-----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, VTfT/Ryfk/PsZ3ly21bfPB5pe87bp4PGGRyKzNw4JRrGtFHkTfvI+RwHmXJSbPkA P5O1nAV7sD4JRM8PWEGlVQ== 0000950134-98-001736.txt : 19980306 0000950134-98-001736.hdr.sgml : 19980306 ACCESSION NUMBER: 0000950134-98-001736 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980305 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: K N ENERGY INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 480290000 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06446 FILM NUMBER: 98557719 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-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- ------------------------- Commission File Number 1-6446 --------------------------------------------------------- K N ENERGY, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Kansas 48-0290000 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 370 Van Gordon Street P.O. Box 281304, Lakewood, Colorado 80228-8304 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (303) 989-1740 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------------------------ --------------------------- Common stock, par value $5 per share New York Stock Exchange Preferred share purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Preferred stock, Class A $5 cumulative series - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. $1,693,628,233 as of February 20, 1998 - -------------------------------------------------------------------------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common stock, $5 par value; authorized 50,000,000 shares; outstanding 32,140,425 shares as of February 20, 1998 - -------------------------------------------------------------------------------- List hereunder documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. 1998 Proxy Statement Part III ================================================================================ 2 K N ENERGY, INC. AND SUBSIDIARIES Documents Incorporated by Reference and Index
Page Number ----------- 1998 Proxy Included Statement Herein ---------- -------- PART I ITEMS 1 & 2: BUSINESS AND PROPERTIES.................................................... 3-12 ITEM 3: LEGAL PROCEEDINGS ......................................................... 12-14 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the last quarter of 1997. EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 15-16 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................................... 17 ITEM 6: SELECTED FINANCIAL DATA.................................................... 18 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 19-26 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Public Accountants ................................ 27 Consolidated Statements of Income for the Three Years Ended December 31, 1997, 1996 and 1995 ........................ 28 Consolidated Balance Sheets as of December 31, 1997 and 1996............. 29 Consolidated Statements of Common Stockholders' Equity for the Three Years Ended December 31, 1997, 1996 and 1995 30 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997, 1996 and 1995......................... 31 Notes to Consolidated Financial Statements............................... 32-51 Selected Quarterly Financial Data (Unaudited)......................... 52 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no such matters during 1997. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................... 3-17* ITEM 11: EXECUTIVE COMPENSATION..................................................... 9-17* ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 3-7*, 19* ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 7* PART IV ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K (a) 1. Financial Statements Reference is made to the listing of financial statements and supplementary data under Item 8 in Part II of this index. 2. Financial Statement Schedules None 3. Exhibits Exhibit Index................................................... 58-60 List of Executive Compensation Plans and Arrangements........... 55-56 Exhibit 12 - Ratio of Earnings to Fixed Charges................. 61 Exhibit 13 - 1997 Annual Report to Shareholders**............... 62 Exhibit 21 - Subsidiaries of the Registrant..................... 63-65 Exhibit 23 - Consent of Independent Public Accountants.......... 66 Exhibit 27 - Financial Data Schedule*** Exhibit 99 - Consent of Independent Public Accountants.......... 67 (b) Reports on Form 8-K.................................................. 56 SIGNATURES ................................................................................ 57
Note: Individual financial statements of the parent Company are omitted pursuant to the provisions of Accounting Series Release No. 302. * Incorporated herein by reference. ** Such report is being furnished for the information of the Securities and Exchange Commission ("SEC") only and is not to be deemed filed as a part of this annual report on Form 10-K. *** Included in SEC copy only. 2 3 PART I ITEMS 1 and 2: BUSINESS and PROPERTIES As used in this report "the Company," "K N" and "K N Energy" refer to K N Energy, Inc., together with its consolidated subsidiaries (excluding MidCon), unless the context otherwise requires. "MidCon" refers to MidCon Corp., together with its consolidated subsidiaries, unless the context otherwise requires. All volumes of natural gas referred to herein are stated at a pressure base of 14.73 pounds per square inch absolute and at 60 degrees Fahrenheit and, in most instances, are rounded to the nearest major multiple. The term "Mcf" means thousand cubic feet, the term "MMcf" means million cubic feet, the term "Bcf" means billion cubic feet and the term "Tcf" means trillion cubic feet. The term "MMBtus" means million British thermal units ("Btus"). "NGLs" refers to natural gas liquids, which consist of ethane, propane, butane, iso-butane and natural gasoline. The term "Bbls" means barrels. (A) General Description K N Energy is an integrated energy services provider whose operations include the gathering, processing, transportation and storage of natural gas, and the marketing of natural gas and NGLs. As of December 31, 1997, the Company operated over 12,300 miles of interstate and intrastate pipelines and over 8,800 miles of gathering and processing pipeline that connect major supply areas with major consuming areas in the Western and Mid-Continent United States. The Company also owned or operated at such date 19 natural gas processing plants with total processing capacity of approximately 1.7 Bcf per day, including the Bushton complex in the Hugoton Basin, one of the largest natural gas extraction facilities in the United States, and 7 storage facilities with 827 MMcf per day of withdrawal capacity. As of December 31, 1997, the Company's regulated retail natural gas business served over 210,000 customers in Colorado, Nebraska and Wyoming (excluding customers served by the Company's Kansas natural gas distribution assets which are the subject of a definitive sale agreement, expected to be closed in the first half of 1998). The Company also markets innovative products and services, such as the Simple Choicesm ("Simple Choice") menu of products and call center services designed for residential consumers, utilities and small businesses through its 50% owned ENOable, LLC ("ENOable") affiliate. The Company's executive offices are located at 370 Van Gordon Street, P.O. Box 281304, Lakewood, Colorado 80228-8304 and its telephone number is (303) 989-1740. K N was incorporated in the State of Kansas on May 18, 1927. The Company employed 2,134 people at December 31, 1997. On January 30, 1998, pursuant to a definitive stock purchase agreement (the "Agreement"), K N Energy paid approximately $2.1 billion in cash and issued a note in an aggregate principal amount of approximately $1.39 billion (the "Substitute Note") to Occidental Petroleum Corporation ("Occidental") to acquire the outstanding shares of capital stock of MidCon (the "MidCon Shares") and a note in a like aggregate principal amount (the "ESOP Note") issued to Occidental by MidCon's employee stock ownership plan (the "Acquisition"). As a result of the Acquisition, MidCon became a wholly owned subsidiary of K N Energy. In connection with the planned termination of MidCon's employee stock ownership plan following the Acquisition, the ESOP Note was cancelled. The Substitute Note is required to be paid in full on January 4, 1999 and bears interest at 5.798%. The Company is required to collateralize the Substitute Note plus an amount equal to 105 days of accrued interest with U.S. government securities or one or more letters of credit, or a combination thereof. Such amounts were initially collateralized with letters of credit which the Company intends to replace with U.S. government securities purchased utilizing all or a portion of the proceeds of certain future securities offerings, see Capital Resources. The Agreement contains representations and warranties of each of Occidental and the Company, which survive the closing for one year (except as to certain tax matters, which survive for two years), and customary 3 4 covenants. In connection with its acquisition of the MidCon Shares, the Company became obligated with respect to MidCon's liabilities, including, without limitation, liabilities with respect to environmental matters, liabilities under MidCon's benefit plans for active and retired employees and the obligations of Occidental's insurance subsidiary with respect to insurance policies previously issued to MidCon. Each party has agreed to indemnify the other party for certain losses or liabilities incurred as a result of a breach of representation or warranty or covenant and, in the case of Occidental, to indemnify the Company for certain losses or liabilities arising out of MidCon's employee stock ownership plan. As a result of various regulatory requirements, prior to the consummation of the Acquisition, MidCon dividended all of the issued and outstanding capital stock of MidCon Power Services Corp. ("MidCon Power"), a wholly owned subsidiary of MidCon, to Occidental. K N and Occidental have entered into a separate stock transfer agreement for the acquisition of all the issued and outstanding capital stock of MidCon Power by K N. The acquisition of the MidCon Power capital stock by K N was contingent on the Federal Energy Regulatory Commission ("FERC") approving the transaction, which approved was received on March 2, 1998. The closing of the MidCon Power acquisition is expected to occur by mid-March 1998. MidCon is engaged in the purchase, gathering, processing, transmission, storage and sale of natural gas to utilities, municipalities and industrial and commercial users. MidCon operates over 14,000 miles of natural gas pipelines which are located in the center of the North American pipeline grid. These pipeline assets include two major interconnected transmission pipelines terminating in the Chicago area: one originating in West Texas and the other in the Gulf Coast areas of Texas and Louisiana, as well as a major intrastate pipeline located in Texas. MidCon also purchases electricity from electric utilities and other electric power producers and marketers and resells the electricity to wholesale and end-use customers. (B) Narrative Description of Business Overview K N Energy is an integrated energy services provider with operations that include the gathering, processing, transportation and storage of natural gas and the marketing of natural gas and NGLs. The Company's operations currently are organized into three segments: (i) gathering, processing and marketing services (including intrastate transmission and storage in Texas), (ii) interstate transportation and storage, and (iii) retail natural gas services, although the Company currently expects that its future reporting of business unit results may change as a result of the implementation of statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". As discussed below, certain of the Company's operations are regulated by various federal and state entities. For the year ended December 31, 1997, approximately 48% of the Company's operating income was derived from regulated assets, although such percentage has increased as a result of the acquisition of MidCon as described preceding. (1) Gathering, Processing, and Marketing Services The Company provides natural gas gathering, processing, storage, transportation, marketing, field services and supply services, to a variety of customers. Within this business segment, the Company owns and operates approximately 12,900 miles of pipeline in nine states and operates 19 gas processing plants in five states and natural gas storage facilities in West Texas and on the Gulf Coast. For the year ended December 31, 1997, this business segment accounted for approximately 52% of consolidated operating income. Revenues from the Company's gathering, processing, storage, transportation, marketing and supply activities are generated in four different ways. First, the Company performs a merchant function whereby the Company 4 5 purchases gas at the wellhead, combines such gas with other supplies of gas, and markets the aggregated gas to consumers. Second, the Company gathers, transports and/or processes gas for producers or other third parties who retain title to the gas. Third, the Company processes gas into NGLs and markets NGLs. Fourth, the Company provides gas marketing and supply services, including certain storage services, to producers, various natural gas resellers and end users. The Company also arranges the purchase and transportation of producers' excess or uncommitted gas to end users, acts as shipper or agent for the end users, administers nominations and provides balancing assistance when needed. In conjunction with its merchant function, the Company engages in price risk management activities in the energy financial instruments market to hedge its price and basis risk exposure. The Company buys and sells gas and crude oil futures positions on the New York Mercantile Exchange and Kansas City Board of Trade and uses over-the-counter energy swaps and options for the purpose of reducing adverse price exposure to gas supply costs or specific market margins. Pursuant to guidelines approved by its Board of Directors, the Company engages in these activities only as a hedging mechanism against price volatility associated with pre-existing or anticipated physical gas and condensate sales, gas purchases, system use and storage in order to protect profit margins, and is prohibited from engaging in speculative trading. Gas Gathering and Processing The Company's gathering and processing subsidiaries operate pipeline systems in seven Mid-Continent and Rocky Mountains states. These subsidiaries perform various services for customers including, among others, gathering gas at the wellhead or other field aggregation points, transporting gas on an intrastate basis at negotiated rates, processing gas to extract NGLs, and marketing natural gas and NGLs. Based on average throughput, the Company's largest gathering operation is its Hugoton Basin system in Kansas which gathers approximately 530 MMcf per day, making K N the largest gatherer in this basin. The Hugoton Basin system interconnects with several gas processing plants in the area including K N's Bushton plant. The Company's Wattenberg System in northeastern Colorado, which includes gathering and transmission lines, has current throughput of approximately 150 MMcf per day. K N's West Texas System is located primarily in western Texas and the Texas Panhandle. This system, which includes gathering, intrastate transmission and storage pipelines, six gas processing plants, and one storage facility, has gathering throughput of approximately 140 MMcf per day. The Company also owns gathering facilities in the Powder River and Wind River Basins of Wyoming and the Piceance and Uinta Basins of western Colorado and eastern Utah with combined throughput of approximately 130 MMcf per day. In addition to the above systems, K N recently acquired two gathering systems in the Rocky Mountains which gather in aggregate approximately 460 MMcf per day. In December 1997, K N purchased an equity interest in the Red Cedar Gathering System in the San Juan Basin of New Mexico. The Red Cedar system gathers approximately 440 MMcf per day of natural gas and is connected to the Company's jointly owned Coyote Gulch processing plant and to the TransColorado pipeline. Also in December 1997, K N acquired Interenergy Corporation, a closely held provider of natural gas services in the Rocky Mountain area. The Interenergy assets include pipelines which gather approximately 20 MMcf per day, a gas processing plant in Wyoming and an interest in a gas processing plant in North Dakota. In 1996, Wildhorse Energy Partners, LLC ("Wildhorse"), a joint venture between K N and Tom Brown, Inc. ("TBI"), purchased gathering and processing assets of Williams Field Services in western Colorado and eastern Utah. The acquisition of these assets provided Wildhorse access to existing TBI production, to approximately 240,000 acres of undeveloped leaseholds held by TBI in the Piceance Basin and to undeveloped third-party acreage throughout the Piceance and Uinta basins. The assets acquired included approximately 950 miles of natural gas gathering lines, two processing plants, a carbon dioxide treatment plant and a dew point control 5 6 plant. During the year ended December 31, 1997, these facilities processed and treated approximately 70 MMcf of natural gas per day. At December 31, 1997, the Company's gathering, processing and marketing segment operated 19 natural gas processing plants, including the Bushton complex, one of the largest NGLs extraction facilities in the United States. On a daily basis, these plants process approximately 1.4 Bcf of natural gas (and have capacity to process 1.7 Bcf of natural gas per day) and produce approximately 2.4 million gallons] of NGLs. NGLs are sold by the Company on a contractual basis to various NGL pipelines, end users and marketers at index-based prices. Marketing In 1997, the Company's natural gas marketing customers included local distribution companies, industrial, commercial and agricultural end users, electric utilities, Company affiliates, and other marketers located both on and off K N's pipeline systems. Natural gas is purchased by K N's gathering, processing and marketing business from various sources, including gas producers, gas processing plants and pipeline interconnections. For the year ended December 31, 1997, the Company's gathering, processing and marketing operations sold an average of approximately 1.6 Bcf of natural gas per day before intersegment eliminations. As is customary in the industry, most of the Company's gas purchase agreements are for periods of one year or less, and many are for periods of 60 days or less. Various agreements permit the purchaser or the supplier to renegotiate the purchase price or discontinue the purchase under certain circumstances. Purchase volume obligations under many of the agreements utilized by this business segment are generally "best efforts" and do not have traditional take-or-pay provisions. However, certain agreements require the Company to prepay for, or to receive, minimum quantities of natural gas. The Company owns a storage facility located in Gaines County, Texas, which had a working storage capacity of 16.4 Bcf of natural gas at December 31, 1997 and withdrawal capacity of 525 MMcf per day. This facility has traditionally been used to meet peak day requirements of the West Texas system. K N also has lease rights in the Stratton Ridge facility located in Brazoria County, Texas, including a peak day natural gas withdrawal capacity of 150 MMcf per day at December 31, 1997. K N Field Services K N Field Services, Inc. ("KNFS") provides field operations services to gas and oil industry customers who own production, gathering, processing and transportation assets. To the extent possible, KNFS uses the existing infrastructure and labor force employed in the Company's own systems to serve its clients. Among the services KNFS provides are well tending, site services, corrosion monitoring, compression operations and maintenance, safety training, gathering and pipeline operations and maintenance, measurement, pressure and flow monitoring, water hauling and line locating. (2) Interstate Transportation and Storage Services The Company's interstate pipeline system provides transportation and storage services to affiliates, third-party natural gas distribution utilities, and other shippers. For the year ended December 31, 1997, this business segment accounted for approximately 25% of consolidated operating income. As of December 31, 1997, the Company's interstate pipeline system consisted of approximately 6,900 miles of transmission lines and one storage field. The Company provides both firm and interruptible transportation and no-notice services to its customers. Under no-notice service, customers are able to meet their peak day requirements without making specific nominations 6 7 as required by firm and interruptible transportation service tariffs. The local distribution companies and other shippers may release their unused firm transportation capacity rights to other shippers. It is the Company's experience that this released capacity has, to a large extent, replaced interruptible transportation on the Company's interstate pipeline system. Firm transportation customers pay a monthly reservation charge plus a commodity charge based on actual volumes transported. Interruptible transportation is billed on the basis of volumes shipped. In 1996, K N purchased a crude oil pipeline (renamed the Pony Express Pipeline) running from Lost Cabin in central Wyoming to Freeman, Missouri near Kansas City, and converted it to natural gas transport service. The line became operational in August 1997 and, under its current configuration, has a maximum capacity of 255 MMcf per day. The Pony Express Pipeline provides access to significant natural gas reserves principally from the Denver-Julesburg, Wind River and Powder River Basins and is a catalyst for the development of the market hub at Rockport, Colorado. As a complement to this pipeline, in November 1996 the Company acquired one 20-year contract and one 19-year contract to provide firm transportation capacity of 230 MMcf of natural gas per day to the Kansas City metropolitan area. This project reflects the Company's ongoing strategy to balance regulated pipeline projects with the corresponding potential for greater returns from other nonregulated business segments. The Company is a one-half joint venture partner in the TransColorado Gas Transmission Company ("TransColorado"). TransColorado's pipeline is expected to provide increased flexibility in accessing multiple natural gas basins in the Rocky Mountain region. Though only a portion of the pipeline is currently operational, when completed, the TransColorado Pipeline will extend 290 miles, from the Piceance Basin of Colorado to Blanco, New Mexico, and will have an initial capacity of 300 MMcf per day. The TransColorado Pipeline will operate as an interstate pipeline regulated by the FERC. The Company's interstate pipeline system provides storage services to its customers through its Huntsman Storage Field in Cheyenne County, Nebraska. The facility had a peak natural gas withdrawal capacity of 100 MMcf per day at December 31, 1997. (3) Retail Natural Gas Services The Company provides retail natural gas services to residential, commercial, agricultural and industrial customers for space heating, crop irrigation, drying, and processing of agricultural products. The Company's en*able joint venture also has a 24-hour Customer Service Center in Scottsbluff, Nebraska, which centralizes customer service calls, service start-up and billing calls, service dispatch and remittance operations for the three-state region. For the year ended December 31, 1997, this business segment accounted for approximately 23% of consolidated operating income. Regulated Retail Services The Company's retail natural gas business operated approximately 1,500 miles of intrastate natural gas transmission, gathering and storage facilities as of December 31, 1997. These intrastate pipeline systems serve industrial customers and much of the Company's retail natural gas business in Colorado and Wyoming. As of December 31, 1997, the Company's retail natural gas business served over 210,000 customers in Colorado, Nebraska and Wyoming through approximately 7,200 miles of distribution pipelines (excluding the Company's Kansas natural gas distribution assets which the Company entered into an agreement to sell in December 1997, and which sale is expected to be consummated in the first half of 1998, following receipt of regulatory approval). The Company's underground storage facilities are used to provide natural gas for load balancing and peak system demand. Storage services for the Company's retail natural gas services segment are provided by three facilities 7 8 owned in Wyoming, one facility in Colorado owned and operated by Wildhorse and a storage facility located in Nebraska and owned by the Company's interstate pipeline system. The peak day natural gas withdrawal capacity available for this segment at December 31, 1997 was 103 MMcf per day. The Company's retail operations in Nebraska, Wyoming and northeastern Colorado serve areas that are primarily rural and agriculturally based. In much of Nebraska, the winter heating load is balanced by irrigation requirements in summer months and grain drying in the fall. The economy in the western Colorado service territory continues to grow as a result of growth in mountain resort communities and development of retirement communities. Gas Purchases and Supply The Company's retail natural gas business relies on the Company's interstate pipeline system, the intrastate pipeline systems it operates, and third-party pipelines for transportation and storage services required to serve its markets. Its gas supply requirements are being met through a combination of purchases from wholly owned marketing subsidiaries and third-party suppliers. The gas supply for the retail natural gas business segment comes primarily from basins in Kansas, Montana, Wyoming, Colorado, New Mexico and western Nebraska which include under-developed basins that represent significant proved reserves. The Company's gas supplies are strategically located with respect to existing and planned pipeline capacity, giving the Company access to gas for its retail customer base. Certain gas purchase contracts contain take-or-pay clauses which require that a certain purchase level be attained each contract year, or the Company must make a payment which is generally equal to the contract price multiplied by the deficient volume. All such payments are fully recoupable under the terms of the gas purchase contracts and the existing regulatory rules. To date, no buy-out or buy-down payments relating to take-or-pay contracts have been made by this business segment. See "--Gathering, Processing and Marketing Services--Marketing." Unregulated Retail Services In September 1996, the Company, through its subsidiary K N Services, Inc. ("KNS"), began marketing its Simple Choice package of products and services. In addition to natural gas service, under Simple Choice, customers can order satellite TV, appliance protection, long-distance telephone service, wireless Internet access and other products and services with one call, paid for with one monthly payment and backed by one service guarantee. Simple Choice was launched in Scottsbluff, Nebraska, where the Company also opened its first Simple Choice General Store. In early 1997, K N and PacifiCorp jointly formed en*able to market the Simple Choice brand to K N's approximately 200,000 and PacifiCorp's approximately 1.5 million customers as well as to other utilities. en*able is engaged in efforts to create Simple Choice partnerships and licensing agreements with other utilities. An integral part of the Simple Choice package is outsourced billing and customer service for third-party utilities. To enhance this capability, early in 1997 KNS and PacifiCorp's subsidiary, PacifiCorp Holdings, Inc., acquired OrCom Systems, Inc., the software development company that designed the billing system which supports the Simple Choice brand of products and services. 8 9 (4) General (a) Federal and State Regulation Gathering, Processing and Marketing Services Under the Natural Gas Act, facilities used for and operations involving the production and gathering of natural gas are exempt from FERC's jurisdiction, while facilities used for and operations involving interstate transmission are not exempt. However, the FERC's determination of what constitutes exempt gathering facilities as opposed to jurisdictional transmission facilities has evolved over time. Under current law, facilities which otherwise are classified as gathering may be subject to ancillary FERC rate and service jurisdiction when owned by an interstate pipeline company and used in connection with interstate transportation or jurisdictional sales. The FERC has historically distinguished between facilities owned by noninterstate pipeline companies, such as the Company's gathering facilities, on a fact-specific basis. The issue of state jurisdiction over gathering activities has previously been raised before the Colorado Public Utilities Commission, Kansas Corporation Commission, New Mexico Public Service Commission, Texas Railroad Commission and Wyoming Public Service Commission, as well as before state legislative bodies. The Company is closely monitoring developments in this area. As part of its corporate reorganization, the Company requested, was granted authority and in 1994 transferred substantially all of its gathering facilities to a wholly owned subsidiary. The FERC determined that after the transfer the gathering facilities would be nonjurisdictional, but the FERC reserved the right to reassert jurisdiction if the Company was found to be operating the facilities in an anti-competitive manner or contrary to open access principles. The operations of the Company's intrastate pipeline and marketing subsidiaries located primarily in Texas are affected by FERC rules and regulations issued pursuant to the Natural Gas Act and the Natural Gas Policy Act. Of particular importance are regulations which allow increased access to interstate transportation services, without the necessity of obtaining prior FERC authorization for each transaction. The most important element of the program is nondiscriminatory access, under which a regulated pipeline must agree, under certain conditions, to transport gas for any party requesting such service. The interstate gas marketing activities of the Company's various marketing and pipeline subsidiaries are conducted either as unregulated first sales or pursuant to blanket certificate authority granted by the FERC under the Natural Gas Act. Certain of the Company's intrastate pipeline services and assets are subject to regulation by the Texas Railroad Commission. Interstate Transportation and Storage Services Facilities for the transportation of natural gas in interstate commerce and for storage services in interstate commerce are subject to regulation by the FERC under the Natural Gas Act and the Natural Gas Policy Act. The acquisition of MidCon's interstate natural gas pipeline system results in a significant increase in the percentage of the Company's assets subject to regulation by the FERC. The Company is also subject to the requirements of FERC Order Nos. 497, et seq. and 566, et. seq., the Marketing Affiliate Rules, which prohibit preferential treatment by an interstate pipeline of its marketing affiliates and govern in particular the provision of information by an interstate pipeline to its marketing affiliates. 9 10 In January 1998, the Company's subsidiary, K N Interstate Gas Transmission Co. ("KNI") filed a rate case requesting an increase in its rates which would result in additional annual revenues of $30.2 million. The FERC, by an order dated February 26, 1998, accepted the filing and suspended its effective date for the full five-month period permitted by the Natural Gas Act thus permitting the rates to go into effect subject to refund August 1, 1998. Various parties intervened in the proceedings. There will be additional proceedings before the FERC to resolve differences. Retail Natural Gas Services Certain of the Company's intrastate pipelines, storage, distribution and/or retail sales in Colorado, Kansas, Texas and Wyoming are under the regulatory authority of each state's utility commission. In Nebraska, retail gas sales rates for residential and small commercial customers within a municipality are regulated by each municipality served. In certain of the incorporated communities in which the Company provides natural gas services at retail, the Company operates under franchises granted by the applicable municipal authorities. The duration of franchises varies. In unincorporated areas, the Company's natural gas utility services are not subject to municipal franchise. The Company has been issued various certificates of public convenience and necessity by the regulatory commissions in Colorado, Kansas and Wyoming authorizing it to provide natural gas utility services within certain incorporated and unincorporated areas of those states. Continuing regulatory change will provide energy consumers with increasing choices among their suppliers. The Company emerged as a leader in providing for customer choice by filing an application with the Wyoming Public Service Commission in 1995 to allow 10,500 residential and commercial customers to choose to purchase the gas from a qualified list of suppliers. The proposal provided that the Company would continue to provide all other utility services. In early 1996, the Wyoming Public Service Commission issued an order allowing the Company to bring competition to these 10,500 residential and commercial customers beginning in mid 1996. Choosing from a menu of three competing suppliers, approximately 80% of the Company's customers chose to remain with the Company. The experience gave the Company early and valuable experience in competing in an unbundled environment and led to the development of new products and services that add value to the natural gas commodity. The innovative program was one of the first in the nation that allowed essentially all customers the opportunity to exercise energy choice for natural gas. Similarly, the Company has made voluntary filings with municipal authorities in Nebraska to provide its retail customers with an opportunity to purchase gas from competing suppliers on an unregulated basis. The Company will continue to provide all other gas utility services. If municipal approvals are received, the program will be implemented in 1998. (b) Environmental Regulation The Company's operations and properties are subject to extensive and evolving Federal, state and local laws and regulations governing the release or discharge of regulated materials into the environment or otherwise relating to environmental protection. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. Moreover, the Company believes recent trends toward stricter standards in environmental legislation and regulation are likely to continue. The United States Oil Pollution Act of 1990 and regulations promulgated thereunder by the Minerals Management Service impose a variety of requirements on persons who are or may be responsible for oil spills in waters of the United States. The term "waters of the United States" has been broadly defined to include inland waterbodies, such as wetlands, playa lakes and intermittent streams. The Company has a limited number of facilities that could affect "waters of the United States." The Federal Water Pollution Control Act, also known as the Clean Water Act, and 10 11 regulations promulgated thereunder, require containment of potential discharges of oil or hazardous substances and preparation of oil spill contingency plans. The Company has implemented programs that address containment of potential discharges and spill contingency planning. The failure to comply with ongoing environmental regulatory requirements or inadequate cooperation during a spill event may subject a responsible party to civil or criminal enforcement actions. The Comprehensive Environmental Response, Compensation and Liability Act, as amended ("Superfund"), imposes liability on certain classes of persons who are considered to have contributed to the release of a "hazardous substance" into the environment without regard to fault or the legality of the original conduct. Under Superfund, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. Furthermore, neighboring landowners and other third parties have the right to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Federal and state regulations implementing the 1990 Amendments to the Clean Air Act affect the Company's operations in several ways. Natural gas compressors for both gathering and transmission activity are now required to meet stricter air emission standards. Additionally, states in which the Company operates are adopting regulations under the authority of the "Operating Permit Program" under Title V of these 1990 Amendments. This Operating Permit Program requires operators of certain facilities to obtain individual site-specific air permits containing stricter operational and technological standards of operation in order to achieve compliance with this section of the 1990 Clean Air Act Amendments and associated state air regulations. The Toxic Substances Control Act, as amended ("TSCA"), imposes certain operational and technical standards on persons who manufacture, process, distribute, use or dispose of TSCA-related substances, including such things as polychlorinated biphenyls ("PCBs"), asbestos, and lead-based paints. The Company has facilities which contain such TSCA-related substances. In connection with the Acquisition of MidCon, Occidental indemnified the Company against certain liabilities, including litigation and the failure of MidCon to be in compliance with applicable laws, in each case which would have a material adverse effect on MidCon, for one year following the closing date. To the extent that an environmental liability of MidCon is not covered by Occidental's indemnity obligation or, to the extent that matters arise following the termination of Occidental's indemnification obligation, the Company will be responsible for MidCon's environmental liabilities. The Company does not expect that such costs will have a material adverse impact on its business, financial position or results of operations. Based on current information and taking into account reserves established for environmental matters, the Company does not believe that compliance with Federal, state and local environmental laws and regulations will have a material adverse effect on the Company's business, financial position or results of operations. In addition, the clean-up programs in which the Company is engaged are not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas. However, there can be no assurances that future events, such as changes in existing laws, the promulgation of new laws, or the development of new facts or conditions will not cause the Company to incur significant costs. (c) Safety Regulation The operations of certain of the Company's gas pipelines are subject to regulation by the United States Department of Transportation (the "DOT") under the Natural Gas Pipeline Safety Act of 1968, as amended (the "NGPSA"). The NGPSA establishes safety standards with respect to the design, installation, testing, construction, operation and management of natural gas pipelines, and requires entities that own or operate pipeline facilities to comply with the applicable safety standards, to establish and maintain inspection and maintenance plans, and to comply with such plans. 11 12 The NGPSA was amended by the Pipeline Safety Act of 1992 to require the DOT's Office of Pipeline Safety to consider, among other things, protection of the environment when developing minimum pipeline safety regulations. Management believes the Company's operations, to the extent they may be subject to the NGPSA, comply in all material respects with the NGPSA. The Company is also subject to state and federal laws and regulations concerning occupational health and safety. (d) Other Amounts spent by the Company during 1997, 1996 and 1995 on research and development activities were not material. (C) Financial Information About Foreign and Domestic Operations and Export Sales Substantially all of the Company's operations are in the contiguous 48 states. ITEM 3: LEGAL PROCEEDINGS The Company was named as one of four potentially responsible parties ("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site known as the Mystery Bridge Road/U.S. Highway 20 site located near Casper, Wyoming (the "Brookhurst Subdivision") in 1989. A majority of the Company's groundwater, soil and free phase petroleum cleanup occurred between 1990 and 1996. Groundwater remediation standards were recently achieved at the Company's operable unit, and the EPA has allowed the Company to go into a post-remedial action monitoring phase. The total remaining estimated cost is not expected to exceed $150,000. (United States of America v. Dow Chemical Company, Dowell Schlumberger, Inc., and K N Energy, Inc., Civil Action No. 91CV1042, United States District Court for the District of Wyoming; formerly reported as Administrative Orders for Removal Action on Consent, October 15, 1987, and Amendment to Administrative Order for Removal Order on Consent, October 10, 1989, Docket No. CERCLA VII-88-01, United States Environmental Protection Agency; Judicial Entry of Consent Decree, United States v. Dow Chemical Company, et al. (D. Wyo) USDC-WY-91CV1042B, Superfund Site Number 8T83, Natrona County, Wyoming; EPA Docket Number CERCLA-VIII). In 1994, a mercury sampling program was initiated on the Company's systems in central and western portions of Kansas. The Company is working with the Kansas Department of Health and Environment pursuant to a voluntary agreement. The assessment program is being completed, and the Company in 1998 will commence a phased remediation program for those sites where concentrations are above regulatory thresholds, at an expected cost of $200,000 in 1998. The program will take place over a period of years, and the costs are not expected to have a material adverse impact on the Company's business, financial position or results of operations. The Company performed environmental audits in Colorado, Kansas and Nebraska, which revealed that certain grease and lubricating oils used at various pipeline and facilities locations contained PCBs. The Company is working with the appropriate regulatory agencies to manage the cleanup and remediation of the pipelines and facilities. The Company filed suit against Rockwell International Corporation ("Rockwell"), manufacturer of the PCB-containing grease used in certain of the Company's pipelines and facilities, and two other related defendants for expenses and losses incurred by the Company for cleanup or mitigation. The Company settled with Rockwell in March 1994. (K N Energy, Inc. and Rocky Mountain Natural Gas Company v. Rockwell International Corp et al., United States District Court for the District of Colorado, Case No. 93-711). To date since 1991, the Company has incurred approximately $500,000 in costs associated with the remediation and management of this issue, including preparation and implementation of a workplan. In 1998, the Company may spend up to approximately $470,000. A substantial portion of these costs are recoverable under the settlement entered into with Rockwell. The total potential remediation and cleanup costs at 12 13 currently identified locations is not expected to have a material adverse impact on the Company's financial position or results of operations. The cleanup programs are not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas. Pursuant to certain acquisition agreements involving Cabot Corporation ("Cabot"), the Company's largest stockholder, Cabot indemnified the Company for certain environmental liabilities. Issues have arisen concerning Cabot's indemnification obligations. The Company and Cabot have agreed to enter into binding arbitration to resolve all issues in dispute. The Company is unable to estimate its potential exposure for such liabilities at this time, but does not expect them to have a material adverse impact on the Company's financial position or results of operations. The Company acquired certain gathering and processing assets from Parker & Parsley Gas Processing Co. and its affiliates in October 1995. In connection with that acquisition, and for a reduction in the purchase price that included the estimated costs of remediation of $3.9 million, the Company agreed to accept all responsibility and liability for environmental matters associated with such properties. Also, in March 1997, the Company acquired the Bushton processing complex and Hugoton Basin gathering assets from Enron Corporation and certain of its affiliates. In connection with that acquisition, the Company established reserves to fund previously-identified environmental/operational issues; the Company will also be reimbursed on a shared basis for costs and expenses associated with any environmental deficiencies identified at the facility in the next five years up to a maximum of $10 million, although the Company does not anticipate costs will reach that amount. After consideration of reserves established and the agreements entered into in connection with these various acquisitions, costs and expenses related to environmental matters are not expected to have a material adverse effect on the business, financial position or results of operations of the Company. In May 1997, the Nebraska Department of Environmental Quality ("NDEQ") issued a violation notice to KNI regarding historical Prevention of Significant Deterioration permitting issues related to certain engines at the Big Springs, Nebraska, facility. KNI is in the process of obtaining the proper permits at this time, and is also engaged in discussions with NDEQ regarding settlement of the violation notice and a $500,000 fine currently proposed by the NDEQ. The costs associated with this matter are not expected to have a material adverse effect on the Company's business, financial position or results of operations. On October 9, 1992, Jack J. Grynberg filed suit in the United States District Court for the District of Colorado against the Company, Rocky Mountain Natural Gas Company ("RMNG') and GASCO, Inc. (the "K N Entities") alleging that the KN Entities as well as K N Production Company and K N Gas Gathering, Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts that the defendant companies have engaged in an illegal exercise of monopoly power, have illegally denied him economically feasible access to essential facilities to transport and distribute gas produced from fewer than 20 wells located in northwest Colorado, and have illegally attempted to monopolize or to enhance or maintain an existing monopoly. Grynberg also asserts certain causes of action relating to a gas purchase contract. The Company's potential liability for monetary damages and the amount of such damages, if any, are subject to dispute between the parties; however, the Company believes it has a meritorious position in these matters and does not expect this lawsuit to have a material adverse effect on the Company's financial position or results of operations. In July 1996, the U. S. District Court, District of Colorado lifted its stay and allowed discovery for a period of time. Currently, this case is still pending. Discovery is now complete, but no trial date has yet been set. (Grynberg v. K N, et al., Civil Action No. 92-2000, United States District Court for the District of Colorado). On July 26, 1996, K N and RMNG along with over 70 other natural gas pipeline companies, were served by Jack J. Grynberg, acting on behalf of the Government of the United States, with a Civil False Claims Act lawsuit alleging mismeasurement of the heating content and volume of natural gas resulting in underpayment of royalties to the federal government. The government, particularly officials from the Departments of Justice and Interior, reviewed the complaint and the evidence presented by Mr. Grynberg and declined to intervene in the action, allowing Mr. Grynberg to proceed on his own. No specific claims were made against K N or RMNG, and no specific monetary damages were 13 14 claimed. K N and the other named companies filed a motion to dismiss the lawsuit on grounds of improper joinder and lack of jurisdiction. The motion to dismiss was granted in 1997, and K N is no longer required to respond to this action. However, the court did give Mr. Grynberg leave to refile and pursue this action in a court with proper jurisdiction. The Company believes it has a meritorious position in this matter, and does not expect this lawsuit to have a material adverse effect on the Company's financial position or results of operations. (United States of America ex rel. Jack J. Grynberg v. Alaska Pipeline Company, et al., Civil Action No. 95-725-TF#, United States District Court for the District of Columbia). The Company believes it has meritorious defenses to all lawsuits and legal proceedings in which it is a defendant and will vigorously defend against them. Based on its evaluation of the above matters, and after consideration of reserves established, the Company believes that the resolution of such matters will not have a material adverse effect on the Company's financial position or results of operations. 14 15 EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification and Business Experience of Executive Officers
Name Age Position and Business Experience - ------------------------------------------------- --- ------------------------------------------------------------ Morton C. Aaronson............................... 39 Chief Marketing Officer since April 1996. Vice President since January 1996. Vice President, MCI/ NewsCorp. Business Development from May 1995 to January 1996. Vice President, Market Management, MCI Communications Corporation from August 1994 to May 1995. Vice President, Large Accounts and Global Markets, MCI Communications Corporation, from July 1993 to August 1994. Director, Major Accounts Marketing, MCI Communications Corporation from July 1992 to July 1993. John N. DiNardo.................................. 50 Vice President and General Manager since April 1996. Vice President - Gas Gathering and Processing from March 1994 to April 1996. General Manager, K N Gas Gathering, Inc. and K N Front Range Gathering Company from May 1993 to March 1994. Director of Project Development, K N Gas Gathering, Inc. from August 1991 to May 1993. Jack W. Ellis II................................. 44 Vice President and Controller since December 1997. Vice President and Controller, NorAm Energy Co. from December 1989 to August 1997. William S. Garner, Jr............................ 48 Vice President since April 1997. Vice President and General Counsel from January 1991 to April 1997 and Secretary from April 1992 to April 1996. Larry D. Hall.................................... 55 Chairman of the Board since April 1996. President and Chief Executive Officer since July 1994. President and Chief Operating Officer from May 1988 to July 1994. Director since 1984. S. Wesley Haun................................... 50 Vice President, Strategic Business Development Since April 1997. Vice President since April 1996. Vice President, Marketing and Supply from May 1993 to April 1996. Vice President, Gas Supply from March 1990 to May 1993. E. Wayne Lundhagen............................... 60 Vice President and Treasurer since March 1995. Vice President, Finance and Accounting from May 1988 to March 1995. Clyde E. McKenzie................................ 50 Vice President and Chief Financial Officer since April 1996. Vice President and Treasurer, Apache Corporation from 1988 to 1996. John L. Pelletier............................... 49 Vice President, Administration since February 1998. Vice President, Administration of MidCon Corp. from 1992 to January 1998.
15 16 John F. Riordan................................. 62 Vice Chairman of the Board and Director since February 1998. President and Chief Executive Officer of MidCon Corp. from 1990 to January 1998. Executive Vice President and Director of Occidental Petroleum Corporation from 1991 to January 1998. Murray R. Smith................................. 43 Vice President - Corporate Communications since August 1996. Senior Vice President, K N Services, Inc. from April to August 1996. Director of Field Communications, Training and Sales Programs, MCI Communications Corporation from October 1995 to April 1996. Director of Field Marketing and Communications, WorldWide Sales, MCI Communications Corporation from October 1994 to October 1995. Director of Field Marketing - Business Services, MCI Communications Corporation from June 1992 to October 1994. Director of Marketing, Southern Division, MCI Communications Corporation from November 1990 to June 1992. H. Rickey Wells................................. 41 Vice President - Business Operations since April 1996. Vice President, Operations from June 1988 to April 1996. Martha B. Wyrsch................................ 40 Vice President, General Counsel and Secretary since August 1997. Vice President, Deputy General Counsel and Secretary from April 1996 to August 1997. Deputy General Counsel from November 1995 to April 1996. Assistant General Counsel from June 1995 to November 1995. Senior Counsel from June 1993 to June 1995.
These officers generally serve until April of each year. (B) Involvement in Certain Legal Proceedings None. 16 17 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed for trading on the New York Stock Exchange under the symbol KNE. Dividends paid and the price range of the Company's common stock by quarter for the last two years are provided below.
1997 1996 ---- ---- Market Price Data (Low-High-Close) Quarter Ended: March 31 $36.125 - $41.75 - $39.50 $27.00 - $31.75 - $31.125 June 30 $36.875 - $43.125 - $42.125 $30.625 - $34.375 - $33.50 September 30 $39.00 - $47.938 - $45.75 $31.75 - $36.625 - $35.25 December 31 $41.00 - $54.00 - $54.00 $35.00 - $41.25 - $39.25 Dividends Quarter Ended: March 31 $0.27 $0.26 June 30 $0.27 $0.26 September 30 $0.27 $0.26 December 31 $0.28 $0.27 Common Stockholders Year-end 10,090 9,794
17 18 ITEM 6: SELECTED FINANCIAL DATA FIVE-YEAR REVIEW K N ENERGY, INC. AND SUBSIDIARIES Selected Financial Data (In Thousands, Except Per Share Amounts)
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- OPERATING REVENUES: Gathering, Processing and Marketing Services $ 1,866,327 $ 1,191,292 $ 854,462 $ 838,474 $ 730,895 Interstate Transportation and Storage Services 23,757 25,352 22,217 21,044 99,838 Retail Natural Gas Services 255,034 223,838 227,282 220,431 212,905 Gas and Oil Production -- -- 7,437 11,328 5,321 ----------- ----------- ----------- ----------- ----------- Total Operating Revenues $ 2,145,118 $ 1,440,482 $ 1,111,398 $ 1,091,277 $ 1,048,959 =========== =========== =========== =========== =========== OPERATING INCOME $ 142,249 $ 134,801 $ 115,362 $ 54,879 $ 80,874 Other Income and (Deductions) (29,091) (35,085) (33,790) (30,058) (31,406) ----------- ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 113,158 99,716 81,572 24,821 49,468 Income Taxes 35,661 35,897 29,050 9,500 18,599 ----------- ----------- ----------- ----------- ----------- NET INCOME 77,497 63,819 52,522 15,321 30,869 Less - Preferred Stock Dividends 350 398 492 630 853 ----------- ----------- ----------- ----------- ----------- EARNINGS AVAILABLE FOR COMMON STOCK $ 77,147 $ 63,421 $ 52,030 $ 14,691 $ 30,016 =========== =========== =========== =========== =========== DILUTED EARNINGS PER COMMON SHARE $ 2.45 $ 2.14 $ 1.83 $ 0.52 $ 1.09 =========== =========== =========== =========== =========== DIVIDENDS PER COMMON SHARE $ 1.09 $ 1.05 $ 1.01 $ 0.76 $ 0.51 =========== =========== =========== =========== =========== NUMBER OF SHARES USED IN COMPUTING DILUTED EARNINGS PER COMMON SHARE 31,538 29,624 28,360 28,044 27,424 =========== =========== =========== =========== =========== TOTAL ASSETS $ 2,305,805 $ 1,629,720 $ 1,257,457 $ 1,172,384 $ 1,169,275 =========== =========== =========== =========== =========== CAPITAL EXPENDITURES $ 311,093 $ 119,987 $ 79,313 $ 70,511 $ 100,780 =========== =========== =========== =========== =========== ACQUISITIONS $ 153,756 $ 155,909 $ 35,897 $ 31,363 $ 65,172 =========== =========== =========== =========== =========== CAPITALIZATION: Common Stockholders' Equity $ 606,132 48% $ 519,794 55% $ 426,760 57% $ 393,686 54% $ 391,462 53% Preferred Stock 7,000 -- 7,000 1% 7,000 1% 7,000 1% 7,000 1% Preferred Stock Subject to Mandatory Redemption -- -- -- -- 572 -- 1,715 -- 2,858 -- Preferred Capital Trust Securities 100,000 8% -- -- -- -- -- -- -- -- Long-Term Debt 553,816 44% 423,676 44% 315,564 42% 334,644 45% 335,190 46% ----------- --- ----------- --- ----------- --- ----------- --- ----------- --- Total Capitalization $ 1,266,948 100% $ 950,470 100% $ 749,896 100% $ 737,045 100% $ 736,510 100% =========== === =========== === =========== === =========== === =========== === BOOK VALUE PER COMMON SHARE $ 18.93 $ 17.16 $ 15.19 $ 14.25 $ 14.39 =========== =========== =========== =========== ===========
18 19 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On January 30, 1998, K N acquired all the outstanding capital stock of MidCon Corp. for approximately $2.1 billion in cash and a $1.39 billion short-term note. See K N - MidCon Combination in the Outlook/Forward-Looking Information section of this report and Note 2 of Notes to Consolidated Financial Statements. CONSOLIDATED EARNINGS Consolidated net income, diluted earnings per common share and return on average common equity for the three years ended December 31, 1997 were:
1997 1996 1995 ---- ---- ---- Net Income (In Millions) $77.5 $63.8 $52.5 Earnings per Common Share $2.45 $2.14 $1.83 Return on Average Common Equity 13.7% 13.4% 12.7%
Net income and diluted earnings per share for 1997 represent increases of 21 percent and 14 percent, respectively, from 1996. This improvement resulted principally from (1) the earnings contribution of the Bushton assets acquired in April 1997, (2) the August 1997 startup of the Pony Express Pipeline, (3) earnings from the Company's equity investments in the TransColorado Pipeline and the Coyote Gulch Gas Treating Plant, (4) income related to the sale of a 50 percent interest in en*able, and (5) a lower 1997 income tax provision. To achieve its double-digit earnings growth in 1997, the Company overcame several challenges, including losses in certain power marketing transactions, lower natural gas liquids ("NGLs") prices, record low demand for wholesale irrigation load in the Texas intrastate market area and a delay in reaching full throughput capacity on the Pony Express Pipeline (which impacted operating results for both the gathering, processing and marketing, and the interstate pipeline segments). These negative factors were mitigated by the Company's decision to take advantage of favorable market conditions to effect certain transactions as discussed following. The 17 percent increase in 1996 diluted earnings per share from 1995 was primarily attributable to business growth on the interstate pipeline and gathering and processing systems, higher prices for NGLs, expense savings from the 1995 corporate restructuring, and incremental sales of storage gas. Operating results for 1996 were adversely impacted by low demand for retail irrigation sales and transportation services due to abnormally heavy rainfall during the summer. 19 20 RESULTS OF OPERATIONS Comparative operating results by business segment, consolidated other income and (deductions) and income taxes are presented below. Segment operating revenues, costs and expenses and volumetric data cited below are before intersegment eliminations; dollar amounts are in millions.
GATHERING, PROCESSING AND MARKETING SERVICES 1997 1996 1995 ---- ---- ---- Operating Revenues - Gas Sales $1,443.9 $ 983.4 $706.8 Natural Gas Liquids Sales 275.9 189.9 117.0 Gathering, Transportation and Other 210.6 83.2 66.7 -------- -------- ------ 1,930.4 1,256.5 890.5 -------- -------- ------ Operating Costs and Expenses - Gas Purchases and Other Costs of Sales 1,691.5 1,050.1 704.3 Operations and Maintenance 115.1 89.1 85.1 Depreciation and Amortization 34.8 31.7 26.5 Taxes, Other Than Income Taxes 14.6 11.1 10.0 -------- -------- ------ 1,856.0 1,182.0 825.9 -------- -------- ------ Operating Income $ 74.4 $ 74.5 $ 64.6 ======== ======== ====== Systems Throughput (Trillion Btus) - Gas Sales 573.7 430.1 407.8 Gathering and Transportation 423.0 313.1 306.0 -------- -------- ------ 996.7 743.2 713.8 ======== ======== ====== Natural Gas Liquids Sales (Million Gallons) - Company-Owned and Processed 549.7 405.9 375.6 Third-Party Marketed 167.7 63.9 12.5 -------- -------- ------ 717.4 469.8 388.1 ======== ======== ======
The significant increases in 1997 operating revenues, costs and expenses and volumetric data largely reflect the acquisition of the Bushton gathering and processing assets effective April 1, 1997. Other operating revenues and other costs of sales also reflect a significant increase in 1997 power marketing activity which, as discussed below, was suspended in the third quarter. The Bushton acquisition contributed incremental 1997 operating revenues of $114.8 million and operating income of $15.4 million. This segment's 1997 operating income was level with the prior year's results, as 1997 operations were adversely impacted by losses from certain power marketing transactions, lower NGLs prices, reduced wholesale irrigation demand (5.9 trillion Btus below 1996 deliveries due to abundant rainfall in the Texas intrastate market area) and $1.4 million of expenses incurred to centralize the Company's marketing activities in Houston. During 1997, losses of approximately $4.0 million were incurred in connection with certain power marketing transactions which were not in compliance with the Company's risk management policies. Subsequently, power marketing activities were suspended in the third quarter. Excluding the Bushton facility, average NGLs prices in 1997 were $0.03 per gallon lower than 1996, creating a negative impact on 1997 operating income of approximately $7.5 million. Irrigation-related gas marketing and transportation and storage margins were adversely impacted by approximately $5.4 million due to the abnormally wet 1997 summer. Additionally, the delay until January 1998 in reaching full throughput capability on the Pony Express Pipeline limited growth in gathering and processing volumes at the Company's expanded Douglas plant and marketing opportunities into the Kansas City area, as upstream business expansion opportunities off the Pony Express Pipeline were expected to offset on-going declines in certain producing areas. The cumulative unfavorable earnings impact of these 1997 events was substantially mitigated by increased sales of storage gas and the sale of certain non-strategic gas supply, NGLs marketing and storage-related contracts. These transactions, aggregating $15.9 million of net margin increases over similar transactions in 1996, 20 21 essentially offset the losses and negative market circumstances enumerated above. The Company currently expects that future margins from storage sales will be less. The 15 percent increase in 1996 operating income over 1995 largely resulted from three factors: (1) growth in volumes (principally due to acquisitions, the Wildhorse joint venture with Tom Brown, Inc., and sales of storage gas), (2) higher NGLs prices and (3) expense savings accruing from the 1995 corporate restructuring. This segment did experience compression of margins during 1996 in all three of its principal activities (gas sales, NGLs sales and transportation and gathering services) due to competitive factors and significantly higher gas costs influenced by colder weather nationwide. Average 1996 NGLs sales prices exceeded those realized in 1995 by $0.10 per gallon. However, the impact of higher NGLs prices was partially offset by the effect of higher gas prices on shrink and fuel payments to producers under "keep whole" processing agreements.
INTERSTATE TRANSPORTATION AND STORAGE SERVICES 1997 1996 1995 ---- ---- ---- Operating Revenues - Transportation and Storage $ 73.8 $ 63.4 $ 58.6 Other 6.0 8.4 5.8 -------- -------- -------- 79.8 71.8 64.4 -------- -------- -------- Operating Costs and Expenses - Gas Purchases and Other Costs of Sales 6.0 7.3 7.7 Operations and Maintenance 26.1 24.3 27.5 Depreciation and Amortization 9.0 8.0 7.8 Taxes, Other Than Income Taxes 3.7 2.8 3.4 -------- -------- -------- 44.8 42.4 46.4 -------- -------- -------- Operating Income $ 35.0 $ 29.4 $ 18.0 ======== ======== ======== Systems Throughput (Trillion Btus) 177.4 156.8 155.6 ======== ======== ========
The Pony Express Pipeline accounted for the majority of the 1997 improvement in the interstate pipeline's operating income, despite regulatory delays in commencing the project and operational delays in reaching its design capability. Additionally, 1997 operating results were positively impacted by increased 1997 gas supply requirements in the Company's retail natural gas services segment resulting from colder weather and higher irrigation demand. Effective August 31, 1997, the Casper processing plant was transferred to an unregulated subsidiary included in the gathering, processing and marketing segment. The reduction in 1997 other operating revenues and gas purchases and other costs of sales is primarily due to this transfer. 21 22 This segment's 1996 results showed substantial improvement over 1995 as throughput and demand revenues increased due to mid-year 1996 system expansions in Wyoming. Throughput in 1996 was adversely affected by below normal irrigation load on the Company's retail segment served by the interstate pipeline. Lower 1996 operations and maintenance and payroll taxes resulted from expense savings due to the 1995 corporate restructuring.
1997 1996 1995 ---- ---- ---- RETAIL NATURAL GAS SERVICES Operating Revenues - Gas Sales $ 219.4 $ 190.0 $ 204.0 Transportation and Other 37.4 35.4 28.3 -------- -------- -------- 256.8 225.4 232.3 -------- -------- -------- Operating Costs and Expenses - Gas Purchases and Other Costs of Sales 148.3 115.3 122.4 Operations and Maintenance 57.9 62.3 60.3 Depreciation and Amortization 12.2 11.5 11.0 Taxes, Other Than Income Taxes 5.6 5.4 5.6 -------- -------- -------- 224.0 194.5 199.3 -------- -------- -------- Operating Income $ 32.8 $ 30.9 $ 33.0 ======== ======== ======== Systems Throughput (Trillion Btus) - Gas Sales 38.6 34.7 39.0 Transportation 34.9 32.9 27.4 -------- -------- -------- 73.5 67.6 66.4 ======== ======== ========
Operating income in 1997 as compared to 1996 was positively affected by increased demand for space-heating and irrigation due to colder weather and less rainfall during the summer. Although approximately 13 percent below a normal year, irrigation deliveries of 10.9 trillion Btus in 1997 exceeded 1996 requirements by 1.4 trillion Btus. The impact of 1997 company-wide expense controls on operations and maintenance costs is most apparent in this segment, as this segment has not experienced significant acquisitions or expansion projects this year. Operating results for 1996 were adversely impacted by low demand for irrigation requirements due to abnormally heavy rainfall during the summer. Irrigation sales and transportation volumes in 1996 were 3.8 trillion Btus below the 1995 season. Deliveries to irrigators of 12.6 trillion Btus in 1995 were more indicative of a normal year's load. This negative impact on 1996 earnings was partially mitigated by increased customer requirements for grain drying and growth in transportation volumes on the Rocky Mountain intrastate pipeline due to the fourth quarter 1996 acquisition of interconnected gathering and processing facilities. Operations and maintenance expenses were 3.3 percent higher than in 1995, as costs incurred in the development of new marketing initiatives exceeded savings realized from the 1995 corporate restructuring.
