings from commercial banks and other lending institutions. He shall maintain banking arrangements to receive, have custody of and disburse the Company's moneys and securities. He shall invest the Company's funds as required and establish and coordinate policies for investment in pension and other similar trusts. Section 12. Assistant Treasurers. The Assistant -------------------- Treasurers, if any, in the order of their seniority or in any 22 other order determined by the Board, shall in the absence or disability of the Treasurer, perform the duties and exercise the power of the Treasurer and shall perform such other duties as the Board of Directors or the Treasurer shall prescribe. ARTICLE IX CERTIFICATE OF SHARES Section 1. Form; Signature. The certificates for shares of --------------- the Corporation shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each certificate shall exhibit the registered holder's name and the number and class of shares, and shall be signed by the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, and shall bear the seal of the Corporation or a facsimile thereof. Where any such certificate is countersigned by a transfer agent or by a registrar other than the Corporation, the signature of any such officer may be a facsimile signature. In case any officer who signed, or whose facsimile signature or signatures were placed on any such certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Corporation with the same effect as if he were such officer at the date of issue. 23 Section 2. Lost Certificates. The Board of Directors may ----------------- direct a new share certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 3. Registration of Transfer. Upon surrender to the ------------------------ Corporation or any transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation, or such transfer agent to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Registered Shareholders. Except as otherwise ----------------------- provided by law, the Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the 24 owner of shares to receive dividends or other distributions, and to vote as such owner, and to hold liable for calls a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or legal claim to or interest in such share or shares on the part of any other person. Section 5. Record Date. For the purpose of determining the ----------- shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action affecting the interests of shareholders, the Board of Directors may fix, in advance, a record date. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting, nor more than sixty (60) days prior to any other action. In each such case, except as otherwise provided by law, only such persons as shall be shareholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to express such consent or dissent, or to receive payment of such dividend, or such allotment of rights, or otherwise to be recognized as shareholders for the related purpose, notwithstanding any 25 registration of transfer of shares on the books of the Corporation after any such record date so fixed. ARTICLE X GENERAL PROVISIONS Section 1. Dividends. Subject to the provisions of the --------- Articles of Incorporation, if any, dividends upon the outstanding shares of the Corporation may be declared by the Board of Directors at any regular or special meeting, pursuant to law and may be paid in cash, in property, or in shares of the Corporation. Section 2. Reserves. Before payment of any dividends, -------- there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 3. Annual Statement. The Board of Directors shall ---------------- present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full 26 and clear statement of the business and condition of the corporation. Section 4. Instruments Under Seal. All deeds, bonds, ---------------------- mortgages, contracts, and other instruments requiring a seal may be signed in the name of the Corporation by the President or by any other officer authorized to sign such instrument by the President or the Board of Directors. Section 5. Checks. All checks or demands for money and ------ notes or other instrument evidencing indebtedness or obligation of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 6. Fiscal Year. The fiscal year of the Corporation ----------- shall begin on the first day of January of each year and shall end on the thirty-first day of December following. Section 7. Seal. The corporate seal shall have inscribed ---- thereon the name of the corporation and the words "Corporate Seal, Kansas 1927." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE XI AMENDMENTS Section 1. These By-Laws may be altered or repealed at any regular meeting of the Board of Directors, or at any special 27 meeting of the Board of Directors if notice of such alteration or repeal be contained in the notice of such special meeting. ARTICLE XII SPECIAL MANAGEMENT PROVISIONS Section 1. General. The provisions of this Article XII of ------- the By-Laws have been adopted by the Board of Directors of the Corporation pursuant to that certain Agreement of Merger by and between the Corporation, KNE Acquisition Corporation, a Delaware corporation, and American Oil and Gas Corporation, a Delaware corporation dated March 24, 1994 (the "Merger Agreement"). Capitalized terms used in this Article XII not otherwise defined herein shall have the meaning ascribed to them in the Merger Agreement. The provisions of this Article XII shall be effective from and after the Effective Time notwithstanding any other provisions of these By-Laws to the contrary. In the event of a conflict between the provisions of this Article XII and other provisions of the By-Laws, the provisions of this Article XII shall control. Section 2. Cabot Director. For so long as Cabot -------------- Corporation shall continue to own beneficially (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission) 10% or more of the issued and outstanding voting stock of the Corporation, Cabot Corporation shall have the right 28 to designate one person to serve as an advisory director of the Corporation. In the event beneficial ownership of Cabot Corporation of the issued and outstanding voting stock of the Corporation falls below 10% but constitutes more than 5%, the Board of Directors shall appoint the Cabot Corporation advisory director as a full director, to serve the then remaining term of a Class II director. For so long as Cabot Corporation continues to own beneficially less than 10% but more than 5% of the issued and outstanding voting stock of the Corporation, the Board of Directors shall nominate a Cabot Corporation designee (provided that such nominee is otherwise qualified as required by these By- Laws) for election by the Corporation's stockholders as a director. The Corporation shall at all times during which Cabot Corporation shall beneficially own in excess 10% of the issued and outstanding voting stock of the Corporation, maintain a vacancy on its Board of Directors for such Cabot designee. Section 3. Vacancies in Certain Offices. Any vacancy ---------------------------- arising following the Effective Time and prior to the Corporation's Annual Meeting of Stockholders in 1996, in the offices of the Chairman of the Board, Vice-Chairman of the Board, President, Chief Executive Officer or Chief Operating Officer, or on the Management Committee or the Chairman of the Management Committee, shall be filled by the Board of Directors upon recommendation by a Special Nominating Committee of the Board of 29 Directors. The Board of Directors shall by majority vote establish a Special Nominating Committee in the event of a vacancy in any of the foregoing positions. The Special Nominating Committee shall consist of four directors, two of whom shall be designated by the Board of Directors from the directors of the Corporation who served as a director prior to the Effective Time, and two of whom shall be designated by the directors designated by American Oil and Gas Corporation in the Merger Agreement. Section 4. Continuation of Retirement Policy. The --------------------------------- Corporation shall continue its present retirement policy that officers of the Corporation (including the Chairman of the Board, Vice-Chairman of the Board, President and Chief Executive Officer or Chief Operating Officer) shall be ineligible and cease to serve as an officer of the Corporation as of the first of the month coincident with or next following his or her 65th birthday. Section 5. Super-Majority Vote. For purposes of this ------------------- Article XII, the term "Super-Majority Vote" shall mean the affirmative vote of at least 12 of a 14-member Board of Directors; at least 11 of a 13-member Board of Directors; at least 10 of a 12-member Board of Directors; at least 9 of an 11- member Board of Directors; or in all other cases, the affirmative vote of a number of directors equal to at least 85% of the total number of directors. A Super-Majority Vote shall be required for 30 the following actions to be taken by the Board of Directors; (i) amendment, modification or revocation of any provision of this Article XII; (ii) amendment, modification or revocation of the current retirement policy of the Corporation; and (iii) any increase in the number of members to serve on the Board of Directors; provided that, no Super-Majority Vote shall be required for any such action taken by the Board of Directors from and after the date of the annual stockholders meeting for 1997. I hereby certify that the foregoing are the By-Laws of K N Energy, Inc. as the same were adopted at the meeting of the Board of Directors on May 20, 1975, and subsequently amended at meetings of the Board of Directors on November 20, 1975, November 8, 1978, August 5, 1983, November 11, 1983, November 16, 1984, January 9, 1988, March 24, 1989, August 10, 1989, January 20, 1991, November 10, 1993, June 24, 1994, July 13, 1994, April 11, 1996, February 10, 1998, March 9, 1999, and are still in force and effect on this 9th day of March, 1999. /s/ Martha B. Wyrsch --------------------- Martha B. Wyrsch Secretary -----END PRIVACY-ENHANCED MESSAGE-----