OTHER INCOME AND (DEDUCTIONS) 1997 1996 1995 ---- ---- ---- Interest Expense $ (43.5) $ (35.9) $ (34.2) ------- ------- ------- Minority Interests and Other, Net 14.4 0.8 0.4 ------- ------- ------- $ (29.1) $ (35.1) $ (33.8) ======= ======= =======
Increases in the most recent two years' interest expense result from the issuance of long-term debt in 1997 and 1996 and higher levels of short-term borrowings incurred principally to fund capital expenditures. In 1997 and 1996, the Company capitalized $7.8 million and $1.8 million, respectively, of interest costs primarily related to the construction of the Pony Express Pipeline. Minority Interests and Other, Net for 1997 includes $5.7 million of earnings from the Company's equity investments in the TransColorado Pipeline and the Coyote Gulch Gas Treating Plant, and $7.0 million of income related to the sale of a 50 percent interest in en*able, with no corresponding amounts in 1996. Net gains totaling $ 3.7 million on the sale of several non-strategic gathering systems and, in accordance with regulatory guidelines, the capitalization of equity financing costs of $4.5 million 22 23 related to the Pony Express Pipeline, more than offset the $5.8 million of financing costs (included in Minority Interests) associated with the 8.56% Preferred Capital Trust Securities issued in April 1997.
INCOME TAXES 1997 1996 1995 ---- ---- ---- Provisions $ 35.7 $ 35.9 $ 29.1 ======= ======= ======= Effective Tax Rate 31.5% 36.0% 35.6% ======= ======= =======
The reduced 1997 provision for income taxes and the resulting reduction in the effective tax rate are due to the successful resolution of certain issues from prior years' income tax filings. Refer to Note 7 of Notes to Consolidated Financial Statements for a reconciliation of the statutory rate to yearly effective rates. LIQUIDITY AND CAPITAL RESOURCES During 1997 the primary sources of cash were from internally generated cash flows, the public offerings of long-term debt and preferred capital trust securities and short-term borrowings. Cash outflows funded capital expenditures and acquisitions, debt service and dividend payments. CASH FLOWS FROM OPERATING ACTIVITIES Net cash flows from operating activities for 1997 totaled $97.5 million, compared with $75.6 million and $132.2 million for 1996 and 1995, respectively. The improvement in 1997's net operating cash flows was largely attributable to the same factors resulting in the reported increase in earnings. Net operating cash flows in 1996 were primarily negatively impacted by disbursements to buyout above-market gas purchase contracts and increases in storage gas inventories. CAPITAL EXPENDITURES AND COMMITMENTS Capital expenditures of $311.1 million in 1997 were significantly higher than expenditures of $120.0 million in 1996 and $79.3 million in 1995. The large increase in 1997 capital expenditures resulted from the completion of the Pony Express Pipeline, construction of transmission laterals into the Kansas City metropolitan area, and capital investment related to the Bushton acquisition, including initial expenditures to reduce field pressures in the Hugoton Basin. The 1998 capital expenditures budget totals $149.5 million (before adjustment to reflect the consolidation with MidCon). Budgeted maintenance, safety and environmental expenditures approximate $56.4 million and budgeted business growth or expansion expenditures approximate $93.1 million. Principal acquisitions or investments made during 1997 included the Bushton gas gathering and processing assets effective in April, Interenergy effective in December (primarily a gathering and marketing entity) and an interest in the Red Cedar Gathering Company acquired at year-end. See Notes 3(A), 3(C) and 3(B) of Notes to Consolidated Financial Statements. 23 24 CAPITAL RESOURCES At December 31, 1997, the Company had a credit agreement with 11 banks (the "Pre-Acquisition Facility") pursuant to which the Company could borrow or provide support for commercial paper issuance up to a total of $350 million. Borrowings under the Pre-Acquisition Facility were $329.2 million and $129.3 million at December 31, 1997 and 1996, respectively. The Pre-Acquisition Facility was terminated in January 1998 and replaced with new credit lines and an acquisition facility in conjunction with the acquisition of MidCon. See Note 8(A) of Notes to Consolidated Financial Statements. In January 1998, following a review of the K N - MidCon combination, Fitch Investors Service ("Fitch"), Moody's Investors Service ("Moody's") and Standard & Poor's ("S&P") lowered their ratings of the Company's senior unsecured debt. Fitch lowered its rating from A- to BBB, Moody's lowered its rating from A3 to Baa2 and S&P lowered its rating from BBB+ to BBB-. The Company intends to strengthen its balance sheet during 1998 by public equity offerings, limiting capital expenditures (for both MidCon and the historical K N companies) and increasing internally generated cash flows. In recent years, the Company's capitalization has averaged approximately 45 percent debt to 55 percent equity. As a result of the acquisition of MidCon on January 30, 1998, the Company's leverage has increased significantly through the utilization of an acquisition debt facility and new revolving credit facilities. See Note 8(A) of Notes to Consolidated Financial Statements. The Company currently has in place a shelf registration statement with the Securities and Exchange Commission in a total amount of $4.0 billion, pursuant to which, as of March 4, 1997, the Company had agreed to the pricing for public sale of $2.35 billion principal amount of debt securities of varying maturities and 10 million shares of common stock (up to 11.5 million shares if the underwriters' over-allotment option is fully exercised). The proceeds of these offerings are expected to be used to (1) repay the acquisition debt associated with the purchase of MidCon and (2) purchase U.S. government securities to serve as a portion of the collateral required for the note issued to the seller in the MidCon acquisition. The Company's future financing plans include the public issuance of other securities, including trust securities which are mandatorily redeemable or convertible. The Company currently expects that, even if it is successful in completing both the offerings currently in progress and its planned offerings, its degree of leverage in the near-term will remain significantly above historical levels. REGULATION In 1997, approximately 48 percent of the Company's operating income was derived from assets which are rate-regulated at either the federal, state or local level. At least in the near-term, a significantly higher percentage of the Company's operating income is expected to be derived from rate-regulated operations as a result of the acquisition of MidCon. In substantially all regulatory jurisdictions, rates are currently determined using cost-based regulation and, at this time, the Company does not expect a significant change in the manner in which rates are set. Thus far, the primary impact of competition on the Company's regulated businesses has been the conversion of services from the "bundled" merchant and transportation function (including the pass-through of actual gas costs expended) to transportation services only. The Company anticipates that this conversion to transportation service will continue and become more prevalent at the retail level. During 1998, K N will continue to implement its Choice Gas Program in Nebraska, pursuant to which approximately 100,000 retail customers will be able to choose their gas supplier. See Note 4(B) of Notes to Consolidated Financial Statements. RISK MANAGEMENT To minimize the risk of price changes in the natural gas and NGLs markets, the Company uses certain financial instruments for hedging purposes. These instruments include energy products traded on the New York Mercantile Exchange, the Kansas City Board of Trade and over-the-counter markets, including futures and options contracts and fixed-price swaps. Pursuant to guidelines approved by its Board of Directors, the Company is to engage in these activities only as a hedging mechanism against price volatility associated with pre-existing or anticipated physical gas and 24 25 condensate sales, gas purchases, system use and storage in order to protect profit margins, and is not to engage in speculative trading. See "Results of Operations - Gathering, Processing and Marketing Services." Commodity-related activities of the risk management group are monitored by the Company's Risk Management Committee, which is charged with the review and enforcement of the Board of Directors' risk management guidelines. The Risk Management Committee reviews the types of hedging instruments used, contract limits and approval levels and may review the pricing and hedging of any or all commodity transactions. All energy futures, swaps and options are recorded at fair value. Gains and losses on hedging positions are deferred and recognized as gas purchases expense in the periods in which the underlying physical transactions occur. The Company's Treasury Department manages the Company's interest rate exposure, utilizing interest rate swaps, caps or similar derivatives within Board-established guidelines. None of these interest rate derivatives are leveraged. OUTLOOK/FORWARD-LOOKING INFORMATION GENERAL The statements contained in this section, Outlook/Forward-Looking Information, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that these statements are based upon reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements contained herein include, among other factors, the pace of deregulation of retail natural gas and electricity markets in the United States, federal and state regulatory developments, the timing and extent of changes in commodity prices for oil, gas, NGLs, electricity, certain agricultural products and interest rates, the extent of success in acquiring natural gas facilities, the timing and success of efforts to develop power, pipeline and other projects, political developments in foreign countries, and conditions of the capital markets and equity markets during the periods covered by the forward-looking statements. K N - MIDCON COMBINATION On December 18, 1997, K N entered into a definitive agreement to acquire all of the outstanding capital stock of MidCon from Occidental Petroleum Corporation for $3.49 billion, consisting of $2.1 billion in cash and the assumption of $1.39 billion of short-term debt. The acquisition closed on January 30, 1998, at which time MidCon became a wholly owned subsidiary of the Company. MidCon is engaged in the purchase, gathering, processing, transmission, storage and sale of natural gas to utilities, municipalities and industrial and commercial users. MidCon operates over 14,000 miles of natural gas pipelines which are located in the center of the North American pipeline grid. These pipeline assets include two major interconnected transmission pipelines terminating in the Chicago area: one originating in West Texas and the other in the Gulf Coast areas of Texas and Louisiana, as well as a major intrastate pipeline located in Texas. MidCon also purchases electricity from electric utilities and other electric power producers and marketers and resells the electricity to wholesale and end-use customers. As a result of the acquisition, K N will be one of the largest integrated natural gas companies in the United States. The Company will own and/or operate approximately 26,000 miles of interstate, intrastate and offshore natural gas transmission pipeline, approximately 11,000 miles of gathering pipeline, approximately 7,000 miles of local distribution pipeline, and 16 storage facilities with storage capacity of more than 250 Bcf of working gas. The Company will also be one of the largest transporters and marketers of natural gas in the United States with average sales volumes of 3.7 Bcf and average transportation volumes of 5.1 Bcf of natural gas per day. On a pro forma basis including only adjustments directly attributable to the acquisition of MidCon, as of and for the year ended December 31, 1997, the Company had approximately $8.2 billion in assets, operating revenues of 25 26 approximately $5.2 billion, operating income of approximately $358.6 million and net income of approximately $83.0 million. In addition to significantly increasing the Company's size and scope of operations, as well as its geographic presence, management believes the acquisition will also provide K N with a strong platform for future growth. The Company will have assets in 16 states and access to several of the largest natural gas markets in the United States, including Chicago, Houston, Kansas City and Denver. The combined company will have access to natural gas supplies in the major natural gas supply basins in the United States, including those in the Mid-Continent, West Texas, Rocky Mountain and Gulf Coast regions. The Company will also be one of the nation's largest owners and operators of natural gas storage assets in both supply and market areas. Management believes these assets are strategically located and will allow the Company to become a major supplier of storage service, particularly in the Chicago market, and that the acquisition will also significantly broaden the Company's retail presence in both the residential and small business market segments. LITIGATION AND ENVIRONMENTAL The Company's anticipated environmental capital costs and expenses for 1998, including expected costs and expenses for voluntary remediation efforts, are approximately $7.7 million, exclusive of anticipated costs and expenses associated with the recently acquired MidCon assets. A substantial portion of the Company's environmental costs are either recoverable through insurance and indemnification provisions, have reserves associated with them or have been previously expensed as part of ongoing business operations. Refer to Notes 2 and 5 of Notes to Consolidated Financial Statements for additional information on the Company's pending litigation and environmental matters. The Company's management believes it has established reserves such that the resolution of pending litigation and environmental matters will not have a material adverse impact on the Company's financial position or results of operations. SIGNIFICANT OPERATING VARIABLES The Company's principal exposure to price variability is with NGLs prices. The Company attempts to mitigate this exposure by an appropriate mix of "percent of proceeds" and "keep whole" processing agreements and by the use of financial hedging instruments. See Risk Management elsewhere herein. Under current agreements with producers, excluding MidCon processing facilities, a one cent change in average per gallon prices impacts pre-tax operating income by approximately $5.5 million. READINESS FOR YEAR 2000 The Company has completed a high-level assessment of its systems and infrastructure to determine the extent of the work needed to ensure Year 2000 compliance. A plan has been developed and is being implemented to test and verify Year 2000 compliance, including making necessary modifications, for all systems and processes. K N will continue to evaluate the estimated costs associated with these efforts based on the results of this work. While these efforts involve additional costs, the Company believes, based on available information, that these costs will not be material to its results of operations. 26 27 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To K N Energy, Inc.: We have audited the accompanying consolidated balance sheets of K N Energy, Inc. (a Kansas corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of K N Energy, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Denver, Colorado February 3, 1998 27 28 CONSOLIDATED STATEMENTS OF INCOME K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- 1997 1996 1995 ---- ---- ---- (In Thousands, Except Per Share Amounts) OPERATING REVENUES: Gathering, Processing and Marketing Services $ 1,866,327 $ 1,191,292 $ 854,462 Interstate Transportation and Storage Services 23,757 25,352 22,217 Retail Natural Gas Services 255,034 223,838 227,282 Gas and Oil Production -- -- 7,437 ----------- ----------- ----------- Total Operating Revenues 2,145,118 1,440,482 1,111,398 ----------- ----------- ----------- OPERATING COSTS AND EXPENSES: Gas Purchases and Other Costs of Sales 1,724,671 1,060,374 753,022 Operations and Maintenance 198,274 174,774 173,288 Depreciation, Depletion and Amortization 55,994 51,212 49,891 Taxes, Other Than Income Taxes 23,930 19,321 19,835 ----------- ----------- ----------- Total Operating Costs and Expenses 2,002,869 1,305,681 996,036 ----------- ----------- ----------- OPERATING INCOME 142,249 134,801 115,362 ----------- ----------- ----------- OTHER INCOME AND (DEDUCTIONS): Interest Expense (43,495) (35,933) (34,211) Minority Interests (8,706) (2,946) (905) Other, Net 23,110 3,794 1,326 ----------- ----------- ----------- Total Other Income and (Deductions) (29,091) (35,085) (33,790) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 113,158 99,716 81,572 Income Taxes 35,661 35,897 29,050 ----------- ----------- ----------- NET INCOME 77,497 63,819 52,522 Less - Preferred Stock Dividends 350 398 492 ----------- ----------- ----------- EARNINGS AVAILABLE FOR COMMON STOCK $ 77,147 $ 63,421 $ 52,030 =========== =========== =========== BASIC EARNINGS PER COMMON SHARE $ 2.48 $ 2.18 $ 1.87 =========== =========== =========== DILUTED EARNINGS PER COMMON SHARE $ 2.45 $ 2.14 $ 1.83 =========== =========== ===========
The accompanying notes are an integral part of these statements. 28 29 CONSOLIDATED BALANCE SHEETS K N ENERGY, INC. AND SUBSIDIARIES
DECEMBER 31 ----------- 1997 1996 ---- ---- (In Thousands) ASSETS: CURRENT ASSETS: Cash and Cash Equivalents $ 22,471 $ 10,339 Restricted Deposits 11,339 6,666 Accounts Receivable 409,937 304,942 Materials and Supplies 13,476 6,092 Gas in Underground Storage 33,558 43,511 Prepaid Gas 5,507 12,001 Other Prepaid Expenses 16,687 12,824 Gas Imbalances and Other 63,555 65,319 ---------- ---------- 576,530 461,694 ---------- ---------- INVESTMENTS 149,869 50,538 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET 1,420,975 1,022,301 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS 158,431 95,187 ---------- ---------- TOTAL ASSETS $2,305,805 $1,629,720 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Current Maturities of Long-Term Debt $ 30,751 $ 26,971 Notes Payable 329,200 129,300 Accounts Payable 334,418 241,187 Accrued Expenses 37,264 34,696 Accrued Taxes 7,445 16,045 Gas Imbalances and Other 57,733 50,417 ---------- ---------- 796,811 498,616 ---------- ---------- DEFERRED LIABILITIES, CREDITS AND RESERVES: Deferred Income Taxes 168,583 122,371 Other 26,160 31,930 ---------- ---------- 194,743 154,301 ---------- ---------- LONG-TERM DEBT 553,816 423,676 ---------- ---------- K N-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL TRUST SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF K N 100,000 - ---------- ---------- MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 47,303 26,333 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 2, 3(A), 5 AND 13) STOCKHOLDERS' EQUITY: Preferred Stock 7,000 7,000 ---------- ---------- Common Stock- Authorized - 50,000,000 Shares, Par Value $5 Per Share Outstanding - 32,024,557 and 30,295,792 Shares, Respectively 160,123 151,479 Additional Paid-in Capital 270,678 228,902 Retained Earnings 185,658 142,578 Deferred Compensation (9,203) (2,908) Treasury Stock, at Cost - 28,482 and 7,216 Shares, Respectively (1,124) (257) ---------- ---------- Total Common Stockholders' Equity 606,132 519,794 ---------- ---------- Total Stockholders' Equity 613,132 526,794 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,305,805 $1,629,720 ========== ==========
The accompanying notes are an integral part of these statements. 29 30 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY K N ENERGY, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK ADDITIONAL DEFERRED TREASURY STOCK ------------ PAID-IN RETAINED COMPEN- -------------- SHARES AMOUNT CAPITAL EARNINGS SATION SHARES AMOUNT ------ ------ ------- -------- ------ ------ ------ (Dollars In Thousands) BALANCE, DECEMBER 31, 1994 27,617,531 $ 138,088 $ 170,932 $ 86,032 $ (378) (44,417) $ (988) Net Income 52,522 Cash Dividends - Common, $1.01 Per Share (28,167) Preferred (492) Treasury Stock Acquired (72,500) (1,959) Employee Stock Options 354,901 1,774 4,006 Employee Benefit Plans 20,738 104 394 80 2 Dividend Reinvestment and Stock Purchase Plans 97,979 490 1,444 106,098 2,633 Issuance of Common Shares as Executive Compensation 6,600 33 134 Amortization of Deferred Compensation 156 ---------- ----------- ----------- ----------- ----------- ------- -------- BALANCE, DECEMBER 31, 1995 28,097,749 140,489 176,910 109,895 (222) (10,739) (312) Net Income 63,819 Cash Dividends - Common, $1.05 Per Share (30,738) Preferred (398) Sale of Common Stock, Net 1,715,000 8,575 44,591 Redemption and Cancellation of Common Stock Warrants (7,420) Unrealized Holding Gains on Available-for-Sale Securities 5,735 Treasury Stock Acquired (220,178) (7,069) Acquisition of Business 1,648 33,765 1,183 Employee Stock Options 292,421 1,462 2,981 517 16 Dividend Reinvestment and Stock Purchase Plans 95,572 478 1,438 189,419 5,925 Issuance of Common Shares as Executive Compensation 95,050 475 3,019 (3,494) Amortization of Deferred Compensation 808 ---------- ----------- ----------- ----------- ----------- ------- -------- BALANCE, DECEMBER 31, 1996 30,295,792 151,479 228,902 142,578 (2,908) (7,216) (257) Net Income 77,497 Cash Dividends - Common, $1.09 Per Share (34,067) Preferred (350) Exercise of Common Stock Warrants 642,232 3,211 8,060 Unrealized Holding Losses on Available-for-Sale Securities (1,492) Treasury Stock Acquired (53,190) (2,096) Acquisition of Business 544,604 2,723 21,411 Employee Stock Options 223,564 1,118 4,459 514 19 Dividend Reinvestment and Stock Purchase Plans 87,615 438 1,805 31,410 1,210 Issuance of Common Shares as Executive Compensation 230,750 1,154 7,533 (8,687) Amortization of Deferred Compensation 2,392 ---------- ----------- ----------- ----------- ----------- ------- -------- BALANCE, DECEMBER 31, 1997 32,024,557 $ 160,123 $ 270,678 $ 185,658 $ (9,203) (28,482) $ (1,124) ========== =========== =========== =========== =========== ======= ========
The accompanying notes are an integral part of these statements. 30 31 CONSOLIDATED STATEMENTS OF CASH FLOWS K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 77,497 $ 63,819 $ 52,522 Adjustments to Reconcile Net Income to Net Cash Flows From Operating Activities: Depreciation, Depletion and Amortization 55,994 51,212 49,891 Deferred Income Taxes 17,155 16,443 15,975 Deferred Purchased Gas Costs (17,146) (8,109) (1,458) Provision for Losses on Accounts Receivable 1,479 307 949 (Gain) Loss on Sale of Facilities (4,860) 491 -- Changes in Gas in Underground Storage (3,167) (22,056) 26,541 Changes in Other Working Capital Items, Net of Acquisitions and Dispositions (17,381) (2,803) 4,016 Changes in Deferred Revenues (5,736) (13,883) (21,267) Other, Net (6,332) (9,811) 5,080 --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES 97,503 75,610 132,249 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (311,093) (119,987) (79,313) Acquisitions (118,590) (147,137) (31,945) Investments (89,307) (2,142) (6,598) Proceeds from Sales of Assets 22,433 11,922 2,706 Collections Under Basket Agreement -- 6 1,491 --------- --------- --------- NET CASH FLOWS USED IN INVESTING ACTIVITIES (496,557) (257,338) (113,659) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-Term Debt, Net 199,900 41,300 28,000 Long-Term Debt - Issued 150,000 125,000 -- - Retired (27,832) (18,170) (21,322) Preferred Capital Trust Securities Issued 100,000 -- -- Preferred Stock Redemption -- (572) (1,143) Common Stock Issued 19,091 61,668 8,379 Redemption and Cancellation of Common Stock Warrants -- (7,420) -- Treasury Stock - Issued 1,229 5,941 2,635 - Acquired (2,096) (7,069) (1,959) Cash Dividends - Common (34,067) (30,738) (28,167) - Preferred (350) (398) (492) Minority Interests - Contributions 7,823 13,586 2,906 - Distributions (212) (2,182) (2,765) Securities Issuance Costs (2,300) (3,133) (35) --------- --------- --------- NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES 411,186 177,813 (13,963) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 12,132 (3,915) 4,627 Cash and Cash Equivalents at Beginning of Year 10,339 14,254 9,627 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 22,471 $ 10,339 $ 14,254 ========= ========= =========
The accompanying notes are an integral part of these statements. 31 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Nature of Operations K N Energy, Inc., referred to herein together with its consolidated subsidiaries as "K N" or "the Company," is an energy services provider and has operations in 11 states in the Rocky Mountain and Mid-Continent regions, with principal operations in Colorado, Kansas, Nebraska, Oklahoma, Texas and Wyoming. The Company is building a natural gas distribution system, expected to begin operations in the first quarter of 1998, in the Mexican state of Sonora. Energy services include: gathering, processing, storing, transporting and marketing natural gas, providing retail natural gas distribution services, providing field services to natural gas producers and marketing natural gas liquids ("NGLs"). The Company has both regulated and nonregulated operations. (B) Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from these estimates. The consolidated financial statements include the accounts of K N and its majority-owned subsidiaries. Investments in jointly owned operations in which the Company has 20 to 50 percent ownership are accounted for under the equity method. All material intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current presentation. (C) Accounting for Regulatory Activities The Company's regulated public utilities are accounted for in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71, Accounting for the Effects of Certain Types of Regulation, which prescribes the circumstances in which the application of generally accepted accounting principles is affected by the economic effects of regulation. 32 33 Regulatory assets and liabilities represent probable future revenues or expenses to the Company associated with certain charges and credits, which will be recovered from or refunded to customers through the ratemaking process. The following regulatory assets and liabilities are reflected in the accompanying Consolidated Balance Sheets (in thousands):
DECEMBER 31 ----------- 1997 1996 ---- ---- REGULATORY ASSETS: Employee Benefit Costs $ 1,348 $ 1,084 Debt Refinancing Costs 2,682 3,100 Deferred Income Taxes 754 706 Purchased Gas Costs 53,790 28,814 Plant Acquisition Adjustments 454 454 Rate Regulation and Application Costs 601 830 ------- ------ Total Regulatory Assets 59,629 34,988 ------- ------ REGULATORY LIABILITIES: Deferred Income Taxes 3,718 4,218 Purchased Gas Costs 5,195 6,529 ------- ----- Total Regulatory Liabilities 8,913 10,747 ------- ------ NET REGULATORY ASSETS $50,716 $24,241 ======= =======
As of December 31, 1997, $46.1 million of the Company's regulated assets and $8.1 million of the Company's regulated liabilities were being recovered from or refunded to customers through rates over periods ranging from one to 16 years. All of the regulatory assets being recovered at December 31, 1997, are being recovered without a return on investment. (D) Revenue Recognition Policies In general, the Company recognizes revenues as services are rendered or goods are delivered. The Company's rate-regulated retail natural gas distribution business bills customers on a monthly cycle billing basis. Revenues are recorded on an accrual basis, including an estimate for gas delivered but unbilled at the end of each accounting period. (E) Earnings Per Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share. This new statement became effective December 15, 1997, and provides computation, presentation and disclosure requirements for earnings per share. Basic earnings per share is computed based on the monthly weighted-average number of common shares outstanding during the periods. The weighted-average number of common shares used in computing basic earnings per share was 31,059,000, 29,102,000 and 27,836,000 for 1997, 1996 and 1995, respectively. Diluted earnings per share is computed based on the monthly weighted-average number of common shares outstanding during the periods and the assumed exercise of dilutive common stock equivalents (stock options and warrants) using the treasury stock method. Dilutive common stock equivalents assumed to have been exercised totaled 479,000, 522,000 and 524,000 for 1997, 1996 and 1995, respectively. (F) Restricted Deposits The Company uses energy financial instruments to minimize its exposure to price risk related to natural gas and NGLs. Restricted Deposits consist of monies on deposit with brokers that are restricted to meet exchange trading requirements. See Note 10. 33 34 (G) Gas in Underground Storage K N's rate-regulated retail distribution business and Northern Gas Company account for gas in underground storage using the last-in, first-out ("LIFO") method. AOG Gas Transmission Company, L.P., KN Services, Inc., KN Gas Supply Services, Inc., KN Marketing, L.P., KN Natural Gas, Inc. and Westar Transmission Company value gas in underground storage at average cost. Rocky Mountain Natural Gas Company ("RMNG") uses the first-in, first-out ("FIFO") method. All entities discussed above are wholly owned by K N. The Company also maintains gas in its underground storage facilities on behalf of certain third parties. The Company receives a fee for its storage services but does not reflect the value of third party gas in the accompanying financial statements. (H) Investments Investments consist primarily of equity method investments in unconsolidated subsidiaries and joint ventures. In addition, the Company has an investment in Tom Brown, Inc. common and convertible preferred stock. See Note 3(F). (I) Prepaid Gas Prepaid gas represents payments made in lieu of taking delivery of natural gas under the take-or-pay provisions of certain of the Company's gas purchase contracts, net of any subsequent recoupments in kind from producers. Such payments are fully recoupable from future production and, when recoupment is made in kind in a subsequent contract year, natural gas purchase expense is recorded and the asset is reduced. (J) Property, Plant and Equipment Property, plant and equipment is stated at historical cost which, for constructed plant, includes indirect costs such as payroll taxes, fringe benefits, and administrative and general costs. Expenditures which increase capacities, improve efficiencies or extend useful lives are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred. The cost of normal retirements of depreciable utility property, plant and equipment, plus the cost of removal less salvage, is deducted from accumulated depreciation with no effect on current period earnings. Gains or losses are recognized upon retirement of nonutility property, plant and equipment, and when utility property, plant and equipment constituting an operating unit or system is sold or abandoned. In accordance with the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company reviews the carrying values of its long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. As yet, no asset or group of assets has been identified for which the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset(s) and, accordingly, no impairment losses have been recorded. However, currently unforeseen events and changes in circumstances could require the recognition of impairment losses at some future date. (K) Depreciation, Depletion and Amortization Depreciation is computed based on the straight-line method over estimated useful lives ranging from three to 40 years each for the Gathering, Processing and Marketing, Interstate Transportation and Storage and Retail Natural Gas Services segments. 34 35 (L) Cash Flow Information The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Changes in Other Working Capital Items Summary and Supplemental Disclosures of Cash Flow Information are as follows (in thousands): CHANGES IN OTHER WORKING CAPITAL ITEMS SUMMARY (NET OF ACQUISITION AND DISPOSITION EFFECTS)
1997 1996 1995 ---- ---- ---- Accounts Receivable $ (82,088) $ (89,773) $ (67,364) Materials and Supplies (1,777) 4,761 2,172 Other Current Assets (7,656) (43,847) 19,650 Accounts Payable 82,504 83,934 50,447 Other Current Liabilities (8,364) 42,122 (889) --------- --------- --------- $ (17,381) $ (2,803) $ 4,016 ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest (Net of Amount Capitalized) $ 41,986 $ 31,748 $34,503 ======== ======== ======= Distributions on Preferred Capital Trust Securities $ 4,066 $ - $ - ======== ======== ======= Income Taxes $ 15,823 $ 14,156 $ 9,774 ======== ======== =======
2. SUBSEQUENT EVENT On January 30, 1998, K N acquired from Occidental Petroleum Corporation ("Occidental") all of the outstanding shares of common stock of MidCon Corp. ("MidCon"), a wholly owned subisdiary of Occidental, for approximately $2.1 billion in cash and a short-term note of approximately $1.39 billion. In conjunction with the acquisition, the Company assumed MidCon's obligation to lease the MidCon Texas intrastate pipeline system under a 30-year operating lease, requiring average annual lease payments of $30 million. This acquisition is being accounted for as a purchase. The total amount of funds required by the Company to complete the acquisition, including payment of related transaction costs, was approximately $2.5 billion, which was financed through a credit facililty established on January 30, 1998, with a syndicate of lenders. See Note 8(A). MidCon is engaged in the purchase, gathering, processing, transmission, storage and sale of natural gas to utilities, municipalities, and industrial and commercial users. MidCon also purchases electricity from electric utilities and other electric power producers and marketers and resells the electricity to wholesale and end-use customers. The Company's consolidated financial statements and related notes will include the transactions and balances of MidCon effective with its purchase date of January 30, 1998. While the Company has assumed responsibility for liabilities and contingencies of MidCon as of the date of the acquisition, the Company believes that its allocation of purchase price to assets acquired and liabilities assumed, when finalized, will make adequate provision for such items and, accordingly, the Company expects that the ultimate resolution of such items will not have a material adverse impact on its results of operations or financial position. 35 36 3. MERGER, ACQUISITIONS AND DISPOSITIONS (A) Bushton In March 1997, K N completed its purchase of several Enron Corporation subsidiaries that owned or operated the Bushton natural gas processing facility located in Ellsworth County, Kansas, and other Hugoton Basin gathering assets located in Kansas and Oklahoma. The Company assumed operation of these facilities effective April 1, 1997, and has accounted for this transaction as a purchase. Pursuant to this agreement, K N also leases the processing facilities at Bushton under operating leases requiring semi-annual payments averaging $23.1 million per annum for the remaining term of the leases. Under the terms of these leases, K N has the option of terminating the leases and/or buying the assets at any time after November 2003, and extending the leases beyond May 2012, the scheduled termination date. In addition, K N may purchase the processing facilities upon termination of the leases. (B) Red Cedar In December 1997, K N purchased an equity interest in Red Cedar Gathering Company ("Red Cedar"), a gathering system located in the northern San Juan Basin on the Southern Ute Indian Reservation in La Plata County, Colorado. Red Cedar is jointly owned by the Southern Ute Indian Tribe. (C) Interenergy On December 19, 1997, K N acquired Interenergy Corporation ("Interenergy"), a diversified energy company involved with natural gas gathering, processing and marketing in the Rocky Mountain and mid-continent states. K N exchanged 544,604 shares of K N common stock for all the outstanding shares of Interenergy and assumed Interenergy's debt in a transaction accounted for as a purchase. (D) Sale of Kansas Distribution Properties In October 1997, K N entered into an agreement to sell its retail natural gas distribution properties in Kansas to Midwest Energy, Inc., a customer-owned cooperative based in Hays, Kansas. The agreement provides for the sale of natural gas distribution systems in 58 Kansas communities, serving approximately 30,000 residential, commercial and industrial customers. The transaction is subject to approval by applicable state and federal regulatory authorities, and is expected to close in the first half of 1998. (E) Pony Express Pipeline In 1996, K N purchased a 900-mile crude oil pipeline owned by Amoco Pipeline Company for conversion to natural gas service. In May 1996, one of K N's regulated interstate pipeline subsidiaries, K N Interstate Gas Transmission Co. ("KNI"), filed with the Federal Energy Regulatory Commission ("FERC") requesting authority to purchase from K N the portion of the line, renamed the Pony Express Pipeline, from Lost Cabin, Wyoming in central Wyoming to Freeman, Missouri near Kansas City. KNI also requested authority to convert the pipeline to natural gas service, install compression and construct additional pipeline facilities. On May 30, 1997, the FERC issued an order granting KNI's requested authority to proceed with the project. On November 27, 1996, KNI acquired two contracts to provide firm transportation capacity of 230 MMcf per day to the Kansas City metropolitan area, part of which is transported through the Pony Express Pipeline. KNI constructed approximately 36 miles of lateral facilities to connect the new markets with the Pony Express Pipeline and a third party pipeline. 36 37 (F) Gas and Oil Properties On January 31, 1996, K N and Tom Brown, Inc. ("TBI") closed a transaction pursuant to which K N transferred its stock in K N Production Company ("KNPC"), a wholly owned subsidiary of K N, to TBI in exchange for common and convertible preferred stock of TBI. The transaction represents a non-monetary exchange (valued at that time at $39.1 million) of oil and gas assets for accounting purposes. The common shares are considered available-for-sale securities and, as a result, unrealized holding gains totaling $4.2 million are included in additional paid-in capital in the Consolidated Balance Sheet at December 31, 1997. In conjunction with this transaction, K N and TBI formed Wildhorse Energy Partners, LLC, owned 55 percent by K N and 45 percent by TBI, which performs certain gathering, processing, field, marketing and storage services in a defined area of mutual interest. (G) TransColorado Project During 1996, an agreement was executed providing for the construction and operation of a new unregulated gas treating plant in southwestern Colorado owned by affiliates of K N and El Paso Natural Gas Company. The treating plant is connected to Phase I (New Mexico pre-build) of the TransColorado pipeline. The pipeline and plant had a combined capital cost of approximately $30 million. 4. REGULATORY MATTERS (A) Rate Matters On January 23, 1998, KNI filed a general rate case with the FERC requesting a $30.2 million annual increase in revenues. KNI expects revised rates to become effective August 1, 1998, subject to refund. (B) Retail Unbundling In November 1997, K N announced a plan, subject to municipal regulatory approval in each community it serves, to give residential and small commercial customers in Nebraska a choice of natural gas suppliers, effective June 1, 1998. Currently, K N purchases natural gas, transports it across interstate transmission systems and delivers it to these customers, providing what is known as a "bundled" service. This program would separate, or "unbundle," the natural gas purchases from other utility services. By early February 1998, over 60 communities had approved the plan. If approved by all 178 communities served in Nebraska, the unbundling of retail natural gas service to all of K N's approximately 100,000 customers in Nebraska will be complete. In June 1996, after receiving Wyoming Public Service Commission approval for a pilot program, K N implemented a similar plan for approximately 10,500 residential and commercial customers in 10 Wyoming communities. The Company does not believe these regulatory changes will have a material adverse impact on its financial position or results of operations. 5. ENVIRONMENTAL AND LEGAL MATTERS (A) Environmental The Company was named as one of four potentially responsible parties ("PRPs") at a U.S. Environmental Protection Agency ("EPA") Superfund site known as the Mystery Bridge Road/U.S. Highway 20 site located near Casper, Wyoming (the "Brookhurst Subdivision") in 1989. A majority of the Company's groundwater, soil and free phase petroleum cleanup occurred between 1990 and 1996. Groundwater remediation standards were recently achieved at 37 38 the Company's operable unit, and the EPA has allowed the Company to go into a post-remedial action monitoring phase. The total remaining estimated cost is not expected to exceed $150,000. In 1994, a mercury sampling program was initiated on the Company's systems in central and western portions of Kansas. The Company is working with the Kansas Department of Health and Environment pursuant to a voluntary agreement. The assessment program is being completed, and the Company in 1998 will commence a phased remediation program for those sites where concentrations are above regulatory thresholds, at an expected cost of $200,000 in 1998. The program will take place over a period of years, and the costs are not expected to have a material adverse impact on the Company's business, financial position or results of operations. The Company performed environmental audits in Colorado, Kansas and Nebraska, which revealed that certain grease and lubricating oils used at various pipeline and facilities locations contained polychlorinated biphenyls ("PCBs"). The Company is working with the appropriate regulatory agencies to manage the cleanup and remediation of the pipelines and facilities. The Company filed suit against Rockwell International Corporation ("Rockwell"), manufacturer of the PCB-containing grease used in certain of the Company's pipelines and facilities, and two other related defendants for expenses and losses incurred by the Company for cleanup or mitigation. The Company settled with Rockwell in March 1994. To date since 1991, the Company has incurred approximately $500,000 in costs associated with the remediation and management of this issue, including preparation and implementation of a workplan. In 1998, the Company may spend up to approximately $470,000. A substantial portion of these costs are recoverable under the settlement entered into with Rockwell. The total potential remediation and cleanup costs at currently identified locations is not expected to have a material adverse impact on the Company's financial position or results of operations. The cleanup programs are not expected to interrupt or diminish the Company's operational ability to gather or transport natural gas. Pursuant to certain acquisition agreements involving Cabot Corporation ("Cabot"), the Company's largest stockholder, Cabot indemnified the Company for certain environmental liabilities. Issues have arisen concerning Cabot's indemnification obligations. The Company and Cabot have agreed to enter into binding arbitration to resolve all issues in dispute. The Company is unable to estimate its potential exposure for such liabilities at this time, but does not expect them to have a material adverse impact on the Company's financial position or results of operations. The Company acquired certain gathering and processing assets from Parker & Parsley Gas Processing Co. and its affiliates in October 1995. In connection with that acquisition, and for a reduction in the purchase price that included the estimated costs of remediation of $3.9 million, the Company agreed to accept all responsibility and liability for environmental matters associated with such properties. Also, in March 1997, the Company acquired the Bushton processing complex and Hugoton Basin gathering assets form Enron Corporation and certain of its affiliates. In connection with that acquisition, the Company established reserves to fund previously-identified environmental/operational issues; the Company will also be reimbursed on a shared basis for costs and expenses associated with any environmental deficiencies identified at the facility in the next five years up to a maximum of $10 million, although the Company does not anticipate costs will reach that amount. After consideration of reserves established and the agreements entered into in connection with these various acquisitions, costs and expenses related to environmental matters are not expected to have a material adverse effect on the business, financial position or results of operations of the Company. In May 1997, the Nebraska Department of Environmental Quality ("NDEQ") issued a violation notice to KNI regarding historical Prevention of Significant Deterioration permitting issues related to certain engines at the Big Springs, Nebraska, facility. KNI is in the process of obtaining the proper permits at this time, and is also engaged in discussions with NDEQ regarding settlement of the violation notice and a $500,000 fine currently proposed by the NDEQ. The costs associated with this matter are not expected to have a material adverse effect on the Company's business, financial position or results of operations. 38 39 (B) Litigation On October 9, 1992, Jack J. Grynberg filed suit in the United States District Court for the District of Colorado against the Company, RMNG and GASCO, Inc. (the "K N Entities") alleging that the K N Entities as well as KNPC and K N Gas Gathering, Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts that the defendant companies have engaged in an illegal exercise of monopoly power, have illegally denied him economically feasible access to essential facilities to transport and distribute gas produced from fewer than 20 wells located in northwest Colorado, and have illegally attempted to monopolize or to enhance or maintain an existing monopoly. Grynberg also asserts certain causes of action relating to a gas purchase contract. The Company's potential liability for monetary damages and the amount of such damages, if any, are subject to dispute between the parties; however, the Company believes it has a meritorious position in these matters and does not expect this lawsuit to have a material adverse effect on the Company's financial position or results of operations. In July 1996, the U. S. District Court, District of Colorado lifted its stay and allowed discovery for a period of time. Currently, this case is still pending. Discovery is now complete, but no trial date has yet been set. On July 26, 1996, K N and RMNG along with over 70 other natural gas pipeline companies, were served by Jack J. Grynberg, acting on behalf of the Government of the United States, with a Civil False Claims Act lawsuit alleging mismeasurement of the heating content and volume of natural gas resulting in underpayment of royalties to the federal government. The government, particularly officials from the Departments of Justice and Interior, reviewed the complaint and the evidence presented by Mr. Grynberg and declined to intervene in the action, allowing Mr. Grynberg to proceed on his own. No specific claims were made against K N or RMNG, and no specific monetary damages were claimed. K N and the other named companies filed a motion to dismiss the lawsuit on grounds of improper joinder and lack of jurisdiction. The motion to dismiss was granted in 1997, and K N is no longer required to respond to this action. However, the court did give Mr. Grynberg leave to refile and pursue this action in a court with proper jurisdiction. The Company believes it has a meritorious position in this matter, and does not expect this lawsuit to have a material adverse effect on the Company's financial position or results of operations. The Company believes it has meritorious defenses to all lawsuits and legal proceedings in which it is a defendant and will vigorously defend against them. Based on its evaluation of the above matters, and after consideration of reserves established, the Company believes that the resolution of such matters will not have a material adverse effect on the Company's financial position or results of operations. 6. PROPERTY, PLANT AND EQUIPMENT Investment in property, plant and equipment, at cost, and accumulated depreciation and amortization ("Accumulated D&A"), detailed by business segment, are as follows (in thousands):
DECEMBER 31, 1997 ----------------- PROPERTY, PLANT ACCUMULATED AND EQUIPMENT D&A NET ------------- ----------------- --- Gathering, Processing and Marketing Services $ 900,084 $ 235,640 $ 664,444 Interstate Transportation and Storage Services 632,685 156,383 476,302 Retail Natural Gas Services 438,832 158,603 280,229 ----------- --------- ----------- $ 1,971,601 $ 550,626 $ 1,420,975 =========== ========= ===========
DECEMBER 31, 1996 ----------------- PROPERTY, PLANT ACCUMULATED AND EQUIPMENT D&A NET ------------- ----------------- --- Gathering, Processing and Marketing Services $ 683,569 $ 212,926 $ 470,643 Interstate Transportation and Storage Services 447,557 156,358 291,199 Retail Natural Gas Services 409,626 149,167 260,459 ----------- --------- ----------- $ 1,540,752 $ 518,451 $ 1,022,301 =========== ========= ===========
39 40 7. INCOME TAXES Deferred income tax assets and liabilities are recognized for temporary differences between the basis of assets and liabilities for financial reporting and tax purposes. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective. Deferred tax assets are reduced by a valuation allowance for the amount of any tax benefit that is not expected to be realized. Components of the income tax provision applicable to federal and state income taxes are as follows (in thousands):
1997 1996 1995 ---- ---- ---- TAXES CURRENTLY PAYABLE: Federal $15,932 $17,685 $11,069 State 2,574 1,769 2,006 ------- ------- ------- Total 18,506 19,454 13,075 ------- ------- ------- TAXES DEFERRED: Federal 16,497 15,601 15,672 State 658 842 303 ------- ------- ------- Total 17,155 16,443 15,975 ------- ------- ------- TOTAL TAX PROVISION $35,661 $35,897 $29,050 ======= ======= ======= EFFECTIVE TAX RATE 31.5% 36.0% 35.6% ======= ======= =======
The difference between the statutory federal income tax rate and the Company's effective income tax rate is summarized as follows:
1997 1996 1995 ---- ---- ---- FEDERAL INCOME TAX RATE 35.0% 35.0% 35.0% INCREASE (DECREASE) AS A RESULT OF: State Income Tax, Net of Federal Benefit 1.9% 1.7% 1.8% Nonconventional Fuels Credit -- -- (1.0%) Adjustments to Prior Year Accruals* (5.1%) -- -- Other (0.3%) (0.7%) (0.2%) ------ ------ ------- EFFECTIVE TAX RATE 31.5% 36.0% 35.6% ====== ====== =======
*Adjustments relate to the successful resolution of certain issues from prior years' income tax filings. 40 41 The Company has recorded deferred regulatory assets of $0.8 million and $0.7 million, and deferred regulatory liabilities of $3.7 million and $4.2 million at December 31, 1997, and 1996, respectively, which are expected to result in cost-of-service adjustments. These amounts reflect the "gross of tax" presentation required under SFAS No. 109, Accounting for Income Taxes. The deferred tax assets and liabilities and deferred regulatory assets and liabilities for rate-regulated entities computed according to SFAS 109 result from the following (in thousands):
DECEMBER 31 1997 1996 ---- ---- DEFERRED TAX ASSETS: Unbilled Revenue $ 913 $ 925 Vacation Accrual 2,008 1,599 State Taxes 5,722 4,438 Capitalized Overhead Adjustment 1,086 1,858 Operating Reserves 2,281 1,155 Alternative Minimum Tax Credits 6,780 10,164 Other 996 4,339 --------- --------- TOTAL DEFERRED TAX ASSETS 19,786 24,478 --------- --------- DEFERRED TAX LIABILITIES: Liberalized Depreciation 168,707 131,192 Rate Matters 8,420 6,757 Prepaid Pension 2,814 2,735 Stock Investments 3,556 3,457 Other 4,872 2,708 --------- --------- TOTAL DEFERRED TAX LIABILITIES 188,369 146,849 --------- --------- NET DEFERRED TAX LIABILITIES $ 168,583 $ 122,371 ========= ========= DEFERRED ACCOUNTS FOR RATE REGULATED ENTITIES: Assets $ 754 $ 706 ========= ========= Liabilities $ 3,718 $ 4,218 ========= =========
8. FINANCING (A) Notes Payable At December 31, 1996, K N had a revolving credit agreement with seven banks to borrow for general corporate purposes, including commercial paper support, up to a total of $200 million. On March 7, 1997, this agreement was amended to include a total of 11 banks and to increase the amount of the credit facility to $350 million, (the "Pre-Acquisition Facility"). Borrowings were made at rates negotiated on the borrowing date and for a term of no more than 360 days. Under the credit agreement, K N agreed to pay a facility fee based on the total commitment, at rates which varied based on the financial rating of K N's long-term debt. Facility fees paid in 1997 and 1996 were $0.3 million and $0.2 million, respectively. At December 31, 1997, $100 million was outstanding under this credit agreement, compared with $40 million at December 31, 1996, and the agreement was terminated concurrently with the acquisition of MidCon as described following. Commercial paper issued by K N and supported by short-term credit facilities represents unsecured short-term notes with maturities not to exceed 270 days from the date of issue. During 1997, all commercial paper was redeemed within 61 days, with interest rates ranging from 5.20 to 7.40 percent. Commercial paper outstanding at December 31, 1997, and 1996, respectively, was $229.2 and $89.3 million. The weighted-average interest rates on short-term borrowings outstanding at December 31, 1997, and 1996, respectively, were 6.87 percent and 6.93 percent. Average short-term borrowings outstanding during 1997 and 1996 were $200.4 million and $60.8 million, respectively. During 1997 and 1996, the weighted-average interest rates on short-term borrowings outstanding were 5.32 percent and 5.62 percent, respectively. 41 42 Effective with the acquisition of MidCon on January 30, 1998, the Pre-Acquistion Facility was replaced with a $4.5 billion credit facility (the "Bank Facility") consisting of (1) a $1.4 billion 11-month letter of credit facility (the "L/C Facility") to support the note issued to Occidental in conjunction with the purchase of MidCon, (2) a $2.1 billion, 364-day revolving facility (the "Acquisition Facility"), (3) a $400 million five-year revolving credit facility (the "$400 million Facility") providing for loans and letters of credit, of which the letter of credit usage may not exceed $100 million and (4) a 364-day $600 million revolving credit facility (the "$600 million Facility"). The L/C Facility and the Acquisition Facility may be used only in conjunction with the acquisition of MidCon. On February 3, 1998, the Company had fully utilized the Acquisition Facility and the L/C Facility. In addition, the Company had $150 million of borrowings and $23 million of letter of credit utilization under the $400 million Facility. The Company is in the process of implementing its plans to refinance the acquisition-related borrowings through the public issuance of common stock, trust securities and long-term debt. See Note 2 for additional information regarding the MidCon acquisition. The Bank Facility includes covenants which are common in such arrangements, including requirements that (1) the ratio of the Company's total debt to total capitalization not exceed 87 percent initially, or 67 percent upon completion of the Company's refinancing plan for the MidCon acquisition borrowings and (2) the Company's consolidated net worth be at least $570 million plus (i) 50 percent of incremental consolidated net income and (ii) 80 percent of any increase in net worth resulting from the issuance of certain securities. In addition, a minimum interest coverage ratio requirement would be triggered if the Company's senior debt ratings fall below specified levels. (B) Long-Term Debt
DECEMBER 31 ----------- 1997 1996 ---- ---- (In Thousands) DEBENTURES: 6.5% Series, Due 2013 $ 50,000 $ 50,000 7.85% Series, Due 2022 26,684 27,545 8.75% Series, Due 2024 75,000 75,000 7.35% Series, Due 2026 125,000 125,000 6.67% Series, Due 2027 150,000 - SINKING FUND DEBENTURES: 9.95% Series, Due 2020 20,000 20,000 9.625% Series, Due 2021 45,000 45,000 8.35% Series, Due 2022 35,000 35,000 Unamortized Debt Discount (957) (1,013) SENIOR NOTES: 7.27%, Due 1998-2002 25,000 30,000 11.846% (AOG), Due 1998-1999 11,875 18,661 Medium-Term Notes, 10.01% Average Rate, Due 1998-1999 7,000 8,000 Other 14,965 17,454 Current Maturities of Long-Term Debt (30,751) (26,971) --------- --------- Total Long-Term Debt $ 553,816 $ 423,676 ========= =========
Maturities of long-term debt for the five years ending December 31, 2002, are as follows (in thousands):
YEAR AMOUNT - ---- ------ 1998 $30,751 1999 13,089 2000 5,000 2001 6,000 2002 8,250
42 43 On November 24, 1997, K N filed a shelf registration statement with the Securities and Exchange Commission ("SEC") allowing the Company to issue up to an aggregate of $500 million of common stock, and/or unsecured debt securities. In January 1998, the Company filed a shelf registration with the SEC on Form S-3 which, together with the $500 million filing in November 1997, now covers the issuance of a total of $4.0 billion of securities including common stock, stock purchase units, preferred trust securities, and unsecured debt. The registration statement became effective January 30, 1998. On October 27, 1997, K N publicly sold $150 million of 6.67% debentures maturing on November 1, 2027. These debentures are callable by the Company any time after November 1, 2004 and are redeemable at the option of the registered holders on November 1, 2004. The Company used the net proceeds from the sale to reduce short-term indebtedness. On July 26, 1996, K N sold publicly $125 million of 30-year 7.35% debentures at an all-in cost to the Company of 7.40 percent. At December 31, 1997, and 1996, the carrying amount of the Company's long-term debt was $585.5 million and $451.7 million, respectively. The estimated fair values of the Company's long-term debt at 1997 and 1996 are shown in Note 14. (C) Capital Securities On April 24, 1997, the Company sold $100 million of 8.56% Preferred Capital Trust Securities (the "Capital Securities") maturing on April 15, 2027. The sale was effected through a wholly owned business trust named K N Capital Trust I (the "Trust"). The Company used the net proceeds from the sale to reduce short-term indebtedness. The financial statements of the Trust are consolidated into the Company's consolidated financial statements, with the Capital Securities treated as a minority interest and shown in the Company's Consolidated Balance Sheet as "K N-Obligated Mandatorily Redeemable Preferred Capital Trust Securities of Subsidiary Trust Holding Solely Debentures of K N." See Note 14 for the fair value of these securities. (D) Common Stock On June 11, 1997, Cabot Corporation exercised the remaining warrants held by it and purchased, in an unregistered offering, 642,232 shares of K N's Common Stock, which were issued to Cabot Specialty Chemicals, Inc., in exchange for Cabot's payment of $11.3 million. After this exercise, Cabot Corporation owned 2,990,186 shares, or approximately 9 percent of the common stock of K N. On August 6, 1996, K N sold publicly 1,715,000 shares of its common stock at $32.25 per share, less offering expenses. K N applied approximately $7.4 million of the net proceeds from the offering to redeem and cancel outstanding warrants to purchase a total of 545,200 shares of K N's common stock. In connection with this sale of K N common stock, Cabot Corporation sold 1,850,000 shares of K N common stock. K N did not receive any of the proceeds from the sale of K N common stock by Cabot Corporation. 9. PREFERRED STOCK The Company has authorized 200,000 shares of Class A and 2,000,000 shares of Class B preferred stock, all without par value. 43 44 (A) Class A $5.00 Preferred Stock At both December 31, 1997, and 1996, 70,000 shares of the Company's Class A $5.00 Cumulative Series preferred stock were outstanding. The Class A $5.00 Preferred Stock is redeemable, in whole or in part, at the option of the Company at any time on 30 days' notice at $105 per share plus accrued dividends and has no sinking fund requirements. (B) Class B Preferred Stock The Company did not have any outstanding shares of Class B Preferred Stock at December 31, 1997, or 1996. The remaining 5,720 shares of K N Class B $8.30 Preferred Stock subject to mandatory redemption were redeemed by the Company in 1996. In 1995, the Company redeemed 5,714 shares subject to mandatory redemption, and an additional 5,714 shares at $100 per share. (C) Rights of Preferred Shareholders All outstanding series of preferred stock have voting rights. If, for any class of preferred stock, the Company (i) is in arrears on dividends, (ii) has failed to pay or set aside any amounts required to be paid or set aside for all sinking funds, or (iii) is in default on any of its redemption obligations, then no dividends shall be paid or declared on any class of stock junior to the preferred stock nor shall any of such stock be purchased or redeemed by the Company. Also, if dividends on any class of preferred stock are sufficiently in arrears, the holders of that stock may elect one-third of the Company's Board of Directors. 10. RISK MANAGEMENT The Company uses two types of risk management instruments - energy financial instruments and interest rate swaps - which are discussed below. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments, but does not expect any counterparties to fail to meet their obligations given their existing credit ratings. The fair value of these risk management instruments reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses on open contracts. Market quotes are available for substantially all financial instruments used by the Company. (A) Energy Financial Instruments The Company uses energy financial instruments to minimize its risk of price changes in the spot and fixed price natural gas and NGLs markets. Energy risk management products include commodity futures and options contracts, fixed-price swaps and basis swaps. Pursuant to its Board of Directors' approved guidelines, the Company is to engage in these activities only as a hedging mechanism against price volatility associated with pre-existing or anticipated physical gas and condensate sales, gas purchases, system use and storage in order to protect profit margins, and is prohibited from engaging in speculative trading. Commodity-related activities of the risk management group are monitored by the Company's Risk Management Committee, which is charged with the review and enforcement of the Board of Directors' risk management guidelines. All energy futures, swaps and options are recorded at fair value. Gains and losses on hedging positions are deferred and recognized as gas purchases expense in the periods in which the underlying physical transactions occur. The differences between the current market value and the original physical contracts' value, associated with hedging activities, are reflected, depending on maturity, as deferred charges or credits and other current assets or liabilities in the accompanying Consolidated Balance Sheets. These deferrals are offset by the corresponding 44 45 value of the underlying physical transactions. In the event energy financial instruments do not meet the criteria for hedge accounting, the deferred gains or losses associated with the corresponding financial instruments would be included in the results of operations in the current period. In the event energy financial instruments are terminated prior to the period of physical delivery of the items being hedged, the gains or losses on the energy financial instruments at the time of termination remain deferred until the period of physical delivery unless both the energy financial instruments and the items being hedged result in a loss. If this occurs, the loss is recorded immediately. As of December 31, 1997, the Company had deferred a net loss of $11.8 million associated with hedging activities, of which $4.0 million relates to commodity contracts and $7.8 million to over-the-counter swaps and options. The deferrals are reflected as other current assets and deferred charges in the accompanying Consolidated Balance Sheet and will be matched with the corresponding underlying physical transactions. At December 31, 1997, the Company held notional long volumetric positions of 28.6 Bcf of gas, of which 7.6 Bcf short positions were held in gas commodity positions, and 36.2 Bcf long positions were held in over-the-counter swaps and options. Of the 28.6 Bcf notional total, associated physical transactions of 28.3 Bcf were expected to occur in 1998 and 0.3 Bcf in 1999 and 2000. A change of plus or minus 10 percent of the fair market prices of the above financial instruments would have the approximate effect of reducing or increasing the deferrals by $9.2 million, which would be offset by corresponding increases or decreases in the value of the underlying physical transactions. (B) Interest Rate Swaps From time to time, the Company has entered into various interest rate swap and cap agreements for the purpose of managing interest rate exposure. Settlement amounts payable or receivable under these agreements are recorded as interest expense or income in the accounting period they are incurred. The notional principal covered under such arrangements for the periods presented are not material to the consolidated financial statements taken as a whole. As of December 31, 1997, all such agreements had expired. 11. EMPLOYEE BENEFITS (A) Retirement Plans The Company has defined benefit pension plans covering substantially all full-time employees. These plans provide pension benefits that are based on the employees' compensation during the period of employment, age and years of service. These plans are tax-qualified subject to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The Company's funding policy is to contribute annually the recommended contribution using the actuarial cost method and assumptions used for determining annual funding requirements. Plan assets consist primarily of pooled fixed income, equity, bond and money market funds. Net periodic pension cost includes the following components (in thousands):
1997 1996 1995 ---- ---- ---- Service Cost - Benefits Earned During the Period $ 3,462 $ 3,289 $ 3,332 Interest Cost on Projected Benefit Obligation 7,155 6,756 6,372 Actual Return on Assets (23,663) (18,243) (17,569) Net Amortization and Deferral 13,076 8,896 8,415 -------- -------- -------- Net Periodic Pension Cost $ 30 $ 698 $ 550 ======== ======== ========
45 46 The following table sets forth the plans' funded status and amounts recognized under the caption "Gas Imbalances and Other" in the Company's Consolidated Balance Sheets at December 31, 1997 and 1996 (in thousands):
DECEMBER 31 ----------- 1997 1996 ---- ---- Actuarial Present Value of Benefit Obligations: Vested Benefit Obligation $ (92,292) $(84,861) ========= ======== Accumulated Benefit Obligation $ (99,299) $(90,779) ========= ======== Projected Benefit Obligation $(106,383) $(97,182) Plan Assets at Fair Value 141,423 123,736 --------- -------- Plan Assets in Excess of Projected Benefit Obligation 35,040 26,554 Unrecognized Net Gain (24,669) (16,023) Prior Service Cost Not Yet Recognized in Net Periodic Pension Costs 138 155 Unrecognized Net Asset (1,136) (1,282) --------- -------- Prepaid Pension Cost $ 9,373 $ 9,404 ========= ========
The rate of increase in future compensation and the expected long-term rate of return on plan assets were 3.5 and 8.5 percent, respectively, for both 1997 and 1996. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25 percent for 1997 and 7.5 percent for 1996. For 1997, seven percent, and for 1996 an amount equal to a maximum of 10 percent, of eligible employee compensation was contributed to the Employees Retirement Fund Trust Profit Sharing Plan (the "Profit Sharing Plan"), a defined contribution plan. In 1997 and 1996, the Company's contribution was determined by comparing actual results to a predetermined graduated scale of annual operating income goals. Prior to 1996 the Company contributed an amount equal to the lesser of 10 percent of the Company's net income or 10 percent of eligible employee compensation to the Profit Sharing Plan. Contributions by the Company were $5.3 million, $6.6 million, and $5.6 million for 1997, 1996 and 1995, respectively, 50 percent of which was in the form of the Company's common stock. (B) Other Postretirement Employee Benefits The Company has a defined benefit postretirement plan providing medical care benefits upon retirement for all eligible employees with at least five years of credited service as of January 1, 1993, and also covers their eligible dependents. Retired employees are required to contribute monthly amounts which depend upon the retired employee's age, years of service upon retirement and date of retirement. This plan also provides life insurance benefits upon retirement for all employees with at least 10 years of credited service who are age 55 or older when they retire. The Company pays for a portion of the life insurance benefit. Employees may, at their option, increase the benefit by making contributions from age 55 until age 65 or retirement, whichever is earlier. The Company funds the future expected postretirement benefit costs under the plan by making payments to Voluntary Employee Benefit Association trusts. The Company's funding policy is to contribute amounts within the deductible limits imposed on Internal Revenue Code Sec. 501(c)(9) trusts. Plan assets consist primarily of pooled fixed income funds. Net periodic postretirement benefit cost includes the following components (in thousands):
1997 1996 1995 ---- ---- ---- Service Cost - Benefits Earned During the Period $ 205 $ 324 $ 378 Interest Cost on APBO 1,394 1,392 1,381 Actual Return on Assets (159) (114) (156) Net Amortization and Deferral 811 894 884 ------ ------ ------ Net Periodic Postretirement Benefit Cost $2,251 $2,496 $2,487 ====== ====== ======
46 47 The following table sets forth the plan's funded status and the amounts recognized in the Company's Consolidated Balance Sheets as follows (in thousands):
DECEMBER 31 ----------- 1997 1996 ---- ---- Accumulated Postretirement Benefit Obligation: Retirees $ (13,824) $ (15,578) Eligible Active Plan Participants (1,949) (1,549) Ineligible Active Plan Participants (3,995) (2,294) --------- --------- Total APBO (19,768) (19,421) Plan Assets at Fair Value 3,569 3,192 --------- --------- APBO in Excess of Plan Assets (16,199) (16,229) Unrecognized Net Gain (681) (1,179) Unrecognized Transition Obligation 13,936 14,865 -------- -------- Accrued Postretirement Benefit Cost $ (2,944) $ (2,543) ======== ========
The weighted-average discount rate used in determining the actuarial present value of the APBO was 7.25 percent in 1997 and 7.5 percent in 1996. The assumed health care cost trend rate was seven percent for 1997 and beyond. A one-percentage-point increase in the assumed health care cost trend rate for each future year would have increased the aggregate of the service and interest cost components of the 1997 net periodic postretirement benefit cost by approximately $14,000 and would have increased the APBO as of December 31, 1997, by approximately $198,000. 12. COMMON STOCK OPTION AND PURCHASE PLANS The Company has the following stock option plans: The 1982 Incentive Stock Option Plan ("the 1982 Plan"), the 1982 Stock Option Plan for Non-Employee Directors ("the 1982 Directors' Plan"), the 1986 Incentive Option Plan ("the 1986 Plan"), the 1988 Incentive Stock Option Plan ("the 1988 Plan"), the 1992 Stock Option Plan for Non-Employee Directors ("the 1992 Directors' Plan"), the 1994 K N Energy, Inc. Long-Term Incentive Plan ("the LTIP Plan") and the American Oil and Gas Corporation Stock Incentive Plan ("the AOG Plan"). The Company also has an employee stock purchase plan ("the ESP Plan"). The Company accounts for its plans under Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. The Company recorded compensation expense totaling $2.4 million, $0.8 million, and $0.2 million for 1997, 1996 and 1995, respectively, relating to restricted stock grants awarded under the plans. Had compensation cost for these plans been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and diluted earnings per share would have been reduced to the following pro forma amounts (in thousands except per share amounts):
1997 1996 1995 ---- ---- ---- NET INCOME: As Reported $77,497 $63,819 $52,522 ======= ======= ======= Pro Forma $73,028 $62,497 $52,101 ======= ======= ======= EARNINGS PER SHARE: As Reported $ 2.45 $ 2.14 $ 1.83 ======= ======= ======= Pro Forma $ 2.30 $ 2.10 $ 1.82 ======= ======= =======
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Additionally, 47 48 the pro forma amounts include $0.4 million, $0.4 million and $0.3 million related to the purchase discount offered under the ESP Plan for 1997, 1996 and 1995, respectively. The Company may sell up to 600,000 shares of stock to its eligible employees under the ESP Plan. Employees purchased 88,135 shares, 87,615 shares, and 95,572 shares for plan years 1997, 1996 and 1995, respectively, and have purchased 572,734 shares through the 1997 plan year. Shares are issued in the month following the end of each plan year. Employees purchase shares through voluntary payroll deductions at a 15 percent discount from the market value of the common stock, as defined in the plan. The weighted-average fair value per share of purchase rights granted in 1997, 1996 and 1995 was $9.72, $6.45 and $5.35, respectively.
OPTION SHARES GRANTED SHARES SUBJECT THROUGH EXPIRATION PLAN NAME TO THE PLAN 12/31/97 VESTING PERIOD PERIOD --------- ----------- -------- -------------- ------ 1982 Plan 888,525 888,525 Immediate 10 years 1982 Directors' Plan 124,393 124,393 Three years 10 years 1986 Plan 412,500 412,500 Immediate 10 years 1988 Plan 412,500 412,500 Immediate 10 years 1992 Directors' Plan 350,000 122,250 Immediate 10 years LTIP Plan 2,200,000 2,078,785 0 - 5 years 5 - 10 years AOG Plan 517,000 517,000 Three years 10 years
Under all plans, except the LTIP Plan and the AOG Plan, options are granted at not less than 100 percent of the market value of the stock at the date of grant. Under the LTIP Plan options may be granted at less than 100 percent of the market value of the stock at the date of grant. Certain restricted stock awards include provisions accelerating the lapsing of restrictions in the event certain operating goals are met. At December 31, 1997, 161 employees, officers and directors of the Company held options under the plans. A summary of the status of the Company's stock option plans at December 31, 1997, 1996 and 1995, and changes during the years then ended is presented in the table and narrative below:
1997 1996 1995 ---- ---- ---- WTD AVG WTD AVG WTD AVG EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- OUTSTANDING AT BEGINNING OF YEAR 1,726,487 $27.78 1,164,510 $21.25 1,214,024 $18.49 Granted 752,402 $28.52 925,126 $31.61 348,200 $25.87 Exercised (253,050) $21.17 (329,574) $15.88 (373,423) $16.54 Forfeited (79,129) $28.45 (33,575) $23.69 (24,291) $21.80 --------- ----- --------- ----- --------- ----- OUTSTANDING AT END OF YEAR 2,146,710 $28.79 1,726,487 $27.78 1,164,510 $21.25 ========= ====== ========= ====== ========= ====== EXERCISABLE AT END OF YEAR 895,415 $29.62 604,962 $24.52 584,902 $18.16 ========= ====== ========= ====== ========= ====== WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED $ 15.71 $ 9.53 $ 4.71 ======== ========= =========
48 49 The following table sets forth K N's December 31, 1997 price ranges, common stock options outstanding, weighted-average exercise prices, weighted-average remaining contractual lives, common stock options exercisable and the exercisable weighted-average exercise price.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------------------- ------------------------------------- WTD AVG WTD AVG REMAINING WTD AVG PRICE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE RANGE OUTSTANDING PRICE LIFE EXERCISABLE PRICE ----- ----------- ----- ---- ----------- ----- $ 0.00 - $25.19 801,335 $14.62 5.65 406,541 $21.49 $28.00 - $36.06 840,974 $34.65 8.50 329,083 $34.12 $37.31 - $52.13 504,401 $41.53 9.53 159,791 $41.03 --------- ------- 2,146,710 $28.79 7.68 895,415 $29.62 ========= =======
The weighted-average fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following assumptions: risk-free interest rate of 5.5 percent, expected weighted-average lives of 4 years and expected volatility of 20 percent for grants in 1997, 1996 and 1995; and expected dividend yields of 2.5 percent for grants in 1997 and 1996 and 3.5 percent for grants in 1995. 13. COMMITMENTS AND CONTINGENT LIABILITIES (A) Leases The Company has entered into several lease agreements that are classified as operating leases including those referred to in Notes 2 and 3(A). Expenses incurred under operating leases were $33.0 million in 1997, $22.3 million in 1996 and $16.2 million in 1995. Excluding the assumption of operating leases of MidCon, future minimum commitments under major operating leases as of December 31, 1997 are as follows (in thousands):
YEAR ENDING DECEMBER 31 AMOUNT - ----------- ------ 1998 $ 36,254 1999 35,802 2000 39,363 2001 41,432 2002 34,838 Thereafter 248,551 -------- Total Commitments $436,240 ========
(B) Basket Agreement Under terms of an agreement (the "Basket Agreement") entered into with Cabot as part of AOG's acquisition of Cabot's natural gas pipeline business, AOG and Cabot equally shared net payments made in settlement of certain liabilities related to operations of the acquired business prior to the acquisition date The Basket Agreement was settled in 1997, without a material impact on the Company's financial position or results of operations. (C) Guarantees of Unconsolidated Subsidiaries' Debt The Company executed guarantees of two unconsolidated subsidiaries' revolving credit agreements with Credit Lyonnais, effective July 19, 1996. One guarantee is for TransColorado Gas Transmission Company ("TransColorado") for a maximum of $7.5 million due by December 31, 1999, and another guarantee is for Coyote 49 50 Gas Treating, LLC ("Coyote") for a maximum of $10 million due by December 31, 1999. As of December 31, 1997, $6.4 and $8.7 million, respectively, represent the guaranteed amounts by the Company borrowed against the TransColorado and Coyote agreements. (D) Capital Expenditures Budget The consolidated capital expenditures budget for 1998 totals $149.5 million, (before adjustment to reflect the consolidation with MidCon). Approximately $15.1 million had been committed for the purchase of plant and equipment at December 31, 1997. 14. FAIR VALUE The following fair values of investments, Long-Term Debt, Capital Securities and K N Preferred Stock were estimated based on an evaluation made by an independent securities analyst. Fair values of Energy Financial Instruments, net reflect the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses on open contracts. Market quotes are available for substantially all instruments used by the Company.
DECEMBER 31 ----------- 1997 1996 ---- ---- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (In Millions) FINANCIAL ASSETS TBI Class A Preferred Stock $ 25.6 $ (i) $ 25.6 $ (i) TBI Common Stock $ 17.7 $ 17.7 $ 19.2 $ 19.2 Energy Financial Instruments, net - - $ 1.8 $ 1.8 FINANCIAL LIABILITIES Long-Term Debt $585.5 $622.1 $451.7 $471.7 Capital Securities $100.0 $100.7 $ - $ - Energy Financial Instruments, net $ 11.8 $ 11.8 $ - $ - K N Class A $5.00 Preferred Stock $ 7.0 $ 6.0 $ 7.0 $ 5.3
(i) Fair values for TBI Class A Preferred Stock are not readily available. 15. MAJOR CUSTOMER Sales to Atmos Energy Corporation and affiliates comprised 10 percent of consolidated revenues in 1995. 16. BUSINESS SEGMENT INFORMATION The Company is a natural gas energy products and services provider engaged in the following activities: o gathering, processing, marketing, transporting and storing natural gas; providing field services to natural gas producers and marketing NGLs (Gathering, Processing and Marketing Services); o interstate storing and transporting natural gas (Interstate Transportation and Storage Services); o providing retail natural gas sales and transportation services (Retail Natural Gas Services). The Company was involved in developing and producing natural gas and crude oil in 1995 (Gas and Oil Production). 50 51 BUSINESS SEGMENT INFORMATION (Before Intersegment Eliminations)
1997 1996 1995 ---- ---- ---- (In Thousands) OPERATING REVENUES: Gathering, Processing and Marketing Services $1,930,360 $1,256,478 $ 890,455 Interstate Transportation and Storage Services 79,811 71,769 64,405 Retail Natural Gas Services 256,837 225,432 232,317 Gas and Oil Production - - 10,721 Intersegment Eliminations (121,890) (113,197) (86,500) ---------- ---------- ---------- $2,145,118 $1,440,482 $1,111,398 ========== ========== ========== OPERATING INCOME: Gathering, Processing and Marketing Services $ 74,373 $ 74,460 $ 64,623 Interstate Transportation and Storage Services 35,024 29,460 17,933 Retail Natural Gas Services 32,852 30,881 32,995 Gas and Oil Production - - (189) ---------- ---------- ---------- OPERATING INCOME 142,249 134,801 115,362 Other Income and (Deductions) (29,091) (35,085) (33,790) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES $ 113,158 $ 99,716 $ 81,572 ========== ========== ========== IDENTIFIABLE ASSETS (AT DECEMBER 31): Gathering, Processing and Marketing Services $1,165,086 $ 869,141 $ 685,023 Interstate Transportation and Storage Services 493,864 315,503 178,882 Retail Natural Gas Services 491,719 419,415 328,166 Gas and Oil Production - - 36,451 Corporate * 155,136 25,661 28,935 ---------- ---------- ---------- $2,305,805 $1,629,720 $1,257,457 ========== ========== ========== DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE: Gathering, Processing and Marketing Services $ 34,769 $ 31,654 $ 26,510 Interstate Transportation and Storage Services 9,063 8,078 7,767 Retail Natural Gas Services 12,162 11,480 11,006 Gas and Oil Production - - 4,608 ---------- ---------- ---------- $ 55,994 $ 51,212 $ 49,891 ========== ========== ========== CAPITAL EXPENDITURES AND ACQUISITIONS: Gathering, Processing and Marketing Services $ 236,728 $ 96,486 $ 67,774 Interstate Transportation and Storage Services 188,893 150,640 11,200 Retail Natural Gas Services 39,228 28,770 30,080 Gas and Oil Production - - 6,156 ---------- ---------- ---------- $ 464,849 $ 275,896 $ 115,210 ========== ========== ==========
* Principally cash and investments in equity of unconsolidated subsidiaries 51 52 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) K N ENERGY, INC. AND SUBSIDIARIES QUARTERLY OPERATING RESULTS FOR 1997 AND 1996 (In Thousands Except Per Share Amounts)
1997 ---- FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Operating Revenues $489,473 $357,847 $515,137 $782,661 Operating Income 39,905 23,932 32,382 46,030 Net Income 20,358 10,872 17,808 28,459 Preferred Dividends 88 87 88 87 Earnings Available for Common Stock $ 20,270 $ 10,785 $ 17,720 $ 28,372 ======== ======== ======== ======== Number of Common Shares Used In Computing Basic Earnings Per Share 30,518 30,787 31,372 31,558 ======== ======== ======== ======== Number of Common Shares Used In Computing Diluted Earnings Per Share 30,169 31,377 31,709 31,997 ======== ======== ======== ======== Basic Earnings Per Common Share $ 0.66 $ 0.35 $ 0.56 $ 0.90 ======== ======== ======== ======== Diluted Earnings Per Common Share $ 0.65 $ 0.34 $ 0.56 $ 0.89 ======== ======== ======== ========
1996 ---- FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Operating Revenues $384,440 $277,148 $303,632 $475,262 Operating Income 35,776 22,084 30,157 46,784 Net Income 17,507 8,848 13,693 23,771 Preferred Dividends 100 99 99 100 Earnings Available for Common Stock $ 17,407 $ 8,749 $ 13,594 $ 23,671 ======== ======== ======== ======== Number of Common Shares Used In Computing Basic Earnings Per Share 28,265 28,411 29,509 30,221 ======== ======== ======== ======== Number of Common Shares Used In Computing Diluted Earnings Per Share 28,945 29,181 30,046 30,875 ======== ======== ======== ======== Basic Earnings Per Common Share $ 0.62 $ 0.31 $ 0.46 $ 0.78 ======== ======== ======== ======== Diluted Earnings Per Common Share $ 0.60 $ 0.30 $ 0.46 $ 0.78 ======== ======== ======== ========
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no such matters during 1997. 52 53 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification of Directors For information regarding the Directors, see pages 2-9 of the 1998 Proxy Statement. (B) Identification of Executive Officers See Executive Officers of the Registrant under Part I. (C) Identification of Certain Significant Employees None. (D) Family Relationships See "Election of Directors" on page 7 of the 1998 Proxy Statement. (E) Business Experience See Executive Officers of the Registrant under Part I. For business experience of the Directors, see pages 3-6 of the 1998 Proxy Statement. (F) Involvement in Certain Legal Proceedings None. (G) Promoters and Control Persons None. ITEM 11: EXECUTIVE COMPENSATION See "Director Compensation," "Report of the Compensation Committee on Executive Compensation," "Executive Compensation," "Stock Options," "Performance Graph," "Pension and Supplemental Benefits" and "Severance and Other Agreements" on pages 8-21 of the 1998 Proxy Statement. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the following pages of the 1998 Proxy Statement: (i) Pages 3-7 relating to common stock owned by directors; (ii) page 19, "Executive Stock Ownership;" and (iii) pages 31-32, "Principal Shareholders." 53 54 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (A) Transactions with Management and Others See "Relationship Between Certain Directors and the Company" on page 7 of the 1998 Proxy Statement. (B) Certain Business Relationships See "Relationship Between Certain Directors and the Company"on page 7 of the 1998 Proxy Statement. (C) Indebtedness of Management See "Relationship Between Certain Directors and the Company" on page 7 of the 1998 Proxy Statement. (D) Transactions with Promoters Not applicable. 54 55 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) See the index for a listing and page numbers of financial statements and exhibits included herein or incorporated by reference. Executive Compensation Plans and Arrangements Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1982 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1982 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1986 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1988 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Directors' Deferred Compensation Plan Agreement (Exhibit 10.8, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1987 Directors' Deferred Fee Plan As Amended and Form of Participation Agreement regarding the Plan (Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1995)* 1992 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* 1994 K N Energy, Inc. Long-Term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)* K N Energy, Inc. 1996 Executive Incentive Plan (Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1995)* K N Energy, Inc. Nonqualified Deferred Compensation Plan (Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994)* K N Energy, Inc. Nonqualified Retirement Income Restoration Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended December 31, 1994)* 55 56 K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan (Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (Exhibit 10(p) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Exhibit 10(q) to the Annual Report on Form 10-K for the year ended December 31, 1995)* K N Energy, Inc. Performance Incentive Plan (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Form of Change of Control Severance Agreement (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Form of Incentive Stock Option Agreement (Exhibit 10(v) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Form of Restricted Stock Agreement (Exhibit 10(w) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Employment Agreement dated March 21, 1996 between K N Energy, Inc. and Murray R. Smith (Exhibit 10(x) to the Annual Report on Form 10-K for the year ended December 31, 1996)* (b) Reports on Form 8-K On October 27, 1997, a Current Report on Form 8-K was filed to report that on that date K N Energy, Inc. sold $150 million of its 6.67% debentures due November 1, 1997 pursuant to an underwritten public offering. * Incorporated herein by reference. 56 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. K N ENERGY, INC. (Registrant) March 5, 1998 By /s/ Clyde E. McKenzie ------------------------- Clyde E. McKenzie Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Edward H. Austin, Jr. Director - ------------------------------ Edward H. Austin, Jr. /s/ Charles W. Battey Director - ------------------------------ Charles W. Battey /s/ Stewart A. Bliss Director - ------------------------------ Stewart A. Bliss /s/ David W. Burkholder Director - ------------------------------ David W. Burkholder /s/ David M. Carmichael Director - ------------------------------ David M. Carmichael /s/ Robert H. Chitwood Director - ------------------------------ Robert H. Chitwood /s/ Howard P. Coghlan Director - ------------------------------ Howard P. Coghlan /s/ Jordan L. Haines Director - ------------------------------ Jordan L. Haines /s/ Larry D. Hall Chairman, President, Chief Executive Officer - ------------------------------ and Director (Principal Executive Officer) Larry D. Hall /s/ William J. Hybl Director - ------------------------------ William J. Hybl /s/ Richard D. Kinder Director - ------------------------------ Richard D. Kinder /s/ Clyde E. McKenzie Vice President and Chief Financial Officer - ------------------------------ (Principal Financial and Accounting Officer) Clyde E. McKenzie /s/ Edward Randall, III Director - ------------------------------ Edward Randall, III /s/ John F. Riordan Director - ------------------------------ John F. Riordan /s/ James C. Taylor Director - ------------------------------ James C. Taylor /s/ H. A. True, III Director - ------------------------------ H. A. True, III
57 58
Exhibit Index Page Number ------------- ----------- List of Executive Compensation Plans and Arrangements........................... 55-56 Exhibit 2(a) - Stock Purchase Agreement, dated December 18, 1997, between K N Energy, Inc. and Occidental Petroleum Corporation (Exhibit 2.1, File No. 333-44421)* Exhibit 2(b) - Amendment No. 1 to Stock Purchase Agreement, dated January 30,1998, between K N Energy, Inc. and Occidental Petroleum Corporation (Attached hereto as Exhibit 2(b))** Exhibit 3(a) - Restated Articles of Incorporation (Exhibit 3(a) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 3(b) - By-Laws of the Company, as amended (Exhibit 3(b) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 4(a) - Indenture dated as of September 1, 1988, between K N Energy, Inc. and Continental Illinois National Bank and Trust Company of Chicago (Exhibit 1.2, Current Report on Form 8-K Dated October 5, 1988)* Exhibit 4(b) - First supplemental indenture dated as of January 15, 1992, between K N Energy, Inc. and Continental Illinois National Bank and Trust Company of Chicago (Exhibit 4.2, File No. 33-45091)* Exhibit 4(c) - Second supplemental indenture dated as of December 15, 1992, between K N Energy, Inc. and Continental Bank, National Association (Exhibit 1.2 Current Report on Form 8-K dated December 15, 1992)* Exhibit 4(d) - Indenture dated as of November 20, 1993, between K N Energy, Inc. and Continental Bank, National Association (Exhibit 4.1, File No. 33-51115)* Note - Copies of instruments relative to long-term debt in authorized amounts that do not exceed 10 percent of the consolidated total assets of the Company and its subsidiaries have not been furnished. The Company will furnish such instruments to the Commission upon request Exhibit 4(e) - $600,000,000 364-Day Credit Agreement among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Attached hereto as Exhibit 4(e))** Exhibit 4(f) - $400,000,000 Five-Year Credit Agreement among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Attached hereto as Exhibit 4(f))** Exhibit 4(g) - $2,100,000,000 364-Day Credit Agreement among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Attached hereto as Exhibit 4(g))** Exhibit 4(h) - $1,394,846,122 Reimbursement Agreement among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Attached hereto as Exhibit 4(h))** Exhibit 10(a) - Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(b) - 1982 Stock Option Plan for Non-Employee
58 59
Exhibit Index Page Number ------------- ----------- Directors of the Company with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(c) - 1982 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(d) - 1986 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(e) - 1988 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(f) - Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(g) - Directors' Deferred Compensation Plan Agreement (Exhibit 10.8, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(h) - 1987 Directors' Deferred Fee Plan As Amended and Form of Participation Agreement regarding the Plan (Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* Exhibit 10(j) - 1994 K N Energy, Inc. Long-Term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)* Exhibit 10(k) - K N Energy, Inc. 1996 Executive Incentive Plan (Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(l) - K N Energy, Inc. Nonqualified Deferred Compensation Plan (Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(m) - K N Energy, Inc. Nonqualified Retirement Income Restoration Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(n) - K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan (Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(o) - Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (Exhibit 10(p) to the Annual Report on Form 10-K for the year ended December 31, 1995)*
59 60
Exhibit Index Page Number ------------- ----------- Exhibit 10(p) - Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Exhibit 10(q) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(q) - Amended and Restated Basket Agreement dated as of June 30, 1990, by and between American Pipeline Company ("APC"), Cabot and Cabot Transmission Corporation (Exhibit 10.5(a) to the Annual Report on Form 10-K for American Oil and Gas Corporation ("AOG") for the year ended December 31, 1993)* Exhibit 10(r) - First Amendment to Amended and Restated Omnibus Acquisition Agreement and Amended and Restated Basket Agreement dated as of March 31, 1992 by and among AOG, APC, Cabot and Cabot Transmission (Exhibit 10.5(d) to the Annual Report on Form 10-K for AOG for the year ended December 31, 1993)* Exhibit 10(s) - Rights Agreement between K N Energy, Inc. and the Bank of New York, as Rights Agent, dated as of August 21, 1995 (Exhibit 1 on Form 8-A dated August 21, 1995)* Exhibit 10(t) - K N Energy, Inc. Performance Incentive Plan (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(u) - Form of Change of Control Severance Agreement (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 10(v) - Form of Incentive Stock Option Agreement (Exhibit 10(v) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 10(w) - Form of Restricted Stock Agreement (Exhibit 10(w) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 10(x) - Employment Agreement dated March 21, 1996 between K N Energy, Inc. and Murray R. Smith (Exhibit 10(x) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 10(y) - Intrastate Pipeline System Lease, dated December 31, 1996, between MidCon Texas Pipeline, L.P. and MidCon Texas Pipeline Operator, Inc. (Attached hereto as Exhibit 10(y))** Exhibit 10(z) - Amendment Number One To Intrastate Pipeline System Lease, dated January 31, 1998, between MidCon Texas Pipeline, L.P. and MidCon Texas Pipeline Operator, Inc. (Attached hereto as Exhibit 10(z))** Exhibit 12 - Ratio of Earnings to Fixed Charges................ 61 Exhibit 13 - 1997 Annual Report to Shareholders***.............. 62 Exhibit 21 - Subsidiaries of the Registrant..................... 63-65 Exhibit 23 - Consent of Independent Public Accountants.......... 66 Exhibit 27 - Financial Data Schedule**** Exhibit 99 - Consent of Independent Public Accountants.......... 67
* Incorporated herein by reference. ** Included in SEC and NYSE copies only. *** Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this annual report on Form 10-K. **** Included in SEC copy only. 60 EX-2.B 2 AMENDMENT NO. 1 TO STOCK PUCHASE AGREEMENT 1 AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT (this "Amendment"), dated January 30, 1998, by and between Occidental Petroleum Corporation, a Delaware corporation (the "Seller"), and KN Energy, Inc., a Kansas corporation (the "Buyer"), amending that certain Stock Purchase Agreement (the "Original SPA"), dated as of December 18, 1997, by and between the Seller and the Buyer. Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the Original SPA. W I T N E S S E T H: WHEREAS, the Seller and the Buyer have entered into the Original SPA pursuant to which the Buyer is purchasing all of the issued and outstanding Common Stock of MidCon; and WHEREAS, the Original SPA has previously been amended by that certain Supplemental Agreement dated January 20, 1998 (the "Supplemental Agreement"), between the Buyer and the Seller, providing for, among other things, the dividend of MPSC from MidCon to the Seller, on the terms and subject to the conditions provided therein (the Original SPA, as amended by the Supplemental Agreement and this Amendment is referred to herein as the "SPA"); WHEREAS, the Buyer and the Seller have agreed to amend the Original SPA as provided herein in order to resolve certain issues that have arisen under the SPA in view of the passage of time and certain interests of the Buyer and the Seller. 2 NOW, THEREFORE, in consideration of, and subject to, the mutual covenants, agreements, terms and conditions herein contained, the Parties hereto hereby agree as follows: 1. Delivery Date. (a) Sections 1.2, 4.2 (excluding Sections 4.2.5 and 4.2.7), 4.3, 4.4, 5.2.5, 5.3.3 and 5.3.6 of the Original SPA are hereby amended by (i) deleting therefrom the words "at the Closing" and inserting, in lieu thereof, the words "on the Delivery Date," and (ii) after giving effect to the amendment provided for in the immediately preceding clause (i), deleting therefrom the words "Closing" and "Closing Date" and inserting, in lieu thereof, the words "Delivery Date." (b) Section 4.1 of the Original SPA is hereby amended and restated in its entirety to read as follows: "4.1 Time and Place of the Closing. Subject to the satisfaction or waiver of the conditions precedent set forth herein, the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of the Seller, 10889 Wilshire Boulevard, Los Angeles, California, at 11:59 p.m., Los Angeles time, on January 31, 1998." (c) Section 4.2.7 of the Original SPA is hereby amended by deleting therefrom the words "Closing Date" and inserting, in lieu thereof, the words "Delivery Date." (d) Section 9.16 of the Original SPA is hereby amended and restated in its entirety to read as follows: "9.16 'Closing Date' shall mean January 31, 1998." 2 3 (e) Article IX of the Original SPA is hereby amended by inserting, immediately following Section 9.25, a new Section 9.25(a), which shall read in its entirety as follows: "9.25(a) 'Delivery Date' shall mean the date immediately preceding the Closing Date." 2. Cash Management Agreement (Section 5.1.2(b)). Section 5.1.2(b) of the Original SPA shall be deleted in its entirety and the following shall be substituted therefor: "(b) Loan Balances at Closing. The balance of each of the OPC Loans and the MidCon Loans as at the Closing shall be calculated by including all amounts accrued but not yet payable (other than cash payments which have been settled directly notwithstanding the terms of the Cash Management Agreement) for the period elapsed up to the Closing, which amounts will include (i) the payment by, or on behalf of, MidCon to the MidCon ESOP Trustee and its advisors, (ii) the amount of Taxes of all sorts accrued pursuant to Article VI , (iii) $5,928,000, representing the amount by which (A) Taxes credited to MidCon during the calendar year ending December 31, 1997, exceed (B) the amount of Taxes which would have ultimately been credited to MidCon for the calendar year ending December 31, 1997, pursuant to the Tax Sharing Agreement, if it were not terminated and (iv) any tax benefit pursuant to the Tax Sharing Agreement for the period prior to the Closing resulting from the payment of $5,970,000 under the Bonus Agreements referenced in the Letter Agreement dated December 18, 1997." 3. Revision to the Schedules to the SPA (Section 5.3.3). The Buyer and the Seller have agreed to amend and restate all of the Schedules in their entirety as attached hereto and incorporated by this reference herein. The Schedules attached to the Original SPA shall have no further force or effect from and after the date hereof. The Buyer hereby waives any breach of the Seller's representations and warranties in Section 2.16 arising as a result of the contract between MidCon and Kamine/Besicorp ("Kamine") listed in clause (d) of Schedule 2.16.5, including Kamine's bankruptcy and failure to perform thereunder. The Buyer and the Seller hereby amend 3 4 Section 5.3.3 to delete the five (5) Business Days' notice requirement for any further Schedule revisions pursuant to Section 5.3.3 of the Original SPA. 4. Insurance Matters (Section 5.1.5). The Buyer and the Seller hereby agree that the Novation Agreement effective on the Closing, by and among National Union Fire Insurance Company of Pittsburgh, PA., acting on its own behalf and on behalf of its affiliated insurance companies (collectively, the "Insurer"), the Buyer and the Seller, together with the related Hold Harmless Agreement by and between the Insurer and the Buyer effective on the Closing, have been delivered in satisfaction of the requirement for a Novation Agreement, in substantially the form of Exhibit 5.1.5(b) to the Original SPA, and in satisfaction of the undertaking set forth in Section 5.1.5 of the Original SPA. 5. Substitute Note. (a) Section 9.83 of the Original SPA is hereby amended and restated in its entirety to read as follows: "9.83 'Substitute Note' shall mean a note substantially in the form of Exhibit 9.83 hereto." (b) Exhibit 9.83 to the Original SPA is hereby amended and restated in its entirety to read as set forth on Exhibit 9.83 to this Amendment. 6. Financing Arrangements (Section 5.3.4). Section 5.3.4 of the Original SPA shall be deleted in its entirety and the following shall be substituted therefor: "5.3.4 Substitute Note. On the Delivery Date, the Seller shall assign to the Buyer (a) the ESOP Note, and (b) by execution and delivery to the Buyer of the Term 4 5 Loan Assignment Agreement, all of the Seller's rights and obligations under the Term Loan Agreement and, in exchange therefor, on the Delivery Date the Buyer shall execute and deliver to the Seller the Term Loan Assignment Agreement and shall issue to the Seller a Substitute Note, which entitles the holder thereof to the benefit of one or more letters of credit that entitle the holder to draw up to $1,418,434,132 in the aggregate in the event that the Buyer fails to make a payment of principal or interest under the Substitute Note, which letters of credit shall be in form and substance satisfactory to the Seller, and shall be issued by a bank or group of banks with each such bank either (a) having an investment grade credit rating by either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"), so long as neither of the above rating agencies has provided a credit rating below investment grade, (b) having been agreed to by the Seller or (c) if a bank is not such an investment grade credit, its portion of the letter of credit can be fronted by a bank having such investment grade credit." 7. MC Panhandle Indemnity (Section 8.3.1). Section 8.3.1(d) of the Original SPA shall be deleted in its entirety and the following shall be substituted therefor: "(d) any loss, claim, damage, liability, cost or expense arising out of or relating to any claims by Persons which own interests in the assets assigned by MidCon Gas Services Corp. ("MGS") to MC Panhandle Inc. ("MCP") pursuant to the Assignment and Assumption Agreement dated December 31, 1996 by and between MGS and MCP (the "Assignment"), including those cases referred to on Schedule 2.13, but only to the extent such losses, claims, damages, liabilities, costs and expenses (i) relate to the liability of MidCon or its Subsidiaries in such matter and (ii) exceed $10 million; provided, however, that the Seller shall be entitled to defend, in accordance with the procedures set forth in Section 8.4.5, all actions, suits, proceedings or claims referenced in this clause (d). Notwithstanding anything to the contrary contained in this Agreement or in the Assignment, the Parties hereby agree that to avoid any dispute regarding the interpretation of any of the other relevant provisions of this Agreement or the Assignment, the Buyer shall, or shall cause MidCon or MGS to, pay for, and the Seller shall, or shall cause MCP to, charge MidCon or MGS for, all amounts payable to discharge all losses, claims, damages, liabilities, costs and expenses incurred by the Seller or its Subsidiaries, including MCP (in each case, directly or on behalf of MidCon and its subsidiaries), to defend, to discharge judgments and to pay the cash portion of settlements relating to or arising from the ownership or operation of the assets assigned pursuant to the Assignment, regardless of whether or not the payments are specifically made to discharge claims for the period prior to December 31, 1996; provided, however, that such amounts shall under no circumstances exceed $10 million. The Buyer shall, or shall cause MidCon and MGS, to pay the foregoing amounts ten (10) days after receipt of information properly documenting that the amounts were incurred after the Closing. None of the obligations of the Buyer, MidCon or MGS to reimburse the Seller for such amounts shall be terminated by reason of the limitations or survival provisions set forth in Section 8.1 of the SPA." 5 6 8. Orders of Federal Energy Regulatory Commission Regarding the Complaint Filed by Amoco. The Buyer hereby waives all claims it may have, now or in the future, against the Seller arising directly or indirectly from the penalties imposed by the FERC in its January 16, 1998, orders or the settlement of the Amoco matter identified in Schedule 2.13 to the SPA. 9. Financial Information (Section 10.1). From time to time, the Seller may require financial information or other information regarding MidCon's business and operations through January 31, 1998, in order to (a) review the Loan Balances at the Closing, (b) prepare Tax returns including any periods ending on or prior to January 31, 1998, or (c) to satisfy legal or operational requirements, including financial reporting requirements, or to obtain any revenue or SIC Code information which may be required by the HSR Act. The Buyer hereby agrees that it shall promptly furnish such information upon the request of the Seller. 10. Entire Agreement; Third Party Beneficiaries (Section 10.10). This Amendment, taken together with (i) the Original SPA, as amended by this Amendment and the Supplemental Agreement, (ii) those certain Confidentiality Agreements by and between the Seller and the Buyer (including the documents and the instruments referred to herein and therein) as more fully described in Section 10.3 of the SPA, (iii) those certain letter agreements from the Seller to the Buyer dated December 18, 1997, and the date hereof, respectively, regarding compensation of certain officers of MidCon and (iv) the Supplemental Agreement (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided under Section 5.2.3, Section 5.2.6, Section 8.2 and Section 8.3 of the SPA, are not intended to confer upon any person other than the Parties any rights or remedies hereunder. 6 7 11. Effect of Amendment and Modification. Except as amended by this Amendment and the Supplemental Agreement, the Original SPA shall continue in full force and effect. 12. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall be considered one and the same agreement. 7 8 IN WITNESS WHEREOF, the Seller and the Buyer have caused this Amendment to be signed by their respective officers thereunder duly authorized, all as of the date first written above. OCCIDENTAL PETROLEUM CORPORATION ("Seller") By: ---------------------------------------------- Name: Stephen I. Chazen Title: Executive Vice President - Corporate Development KN ENERGY, INC. ("Buyer") By: ---------------------------------------------- Name: Larry D. Hall Title: Chairman, President and Chief Executive Officer 8 EX-4.E 3 364 DAY CREDIT AGREEMENT 1 CONFORMED COPY $600,000,000 364-DAY CREDIT AGREEMENT dated as of January 30, 1998 among K N Energy, Inc., The Banks Listed Herein, and Morgan Guaranty Trust Company of New York, as Administrative Agent ---------------- J. P. Morgan Securities Inc., BancAmerica Robertson Stephens, Chase Securities Inc. and NationsBanc Montgomery Securities LLC, Syndication Agents 2 TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITIONS SECTION 1.1. Definitions.....................................................1 SECTION 1.2. Accounting Terms and Determinations............................15 SECTION 1.3. Types of Borrowings............................................15 ARTICLE 2 THE CREDITS SECTION 2.1. Commitments to Lend............................................16 SECTION 2.2. Notice of Committed Borrowing..................................16 SECTION 2.3. Money Market Borrowings........................................16 SECTION 2.4. Notice to Banks; Funding of Loans..............................20 SECTION 2.5. Notes..........................................................21 SECTION 2.6. Maturity of Loans..............................................22 SECTION 2.7. Interest Rates.................................................22 SECTION 2.8. Fees...........................................................26 SECTION 2.9. Optional Termination or Reduction of Commitments...............26 SECTION 2.10. Scheduled Termination of Commitments...........................26 SECTION 2.11. Optional Prepayments...........................................27 SECTION 2.12. General Provisions as to Payments..............................27 SECTION 2.13. Funding Losses.................................................28 SECTION 2.14. Computation of Interest and Fees...............................28 SECTION 2.15. Regulation D Compensation......................................29 ARTICLE 3 CONDITIONS SECTION 3.1. Effectiveness..................................................29 SECTION 3.2. Borrowings.....................................................30 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.1. Corporate Existence and Power..................................31 SECTION 4.2. Corporate and Governmental Authorization; No Contravention..............................................31
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PAGE SECTION 4.3. Binding Effect.................................................32 SECTION 4.4. Financial Information..........................................32 SECTION 4.5. Litigation.....................................................32 SECTION 4.6. Compliance with ERISA..........................................33 SECTION 4.7. Environmental Matters..........................................33 SECTION 4.8. Taxes..........................................................34 SECTION 4.9. Subsidiaries...................................................34 SECTION 4.10. Not an Investment Company......................................34 SECTION 4.11. Full Disclosure................................................34 SECTION 4.12. MidCon Acquisition.............................................34 ARTICLE 5 COVENANTS SECTION 5.1. Information....................................................35 SECTION 5.2. Payment of Obligations.........................................37 SECTION 5.3. Maintenance of Property; Insurance.............................37 SECTION 5.4. Conduct of Business and Maintenance of Existence...............38 SECTION 5.5. Compliance with Laws...........................................38 SECTION 5.6. Inspection of Property, Books and Records......................38 SECTION 5.7. Debt...........................................................39 SECTION 5.8. Minimum Net Worth..............................................39 SECTION 5.9. Minimum Interest Coverage Ratio................................39 SECTION 5.10. Negative Pledge................................................40 SECTION 5.11. Consolidations, Mergers and Sales of Assets....................40 SECTION 5.12. Use of Proceeds................................................41 SECTION 5.13. Transactions with Affiliates...................................41 ARTICLE 6 DEFAULTS SECTION 6.1. Events of Default..............................................41 SECTION 6.2. Notice of Default..............................................44 ARTICLE 7 THE AGENTS SECTION 7.1. Appointment and Authorization..................................44 SECTION 7.2. Administrative Agent and Affiliates............................44 SECTION 7.3. Action by Administrative Agent.................................45 SECTION 7.4. Consultation with Experts......................................45
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PAGE SECTION 7.5. Liability of Administrative Agent..............................45 SECTION 7.6. Indemnification................................................45 SECTION 7.7. Credit Decision................................................46 SECTION 7.8. Successor Administrative Agent.................................46 SECTION 7.9. Agents' Fees...................................................46 SECTION 7.10. Other Agents...................................................46 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair.......47 SECTION 8.2. Illegality.....................................................47 SECTION 8.3. Increased Cost and Reduced Return..............................48 SECTION 8.4. Taxes..........................................................50 SECTION 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans......51 SECTION 8.6. Substitution of Bank...........................................52 ARTICLE 9 MISCELLANEOUS SECTION 9.1. Notices........................................................52 SECTION 9.2. No Waivers.....................................................53 SECTION 9.3. Expenses; Indemnification......................................53 SECTION 9.4. Sharing of Set-offs............................................53 SECTION 9.5. Amendments and Waivers.........................................54 SECTION 9.6. Successors and Assigns.........................................54 SECTION 9.7. Collateral.....................................................56 SECTION 9.8. Governing Law; Submission to Jurisdiction......................56 SECTION 9.9. Counterparts; Integration......................................56 SECTION 9.10. WAIVER OF JURY TRIAL...........................................56 SECTION 9.11. Existing Credit Agreement......................................57
5 PRICING SCHEDULE EXHIBIT A - NOTE EXHIBIT B - MONEY MARKET QUOTE REQUEST EXHIBIT C - INVITATION FOR MONEY MARKET QUOTES EXHIBIT D - MONEY MARKET QUOTE EXHIBIT E-1 - OPINION OF SPECIAL COUNSEL FOR THE BORROWER EXHIBIT E-2 - OPINION OF KANSAS COUNSEL FOR THE BORROWER EXHIBIT E-3 - OPINION OF GENERAL COUNSEL OF THE BORROWER EXHIBIT F - OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENTS EXHIBIT G - ASSIGNMENT AND ASSUMPTION AGREEMENT 6 364-DAY CREDIT AGREEMENT AGREEMENT dated as of January 30, 1998 among K N ENERGY, INC., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. W I T N E S S E T H: WHEREAS, the Borrower, desires to replace the Amended and Restated Credit Agreement dated as of March 7, 1997 (the "Existing Credit Agreement"), among the Borrower, certain banks and Morgan Guaranty Trust Company of New York, as agent, by entering into this Agreement; and WHEREAS, the Banks agree to do so. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1. Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.3. "Acquisition" means the purchase of MidCon Corp. by the Borrower from Occidental Petroleum Corporation pursuant to the Stock Purchase Agreement. "Adjusted CD Rate" has the meaning set forth in Section 2.7(b). "Administrative Agent" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks under this Agreement, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. 7 "Agent" means each of the Administrative Agent and the Syndication Agents, and "Agents" means any combination of them, as the context may require. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.7(b). "Assignee" has the meaning set forth in Section 9.6(c). "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day or (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Committed Loan to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Committed Borrowing or pursuant to Article 8. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means K N Energy, Inc., a Kansas corporation, and its successors. "Borrower's 1996 Form 10-K" means the Borrower's annual report on Form 10-K for 1996, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrower's Latest Form 10-Q" means the Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 1997, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrowing" has the meaning set forth in Section 1.3. "CD Base Rate" has the meaning set forth in Section 2.7(b). "CD Loan" means a Committed Loan to be made by a Bank as a CD Loan in accordance with the applicable Notice of Committed Borrowing. "CD Margin" has the meaning set forth in Section 2.7(b). "CD Reference Banks" means NationsBank, N.A., The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. "Commitment" means, with respect to each Bank, the amount set forth 8 opposite the name of such Bank on the signature pages of this Agreement, as such amount may be reduced from time to time pursuant to Sections 2.9 and 2.10. "Committed Loan" means a loan made by a Bank pursuant to Section 2.1. "Consolidated Assets" means the total amount of assets appearing on the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, prepared in accordance with generally accepted accounting principles as of the date of the most recent regularly prepared consolidated financial statements prior to the taking of any action for the purposes of which the determination is being made. "Consolidated Debt" of any Person means at any date the sum (without duplication) of (i) the Debt of such Person and its Consolidated Subsidiaries, determined on a consolidated basis as of such date plus (ii) the excess (if any) of the Trust Preferred Securities of such Person over 10% of the Consolidated Total Capitalization of such Person at such date minus (iii) the portion of the Substitute Note collateralized as contemplated by Section 5.10(b) hereof. "Consolidated EBITDA" means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining Consolidated Net Income for such period, the aggregate amount of (i) Consolidated Interest Expense, (ii) income tax expense and (iii) depreciation and amortization expense. "Consolidated Interest Expense" means, for any period, the interest expense of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "Consolidated Subsidiary" of any Person means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Net Income" means, for any period, the net income of the Borrower and its Consolidated Subsidiaries before extraordinary items, determined on a consolidated basis for such period. "Consolidated Net Worth" of any Person means at any date the sum (without duplication) of (i) the consolidated stockholders' equity of such Person and its Consolidated Subsidiaries, determined as of such date plus (ii) the Mandatorily Convertible Preferred Stock of such Person plus (iii) the Trust Preferred Securities of such Person; provided that the amount of Trust Preferred Securities added pursuant to this clause (iii) shall not exceed 10% of Consolidated Total Capitalization of such Person at such date. "Consolidated Total Capitalization" of any Person means at any date the sum of Consolidated Debt of such Person and Consolidated Net Worth of such Person, each determined as of such date. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) 9 all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable or deferred employee and director compensation arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, for purposes of Section 5.11 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.7(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.1. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface 10 water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a Euro-Dollar Loan in accordance with the applicable Notice of Committed Borrowing. "Euro-Dollar Margin" has the meaning set forth in Section 2.7(c). "Euro-Dollar Reference Banks" means the principal London offices (for determinations of a London Interbank Offered Rate) or domestic offices (for determinations of an Interbank Offered Rate) of NationsBank, N.A., The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.1. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day 11 next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.1(a)) or any combination of the foregoing. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnitee" has the meaning set forth in Section 9.3(b). "Interest Coverage Ratio" means, at any date, the ratio of Consolidated EBITDA to Consolidated Interest Expense for the period of four consecutive fiscal quarters most recently ended on or before such date. "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing; except that with respect to any Borrowing occurring prior to the Syndication Date, (i) any such Borrowing occurring prior to February 23, 1998 shall have an Interest Period ending on February 23, 1998 and (ii) any such Borrowing on or after February 23, 1998 shall have an Interest Period ending one week thereafter; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar 12 Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (3) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (4) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter (but not more than nine months) as the Borrower may elect in accordance with Section 2.3; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (5) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than seven days nor more than 360 days) as the Borrower may elect in accordance with Section 2.3; provided that: 13 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.3. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Domestic Loan or a Euro-Dollar Loan or a Money Market Loan and "Loans" means Domestic Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.7(c). "Mandatorily Convertible Preferred Stock", means, with respect to the Borrower, preferred securities of a Subsidiary which are (i) mandatorily convertible into common equity securities of the Borrower within approximately three years of their date of issuance, (ii) issued in conjunction with, and pledged to secure, an obligation to purchase common equity securities of the Borrower within approximately three years for an equal amount or (iii) otherwise structured in a manner satisfactory to the Administrative Agent so as to ensure the issuance of incremental common equity securities of the Borrower in a substantially equal amount within approximately three years. "Material Debt" means Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $75,000,000. "Material Financial Obligations" means a principal or face amount of Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) and/or payment obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $125,000,000. 14 "Material Subsidiary" means any Subsidiary the consolidated assets of which constitute 10% or more of Consolidated Assets. "Money Market Absolute Rate" has the meaning set forth in Section 2.3(d). "Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may from time to time by notice to the Borrower and the Administrative Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.1(a)). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.3(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.3. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.2) or a Notice of Money Market Borrowing (as defined in Section 2.3(f)). "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.6(b). 15 "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Purchase Agreement" means the Purchase and Sale Agreement dated as of January 28, 1994, among K N Gas Supply Services, Inc., the Borrower, Bank of America National Trust and Savings Association, as the initial Purchaser (as defined therein), and Bank of America National Trust and Savings Association, as agent for the Purchasers. "Pricing Schedule" means the Schedule attached hereto identified as such. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refunding Borrowing" means a Committed Borrowing which, after application of the proceeds thereof, results in no net increase in the outstanding principal amount of Committed Loans made by any Bank. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Reimbursement Agreement" means the Reimbursement Agreement dated as of January 30, 1998, among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company as the administrative agent, as amended and in effect from time to time. "Required Banks" means at any time Banks having at least 66 2/3 % of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "Revolving Credit Period" means the period from and including the Effective Date to but not including the Termination Date. 16 "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Stock Purchase Agreement" means the Stock Purchase Agreement dated as of December 18, 1997, between Occidental Petroleum Corporation, a Delaware corporation, and the Borrower as amended and in effect from time to time; provided that any such amendment from the form thereof heretofore furnished to each of the Banks which could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, shall be effective for purposes of references thereto in this Agreement only if such amendment shall have received the written consent of the Required Banks (which shall not be unreasonably withheld). "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Substitute Note" means the Substitute Note (as defined in the Stock Purchase Agreement) issued by the Borrower to Occidental Petroleum Corporation in connection with the Acquisition. "Syndication Agent" means either J.P. Morgan Securities Inc., BancAmerica Robertson Stephens, Chase Securities Inc. or NationsBanc Montgomery Securities LLC in its capacity as a syndication agent in respect of this Agreement, and "Syndication Agents" means all of them. "Syndication Date" means the earlier of (i) March 31, 1998 and (ii) the first date subsequent to the date hereof on which the Commitments of the Banks listed on the signature pages hereof shall have been reduced to an amount less than 75% of the aggregate amount of the Commitments by reason of the completion of primary syndication. "Termination Date" means January 29, 1999, or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Trust Preferred Securities" means, with respect to the Borrower, mandatorily redeemable capital trust securities of trusts which are Subsidiaries and the subordinated debentures of the Borrower in which the proceeds of the issuance of such capital trust securities are invested, including, without limitation, (i) the 8.56% Series B Capital Trust Pass-through Securities of K N Capital Trust I and (ii) the capital securities trust of K N Capital Trust II anticipated to be issued after the Effective Date. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. 17 "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Wholly-Owned Consolidated Subsidiary" of any Person means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. SECTION 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. SECTION 1.3. Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.3 in which the Bank participants are determined on the basis of their bids in accordance therewith). ARTICLE 2 THE CREDITS SECTION 2.1. Commitments to Lend. During the Revolving Credit Period each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $5,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.2(e)) and shall be made from the several Banks ratably in proportion to their 18 respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. SECTION 2.2. Notice of Committed Borrowing. The Borrower shall give the Administrative Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, except if the Euro-Dollar Borrowing is at the Interbank Offered Rate, then upon the date of each such borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.3. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.1, the Borrower may, as set forth in this Section, request the Banks during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received not later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $5,000,000 or a larger multiple of $1,000,000, 19 (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Administrative Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Administrative Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Administrative Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.1 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall be irrevocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be 20 subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Administrative Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of 21 Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Administrative Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $5,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Administrative Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Administrative Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Administrative Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Administrative Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.4. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) If any Bank makes a new Loan hereunder on a day on which the Borrower is to repay all or any part of an outstanding Loan from such Bank, such 22 Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Administrative Agent as provided in subsection (b) of this Section, or remitted by the Borrower to the Administrative Agent as provided in Section 2.12, as the case may be. (d) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsections (b) and (c) of this Section 2.4 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.7 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.5. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Administrative Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.1(b), the Administrative Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.6. Maturity of Loans. Each Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. 23 SECTION 2.7. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan shall, as a result of clause (2)(b) of the definition of Interest Period, have an Interest Period of less than 30 days, such CD Loan shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to the Interest Period for such Loan and (ii) the rate applicable to Base Rate Loans for such day. "CD Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate ---------- * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Administrative Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. 24 "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. ss. 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period; provided that each Euro-Dollar Loan made prior to the Syndication Date having an Interest Period of one week shall bear interest on the outstanding principal thereof, for each day during such Interest Period, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. The "Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the New York interbank market at approximately 12:00 Noon (New York City time) on the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such 25 Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to the Interest Period for such Loan and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.1 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) Subject to Section 8.1(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.7(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.3. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.3. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (f) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.1 shall apply. SECTION 2.8. Fees. The Borrower shall pay to the Administrative Agent for the account of the Banks ratably a facility fee at the Facility Fee Rate 26 (determined daily in accordance with the Pricing Schedule). Such facility fee shall accrue (i) from and including the Effective Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or such earlier date of termination to but excluding the date the Loans shall be repaid in their entirety, on the daily aggregate outstanding principal amount of the Loans. Accrued fees under this Section shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 2.9. Optional Termination or Reduction of Commitments. During the Revolving Credit Period, the Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $10,000,000 or any larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. Promptly after receiving a notice pursuant to this subsection, the Administrative Agent shall notify each Bank of the contents thereof. SECTION 2.10. Scheduled Termination of Commitments. The Commitments shall terminate on the Termination Date, and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.11. Optional Prepayments. (a) The Borrower may, upon at least one Domestic Business Day's notice by 11:00 A.M. (New York City time) to the Administrative Agent, prepay any Base Rate Borrowing (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.1(a)) in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Base Rate Loans of the several Banks included in such Borrowing. (b) Subject to Section 2.13, the Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, prepay any CD Borrowing or upon at least three Euro-Dollar Business Days' notice to the Administrative Agent prepay any Euro-Dollar Borrowing, in each case in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (c) Except as provided in Section 2.11(a), the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. (d) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. 27 SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, without any set-off or counterclaim, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.13. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.7(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.4(a) or 2.11(d), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow or prepay, provided that such Bank shall have delivered to the Borrower a certificate setting forth in reasonable detail the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed 28 (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. Regulation D Compensation. For so long as any Bank maintains reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. ARTICLE 3 CONDITIONS SECTION 3.1. Effectiveness. This Agreement shall become effective upon (x) termination of the Commitments (as defined in the Existing Credit Agreement referred to below in this clause (x)) under the Existing Credit Agreement dated as of March 7, 1997 among the Borrower, the banks listed therein and Morgan Guaranty Trust Company of New York, as agent, and payment in full of all amounts owing thereunder to any of such banks or such agent and (y) receipt by the Administrative Agent of the following documents, each dated the Effective Date unless otherwise indicated: (a) counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); (b) a duly executed Note for the account of each Bank dated on or before the Effective Date complying with the provisions of Section 2.5; (c) opinions of Simpson Thacher & Bartlett, special counsel for the Borrower, Polsinelli, White, Vardeman & Shalton, Kansas counsel for the 29 Borrower, and Martha B. Wyrsch, General Counsel of the Borrower, substantially in the respective forms of Exhibits E-1, E-2 and E-3 hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (d) an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; and (e) all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall promptly notify the Borrower and each Bank of the effectiveness of this Agreement, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.2. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) the fact that the Closing Date shall have occurred on or prior to March 31, 1998; (b) in the case of the first Borrowing, the fact that prior to or substantially simultaneously with such Borrowing, the Borrower shall have consummated the Acquisition in accordance with the Stock Purchase Agreement without waiver of any material condition specified therein; (c) in the case of the first Borrowing, the fact that the Borrower shall have paid or shall concurrently pay all fees then due and payable to the Administrative Agent for the account of any Agent or Bank, as previously agreed; (d) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.2 or 2.3, as the case may be; (e) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (f) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (g) the fact that the representations and warranties of the Borrower contained in this Agreement (except (i) in the case of Borrowings subsequent to the first Borrowing, the representation and warranty set forth in Section 4.12 and (ii) in the case of a Refunding Borrowing, the representations and warranties set forth in Sections 4.4(c), 4.5 and 4.7 as to any matter which has theretofore been disclosed in writing by the Borrower to the Banks) shall be true on and as of the date of such Borrowing. 30 Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b) and (c) (in the case of the first Borrowing) and (e), (f) and (g) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.1. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (other than filings of this Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 4.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms. SECTION 4.4. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of income, cash flows and common stockholders' equity for the fiscal year then ended, reported on by Arthur Andersen LLP and set forth in the Borrower's 1996 Form 10-K, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1997 and the related unaudited consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's Latest Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated 31 financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine-month period (subject to normal year-end adjustments). (c) Since September 30, 1997 there has been no material adverse change in the business, financial position, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.5. Litigation. Except as disclosed in the most recent Annual Report on Form 10-K delivered by the Borrower to the Banks, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which would materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. SECTION 4.6. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA, which waiver, failure or liability could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.7. Environmental Matters. In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. 32 SECTION 4.8. Taxes. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes shown to be due on such returns or pursuant to any assessment received by the Borrower or any Subsidiary to the extent that such taxes have become due and before they have become delinquent, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. SECTION 4.9. Subsidiaries. Each of the Borrower's corporate Material Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.10. Not an Investment Company. The Borrower is not an "investment company" or controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.11. Full Disclosure. All information heretofore furnished by the Borrower to any Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to any Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts peculiar to the business of the Company or any of its Subsidiaries which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations under this Agreement. SECTION 4.12. MidCon Acquisition. The representations and warranties of all parties contained in the Stock Purchase Agreement will be true and correct on and as of the date of the first Borrowing under this Agreement except to the extent that the failure of the same to be true and correct could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.1. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows and common 33 stockholder's equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all audited by Arthur Andersen LLP or other independent public accountants of nationally recognized standing; provided, however, that delivery pursuant to clause (g) below of copies of the Annual Report on Form 10- K (without exhibits) of the Borrower for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (a); (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter (in the case of such statements of income) and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such income and cash flows in comparative form the figures for the corresponding quarter (in the case of such statements of income) and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by an authorized financial or accounting officer of the Borrower; provided, however, that delivery pursuant to clause (g) below of copies of the Quarterly Report on Form 10-Q (without exhibits) of the Borrower for such quarter filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (b); (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an authorized financial or accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Section 5.7 and, if applicable, Sections 5.8 and 5.9 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; provided, however, that such accountants shall not be liable to anyone by reason of their failure to obtain knowledge of any Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards; (e) within five Domestic Business Days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the public shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; 34 (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents, in each case without exhibits) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) (other than such event as to which the 30-day notice requirement is waived or which is triggered by the Acquisition) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request. SECTION 5.2. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.3. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will maintain or cause to be maintained with, in the good faith judgment of the Borrower, financially sound and reputable insurers, 35 or through self-insurance, insurance with respect to its properties and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. Such insurance may include self-insurance or be subject to co-insurance, deductibility or similar clauses which, in effect, result in self-insurance of certain losses, provided that such self-insurance is in accord with the approved practices of corporations similarly situated and adequate insurance reserves are maintained in connection with such self-insurance, and, notwithstanding the foregoing provisions of this Section 5.3 the Borrower or any Subsidiary may effect workers' compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance in accord with applicable laws. SECTION 5.4. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.4 shall prohibit (i) the merger of a Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) the sale or other disposition (whether by merger or otherwise) of the capital stock or assets of any Subsidiary, if such transaction complies with the provisions of Section 5.11 or (iii) the termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. SECTION 5.5. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except (i) where the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) where failure to comply could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 5.6. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries, as required by generally accepted accounting principles, shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records (subject to compliance with confidentiality agreements, copyrights and the like) and to discuss their 36 respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.7. Debt. (a) Consolidated Debt of the Borrower will at no time exceed the MLP of Consolidated Total Capitalization. "MLP" means Maximum Leverage Percentage, which is 87.00%, subject to adjustment from time to time after the date hereof as follows: (a) upon the issuance of Trust Preferred Securities in the amount of $300,000,000, the MLP will be reduced by 5.25%; (b) upon issuance of common equity securities in the amount of $500,000,000, the MLP will be reduced by 8.75%; and (c) upon issuance of Mandatorily Convertible Preferred Stock in the amount of $400,000,000, the MLP will be reduced by 6.00%. In the event of issuance of securities of the type described above in an amount different from that specified, the consequent reduction of the MLP will be adjusted on a pro rata basis; provided that in the event of issuance of Trust Preferred Securities in an amount greater than the indicated amount, there will not be an additional reduction in the MLP to the extent that the Trust Preferred Securities exceed 10% of the Consolidated Total Capitalization of the Borrower. Upon issuance of all securities of the types described above, the MLP will at all times thereafter be 67.00%. (b) Total Debt of all Consolidated Subsidiaries (excluding Debt of a Consolidated Subsidiary of the Borrower to the Borrower or to another Consolidated Subsidiary of the Borrower) will at no time exceed 10% of Consolidated Debt of the Borrower. (c) Consolidated Debt of each Material Subsidiary will at no time exceed 65% of the Consolidated Total Capitalization of such Material Subsidiary. SECTION 5.8. Minimum Net Worth. Consolidated Net Worth will at no time be less than an amount equal to the sum of (a) $570,000,000 plus (b) 50% of Consolidated Net Income for each fiscal quarter of the Borrower ending after the date hereof and at or prior to such time (but only if such Consolidated Net Income for such fiscal quarter is a positive amount) plus (c) for any issuance of securities resulting in a reduction of the MLP pursuant to Section 5.7(a), an amount equal to 80% of the increase in Consolidated Net Worth resulting from such issuance of securities, if at such time the Borrower's senior unsecured long-term debt is not rated at least Baa2 by Moody's and BBB by S&P. SECTION 5.9. Minimum Interest Coverage Ratio. At any time at which the Borrower's senior unsecured long-term debt is not rated at least Baa3 by Moody's and BBB- by S&P, the Interest Coverage Ratio will not be less than (i) 2.25:1, if such time is prior to March 31, 1999, and (ii) 2.75:1, if such time is on or after March 31, 1999. SECTION 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) any Liens deemed to exist on the date of this Agreement under the Purchase Agreement; (b) Liens on cash and cash equivalents securing the Substitute Note, as contemplated by the Reimbursement Agreement; 37 (c) Liens on assets of any Person existing at the time such Person becomes a Subsidiary and not created in contemplation of such event; (d) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $150,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (e) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $75,000,000; (f) statutory or common law Liens of or upon deposits of cash in favor of banks or other depository institutions; and (g) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Net Worth of the Borrower. SECTION 5.11. Consolidations, Mergers and Sales of Assets. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any other Person, unless: (i) immediately after giving effect to the transaction, no Default shall have occurred and be continuing; and (ii) except in the case of a merger in which the Borrower is the surviving corporation: (x) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, assumes all obligations of the Borrower hereunder and under the Notes; (y) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, is organized under the laws of the United States or any state thereof; and (z) the Borrower has delivered to the Administrative Agent an officer's certificate and opinion of counsel, each stating that such consolidation, merger, or transfer and such assumption comply with the provisions hereof. No such sale, lease or other transfer of assets shall have the effect of releasing the Borrower (or any successor that shall have become such in the manner prescribed in this Section) from its liability under this Agreement and the Notes. SECTION 5.12. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes. None 38 of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. SECTION 5.13. Transactions with Affiliates. The Borrower will not participate in any material transaction with an affiliate (other than a Subsidiary) unless such transaction is in the ordinary course of its business and on terms no less advantageous to the Borrower than could be obtained in such a transaction with an unaffiliated party. ARTICLE 6 DEFAULTS SECTION 6.1. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within three Domestic Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.7 to 5.13, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; provided, however, that if any such failure is cured by the Borrower or such Subsidiary or is waived by the requisite percentage of holders of such Material Financial Obligations entitled to so waive, then the Event of Default under this Agreement by reason of such failure shall be deemed to have been cured; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; provided, however, that if any such acceleration is rescinded, or any such event or condition is cured by the Borrower or any Subsidiary or is waived by the requisite percentage of holders of such Material Debt entitled to so waive, then the Event of Default under this Agreement by reason of such acceleration, event or condition shall be deemed to have been cured; (g) the Borrower or any Material Subsidiary shall commence a voluntary 39 case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation; and in each of the foregoing instances such condition (i) could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, and (ii) shall continue for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (j) a judgment or judgments for the payment of money (not paid or fully covered by insurance or indemnification) in excess of $60,000,000 in the aggregate shall be rendered against the Borrower or any Material Subsidiary and such judgment or judgments are not, within 30 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 30 days after the expiration of such stay; or (k) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of the Borrower; or, during any period of twelve consecutive calendar months, individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of 40 the board of directors of the Borrower; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.2. Notice of Default. The Administrative Agent shall give notice to the Borrower under Section 6.1(c) or 6.1(i) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 THE AGENTS SECTION 7.1. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.2. Administrative Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. SECTION 7.3. Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. SECTION 7.4. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.5. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective 41 directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify any Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. SECTION 7.7. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.8. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, with the consent of the Borrower, which shall not be unreasonably withheld. If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative 42 Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. SECTION 7.9. Agents' Fees. The Borrower shall pay to the Administrative Agent for the account of the Agents fees in the amounts and at the times previously agreed upon between the Borrower and the Agents. SECTION 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on any Syndication Agent, in its capacity as such an Agent. ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Committed Borrowing, Banks having 50% or more of the aggregate amount of the Commitments advise the Administrative Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the Borrower notifies the Administrative Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.2. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance 43 by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 8.3. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.15), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. 44 (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency (including any determination by any such authority, central bank or comparable agency that, for purposes of capital adequacy requirements, the Commitments hereunder do not constitute commitments with an original maturity of one year or less), has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth in reasonable detail the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections (a) and (b) of this Section 8.3, the Borrower shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 90 days prior to the date on which such Bank notifies the Administrative Agent and the Borrower that it proposes to demand such compensation and identifies to the Administrative Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which, because of the retroactive application of such statute, regulation or other such basis, such Bank did not know that such amount would arise or accrue. SECTION 8.4. Taxes. (a) For purposes of this Section 8.4, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank 45 is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. (b) Any and all payments by the Borrower to or for the account of any Bank or the Administrative Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.4) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.1, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.4) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Bank or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.4(b) or (c) with respect to Taxes imposed by the United States; provided that if a Bank, which is 46 otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower, at such Bank's expense, shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.4, then such Bank will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Bank, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. SECTION 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. SECTION 8.6. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4, the Borrower shall have the right, with the assistance of the Administrative Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to purchase the Note and assume the Commitment of such Bank. ARTICLE 9 MISCELLANEOUS SECTION 9.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by 47 telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. SECTION 9.2. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.3. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Davis Polk & Wardwell, special counsel for the Agents, in connection with the preparation and administration of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by each Agent and Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify each Agent and Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of (i) any actual or proposed use of proceeds of Loans hereunder or (ii) any actual or alleged Default under this Agreement or any actual or alleged untruth or inaccuracy of any representation or warranty made by the Borrower in or in connection with this Agreement; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. SECTION 9.4. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such 48 exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. SECTION 9.5. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of any Agent are affected thereby, by such Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for termination of any Commitment or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.5 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial Commitment of not less than $10,000,000) of all, of its rights and 49 obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, and the Administrative Agent; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent shall be required; and provided further that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.4. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.3 or 8.4 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 9.7. Collateral. Each of the Banks represents to each Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.8. Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City having subject matter jurisdiction for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a 50 court has been brought in an inconvenient forum. SECTION 9.9. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof except the obligations of the Borrower to pay fees and expenses and to assist in the syndication process as specified in the respective commitment letters and fee letters heretofore entered into between the Borrower and the Agents. SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 9.11. Existing Credit Agreement. On the Effective Date and simultaneously with the receipt by the Administrative Agent of the required documents pursuant to Section 3.1, the Borrower hereby gives notice to Morgan Guaranty Trust Company of New York, as agent, under Section 2.9 of the Existing Credit Agreement referred to in clause (x) of Section 3.1 of the termination of the Commitments (as defined herein) and the Banks hereby waive the requirement that prior notice of such termination be given as therein provided. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. K N ENERGY, INC. By /s/ Clyde E. McKenzie ---------------------------------- Title: Vice President & Chief Financial Officer 370 Van Gordon Street Lakewood, CO 80228-8304 Attention: Chief Financial Officer Facsimile number: (303) 914-4542 Commitments $200,000,000.01 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ John Kowalczuk ------------------------------ Title: Vice President 51 $133,333,333.33 BANK OF AMERICA NT & SA By /s/ J. Stephen Mernick ------------------------------ Title: Senior Vice President $133,333,333.33 THE CHASE MANHATTAN BANK By /s/ Mary Jo Woodford ------------------------------ Title: Vice President $133,333,333.33 NATIONSBANK, N.A. By /s/ David Rubenking ------------------------------ Title: Senior Vice President - --------------------------- Total Commitments $600,000,000 ============ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By /s/ John Kowalczuk -------------------------------- Title: Vice President 60 Wall Street New York, New York 10260-0060 Attention: John Kowalczuk Telex number: 177615 Facsimile number: 212-648-5014 52 PRICING SCHEDULE The "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day: (TABLE) (CAPTION) Level Level Level Level Level Level Status I II III IV V VI ------ ----- ----- ---- ----- ----- ----- Euro-Dollar Margin Utilization less than 50% 0.230% 0.320% 0.390% 0.5625% 0.750% 1.125% Utilization more than or equal to 50% 0.355% 0.445% 0.515% 0.6875% 0.875% 1.250% CD Margin Utilization less than 50% 0.355% 0.445% 0.515% 0.6875% 0.875% 1.250% Utilization more than or equal to 50% 0.480% 0.570% 0.640% 0.8125% 1.000% 1.375% Facility Fee Rate 0.070% 0.080% 0.110% 0.1875% 0.250% 0.375%
For purposes of this Schedule, the following terms have the following meanings: "Level I Status" exists at any date if, at such date, the Borrower's senior unsecured long-term debt is rated BBB+ or higher by S&P and Baa1 or higher by Moody's. "Level II Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB or higher by S&P and Baa2 or higher by Moody's and (ii) Level I Status does not exist. "Level III Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB- or higher by S&P and Baa3 or higher by Moody's and (ii) neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB+ or higher by S&P and Ba1 or higher by Moody's and (ii) none of Level I Status, Level II Status and Level III Status exists. "Level V Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB or higher by S&P and Ba2 or higher by Moody's and (ii) none of Level I Status, Level II Status, Level III 53 "Level VI Status" exists at any date if, at such date, no other Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. "Utilization" means, at any date, the percentage equivalent of a fraction (i) the numerator of which is the aggregate outstanding principal amount of the Loans at such date and (ii) the denominator of which is the aggregate amount of the Commitments at such date. If for any reason any Loans remain outstanding following termination of the Commitments, Utilization shall be deemed to be in excess of 50%. The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement, and any rating assigned to any other debt security of the Borrower shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 54 EXHIBIT A NOTE New York, New York , 199_ For value received, K N Energy, Inc., a Kansas corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the last day of the Interest Period relating to such Loan. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. K N ENERGY, INC. By ------------------------------ Title: 55 NOTE (cont'd) LOANS AND PAYMENTS OF PRINCIPAL
- ------------------------------------------------------------------------------- Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
56 EXHIBIT B Form of Money Market Quote Request [Date] To: Morgan Guaranty Trust Company of New York (the "Administrative Agent") From: K N Energy, Inc. Re: 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the Banks listed on the signature pages thereof and the Administrative Agent We hereby give notice pursuant to Section 2.3 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount* Interest Period** $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] - -------- *Amount must be $5,000,000 or a larger multiple of $1,000,000. **Not less than one month and not more than nine months (LIBOR Auction) or not less than seven days and not more than 360 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. Terms used herein have the meanings assigned to them in the Credit Agreement. K N ENERGY, INC. By ------------------------------ Title: 57 EXHIBIT C Form of Invitation for Money Market Quotes To: [Name of Bank] Re: Invitation for Money Market Quotes to K N Energy, Inc. (the "Borrower") Pursuant to Section 2.3 of the 364-Day Credit Agreement dated as of January 30, 1998 among the Borrower, the Banks parties thereto and the undersigned, as Administrative Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount Interest Period $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ------------------------------ Authorized Officer 58 EXHIBIT D Form of Money Market Quote To: Morgan Guaranty Trust Company of New York, as Administrative Agent Re: Money Market Quote to K N Energy, Inc. (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: --------------------------------- 2. Person to contact at Quoting Bank: ----------------------------- 3. Date of Borrowing: * -------------------- 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market - ---------------------- * As specified in the related Invitation. 59
Amount** Period*** [Margin****] [Absolute Rate*****] $ $
[Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.]** We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the 364-Day Credit Agreement dated as of January 30, 1998 among the Borrower, the Banks listed on the signature pages thereof and yourselves, as Administrative Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated: By ---------------------- -------------------------------- Authorized Officer - ---------------------- ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. *** Not less than one month and not more than nine months or not less than seven days and not more than 360 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000th of 1%) and specify whether "PLUS" or "MINUS". ***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%). 60 EXHIBIT E-1 OPINION OF SPECIAL COUNSEL FOR THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as special counsel for K N Energy, Inc. (the "Borrower") in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.1(c) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Texas or the United States of America (other than filings of the Credit Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities and Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Texas or the United States of America, or of the articles of incorporation or by-laws of the Borrower. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable against the Borrower in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of Texas and the foregoing opinion is limited to the laws of the State of Texas, the State of New York and the federal laws of the United States of America. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction in which any Bank is located which limits the rate of interest that such Bank may charge or collect. Insofar as the foregoing opinion involves matters governed by the laws of the State of Kansas (which matters do not in our view include the non-contravention opinion in paragraph 1), we have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.1(c) of the Credit Agreement. 61 This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 62 EXHIBIT E-2 OPINION OF KANSAS COUNSEL FOR THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as counsel in the State of Kansas for K N Energy, Inc. (the "Borrower") in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.1(c) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Kansas and do not contravene, or constitute a default under, any 63 provision of applicable law or regulation of the State of Kansas. We are members of the Bar of the State of Kansas and the foregoing opinion is limited to the laws of the State of Kansas. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 64 EXHIBIT E-3 OPINION OF GENERAL COUNSEL OF THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: I am General Counsel of K N Energy, Inc. (the "Borrower"), and I have represented the Borrower in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of my client pursuant to Section 3.1(c) of the Credit Agreement. I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower has all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Colorado or, to the best of my knowledge, any other jurisdiction (other than filings of the 65 Credit Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Colorado or, to the best of my knowledge, any other jurisdiction or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any, Lien on any asset of the Borrower or any of its Subsidiaries. 3. There is no action, suit or proceeding pending against, or to the best of my knowledge threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of the Credit Agreement or the Notes. 4. Each of the Borrower's corporate Material Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. I am a member of the Bar of the State of Colorado and the foregoing opinion is limited to the laws of the State of Colorado and the General Corporation Law of the State of Delaware. Insofar as paragraph 2 above addresses the laws of other jurisdictions, I have relied upon my familiarity with advice given by counsel admitted to practice in those jurisdictions, in connection with this and other transactions. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 66 EXHIBIT F OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENTS To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among K N Energy, Inc., a Kansas corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Administrative Agent"), and have acted as special counsel for the Agents for the purpose of rendering this opinion pursuant to Section 3.1(c) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that the Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York and the federal laws of the United States of America. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. Insofar as the foregoing opinion involves matters governed by the laws of Kansas, we have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.1(c) of the Credit Agreement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 67 EXHIBIT G ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), K N ENERGY, INC. (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "Administrative Agent"). W I T N E S S E T H WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the 364-Day Credit Agreement dated as of January 30, 1998 among the Borrower, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee[, the Borrower and the Administrative Agent] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the 68 date hereof in Federal funds the amount heretofore agreed between them.* [It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee.] Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrower and the Administrative Agent. This Agreement is conditioned upon the consent of the Borrower and the Administrative Agent pursuant to Section 9.6(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Administrative Agent is evidence of this consent. Pursuant to Section 9.6(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. - -------- *Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 69 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By ------------------------------- Title: [ASSIGNEE] By -------------------------------- Title: K N ENERGY, INC. By -------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By --------------------------------- Title: EX-4.F 4 FIVE YEAR CREDIT AGREEMENT 1 CONFORMED COPY $400,000,000 FIVE-YEAR CREDIT AGREEMENT dated as of January 30, 1998 among K N Energy, Inc., The Banks Listed Herein, and Morgan Guaranty Trust Company of New York, as Administrative Agent ---------------- J. P. Morgan Securities Inc., BancAmerica Robertson Stephens, Chase Securities Inc. and NationsBanc Montgomery Securities LLC, Syndication Agents 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions Section 1.1. Definitions.............................................1 Section 1.2. Accounting Terms and Determinations....................15 Section 1.3. Types of Borrowings....................................16 ARTICLE 2 The Credits Section 2.1. Commitments to Lend....................................16 Section 2.2. Notice of Committed Borrowing..........................16 Section 2.3. Money Market Borrowings................................17 Section 2.4. Notice to Banks; Funding of Loans......................21 Section 2.5. Notes..................................................22 Section 2.6. Maturity of Loans......................................23 Section 2.7. Interest Rates.........................................23 Section 2.8. Fees...................................................26 Section 2.9. Optional Termination or Reduction of Commitments.......27 Section 2.10. Scheduled Termination of Commitments...................27 Section 2.11. Optional Prepayments...................................27 Section 2.12. General Provisions as to Payments......................28 Section 2.13. Funding Losses.........................................29 Section 2.14. Computation of Interest and Fees.......................29 Section 2.15. Regulation D Compensation..............................29 Section 2.16. Letters of Credit......................................30 ARTICLE 3 Conditions Section 3.1. Effectiveness..........................................33 Section 3.2. Borrowings and Issuances of Letters of Credit..........34 ARTICLE 4 Representations and Warranties Section 4.1. Corporate Existence and Power..........................35 Section 4.2. Corporate and Governmental Authorization; No Contravention..........................................35 Section 4.3. Binding Effect.........................................36 Section 4.4. Financial Information..................................36 Section 4.5. Litigation.............................................37 Section 4.6. Compliance with ERISA..................................37 Section 4.7. Environmental Matters..................................37 Section 4.8. Taxes..................................................38 Section 4.9. Subsidiaries...........................................38 Section 4.10. Not an Investment Company..............................38 Section 4.11. Full Disclosure........................................38 Section 4.12. MidCon Acquisition.....................................38 ARTICLE 5 Covenants Section 5.1. Information............................................39 Section 5.2. Payment of Obligations.................................41 Section 5.3. Maintenance of Property; Insurance.....................41 Section 5.4. Conduct of Business and Maintenance of Existence.......42 Section 5.5. Compliance with Laws...................................42 Section 5.6. Inspection of Property, Books and Records..............42 Section 5.7. Debt...................................................43 Section 5.8. Minimum Net Worth......................................43 Section 5.9. Minimum Interest Coverage Ratio........................43 Section 5.10. Negative Pledge........................................44
3 Section 5.11. Consolidations, Mergers and Sales of Assets............44 Section 5.12. Use of Proceeds........................................45 Section 5.13. Transactions with Affiliates...........................45 ARTICLE 6 Defaults Section 6.1. Events of Default......................................45 Section 6.2. Notice of Default......................................48 Section 6.3. Cash Cover.............................................48 ARTICLE 7 The Agents Section 7.1. Appointment and Authorization..........................49 Section 7.2. Administrative Agent and Affiliates....................49 Section 7.3. Action by Administrative Agent.........................49 Section 7.4. Consultation with Experts..............................49 Section 7.5. Liability of Administrative Agent......................49 Section 7.6. Indemnification........................................50 Section 7.7. Credit Decision........................................50 Section 7.8. Successor Administrative Agent.........................50 Section 7.9. Agents' Fees...........................................51 Section 7.10. Other Agents...........................................51 ARTICLE 8 Change in Circumstances Section 8.1. Basis for Determining Interest Rate Inadequate or Unfair..............................................51 Section 8.2. Illegality.............................................52 Section 8.3. Increased Cost and Reduced Return......................52 Section 8.4. Taxes..................................................54 Section 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans.............................................56 Section 8.6. Substitution of Bank...................................56 ARTICLE 9 Miscellaneous Section 9.1. Notices................................................57 Section 9.2. No Waivers.............................................57 Section 9.3. Expenses; Indemnification..............................57 Section 9.4. Sharing of Set-offs....................................58 Section 9.5. Amendments and Waivers.................................58 Section 9.6. Successors and Assigns.................................59 Section 9.7. Collateral.............................................60 Section 9.8. Governing Law; Submission to Jurisdiction..............60 Section 9.9. Counterparts; Integration..............................61 Section 9.10. WAIVER OF JURY TRIAL...................................61 Section 9.11. Existing Credit Agreement..............................61
4 PRICING SCHEDULE EXHIBIT A - NOTE EXHIBIT B - MONEY MARKET QUOTE REQUEST EXHIBIT C - INVITATION FOR MONEY MARKET QUOTES EXHIBIT D - MONEY MARKET QUOTE EXHIBIT E-1 - OPINION OF SPECIAL COUNSEL FOR THE BORROWER EXHIBIT E-2 - OPINION OF KANSAS COUNSEL FOR THE BORROWER EXHIBIT E-3 - OPINION OF GENERAL COUNSEL OF THE BORROWER EXHIBIT F - OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENTS EXHIBIT G - ASSIGNMENT AND ASSUMPTION AGREEMENT 5 FIVE-YEAR CREDIT AGREEMENT AGREEMENT dated as of January 30, 1998 among K N ENERGY, INC., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. W I T N E S S E T H: WHEREAS, the Borrower, desires to replace the Amended and Restated Credit Agreement dated as of March 7, 1997 (the "Existing Credit Agreement"), among the Borrower, certain banks and Morgan Guaranty Trust Company of New York, as agent, by entering into this Agreement; and WHEREAS, the Banks agree to do so. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.1. Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.3. "Acquisition" means the purchase of MidCon Corp. by the Borrower from Occidental Petroleum Corporation pursuant to the Stock Purchase Agreement. "Adjusted CD Rate" has the meaning set forth in Section 2.7(b). "Administrative Agent" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks under this Agreement, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. 6 "Agent" means each of the Administrative Agent and the Syndication Agents, and "Agents" means any combination of them, as the context may require. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.7(b). "Assignee" has the meaning set forth in Section 9.6(c). "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day or (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Committed Loan to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Committed Borrowing or pursuant to Article 8. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means K N Energy, Inc., a Kansas corporation, and its successors. "Borrower's 1996 Form 10-K" means the Borrower's annual report on Form 10-K for 1996, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrower's Latest Form 10-Q" means the Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 1997, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrowing" has the meaning set forth in Section 1.3. "CD Base Rate" has the meaning set forth in Section 2.7(b). 7 "CD Loan" means a Committed Loan to be made by a Bank as a CD Loan in accordance with the applicable Notice of Committed Borrowing. "CD Margin" has the meaning set forth in Section 2.7(b). "CD Reference Banks" means NationsBank, N.A., The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages of this Agreement, as such amount may be reduced from time to time pursuant to Sections 2.9 and 2.10. "Committed Loan" means a loan made by a Bank pursuant to Section 2.1. "Consolidated Assets" means the total amount of assets appearing on the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, prepared in accordance with generally accepted accounting principles as of the date of the most recent regularly prepared consolidated financial statements prior to the taking of any action for the purposes of which the determination is being made. "Consolidated Debt" of any Person means at any date the sum (without duplication) of (i) the Debt of such Person and its Consolidated Subsidiaries, determined on a consolidated basis as of such date plus (ii) the excess (if any) of the Trust Preferred Securities of such Person over 10% of the Consolidated Total Capitalization of such Person at such date minus (iii) the portion of the Substitute Note collateralized as contemplated by Section 5.10(b) hereof. "Consolidated EBITDA" means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining Consolidated Net Income for such period, the aggregate amount of (i) Consolidated Interest Expense, (ii) income tax expense and (iii) depreciation and amortization expense. "Consolidated Interest Expense" means, for any period, the interest expense of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "Consolidated Subsidiary" of any Person means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. 8 "Consolidated Net Income" means, for any period, the net income of the Borrower and its Consolidated Subsidiaries before extraordinary items, determined on a consolidated basis for such period. "Consolidated Net Worth" of any Person means at any date the sum (without duplication) of (i) the consolidated stockholders' equity of such Person and its Consolidated Subsidiaries, determined as of such date plus (ii) the Mandatorily Convertible Preferred Stock of such Person plus (iii) the Trust Preferred Securities of such Person; provided that the amount of Trust Preferred Securities added pursuant to this clause (iii) shall not exceed 10% of Consolidated Total Capitalization of such Person at such date. "Consolidated Total Capitalization" of any Person means at any date the sum of Consolidated Debt of such Person and Consolidated Net Worth of such Person, each determined as of such date. "Credit Event" means a Borrowing or an issuance of a Letter of Credit. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable or deferred employee and director compensation arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, for purposes of Section 5.11 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. 9 "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.7(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.1. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. 10 "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a Euro-Dollar Loan in accordance with the applicable Notice of Committed Borrowing. "Euro-Dollar Margin" has the meaning set forth in Section 2.7(c). "Euro-Dollar Reference Banks" means the principal London offices (for determinations of a London Interbank Offered Rate) or domestic offices (for determinations of an Interbank Offered Rate) of NationsBank, N.A., The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.1. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.1(a)) or any combination of the foregoing. 11 "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnitee" has the meaning set forth in Section 9.3(b). "Interest Coverage Ratio" means, at any date, the ratio of Consolidated EBITDA to Consolidated Interest Expense for the period of four consecutive fiscal quarters most recently ended on or before such date. "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing; except that with respect to any Borrowing occurring prior to the Syndication Date, (i) any such Borrowing occurring prior to February 23, 1998 shall have an Interest Period ending on February 23, 1998 and (ii) any such Borrowing on or after February 23, 1998 shall have an Interest Period ending one week thereafter; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; 12 (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (3) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (4) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter (but not more than nine months) as the Borrower may elect in accordance with Section 2.3; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (5) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than seven days nor more than 360 days) as the Borrower may elect in accordance with Section 2.3; provided that: 13 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "Issuing Bank" means Morgan Guaranty Trust Company of New York and any other Bank that may agree with the Borrower in writing to issue letters of credit hereunder, in each case as issuer of a Letter of Credit hereunder. The Borrower shall promptly notify the Administrative Agent of any additional Issuing Banks. "LC Fee Rate" means a rate per annum equal to the Euro-Dollar Margin. "Letter of Credit" means a letter of credit issued or to be issued hereunder by an Issuing Bank in accordance with Section 2.16. "Letter of Credit Commitment" means the lesser of (x) $100,000,000 and (y) the aggregate amount of the Commitments. "Letter of Credit Liabilities" means, for any Bank and at any time, such Bank's ratable participation in the sum of (x) the amounts then owing by the Borrower in respect of amounts drawn under Letters of Credit and (y) the aggregate amount then available for drawing under all Letters of Credit. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.3. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Domestic Loan or a Euro-Dollar Loan or a Money Market Loan and "Loans" means Domestic Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. 14 "London Interbank Offered Rate" has the meaning set forth in Section 2.7(c). "Mandatorily Convertible Preferred Stock", means, with respect to the Borrower, preferred securities of a Subsidiary which are (i) mandatorily convertible into common equity securities of the Borrower within approximately three years of their date of issuance, (ii) issued in conjunction with, and pledged to secure, an obligation to purchase common equity securities of the Borrower within approximately three years for an equal amount or (iii) otherwise structured in a manner satisfactory to the Administrative Agent so as to ensure the issuance of incremental common equity securities of the Borrower in a substantially equal amount within approximately three years. "Material Debt" means Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $75,000,000. "Material Financial Obligations" means a principal or face amount of Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) and/or payment obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $125,000,000. "Material Subsidiary" means any Subsidiary the consolidated assets of which constitute 10% or more of Consolidated Assets. "Money Market Absolute Rate" has the meaning set forth in Section 2.3(d). "Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may from time to time by notice to the Borrower and the Administrative Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.1(a)). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. 15 "Money Market Margin" has the meaning set forth in Section 2.3(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.3. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.2) or a Notice of Money Market Borrowing (as defined in Section 2.3(f)). "Notice of Issuance" has the meaning set forth in Section 2.16(b). "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.6(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. 16 "Purchase Agreement" means the Purchase and Sale Agreement dated as of January 28, 1994, among K N Gas Supply Services, Inc., the Borrower, Bank of America National Trust and Savings Association, as the initial Purchaser (as defined therein), and Bank of America National Trust and Savings Association, as agent for the Purchasers. "Pricing Schedule" means the Schedule attached hereto identified as such. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refunding Borrowing" means a Committed Borrowing which, after application of the proceeds thereof, results in no net increase in the outstanding principal amount of Committed Loans made by any Bank. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Reimbursement Agreement" means the Reimbursement Agreement dated as of January 30, 1998, among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company as the administrative agent, as amended and in effect from time to time. "Required Banks" means at any time Banks having at least 66 2/3 % of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans and the aggregate amount of Letter of Credit Liabilities. "Revolving Credit Period" means the period from and including the Effective Date to but not including the Termination Date. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Stock Purchase Agreement" means the Stock Purchase Agreement dated as of December 18, 1997, between Occidental Petroleum Corporation, a Delaware corporation, and the Borrower as amended and in effect from time to time; provided that any such amendment from the form thereof heretofore furnished to each of the Banks which could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, shall be effective for purposes of references thereto in this Agreement only if such amendment shall have received the written consent of the Required Banks (which shall not be unreasonably withheld). 17 "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Substitute Note" means the Substitute Note (as defined in the Stock Purchase Agreement) issued by the Borrower to Occidental Petroleum Corporation in connection with the Acquisition. "Syndication Agent" means either J.P. Morgan Securities Inc., BancAmerica Robertson Stephens, Chase Securities Inc. or NationsBanc Montgomery Securities LLC in its capacity as a syndication agent in respect of this Agreement, and "Syndication Agents" means all of them. "Syndication Date" means the earlier of (i) March 31, 1998 and (ii) the first date subsequent to the date hereof on which the Commitments of the Banks listed on the signature pages hereof shall have been reduced to an amount less than 75% of the aggregate amount of the Commitments by reason of the completion of primary syndication. "Termination Date" means January 30, 2003, or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Trust Preferred Securities" means, with respect to the Borrower, mandatorily redeemable capital trust securities of trusts which are Subsidiaries and the subordinated debentures of the Borrower in which the proceeds of the issuance of such capital trust securities are invested, including, without limitation, (i) the 8.56% Series B Capital Trust Pass-through Securities of K N Capital Trust I and (ii) the capital trust securities of K N Capital Trust II anticipated to be issued after the Effective Date. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Wholly-Owned Consolidated Subsidiary" of any Person means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. 18 Section 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. Section 1.3. Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.3 in which the Bank participants are determined on the basis of their bids in accordance therewith). ARTICLE 2 The Credits Section 2.1. Commitments to Lend. During the Revolving Credit Period each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time in amounts such that the sum of the aggregate principal amount of Committed Loans by such Bank at any one time outstanding plus the Letter of Credit Liabilities of such Bank at such time shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $5,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.2(e)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. 19 Section 2.2. Notice of Committed Borrowing. The Borrower shall give the Administrative Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, except if the Euro-Dollar Borrowing is at the Interbank Offered Rate, then upon the date of each such borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section 2.3. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.1, the Borrower may, as set forth in this Section, request the Banks during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received not later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $5,000,000 or a larger multiple of $1,000,000, 20 (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Administrative Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Administrative Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Administrative Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.1 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall be irrevocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. 21 (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; 22 (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Administrative Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Administrative Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $5,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and 23 (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Administrative Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Administrative Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Administrative Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Administrative Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. Section 2.4. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) If any Bank makes a new Loan hereunder on a day on which the Borrower is to repay all or any part of an outstanding Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Administrative Agent as provided in subsection (b) of this Section, or remitted by the Borrower to the Administrative Agent as provided in Section 2.12, as the case may be. (d) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsections (b) and (c) of this Section 2.4 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount Administrative Agent, at (i) in the case of the 24 Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.7 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. Section 2.5. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Administrative Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.1(b), the Administrative Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.6. Maturity of Loans. Each Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. Section 2.7. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan shall, as a result of clause (2)(b) of the definition of Interest Period, 25 have an Interest Period of less than 30 days, such CD Loan shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to the Interest Period for such Loan and (ii) the rate applicable to Base Rate Loans for such day. "CD Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate
---------- * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Administrative Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. 26 "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period; provided that each Euro-Dollar Loan made prior to the Syndication Date having an Interest Period of one week shall bear interest on the outstanding principal thereof, for each day during such Interest Period, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. The "Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the New York interbank market at approximately 12:00 Noon (New York City time) on the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to the Interest Period for such Loan and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one 27 day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.1 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) Subject to Section 8.1(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.7(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.3. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.3. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (f) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.1 shall apply. Section 2.8. Fees. (a) The Borrower shall pay to the Administrative Agent for the account of the Banks ratably a facility fee at the Facility Fee Rate (determined daily in accordance with the Pricing Schedule). Such facility fee shall accrue (i) from and including the Effective Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or such earlier date of termination to but excluding the date the Loans and the Letter of Credit Liabilities shall be repaid in their entirety, on the sum of the daily aggregate outstanding principal amount of the Loans and the daily aggregate Letter of Credit Liabilities. 28 (b) The Borrower shall pay to the Administrative Agent (i) for the account of the Banks ratably a Letter of Credit fee accruing daily on the aggregate amount then available for drawing under all Letters of Credit at the LC Fee Rate and (ii) for the account of each Issuing Bank a Letter of Credit fronting fee accruing daily on the aggregate amount then available for drawing under all Letters of Credit issued by such Issuing Bank at a rate per annum as determined from time to time by the Borrower and such Issuing Bank. (c) Accrued fees under this Section shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans and Letter of Credit Liabilities shall be repaid in their entirety). Section 2.9. Optional Termination or Reduction of Commitments. During the Revolving Credit Period, the Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans or Letter of Credit Liabilities are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $10,000,000 or any larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the sum of the aggregate outstanding principal amount of the Loans and the aggregate Letter of Credit Liabilities. Promptly after receiving a notice pursuant to this subsection, the Administrative Agent shall notify each Bank of the contents thereof. Section 2.10. Scheduled Termination of Commitments. The Commitments shall terminate on the Termination Date, and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. Section 2.11. Optional Prepayments. (a) The Borrower may, upon at least one Domestic Business Day's notice by 11:00 A.M. (New York City time) to the Administrative Agent, prepay any Base Rate Borrowing (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.1(a)) in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Base Rate Loans of the several Banks included in such Borrowing. (b) Subject to Section 2.13, the Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, prepay any CD Borrowing or upon at least three Euro-Dollar Business Days' notice to the Administrative Agent prepay any Euro-Dollar Borrowing, in each case in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. 29 (c) Except as provided in Section 2.11(a), the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. (d) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. Section 2.12. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans, of Letter of Credit Liabilities and of fees hereunder, without any set-off or counterclaim, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans, of Letter of Credit Liabilities or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. Section 2.13. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.7(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.4(a) or 2.11(d), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an 30 existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow or prepay, provided that such Bank shall have delivered to the Borrower a certificate setting forth in reasonable detail the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. Section 2.14. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.15. Regulation D Compensation. For so long as any Bank maintains reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. Section 2.16. Letters of Credit. (a) Subject to the terms and conditions hereof, each Issuing Bank agrees to issue Letters of Credit hereunder from time to time before the tenth day before the Termination Date upon the request of the Borrower; provided that, immediately after each Letter of Credit is issued, (i) the aggregate amount of the Letter of Credit Liabilities shall not exceed the Letter of Credit Commitment and (ii) the aggregate amount of the Letter of Credit Liabilities plus the aggregate outstanding amount of all Loans shall not exceed the aggregate amount of the Commitments. Upon the date of issuance by an Issuing Bank of a Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without 31 further action by any party hereto, to have purchased from the Issuing Bank, a participation in such Letter of Credit and the related Letter of Credit Liabilities in the proportion their respective Commitments bear to the aggregate Commitments. Each Letter of Credit shall have a stated amount not less than $5,000,000. (b) The Borrower shall give the Issuing Bank notice at least five Domestic Business Days prior to the requested issuance of a Letter of Credit specifying the date such Letter of Credit is to be issued, and describing the terms of such Letter of Credit and the nature of the transactions to be supported thereby (such notice, including any such notice given in connection with the extension of a Letter of Credit, a "Notice of Issuance"). Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Bank of the contents thereof and of the amount of such Bank's participation in such Letter of Credit. The issuance by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article 3, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the Issuing Bank and that the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested. The Borrower shall also pay to the Issuing Bank for its own account issuance, drawing, amendment and extension charges in the amounts and at the times agreed between the Borrower and the Issuing Bank. The extension or renewal of any Letter of Credit shall be deemed to be an issuance of such Letter of Credit, and if any Letter of Credit contains a provision pursuant to which it is deemed to be extended unless notice of termination is given by the Issuing Bank, the Issuing Bank shall timely give such notice of termination unless it has theretofore timely received a Notice of Issuance and the other conditions to issuance of a Letter of Credit have also theretofore been met with respect to such extension. No Letter of Credit shall have a term extending or be so extendible beyond the fifth Domestic Business Day preceding the Termination Date. (c) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Bank as to the amount to be paid as a result of such demand or drawing and the payment date. The Borrower shall be irrevocably and unconditionally obligated forthwith to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. All such amounts paid by the Issuing Bank and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day. In addition, each Bank will pay to the Administrative Agent, for the account of the Issuing Bank, immediately upon the Issuing Bank's demand at any time during the period commencing after such drawing until reimbursement therefor in full by the Borrower, an amount equal to such Bank's ratable share of such drawing (in proportion to its participation therein), together with interest on such amount for each day from the date of the Issuing Bank's demand for such payment (or, if such demand is made after 12:00 Noon (New York City time) on such date, from the next succeeding 32 Domestic Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate. The Issuing Bank will pay to each Bank ratably all amounts received from the Borrower for application in payment of its reimbursement obligations in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant hereto. (d) The obligations of the Borrower and each Bank under subsection (c) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (i) any lack of validity or enforceability of this Agreement or any Letter of Credit or any document related hereto or thereto; (ii) any amendment, waiver of or any consent to departure from all or any of the provisions of this Agreement, any Letter of Credit or any document related hereto or thereto; (iii) the use which may be made of the Letter of Credit by, or any act or omission of, a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting); (iv) the existence of any claim, set-off, defense or other rights that the Borrower may have at any time against a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting), the Banks (including the Issuing Bank) or any other Person, whether in connection with this Agreement or the Letter of Credit or any document related hereto or thereto or any unrelated transaction; (v) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (vi) payment under a Letter of Credit to the beneficiary of such Letter of Credit against presentation to the Issuing Bank of a draft or certificate that does not comply with the terms of the Letter of Credit; or (vii) any other act or omission to act or delay of any kind by any Bank (including the Issuing Bank), the Administrative Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this subsection (vii), constitute a legal or equitable discharge of the Borrower's or the Bank's obligations hereunder. 33 (e) The Borrower hereby indemnifies and holds harmless each Bank (including each Issuing Bank) and the Administrative Agent from and against any and all claims, damages, losses, liabilities, costs or expenses which such Bank or the Administrative Agent may incur (including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the Issuing Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to such Issuing Bank hereunder (but nothing herein contained shall affect any rights the Borrower may have against such defaulting Bank)), and none of the Banks (including an Issuing Bank) nor the Administrative Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including without limitation any of the circumstances enumerated in subsection (d) above, as well as (i) any error, omission, interruption or delay in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, (ii) any error in interpretation of technical terms, (iii) any loss or delay in the transmission of any document required in order to make a drawing under a Letter of Credit, (iv) any consequences arising from causes beyond the control of an Issuing Bank, including without limitation any government acts, or any other circumstances whatsoever in making or failing to make payment under such Letter of Credit; provided that the Borrower shall not be required to indemnify any Issuing Bank for any claims, damages, losses, liabilities, costs or expenses, and the Borrower shall have a claim for direct (but not consequential) damage suffered by it, to the extent found by a court of competent jurisdiction to have been caused by (x) the gross negligence or willful misconduct of such Issuing Bank in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) such Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. Nothing in this subsection (e) is intended to limit the obligations of the Borrower under Section 2.16(c) of this Agreement. To the extent the Borrower is obligated to but does not indemnify an Issuing Bank as required by this subsection, the Banks agree to do so ratably in accordance with their Commitments. ARTICLE 3 Conditions Section 3.1. Effectiveness. This Agreement shall become effective upon (x) termination of the Commitments (as defined in the Existing Credit Agreement referred to below in this clause (x)) under the Existing Credit Agreement dated as of March 7, 1997 among the Borrower, the banks listed therein and Morgan Guaranty Trust Company of New York, as agent, and payment in full of all amounts owing thereunder to any of such banks or such agent and (y) receipt by the Administrative Agent of the following documents, each dated the Effective Date unless otherwise indicated: (a) counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); 34 (b) a duly executed Note for the account of each Bank dated on or before the Effective Date complying with the provisions of Section 2.5; (c) opinions of Simpson Thacher & Bartlett, special counsel for the Borrower, Polsinelli, White, Vardeman & Shalton, Kansas counsel for the Borrower, and Martha B. Wyrsch, General Counsel of the Borrower, substantially in the respective forms of Exhibits E-1, E-2 and E-3 hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (d) an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; and (e) all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall promptly notify the Borrower and each Bank of the effectiveness of this Agreement, and such notice shall be conclusive and binding on all parties hereto. Section 3.2. Borrowings and Issuances of Letters of Credit. The obligation of any Bank to make a Loan on the occasion of any Borrowing and the obligation of an Issuing Bank to issue (or renew or extend the term of) any Letter of Credit is subject to the satisfaction of the following conditions: (a) the fact that the Closing Date shall have occurred on or prior to March 31, 1998; (b) in the case of the first Credit Event, the fact that prior to or substantially simultaneously with such Credit Event, the Borrower shall have consummated the Acquisition in accordance with the Stock Purchase Agreement without waiver of any material condition specified therein; (c) in the case of the first Borrowing, the fact that the Borrower shall have paid or shall concurrently pay all fees then due and payable to the Administrative Agent for the account of any Agent or Bank, as previously agreed; (d) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.2 or 2.3, as the case may be; (e) the fact that, immediately after such Credit Event, the sum of the aggregate outstanding principal amount of the Loans and the aggregate amount of Letter of Credit Liabilities will not exceed the aggregate amount of the Commitments; (f) the fact that, immediately before and after such Credit Event, no Default shall have occurred and be continuing; 35 (g) the fact that the representations and warranties of the Borrower contained in this Agreement (except, (i) in the case of Credit Events subsequent to the first Credit Event, the representation and warranty set forth in Section 4.12 and (ii) in the case of a Refunding Borrowing, the representations and warranties set forth in Sections 4.4(c), 4.5 and 4.7 as to any matter which has theretofore been disclosed in writing by the Borrower to the Banks) shall be true on and as of the date of such Credit Event; and (h) in the case of an issuance of a Letter of Credit, the fact that, immediately after such issuance of a Letter of Credit, the aggregate amount of the Letter of Credit Liabilities shall not exceed the Letter of Credit Commitment. Each Credit Event hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Credit Event as to the facts specified in clauses (b) and (c) (in the case of the first Credit Event) and (e), (f), (g) and (h) of this Section. ARTICLE 4 Representations and Warranties The Borrower represents and warrants that: Section 4.1. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Section 4.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (other than filings of this Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. Section 4.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms. 36 Section 4.4. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of income, cash flows and common stockholders' equity for the fiscal year then ended, reported on by Arthur Andersen LLP and set forth in the Borrower's 1996 Form 10-K, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1997 and the related unaudited consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's Latest Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine-month period (subject to normal year-end adjustments). (c) Since September 30, 1997 there has been no material adverse change in the business, financial position, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.5. Litigation. Except as disclosed in the most recent Annual Report on Form 10-K delivered by the Borrower to the Banks, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which would materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. Section 4.6. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA, which waiver, failure or liability could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. 37 Section 4.7. Environmental Matters. In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.8. Taxes. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes shown to be due on such returns or pursuant to any assessment received by the Borrower or any Subsidiary to the extent that such taxes have become due and before they have become delinquent, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. Section 4.9. Subsidiaries. Each of the Borrower's corporate Material Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Section 4.10. Not an Investment Company. The Borrower is not an "investment company" or controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.11. Full Disclosure. All information heretofore furnished by the Borrower to any Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to any Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts peculiar to the business of the Company or any of its Subsidiaries which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations under this Agreement. 38 Section 4.12. MidCon Acquisition. The representations and warranties of all parties contained in the Stock Purchase Agreement will be true and correct on and as of the date of the first Borrowing under this Agreement except to the extent that the failure of the same to be true and correct could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. ARTICLE 5 Covenants The Borrower agrees that, so long as any Bank has any Commitment hereunder or any Letter of Credit Liability or any amount payable under any Note remains unpaid: Section 5.1. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows and common stockholder's equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all audited by Arthur Andersen LLP or other independent public accountants of nationally recognized standing; provided, however, that delivery pursuant to clause (g) below of copies of the Annual Report on Form 10-K (without exhibits) of the Borrower for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (a); (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter (in the case of such statements of income) and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such income and cash flows in comparative form the figures for the corresponding quarter (in the case of such statements of income) and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by an authorized financial or accounting officer of the Borrower; provided, however, that delivery pursuant to clause (g) below of copies of the Quarterly Report on Form 10-Q (without exhibits) of the Borrower for such quarter filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (b); (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an authorized financial or accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower 39 was in compliance with the requirements of Section 5.7 and, if applicable, Sections 5.08 and 5.09 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; provided, however, that such accountants shall not be liable to anyone by reason of their failure to obtain knowledge of any Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards; (e) within five Domestic Business Days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the public shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents, in each case without exhibits) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) (other than such event as to which the 30-day notice requirement is waived or which is triggered by the Acquisition) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan 40 or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request. Section 5.2. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. Section 5.3. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will maintain or cause to be maintained with, in the good faith judgment of the Borrower, financially sound and reputable insurers, or through self-insurance, insurance with respect to its properties and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. Such insurance may include self-insurance or be subject to co-insurance, deductibility or similar clauses which, in effect, result in self-insurance of certain losses, provided that such self-insurance is in accord with the approved practices of corporations similarly situated and adequate insurance reserves are maintained in connection with such self-insurance, and, notwithstanding the foregoing provisions of this Section 5.3 the Borrower or any Subsidiary may effect workers' compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance in accord with applicable laws. Section 5.4. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.4 shall prohibit (i) the merger of a Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation 41 surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) the sale or other disposition (whether by merger or otherwise) of the capital stock or assets of any Subsidiary, if such transaction complies with the provisions of Section 5.11 or (iii) the termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. Section 5.5. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except (i) where the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) where failure to comply could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 5.6. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries, as required by generally accepted accounting principles, shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records (subject to compliance with confidentiality agreements, copyrights and the like) and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. Section 5.7. Debt. (a) Consolidated Debt of the Borrower will at no time exceed the MLP of Consolidated Total Capitalization. "MLP" means Maximum Leverage Percentage, which is 87.00%, subject to adjustment from time to time after the date hereof as follows: (a) upon the issuance of Trust Preferred Securities in the amount of $300,000,000, the MLP will be reduced by 5.25%; (b) upon issuance of common equity securities in the amount of $500,000,000, the MLP will be reduced by 8.75%; and (c) upon issuance of Mandatorily Convertible Preferred Stock in the amount of $400,000,000, the MLP will be reduced by 6.00%. In the event of issuance of securities of the type described above in an amount different from that specified, the consequent reduction of the MLP will be adjusted on a pro rata basis; provided that in the event of issuance of Trust Preferred Securities in an amount greater than the indicated amount, there will not be an additional reduction in the MLP to the extent that the Trust Preferred Securities exceed 10% of the Consolidated Total Capitalization of the Borrower. Upon issuance of all securities of the types described above, the MLP will at all times thereafter be 67.00%. (b) Total Debt of all Consolidated Subsidiaries (excluding Debt of a Consolidated Subsidiary of the Borrower to the Borrower or to another Consolidated Subsidiary of the Borrower) will at no time exceed 10% of Consolidated Debt of the Borrower. 42 (c) Consolidated Debt of each Material Subsidiary will at no time exceed 65% of the Consolidated Total Capitalization of such Material Subsidiary. Section 5.8. Minimum Net Worth. Consolidated Net Worth will at no time be less than an amount equal to the sum of (a) $570,000,000 plus (b) 50% of Consolidated Net Income for each fiscal quarter of the Borrower ending after the date hereof and at or prior to such time (but only if such Consolidated Net Income for such fiscal quarter is a positive amount) plus (c) for any issuance of securities resulting in a reduction of the MLP pursuant to Section 5.07(a), an amount equal to 80% of the increase in Consolidated Net Worth resulting from such issuance of securities, if at such time the Borrower's senior unsecured long-term debt is not rated at least Baa2 by Moody's and BBB by S&P. Section 5.9. Minimum Interest Coverage Ratio. At any time at which the Borrower's senior unsecured long-term debt is not rated at least Baa3 by Moody's and BBB- by S&P, the Interest Coverage Ratio will not be less than (i) 2.25:1, if such time is prior to March 31, 1999, and (ii) 2.75:1, if such time is on or after March 31, 1999. Section 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) any Liens deemed to exist on the date of this Agreement under the Purchase Agreement; (b) Liens on cash and cash equivalents securing the Substitute Note, as contemplated by the Reimbursement Agreement; (c) Liens on assets of any Person existing at the time such Person becomes a Subsidiary and not created in contemplation of such event; (d) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $150,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (e) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $75,000,000; (f) statutory or common law Liens of or upon deposits of cash in favor of banks or other depository institutions; and (g) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Net Worth of the Borrower. 43 Section 5.11. Consolidations, Mergers and Sales of Assets. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any other Person, unless: (i) immediately after giving effect to the transaction, no Default shall have occurred and be continuing; and (ii) except in the case of a merger in which the Borrower is the surviving corporation: (x) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, assumes all obligations of the Borrower hereunder and under the Notes; (y) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, is organized under the laws of the United States or any state thereof; and (z) the Borrower has delivered to the Administrative Agent an officer's certificate and opinion of counsel, each stating that such consolidation, merger, or transfer and such assumption comply with the provisions hereof. No such sale, lease or other transfer of assets shall have the effect of releasing the Borrower (or any successor that shall have become such in the manner prescribed in this Section) from its liability under this Agreement and the Notes. Section 5.12. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. Section 5.13. Transactions with Affiliates. The Borrower will not participate in any material transaction with an affiliate (other than a Subsidiary) unless such transaction is in the ordinary course of its business and on terms no less advantageous to the Borrower than could be obtained in such a transaction with an unaffiliated party. ARTICLE 6 Defaults Section 6.1. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: 44 (a) the Borrower shall fail to reimburse any drawing under any Letter of Credit when required hereunder or to pay when due any principal of any Loan or shall fail to pay within three Domestic Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.7 to 5.13, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; provided, however, that if any such failure is cured by the Borrower or such Subsidiary or is waived by the requisite percentage of holders of such Material Financial Obligations entitled to so waive, then the Event of Default under this Agreement by reason of such failure shall be deemed to have been cured; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; provided, however, that if any such acceleration is rescinded, or any such event or condition is cured by the Borrower or any Subsidiary or is waived by the requisite percentage of holders of such Material Debt entitled to so waive, then the Event of Default under this Agreement by reason of such acceleration, event or condition shall be deemed to have been cured; (g) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other 45 similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation; and in each of the foregoing instances such condition (i) could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, and (ii) shall continue for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (j) a judgment or judgments for the payment of money (not paid or fully covered by insurance or indemnification) in excess of $60,000,000 in the aggregate shall be rendered against the Borrower or any Material Subsidiary and such judgment or judgments are not, within 30 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 30 days after the expiration of such stay; or (k) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of the Borrower; or, during any period of twelve consecutive calendar months, individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of the board of directors of the Borrower; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. 46 Section 6.2. Notice of Default. The Administrative Agent shall give notice to the Borrower under Section 6.1(c) or 6.1(i) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. Section 6.3. Cash Cover. The Borrower agrees, in addition to the provisions of Section 6.01 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by the Administrative Agent upon the instruction of the Banks having more than 50% in the aggregate amount of the Commitments (or, if the Commitments shall have been terminated, holding more than 50% of the Letter of Credit Liabilities), forthwith pay to the Administrative Agent an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to the Administrative Agent) equal to the aggregate amount available for drawing under all Letters of Credit then outstanding at such time, provided that, upon the occurrence of any Event of Default specified in Section 6.01(g) or (h) with respect to the Borrower, the Borrower shall pay such amount forthwith without any notice or demand or any other act by the Administrative Agent or the Banks. ARTICLE 7 The Agents Section 7.1. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. Section 7.2. Administrative Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. 47 Section 7.3. Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. Section 7.4. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.5. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. Section 7.6. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify any Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. Section 7.7. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall 48 deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. Section 7.8. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, with the consent of the Borrower, which shall not be unreasonably withheld. If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. Section 7.9. Agents' Fees. The Borrower shall pay to the Administrative Agent for the account of the Agents fees in the amounts and at the times previously agreed upon between the Borrower and the Agents. Section 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on any Syndication Agent, in its capacity as such an Agent. ARTICLE 8 Change in Circumstances Section 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Committed Borrowing, Banks having 50% or more of the aggregate amount of the Commitments advise the Administrative Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, 49 the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the Borrower notifies the Administrative Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. Section 8.2. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. Section 8.3. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or Letter of Credit or any obligation to make Committed Loans or issue or participate in any Letter of Credit or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental 50 authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.15), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its participation in any Letter of Credit or its obligation to make Fixed Rate Loans or issue or participate in Letters of Credit and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan or of issuing or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth in reasonable detail the additional 51 amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections (a) and (b) of this Section 8.3, the Borrower shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 90 days prior to the date on which such Bank notifies the Administrative Agent and the Borrower that it proposes to demand such compensation and identifies to the Administrative Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which, because of the retroactive application of such statute, regulation or other such basis, such Bank did not know that such amount would arise or accrue. Section 8.4. Taxes. (a) For purposes of this Section 8.4, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note or Letter of Credit, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or Letter of Credit or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or Letter of Credit. (b) Any and all payments by the Borrower to or for the account of any Bank or the Administrative Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.4) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.1, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any 52 jurisdiction on amounts payable under this Section 8.4) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Bank or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.4(b) or (c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower, at such Bank's expense, shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.4, then such Bank will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Bank, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. Section 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and 53 (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. Section 8.6. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4, the Borrower shall have the right, with the assistance of the Administrative Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to purchase the Note and assume the Commitment of such Bank. ARTICLE 9 Miscellaneous Section 9.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. Section 9.2. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.3. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Davis Polk & Wardwell, special counsel for the Agents, in connection with the preparation and administration of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by each Agent and Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. 54 (b) The Borrower agrees to indemnify each Agent and Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of (i) any actual or proposed use of proceeds of Loans hereunder or (ii) any actual or alleged Default under this Agreement or any actual or alleged untruth or inaccuracy of any representation or warranty made by the Borrower in or in connection with this Agreement; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. Section 9.4. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to its Loans and Letter of Credit Liabilities which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to the Loans and Letter of Credit Liabilities of such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Loans and Letter of Credit Liabilities of the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Loans and Letter of Credit Liabilities shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Loan and Letter of Credit Liability, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. Section 9.5. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of any Agent or any Issuing Bank are affected thereby, by it); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or Letter of Credit Liability or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or the amount to be reimbursed in respect of any Letter of Credit or interest thereon or any fees hereunder or for termination of any Commitments or (iv) change the percentage of the Commitments or of the 55 aggregate unpaid principal amount of the Loans and/or Letter of Credit Liabilities, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. Section 9.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower, the Issuing Banks and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.5 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial Commitment of not less than $10,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, the Issuing Banks and the Administrative Agent; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent shall be required; and provided further that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any 56 assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.4. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.3 or 8.4 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 9.7. Collateral. Each of the Banks represents to each Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 9.8. Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City having subject matter jurisdiction for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 9.9. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof except the obligations of the Borrower to pay fees and expenses and to assist in the syndication process as specified in the respective commitment letters and fee letters heretofore entered into between the Borrower and the Agents. 57 Section 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 9.11. Existing Credit Agreement. On the Effective Date and simultaneously with the receipt by the Administrative Agent of the required documents pursuant to Section 3.1, the Borrower hereby gives notice to Morgan Guaranty Trust Company of New York, as agent, under Section 2.9 of the Existing Credit Agreement referred to in clause (x) of Section 3.1 of the termination of the Commitments (as defined herein) and the Banks hereby waive the requirement that prior notice of such termination be given as therein provided. 58 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. K N ENERGY, INC. By /s/ Clyde E. McKenzie -------------------------------------- Title: Vice President & Chief Financial Officer 370 Van Gordon Street Lakewood, CO 80228-8304 Attention: Chief Financial Officer Facsimile number: (303) 914-4542 Commitments - ----------- $133,333,333.33 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ John Kowalczuk -------------------------------------- Title: Vice President $88,888,888.89 BANK OF AMERICA NT & SA By /s/ J. Stephen Mernick -------------------------------------- Title: Senior Vice President $88,888,888.89 THE CHASE MANHATTAN BANK By /s/ Mary Jo Woodford -------------------------------------- Title: Vice President 59 $88,888,888.89 NATIONSBANK, N.A. By /s/ David C. Rubenking -------------------------------------- Title: Senior Vice President - --------------------- Total Commitments $400,000,000 ============ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By /s/ John Kowalczuk -------------------------------------- Title: Vice President 60 Wall Street New York, New York 10260-0060 Attention: John Kowalczuk Telex number: 177615 Facsimile number: 212-648-5014 60 PRICING SCHEDULE The "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day:
- -------------------------------------------------------------------------- Level Level Level Level Level Level Status I II III IV V VI - -------------------------------------------------------------------------- Euro-Dollar Margin Utilization < 50% 0.200% 0.275% 0.325% 0.500% 0.625% 1.000% Utilization > 50% 0.325% 0.400% 0.450% 0.625% 0.750% 1.125% - - -------------------------------------------------------------------------- CD Margin Utilization < 50% 0.325% 0.400% 0.450% 0.625% 0.750% 1.125% Utilization > 50% 0.450% 0.525% 0.575% 0.750% 0.875% 1.250% - - -------------------------------------------------------------------------- Facility Fee Rate 0.100% 0.125% 0.175% 0.250% 0.375% 0.500% - --------------------------------------------------------------------------
For purposes of this Schedule, the following terms have the following meanings: "Level I Status" exists at any date if, at such date, the Borrower's senior unsecured long-term debt is rated BBB+ or higher by S&P and Baa1 or higher by Moody's. "Level II Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB or higher by S&P and Baa2 or higher by Moody's and (ii) Level I Status does not exist. "Level III Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB- or higher by S&P and Baa3 or higher by Moody's and (ii) neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB+ or higher by S&P and Ba1 or higher by Moody's and (ii) none of Level I Status, Level II Status and Level III Status exists. "Level V Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB or higher by S&P and Ba2 or higher by Moody's and (ii) none of Level I Status, Level II Status, Level III Status and Level IV Status exists. "Level VI Status" exists at any date if, at such date, no other Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. 61 "Utilization" means, at any date, the percentage equivalent of a fraction (i) the numerator of which is the sum of the aggregate outstanding principal amount of the Loans and the aggregate Letter of Credit Liabilities at such date and (ii) the denominator of which is the aggregate amount of the Commitments at such date. If for any reason any Loans remain outstanding following termination of the Commitments, Utilization shall be deemed to be in excess of 50%. The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement, and any rating assigned to any other debt security of the Borrower shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 62 EXHIBIT A NOTE New York, New York , 199_ For value received, K N Energy, Inc., a Kansas corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the last day of the Interest Period relating to such Loan. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Five-Year Credit Agreement dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. K N ENERGY, INC. By -------------------------------------- Title: 63 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL
- ------------------------------------------------------------------ Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------
64 EXHIBIT B Form of Money Market Quote Request [Date] To: Morgan Guaranty Trust Company of New York (the "Administrative Agent") From: K N Energy, Inc. Re: Five-Year Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the Banks listed on the signature pages thereof and the Administrative Agent We hereby give notice pursuant to Section 2.3 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount* Interest Period** $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] - ------------ * Amount must be $5,000,000 or a larger multiple of $1,000,000. ** Not less than one month and not more than nine months (LIBOR Auction) or not less than seven days and not more than 360 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. Terms used herein have the meanings assigned to them in the Credit Agreement. K N ENERGY, INC. By ----------------------------------- Title: 65 EXHIBIT C Form of Invitation for Money Market Quotes To: [Name of Bank] Re: Invitation for Money Market Quotes to K N Energy, Inc. (the "Borrower") Pursuant to Section 2.03 of the Five-Year Credit Agreement dated as of January 30, 1998 among the Borrower, the Banks parties thereto and the undersigned, as Administrative Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount Interest Period $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ------------------------------------ Authorized Officer 66 EXHIBIT D Form of Money Market Quote To: Morgan Guaranty Trust Company of New York, as Administrative Agent Re: Money Market Quote to K N Energy, Inc. (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ________________________________ 2. Person to contact at Quoting Bank: ----------------------------- 3. Date of Borrowing: ____________________* 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market - ---------------- * As specified in the related Invitation. 67 Amount** Period*** [Margin****] [Absolute Rate*****] $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.]** We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Five-Year Credit Agreement dated as of January 30, 1998 among the Borrower, the Banks listed on the signature pages thereof and yourselves, as Administrative Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated: By ---------------------------------------- Authorized Officer - ------------ ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. *** Not less than one month and not more than nine months or not less than seven days and not more than 360 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000th of 1%) and specify whether "PLUS" or "MINUS". ***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%). 68 EXHIBIT E-1 OPINION OF SPECIAL COUNSEL FOR THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as special counsel for K N Energy, Inc. (the "Borrower") in connection with the Five-Year Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.1(c) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Texas or the United States of America (other than filings of the Credit Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities and Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or 69 regulation of the State of Texas or the United States of America, or of the articles of incorporation or by-laws of the Borrower. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable against the Borrower in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of Texas and the foregoing opinion is limited to the laws of the State of Texas, the State of New York and the federal laws of the United States of America. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction in which any Bank is located which limits the rate of interest that such Bank may charge or collect. Insofar as the foregoing opinion involves matters governed by the laws of the State of Kansas (which matters do not in our view include the non-contravention opinion in paragraph 1), we have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.1(c) of the Credit Agreement. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 70 EXHIBIT E-2 OPINION OF KANSAS COUNSEL FOR THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as counsel in the State of Kansas for K N Energy, Inc. (the "Borrower") in connection with the Five-Year Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.1(c) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. 71 Upon the basis of the foregoing, we are of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Kansas and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Kansas. We are members of the Bar of the State of Kansas and the foregoing opinion is limited to the laws of the State of Kansas. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 72 EXHIBIT E-3 OPINION OF GENERAL COUNSEL OF THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: I am General Counsel of K N Energy, Inc. (the "Borrower"), and I have represented the Borrower in connection with the Five-Year Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of my client pursuant to Section 3.1(c) of the Credit Agreement. I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. 73 Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower has all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Colorado or, to the best of my knowledge, any other jurisdiction (other than filings of the Credit Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Colorado or, to the best of my knowledge, any other jurisdiction or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any, Lien on any asset of the Borrower or any of its Subsidiaries. 3. There is no action, suit or proceeding pending against, or to the best of my knowledge threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of the Credit Agreement or the Notes. 4. Each of the Borrower's corporate Material Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. I am a member of the Bar of the State of Colorado and the foregoing opinion is limited to the laws of the State of Colorado and the General Corporation Law of the State of Delaware. Insofar as paragraph 2 above addresses the laws of other jurisdictions, I have relied upon my familiarity with advice given by counsel admitted to practice in those jurisdictions, in connection with this and other transactions. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 74 EXHIBIT F OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENTS To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the Five-Year Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among K N Energy, Inc., a Kansas corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Administrative Agent"), and have acted as special counsel for the Agents for the purpose of rendering this opinion pursuant to Section 3.1(c) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that the Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York and the federal laws of the United States of America. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. Insofar as the foregoing opinion involves matters governed by the laws of Kansas, we have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.1(c) of the Credit Agreement. 75 This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 76 A EXHIBIT G ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), K N ENERGY, INC. (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and Administrative Agent (the "Administrative Agent"). W I T N E S S E T H WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Five-Year Credit Agreement dated as of January 30, 1998 among the Borrower, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower and participate in Letters of Credit in an aggregate principal amount at any time outstanding not to exceed $_________________; WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; WHEREAS, Letters of Credit with a total amount available for drawing thereunder of $_____________are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans and Letter of Credit Liabilities, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; 77 NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by, and Letter of Credit Liabilities of, the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee[, the Borrower, the Issuing Bank(s) and the Administrative Agent] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.(*) [It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee.] Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. - ------------ (*) Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 78 SECTION 4. Consent of the Borrower and the Administrative Agent. This Agreement is conditioned upon the consent of the Borrower, the Administrative Agent and the Issuing Bank(s) pursuant to Section 9.6(c) of the Credit Agreement. The execution of this Agreement by the Borrower, the Administrative Agent and the Issuing Bank(s) is evidence of this consent. Pursuant to Section 9.6(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note or Letter of Credit. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 79 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By -------------------------------------- Title: [ASSIGNEE] By -------------------------------------- Title: K N ENERGY, INC. By -------------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank and as Administrative Agent By -------------------------------------- Title: EX-4.G 5 364 DAY CREDIT AGREEMENT 1 CONFORMED COPY $2,100,000,000 364-DAY CREDIT AGREEMENT dated as of January 30, 1998 among K N Energy, Inc., The Banks Listed Herein, and Morgan Guaranty Trust Company of New York, as Administrative Agent ------------ J. P. Morgan Securities Inc., BancAmerica Robertson Stephens, Chase Securities Inc. and NationsBanc Montgomery Securities LLC, Syndication Agents 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions Section 1.01. Definitions........................................... 1 Section 1.02. Accounting Terms and Determinations................... 13 Section 1.03. Types of Borrowings................................... 13 ARTICLE 2 The Credits Section 2.01. Commitments to Lend................................... 13 Section 2.02. Notice of Borrowing................................... 14 Section 2.03. Notice to Banks; Funding of Loans..................... 14 Section 2.04. Notes................................................. 15 Section 2.05. Maturity of Loans..................................... 16 Section 2.06. Interest Rates........................................ 16 Section 2.07. Fees.................................................. 19 Section 2.08. Optional Termination or Reduction of Commitments...... 19 Section 2.09. Scheduled Termination of Commitments.................. 20 Section 2.10. Optional Prepayments.................................. 20 Section 2.11. General Provisions as to Payments..................... 20 Section 2.12. Funding Losses........................................ 21 Section 2.13. Computation of Interest and Fees...................... 21 Section 2.14. Regulation D Compensation............................. 21 Section 2.15. Mandatary Prepayments................................. 22 ARTICLE 3 Conditions Section 3.01. Effectiveness......................................... 23 Section 3.02. Borrowings............................................ 24 ARTICLE 4 Representations and Warranties Section 4.01. Corporate Existence and Power......................... 25 Section 4.02. Corporate and Governmental Authorization; No Contravention........................................ 25 Section 4.03. Binding Effect........................................ 26 Section 4.04. Financial Information................................. 26 Section 4.05. Litigation............................................ 26 Section 4.06. Compliance with ERISA................................. 26 Section 4.07. Environmental Matters................................. 27 Section 4.08. Taxes................................................. 27 Section 4.09. Subsidiaries.......................................... 28 Section 4.10. Not an Investment Company............................. 28 Section 4.11. Full Disclosure....................................... 28 Section 4.12. MidCon Acquisition.................................... 28 ARTICLE 5 Covenants Section 5.01. Information........................................... 28 Section 5.02. Payment of Obligations................................ 31 Section 5.03. Maintenance of Property; Insurance.................... 31 Section 5.04. Conduct of Business and Maintenance of Existence...... 31 Section 5.05. Compliance with Laws.................................. 32 Section 5.06. Inspection of Property, Books and Records............. 32 Section 5.07. Debt.................................................. 32 Section 5.08. Minimum Net Worth..................................... 33 Section 5.09. Minimum Interest Coverage Ratio....................... 33 Section 5.10. Negative Pledge....................................... 33 Section 5.11. Consolidations, Mergers and Sales of Assets........... 34 Section 5.12. Use of Proceeds....................................... 35 Section 5.13. Transactions with Affiliates.......................... 35
3 ARTICLE 6 Defaults Section 6.01. Events of Default..................................... 35 Section 6.02. Notice of Default..................................... 38 ARTICLE 7 The Agents Section 7.01. Appointment and Authorization......................... 38 Section 7.02. Administrative Agent and Affiliates................... 38 Section 7.03. Action by Administrative Agent........................ 38 Section 7.04. Consultation with Experts............................. 38 Section 7.05. Liability of Administrative Agent..................... 39 Section 7.06. Indemnification....................................... 39 Section 7.07. Credit Decision....................................... 39 Section 7.08. Successor Administrative Agent........................ 40 Section 7.09. Agents' Fees.......................................... 40 Section 7.10. Other Agents.......................................... 40 ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair............................................... 40 Section 8.02. Illegality............................................ 41 Section 8.03. Increased Cost and Reduced Return..................... 42 Section 8.04. Taxes................................................. 43 Section 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans................................................ 45 Section 8.06. Substitution of Bank.................................. 45 ARTICLE 9 Miscellaneous Section 9.01. Notices............................................... 46 Section 9.02. No Waivers............................................ 46 Section 9.03. Expenses; Indemnification............................. 46 Section 9.04. Sharing of Set-offs................................... 47 Section 9.05. Amendments and Waivers................................ 47 Section 9.06. Successors and Assigns................................ 48 Section 9.07. Collateral............................................ 49 Section 9.08. Governing Law; Submission to Jurisdiction............. 49 Section 9.09. Counterparts; Integration............................. 50 Section 9.10. WAIVER OF JURY TRIAL.................................. 50
4 PRICING SCHEDULE EXHIBIT A - NOTE EXHIBIT B - OPINION OF SPECIAL COUNSEL FOR THE BORROWER EXHIBIT C - OPINION OF KANSAS COUNSEL FOR THE BORROWER EXHIBIT D - OPINION OF GENERAL COUNSEL OF THE BORROWER EXHIBIT E - OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENTS EXHIBIT F - ASSIGNMENT AND ASSUMPTION AGREEMENT 5 364-DAY CREDIT AGREEMENT AGREEMENT dated as of January 30, 1998 among K N ENERGY, INC., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. The parties hereto agree as follows: ARTICLE 1 Definitions Section 1.1. Definitions. The following terms, as used herein, have the following meanings: "Acquisition" means the purchase of MidCon Corp. by the Borrower from Occidental Petroleum Corporation pursuant to the Stock Purchase Agreement. "Adjusted CD Rate" has the meaning set forth in Section 2.6(b). "Administrative Agent" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks under this Agreement, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means each of the Administrative Agent and the Syndication Agents, and "Agents" means any combination of them, as the context may require. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. 6 "Assessment Rate" has the meaning set forth in Section 2.6(b). "Assignee" has the meaning set forth in Section 9.6(c). "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.6(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day or (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Loan to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Borrowing or pursuant to Article 8. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means K N Energy, Inc., a Kansas corporation, and its successors. "Borrower's 1996 Form 10-K" means the Borrower's annual report on Form 10-K for 1996, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrower's Latest Form 10-Q" means the Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 1997, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrowing" has the meaning set forth in Section 1.3. "CD Base Rate" has the meaning set forth in Section 2.6(b). "CD Loan" means a Loan to be made by a Bank as a CD Loan in accordance with the applicable Notice of Borrowing. "CD Margin" has the meaning set forth in Section 2.6(b). "CD Reference Banks" means NationsBank, N.A., The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. "Commitment" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages of this Agreement, as such amount may be reduced from time to time pursuant to Sections 2.8, 2.9 and 2.15. "Consolidated Assets" means the total amount of assets appearing on the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, prepared in accordance with generally accepted 7 accounting principles as of the date of the most recent regularly prepared consolidated financial statements prior to the taking of any action for the purposes of which the determination is being made. "Consolidated Debt" of any Person means at any date the sum (without duplication) of (i) the Debt of such Person and its Consolidated Subsidiaries, determined on a consolidated basis as of such date plus (ii) the excess (if any) of the Trust Preferred Securities of such Person over 10% of the Consolidated Total Capitalization of such Person at such date minus (iii) the portion of the Substitute Note collateralized as contemplated by Section 5.10(b) hereof. "Consolidated EBITDA" means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining Consolidated Net Income for such period, the aggregate amount of (i) Consolidated Interest Expense, (ii) income tax expense and (iii) depreciation and amortization expense. "Consolidated Interest Expense" means, for any period, the interest expense of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "Consolidated Subsidiary" of any Person means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Net Income" means, for any period, the net income of the Borrower and its Consolidated Subsidiaries before extraordinary items, determined on a consolidated basis for such period. "Consolidated Net Worth" of any Person means at any date the sum (without duplication) of (i) the consolidated stockholders' equity of such Person and its Consolidated Subsidiaries, determined as of such date plus (ii) the Mandatorily Convertible Preferred Stock of such Person plus (iii) the Trust Preferred Securities of such Person; provided that the amount of Trust Preferred Securities added pursuant to this clause (iii) shall not exceed 10% of Consolidated Total Capitalization of such Person at such date. "Consolidated Total Capitalization" of any Person means at any date the sum of Consolidated Debt of such Person and Consolidated Net Worth of such Person, each determined as of such date. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable or deferred employee and director compensation arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, for purposes of Section 5.11 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter 8 of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.6(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.1. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 9 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a Euro-Dollar Loan in accordance with the applicable Notice of Committed Borrowing. "Euro-Dollar Margin" has the meaning set forth in Section 2.6(c). "Euro-Dollar Reference Banks" means the principal London offices (for determinations of a London Interbank Offered Rate) or domestic offices (for determinations of an Interbank Offered Rate) of NationsBank, N.A., The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.1. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the 10 Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or any combination of the foregoing. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnitee" has the meaning set forth in Section 9.3(b). "Interest Coverage Ratio" means, at any date, the ratio of Consolidated EBITDA to Consolidated Interest Expense for the period of four consecutive fiscal quarters most recently ended on or before such date. "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing; except that with respect to any Borrowing occurring prior to the Syndication Date, (i) any such Borrowing occurring prior to February 23, 1998 shall have an Interest Period ending on February 23, 1998 and (ii) any such Borrowing on or after February 23, 1998 shall have an Interest Period ending one week thereafter; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and 11 (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; and (3) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a loan made by a Bank pursuant to Section 2.1. "London Interbank Offered Rate" has the meaning set forth in Section 2.6(c). "Mandatorily Convertible Preferred Stock", means, with respect to the Borrower, preferred securities of a Subsidiary which are (i) mandatorily convertible into common equity securities of the Borrower within approximately three years of their date of issuance, (ii) issued in conjunction with, and pledged to secure, an obligation to purchase common equity securities of the Borrower within approximately three years for an equal amount or (iii) otherwise structured in a manner satisfactory to the Administrative Agent so 12 as to ensure the issuance of incremental common equity securities of the Borrower in a substantially equal amount within approximately three years. "Material Debt" means Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $75,000,000. "Material Financial Obligations" means a principal or face amount of Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) and/or payment obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $125,000,000. "Material Subsidiary" means any Subsidiary the consolidated assets of which constitute 10% or more of Consolidated Assets. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" has the meaning set forth in Section 2.02. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.6(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. 13 "Purchase Agreement" means the Purchase and Sale Agreement dated as of January 28, 1994, among K N Gas Supply Services, Inc., the Borrower, Bank of America National Trust and Savings Association, as the initial Purchaser (as defined therein), and Bank of America National Trust and Savings Association, as agent for the Purchasers. "Pricing Schedule" means the Schedule attached hereto identified as such. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refunding Borrowing" means a Borrowing which, after application of the proceeds thereof, results in no net increase in the outstanding principal amount of Loans made by any Bank. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Reimbursement Agreement" means the Reimbursement Agreement dated as of January 30, 1998, among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company as the administrative agent, as amended and in effect from time to time. "Required Banks" means at any time Banks having at least 66 2/3 % of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "Revolving Credit Period" means the period from and including the Effective Date to but not including the Termination Date. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Stock Purchase Agreement" means the Stock Purchase Agreement dated as of December 18, 1997, between Occidental Petroleum Corporation, a Delaware corporation, and the Borrower as amended and in effect from time to time; provided that any such amendment from the form thereof heretofore furnished to each of the Banks which could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, shall be effective for purposes of references thereto in this Agreement only if such amendment shall have received the written consent of the Required Banks (which shall not be unreasonably withheld). "Subsidiary" means, as to any Person, any corporation or other 14 entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Substitute Note" means the Substitute Note (as defined in the Stock Purchase Agreement) issued by the Borrower to Occidental Petroleum Corporation in connection with the Acquisition. "Syndication Agent" means either J.P. Morgan Securities Inc., BancAmerica Robertson Stephens, Chase Securities Inc. or NationsBanc Montgomery Securities LLC in its capacity as a syndication agent in respect of this Agreement, and "Syndication Agents" means all of them. "Syndication Date" means the earlier of (i) March 31, 1998 and (ii) the first date subsequent to the date hereof on which the Commitments of the Banks listed on the signature pages hereof shall have been reduced to an amount less than 75% of the aggregate amount of the Commitments by reason of the completion of primary syndication. "Termination Date" means January 29, 1999, or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Trust Preferred Securities" means, with respect to the Borrower, mandatorily redeemable capital trust securities of trusts which are Subsidiaries and the subordinated debentures of the Borrower in which the proceeds of the issuance of such capital trust securities are invested, including, without limitation, (i) the 8.56% Series B Capital Trust Pass-through Securities of K N Capital Trust I and (ii) the capital trust securities of K N Capital Trust II anticipated to be issued after the Effective Date. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Wholly-Owned Consolidated Subsidiary" of any Person means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. Section 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all 15 financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. Section 1.3. Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans). ARTICLE 2 The Credits Section 2.1. Commitments to Lend. During the Revolving Credit Period each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time in amounts such that the aggregate principal amount of Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $5,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.2(e)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.10, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. Section 2.2. Notice of Borrowing. The Borrower shall give the Administrative Agent notice (a "Notice of Borrowing") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, except if the Euro-Dollar Borrowing is at the Interbank Offered Rate, then upon the date of each such borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, 16 (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section 2.3. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) If any Bank makes a new Loan hereunder on a day on which the Borrower is to repay all or any part of an outstanding Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Administrative Agent as provided in subsection (b) of this Section, or remitted by the Borrower to the Administrative Agent as provided in Section 2.11, as the case may be. (d) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsections (b) and (c) of this Section 2.3 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.6 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. Section 2.4. Notes. (a) The Loans of each Bank shall be 17 evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Administrative Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.1(b), the Administrative Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.5. Maturity of Loans. Each Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. Section 2.6. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan shall, as a result of clause (2)(b) of the definition of Interest Period, have an Interest Period of less than 30 days, such CD Loan shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to the Interest Period for such Loan and (ii) the rate applicable to Base Rate Loans for such day. 18 "CD Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ------ ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate __________ * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Administrative Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for 19 such day plus the London Interbank Offered Rate applicable to such Interest Period; provided that each Euro-Dollar Loan made prior to the Syndication Date having an Interest Period of one week shall bear interest on the outstanding principal thereof, for each day during such Interest Period, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. The "Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the New York interbank market at approximately 12:00 Noon (New York City time) on the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to the Interest Period for such Loan and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.1 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the Banks of each rate of interest so determined, 20 and its determination thereof shall be conclusive in the absence of manifest error. (f) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.1 shall apply. Section 2.7. Fees. The Borrower shall pay to the Administrative Agent for the account of the Banks ratably a facility fee at the Facility Fee Rate (determined daily in accordance with the Pricing Schedule). Such facility fee shall accrue (i) from and including the Effective Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or such earlier date of termination to but excluding the date the Loans shall be repaid in their entirety, on the daily aggregate outstanding principal amount of the Loans. Accrued fees under this Section shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). Section 2.8. Optional Termination or Reduction of Commitments. During the Revolving Credit Period, the Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $10,000,000 or any larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. Promptly after receiving a notice pursuant to this subsection, the Administrative Agent shall notify each Bank of the contents thereof. Section 2.9. Scheduled Termination of Commitments. The Commitments shall terminate on the Termination Date, and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. Section 2.10. Optional Prepayments. (a) The Borrower may, upon at least one Domestic Business Day's notice by 11:00 A.M. (New York City time) to the Administrative Agent, prepay any Base Rate Borrowing in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Base Rate Loans of the several Banks included in such Borrowing. (b) Subject to Section 2.12, the Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, prepay any CD Borrowing or upon at least three Euro-Dollar Business Days' notice to the Administrative Agent prepay any Euro-Dollar Borrowing, in each case in whole 21 at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. Section 2.11. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, without any set-off or counterclaim, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. Section 2.12. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.6(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.3(a) or 2.10(c), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such 22 payment or failure to borrow or prepay, provided that such Bank shall have delivered to the Borrower a certificate setting forth in reasonable detail the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. Section 2.13. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.14. Regulation D Compensation. For so long as any Bank maintains reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. Section 2.15. Mandatory Prepayments. (a) If the Borrower or any of its Subsidiaries issues debt or equity securities prior to the Termination Date (other than (w) equity securities issued in consideration for the acquisition of any assets (including, without limitation, any equity interests of any other Person), (x) equity securities issued to the Borrower or any of its Subsidiaries, (y) directors' qualifying shares and (z) equity securities issued in the ordinary course of business in connection with now or hereafter existing employee stock purchase plans and other employee compensation arrangements and dividend reinvestment plans), the Borrower shall apply the net cash proceeds thereof until such amount has been fully applied either (I) to the collateralization of the Substitute Note so as to cause an equivalent reduction in the aggregate Letter of Credit Amount under and as defined in the Reimbursement Agreement (or, if the Letter of Credit shall not have been issued, the aggregate amount of the Commitments thereunder), until such Letter of Credit Amount (or the aggregate amount of the Commitments) has 23 been reduced to zero; or (II) to the prepayment of outstanding Loans under this Agreement, and simultaneously to the reduction of the aggregate Commitments hereunder, until such Loans and Commitments have been reduced to zero, or to a combination of (I) and (II) as the Borrower may elect. Each such reduction and payment or prepayment shall occur within five Euro-Dollar Business Days of the receipt by the Borrower or any of its Subsidiaries of such net cash proceeds, provided that (i) if such net cash proceeds are less than $10,000,000, such prepayment shall be effective upon receipt of proceeds such that, together with all other such amounts not previously applied, the net cash proceeds are equal to at least $20,000,000; and (ii) if any prepayment would otherwise require prepayment of Fixed Rate Loans or portions thereof prior to the last day of the then current Interest Period, then such prepayment shall, unless the Administrative Agent otherwise notifies the Borrower upon the instructions of the Required Banks, be deferred to the last day of such Interest Period. The Borrower shall give the Administrative Agent at least five Euro-Dollar Business Days' notice of each payment or prepayment required to be made pursuant to this subsection (a). (b) Each reduction of Commitments and prepayment of Loans under this Agreement shall be applied ratably to the respective Commitments and Loans of all Banks. Each payment of principal of the Loans shall be made together with interest accrued and unpaid on the amount repaid to the date of payment. ARTICLE 3 Conditions Section 3.1. Effectiveness. This Agreement shall become effective upon receipt by the Administrative Agent of the following documents, each dated the Effective Date unless otherwise indicated: (a) counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); (b) a duly executed Note for the account of each Bank dated on or before the Effective Date complying with the provisions of Section 2.4; (c) opinions of Simpson Thacher & Bartlett, special counsel for the Borrower, Polsinelli, White, Vardeman & Shalton, Kansas counsel for the Borrower, and Martha B. Wyrsch, General Counsel of the Borrower, substantially in the respective forms of Exhibits B, C and D hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; 24 (d) an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; and (e) all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall promptly notify the Borrower and each Bank of the effectiveness of this Agreement, and such notice shall be conclusive and binding on all parties hereto. Section 3.2. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) the fact that the Closing Date shall have occurred on or prior to March 31, 1998; (b) in the case of the first Borrowing, the fact that prior to or substantially simultaneously with such Borrowing, the Borrower shall have consummated the Acquisition in accordance with the Stock Purchase Agreement without waiver of any material condition specified therein; (c) in the case of the first Borrowing, the fact that the Borrower shall have paid or shall concurrently pay all fees then due and payable to the Administrative Agent for the account of any Agent or Bank, as previously agreed; (d) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.2; (e) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (f) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (g) the fact that the representations and warranties of the Borrower contained in this Agreement (except (i) in the case of Borrowings subsequent to the first Borrowing, the representation and warranty set forth in Section 4.12 and (ii) in the case of a Refunding Borrowing, the representations and warranties set forth in Sections 4.4(c), 4.5 and 4.7 as to any matter which has theretofore been disclosed in writing by the Borrower to the Banks) shall be true on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b) and (c) (in the case of the first Borrowing) and (e), (f) and (g) of this Section. 25 ARTICLE 4 Representations and Warranties The Borrower represents and warrants that: Section 4.1. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Section 4.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (other than filings of this Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. Section 4.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms. Section 4.4. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of income, cash flows and common stockholders' equity for the fiscal year then ended, reported on by Arthur Andersen LLP and set forth in the Borrower's 1996 Form 10-K, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1997 and the related unaudited consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's Latest Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine-month period (subject to normal year-end adjustments). (c) Since September 30, 1997 there has been no material adverse 26 change in the business, financial position, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.5. Litigation. Except as disclosed in the most recent Annual Report on Form 10-K delivered by the Borrower to the Banks, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which would materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. Section 4.6. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA, which waiver, failure or liability could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.7. Environmental Matters. In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. 27 Section 4.8. Taxes. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes shown to be due on such returns or pursuant to any assessment received by the Borrower or any Subsidiary to the extent that such taxes have become due and before they have become delinquent, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. Section 4.9. Subsidiaries. Each of the Borrower's corporate Material Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Section 4.10. Not an Investment Company. The Borrower is not an "investment company" or controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.11. Full Disclosure. All information heretofore furnished by the Borrower to any Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to any Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts peculiar to the business of the Company or any of its Subsidiaries which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations under this Agreement. Section 4.12. MidCon Acquisition. The representations and warranties of all parties contained in the Stock Purchase Agreement will be true and correct on and as of the date of the first Borrowing under this Agreement except to the extent that the failure of the same to be true and correct could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. ARTICLE 5 Covenants The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: Section 5.1. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows and common stockholder's equity for such fiscal year, setting forth in each case in 28 comparative form the figures for the previous fiscal year, all audited by Arthur Andersen LLP or other independent public accountants of nationally recognized standing; provided, however, that delivery pursuant to clause (g) below of copies of the Annual Report on Form 10-K (without exhibits) of the Borrower for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (a); (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter (in the case of such statements of income) and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such income and cash flows in comparative form the figures for the corresponding quarter (in the case of such statements of income) and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by an authorized financial or accounting officer of the Borrower; provided, however, that delivery pursuant to clause (g) below of copies of the Quarterly Report on Form 10-Q (without exhibits) of the Borrower for such quarter filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (b); (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an authorized financial or accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Section 5.7 and, if applicable, Sections 5.08 and 5.09 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; provided, however, that such accountants shall not be liable to anyone by reason of their failure to obtain knowledge of any Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards; (e) within five Domestic Business Days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the public shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; 29 (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents, in each case without exhibits) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) (other than such event as to which the 30-day notice requirement is waived or which is triggered by the Acquisition) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request. Section 5.2. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. Section 5.3. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will maintain or cause to be maintained with, in the good faith judgment of the Borrower, financially sound and reputable insurers, or through self-insurance, insurance with respect to its properties 30 and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. Such insurance may include self-insurance or be subject to co-insurance, deductibility or similar clauses which, in effect, result in self-insurance of certain losses, provided that such self-insurance is in accord with the approved practices of corporations similarly situated and adequate insurance reserves are maintained in connection with such self-insurance, and, notwithstanding the foregoing provisions of this Section 5.3 the Borrower or any Subsidiary may effect workers' compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance in accord with applicable laws. Section 5.4. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.4 shall prohibit (i) the merger of a Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) the sale or other disposition (whether by merger or otherwise) of the capital stock or assets of any Subsidiary, if such transaction complies with the provisions of Section 5.11 or (iii) the termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. Section 5.5. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except (i) where the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) where failure to comply could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 5.6. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries, as required by generally accepted accounting principles, shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records 31 (subject to compliance with confidentiality agreements, copyrights and the like) and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. Section 5.7. Debt. (a) Consolidated Debt of the Borrower will at no time exceed the MLP of Consolidated Total Capitalization. "MLP" means Maximum Leverage Percentage, which is 87.00%, subject to adjustment from time to time after the date hereof as follows: (a) upon the issuance of Trust Preferred Securities in the amount of $300,000,000, the MLP will be reduced by 5.25%; (b) upon issuance of common equity securities in the amount of $500,000,000, the MLP will be reduced by 8.75%; and (c) upon issuance of Mandatorily Convertible Preferred Stock in the amount of $400,000,000, the MLP will be reduced by 6.00%. In the event of issuance of securities of the type described above in an amount different from that specified, the consequent reduction of the MLP will be adjusted on a pro rata basis; provided that in the event of issuance of Trust Preferred Securities in an amount greater than the indicated amount, there will not be an additional reduction in the MLP to the extent that the Trust Preferred Securities exceed 10% of the Consolidated Total Capitalization of the Borrower. Upon issuance of all securities of the types described above, the MLP will at all times thereafter be 67.00%. (b) Total Debt of all Consolidated Subsidiaries (excluding Debt of a Consolidated Subsidiary of the Borrower to the Borrower or to another Consolidated Subsidiary of the Borrower) will at no time exceed 10% of Consolidated Debt of the Borrower. (c) Consolidated Debt of each Material Subsidiary will at no time exceed 65% of the Consolidated Total Capitalization of such Material Subsidiary. Section 5.8. Minimum Net Worth. Consolidated Net Worth will at no time be less than an amount equal to the sum of (a) $570,000,000 plus (b) 50% of Consolidated Net Income for each fiscal quarter of the Borrower ending after the date hereof and at or prior to such time (but only if such Consolidated Net Income for such fiscal quarter is a positive amount) plus (c) for any issuance of securities resulting in a reduction of the MLP pursuant to Section 5.07(a), an amount equal to 80% of the increase in Consolidated Net Worth resulting from such issuance of securities, if at such time the Borrower's senior unsecured long-term debt is not rated at least Baa2 by Moody's and BBB by S&P. Section 5.9. Minimum Interest Coverage Ratio. At any time at which the Borrower's senior unsecured long-term debt is not rated at least Baa3 by Moody's and BBB- by S&P, the Interest Coverage Ratio will not be less than (i) 2.25:1, if such time is prior to March 31, 1999, and (ii) 2.75:1, if such time is on or after March 31, 1999. Section 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) any Liens deemed to exist on the date of this Agreement under the Purchase Agreement; 32 (b) Liens on cash and cash equivalents securing the Substitute Note, as contemplated by the Reimbursement Agreement; (c) Liens on assets of any Person existing at the time such Person becomes a Subsidiary and not created in contemplation of such event; (d) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $150,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (e) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $75,000,000; (f) statutory or common law Liens of or upon deposits of cash in favor of banks or other depository institutions; and (g) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Net Worth of the Borrower. Section 5.11. Consolidations, Mergers and Sales of Assets. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any other Person, unless: (i) immediately after giving effect to the transaction, no Default shall have occurred and be continuing; and (ii) except in the case of a merger in which the Borrower is the surviving corporation: (x) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, assumes all obligations of the Borrower hereunder and under the Notes; (y) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, is organized under the laws of the United States or any state thereof; and (z) the Borrower has delivered to the Administrative Agent an officer's certificate and opinion of counsel, each stating that such consolidation, merger, or transfer and such assumption comply with the provisions hereof. No such sale, lease or other transfer of assets shall have the effect of releasing the Borrower (or any successor that shall have become such in the manner prescribed in this Section) from its liability under this Agreement and the Notes. 33 Section 5.12. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. Section 5.13. Transactions with Affiliates. The Borrower will not participate in any material transaction with an affiliate (other than a Subsidiary) unless such transaction is in the ordinary course of its business and on terms no less advantageous to the Borrower than could be obtained in such a transaction with an unaffiliated party. ARTICLE 6 Defaults Section 6.1. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within three Domestic Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.7 to 5.13, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; provided, however, that if any such failure is cured by the Borrower or such Subsidiary or is waived by the requisite percentage of holders of such Material Financial Obligations entitled to so waive, then the Event of Default under this Agreement by reason of such failure shall be deemed to have been cured; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; provided, however, that if any such acceleration is rescinded, or any such event or condition is cured by the Borrower or any Subsidiary or is waived by the requisite percentage of holders of such Material Debt entitled to 34 so waive, then the Event of Default under this Agreement by reason of such acceleration, event or condition shall be deemed to have been cured; (g) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation; and in each of the foregoing instances such condition (i) could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, and (ii) shall continue for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (j) a judgment or judgments for the payment of money (not paid or fully covered by insurance or indemnification) in excess of $60,000,000 in the aggregate shall be rendered against the Borrower or any Material Subsidiary and such judgment or judgments are not, within 30 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 30 days after the expiration of such stay; or (k) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have 35 acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of the Borrower; or, during any period of twelve consecutive calendar months, individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of the board of directors of the Borrower; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. Section 6.2. Notice of Default. The Administrative Agent shall give notice to the Borrower under Section 6.1(c) or 6.1(i) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 The Agents Section 7.1. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. Section 7.2. Administrative Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. Section 7.3. Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. 36 Section 7.4. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.5. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. Section 7.6. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify any Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. Section 7.7. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. Section 7.8. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, with the consent 37 of the Borrower, which shall not be unreasonably withheld. If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. Section 7.9. Agents' Fees. The Borrower shall pay to the Administrative Agent for the account of the Agents fees in the amounts and at the times previously agreed upon between the Borrower and the Agents. Section 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on any Syndication Agent, in its capacity as such an Agent. ARTICLE 8 Change in Circumstances Section 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) Banks having 50% or more of the aggregate amount of the Commitments advise the Administrative Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the Borrower notifies the Administrative Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a 38 Base Rate Borrowing. Section 8.2. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. Section 8.3. Increased Cost and Reduced Return. (a) If on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.15), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to 39 reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency (including any determination by any such authority, central bank or comparable agency that, for purposes of capital adequacy requirements, the Commitments hereunder do not constitute commitments with an original maturity of one year or less), has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth in reasonable detail the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections (a) and (b) of this Section 8.3, the Borrower shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 90 days prior to the date on which such Bank notifies the Administrative Agent and the Borrower that it proposes to demand such compensation and identifies to the Administrative Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which, because of the retroactive application of such statute, regulation or other such basis, such Bank did not know that such amount would arise or accrue. Section 8.4. Taxes. (a) For purposes of this Section 8.4, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any 40 payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. (b) Any and all payments by the Borrower to or for the account of any Bank or the Administrative Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.4) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.1, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.4) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Bank or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or 41 business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.4(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.4(b) or (c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower, at such Bank's expense, shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.4, then such Bank will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Bank, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. Section 8.5. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. Section 8.6. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4, the Borrower shall have the right, with the assistance of the Administrative Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to purchase the Note and assume the Commitment of such Bank. 42 ARTICLE 9 Miscellaneous Section 9.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. Section 9.2. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.3. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Davis Polk & Wardwell, special counsel for the Agents, in connection with the preparation and administration of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by each Agent and Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify each Agent and Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of (i) any actual or proposed use of proceeds of Loans hereunder or (ii) any actual or alleged Default under this Agreement or any actual or alleged untruth or inaccuracy of any representation or warranty made by the Borrower in or in connection with this Agreement; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. 43 Section 9.4. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set- off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. Section 9.5. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of any Agent are affected thereby, by such Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for termination of any Commitment or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. Section 9.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement 44 may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.5 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial Commitment of not less than $10,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit F hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, and the Administrative Agent; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent shall be required. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.4. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.3 or 8.4 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 9.7. Collateral. Each of the Banks represents to each Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or 45 maintenance of the credit provided for in this Agreement. Section 9.8. Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City having subject matter jurisdiction for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 9.9. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof except the obligations of the Borrower to pay fees and expenses and to assist in the syndication process as specified in the respective commitment letters and fee letters heretofore entered into between the Borrower and the Agents. Section 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 46 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. K N ENERGY, INC. By /s/ Clyde E. McKenzie ------------------------------------- Title: Vice President & Chief Financial Officer 370 Van Gordon Street Lakewood, CO 80228-8304 Attention: Chief Financial Officer Facsimile number: (303) 914-4542 Commitments - ----------- $699,999,999.99 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ John Kowalczuk ------------------------------------- Title: Vice President 47 $466,666,666.67 BANK OF AMERICA NT & SA By /s/ J. Stephen Mernick ------------------------------------- Title: Senior Vice President $466,666,666.67 THE CHASE MANHATTAN BANK By /s/ Mary Jo Woodford ------------------------------------- Title: Vice President $466,666,666.67 NATIONSBANK, N.A. By /s/ David C. Rubenking ------------------------------------- Title: Senior Vice President Total Commitments $2,100,000,000 - -------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By /s/ John Kowalczuk ------------------------------------- Title: Vice President 60 Wall Street New York, New York 10260-0060 Attention: John Kowalczuk Telex number: 177615 Facsimile number: 212-648-5014 48 PRICING SCHEDULE The "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day:
=========================================================================== Level Level Level Level Level Level Status I II III IV V VI - --------------------------------------------------------------------------- Euro-Dollar Margin Utilization < 50% 0.230% 0.320% 0.390% 0.5625% 0.750% 1.125% Utilization > 50% 0.355% 0.445% 0.515% 0.6875% 0.875% 1.250% - - --------------------------------------------------------------------------- CD Margin Utilization < 50% 0.355% 0.445% 0.515% 0.6875% 0.875% 1.250% Utilization > 50% 0.480% 0.570% 0.640% 0.8125% 1.000% 1.375% - - --------------------------------------------------------------------------- Facility Fee Rate 0.070% 0.080% 0.110% 0.1875% 0.250% 0.375% ===========================================================================
For purposes of this Schedule, the following terms have the following meanings: "Level I Status" exists at any date if, at such date, the Borrower's senior unsecured long-term debt is rated BBB+ or higher by S&P and Baa1 or higher by Moody's. "Level II Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB or higher by S&P and Baa2 or higher by Moody's and (ii) Level I Status does not exist. "Level III Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB- or higher by S&P and Baa3 or higher by Moody's and (ii) neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB+ or higher by S&P and 49 Ba1 or higher by Moody's and (ii) none of Level I Status, Level II Status and Level III Status exists. "Level V Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB or higher by S&P and Ba2 or higher by Moody's and (ii) none of Level I Status, Level II Status, Level III Status and Level IV Status exists. "Level VI Status" exists at any date if, at such date, no other Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. "Utilization" means, at any date, the percentage equivalent of a fraction (i) the numerator of which is the aggregate outstanding principal amount of the Loans at such date and (ii) the denominator of which is the aggregate amount of the Commitments at such date. If for any reason any Loans remain outstanding following termination of the Commitments, Utilization shall be deemed to be in excess of 50%. The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement, and any rating assigned to any other debt security of the Borrower shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 50 EXHIBIT A NOTE New York, New York , 199_ For value received, K N Energy, Inc., a Kansas corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the last day of the Interest Period relating to such Loan. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. K N ENERGY, INC. By ------------------------------------ Title: 51 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL
- --------------------------------------------------------------------------- Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - ---------------------------------------------------------------------------
52 EXHIBIT B OPINION OF SPECIAL COUNSEL FOR THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as special counsel for K N Energy, Inc. (the "Borrower") in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.1(c) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Texas or the United States of America (other than filings of the Credit Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities and Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Texas or the United States of America, or of the articles of incorporation or by-laws of the Borrower. 53 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable against the Borrower in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of Texas and the foregoing opinion is limited to the laws of the State of Texas, the State of New York and the federal laws of the United States of America. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction in which any Bank is located which limits the rate of interest that such Bank may charge or collect. Insofar as the foregoing opinion involves matters governed by the laws of the State of Kansas (which matters do not in our view include the non-contravention opinion in paragraph 1), we have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.1(c) of the Credit Agreement. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 54 EXHIBIT C OPINION OF KANSAS COUNSEL FOR THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as counsel in the State of Kansas for K N Energy, Inc. (the "Borrower") in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.1(c) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Kansas and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Kansas. We are members of the Bar of the State of Kansas and the foregoing opinion is limited to the laws of the State of Kansas. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 55 EXHIBIT D OPINION OF GENERAL COUNSEL OF THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: I am General Counsel of K N Energy, Inc. (the "Borrower"), and I have represented the Borrower in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of my client pursuant to Section 3.1(c) of the Credit Agreement. I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower has all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Colorado or, to the best of my knowledge, any other jurisdiction (other than filings of the Credit Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Colorado or, to the best of my knowledge, any other jurisdiction or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any, Lien on any asset of the Borrower or any of its Subsidiaries. 56 3. There is no action, suit or proceeding pending against, or to the best of my knowledge threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of the Credit Agreement or the Notes. 4. Each of the Borrower's corporate Material Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. I am a member of the Bar of the State of Colorado and the foregoing opinion is limited to the laws of the State of Colorado and the General Corporation Law of the State of Delaware. Insofar as paragraph 2 above addresses the laws of other jurisdictions, I have relied upon my familiarity with advice given by counsel admitted to practice in those jurisdictions, in connection with this and other transactions. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 57 EXHIBIT E OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENTS To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the 364-Day Credit Agreement (the "Credit Agreement") dated as of January 30, 1998 among K N Energy, Inc., a Kansas corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Administrative Agent"), and have acted as special counsel for the Agents for the purpose of rendering this opinion pursuant to Section 3.1(c) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that the Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York and the federal laws of the United States of America. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. Insofar as the foregoing opinion involves matters governed by the laws of Kansas, we have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.1(c) of the Credit Agreement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 58 EXHIBIT F ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), K N ENERGY, INC. (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "Administrative Agent"). W I T N E S S E T H WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the 364-Day Credit Agreement dated as of January 30, 1998 among the Borrower, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the 59 purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee[, the Borrower and the Administrative Agent] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.(*) [It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee.] Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. - ---------- *Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 60 SECTION 4. Consent of the Borrower and the Administrative Agent. This Agreement is conditioned upon the consent of the Borrower and the Administrative Agent pursuant to Section 9.6(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Administrative Agent is evidence of this consent. Pursuant to Section 9.6(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 61 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By ----------------------------------- Title: [ASSIGNEE] By ----------------------------------- Title: K N ENERGY, INC. By ----------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By ----------------------------------- Title: EX-4.H 6 122 REIMBURSEMENT AGREEMENT 1 CONFORMED COPY $1,394,846,122 REIMBURSEMENT AGREEMENT dated as of January 30, 1998 among K N Energy, Inc., The Banks Listed Herein, and Morgan Guaranty Trust Company of New York, as Administrative Agent ---------------------- J. P. Morgan Securities Inc., BancAmerica Robertson Stephens, Chase Securities Inc. and NationsBanc Montgomery Securities LLC, Syndication Agents 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.1. Definitions.................................................... 1 SECTION 1.2. Accounting Terms and Determinations............................ 10 ARTICLE 2 THE LETTER OF CREDIT SECTION 2.1. Issuance of the Letter of Credit............................... 10 SECTION 2.2. Drawings under the Letter of Credit............................ 11 SECTION 2.3. Reimbursement Obligation....................................... 11 SECTION 2.4. Fees........................................................... 11 SECTION 2.5. General Provisions as to Payments.............................. 12 SECTION 2.6. Obligations.................................................... 12 SECTION 2.7. Indemnification................................................ 13 SECTION 2.8. Mandatory Reductions........................................... 14
3 ARTICLE 3 CONDITIONS SECTION 3.1. Effectiveness.................................................. 15 SECTION 3.2. Borrowings and Issuances of Letters of Credit.................. 16 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.1. Corporate Existence and Power.................................. 17 SECTION 4.2. Corporate and Governmental Authorization; No Contravention.............................................. 17 SECTION 4.3. Binding Effect................................................. 17 SECTION 4.4. Financial Information.......................................... 17 SECTION 4.5. Litigation..................................................... 18 SECTION 4.6. Compliance with ERISA.......................................... 18 SECTION 4.7. Environmental Matters.......................................... 18 SECTION 4.8. Taxes.......................................................... 19 SECTION 4.9. Subsidiaries................................................... 19 SECTION 4.10. Not an Investment Company...................................... 19 SECTION 4.11. Full Disclosure................................................ 19 SECTION 4.12. MidCon Acquisition............................................. 20
4 ARTICLE 5 COVENANTS SECTION 5.1. Information.................................................... 20 SECTION 5.2. Payment of Obligations......................................... 22 SECTION 5.3. Maintenance of Property; Insurance............................. 22 SECTION 5.4. Conduct of Business and Maintenance of Existence............... 23 SECTION 5.5. Compliance with Laws........................................... 23 SECTION 5.6. Inspection of Property, Books and Records...................... 24 SECTION 5.7. Debt........................................................... 24 SECTION 5.8. Minimum Net Worth.............................................. 25 SECTION 5.9. Minimum Interest Coverage Ratio................................ 25 SECTION 5.10. Negative Pledge................................................ 25 SECTION 5.11. Consolidations, Mergers and Sales of Assets.................... 26 SECTION 5.12. Transactions with Affiliates................................... 26 ARTICLE 6 DEFAULTS SECTION 6.1. Events of Default............................................... 27
5 ARTICLE 7 THE AGENTS SECTION 7.1. Appointment and Authorization.................................. 29 SECTION 7.2. Administrative Agent and Affiliates............................ 29 SECTION 7.3. Action by Administrative Agent................................. 30 SECTION 7.4. Consultation with Experts...................................... 30 SECTION 7.5. Liability of Administrative Agent.............................. 30 SECTION 7.6. Indemnification................................................ 30 SECTION 7.7. Credit Decision................................................ 31 SECTION 7.8. Successor Administrative Agent................................. 31 SECTION 7.9. Agents' Fees................................................... 31 SECTION 7.10. Other Agents................................................... 31 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.1. Increased Cost and Reduced Return.............................. 32 SECTION 8.2. Taxes.......................................................... 33
6 ARTICLE 9 MISCELLANEOUS SECTION 9.1. Notices........................................................ 35 SECTION 9.2. No Waivers..................................................... 35 SECTION 9.3. Expenses; Indemnification...................................... 35 SECTION 9.4. Sharing of Set-offs............................................ 36 SECTION 9.5. Amendments and Waivers......................................... 37 SECTION 9.6. Successors and Assigns......................................... 37 SECTION 9.7. Collateral..................................................... 38 SECTION 9.8. Governing Law; Submission to Jurisdiction...................... 38 SECTION 9.9. Counterparts; Integration...................................... 38 SECTION 9.10. WAIVER OF JURY TRIAL........................................... 38 SECTION 9.11. Obligations Several............................................ 38
7 PRICING SCHEDULE EXHIBIT A - LETTER OF CREDIT EXHIBIT B - BENEFICIARY UNDERTAKING EXHIBIT C - OPINION OF SPECIAL COUNSEL FOR THE BORROWER EXHIBIT D - OPINION OF KANSAS COUNSEL FOR THE BORROWER EXHIBIT E - OPINION OF GENERAL COUNSEL OF THE BORROWER EXHIBIT F - OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENTS 8 REIMBURSEMENT AGREEMENT AGREEMENT dated as of January 30, 1998 among K N ENERGY, INC., the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. The parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1. Definitions. The following terms, as used herein, have the following meanings: "Acquisition" means the purchase of MidCon Corp. by the Borrower from Occidental Petroleum Corporation pursuant to the Stock Purchase Agreement. "Acquisition Revolver" means the $2,100,000,000 Credit Agreement of even date herewith among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company of New York, as amended and in effect from time to time. "Administrative Agent" means Morgan Guaranty Trust Company of New York in its capacity as administrative agent for the Banks under this Agreement, and its successors in such capacity. 9 "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means each of the Administrative Agent and the Syndication Agents, and "Agents" means any combination of them, as the context may require. "Bank" means each bank listed on the signature pages hereof and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day or (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. 10 "Beneficiary" means Occidental Petroleum Corporation, as Beneficiary under the Letter of Credit or any transferee thereof as provided in the Letter of Credit. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means K N Energy, Inc., a Kansas corporation, and its successors. "Borrower's 1996 Form 10-K" means the Borrower's annual report on Form 10-K for 1996, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrower's Latest Form 10-Q" means the Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 1997, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Commitment" means, for any Bank, the several obligation of such Bank to issue the Letter of Credit to the extent of such Bank's Commitment Percentage of $1,394,846,122, as such amount may be reduced from time to time in accordance with Section 2.8(b). 11 "Commitment Percentage" means, for any Bank, the Commitment Percentage specified for such Bank in paragraph 3 of the Letter of Credit. "Consolidated Assets" means the total amount of assets appearing on the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, prepared in accordance with generally accepted accounting principles as of the date of the most recent regularly prepared consolidated financial statements prior to the taking of any action for the purposes of which the determination is being made. "Consolidated Debt" of any Person means at any date the sum (without duplication) of (i) the Debt of such Person and its Consolidated Subsidiaries, determined on a consolidated basis as of such date plus (ii) the excess (if any) of the Trust Preferred Securities of such Person over 10% of the Consolidated Total Capitalization of such Person at such date minus (iii) the portion of the Substitute Note collateralized as contemplated by Section 5.10(b) hereof. "Consolidated EBITDA" means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining Consolidated Net Income for such period, the aggregate amount of (i) Consolidated Interest Expense, (ii) income tax expense and (iii) depreciation and amortization expense. "Consolidated Interest Expense" means, for any period, the interest expense of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. 12 "Consolidated Subsidiary" of any Person means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Net Income" means, for any period, the net income of the Borrower and its Consolidated Subsidiaries before extraordinary items, determined on a consolidated basis for such period. "Consolidated Net Worth" of any Person means at any date the sum (without duplication) of (i) the consolidated stockholders' equity of such Person and its Consolidated Subsidiaries, determined as of such date plus (ii) the Mandatorily Convertible Preferred Stock of such Person plus (iii) the Trust Preferred Securities of such Person; provided that the amount of Trust Preferred Securities added pursuant to this clause (iii) shall not exceed 10% of Consolidated Total Capitalization of such Person at such date. "Consolidated Total Capitalization" of any Person means at any date the sum of Consolidated Debt of such Person and Consolidated Net Worth of such Person, each determined as of such date. "Date of Issuance" means the date of issuance of the Letter of Credit. 13 "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable or deferred employee and director compensation arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, for purposes of Section 5.11 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. 14 "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Expiration Date" has the meaning set forth in the Letter of Credit. "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. 15 "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Event of Default" has the meaning set forth in Section 6.1. "Facility Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Facility Office) or such other office as such Bank may hereafter designate as its Facility Office by notice to the Borrower and the Administrative Agent. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Administrative Agent. 16 "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnitee" has the meaning set forth in Section 9.3(b). "Interest Coverage Ratio" means, at any date, the ratio of Consolidated EBITDA to Consolidated Interest Expense for the period of four consecutive fiscal quarters most recently ended on or before such date. 17 "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "Letter of Credit" means a Letter of Credit to be issued hereunder by the Banks severally and not jointly, which shall be in the form of Exhibit A and dated the Date of Issuance, as the same may be amended from time to time in accordance with the terms thereof. Exhibit A, for purposes of illustration, is completed as if the Date of Issuance were January 30, 1998. "Letter of Credit Amount" has the meaning set forth in the Letter of Credit. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Mandatorily Convertible Preferred Stock", means, with respect to the Borrower, preferred securities of a Subsidiary which are (i) mandatorily convertible into common equity securities of the Borrower within approximately 18 three years of their date of issuance, (ii) issued in conjunction with, and pledged to secure, an obligation to purchase common equity securities of the Borrower within approximately three years for an equal amount or (iii) otherwise structured in a manner satisfactory to the Administrative Agent so as to ensure the issuance of incremental common equity securities of the Borrower in a substantially equal amount within approximately three years. "Material Debt" means Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $75,000,000. "Material Financial Obligations" means a principal or face amount of Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) and/or payment obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $125,000,000. "Material Subsidiary" means any Subsidiary the consolidated assets of which constitute 10% or more of Consolidated Assets. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the 19 ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.6(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Purchase Agreement" means the Purchase and Sale Agreement dated as of January 28, 1994, among K N Gas Supply Services, Inc., the Borrower, Bank of 20 America National Trust and Savings Association, as the initial Purchaser (as defined therein), and Bank of America National Trust and Savings Association, as agent for the Purchasers. "Pricing Schedule" means the Schedule attached hereto identified as such. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Reimbursable Amount" has the meaning set forth in Section 2.3. "Required Banks" means at any time Banks having Commitment Percentages aggregating at least 66 2/3 %. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Stock Purchase Agreement" means the Stock Purchase Agreement dated as of December 18, 1997, between Occidental Petroleum Corporation, a Delaware corporation, and the Borrower as amended and in effect from time to time; 21 provided that any such amendment from the form thereof heretofore furnished to each of the Banks which could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, shall be effective for purposes of references thereto in this Agreement only if such amendment shall have received the written consent of the Required Banks (which shall not be unreasonably withheld). "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Substitute Note" means the Substitute Note (as defined in the Stock Purchase Agreement) issued by the Borrower to Occidental Petroleum Corporation in connection with the Acquisition. "Syndication Agent" means either J.P. Morgan Securities Inc., BancAmerica Robertson Stephens, Chase Securities Inc. or NationsBanc Montgomery Securities LLC in its capacity as a syndication agent in respect of this Agreement, and "Syndication Agents" means all of them. "Termination Date" means (i) March 31, 1998, if the Letter of Credit shall not have been issued on or prior to such date, or (ii) the first date after the Date of Issuance on which there are no Reimbursable Amounts and no Undrawn Amounts, in all other cases. 22 "Trust Preferred Securities" means, with respect to the Borrower, mandatorily redeemable capital trust securities of trusts which are Subsidiaries and the subordinated debentures of the Borrower in which the proceeds of the issuance of such capital trust securities are invested, including, without limitation, (i) the 8.56% Series B Capital Trust Pass-through Securities of K N Capital Trust I and (ii) the capital trust securities of K N Capital Trust II anticipated to be issued after the Effective Date. "Undrawn Amount" means, for any Bank, the amount equal to the product of such Bank's Commitment Percentage and the Letter of Credit Amount. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. 23 "Wholly-Owned Consolidated Subsidiary" of any Person means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. SECTION 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. 24 ARTICLE 2 THE LETTER OF CREDIT SECTION 2.1. Issuance of the Letter of Credit. Subject to the terms and conditions hereof, the Banks severally agree to issue the Letter of Credit to the Beneficiary on a date, not later than March 31, 1998, and in an initial Letter of Credit Amount, not greater than $1,394,846,122, specified by the Borrower by at least three Domestic Business Days' notice to the Administrative Agent. The Administrative Agent shall promptly notify each Bank of the Date of Issuance so specified by the Borrower. SECTION 2.2. Drawings under the Letter of Credit. (a) Upon receipt from the Beneficiary of a demand for payment under the Letter of Credit, the Administrative Agent shall determine in accordance with the terms and conditions of the Letter of Credit whether such demand for payment should be honored. (b) If the Administrative Agent determines that a demand for payment by the Beneficiary should be honored in accordance with the terms and conditions set forth in the Letter of Credit, the Administrative Agent shall promptly notify the Borrower and each Bank as to the aggregate amount to be paid as a result of such demand and shall promptly notify each Bank as to its share of such amount. Each Bank shall make available to the Beneficiary through the Administrative Agent its share of the amount so demanded in accordance with the terms of the Letter of Credit. SECTION 2.3. Reimbursement Obligation. If any Bank pays any portion of any draft presented under the Letter of Credit, the Borrower agrees to pay to 25 such Bank on the date of such payment ("Reimbursement Due Date") an amount equal to the amount paid by such Bank under the Letter of Credit ("Reimbursable Amount"). If any Reimbursable Amount is not paid on or before the relevant Reimbursement Due Date, the overdue amount shall bear interest until paid as provided in Section 2.5(c). SECTION 2.4. Fees. (a) The Borrower shall pay to the Administrative Agent, for the account of the Banks ratably in proportion to their Commitment Percentages, a facility fee at the Facility Fee Rate (determined daily in accordance with the Pricing Schedule) on (i) to but not including the earlier of the Termination Date and the Date of Issuance, the aggregate amount of the Commitments and (ii) on and after the Date of Issuance, the sum of the aggregate Undrawn Amounts of the Banks and the aggregate Reimbursable Amounts of the Banks. Such facility fee shall accrue from and including the date of this Agreement to but excluding the Termination Date and shall be payable in arrears on each March 31, June 30, September 30 and December 31, and on the Termination Date. (b) The Borrower shall pay to the Administrative Agent, for the account of the Banks ratably in proportion to their Commitment Percentages, a letter of credit fee at the Letter of Credit Fee Rate (determined daily in accordance with the Pricing Schedule) on the aggregate Undrawn Amounts of the Banks. Such letter of credit fee shall accrue from and including the Date of Issuance to and including the Expiration Date and shall be payable in arrears on each March 31, June 30, September 30 and December 31, and on the Expiration Date. 26 (c) All fees payable hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day (or, if such last day is the Expiration Date, including the last day)). SECTION 2.5. General Provisions as to Payments. (a) All payments to be made by the Borrower under this Agreement shall be made not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.1 for the account of the party entitled thereto. The Administrative Agent shall promptly distribute to each of the Banks its ratable share of each such payment received by the Administrative Agent for the account of the Banks. (b) Whenever any payment shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. If the date for any payment of a Reimbursable Amount is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (c) All Reimbursable Amounts not repaid by the Borrower on the Reimbursement Due Date shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. Such interest shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). 27 (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks pursuant to Section 2.3 or Section 2.4 that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.6. Obligations. The obligations of the Borrower under this Agreement shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (a) any lack of validity or enforceability of this Agreement or the Letter of Credit or any document related hereto or thereto; (b) any amendment or waiver of or any consent to departure from all or any of the provisions of this Agreement, the Letter of Credit or any document related hereto or thereto; (c) the existence of any claim, set-off, defense or other rights that the Borrower may have at any time against the Beneficiary (or any 28 Person for whom the Beneficiary may be acting), the Banks or any other Person, whether in connection with this Agreement or the Letter of Credit or any document related hereto or thereto or any unrelated transactions; (d) any statement or any other document presented under the Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by any Bank under the Letter of Credit to the Beneficiary of such Letter of Credit against presentation to the Administrative Agent of a draft or certificate that does not comply with the terms of the Letter of Credit; or (f) any other act or omission to act or delay of any kind by any Bank, the Administrative Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this subsection (f), constitute a legal or equitable discharge of the Borrower's obligations. Nothing in this Agreement and no failure by the Borrower to perform any of its obligations hereunder shall affect the several obligations of the Banks under the Letter of Credit. SECTION 2.7. Indemnification. The Borrower hereby indemnifies and holds harmless each Bank and the Administrative Agent from and against any and all 29 claims, damages, losses, liabilities, costs or expenses which such Bank or the Administrative Agent may incur, and none of the Banks nor the Administrative Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under the Letter of Credit, including without limitation any of the circumstances enumerated in Section 2.6 above, as well as (i) any error, omission, interruption or delay in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, (ii) any error in interpretation of technical terms, (iii) any loss or delay in the transmission of any document required in order to make a drawing under the Letter of Credit, (iv) any consequences arising from causes beyond the control of a Bank, including without limitation any government acts, or any other circumstances whatsoever in making or failing to make payment under the Letter of Credit; provided that the Borrower shall not be required to indemnify any Bank for any claims, damages, losses, liabilities, costs or expenses, and the Borrower shall have a claim against the indicated party for direct (but not consequential) damage suffered by it, to the extent found by a court of competent jurisdiction to have been caused by (x) the gross negligence or willful misconduct of the Administrative Agent in determining whether a request presented under the Letter of Credit complied with the terms of the Letter of Credit or (y) a Bank's failure to pay under the Letter of Credit after receipt of notice from the Administrative Agent of the presentation to it of a request strictly complying with the terms and conditions of the Letter of Credit. Nothing in this Section 2.7 is intended to limit the obligations of the Borrower under Section 2.3 of this Agreement. To the extent the Borrower is obligated to but does not indemnify the Administrative Agent as required by this Section, the Banks agree to do so ratably in accordance with their Commitment Percentages. 30 SECTION 2.8. Mandatory Reductions. (a) If the Borrower or any of its Subsidiaries issues debt or equity securities prior to January 29, 1999 (other than (w) equity securities issued in consideration for the acquisition of any assets (including, without limitation, any equity interests of any other Person), (x) equity securities issued to the Borrower or any of its Subsidiaries, (y) directors' qualifying shares and (z) equity securities issued in the ordinary course of business in connection with now or hereafter existing employee stock purchase plans and other employee compensation arrangements and dividend reinvestment plans), the Borrower shall apply the net cash proceeds thereof until such amount has been fully applied either (I) to the collateralization of the Substitute Note so as to cause an equivalent reduction in the aggregate Letter of Credit Amount (or, if the Letter of Credit shall not have been issued, the aggregate Commitments) until the Letter of Credit Amount (or Commitments) has been reduced to zero; or (II) to the prepayment of outstanding Loans under the Acquisition Revolver, and simultaneously to the reduction of the aggregate Commitments thereunder, until such Loans and Commitments have been reduced to zero, or to a combination of (I) and (II) as the Borrower may elect. Each such reduction and payment or prepayment shall occur within five Euro-Dollar Business Days of the receipt by the Borrower or any of its Subsidiaries of such net cash proceeds, provided that if such net cash proceeds are less than $10,000,000, such reduction and payment or prepayment shall be effective upon receipt of proceeds such that, together with all other such amounts not previously applied, the net cash proceeds are equal to at least $20,000,000. The Borrower shall give the Administrative Agent at least five Euro-Dollar Business Days' notice of each application required to be made pursuant to this subsection (a). 31 (b) If, prior to the Date of Issuance, collateral is pledged to secure the Substitute Note, the aggregate amount of the Commitments shall be reduced in the same manner as the Letter of Credit Amount would have been reduced had such collateral been pledged on or after the Date of Issuance. Each reduction of Commitments under this Agreement shall be applied ratably to the respective Commitments of all Banks. ARTICLE 3 CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become effective upon receipt by the Administrative Agent of the following documents, each dated the Effective Date unless otherwise indicated: (a) counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); (b) a letter from Occidental Petroleum Corporation to the Agent substantially in the form of Exhibit B hereto and evidencing the obligation of Occidental Petroleum Corporation to accept a substitute Letter of Credit to be issued on the Syndication Date; 32 (c) opinions of Simpson Thacher & Bartlett, special counsel for the Borrower, Polsinelli, White, Vardeman & Shalton, Kansas counsel for the Borrower, and Martha B. Wyrsch, General Counsel of the Borrower, substantially in the respective forms of Exhibits C, D and E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (d) an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; and (e) all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall promptly notify the Borrower and each Bank of the effectiveness of this Agreement, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.2. Issuances of Letter of Credit. The obligation of any Bank to issue the Letter of Credit is subject to the satisfaction of the following conditions: (a) the fact that the Closing Date shall have occurred on or prior to March 31, 1998; 33 (b) the fact that prior to or substantially simultaneously with such issuance, the Borrower shall have consummated the Acquisition in accordance with the Stock Purchase Agreement without waiver of any material condition specified therein; (c) the fact that the Borrower shall have paid or shall concurrently pay all fees then due and payable to the Administrative Agent for the account of any Agent or Bank, as previously agreed; (d) receipt by the Administrative Agent of notice as required by Section 2.1; (e) the fact that, immediately before and after such issuance no Default shall have occurred and be continuing; and (f) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of such issuance; The issuance of the Letter of Credit hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such issuance as to the facts specified in clauses (b), (c), (e) and (f) of this Section. 34 ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.1. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (other than filing of this Agreement with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 4.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower enforceable in accordance with its terms. 35 SECTION 4.4. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of income, cash flows and common stockholders' equity for the fiscal year then ended, reported on by Arthur Andersen LLP and set forth in the Borrower's 1996 Form 10-K, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1997 and the related unaudited consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's Latest Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine-month period (subject to normal year-end adjustments). (c) Since September 30, 1997 there has been no material adverse change in the business, financial position, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.5. Litigation. Except as disclosed in the most recent Annual Report on Form 10-K delivered by the Borrower to the Banks, there is no action, 36 suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which would materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement. SECTION 4.6. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA, which waiver, failure or liability could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. 37 SECTION 4.7. Environmental Matters. In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.8. Taxes. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes shown to be due on such returns or pursuant to any assessment received by the Borrower or any Subsidiary to the extent that such taxes have become due and before they have become delinquent, except such taxes as are being contested in good faith by 38 appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. SECTION 4.9. Subsidiaries. Each of the Borrower's corporate Material Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.10. Not an Investment Company. The Borrower is not an "investment company" or controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.11. Full Disclosure. All information heretofore furnished by the Borrower to any Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to any Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts peculiar to the business of the Company or any of its Subsidiaries which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations under this Agreement. SECTION 4.12. MidCon Acquisition. The representations and warranties of all parties contained in the Stock Purchase Agreement will be true and correct 39 on and as of the date of the first Borrowing under this Agreement except to the extent that the failure of the same to be true and correct could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any Undrawn Amount or any Reimbursable Amount payable under any Note remains unpaid: SECTION 5.1. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows and common stockholder's equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all audited by Arthur Andersen LLP or other independent public accountants of nationally recognized standing; provided, however, that delivery pursuant to clause (g) below of copies of the Annual Report on Form 10- K (without exhibits) of the Borrower for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (a); 40 (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter (in the case of such statements of income) and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such income and cash flows in comparative form the figures for the corresponding quarter (in the case of such statements of income) and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by an authorized financial or accounting officer of the Borrower; provided, however, that delivery pursuant to clause (g) below of copies of the Quarterly Report on Form 10-Q (without exhibits) of the Borrower for such quarter filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (b); (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an authorized financial or accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Section 5.7 and, if applicable, Sections 5.8 and 5.9 on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; 41 (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; provided, however, that such accountants shall not be liable to anyone by reason of their failure to obtain knowledge of any Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards; (e) within five Domestic Business Days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the public shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents, in each case without exhibits) which the Borrower shall have filed with the Securities and Exchange Commission; 42 (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) (other than such event as to which the 30-day notice requirement is waived or which is triggered by the Acquisition) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and 43 (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request. SECTION 5.2. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.3. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will maintain or cause to be maintained with, in the good faith judgment of the Borrower, financially sound and reputable insurers, or through self-insurance, insurance with respect to its properties and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. Such insurance may include self-insurance or be subject to co-insurance, deductibility or similar clauses which, in effect, result in self-insurance of certain losses, provided that such self-insurance is in accord with the approved practices of corporations similarly situated and adequate 44 insurance reserves are maintained in connection with such self-insurance, and, notwithstanding the foregoing provisions of this Section 5.3 the Borrower or any Subsidiary may effect workers' compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance in accord with applicable laws. SECTION 5.4. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.4 shall prohibit (i) the merger of a Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) the sale or other disposition (whether by merger or otherwise) of the capital stock or assets of any Subsidiary, if such transaction complies with the provisions of Section 5.11 or (iii) the termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. 45 SECTION 5.5. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except (i) where the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) where failure to comply could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 5.6. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries, as required by generally accepted accounting principles, shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records (subject to compliance with confidentiality agreements, copyrights and the like) and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.7. Debt. (a) Consolidated Debt of the Borrower will at no time exceed the MLP of Consolidated Total Capitalization. "MLP" means Maximum Leverage Percentage, which is 87.00%, subject to adjustment from time to time 46 after the date hereof as follows: (a) upon the issuance of Trust Preferred Securities in the amount of $300,000,000, the MLP will be reduced by 5.25%; (b) upon issuance of common equity securities in the amount of $500,000,000, the MLP will be reduced by 8.75%; and (c) upon issuance of Mandatorily Convertible Preferred Stock in the amount of $400,000,000, the MLP will be reduced by 6.00%. In the event of issuance of securities of the type described above in an amount different from that specified, the consequent reduction of the MLP will be adjusted on a pro rata basis; provided that in the event of issuance of Trust Preferred Securities or Mandatorily Convertible Preferred Stock in an amount greater than the indicated amount, there will not be an additional reduction in the MLP to the extent that the Trust Preferred Securities exceed 10% of the Consolidated Total Capitalization of the Borrower. Upon issuance of all securities of the types and in the amounts described above, the MLP will at all times thereafter be 67.00%. (b) Total Debt of all Consolidated Subsidiaries (excluding Debt of a Consolidated Subsidiary of the Borrower to the Borrower or to another Consolidated Subsidiary of the Borrower) will at no time exceed 10% of Consolidated Debt of the Borrower. (c) Consolidated Debt of each Material Subsidiary will at no time exceed 65% of the Consolidated Total Capitalization of such Material Subsidiary. SECTION 5.8. Minimum Net Worth. Consolidated Net Worth will at no time be less than an amount equal to the sum of (a) $570,000,000 plus (b) 50% of Consolidated Net Income for each fiscal quarter of the Borrower ending after the date hereof and at or prior to such time (but only if such Consolidated Net 47 Income for such fiscal quarter is a positive amount) plus (c) for any issuance of securities resulting in a reduction of the MLP pursuant to Section 5.7(a), an amount equal to 80% of the increase in Consolidated Net Worth resulting from such issuance of securities, if at such time the Borrower's senior unsecured long-term debt is not rated at least Baa2 by Moody's and BBB by S&P. SECTION 5.9. Minimum Interest Coverage Ratio. At any time at which the Borrower's senior unsecured long-term debt is not rated at least Baa3 by Moody's and BBB- by S&P, the Interest Coverage Ratio will not be less than (i) 2.25:1, if such time is prior to March 31, 1999, and (ii) 2.75:1, if such time is on or after March 31, 1999. SECTION 5.10. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) any Liens deemed to exist on the date of this Agreement under the Purchase Agreement; (b) Liens on cash and cash equivalents securing the Substitute Note, as contemplated by Section 2.8; (c) Liens on assets of any Person existing at the time such Person becomes a Subsidiary and not created in contemplation of such event; (d) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $150,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; 48 (e) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $75,000,000; (f) statutory or common law Liens of or upon deposits of cash in favor of banks or other depository institutions; and (g) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Net Worth of the Borrower. SECTION 5.11. Consolidations, Mergers and Sales of Assets. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any other Person, unless: (i) immediately after giving effect to the transaction, no Default shall have occurred and be continuing; and (ii) except in the case of a merger in which the Borrower is the surviving corporation: (x) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, assumes all obligations of the Borrower hereunder; 49 (y) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, is organized under the laws of the United States or any state thereof; and (z) the Borrower has delivered to the Administrative Agent an officer's certificate and opinion of counsel, each stating that such consolidation, merger, or transfer and such assumption comply with the provisions hereof. No such sale, lease or other transfer of assets shall have the effect of releasing the Borrower (or any successor that shall have become such in the manner prescribed in this Section) from its liability under this Agreement. SECTION 5.12. Transactions with Affiliates. The Borrower will not participate in any material transaction with an affiliate (other than a Subsidiary) unless such transaction is in the ordinary course of its business and on terms no less advantageous to the Borrower than could be obtained in such a transaction with an unaffiliated party. ARTICLE 6 DEFAULTS SECTION 6.1. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: 50 (a) the Borrower shall fail to reimburse any drawing under the Letter of Credit when required hereunder or shall fail to pay within three Domestic Business Days of the due date thereof any interest, any fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.7 to 5.12, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; provided, however, that if any such failure is cured by the Borrower or such Subsidiary or is waived by the requisite percentage of holders of such Material Financial Obligations entitled to so waive, then the Event of Default under this Agreement by reason of such failure shall be deemed to have been cured; 51 (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; provided, however, that if any such acceleration is rescinded, or any such event or condition is cured by the Borrower or any Subsidiary or is waived by the requisite percentage of holders of such Material Debt entitled to so waive, then the Event of Default under this Agreement by reason of such acceleration, event or condition shall be deemed to have been cured; (g) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any 52 substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation; and in each of the foregoing instances such condition (i) could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, and (ii) shall continue for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (j) a judgment or judgments for the payment of money (not paid or fully covered by insurance or indemnification) in excess of $60,000,000 in the aggregate shall be rendered against the Borrower or any Material Subsidiary and 53 such judgment or judgments are not, within 30 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 30 days after the expiration of such stay; or (k) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of the Borrower; or, during any period of twelve consecutive calendar months, individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of the board of directors of the Borrower; then, and in every such event, the Borrower shall, if requested by the Administrative Agent upon the instruction of the Banks having Commitment Percentages aggregating more than 50%, forthwith pay to the Administrative Agent an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to the Administrative Agent) equal to the Letter of Credit Amount at such time, provided that, upon the occurrence of any Event of Default specified in Section 6.1(g) or (h) with respect to the Borrower, the Borrower shall pay such amount forthwith without any notice or demand or any other act by the Administrative Agent or the Banks. ARTICLE 7 THE AGENTS SECTION 7.1. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Letter of Credit as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. 54 SECTION 7.2. Administrative Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement and the Letter of Credit as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. SECTION 7.3. Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. SECTION 7.4. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.5. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any 55 statement, warranty or representation made in connection with this Agreement, the issuance of the Letter of Credit hereunder or any drawing thereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Letter of Credit or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance with its Commitment Percentage, indemnify any Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. 56 SECTION 7.7. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.8. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, with the consent of the Borrower, which shall not be unreasonably withheld. If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. 57 SECTION 7.9. Agents' Fees. The Borrower shall pay to the Administrative Agent for the account of the Agents fees in the amounts and at the times previously agreed upon between the Borrower and the Agents. SECTION 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on any Syndication Agent, in its capacity as such an Agent. ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.1. Increased Cost and Reduced Return. (a) If on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Facility Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Facility Office) or shall impose on any Bank (or its Facility Office) any other condition affecting the Letter of Credit or its obligation to issue the Letter of Credit and the result of any of the foregoing is to increase the cost to such Bank (or its Facility Office) of issuing or maintaining the Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Facility Office) under this Agreement with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. 58 (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Facility Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth in reasonable detail the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections (a) and (b) of this Section 8.1, the Borrower shall only be 59 obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 90 days prior to the date on which such Bank notifies the Administrative Agent and the Borrower that it proposes to demand such compensation and identifies to the Administrative Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which, because of the retroactive application of such statute, regulation or other such basis, such Bank did not know that such amount would arise or accrue. SECTION 8.2. Taxes. (a) For purposes of this Section 8.2, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or the Letter of Credit, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Facility Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or the Letter of Credit or from the execution or delivery of, or otherwise with respect to, this Agreement or the Letter of Credit. 60 (b) Any and all payments by the Borrower to or for the account of any Bank or the Administrative Agent hereunder shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.2) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.1, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.2) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Bank or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, 61 and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.2(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.2(b) or (c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower, at such Bank's expense, shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.2, then such Bank will change the jurisdiction of its Facility Office if, in the judgment of such Bank, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. 62 ARTICLE 9 MISCELLANEOUS SECTION 9.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. SECTION 9.2. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under the Letter of Credit shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 63 SECTION 9.3. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Davis Polk & Wardwell, special counsel for the Agents, in connection with the preparation and administration of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by each Agent and Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify each Agent and Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of (i) any actual or proposed use of the Letter of Credit hereunder or (ii) any actual or alleged Default under this Agreement or any actual or alleged untruth or inaccuracy of any representation or warranty made by the Borrower in or in connection with this Agreement; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. 64 SECTION 9.4. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to its Reimbursable Amounts which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to the Reimbursable Amounts of such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Reimbursable Amounts of the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Reimbursable Amounts shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Reimbursable Amount, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. SECTION 9.5. Amendments and Waivers. Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of any Agent are affected thereby, by it); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment or Commitment Percentage of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Reimbursable Amount or any fees hereunder, (iii) postpone the date for any 65 payment of principal of or interest on any Reimbursable Amount or any fees hereunder or for termination of any Commitments or (iv) change the aggregate Commitment Percentages, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or its obligations under the Letter of Credit. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder and under the Letter of Credit, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and under the Letter of Credit. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.5 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. 66 (c) No Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.1 or 8.2 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.1 or 8.2 requiring such Bank to designate a different Facility Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 9.7. Collateral. Each of the Banks represents to each Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.8. Governing Law; Submission to Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City having subject matter jurisdiction for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 9.9. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof except the obligations of the Borrower to pay fees and expenses and to assist in the syndication process as specified in the respective commitment letters and fee letters heretofore entered into between the Borrower and the Agents. 67 SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 9.11. Obligations Several. The obligations of each Bank hereunder and under the Letter of Credit are several but not joint. Failure of any Bank to carry out its obligations hereunder and under the Letter of Credit shall not relieve any other Bank, the Administrative Agent or the Borrower of any of their respective obligations hereunder. Neither the Administrative Agent nor any Bank shall be responsible for the obligations of any other party hereunder. 68 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. K N ENERGY, INC. By /s/ Clyde E. McKenzie ---------------------------------- Title: Vice President & Chief Financial Officer 370 Van Gordon Street Lakewood, CO 80228-8304 Attention: Chief Financial Officer Facsimile number: (303) 914-4542 Commitment Percentages 33.34% MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ John Kowalczuk ----------------------------------- Title: Vice President 22.22% BANK OF AMERICA NT & SA By /s/ J. Stephen Mern ----------------------------------- Title: Senior Vice President 69 22.22% THE CHASE MANHATTAN BANK By /s/ Mary Jo Woodford ----------------------------------- Title: Vice President 22.22% NATIONSBANK, N.A. By /s/ David C. Rubenking ----------------------------------- Title: Senior Vice President - --------------------------- Total 100% ==== MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By /s/ John Kowalczuk ----------------------------------- Title: Vice President 60 Wall Street New York, New York 10260-0060 Attention: John Kowalczuk Telex number: 177615 Facsimile number: 212-648-5014 70 PRICING SCHEDULE The "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day:
Level Level Level Level Level Level Status I II III IV V VI Letter of Credit 0.355% 0.445% 0.515% 0.6875% 0.875% 1.250% Fee Rate Facility Fee Rate 0.070% 0.080% 0.110% 0.1875% 0.250% 0.375%
For purposes of this Schedule, the following terms have the following meanings: "Level I Status" exists at any date if, at such date, the Borrower's senior unsecured long-term debt is rated BBB+ or higher by S&P and Baa1 or higher by Moody's. "Level II Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB or higher by S&P and Baa2 or higher by Moody's and (ii) Level I Status does not exist. 71 "Level III Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB- or higher by S&P and Baa3 or higher by Moody's and (ii) neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB+ or higher by S&P and Ba1 or higher by Moody's and (ii) none of Level I Status, Level II Status and Level III Status exists. "Level V Status" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB or higher by S&P and Ba2 or higher by Moody's and (ii) none of Level I Status, Level II Status, Level III Status and Level IV Status exists. "Level VI Status" exists at any date if, at such date, no other Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement, and any rating assigned to any other debt security of the Borrower shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 72 EXHIBIT A IRREVOCABLE STANDBY LETTER OF CREDIT January 30, 1998 [Letter of Credit Nos.] [Several Banks] Ladies and Gentlemen: 1. By order of our customer, K N Energy, Inc. ("K N"), we, the banks listed in paragraph 3 below (each a "Bank" and collectively the "Banks"), hereby establish (severally in our respective Commitment Percentages specified in paragraph 3 below) this Irrevocable Standby Letter of Credit ("Letter of Credit") in favor of Occidental Petroleum Corporation ("Occidental"), a Delaware corporation, and its permitted transferees ("you" or the "Beneficiary") in the aggregate amount of US $1,394,846,122 (One Billion, Three Hundred Ninety Four Million, Eight Hundred Forty-Six Thousand, One Hundred Twenty-Two United States Dollars) (as such amount may be reduced from time to time in accordance with paragraph 2 below, the "Letter of Credit Amount") in order to assure payment of principal of the promissory note of even date herewith executed by K N in favor of Occidental in the same principal amount ("Substitute Note"). 73 2. If so agreed by the Beneficiary, K N may from time to time pledge collateral to secure payment of the Substitute Note. In accordance with any such agreement, upon any such pledge, K N and the Beneficiary will jointly notify the Administrative Agent thereof and specify the amount by which the Letter of Credit Amount is to be reduced as a result of such pledge. Upon the date of receipt by the Administrative Agent from the Beneficiary of any such notice purporting to be signed by an authorized officer of each of K N and the Beneficiary, the Letter of Credit Amount shall be permanently reduced by the amount specified therein. 3. Each Bank shall be severally responsible for its following commitment percentage ("Commitment Percentage") of the drawing hereunder:
Bank Commitment Percentage ---- --------------------- Morgan Guaranty Trust Company of New York 33.34% Bank of America NT & SA 22.22% The Chase Manhattan Bank 22.22% NationsBank 22.22% Total 100%
The obligations of the Banks under this Letter of Credit are several and no Bank shall be liable for the failure of any other Bank to perform its 74 obligations hereunder. Morgan Guaranty Trust Company of New York, as Administrative Agent for the Banks ("Administrative Agent"), shall have no liability for the failure of any Bank to perform its obligations hereunder. 4. Funds are available to you under this Letter of Credit in a single drawing against your draft, in an amount up to but not exceeding the Letter of Credit Amount, presented at (or by facsimile transmission to) the office of the Administrative Agent specified in paragraph 8 below or at its offices at 500 Stanton-Christiania Road, Newark, DE 19713-2107, Attention: Letter of Credit Services Department. Such draft must be in the form of Annex 1 hereto, with blanks appropriately completed, and must be accompanied by a certificate of one who purports to be an authorized officer of the Beneficiary in the form of Annex 2 hereto, with blanks appropriately completed. No other documents or instruments shall be required for drawing under this Letter of Credit. 5. This Letter of Credit shall be transferable by the Beneficiary only to a transferee (including a pledgee) of the Substitute Note upon delivery to the Administrative Agent of a transfer notice in the form of Annex 3 hereto, with blanks appropriately completed, by certified mail, return receipt requested, or hand delivery at the office of the Administrative Agent referred to in paragraph 8 below. Upon such delivery, we shall promptly transfer the same to your transferee or, if so requested by your transferee, issue upon surrender of this Letter of Credit a Letter of Credit to your transferee with provisions therein consistent with this Letter of Credit. 75 6. This Letter of Credit shall expire at 3:00 P.M. (New York City time) on January 19, 1999 ("Expiration Date"), it being understood that such expiration shall not affect the obligations of the Administrative Agent and each Bank hereunder in respect of any drawing duly made on or prior to the Expiration Date. 7. If the Administrative Agent receives from you the items described in paragraph 4 above by 3:00 P.M. (New York City time) on a domestic business day on or before the Expiration Date, each Bank will unconditionally honor the same in the amount of its Commitment Percentage (as specified in paragraph 3 above) by remitting such amount, in immediately available funds, to the Administrative Agent at its office at 60 Wall Street, New York, New York 10260, for your account, no later than the date one domestic business day after receipt by the Administrative Agent of such items, and the Administrative Agent shall pay the total amount so received by it to you on the same day by wire transfer of immediately available funds to The Chase Manhattan Bank, New York, for credit to Occidental Petroleum Corporation account number 144-0-34496, or to such other account or accounts as you may specify in writing to the Administrative Agent. The term "domestic business day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. 8. All communications regarding this Letter of Credit shall be addressed to Morgan Guaranty Trust Company of New York, c/o J.P. Morgan Services, Inc., Attention: Letter of Credit Services Department, 500 Stanton Christiana Road, Newark, DE 19713-2107 (facsimile number (302) 634-1838 or (302) 634-1839) and shall reference this Letter of Credit. All such 76 communications shall be effective when received by the Administrative Agent at the above address (whether by mail delivery, facsimile or otherwise). The Administrative Agent agrees to notify K N (by facsimile transmission) when it receives the items required pursuant to paragraph 4 above. Such notice shall be addressed to: K N Energy, Inc., 370 Van Gordon St., Lakewood, CO 80228-8304, Attention: Treasurer (facsimile number (303) 763-3155). 9. This Letter of Credit sets forth in full the terms of our several undertakings, and such undertakings shall not in any way be modified by reference to any document, instrument, or agreement referred to herein. This Letter of Credit may be amended if, but only if, such amendment is in writing and is signed by the Beneficiary, the Administrative Agent and each Bank, with the written consent of K N. This Letter of Credit may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 10. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 ("Uniform Customs"), as the same exists on the date of issuance of this Letter of Credit. Notwithstanding Section 48(g) of the Uniform Customs, this Letter of Credit my be successively transferred. This Letter of Credit shall be deemed to be a contract made under the laws of the State of New York and shall, as to matters not governed by the Uniform Customs, be governed by and construed in accordance with the laws of the State of New York. Very truly yours, [AUTHORIZED BANK SIGNATURES] 77 ANNEX 1 TO LETTER OF CREDIT [FORM OF DRAFT] U.S. $ [aggregate amount] , 19 ------------ [Names of Banks] [c/o Administrative Agent, name & address] Pay to the order of [Beneficiary] the aggregate amount of U.S. $_______ ([insert amount in words] United States Dollars). Drawn under the Irrevocable Standby Letter of Credit, Nos. __________ dated __________ (the "Letter of Credit"). All terms defined in the Letter of Credit have the same meanings as used herein. The portion of said aggregate amount being drawn on each Bank is the amount of this draft multiplied by such Bank's Commitment Percentage set forth in paragraph 3 of the Letter of Credit. [BENEFICIARY] By:___________________________ [Name and Title] 78 ANNEX 2 TO LETTER OF CREDIT OFFICER'S CERTIFICATE In [his/her] capacity as [a duly authorized officer] of [Name of Beneficiary] (the "Beneficiary"), the undersigned hereby certifies as follows: K N Energy, Inc. ("K N") is in default of its payment obligations under the promissory note dated January 30, 1998 and executed by K N in favor of Occidental Petroleum Corporation in the original principal amount of $1,394,846,122 (the "Substitute Note"). The Beneficiary is entitled to draw under the Irrevocable Standby Letter of Credit Nos._________________ which supports payment of principal of the Substitute Note in the aggregate amount of the draft which accompanies this Certificate. The undersigned officer is duly authorized to deliver this Certificate on behalf of the Beneficiary. Promptly after the draft which accompanies this Certificate is honored, the Beneficiary will deliver the original Letter of Credit to Morgan Guaranty Trust Company of New York, at its address specified in the Letter of Credit. IN WITNESS WHEREOF the undersigned has hereunto set [his/her] name this ___ day of [Month], [Year]. ----------------------------- Title: 79 ANNEX 3 TO LETTER OF CREDIT TRANSFER NOTICE [Date] TO: [Names of Banks] [c/o Administrative Agent, name & address] The undersigned is the Beneficiary of your Irrevocable Standby Letter of Credit Nos._________ dated __________ ("Letter of Credit"). All terms defined in the Letter of Credit have the same meanings as used herein. The undersigned has transferred to _______________ ("Transferee") the undersigned's rights with respect to the Substitute Note and the Transferee shall hereafter be the Beneficiary under the Letter of Credit. The Letter of Credit is returned herewith and in accordance therewith we ask that you issue a new irrevocable letter of credit in favor of the Transferee with provisions consistent with the Letter of Credit. [Name of Beneficiary] By -------------------------- Name: Title: 80 EXHIBIT B FORM OF BENEFICIARY UNDERTAKING , 1998 ------------ Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, NY 10260 Ladies and Gentlemen: We refer to the Reimbursement Agreement dated as of the date hereof (the "Reimbursement Agreement") among K N Energy, Inc., the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent, pursuant to which we understand that the Irrevocable Standby Letter of Credit Nos._______________ (the "Letter of Credit") has been issued to us as Beneficiary. We understand that the parties to the Reimbursement Agreement intend to syndicate more broadly the participations of the banks thereunder, and upon completion of such broader syndication, to tender to us a substitute Irrevocable Standby Letter of Credit in form and substance identical to the Letter of Credit issued today, but reflecting the identities and relative participations (which shall aggregate 100%) of the banks at the conclusion of such syndication. We hereby agree that, upon tender to us of such a substitute Irrevocable Standby Letter of Credit, we will surrender for cancellation the Irrevocable Standby Letter of Credit previously issued to us; provided that the banks signatories to such substitute Irrevocable Standby Letter of Credit are all either included in the list attached as Annex A hereto or otherwise reasonably satisfactory to us. Very truly yours, OCCIDENTAL PETROLEUM CORPORATION By ----------------------------- Title: 81 ANNEX A TO EXHIBIT B ABN AMRO BANK N.V. Arab Banking Corporation Banca Commerciale Italiana Banca di Roma Bank of America National Trust & Savings Association Bank of Montreal Bank of Nova Scotia Bank of Tokyo-Mitsubishi, Ltd. Banque Francais Du Commerce Exterieur Banque Nationale de Paris Banque Paribas Barclays Bank PLC Bayerische Vereinsbank Caisse Nationale de Credit Agricole Cariplo-Cassa di Risparmio delle Provincie Chase Manhattan Bank Christiana Bank CIBC Inc. Citibank Colorado National Commerzbank AG Credit Lyonnais Credit Suisse Den Norske Bank ASA Deutsche Morgan Grenfell Inc. DG Bank Dresdner Bank AG First Chicago NBD Corporation First Union National Bank Fleet Bank Fleet National Bank Key Bank National Association Kredietbank N.V. Lloyds Bank PLC Mellon Bank, N.A. Natexis Banque NationsBank, N.A. Norwest Bank Minnesota PNC Bank, N.A. Royal Bank of Canada Sanwa Bank Ltd. Societe Generale SunTrust Bank, Atlanta SunTrust Banks, Central Florida NA The Bank of New York The Bank of Nova Scotia The Fuji Bank, Limited The Industrial Bank of Japan, Ltd. The Long-Term Credit Bank of Japan, Ltd. The Northern Trust Company The Sumitomo Bank, Limited The Toronto Dominion Bank U.S. Bank Union Bank of California Union Bank of Switzerland, Houston Agency Wachovia Bank of Georgia, N.A. Wells Fargo Westdeutsche Landesbank 82 EXHIBIT C OPINION OF SPECIAL COUNSEL FOR THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as special counsel for K N Energy, Inc. (the "Borrower") in connection with the Reimbursement Agreement (the "Reimbursement Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Reimbursement Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.01(c) of the Reimbursement Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Reimbursement Agreement and the Letter of Credit require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Texas or the United States of America (other than filings of the Reimbursement Agreement and the Letter of Credit with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities and Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Texas or the United States of America, or of the articles of incorporation or by-laws of the Borrower. 83 2. The Reimbursement Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable against the Borrower in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of Texas and the foregoing opinion is limited to the laws of the State of Texas, the State of New York and the federal laws of the United States of America. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction in which any Bank is located which limits the rate of interest that such Bank may charge or collect. Insofar as the foregoing opinion involves matters governed by the laws of the State of Kansas (which matters do not in our view include the non-contravention opinion in paragraph 1), we have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.01(c) of the Reimbursement Agreement. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 84 EXHIBIT D OPINION OF KANSAS COUNSEL FOR THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as counsel in the State of Kansas for K N Energy, Inc. (the "Borrower") in connection with the Reimbursement Agreement (the "Reimbursement Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Reimbursement Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.01(c) of the Reimbursement Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Reimbursement Agreement and the Letter of Credit are within the Borrower's 85 corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Kansas and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Kansas. We are members of the Bar of the State of Kansas and the foregoing opinion is limited to the laws of the State of Kansas. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 86 EXHIBIT E OPINION OF GENERAL COUNSEL OF THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: I am General Counsel of K N Energy, Inc. (the "Borrower"), and I have represented the Borrower in connection with the Reimbursement Agreement (the "Reimbursement Agreement") dated as of January 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms defined in the Reimbursement Agreement are used herein as therein defined. This opinion is being rendered to you at the request of my client pursuant to Section 3.01(c) of the Reimbursement Agreement. I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower has all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Reimbursement Agreement and the Letter of Credit require no action by or in 87 respect of, or filing with, any governmental body, agency or official of the State of Colorado or, to the best of my knowledge, any other jurisdiction (other than filings of the Reimbursement Agreement and the Letter of Credit with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Colorado or, to the best of my knowledge, any other jurisdiction or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any, Lien on any asset of the Borrower or any of its Subsidiaries. 3. There is no action, suit or proceeding pending against, or to the best of my knowledge threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of the Reimbursement Agreement or the Letter of Credit. 4. Each of the Borrower's corporate Material Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. I am a member of the Bar of the State of Colorado and the foregoing opinion is limited to the laws of the State of Colorado and the General Corporation Law of the State of Delaware. Insofar as paragraph 2 above addresses the laws of other jurisdictions, I have relied upon my familiarity with advice given by counsel admitted to practice in those jurisdictions, in connection with this and other transactions. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 88 EXHIBIT F OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENTS To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the Reimbursement Agreement (the "Reimbursement Agreement") dated as of January 30, 1998 among K N Energy, Inc., a Kansas corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Administrative Agent"), and have acted as special counsel for the Agents for the purpose of rendering this opinion pursuant to Section 3.01(c) of the Reimbursement Agreement. Terms defined in the Reimbursement Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that the Reimbursement Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York and the federal laws of the United States of America. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. Insofar as the foregoing opinion involves matters governed by the laws of Kansas, we have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.1(c) of the Reimbursement Agreement. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, EX-10.Y 7 INTRASTATE PIPELINE SYSTEM LEASE 1 INTRASTATE PIPELINE SYSTEM LEASE THIS INTRASTATE PIPELINE SYSTEM LEASE (this "Lease"), is entered into of as 9:05 a.m. Eastern Standard Time on December 31, 1996 (the "Effective Time"), by MidCon Texas Pipeline, L.P., a Delaware limited partnership ("Lessor"), and MidCon Texas Pipeline Operator, Inc., a Delaware corporation ("Lessee"). SECTION 1. LEASE AND LEASED PROPERTY. (a) Lessor, in consideration of the rents and agreements herein to be performed by Lessee, leases and rents to Lessee, and Lessee hereby leases and rents from Lessor, the easements, rights-of-way, surface leases, fee property, permits, pipelines, compressors, equipment, fixtures, improvements and other property (real and personal) used or useful in connection with Lessor's intrastate pipeline and gas gathering system located in the State of Texas (the "Pipeline System"), including without limitation the property described in Exhibit A hereto and located in the State of Texas, together with all rights and appurtenances thereto (collectively, the "Leased Property"), subject to the terms and provisions of this Lease. (b) There may exist certain prohibitions against the lease of certain of the Leased Property without the prior written consent of third parties (other than consents of administerial nature which are normally granted in the ordinary course of business), which, if not satisfied, may result in a breach thereof by Lessor. Notwithstanding anything in this Lease to the contrary, this Lease shall be deemed ineffective with respect to any property interests described in Exhibit A hereto burdened by such a restriction if such restriction is unsatisfied (such property being hereafter referred to as the "Unleased Property"). Lessor shall exercise reasonable efforts to cure any prior consent requirements with respect to such Unleased Property and, effective upon the satisfaction of such requirements, such Unleased Property shall be deemed a part of the Leased Property without any further action on the part of Lessor. With respect to any Unleased Property during and after the exercise by Lessor of its reasonable efforts to cure any prior consent requirements, Lessee shall operate the Unleased Property on Lessor's behalf in connection with Lessee's use, operation and maintenance of the Leased Property and, Lessee, in consideration of the use and benefit of the Leased Property, shall pay all costs, expenses and liabilities attributable to the Unleased Property and shall perform all covenants (including, without limitation, any covenants of indemnity) set forth in this Lease with respect to such Unleased Property as if such Unleased Property constituted part of the Leased Property hereunder. SECTION 2. TERM. Unless sooner terminated as herein provided, this Lease shall be for a term of thirty (30) years, commencing as of the Effective Time, and expiring thirty (30) years thereafter on December 31, 2026 (the "Term"). Unless this Lease is sooner terminated as provided herein, Lessor and Lessee agree to commence negotiations for a new lease of the Leased Property at least three months prior to the expiration of the Term, with the rent under any such new lease to be not less than the then fair market rental of the Leased Property and containing such other terms and conditions as are mutually acceptable to the parties in their discretion (it being understood by the 2 parties that no party hereunder shall be obligated to enter into a new lease upon terms and conditions which are not satisfactory to such party in its sole discretion). SECTION 3. PURPOSE. Lessee shall use the Leased Property only for the gathering, compression, treatment, receipt, delivery, processing, transportation and exchange of natural gas and its constituents, liquefiable hydrocarbons and liquid hydrocarbons; provided in each case that the material transported (i) shall be in compliance with all laws, rules and regulations and prudent industry practice applicable to the Pipeline System and in compliance with the terms of the instruments (including without limitation, easements, rights-of-way and permits) to which the Leased Property is subject and (ii) will not subject Lessor to any further regulation or consent. Except to the extent currently subject thereto as of the date hereof and notwithstanding anything herein to the contrary, Lessee shall do nothing to subject the Leased Property to regulation by the Federal Energy Regulatory Commission to any extent greater than the Leased Property is currently regulated without the prior written consent of Lessor (which consent can be withheld in its sole discretion). Lessee shall not use, occupy, or permit to be used or occupied, the Leased Property for any purpose that is illegal, that would make void or voidable any insurance relating to the Leased Property, or that would constitute a public or private nuisance. SECTION 4. RENT. (a) Lessee shall pay Lessor, without notice, demand, abatement, deduction or offset, rent as follows: (i) $2,500,000.00 per month for each month during the year 1997; (ii) $1,666,667.00 per month for each month during the years 1998, 1999, 2000 and 2001; (iii) $3,333,333.00 per month for each month during the years 2002, 2003, 2004 and 2005; and (iv) $2,500,000.00 per month for each month during the remaining Term of this Lease. Such rent shall be payable on the first business day of each month, in advance, commencing on January 1, 1997, and continuing throughout the remaining Term of this Lease. (b) All other payments to be paid by Lessee to third parties as provided for under this Lease shall constitute rent payable hereunder and, in the event of nonpayment by Lessee of any such other payments when due according to the terms of this Lease, Lessor shall have the same rights and remedies in respect thereto as Lessor may have in respect to any default of rent payable by Lessee under this Lease. -2- 3 (c) NO HAPPENING, EVENT, OCCURRENCE, OR SITUATION DURING THE TERM OF THE LEASE, WHETHER FORESEEN OR UNFORESEEN, SHALL RELIEVE LESSEE FROM ITS OBLIGATIONS HEREUNDER TO PAY ANY RENT, OR ENTITLE LESSEE TO AN ABATEMENT OF ANY RENT, AND LESSEE WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED UPON IT BY STATUTE, PROCLAMATION, DECREE, ORDER, OR OTHERWISE, TO ANY ABATEMENT, DIMINUTION, REDUCTION, OFFSET, OR SUSPENSION OF ANY RENT BECAUSE OF ANY HAPPENING, EVENT, OCCURRENCE, OR SITUATION WHATSOEVER. SECTION 5. NET LEASE. This Lease is, and shall be deemed and construed to be, a net lease. Lessee shall pay to Lessor, net throughout the term of this Lease, the rent and other payments, if any, hereunder, without abatement, deduction, or offset, and free of any Taxes (as defined below) that Lessee is obligated to pay pursuant to the provisions of Section 6 hereof and of all costs, expenses, and obligations with respect to the Leased Property. Under no circumstances or conditions, whether now existing or hereafter arising, shall Lessor be expected or required to make any payment of any kind whatsoever or be under any other obligation or liability hereunder or with respect to the Leased Property. SECTION 6. TAXES AND ASSESSMENTS. (a) Lessee shall pay, or cause to be paid, all ad valorem taxes, personal property taxes and all other taxes (other than income or franchise taxes of Lessor based on net income) and assessments, use and occupancy taxes, transit taxes, water and sewer charges, excises, levies, license and permit fees and all other similar charges, if any, that are levied, assessed or imposed upon or become due and payable after the date of this Lease in connection with, or a lien upon, the Leased Property, and any fixtures or facilities placed thereon by Lessee, or any equipment used in connection with the Leased Property and all rentals or receipts therefrom, and all taxes of any nature that are imposed in substitution for or in lieu of the foregoing (collectively, the "Taxes"). (b) Lessee shall pay, or cause to be paid, all Taxes directly to the taxing authority, and upon request by Lessor, Lessee shall provide to Lessor evidence of such payment in a form satisfactory to Lessor. Such payment and, to the extent requested by Lessor, delivery of evidence thereof shall be completed prior to the date on which any such Taxes would become delinquent, subject to Section 6(d) below. (c) The certificate, advice, bill or statement issued or given by the appropriate officials authorized or designated by law to issue or give the same or to receive payment of the existence, payment, nonpayment or amount of such Taxes shall be prima facie evidence of the existence, payment, nonpayment or amount of such Taxes. (d) Lessee may contest the validity or amount of any Taxes, provided that Lessee shall diligently and reasonably contest the validity or amount of such Taxes by means of appropriate procedures, and in the event of such contest, Lessee may defer the payment thereof during the -3- 4 pendency of such contest. Lessee shall give prompt written notice to Lessor of any contest by Lessee of the validity or amount of Taxes and such notice shall contain a detailed description of such contest. (e) Lessee, at its sole cost and expense, may endeavor at any time or times to obtain a lowering of the assessed valuation upon any of the Leased Property for the purpose of reducing Taxes thereon. In such event, Lessor will offer no objection, and, at the request of Lessee, will cooperate with Lessee, but without expense to Lessor, in effecting such a reduction. Lessee shall be authorized to collect any tax refund payable as a result of any proceedings Lessee may institute for that purpose, and any such tax refund shall be the property of Lessee to the extent to which it may be based on a payment by Lessee, subject however to apportionment between Lessor and Lessee with respect to Taxes paid or contributed by Lessor in the year in which this Lease begins and ends, after offsetting from such refunds the costs and expenses, including reasonable attorney fees incurred in connection with obtaining such refund. (f) Lessor shall not be required to join in any action or proceeding referred to in Section 6(d) or Section 6(e) hereof unless required by law, or by any rule or regulation, in order to make such action or proceeding effective, in which event any such action or proceeding may be taken by Lessee in the name of, but without expense to, Lessor. Lessee shall defend, indemnify and save Lessor, its partners, directors, officers, shareholders, employees, agents, successors and assigns (collectively, the "Lessor Indemnified Parties") harmless from all liabilities, costs, expenses, claims, losses or damages by reason of, resulting from, or relating to any such action or proceeding. (g) During the Term of this Lease, Lessee alone may claim depreciation or cost recovery of the Alterations (as hereinafter defined), the Additional Property (as hereinafter defined), the repairs, replacements and maintenance of the Leased Property and all equipment, fixtures and machinery therein contained or contained on, below or above the Leased Property for all taxation purposes to the extent that it may legally be entitled to make such claim. SECTION 7. MAINTENANCE, REPAIRS AND UTILITIES. (a) Lessor shall not be required to furnish any services or facilities of any nature whatsoever or to make any repairs or alterations in and to the Leased Property. Lessee hereby assumes the full and sole responsibility for the condition, construction, operation, repair, replacement, maintenance and management of the Leased Property. LESSEE HEREBY WAIVES ANY AND ALL RIGHTS, WHETHER CONFERRED BY STATUTE OR OTHERWISE, TO MAKE ANY REPAIRS, REPLACEMENTS, ALTERATIONS OR IMPROVEMENTS AT THE EXPENSE OF LESSOR, OR TO OBTAIN DAMAGES OR REDUCTIONS OR ABATEMENTS OF ANY RENT OR OTHER SUMS PAYABLE HEREUNDER. (b) Subject to the provisions of Section 7(e) hereof, Lessee, at its sole cost and expense, shall maintain the Leased Property in good condition and order capable for use in the business for which it was used immediately prior to this Lease, and Lessee shall make all repairs to the Leased Property, structural and nonstructural and foreseen and unforeseen. Lessee shall not do, permit or -4- 5 suffer any waste, damages, disfigurement, or injury to or upon the Leased Property or any part thereof. (c) During the Term of this Lease, Lessee, at its sole cost and expense, shall obtain and maintain, in all material respects, all governmental and private authorizations, consents and permits for it to lease, operate, and maintain the Leased Property. During the Term of this Lease, Lessee shall pay and perform each and every obligation of Lessor under any easement, right of way, surface lease, permit, contract or other instrument leased to Lessee hereunder or creating or encumbering any interest leased to Lessee hereunder. (d) Lessee shall be responsible for, and shall pay all charges and fees in connection with, all utility services necessary for Lessee's use of the Leased Property, including but not limited to all gas, electricity, power, water, telephone and other communication services, and any and all other utilities or similar services used in connection with Lessee's use and possession of the Leased Property. (e) Notwithstanding any provision in this Lease to the contrary, Lessee shall be permitted to abandon any part of the Leased Property or dispose of any portion of the Leased Property that, in each case (i) has a fair market value of less than $100,000 with respect to such abandoned or disposed Leased Property and is not necessary to operate and maintain the Pipeline System, or (ii) connects to a well that is no longer capable of producing in paying quantities. Lessee shall be entitled to retain the proceeds, if any, received with respect to property abandoned or otherwise disposed of pursuant to the authorization provided in the preceding sentence. Lessee shall also be permitted to abandon any portion of the Leased Property upon obtaining the prior written consent of Lessor (which consent shall not be unreasonably withheld). Lessee shall be responsible for, and pay all costs and expenses of abandoning or otherwise disposing of any portion of the Leased Premises in accordance with this Section. (f) Except as provided in Section 7(e) hereof, Lessee shall have no right to remove, or permit to be removed, any of the fixtures, improvements or Alterations from the Leased Property or any Additional Property except to the extent such fixtures, improvements or Alterations are replaced by Lessee with improvements or Alterations of like or better quality. SECTION 8. CONDITION OF THE LEASED PROPERTY AND COMPLIANCE WITH LAWS. (a) Lessee has inspected the Leased Property and has investigated its uses and non-uses and the title thereto, and LESSEE ACCEPTS THE SAME "AS IS, WHERE IS" WITH ALL FAULTS AND WITHOUT ANY REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED OR STATUTORY, BY LESSOR AS TO THE TITLE TO THE LEASED PROPERTY, THE NATURE, CONDITION (INCLUDING, WITHOUT LIMITATION, THE ENVIRON-MENTAL CONDITION) OR USABILITY THEREOF, AND LESSEE HEREBY RELEASES AND WAIVES ANY AND ALL CLAIMS, DEMANDS, LOSSES, LIABILITIES, DAMAGES, COSTS OR EXPENSES OF ANY KIND OR NATURE (INCLUDING ATTORNEYS' FEES AND COURT COSTS), INCLUDING DAMAGES FOR PERSONAL -5- 6 INJURY OR DEATH OR PROPERTY LOSS (COLLECTIVELY "LOSSES"), ARISING OUT OF OR RELATED TO THE FOREGOING, EVEN IF SUCH LOSSES ARISE OUT OF OR ARE RELATED TO (OR ALLEGEDLY ARISE OUT OF OR ARE RELATED TO) THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF ANY LESSOR INDEMNIFIED PARTY. (b) At its own cost and expense, Lessee shall comply in all material respects with all present and future laws, acts, rules, requirements, orders, directions, ordinances and/or regulations of any federal, state, municipal or other public department, bureau, office, court or other authority ("Governmental Authorities") pertaining to the use, operation, possession, maintenance, condition and abandonment of the Leased Property or any part thereof, whether or not such laws, acts, rules, requirements, orders, directions, ordinances and/or regulations require the making of structural alterations or the use or application of portions of the Leased Property for compliance therewith or interfere with the use and enjoyment of the Leased Property and Lessee, notwithstanding any other provision to the contrary herein, shall perform such acts as are reasonably necessary to so comply, and shall defend (with counsel reasonably approved by Lessor), indemnify, and hold the Lessor Indemnified Parties harmless from all Losses, fines, penalties, and claims for damages of every kind and nature arising out of any failure to comply with any such laws, acts, rules, requirements, orders, directions, ordinances and/or regulations; the intention of the parties being with respect thereto that, during the Term of this Lease, Lessee shall discharge and perform all the obligations of Lessor, as well as all the obligations of Lessee, arising as aforesaid, and save the Lessor Indemnified Parties harmless therefrom, so that at all times the rental of the Leased Property shall be net to Lessor without deductions or expenses on account of any such laws, acts, rules, requirements, orders, directions, ordinances and/or regulations. The indemnity in this Section 8(b) shall survive the termination or expiration of this Lease. SECTION 9. INSURANCE. (a) Property and Public Liability. Lessee will, upon delivery of the Leased Property to Lessor and at all times during the term of the Lease, at its own expense, carry and maintain or cause to be carried and maintained (i) property insurance with respect to the Leased Property, and (ii) public liability insurance (including contractual liability and nongradual pollution liability coverage), and auto liability insurance, with respect to bodily injury and property damage, in each case with such deductibles, in such amounts (but not less than $50,000,000 million for property insurance and $100,000,000 million for public liability insurance), against such risks and with such insurance companies reasonably satisfactory to Lessor, as is carried by corporations similar to Lessee, provided that Lessee may, with Lessor's written consent (which consent shall not be unreasonably withheld), self-insure in a manner and to the extent such self-insurance is consistent with the self-insurance practices of such other corporations. (b) Liability Policy Provisions. The policy or policies of public liability insurance carried in accordance with subsection (a) hereof shall to the extent such provisions are available at commercially reasonable rates (i) require at least 30 days prior written notice to Lessor of cancellation, lapse, expiration or adverse change to reduce the coverage thereof, (ii) (A) cover the -6- 7 Lessor Indemnified Parties as additional insureds or (B) provide that in the event that any additional insured is named in a certificate of insurance issued in connection with such policy, the policy will be deemed to have been endorsed accordingly, (iii) provide that such insurance is primary with respect to any other insurance carried by or available to Lessor, (iv) provide that the insurer shall waive any right of subrogation and any setoff, counterclaim, or other deduction, whether by attachment or otherwise, against Lessor, and (v) contain a cross-liability clause providing for coverage of Lessee and Lessor as if separate policies had been issued to each of them. (c) Property Policy Provisions. The policy or policies of property insurance carried in accordance with subsection (a) hereof shall to the extent such provisions are available at commercially reasonable rates (i) require at least 30 days' written notice to Lessor of cancellation, lapse, expiration or adverse change to reduce the coverage thereof, (ii) (A) cover the Lessor Indemnified Parties as additional insureds or (B) provide that in the extent that any additional insured is named in a certificate of insurance issued in connection with such policy, the policy will be deemed to have been endorsed accordingly, (iii) provide that, in respect of the interest of Lessor in such policies, the insurance shall not be invalidated by any action or inaction by Lessee or its affiliates (other than a failure of Lessee to pay premiums or other sums owing to the insurer), (iv) insure Lessor regardless of any breach or violation of any warranty, declaration or condition contained in such policies (or in the application therefor or in any other document submitted to the insurer in connection therewith), (v) provide that such insurance is primary with respect to any other insurance carried by or available to Lessor, and (vi) provide that the insurer shall waive any right of subrogation and any setoff, counterclaim, or other deduction, whether by attachment or otherwise, against Lessor. (d) Employer's Liability. Lessee shall, at its own expense, insure or self-insure statutory worker's compensation and employer's liability, with limits and deductibles in such amounts as is carried by corporations similar to Lessee, covering all persons employed by Lessee in connection with or relating to the Leased Property. Any policy covering this insurance shall be endorsed to provide for all states coverage, voluntary compensation and occupational disease. (e) Certificates. On or prior to the date Lessee takes delivery of the Leased Property, and thereafter on or prior to the 30th day preceding the expiration of any policy maintained pursuant to this Section 9, Lessee shall deliver to Lessor certificates of insurance issued by the insurers under the policies required pursuant to this Section 9 or, if unavailable, other evidence of the insurance maintained pursuant to this Section 9 reasonably satisfactory to Lessor. (f) Performance by the Lessor. In the event that Lessee shall fail to maintain insurance as herein provided, Lessor may at its option, but without obligation, provide such insurance and, in such event, Lessee shall, upon demand from time to time, reimburse Lessor for the cost thereof, together with such interest on such cost at the LIBOR Rate (as hereinafter defined) plus 3.25% per annum computed from the date of payment of such cost to the date of reimbursement. Lessor shall give Lessee prompt written notice of any such insurance. The term "LIBOR Rate" shall mean, for any period, the one month London Interbank Offered Rate as reported in The Wall Street Journal for the last business day of the prior month on which day the London interbank market was open for dealings. -7- 8 (g) Separate Insurance. Nothing in this Section 9 shall be construed to prohibit Lessor from insuring at its own expense any portion of Leased Property or its interest therein, and any insurance so maintained shall not provide for or result in a reduction of the coverage or the amounts payable under any of the insurance required to be maintained by Lessee under this Section 9. SECTION 10. LIABILITY, INDEMNITY, AND WAIVER OF SUBROGATION. (a) Indemnity. Lessee shall indemnify, defend and hold the Lessor Indemnified Parties harmless from all Losses resulting or arising from, or relating to, (i) the use or possession of the Leased Property, Alterations or Additional Property by Lessee, (ii) any act, omission, or neglect of Lessee or Lessee's partners, directors, officers, shareholders, employees, agents, invitees or guests, or any parties contracting with Lessee or (iii) any breach of this Lease by Lessee: IT BEING UNDERSTOOD AND AGREED THAT THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL EXTEND TO AND APPLY TO ALL LOSSES BASED UPON OR ALLEGEDLY BASED UPON THE SOLE, JOINT OR CONCURRENT NEGLIGENCE OR OTHER FAULT OF ANY LESSOR INDEMNIFIED PARTY (INCLUDING LIABILITY BASED ON THEORIES OF STRICT LIABILITY) OR FROM THE PRESENCE OF HAZARDOUS MATERIALS UPON THE LEASED PROPERTY. Lessor shall not be liable to Lessee or to Lessee's partners, directors, officers, shareholders, employees, agents, invitees, guests or contractors, and Lessee hereby releases and waives all claims against the Lessor Indemnified Parties for any Losses resulting from or relating to the use and possession of the Leased Property and any Alterations and/or Additional Property, including Losses for: (i) bodily injury, death, or property damage; (ii) business interruption, loss of profits or other direct or consequential damages occasioned by any cause, including the design, construction or condition of the Leased Property and/or the Alterations and the Additional Property; (iii) the wrongful acts or omissions of any other person; (iv) force majeure events; and (v) any damage, loss or injury caused by a defect in the Leased Property, the Alterations and/or the Additional Property, or caused by electricity, gas, oil, fire or any cause whatsoever in, on, or about the Leased Property, the Alterations or the Additional Property, or any part thereof, WHETHER OR NOT ANY OF THE EVENTS LISTED IN THIS PROVISION ARE CAUSED BY THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF ANY LESSOR INDEMNIFIED PARTY OR THE PRESENCE OF HAZARDOUS MATERIALS UPON THE LEASED PROPERTY. The provisions of this Section 10 shall survive the termination of this Lease for any reason. (b) Subrogation. Anything in this Lease to the contrary notwithstanding, Lessee hereby waives any and all rights of recovery, claims, actions, or causes of action against any of the Lessor Indemnified Parties for any Losses that may occur to the Leased Property, Alterations or Additional Property, or to persons, or any part thereof, or any personal property of Lessee therein, by reason of fire, the elements, or any other cause which Lessee is required to insure against under the terms of the policies of insurance that Lessee is required to provide hereunder, REGARDLESS OF CAUSE OR ORIGIN, INCLUDING THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF ANY LESSOR INDEMNIFIED PARTY, and Lessee covenants that no insurer shall hold any right of subrogation against any Lessor Indemnified Party under any policies required hereunder. -8- 9 (c) Stock Purchase Agreement. Notwithstanding anything herein to the contrary, the terms and provisions of this Lease shall not operate to modify or affect the representations and warranties made by Occidental Petroleum Corporation ("OPC"), or the remedies for a breach of said representations and warranties, set forth in that certain Stock Purchase Agreement dated November 20, 1996, between OPC and MidCon Corp. ESOP Trust. SECTION 11. FIRE AND OTHER CASUALTY DAMAGE. If any of the Leased Property or if Alterations currently existing or installed by Lessee upon the Leased Property are partially or totally destroyed or damaged by fire or other casualty, then unless otherwise agreed by Lessor in writing, Lessee shall (and Lessee shall use all insurance proceeds to) repair and restore such Leased Property and such Alterations, as soon as reasonably practicable, to substantially the same condition as existed immediately prior to such destruction or damage. Lessor and Lessee agree that there shall be no reduction or abatement in rent or other amounts payable by Lessee hereunder on account of any destruction of the Leased Property due to casualties. If Lessor agrees in writing, Lessee need not repair and restore such Leased Property and/or Alterations. In such case, all insurance proceeds attributable to such Leased Property and/or Alterations shall be paid to Lessor. SECTION 12. EMINENT DOMAIN. If all or any part of the Leased Property shall be taken by condemnation (which term, as used in this Section 12, shall include any conveyance of avoidance or settlement of eminent domain, condemnation or other similar proceedings), then unless otherwise agreed by Lessor in writing, Lessee shall (and Lessee shall use all proceeds from such condemnation to) relocate and rebuild any portion of the Leased Property so taken in order to operate and maintain the Pipeline System as was previously operated and maintained prior to such taking. Lessor and Lessee agree that there shall be no reduction or abatement in rent or other amounts payable by Lessee hereunder on account of any taking of the Leased Property by condemnation. If Lessor agrees in writing that Lessee need not relocate and rebuild such Leased Property, then all proceeds payable on account of such condemnation shall be paid to Lessor. If Lessee is required to relocate and rebuild any portion of the Leased Property taken by condemnation in accordance with the terms of this Section 12, then Lessor shall pay to Lessee all proceeds received by Lessor on account of such condemnation. SECTION 13. LIENS. (a) Lessor shall not be liable for any labor or materials furnished or to be furnished to Lessee upon credit, and no mechanics' or other lien, for any such labor or materials, shall attach to or affect the interest of Lessor in and to the Leased Property. Except for the Permitted Liens (as hereinafter defined), Lessee shall not encumber all or any part of the Leased Property nor shall Lessee suffer or permit any mechanic's, materialmen's, attachment, execution or other liens or stop notices to attach to or be filed against the Leased Property, Lessee's leasehold interest or the rents, issues and profits of the Leased Property or against Lessor for any work or improvement upon the Leased Property (collectively, the "Non-Permitted Liens"). Whenever and as often as any such Non-Permitted Lien shall have been filed against the Leased Property, whether or not based upon any action or interest of Lessee, Lessee shall immediately take such action by bonding, or making such deposit or payment as will remove or satisfy such lien; provided, however, that Lessee shall have the -9- 10 right to contest, with due diligence, the validity or amount of any such lien if Lessee shall provide such a bond or other deposit as may be required by law or by Lessor or to protect against enforcement of such lien. The term "Permitted Liens" as used in this Lease shall mean easements, liens and other encumbrances which do not materially reduce the value of the affected portion of the Leased Property or which do not secure any debt of Lessee or its affiliates, agents, representatives or permitted assigns for borrowed money. (b) Nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Lessor, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialman, for the performance of any labor or the furnishing of any materials for any improvement, repair or replacement of any portion of the Leased Property nor as giving Lessee any right, power or authority to contract for or permit, on Lessor's behalf or as to Lessor's interest, the rendering of any services or the furnishing of any materials. Lessor shall have no responsibility to Lessee, its contractors, subcontractors, suppliers, materialmen, workmen or other persons, firms or corporations who engage in or participate in any construction upon the Leased Property unless Lessor shall expressly undertake such obligation by an agreement in writing signed by Lessor and made between Lessor and Lessee, its contractors, subcontractors, suppliers, materialmen, workmen, or other persons, firms or corporations. SECTION 14. CONSTRUCTION AND/OR ADDITIONS OF ADDITIONAL PROPERTY AND ALTERATIONS. Lessor acknowledges that Lessee may desire to add Additional Property or to construct Alterations to the Leased Property. (a) In connection with the construction by or on behalf of Lessee of any Alteration, the following shall be applicable: (i) Lessee shall notify Lessor in writing prior to commencing construction of any Alteration and, if requested by Lessor, shall provide Lessor a copy of designs, plans and specifications (the "Plans") for such Alteration. Lessor may within 14 days of receipt of written notification or receipt of the Plans requested reasonably object in writing to such Alteration. If Lessor so objects, Lessee shall revise the Plans to satisfy Lessor's objections. (ii) Upon Lessor's request, Lessee shall furnish to Lessor copies of any contract which Lessee intends to enter into in connection with the construction of any Alteration. Any such contract shall contain a covenant by all contractors and subcontractors to indemnify and hold the Lessor Indemnified Parties harmless from and against all Losses caused by, arising out of or relating to such contractors' or subcontractors' work in connection with the Leased Property, EVEN IF SUCH LOSSES ARE CAUSED BY OR RELATE TO OR ARE ALLEGEDLY CAUSED BY OR RELATE TO, THE SOLE, JOINT AND CONCURRENT NEGLIGENT ACTS OR OMISSIONS OR STRICT LIABILITY OF ANY LESSOR INDEMNIFIED PARTY. (iii) No construction of any Alteration shall be undertaken by Lessee until Lessee shall have procured and paid for, so far as the same may be required, all permits and -10- 11 authorizations of all Governmental Authorities having jurisdiction. Lessor shall join in the application for such permits or authorizations whenever such action is necessary, but without any liability or expense to Lessor. In no event shall any such permit or authorizations (a) materially impair or limit in any way the current use of the Leased Property or use of any adjoining property to the Leased Property and (b) impair or limit in any way the future use of the Leased Property or use of any adjoining property to the Leased Property. (iv) Any Alteration, when completed, and any Additional Property used with the Leased Property, shall be of such character as not to reduce the value, rentability or usefulness of the affected portion of the Leased Property or conflict with the purposes for which Lessee is permitted to use the Leased Property. (v) During the progress of the construction of any Alteration, Lessor may inspect the Leased Property and all work and materials as rendered and installed during such construction. (vi) Any Alteration shall be constructed by Lessee in a good and workmanlike manner and in compliance with all applicable permits and authorizations and with all other laws, ordinances, orders, rules, regulations and requirements of all Governmental Authorities. (vii) The cost of all work in connection with the construction of any Alteration shall be promptly paid by Lessee, and Lessee shall at all times keep the Leased Property free and clear of all liens, including liens for labor and materials supplied or claimed to have been supplied to the Leased Property. Within not more than three (3) month following the completion of any Alteration, Lessee shall deliver to Lessor proof to the reasonable satisfaction of Lessor that the Leased Property and any such improvement are free from any and all liens, charges, and claims, whether or not of record, and whether voluntary or involuntary, for the payment of money, and that every such lien, charge and claim relating to the construction of any Alteration has been fully paid or discharged; provided, however, that Lessee shall have the right to reasonably contest, with due diligence, the validity or amount of any such lien, charge or claim by means of appropriate procedures. Lessee shall give prompt written notice to Lessor of any such contest, and such notice shall contain a detailed description of such contest. (viii) Lessee shall not construct any Alteration without prior written notification to Lessor and consent by Lessee, which consent may not be unreasonably withheld. (b) The term "Alteration" as used in this Lease shall mean any structural alteration in any manner of any fixtures, improvements or building included in the Leased Property (provided that such term shall not include any repairs to the Leased Property or any replacements to the Leased Property due to casualty or condemnation). The term "Additional Property" shall mean any new improvement or fixture placed upon or under any Leased Property by Lessee or any real property (including easements, rights-of-way, surface leases, permits and other real property interests) acquired by the Lessee in connection with the use, operation, maintenance or extension of the Pipeline System -11- 12 (excluding (i) office space or leases and (ii) any new pipeline system, gathering system or compression, processing or treatment plant constructed or acquired by or on behalf of Lessee or its affiliates that is not located upon the Leased Property (except to the extent necessary to connect to an existing portion of the Pipeline System) if (A) such new pipeline system or facilities are capable of being operated independently of the Pipeline System, (B) the Pipeline System is capable of being operated independently of such new pipeline system or facilities and (c) such new pipeline system or facilities were not constructed with the purpose of causing a diminution in the economic value of any portion of the Pipeline System to which it is connected). (c) Title to all Additional Property and Alterations shall be and remain in Lessee during the Term of this Lease. Lessee shall not permit, without Lessor's written consent, title to any Additional Property to be taken or held by any other person (including, without limitation, Lessee's affiliates) without the prior written consent of Lessor (which can be withheld in its sole discretion). Upon expiration or termination of this Lease, title to all Additional Property and Alterations and, subject to Section 15(c) hereof, title to all personal property of Lessee then situated on the Leased Property shall automatically vest in Lessor, free and clear of all claims and encumbrances, and Lessee shall have no further claim thereto (and Lessee hereby grants, conveys and assigns any and all such Additional Property, Alterations and personal property to Lessor, effective as of the expiration or termination of this Lease). Notwithstanding the foregoing, to the extent that any such Alterations are separate in title from the Leased Property, they shall continue to have the character of real property, and in no event shall Lessee's ownership thereof and its leasehold estate in the Leased Property be separately conveyed. (d) All Alterations and Additional Property shall be used for the same purposes as the Leased Property and shall be treated, used and maintained in the same manner as the Leased Property is required to be treated, used and maintained under this Lease. Lessee's rights, obligations and responsibilities hereunder with respect to the Leased Property (including, without limitation, the indemnification provisions hereof) shall also apply in all respects to any Alteration and any Additional Property. SECTION 15. CERTAIN EVENTS UPON TERMINATION. (a) Contemporaneously with the expiration or earlier termination of this Lease, Lessee shall immediately deliver to Lessor the following; (i) Such documents, assignments, instruments and conveyances as Lessor may request to terminate all of Lessee's right, title and interest in and to the Leased Property, to transfer title to any Additional Property or Alterations, and to transfer any agreements relative to any Leased Property, Additional Property or Alterations. (ii) An assignment of Lessee's interest as sublessor in all permitted subleases and all contracts relating to the Leased Property, including Lessee's agreement that Lessor shall not be obligated for any prior default of Lessee under such subleases or contracts. -12- 13 (iii) All books, records, construction plans, surveys, permits and other documents in possession of Lessee relating to and necessary or convenient for the operation of the Leased Property. (iv) An amount equal to the accrued but unpaid Taxes, and insurance premiums with respect to the Leased Property, prorated to the date of termination. All documents required to be delivered by Lessee to Lessor hereunder shall be in form reasonably satisfactory to Lessor. It is the intention of the parties that upon the termination of this Lease, whether by natural expiration or otherwise, Lessor shall, at its option, succeed to a going enterprise and a fully operable pipeline system, complete with the real and personal property with which it was being operated by Lessee. (b) Upon the expiration or earlier termination of this Lease, Lessee shall peaceably quit and surrender the Leased Property to Lessor. Lessee shall leave the Leased Property in good, operable condition and repair, reasonable wear and tear excepted. Lessee shall deliver the Leased Property to Lessor free of all liens and encumbrances created or suffered by Lessee (except the lien of real estate taxes and assessments not then due and any encumbrances expressly approved by Lessor in advance in writing). (c) Notwithstanding anything herein to the contrary, upon expiration of the term of this Lease, Lessor may, at its option and by written agreement, permit or direct Lessee to remove any of its personal property from the Leased Property, and Lessee shall remove the same upon such permission or direction. Any personal property of Lessee which shall remain on the Leased Property after expiration of the term of this Lease for ten (10) days after request by Lessor for removal, may, at the option of Lessor, be deemed to have been abandoned and may be retained by Lessor as its property or be disposed without accountability, in such manner as Lessor may see fit, and if the cost of any removal exceeds any proceeds from the sale thereof, such costs shall be paid by Lessee to Lessor. SECTION 16. ASSIGNMENT AND SUBLEASE. (a) Without the prior written consent of Lessor, which consent may be withheld in Lessor's sole discretion, Lessee shall not transfer or assign this Lease or sublease the Leased Property or, subject to Sections 7(e) and 19(c), any part thereof (whether by operation of law or otherwise) or grant any concession or license within the Leased Property, and any attempt to do any of the foregoing without Lessor's consent shall be void. (b) Notwithstanding any consent by Lessor under this Section 16, the undersigned Lessee will remain jointly and severally liable (along with each approved assignee or subtenant, who shall automatically become liable for all obligations of Lessee hereunder), and Lessor shall be permitted to enforce the provisions of this instrument directly against the undersigned Lessee and/or any assignee or sublessee without proceeding in any way against any other entity. -13- 14 (c) Any consent by Lessor to a particular assignment, sublease or other event specified in Section 16(a) hereof shall not constitute Lessor's consent to any other or subsequent assignment, sublease, or other event specified in Section 16(a) hereof. (d) Lessor shall have the right to transfer and assign, in whole or in part, by operation of law, or otherwise, its rights and obligations hereunder without any liability to Lessee and Lessee shall attorn to any party to which Lessor transfers the Leased Property; provided, however, that upon any such assignment, the assignee shall assume all obligations of Lessor hereunder with respect to such rights assigned, such assignment shall be permitted by applicable law and such assignment shall not in any way impair the Lessee's right or ability to lease and operate the Leased Properties or to otherwise utilize the Leased Properties in the manner permitted by this Lease. SECTION 17. LESSEE'S DEFAULT. Lessor shall have the right to terminate this Lease or to terminate Lessee's right of possession without terminating this Lease in the event that any of the following events or conditions occur or exist (each an "Event of Default" and any event or condition that, upon notice, lapse of time or both would constitute an Event of Default being referred to as a "Default"): (a) any rent payable in accordance with this Lease is not paid (i) within ten (10) days after the due date thereof, if Lessee and Guarantor (as hereinafter defined) are not wholly owned direct or indirect subsidiaries of OPC or (ii) within the longer of ten (10) days after the due date thereof or two days after Lessor gives Lessee written notice that such rent has not been paid, if Lessee and Guarantor are wholly owned direct or indirect subsidiaries of OPC; (b) Lessee fails to correct or cure a breach of any covenant or agreement of Lessee contained in this Lease, except with respect to nonpayment of rent, within thirty (30) days after Lessor has notified Lessee in writing of any such breach thereof; provided that, to the extent Lessee has commenced diligent and reasonable efforts to effect a cure of such breach during such thirty day period, such thirty day period shall be extended for so long as Lessee continues to pursue such cure with reasonable and diligent efforts (but in no event longer than a period of one year from the date of such notice); so long as such extension would not cause or result in a material adverse effect or consequence to any portion of the Leased Property; (c) Lessee vacates or abandons any portion of the Leased Property (unless permitted pursuant to Section 7(e) hereof); (d) MidCon Corp. (such entity or its permitted successors or assigns being hereinafter referred to as "Guarantor") fails to correct or cure a breach of any covenant or agreement of Guarantor contained in the Guaranty of even date herewith by Guarantor for the benefit of Lessor (the "Guaranty"), except with respect to nonpayment of the sum of the Agreed Amount (as defined therein) and Base Amount (as defined therein), within thirty (30) days after Lessor has notified Guarantor in writing of any such breach thereof; -14- 15 (e) any breach of any representations or warranties made by Lessee herein or Guarantor in the Guaranty or in any certificate or statement delivered pursuant hereto or thereto shall prove to have been false or misleading in any material respect on the date as of which made or deemed made; (f) (i) a default (as principal or guarantor) by either the Lessee or Guarantor in payment when due of any principal or interest under any instrument evidencing indebtedness for borrowed money or of any rental on any lease or a revolving credit agreement (in each case, whether now existing or hereafter created), or (ii) the occurrence of an event of default (with respect to the Lessee or Guarantor) as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money of, or guaranteed by, the Lessee or Guarantor (whether such indebtedness now exists or is hereafter created) and the occurrence of such event of default causes such indebtedness to become due and payable prior to its stated maturity or due date and has not been duly waived in writing; provided that no default under this subsection (f) shall be deemed to exist as a result of a default or event of default (as described in clause (i) or clause (ii) above) in respect of any such indebtedness if the principal of and interest on such indebtedness, when added to the principal of and interest on all other such indebtedness then in default or the subject of such an event of default (exclusive of indebtedness under subsection (a)) above, does not exceed $10,000,000; (g) a decree, judgment, or order by a court of competent jurisdiction is entered adjudging Lessee, any Material Entity (as hereinafter defined) or Guarantor as bankrupt or insolvent, or ordering relief against Lessee, any Material Entity, or Guarantor in response to the commencement of an involuntary bankruptcy case, or approving as properly filed a petition seeking reorganization or liquidation of Lessee, any Material Entity, or Guarantor under any bankruptcy or similar law; or a decree or order of a court of competent jurisdiction over the appointment of a receiver, liquidator, trustee, or assignee in bankruptcy or insolvency of Lessee, any Material Entity, or Guarantor or of the property of Lessee, any Material Entity, or Guarantor, or for the winding up or liquidation of the affairs of any of them is entered; (h) any of Lessee, any Material Entity, or Guarantor institutes voluntary bankruptcy proceedings, or consents to the filing of a bankruptcy proceeding against it, or files a petition or answer or consent seeking reorganization or liquidation under any bankruptcy or similar law or similar statute, or consents to the filing of any such petition, or consents to the appointment of a custodian, receiver, liquidator, trustee, sequestrator, assignee or similar official in bankruptcy or insolvency of it or any of its assets or property, or makes a general assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due, or within the meaning of Title 11, U.S. Code, or any similar Federal, state or foreign law for the relief of debtors, becomes insolvent, fails generally to pay its debts as they become due, or takes any corporate action in furtherance of or to facilitate, conditionally or otherwise, any of the foregoing; or (i) one or more judgments or decrees in an aggregate amount of $5,000,000 or more is entered by a court or courts of competent jurisdiction against Lessee or the Subsidiaries (as defined in the Guaranty) of Guarantor or Guarantor (other than any judgment as to which, and only to the extent, a reputable insurance company has acknowledged coverage of such claim in writing) and (i) -15- 16 any such judgments or decrees is not stayed, discharged, paid, bonded or vacated within 30 days or (ii) enforcement proceedings are commenced by any creditor on any such judgments or decrees; provided, however, that for so long as Guarantor and Lessee are wholly owned direct or indirect subsidiaries of OPC, then no event or condition described in Section 17(b) or 17(d) shall constitute a Default or Event of Default hereunder if such event or condition was caused by OPC or the prevention of such event or condition was solely within OPC's control without unreasonable effort or expense. The term "Material Entity" shall mean (i) Guarantor, (ii) any Material Subsidiary (as defined in the Guaranty), or (iii) any two or more Subsidiaries (as defined in the Guaranty) (A) which two or more Subsidiaries own, in the aggregate but not individually, 5% or more of Consolidated Total Assets (as defined in the Guaranty) as of the end of the most recently completed fiscal year of Guarantor and (B) with respect to the event or events specified where the term "Material Entity" is used herein, such event or events affects each such Subsidiary with the same consecutive six month period. SECTION 18. REMEDIES. (a) Upon the occurrence of any of such Events of Default, Lessor shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever to Lessee: (1) terminate this Lease, in which event Lessee shall immediately surrender the Leased Property to Lessor, and if Lessee fails to do so, Lessor may, without prejudice to any other remedy which it may have for possession or arrearage in rent, enter upon and take possession of all or any portion of the Leased Property and expel or remove Lessee and any other person who may be occupying such Leased Property or any part thereof, by force if necessary, without being liable for prosecution or any claims of damages therefor and relet the Leased Property and receive the rent therefor; (2) enter upon and take possession of the Leased Property, expel or remove Lessee and any other person who may be occupying the same or any part thereof, by force if necessary, without being liable for prosecution or any claim for damages therefor, and relet the Leased Property and receive the rent therefor; (3) enter upon the Leased Property, by force if necessary, without being liable for prosecution or any claim for damages therefor, and do whatever Lessee is obligated to do under the terms of this Lease; and, Lessee agrees to reimburse Lessor on demand for any expenses which Lessor may incur in thus effecting compliance with Lessee's obligations under this Lease, and Lessee further agrees that Lessor shall not be liable for any damages resulting to the Lessee from such action, whether caused by the negligence of Lessor or otherwise; (4) enforce specific performance of Lessee's obligations under this Lease; and/or (5) pursue any other remedy permitted at law or in equity. -16- 17 Lessee hereby acknowledges that late payment by Lessee to Lessor of rent due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Accordingly, if any installment of rent due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after said amount is due, then Lessee shall pay to Lessor a late charge equal to the LIBOR Rate plus 3.25% per annum of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the cost Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of its other rights and remedies. (b) Exercise by Lessor of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance by Lessor of surrender of the Leased Property by Lessee, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written agreement of Lessor and Lessee. No such alteration of security devices and no removal or other exercise of dominion by Lessor over the property of Lessee or others at the Leased Property shall be deemed unauthorized or constitute a conversion, Lessee hereby consenting, after any event of default, to the aforesaid exercise of dominion over Lessee's property within the Leased Property. All claims for damages by reason of re-entry and/or repossession and/or alteration of security devices are hereby waived by Lessee, as are all claims for damages by reason of any distress warrant, forcible detainer proceedings, sequestration proceedings or other legal process. Lessee agrees that any re-entry by Lessor may be pursuant to judgment obtained in forcible detainer proceedings or other legal proceedings or without the necessity for any legal proceedings, as Lessor may elect, and Lessor shall not be liable in trespass or otherwise. (c) In the event of termination or repossession of any of the Leased Property for a default by Lessee hereunder, Lessor shall not have any obligation to relet or to attempt to relet the Leased Property. (d) If Lessee should fail to make any payment or cure any default hereunder within the time herein permitted, Lessor, without being under any obligation to do so and without thereby waiving such default, may make such payment and/or remedy such default for the account of Lessee (and enter the Leased Property for such purpose), and thereupon Lessee shall be obligated, and hereby agrees, to pay Lessor upon demand, all costs, expenses and disbursements (including reasonable attorney's fees) incurred by Lessor in taking such remedial action. (e) In the event that Lessor shall have taken possession of the Leased Property pursuant to the authority herein granted, then Lessor shall have the right to keep in place and use all of the fixtures and equipment at the Leased Property, including that which is owned by or leased to Lessee at all times prior to any foreclosure thereon by Lessor or repossession thereof by any Lessor thereof or third party having a lien thereon. The rights of Lessor herein stated shall be in addition to any and all other rights which Lessor has or may hereafter have at law or in equity, and Lessee stipulates and agrees that the rights herein granted Lessor are commercially reasonable. -17- 18 SECTION 19. IMPAIRMENT OF LESSOR'S TITLE. (a) Nothing in this Lease contained or any action or inaction by Lessor shall be deemed or construed to mean that Lessor has granted to Lessee any right, power or permission to do any act or to make any agreement which may create, give rise to, or be the foundation for, any right, title, interest, lien, charge or other encumbrance upon the estate of Lessor in the Leased Property, except as otherwise provided in (c) below. (b) In amplification and not in limitation of the foregoing, Lessee shall not permit any portion of the Leased Property to be used by any person or persons, as such, at any time or times during the Term of this Lease, in such manner as might reasonably tend to impair Lessor's title to or interest in the Leased Property or any portion thereof (including, without limitation, any portion thereof acquired through eminent domain), or in such manner as might reasonably make possible a claim or claims of adverse use, adverse possession, prescription, dedication, or other similar claims of, in, to or with respect to the Leased Property or any part thereof. Lessee, at its sole cost and expense, shall also take all other necessary steps to ensure and protect Lessor's title to the Leased Property, subject to Lessee's interest therein created by this Lease. (c) Portions of or interests in the Leased Property, as of the date hereof, are subject to certain agreements that may require the owner of the Leased Property to transfer such portions of or interests in the Leased Property to third parties, including without limitation the following agreements: (i) Ownership and Operating Agreement dated April 1, 1993, between MidCon Texas Pipeline Corp. and Valero Transmission L.P.; and (ii) Ownership and Operating Agreement dated January 10, 1996, between MidCon Texas Pipeline Corp. and TransAmerica Gas Transmission Corporation. Upon the valid exercise by any such third party of its rights under an agreement existing as of the date hereof to acquire any portion of or interests in the Leased Property, Lessor and Lessee agree to transfer all of their respective rights in such portion of or interests in such Leased Property to the extent covered by any such agreement, and this Lease shall terminate as to such portion of or interests in such Leased Property so transferred as of the date of such transfer. SECTION 20. LESSOR'S LIEN. To secure the payment of all rent due and to become due hereunder and the faithful performance of all of the other covenants of this Lease required by Lessee to be performed, Lessee hereby grants to Lessor a lien on and security interest in and to all property, chattels or goods which may be placed in the Leased Property and also upon all proceeds of any insurance which may accrue to Lessee by reason of damage to or destruction of any such property. All exemption laws are hereby waived by Lessee. This lien and security interest are given in addition to any statutory lien(s) of Lessor and shall be cumulative thereto. This lien and security interest may be foreclosed with or without court proceedings, by public or private sale, with or without notice and Lessor shall have the right to become purchaser, upon being the highest bidder at such sale. This -18- 19 Lease is intended as, and constitutes, a security agreement, and Lessor shall have all the rights, titles, liens and interests in and to all property, chattels or goods placed in the Leased Property which are granted a secured party, as that term is defined under the Uniform Commercial Code. Upon request of Lessor, Lessee agrees to execute financing statements relating to the aforesaid security interest or Lessor may file this Lease or a copy hereof as a financing statement. SECTION 21. LIMITATION OF LIABILITY. The term "Lessor" as used in this Lease insofar as the obligations on the part of Lessor are concerned, shall be limited to and include only the owner at the time in question of the Leased Property. Notwithstanding any provisions of this Lease to the contrary, Lessee hereby agrees that no personal or corporate liability of any kind or character whatsoever now attaches, or at any time hereafter under any condition shall attach to Lessor, or its partners or shareholders, as applicable, for payment of any amount payable under this Lease or for the performance of any obligation under this Lease. The liability of Lessor with respect to such obligations shall be exclusively limited to Lessor's interest in and to the Leased Property. Should Lessor fail to pay any sum required hereunder or fail to perform any obligation required to be performed by Lessor hereunder, then any judicial proceeding against Lessor shall be limited to Lessor's right and interest in and to the Leased Property and any improvement comprising a part thereof, and no attachment, execution, or other writ shall be sought, issued, or levied upon any assets, property or funds of Lessor, or its partners or shareholders, as applicable, other than Lessor's interest in and to the Leased Property. In the event of any transfer or transfers of title to the Leased Property, the Lessor named (and any successor thereto) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all obligations on the part of Lessor contained in this Lease thereafter incurred. SECTION 22. NON-WAIVER. Neither acceptance of rent by Lessor nor failure by Lessor to complain of any default of Lessee shall constitute a waiver of Lessor's rights hereunder. Waiver by Lessor of any default by Lessee shall not constitute a waiver of any other or subsequent default. No act or omission by Lessor or its agents shall be deemed to be the acceptance of a surrender of the Leased Property, and the Leased Property may not be surrendered unless such surrender is accepted by Lessor in writing. SECTION 23. HOLDING OVER. Upon the expiration or termination of the term of this Lease, Lessee shall peaceably surrender the Leased Property, any Alterations and any Additional Property to Lessor, and Lessor shall have the right to re-enter and resume and/or take possession of the Leased Property, any Alterations, and any Additional Property. If Lessee should remain in possession of the same after the termination of this Lease, then Lessee shall be a tenant-at-sufferance, subject to all the provisions of this Lease applicable during its Term, except that Lessee shall be liable for rental equal to (i) 300% of the monthly rent payable pursuant to Section 4(a)(iv) hereof, and (ii) the rent payable pursuant to Section 4(b) hereof, prorated on a per diem basis (which rental Lessee agree, binds and obligates itself to pay to Lessor upon demand for each and every day that Lessee remains in partial or total possession of the Leased Property). Such holding over shall not extend the Term hereof, and Lessee shall be liable to Lessor for all damages (consequential or otherwise) sustained by Lessor resulting from Lessee's failure to timely surrender the Leased Property. -19- 20 SECTION 24. LESSOR'S ENTRY. Lessor may enter in and upon the Leased Property from time to time to inspect same, to show same to prospective purchasers and for any other purpose, provided that such entry shall be made only during reasonable business hours and in a manner so as not to unreasonably interfere with Lessee's use of the Leased Property. SECTION 25. NOTICES. All notices required or permitted hereunder shall be in writing and may be given or served by depositing such notice with the United States postal service, certified mail with return receipt requested, postage prepaid, or by delivering same in person, addressed as follows: To Lessor: c/o MidCon Texas Gas Partners, Inc. 10889 Wilshire Blvd. Los Angeles, CA 90024 Attn: Vice President and Secretary To Lessee: 3200 Southwest Freeway Houston, TX 77027-7523 Attn: President Notices so mailed shall be effective from and after two (2) business days after being so mailed. Notices given in any other manner shall be effective only if and when actually delivered at the address of the addressee. SECTION 26. SURVIVAL. Any representation, warranty, covenant or agreement contained herein which contemplates performance after the expiration or termination of this Lease and all covenants of indemnity set forth in this Lease shall be deemed to survive the expiration or any termination of this Lease. TO THE FULL EXTENT ALLOWED BY LAW, LESSOR DISCLAIMS ALL REPRESENTATIONS OR WARRANTIES TO LESSEE OF ANY KIND, WHETHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, AS TO TITLE, HABITABILITY, CONDITION OF THE LEASED PROPERTY (INCLUDING, WITHOUT LIMITATION, SUITABILITY FOR A PARTICULAR PURPOSE OR COMMERCIAL USE) AND PROVISION OF SERVICES. SECTION 27. SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 16 hereof, the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns. SECTION 28. ENTIRE AGREEMENT AND MODIFICATION. This Lease constitutes the entire agreement between Lessor and Lessee and may be modified or amended only by a written document duly executed by both Lessor and Lessee. -20- 21 SECTION 29. TERMINOLOGY. The captions herein are for convenience only and shall not modify or effect the provisions hereof. Wherever used herein, each gender shall include each other gender, the singular shall include the plural, and the plural shall include the singular. SECTION 30. GOVERNING LAW, SUBMISSION TO JURISDICTION AND SEVERABILITY. This Lease shall be governed by and construed in accordance with the laws of the State of Texas. Any dispute relating to, arising out of, or connected with this Lease shall be filed and maintained in the State or Federal Courts located in Houston, Harris County, Texas. If any clause or provision of this Lease is illegal, invalid, or unenforceable, under present or future laws effective during the Term, then it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of both parties that in lieu of each clause or provision that is illegal, invalid or unenforceable, there be added as part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. SECTION 31. RELATIONSHIP OF PARTIES. It is the intention of the parties hereto to create the relationship of Lessor and Lessee, and no other relationship whatsoever is hereby created. Nothing in this Lease shall be construed to make the parties hereto partners or joint venturers. SECTION 32. RECORDING. Lessor and Lessee shall, at the request of the other, promptly execute an instrument in recordable form constituting a memorandum of this Lease which may be filed for record in the records of any county where the Pipeline System is located. SECTION 33. APPROVALS AND CONSENTS. Whenever the approval or consent of Lessor is required or requested hereunder, such approval or consent may be granted or withheld in Lessor's sole discretion unless expressly provided herein to the contrary. WITNESS THE EXECUTION HEREOF, as of the date first set forth hereinabove. LESSOR MIDCON TEXAS PIPELINE, L.P. BY ITS GENERAL PARTNER MIDCON GAS PARTNERS, INC. By: -------------------------------- John W. Alden, Vice President and Secretary -21- 22 LESSEE MIDCON TEXAS PIPELINE OPERATOR, INC. By: ---------------------------------------- Richard W. FitzGerald, Vice President STATE OF TEXAS ) ) COUNTY OF HARRIS ) The forgoing instrument was acknowledged before me on this the ____ day of December, 1996, by John W. Alden, Vice President and Secretary of MidCon Texas Gas Partners, Inc., General Partner of MidCon Texas Pipeline, L.P., on behalf of said corporation and limited partnership. ------------------------------------------- (S E A L) Notary Public in and for the State of Texas STATE OF TEXAS ) ) COUNTY OF HARRIS ) The forgoing instrument was acknowledged before me on this the ____ day of December, 1996, by Richard W. FitzGerald, Vice President of MidCon Texas Pipeline Operator, Inc., on behalf of such corporation. ------------------------------------------- (S E A L) Notary Public in and for the State of Texas -22- 23 EXHIBIT A [DESCRIPTION OF LEASED PROPERTY TO BE PROVIDED BY MIDCON. INCLUDE DESCRIPTION OF "FACILITIES AGREEMENT," IF NEEDED.] EX-10.Z 8 AMENDMENT NO. 1 INTRASTATE PIPELINE 1 AMENDMENT NUMBER ONE TO INTRASTATE PIPELINE SYSTEM LEASE THIS AMENDMENT NUMBER ONE TO INTRASTATE PIPELINE SYSTEM LEASE (this "Amendment"), is entered into of as 11:59 p.m. Central Standard Time on January 31, 1998 (the "Effective Time"), by MidCon Texas Pipeline, L.P., a Delaware limited partnership ("Lessor"), and MidCon Texas Pipeline Operator, Inc., a Delaware corporation ("Lessee"). WHEREAS, Lessor and Lessee entered into the Intrastate Pipeline System Lease, dated December 31, 1996 (as heretofore amended, supplemented or otherwise modified prior to the date hereof, the "Original Lease"); WHEREAS, Lessor is a limited partnership comprised of corporate partners, each of which partner is either directly or indirectly a wholly-owned subsidiary of Occidental Petroleum Corporation, a Delaware corporation ("OPC"); WHEREAS, Lessee is a wholly-owned subsidiary of MidCon Gas Services Corp., a Delaware corporation ("MidCon Gas"), and MidCon Gas is a wholly-owned subsidiary of MidCon Corp., a Delaware corporation ("MidCon"); 2 WHEREAS, pursuant to that certain Stock Purchase Agreement, dated as of December 18, 1997 (the "Stock Purchase Agreement"), by and between OPC and KN Energy, Inc., a Kansas corporation (the "Buyer"), OPC and the Buyer have agreed (i) that the Buyer shall buy and that OPC shall sell all of the stock of MidCon such that MidCon will become, on the date hereof, a wholly-owned subsidiary of the Buyer and (ii) that the Original Lease shall be amended as more fully set forth in the Stock Purchase Agreement; and Lessor and Lessee are willing, upon and subject to the terms and conditions hereof, so to amend the Original Lease (as so amended, "Lease"); NOW, THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto hereby agree that as of the Effective Time of this Amendment the Original Lease shall be amended as follows: PARAGRAPH 1. Purpose Section 3 shall be deleted in its entirety and the following shall be substituted therefor: "Section 3. Purpose. Lessee shall use the Leased Property only for the gathering, compression, treatment, receipt, delivery, processing, - 2 - 3 transportation and exchange of natural gas and its constituents, liquefiable hydrocarbons and liquid hydrocarbons; provided in each case that Lessee warrants that (i) Lessee shall be in compliance with all present and future laws, acts, rules, requirements, orders, ordinances and regulations of any Governmental Authorities which are applicable to the Pipeline System ("Applicable Laws") and prudent industry practice applicable to the Pipeline System and in compliance with the terms of the instruments (including, without limitation, easements, rights-of-way and permits) to which the Leased Property is subject and (ii) Lessee will not subject Lessor to any further regulation or consent, unless such further regulation or consent is caused by a change in Applicable Laws. Except to the extent currently subject thereto, as of the date hereof and notwithstanding anything herein to the contrary, Lessee shall do nothing to subject the Leased Property to regulation by the Federal Energy Regulatory Commission to any extent greater than the Leased Property is currently regulated without the prior written consent of Lessor (which consent can be withheld in its sole discretion, except no consent is required if such additional regulation is caused by a change in Applicable Laws). Lessee shall not use, occupy, or permit to be used or occupied, the Leased Property for any purpose that is illegal, that would make void or voidable any insurance relating to the Leased Property, or that would constitute a public or private nuisance." - 3 - 4 PARAGRAPH 2. Payment of Rent The last sentence of Section 4(a) shall be deleted in its entirety and the following shall be substituted therefor: "Such rent shall be payable on the first business day of each month, in advance, throughout the remainder of the Term by wire transfer of immediately available funds to a bank account of Lessor (designated from time to time in writing to Lessee not later than three business days prior to the date of payment)." PARAGRAPH 3. Abandonment of Portions of the Leased Property Section 7(e) shall be deleted in its entirety and the following shall be substituted therefor: "(e) Notwithstanding any provision in this Lease to the contrary, Lessee shall be permitted to abandon any part of the Leased Property or dispose of any portion of the Leased Property that, in each case (i) has a fair market value of less than $100,000 with respect to such abandoned or disposed Leased Property and is not necessary to operate and maintain the Pipeline System in a safe and reliable manner as then being operated by Lessee with no reduction in - 4 - 5 throughput capability and in compliance in all respects with Applicable Laws, or (ii) has a fair market value of less than $500,000 with respect to such abandoned and disposed Leased Property if such portion has either been damaged or condemned and is not necessary to operate and maintain the Pipeline System in a safe and reliable manner as then being operated by Lessee with no reduction in throughput capability and in compliance in all respects with Applicable Laws, or (iii) connects to a well that is no longer capable of producing in paying quantities. Lessee shall be entitled to retain the proceeds, if any, received with respect to property abandoned or otherwise disposed of pursuant to the authorization provided in the preceding sentence. Lessee shall also be permitted to abandon any portion of the Leased Property upon obtaining the prior written consent of Lessor (which consent shall not be unreasonably withheld). Lessee shall be responsible for, and pay all costs and expenses of abandoning or otherwise disposing of any portion of the Leased Premises in accordance with this Section. Lessee shall provide an annual report in writing to Lessor describing all portions of the Leased Properties which have been abandoned or disposed of by Lessee." - 5 - 6 PARAGRAPH 4. Indemnification Section 10(c) shall be deleted in its entirety and Sections 10(c) through 10(g) as follows shall be substituted therefor: "(c) Notwithstanding anything in this Lease to the contrary, including, but not limited to, this Section 10, Lessor shall indemnify and save Lessee and its partners, directors, officers, shareholders, employees, agents, successors, and assigns (collectively, the "Lessee Indemnified Parties") harmless from any and all liability, cost, expense, claim, loss or damage ("Loss") by reason of, resulting from or relating to any action taken by Lessor's employees or representatives while physically present on the Leased Property after the Effective Time of this Amendment which action constitutes gross negligence or willful misconduct." "(d) Except as provided in Section 10(b) and upon payment of all amounts due by Lessee to a Lessor Indemnified Party, Lessee, without further act, shall be subrogated to any and all claims or rights held by such Lessor Indemnified Party to recover from a third party (which is not any of the Lessor Indemnified Parties or any Person controlling, controlled by or under common control with any of the Lessor Indemnified Parties) for the amounts paid by Lessee to such Lessor Indemnified Party. Such Lessor Indemnified Party shall - 6 - 7 cooperate with Lessee and give such further assurances as are necessary or advisable to enable Lessee to pursue such claims (to the extent such claim is not in excess of the amount Lessee has paid to such Lessor Indemnified Party in respect of such amount), at Lessee's expense." "(e) With respect to any amount that Lessee is requested by a Lessor Indemnified Party to pay by reason of this Section 10, such Lessor Indemnified Party shall, if so requested by Lessee and prior to any payment, submit such additional information to Lessee as Lessee may reasonably request properly to substantiate the requested payment. In the case of any Loss indemnified by Lessee hereunder which is covered by a policy of insurance maintained by Lessee pursuant to Section 9 of the Lease, each Lessor Indemnified Party agrees to use reasonable efforts to cooperate, at Lessee's expense, with the insurers in the exercise of their rights to investigate, defend or compromise such Loss as may be reasonably required to retain the benefits of such insurance with respect to such Loss by providing reasonably requested information (provided that the recipient of such information has agreed in writing to hold all such information confidential under such recipient's established procedures for the safeguarding of confidential information)." - 7 - 8 "(f) In case any action, suit or proceeding ("Proceeding") shall be commenced or any written threat or assertion of a claim is received that could give rise to a Loss indemnified against under this Section 10, the affected Lessor Indemnified Party or Lessee Indemnified Party, as the case may be (the "Indemnified Party"), shall notify the Party which is to provide the indemnity (the "Indemnitor") (but the failure to do so shall not relieve the Indemnitor of its obligation to indemnify the Indemnified Party; provided, however, that nothing herein shall affect the Indemnitor's right to bring a separate action for damages to the extent that the Indemnitor is materially prejudiced as a result of such failure), and the Indemnitor shall be entitled, at its expense, acting through counsel selected by Indemnitor and reasonably acceptable to the Indemnified Party, to participate in, and, to the extent that Indemnitor desires, to assume and control the defense of such Proceeding, provided, however, that the Indemnitor shall not be entitled to assume and control the defense of any Proceeding unless the Indemnitor has acknowledged in writing to the Indemnified Party its obligation to indemnify the Indemnified Party for any Loss resulting from a settlement of or adverse determination of such Proceeding; and provided further, however, that the Indemnitor shall not be entitled to assume and control the defense of any such Proceeding in any one of the following circumstances: (i) in the case where Lessee is the Indemnitor, if an Event of Default has occurred and is continuing, (ii) if the Indemnified Party notifies the Indemnitor that it has determined, on advice of counsel, that defense of such Proceeding by the - 8 - 9 Indemnitor would involve a conflict of interest between the Indemnitor and the Indemnified Party, (iii) if such Proceeding involves a material risk of the sale, forfeiture or loss of the Leased Property or any substantial part thereof or substantial interest therein, (iv) if such Proceeding entails any risk of criminal liability of the Indemnified Party or (v) if there is a reasonable likelihood that such Proceeding will be adversely determined and the Indemnitor has not demonstrated to the reasonable satisfaction of the Indemnified Party its ability to pay any Loss arising as a result thereof (taking into consideration any applicable insurance coverage). In the event that the Indemnitor shall have assumed control of the defense of any Proceeding as provided above, the Indemnified Party shall cooperate with the Indemnitor in such defense and shall be entitled, at its expense, acting through counsel reasonably acceptable to Indemnitor, to participate in any such Proceeding. In any event, the Indemnitor shall not have any right to settle any such Proceeding or other claim in any manner or on any basis that involves the imposition of any liability or obligation on any Indemnified Party (other than a monetary liability that is fully discharged by the Indemnitor) without the prior written consent of such Indemnified Party. Nothing contained in this Section 10 shall be deemed to require an Indemnified Party to contest any Loss or to assume responsibility for, or control of, any Proceeding with respect thereto. Each Indemnified Party shall, at the expense of the Indemnitor, use its good faith efforts to supply the Indemnitor with such information and documents reasonably requested by the Indemnitor as are necessary or advisable for the - 9 - 10 Indemnitor to participate in or defend any Proceeding or to respond to any other claim to the extent permitted by this Section 10. If any Indemnified Party enters into any settlement or other compromise with respect to any Loss without the prior written consent of the Indemnitor (which consent shall not be unreasonably withheld or delayed, and shall not be required in the case of Lessee as the Indemnitor if an Event of Default has occurred and is continuing at the time of such settlement or compromise), or does not permit the Indemnitor to participate in or defend a Proceeding or other claim that the Indemnitor is entitled to participate in or defend hereunder, then the Indemnified Party shall be deemed to have waived its right to be indemnified under this Section 10 with respect thereto." "(g) So long as no Event of Default has occurred and is continuing in the case of Lessee as the Indemnitor, if an Indemnified Party obtains a refund of all or any part of any Loss paid, reimbursed or otherwise indemnified by Indemnitor hereunder, such Indemnified Party shall pay to the Indemnitor the amount so refunded, including any interest thereon actually received from the party from whom such refund was obtained, net of any taxes payable by (except to the extent such tax is off-set by reason of the re-payment to the Indemnitor contemplated by this Section 10(g)) such Indemnified Party in respect of the receipt or accrual of such refund or interest (but not an amount in excess of the - 10 - 11 amount the Indemnitor has paid to such Indemnified Party in respect of such Loss). If an Event of Default has occurred and is continuing in the case of Lessee as the Indemnitor, any such amount so refunded shall be (i) held by such Indemnified Party as security for the obligations of Lessee under this Lease, (ii) at the option of Lessor, may be applied against Lessee's obligations under this Lease, and (iii) at such time thereafter as no Event of Default shall be continuing, shall be promptly paid to the extent not theretofore applied against such obligations." PARAGRAPH 5. Alterations and Additions Section 14(c) shall be deleted in its entirety and the following shall be substituted therefor: "(c) Title to all Additional Property and Alterations shall be and remain in Lessee during the Term of this Lease. Lessee shall not permit, without Lessor's written consent, title to any Additional Property to be taken or held by any other Person (including, without limitation, Lessee's affiliates) without the prior written consent of Lessor (which can be withheld in its sole discretion). Upon expiration or termination of this Lease, (i) title to all Essential Additional - 11 - 12 Property and to all Alterations shall automatically vest in Lessor, free and clear of all claims and encumbrances, and Lessee shall have no further claim thereto (and Lessee hereby grants, conveys and assigns any and all such Essential Additional Property and any and all such Alterations to Lessor, effective as of the expiration or termination of this Lease) and (ii) Lessee shall continue to have title to any and all Additional Property which is not Essential Additional Property. Notwithstanding the foregoing, to the extent that any such Alterations are separate in title from the Leased Property, they shall continue to have the character of real property, and in no event shall Lessee's ownership thereof and its leasehold estate in the Leased Property be separately conveyed. "Essential Additional Property" shall mean Additional Property which is necessary to operate and maintain the Pipeline System in a safe and reliable manner as then being operated by Lessee with no reduction in throughput capability and in compliance in all respects with Applicable Laws." Section 15(a)(i) shall be modified to substitute "Essential Additional Property" for "Additional Property" wherever it appears. Section 15(c) shall be modified by the deletion of the first sentence thereof in its entirety and the following shall be substituted therefor: - 12 - 13 "Notwithstanding anything herein to the contrary, upon expiration of the Term of this Lease, provided there is no Default or Event of Default, Lessee shall be entitled to remove from the Leased Property any of the Additional Property and any other property of Lessee (which is not Leased Property), that does not constitute an Essential Additional Property or an Alteration." PARAGRAPH 6. Assignment and Sublease Section 16 "Assignment and Sublease" shall be deleted in its entirety and the following shall be substituted therefor: "Section 16. Assignment and Sublease "(a) Except as set forth in Sections 16(d) and 16(e) hereof, without the prior written consent of Lessor, which consent can be withheld in Lessor's sole discretion, Lessee shall not transfer or assign this Lease or sublease the Leased Property or, subject to Sections 7(e) and 19(c), any part thereof (whether by operation of law or otherwise) or grant any concession or license within the - 13 - 14 Leased Property, and any attempt to do any of the foregoing without Lessor's consent shall be void." "(b) Notwithstanding any consent by Lessor under Sections 16(a) and 16(e), the undersigned Lessee will remain jointly and severally liable (along with each assignee or subtenant approved pursuant to Sections 16(a) and 16(e), who shall automatically become liable for all obligations of Lessee hereunder), and Lessor shall be permitted to enforce the provisions of this instrument directly against the undersigned Lessee and/or any such approved assignee or sublessee without proceeding in any way against any other entity." "(c) Any consent by Lessor to a particular assignment, sublease or other event specified in Sections 16(a) and 16(e) hereof shall not constitute Lessor's consent to any other or subsequent assignment, sublease or other event specified in Sections 16(a) and 16(e) hereof." "(d) So long as no Default or Event of Default has occurred and is continuing, Lessee and any Permitted Assignee (each, acting in the capacity of an assignor of rights under this Section 16(d), an "Assignor") may at any time and from time to time during the Term assign, at Lessee's expense, to any Permitted Assignee all (but not less than all) of such Assignor's rights and obligations under this Lease. Upon such execution, delivery to Lessor, and, if - 14 - 15 necessary, recording of an Acceptable Assignment and Assumption Agreement (as defined below) from and after the effective date determined pursuant to such Acceptable Assignment and Assumption Agreement, (i) the assignee thereunder shall be a party hereto and shall have the rights and obligations of Lessee hereunder and the term "Lessee" shall mean such successor Permitted Assignee, (ii) such Assignor shall be released from its obligations under this Lease, including its obligations for the payment of rent, and shall cease to be a party hereto and (iii) in the case of the first such assignment hereunder, the Buyer will be released from its obligations under the Buyer's Guaranty, as amended, supplemented or otherwise modified from time to time, including its obligations for the payment of rent and, in the case of any other assignment hereunder, any guarantor of the relevant Assignor shall be released from its obligations under its guaranty of this Lease, including its obligations for the payment of rent." "Acceptable Assignment and Assumption Agreement" shall mean an assignment and assumption agreement which meets all of the following criteria (i) is in form and substance reasonably satisfactory to Lessor; (ii) assigns such Assignor's interest and pursuant to which such Permitted Assignee assumes all of such Assignor's obligations hereunder (including the obligations to pay all rent when due hereunder and all rent owing by the Assignor or any previous Assignor to Lessor); and (iii) either (A) contains covenants similar in form and - 15 - 16 substance to the Buyer's Pipeline Covenants or (B) is supported by an absolute and unconditional guaranty (from a guarantor of such Permitted Assignee as contemplated in the definition of "Permitted Assignee") in form and substance reasonably satisfactory to Lessor, and which contains covenants similar in form and substance to the Buyer's Pipeline Covenants as defined below (it being understood and agreed that after an assignment pursuant to this Section 16(d) from Lessee to a Person unaffiliated with Lessee and the Buyer, any covenants required in successive Acceptable Assignment and Assumption Agreements or guarantees in support thereof pursuant to clause (d)(iii) above shall be covenants that are similar in form and substance to the Buyer's Pipeline Covenants). "Buyer Guarantor" shall mean the Buyer, or its permitted successor or assigns. "Buyer's Guaranty" shall mean the Guaranty and Agreement for the benefit of Lessor executed by the Buyer on the date hereof all in the form of Exhibit B hereto. "Buyer Pipeline Covenants" shall mean the covenants in Section 10 in the Buyer's Guaranty and the covenants incorporated by reference in Section 11 of the Buyer's Guaranty as applicable from time to time. - 16 - 17 "Permitted Assignee" means either: (a) any Person fifty percent (50%) or more of whose voting securities are owned, directly or indirectly, by Lessee or the Buyer or (b) any Person (1) which is not an affiliate of Lessee or the Buyer, (2) which either (A) has a tangible net worth of not less than $100,000,000, or (B) is not a Person meeting the criteria set forth in clause (b)(2)(A) of this definition but which provides an absolute and unconditional guaranty of its obligations under the Lease (including covenants that are similar in form and substance to the Buyer's Pipeline covenants defined above) from a Person meeting the criteria set forth in clause (b)(2)(A) of this definition and - 17 - 18 (3)(A) whose long-term senior unsecured indebtedness is rated not less than Baa2 (or its equivalent) by at least two Rating Agencies, (B) which is not a Person meeting the criteria set forth in clause (b)(3)(A) of this definition but which provides an absolute and unconditional guaranty of its obligations (including covenants that are similar in form and substance to the Buyer's Pipeline covenants defined above) under the Lease from a Person meeting the criteria set forth in clause (b)(3)(A) of this definition, or (C) which satisfies the minimum financial criteria then in effect to obtain the rating referred to in clause (b)(3)(A) of this definition, in the reasonable opinion of Lessor." "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Rating Agencies" means any of Standard & Poor's Ratings Services, Moody's Investors Service, Inc. and Duff & Phelps Credit Rating Co. - 18 - 19 "(e) Subleasing. So long as no Default or Event of Default has occurred and is continuing, Lessee may, with the prior written consent of Lessor, (which consent will not be unreasonably withheld) sublease the Leased Property, or any portion thereof which can be operated independently of the remainder of the Pipeline System and the remainder of the Pipeline System can be operated in a safe and reliable manner in compliance in all respects with Applicable Laws, to any Person for a period not extending beyond the Term; provided, that in the case of any such sublease (A) the subleasing of the Leased Property or any portion thereof, to such sublessee shall not result in a violation of Applicable Laws on the part of Lessor, (B) the rights of the sublessee thereunder are made expressly subject and subordinate to all the terms of this Lease and terminate upon the termination of this Lease, (C) such transfer of possession does not operate to relieve Lessee of any of its obligations hereunder, and (D) prior to entering into such sublease, if the sublessee thereunder is responsible for providing insurance for the Leased Property, or a portion thereof, as the case may be, Lessee has furnished to Lessor a certificate of an independent insurance broker with respect to any policies of insurance required by Section 9 to be in effect upon commencement of such sublease. In the case of any such sublease, Lessee shall remain primarily liable hereunder for the performance of all the terms of this Lease as if such transfer had not occurred and all the terms and conditions of this Lease shall remain in full force and effect. Lessee will promptly notify Lessor of its entry into any sublease and - 19 - 20 will provide Lessor the name of the sublessee and a list of the property subleased with the location at which they will be located and will provide Lessor promptly upon request copies of any such sublease. "(f) Lessor shall have the right to transfer or assign, in whole or in part, by operation of law, or otherwise, its rights and obligations hereunder without any liability to Lessee and Lessee shall attorn to any party to which Lessor transfers the Leased Property; provided, however, that upon any such assignment, the assignee shall assume all obligations of Lessor hereunder with respect to such rights assigned, such assignment shall be permitted by Applicable Laws and such assignment shall not in any way impair the Lessee's right or ability to lease and operate the Leased Properties or to otherwise utilize the Leased Properties in the manner permitted by this Lease"; provided however, that (a) Lessor shall provide Lessee written notification of Lessor's intent to assign or transfer the Lease not less than thirty (30) days in advance of the execution by Lessor of any binding commitment to assign or transfer this Lease and (b) if Lessor proposes to transfer or assign its rights and obligations under this Lease in accordance with this Section 16(f) at any time on or before January 31, 2008 and the Person to whom the assignment or transfer shall be made is the owner or operator of, or a Person controlling an owner or operator of, a natural gas pipeline system delivering more than 250 million cubic feet per day (based on an annual average) of natural gas to the area in the vicinity of the - 20 - 21 City of Houston, Lessor shall obtain the written consent of Lessee, which consent shall not be unreasonably withheld or delayed." PARAGRAPH 7. Lessee's Default Section 17 shall be deleted in its entirety and the following substituted therefor: Section 17. Lessee's Default. Lessor shall have the right to terminate this Lease or to terminate Lessee's right of possession without terminating this Lease in the event that any of the following events or conditions occur or exist (each an "Event of Default" and any event or condition that, upon notice, lapse of time or both would constitute an Event of Default being referred to as a "Default"): (a) any rent payable in accordance with this Lease is not paid within ten (10) days after the due date thereof; (b) Lessee fails to correct or cure a breach of any covenant or agreement of Lessee contained in this Lease, except with respect to nonpayment of rent, within thirty (30) days after Lessor has notified Lessee in writing of any such breach thereof; provided, however, that, to the extent Lessee - 21 - 22 has commenced diligent and reasonable efforts to effect a cure of such breach during such thirty day period, such thirty day period shall be extended for so long as Lessee continues to pursue such cure with reasonable and diligent efforts so long as such extension would not cause or result in a material adverse effect or consequence to any portion of the Leased Property; "(c) Lessee vacates or abandons any portion of the Leased Property (unless permitted pursuant to Section 7(e) hereof); "(d) If the Guaranty and Agreement dated December 31, 1996 for the benefit of Lessor (the "MidCon Guaranty") issued by MidCon Corp. ("MidCon Guarantor") is still in effect and the MidCon Guarantor fails to correct or cure a breach of any covenant or agreement of MidCon Guarantor contained in the MidCon Guaranty, within thirty (30) days after Lessor has notified MidCon Guarantor in writing of any such breach thereof; provided, however, that, to the extent MidCon Guarantor has commenced diligent and reasonable efforts to effect a cure of such breach of any covenant or agreement of MidCon Guarantor, other than a breach of any of the covenants in Sections 10 and 11 of the MidCon Guaranty, during such thirty day period, such thirty day period shall be extended for so long as MidCon Guarantor continues to pursue such cure with reasonable and diligent efforts so long as such extension would not cause or result in a material adverse effect or consequence to any portion of the Leased Property; - 22 - 23 and provided, further, however, there shall be (i) no Event of Default with respect to nonpayment of the sum of the Agreed Amount (as defined therein) and Base Amount (as defined therein) and (ii) no Event of Default under Section 11.8 of the MidCon Guaranty, as long as MidCon Guarantor's Consolidated Adjusted Tangible Net Worth (as defined in the MidCon Guaranty) exceeds the sum of (a) $1.5 billion and (b) 25% of MidCon Guarantor's cumulative consolidated after tax net income subsequent to December 31, 1996. "(e) If the Buyer's Guaranty shall be in effect and the Buyer Guarantor fails to correct or cure a breach of any covenant or agreement of the Buyer Guarantor contained in the Buyer's Guaranty except with respect to non-payment of the sum of the Agreed Amount (as defined therein) and the Base Amount (as defined therein) within thirty (30) days after Lessor has notified the Buyer Guarantor in writing of any such breach thereof; provided, however, that, to the extent Buyer Guarantor has commenced diligent and reasonable efforts to effect a cure of such breach of any covenant or agreement of Buyer Guarantor, other than a breach of any of the Buyer Pipeline Covenants, during such thirty day period, such thirty day period shall be extended for so long as Lessee continues to pursue such cure with reasonable and diligent efforts, so long as such extension would not cause or result in a material adverse effect or consequence to any portion of the Leased Property. For purposes of this Section 17, (i) "Guarantor" shall mean the "MidCon Guarantor" until the Buyer - 23 - 24 Guaranty becomes effective and the MidCon Guaranty is released pursuant to Section 34 and thereafter the Buyer Guarantor, and (ii) "Guaranty" shall mean the MidCon Guaranty until the Buyer's Guaranty becomes effective and the MidCon Guaranty is released pursuant to Section 34 and thereafter the Buyer's Guaranty. "(f) any representation or warranty made by Lessee herein, or made by any Guarantor, in the respective Guaranty or in any certificate or statement delivered pursuant hereto or thereto shall prove to have been false or misleading in any material respect on the date as of which made or deemed made; "(g) (i) a default (as principal or guarantor) by either Lessee or any Guarantor in payment when due of any principal or interest under any instrument evidencing indebtedness for borrowed money or of any rental on any lease or a revolving credit agreement (in each case, whether now existing or hereafter created), or (ii) the occurrence of an event of default (with respect to Lessee or any Guarantor) as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money of, or guaranteed by, Lessee or any Guarantor (whether such indebtedness now exists or is hereafter created) and the occurrence of such event of default causes such indebtedness to become - 24 - 25 due and payable prior to its stated maturity or due date and has not been duly waived in writing; provided, however, that no default under this subsection (g) shall be deemed to exist as a result of a default or event of default (as described in clause (i) or clause (ii) above) in respect of any such indebtedness if the principal of and interest on such indebtedness, when added to the principal of and interest on all other such indebtedness then in default or the subject of such an event of default (exclusive of indebtedness under subsection (a) above), does not exceed $75,000,000; "(h) a decree, judgment or order by a court of competent jurisdiction is entered adjudging Lessee, any Material Entity (as hereinafter defined) or any Guarantor as bankrupt or insolvent, or ordering relief against Lessee, any Material Entity or any Guarantor in response to the commencement of an involuntary bankruptcy case, or approving as properly filed a petition seeking reorganization or liquidation of Lessee, any Material Entity or any Guarantor under any bankruptcy or similar law; or a decree or order of a court of competent jurisdiction over the appointment of a receiver, liquidator, trustee or assignee in bankruptcy or insolvency of Lessee, any Material Entity or any Guarantor or of the property of Lessee, any Material Entity or any Guarantor, or for the winding up or liquidation of the affairs of any of them is entered; - 25 - 26 "(i) any of Lessee, any Material Entity, or any Guarantor (i) institutes voluntary bankruptcy proceedings, or consents to the filing of a bankruptcy proceeding against it, or files a petition or answer or consent seeking reorganization or liquidation under any bankruptcy or similar law or similar statute, or consents to the filing of any such petition, (ii) consents to the appointment of a custodian, receiver, liquidator, trustee, sequestrator, assignee or similar official in bankruptcy or insolvency of it or any of its assets or property, (iii) makes a general assignment for the benefit of creditors, (iv) admits in writing its inability to pay its debts generally as they become due, (v) within the meaning of Title 11, U.S. Code, or any similar Federal, state or foreign law for the relief of debtors, becomes insolvent, (vi) fails generally to pay its debts as they become due, or (vii) takes any corporate action in furtherance of or to facilitate, conditionally or otherwise, any of the foregoing; or "(j) one or more judgments or decrees in an aggregate amount of $60,000,000 or more is entered by a court or courts of competent jurisdiction against Lessee or any Guarantor (other than any judgment as to which, and only to the extent, a reputable insurance company has acknowledged coverage of such claim in writing) and (i) any such judgments or decrees is not stayed, discharged, paid, bonded or vacated within thirty (30) days or (ii) enforcement proceedings are commenced by any creditor on any such judgments or decrees; - 26 - 27 "The term "Material Entity" shall mean (i) Buyer Guarantor, or (ii) any of its Subsidiaries which Subsidiaries own directly or indirectly, in the aggregate, 10% or more of consolidated total assets as set forth on the Buyer Guarantor's audited consolidated financial statements as of the end of the most recently completed fiscal year of the Buyer Guarantor." PARAGRAPH 8. Notice In Section 25, substitute the following for the address of Lessee: If to Guarantor, as follows: KN Energy, Inc. 370 Van Gordon P.O. Box 281304 Lakewood, Colorado 80228-8304 Telephone: (303) 989-1740 Fax: (303) 763-3115 Attn: Vice President and Treasurer PARAGRAPH 9. Guaranty A new Section 34 shall be added to the Original Lease as follows: "Section 34. Guaranty. MidCon provided the MidCon Guaranty with regard to Lessee's performance of the Original Lease. The MidCon Guaranty - 27 - 28 shall be in full force and effect upon the execution of this Amendment. However, the Buyer has executed and delivered to Lessor the Buyer's Guaranty. The Buyer's Guaranty shall become effective at such time as either (i) the Buyer's Maximum Leveraged Percentage (as defined in Section 5.07 of the Buyer Guarantor's Credit Agreement) applicable pursuant to Section 11(b)(i) of the Buyer's Guaranty is reduced to sixty-seven percent (67%) in accordance with that Section or (ii) the Lessor shall, at its option, elect by written notice to Guarantor to make this Guaranty effective. In either case, Lessor agrees to release the MidCon Guaranty. PARAGRAPH 10. Options to Purchase and Purchase Upon Event of Loss A new Section 35 shall be added to the Original Lease as follows: Section 35. Options to Purchase and Event of Loss In consideration of the Buyer Guarantor acquiring all the capital stock of MidCon from OPC and providing the Buyer's Guaranty to Lessor, Lessor hereby grants Lessee the option to purchase the Leased Property as set forth in this Section 35. Each option to purchase the Leased Property and the procedure for purchase upon an Event of Loss set forth in Section 35(b) shall be subject to the condition that no Default or Event of Default shall have occurred and be - 28 - 29 continuing either at the date that notice of such election, or Notice of Event of Loss, is given by Lessee or at the date that Lessee would purchase the Leased Property. (a) Option to Purchase at End of Term. Lessee is hereby granted the option to purchase all (but no less than all) of the Leased Property upon the expiration of the Term, as defined in Section 2, at a price equal to the Fair Market Value of the Leased Property, as defined in Section 35(d). In order to exercise this Option to Purchase, Lessee must give Lessor written notice of its intent to exercise its option to purchase no later than fifteen (15) months before the expiration of the Term. (b) Purchase Upon Event of Loss. Upon the occurrence of an Event of Loss with respect to the Leased Property, Lessee shall promptly (and in any event within the earlier of thirty (30) days after the occurrence of such Event of Loss and five days after a responsible officer of Lessee obtains knowledge thereof) notify Lessor of such Event of Loss. If the Option Price (as defined below) has been determined as of such dates, on (i) the earlier of (A) the Determination Date next following the date of receipt by Lessee of insurance proceeds in respect of such Event of Loss or (B) the latest Determination Date that occurs on or before the date one - 29 - 30 hundred eighty (180) days following the occurrence of such Event of Loss (or, in each case under clause (A) and (B) above, such later Determination Date immediately succeeding the date on which the Option Price is determined) or (ii) in the event of condemnation, the next Determination Date following the final condemnation award, Lessee shall pay to Lessor an amount equal to the Option Price of the Leased Property, computed as of such Determination Date, plus any rent payable on such date (it being understood and agreed that Lessee shall continue to be obligated to pay all rent due on or prior to the Determination Date on which such Option Price is due (notwithstanding the occurrence of such Event of Loss)). Notwithstanding Sections 11 and 12, Lessee shall not be obligated to replace the Leased Property upon the occurrence of an Event of Loss. Upon payment by Lessee of the Option Price for the Leased Property following an Event of Loss, together with all rent then due hereunder (including, without limitation, all rent due on any date occurring on or prior to the Determination Date on which such Option Price payment is due), (i) all obligations of Lessee hereunder to pay rent in respect of the Leased Property, and the Term, shall terminate and (ii) Lessor shall transfer to, or at the direction of, Lessee, if applicable, the proceeds received by Lessor in the event of condemnation from the relevant government authority as a result of the condemnation as well as the remainder of the Leased Property. LESSEE'S INDEMNIFICATION OBLIGATION AS DESCRIBED IN SECTION 10(A) SHALL BE IN FULL FORCE AND EFFECT IF AN EVENT OF LOSS OCCURS. - 30 - 31 "Determination Date" means the first day of each month during the Term that is not a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized or required by law or other government actions to close in New York City. "Event of Loss", with respect to the Leased Property, means any of the following events: (i) the loss of all or Substantially All of the Leased Property or of the use thereof, due to the destruction of the Leased Property through fire or other casualty; (ii) damage to the Leased Property which renders all or Substantially All (as defined below) of the Leased Property permanently unfit for normal use for any reason whatsoever; (iii) any event that results in a total loss or constructive total loss of all or Substantially All of the Leased Property or an insurance settlement with respect to the Leased Property on the basis of such a total loss; (iv) the condemnation, confiscation or seizure of all or Substantially All of the Leased Property by any governmental authority or purported governmental authority; or (v) the requisition of use by any governmental authority or purported governmental authority which shall have resulted in the loss of possession of all or Substantially All of the Leased Property by Lessee and such loss of possession which shall have continued beyond the earlier of the balance of the Term and one hundred eighty (180) consecutive days, unless waived by Lessor. In determining if "Substantially All" of the Leased Property is - 31 - 32 impacted as noted above, the impacted Leased Property must have a depreciated value on Lessor's books for financial accounting purposes of eighty percent (80%) or more of the depreciated value of the entire Leased Property on Lessor's books for financial accounting purposes. "Option Price", shall mean, with respect to the Leased Property, an amount that, as of a given date, is equal to the higher of (i) the aggregate of the nondiscounted value of all the rentals to be paid to Lessor pursuant to Section 4 of the Lease during the remainder of the Term following such date or (ii) the Fair Market Value of the Leased Property (before any Event of Loss, if applicable) determined, as of such date, as provided in Section 35(d). (c) Early Buyout Option. On and after February 1, 2008, Lessee may purchase all (but not less than all) of the Leased Property on the purchase date specified by Lessee for a price equal to the Option Price as of such date. Upon payment by Lessee of the Option Price for the Leased Property pursuant to this Section 35(c), together with all rent for the Leased Property then due hereunder, all obligations of Lessee hereunder to pay rent for the Leased Property, and the Term, shall terminate. Not earlier than twenty-four (24) months and not later than fifteen (15) months prior to the date specified for the purchase of the Leased Property, - 32 - 33 Lessee shall give Lessor notice (the "Fifteen Month Notice") of its election to exercise the Early Buyout Purchase Option and the Business Day on which Lessee intends to complete the purchase. (d) In the event of the exercise of any of the options to purchase or the purchase upon an Event of Loss in this Section 35, the following terms and conditions shall apply: (i) the "Fair Market Value" of the Leased Property shall be determined by agreement between Lessor and Lessee or, if Lessor and Lessee are unable to agree on a Fair Market Value by one hundred and eighty (180) days either before the end of the Term or before the earlier date Lessee intends to make the purchase under Sections 35(b) or 35(c), the Fair Market Value of the Leased Property shall be determined by a team of three appointed appraisers each having appropriate industry experience to make such valuation, with one appraiser to be selected by Lessor, one appraiser to be selected by Lessee, and the third appraiser to be selected by the first two appraisers. The determination of Fair Market Value shall be the value agreed upon by at least two of the appraisers and, if no such agreement is reached, then the average of the two highest values determined by the appraisers. - 33 - 34 (ii) LESSEE SHALL ACCEPT THE LEASED PROPERTY "AS IS, WHERE IS," WITH ALL FAULTS AND WITHOUT ANY REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED OR STATUTORY, BY LESSOR AS TO THE TITLE TO THE LEASED PROPERTY, THE NATURE, CONDITION (INCLUDING, WITHOUT LIMITATION, THE ENVIRONMENTAL CONDITION) OR USABILITY THEREOF. LESSEE HEREBY RELEASES AND WAIVES ANY AND ALL CLAIMS, DEMANDS, LOSSES, LIABILITIES, DAMAGES COSTS, OR EXPENSES OF ANY KIND OR NATURE (INCLUDING ATTORNEYS' FEES AND COURT COSTS), INCLUDING DAMAGES FOR PERSONAL INJURY OR DEATH OR PROPERTY LOSS (COLLECTIVELY, "LOSSES"), ARISING OUT OF OR RELATED TO THE FOREGOING, EVEN IF SUCH LOSSES ARISE OUT OF OR ARE RELATED TO (OR ALLEGEDLY ARISE OUT OF OR ARE RELATED TO ) THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF LESSOR OR ANY LESSOR INDEMNIFIED PARTY. Lessor shall transfer title in and to all of the Leased Property to or at the direction of Lessee, and shall furnish to or at the direction of Lessee, at the expense of Lessee, one or more bills of sale and deeds, in form and substance reasonably satisfactory to Lessee, evidencing such transfer all in accordance with the foregoing paragraph. - 34 - 35 (iii) Lessee agrees to obtain all consents and approvals for the transfer of the Leased Property and to pay all transfer taxes or other assessments for the transfer of the Leased Property and all costs arising from the transfer. PARAGRAPH 11. Lessor's Covenants, Representation and Warranties Section 36 shall be added to the Original Lease as follows: "Section 36. Lessor's Covenants, Representations and Warranties. "(a) Representations and Warranties of Lessor. Lessor represents and warrants to Lessee that: (i) Lessor is a limited partnership duly organized, validly existing and in good standing under the laws of Delaware and has the power and authority and the legal right to own and operate its property, to lease the property it operates and to conduct the business in which it is currently engaged; (ii) Lessor has the power and authority and the legal right to execute and deliver, and to perform its obligations under, this Lease, and - 35 - 36 has taken all necessary action to authorize its execution, delivery and performance of this Lease; and (iii) This Lease constitutes a legal, valid and binding obligation of Lessor enforceable in accordance with its terms, except as may be affected by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) general equitable principles, including the implied covenant of good faith and fair dealing." "(b) Covenants of Lessor. Lessor covenants and agrees with Lessee as follows: (i) Lessor Liens. Lessor warrants, agrees and covenants that it will not, directly or indirectly, create, incur, assume or suffer to exist, and, at its expense (without any right of indemnity under this Lease), shall promptly take such action as may be necessary duly to discharge a lien, mortgage, deed of trust, encumbrance, pledge, charge, lease, easement, servitude or security interest of any kind (collectively, "Lien") against any portion of the Leased Property (i) in favor of any taxing authority by reason of the nonpayment by Lessor (or any affiliate thereof) of any tax or assessment (other than Taxes relating to the Leased Property for which Lessee is responsible hereunder and - 36 - 37 other than taxes being diligently contested by appropriate proceedings) imposed on Lessor or (ii) that results from any act of, or failure to act by, or in connection with claims against, Lessor (or any affiliate thereof from and after the Effective Date), unrelated to its ownership of, or interest in, such portion of the Leased Property or the transactions contemplated by this Lease (other than Liens arising in the ordinary course of Lessor's business which are diligently being contested by Lessor and which will not subject the Leased Property to forfeiture). In any event, Lessee's obligation under this Lease to take action to remove or satisfy Non-Permitted Liens pursuant to Section 13(a) shall remain in full force and effect." "(ii) Quiet Enjoyment. Subject to Lessor's rights to terminate this Lease, or take possession of the Leased Property under Section 17, and subject to all other rights of Lessor described in the Lease, including, but not limited to, Sections 1, 3, 4, 5, 8, 10, 14, 18, 19, 20, 24 and 26, Lessor warrants, agrees and covenants that, unless a Default or an Event of Default shall have occurred and be continuing, Lessor, any Person acting by, through or under Lessor or deriving its rights from Lessor, and any successor or assign of Lessor or any such Person, shall, during the Term take no action inconsistent with the right of Lessee, its successor and permitted assigns to peaceably and quietly have, hold, use and enjoy possession of the Leased Property or any portion thereof as provided herein. Nothing in this Section shall negate or limit the - 37 - 38 rights granted to Lessor, or the obligations of Lessee, under this Lease as amended under Section 28." PARAGRAPH 12. Except as specifically modified by this Amendment, the other terms and conditions of the Original Lease as modified or waived only by agreements in writing signed by both Lessor and Lessee shall remain in full force and effect as provided in Section 28. WITNESS THE EXECUTION HEREOF, as of the date first set forth hereinabove. LESSOR MIDCON TEXAS PIPELINE, L.P. BY ITS GENERAL PARTNER MIDCON GAS PARTNERS, INC. By: ----------------------------- Name: David C. Yen Title: Vice President & Treasurer LESSEE MIDCON TEXAS PIPELINE OPERATOR, INC. By: ----------------------------- Name: David C. Yen Title: Vice President & Treasurer - 38 - 39 STATE OF CALIFORNIA ) ) S.S. COUNTY OF LOS ANGELES ) On January 30, 1998, before me, Sharon C. Fierro, the undersigned notary public, personally appeared David C. Yen, personally known to me to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument, the entities upon behalf of which he signed, executed the instrument. WITNESS my hand and official seal. - ------------------------------------- Notary Public in and for the State of California [Notarial Seal] - 39 - 40 CONSENT AND ACKNOWLEDGMENT The undersigned Guarantor, by its signature hereto, acknowledges and agrees to the terms and conditions of that certain Amendment Number One to Intrastate Pipeline System Lease entered into by and between MidCon Texas Pipeline, L.P. (Lessor) and MidCon Texas Pipeline Operator, Inc. (Lessee) as of 11:59 p.m. Central Standard Time on January 31, 1998 (the "Amendment"). The undersigned acknowledges and reaffirms its obligations owing under the Guaranty and Agreement dated December 31, 1996 for the benefit of Lessor (defined in Paragraph 7 of the Amendment as the "MidCon Guaranty") and agrees that such Guaranty shall remain in full force and effect. Although the undersigned Guarantor has been informed by the Lessor of the matters set forth in the Amendment, and the undersigned has acknowledged and agreed to same, the undersigned understands and agrees that the Lessor has no duty to notify Guarantor or to seek Guarantor's acknowledgment or agreement, and nothing contained herein shall create such a duty as to any transactions or amendments hereafter. Capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the Intrastate Pipeline System Lease as modified by the Amendment. January 30, 1998 MIDCON CORP. By: -------------------------------- Name: David C. Yen Title: Vice President & Treasurer - 40 - EX-12 9 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 K N ENERGY, INC. AND SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31 ----------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in Thousands) Earnings: Income From Continuing Operations per Statements of Income $ 77,497 $ 63,819 $ 52,522 $ 15,321 $ 30,869 Add: Interest and Debt Expense 51,248 37,760 34,316 32,009 31,478 Income Taxes 35,661 35,897 29,050 9,500 18,599 Portion of Rents Representative of the Interest Factor 12,473 7,417 5,082 3,492 2,863 Less: Undistributed Earnings of less than 50% Owned Unconsolidated Subsidiaries 3,875 -- -- -- -- -------- -------- -------- -------- -------- Income as Adjusted $173,004 $144,893 $120,970 $ 60,322 $ 83,809 ======== ======== ======== ======== ======== Fixed Charges: Interest and Debt Expense per Statements of Income (Includes Amortization of Debt Discount, Premium and Expense) $ 43,495 $ 35,933 $ 34,211 $ 31,815 $ 30,909 Add: Interest Capitalized 7,753 1,827 105 338 965 Portion of Rents Representative of the Interest Factor 12,473 7,417 5,082 3,492 2,863 Preferred Stock Dividends of Subsidiary -- -- -- -- 69 -------- -------- -------- -------- -------- Fixed Charges $ 63,721 $ 45,177 $ 39,398 $ 35,645 $ 34,806 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 2.72 3.21 3.07 1.69 2.41 ======== ======== ======== ======== ========
EX-13 10 ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13 K N ENERGY, INC. 1997 ANNUAL REPORT TO SHAREHOLDERS Interested persons may receive a copy of the Company's 1997 Annual Report to Shareholders without charge by forwarding a written request to: K N Energy, Inc., Investor Relations Department, P. O. Box 281304, Lakewood, Colorado 80228-8304. EX-21 11 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 K N ENERGY, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT
NAME OF COMPANY STATE OF INCORPORATION - --------------- ---------------------- AOG Gas Transmission Company, L.P......................................................................... Texas AOG Holdings, Inc. ....................................................................................... Delaware American Gas Storage, L.P. ............................................................................... Texas American Gathering, L.P. ................................................................................. Texas American Oil & Gas Corporation............................................................................ Delaware American Pipeline Company ................................................................................ Delaware American Processing, L.P. ................................................................................ Texas Caprock Pipeline Company ................................................................................. Delaware Compressor Pump & Engine Machine, Inc. ................................................................... Wyoming en*able, LLC*............................................................................................. Delaware Gas Natural del Noroeste, S.A. de C.V. ................................................................... Mexico K N Energy International, Inc. ........................................................................... Delaware K N Energy de Mexico, S.A. de C.V. ....................................................................... Mexico K N Field Services, Inc. ................................................................................. Colorado K N Finance Company ...................................................................................... Colorado K N Gas Gathering, Inc.................................................................................... Colorado K N Gas Supply Services, Inc. ............................................................................ Colorado K N Interstate Gas Transmission Co. ...................................................................... Colorado K N Marketing, L.P. ...................................................................................... Texas K N Natural Gas, Inc. .................................................................................... Colorado K N Processing, Inc. ..................................................................................... Delaware K N Services, Inc. ....................................................................................... Colorado K N Trading, Inc. .................................................................................... Delaware
2 K N TransColorado, Inc. .................................................................................. Colorado K N Wattenberg Transmission Limited Liability Company..................................................... Colorado K N WesTex Gas Service Company............................................................................ Texas mc(2) Inc.* .............................................................................................. Delaware MCN Gulf Processing Corp.* ............................................................................... Delaware MCN Overseas Inc.* ....................................................................................... Delaware MCN Properties Corp.* .................................................................................... Delaware MGS Marketing Corp.* ..................................................................................... Delaware MidCon Corp.* ............................................................................................ Delaware MidCon Business Services Corp.* .......................................................................... Delaware MidCon Dehydration Corp.* ................................................................................ Delaware MidCon Development Corp.* ................................................................................ Delaware MidCon Exploration Company* .............................................................................. Illinois MidCon Gas Natural de Mexico, S.A. de C.V.* .............................................................. Mexico MidCon Gas Products Corp.* ............................................................................... Delaware MidCon Gas Products of New Mexico Corp.* ................................................................. Delaware MidCon Gas Services Corp.* ............................................................................... Delaware MidCon Management Corp.* ................................................................................. Delaware MidCon Marketing Corp.* .................................................................................. Delaware MidCon Mexico Pipeline Corp.* ............................................................................ Delaware MidCon NGL Corp.* ........................................................................................ Delaware MidCon NGV Corp.* ........................................................................................ Delaware MidCon Razorback Pipeline Corp.* ......................................................................... Delaware MidCon Texas Gas Limited, Inc.* .......................................................................... Delaware MidCon Texas Gas Services Corp.* ......................................................................... Delaware MidCon Texas Pipeline Operator, Inc.* .................................................................... Delaware MidTex Pipeline Company* ................................................................................. Delaware NALOCO, Inc.* ............................................................................................ Delaware NATOCO, Inc.* ............................................................................................ Delaware Natural Gas Pipeline Company of America* ................................................................. Delaware NGPL-Canyon Compression Co.* ............................................................................. Delaware NGPL Independence Pipeline Company* ...................................................................... Delaware
3 NGPL Offshore Company* ................................................................................... Delaware NGPL-Overthrust Inc.* .................................................................................... Delaware NGPL-TIPCO, Inc.* ........................................................................................ Delaware NGPL-Trailblazer Inc.* ................................................................................... Delaware Northern Gas Company. .................................................................................... Wyoming Occidental Energy Development Corp.* ..................................................................... Delaware Palo Duro Pipeline Company, Inc.* ........................................................................ Delaware Panola/Rusk Gatherers .................................................................................... Texas Red River Pipeline, L.P. ................................................................................. Texas Rocky Mountain Natural Gas Company........................................................................ Colorado Slurco Corporation ....................................................................................... Colorado TCP Gathering Co. ........................................................................................ Colorado United Texas Transmission Company* ....................................................................... Delaware Westar Transmission Company............................................................................... Delaware Wildhorse Energy Partners, LLC............................................................................ Delaware
All of the subsidiaries named above are included in the consolidated financial statements of the Registrant included herein, except those marked with an asterisk. EX-23 12 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in (i) Registration Statements on Form S-16, File Nos. 2-51894, 2-55664, 2-63470 and 2-75654; (ii) Registration Statements on Form S-8, File Nos. 2-77752, 33-10747, 33-24934, 33-33018, 33-54403, 33-54443, 33-54555, 333-08059 and 333-08087; and (iii) Registration Statements on Form S-3, Files Nos. 2-84910, 33-26314, 33-23880, 33-42698, 33-44871, 33-45091, 33-46999, 33-54317, 33-69432, 333-04385, 333-40869 and 333-44421 of our report dated February 3, 1998, on the consolidated financial statements of K N Energy, Inc. and subsidiaries for the year ended December 31, 1997 included in this Form 10-K. /s/ Arthur Andersen LLP Denver, Colorado March 5, 1998 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 22,741 0 409,937 0 47,034 576,530 1,971,601 550,626 2,305,805 796,811 553,816 0 7,000 160,123 446,009 2,305,805 2,145,118 2,145,118 1,724,671 2,002,869 0 0 43,495 113,158 35,661 77,497 0 0 0 77,497 2.48 2.45
EX-99 14 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 99 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in Registration Statements on Form S-3, File Nos. 333-04385, 333-40869 and 333-44421, of our report dated January 23, 1998 on MidCon Corp.'s consolidated financial statements for the year ended December 31, 1997, included in the K N Energy, Inc. Form 8-K/A dated February 12, 1998, and to all references to our Firm included in these Registration Statements. /s/ Arthur Andersen LLP Chicago, Illinois March 5, 1998 -----END PRIVACY-ENHANCED MESSAGE-----