-----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, IMHs6me2VzFH1hp4hLqV7VT55dboXmsf6u3aeobvnS2//y77WmG2HlaaLS/MGygF mVJ+Li9vDDr1hBxFGyiEvw== 0000950134-99-001524.txt : 19990310 0000950134-99-001524.hdr.sgml : 19990310 ACCESSION NUMBER: 0000950134-99-001524 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990309 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: 99560767 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 FISCAL YEAR ENDING DECEMBER 31, 1998 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, 1998 --------------------------- 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 incorporation or organization) (I.R.S. Employer Identification No.) 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. $1,468,361,624 as of February 22, 1999 - -------------------------------------------------------------------------------- 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 150,000,000 shares; outstanding 69,651,991 shares as of February 22, 1999 - -------------------------------------------------------------------------------- List hereunder documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. 1999 Proxy Statement Part III - -------------------------------------------------------------------------------- 1 2 K N ENERGY, INC. AND SUBSIDIARIES Documents Incorporated by Reference and Index
Page Number ---------------------------- 1999 Proxy Included Statement Herein ---------- -------- PART I ITEMS 1 & 2: BUSINESS AND PROPERTIES.................................................... 3-15 ITEM 3: LEGAL PROCEEDINGS ......................................................... 16 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 1998. EXECUTIVE OFFICERS OF THE REGISTRANT....................................... 17-18 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................................... 19 ITEM 6: SELECTED FINANCIAL DATA.................................................... 20 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 21-33 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Public Accountants ................................ 34 Consolidated Statements of Income for the Three Years Ended December 31, 1998, 1997 and 1996 ........................ 35 Consolidated Balance Sheets as of December 31, 1998 and 1997............. 36 Consolidated Statements of Common Stockholders' Equity for the Three Years Ended December 31, 1998, 1997 and 1996............... 37 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998, 1997 and 1996......................... 38 Notes to Consolidated Financial Statements............................... 39-64 Selected Quarterly Financial Data (Unaudited)............................ 65 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no such matters during 1998. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................... * ITEM 11: EXECUTIVE COMPENSATION..................................................... * ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. * ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. * 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 Schedule II - Valuation and Qualifying Accounts 68 3. Exhibits Exhibit Index................................................... 72-75 List of Executive Compensation Plans and Arrangements...................... 69-70 Exhibit 12 - Ratio of Earnings to Fixed Charges................. 76 Exhibit 13 - 1998 Annual Report to Shareholders**............... 77 Exhibit 21 - Subsidiaries of the Registrant..................... 78-80 Exhibit 23 - Consent of Independent Public Accountants.......... 81 Exhibit 27 - Financial Data Schedule*** (b) Reports on Form 8-K.................................................. 70 SIGNATURES ................................................................................ 71
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, 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. On February 22, 1999, Sempra Energy ("Sempra") and the Company announced that their respective boards of directors had unanimously approved a definitive agreement (the "Agreement") under which Sempra and the Company would combine in a stock-and-cash transaction valued in the aggregate at $6.0 billion. Sempra is an energy services holding company based in San Diego, California, serving 21 million customers through natural gas and electric distribution, as well as a broad range of energy-related products and services throughout the United States, Canada, Mexico and other countries in Latin America. Under the terms of the Agreement, Sempra will acquire all of the Company's outstanding common shares (the "K N Shares") for a combination of shares of Sempra common stock (the "Sempra Shares") and cash as described following. The Company's shareholders will have the option to elect to receive for each of their K N Shares either (a) .7805 Sempra Shares plus $7.50, (b) 1.115 Sempra Shares or (c) $25.00, subject to pro-ration, such that 70 percent of the K N Shares will be converted into Sempra Shares and 30% of the K N Shares will be converted into cash. This merger is conditioned, among other things, upon the approvals of shareholders of both companies, the Federal Energy Regulatory Commission and the state commissions of Colorado and Wyoming and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Closing is currently expected in six to eight months. (A) General Description K N Energy is an integrated energy services provider whose operations include the gathering, processing, transportation and storage of natural gas, marketing of natural gas and NGLs and electric power generation and sales. As of December 31, 1998, the Company operated nearly 25,000 miles of interstate and intrastate pipelines and over 11,000 miles of gathering and processing pipelines that connect major supply areas with major consuming areas in the Western and Mid-Continent United States. At December 31, 1998 the Company also owned or had an interest in 31 natural gas processing plants with total processing and/or treating capacity of approximately 2,725 MMcf per day, including the Bushton complex in the Hugoton Basin, one of the largest natural gas extraction facilities in the United States, and 25 storage facilities with 5,362 MMcf per day of withdrawal capacity. As of December 31, 1998, the Company's regulated retail natural gas business served over 210,000 customers in Colorado, Nebraska and Wyoming. The Company also markets innovative products and services, such as the Simple Choice(sm) ("Simple Choice") menu of products and call center services designed for residential consumers, utilities and small businesses through its 50% owned en*able, LLC ("en*able") 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 3,308 people at December 31, 1998. On January 30, 1998, pursuant to a definitive stock purchase 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 to Occidental Petroleum Corporation ("Occidental") to acquire the outstanding shares of capital stock of MidCon Corp. 3 4 ("MidCon") and a note in an aggregate principal amount of approximately $1.39 billion issued to Occidental by MidCon's employee stock ownership plan. As a result of this acquisition, which was recorded as a purchase for accounting purposes, MidCon became a wholly owned subsidiary of K N Energy. 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 MidCon-owned 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 leased major intrastate pipeline located in Texas. (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, marketing of natural gas and NGLs and electric power generation and sales. Reflecting the Company's strategy of extracting margins from the various segments of the energy value stream, the Company has segregated its results of operations into "Upstream," "Midstream" and "Downstream" components. The Company's Upstream operations consist of (i) natural gas gathering, (ii) natural gas processing and (iii) NGLs extraction and marketing activities. Midstream operations consist of transportation, storage and bundled sales transactions for K N's interstate and intrastate pipelines. Downstream activities principally consist of energy marketing, regulated natural gas distribution and electric power generation and sales. As discussed following, certain of the Company's operations are regulated by various federal and state entities. UPSTREAM BUSINESS SEGMENT K N's Upstream segment consists of natural gas gathering and processing and NGLs extraction and marketing. Within this business segment, the Company owns and operates approximately 8,000 miles of gathering and processing pipeline in eleven states and owns or has an interest in 31 gas processing and/or treating plants in five states, including the Bushton complex, one of the largest NGLs extraction facilities in the United States. During 1998, the Company's plants processed approximately 1.3 Bcf per day of natural gas (and had capacity to process 2,725 MMcf per day) and produced over 2.5 million gallons of NGLs per day. FACILITIES. The Company has an extensive network of gathering and processing facilities located primarily in the Mid-Continent and Rocky Mountain states and Texas. Based on average throughput, the Company's largest gathering operation is its Hugoton Basin system located in Kansas, which gathers approximately 540 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 largest processing plant, Bushton, which K N acquired in April 1997 (the gathering assets were purchased and the processing facilities are operated by K N under an operating lease) and which has approximately 1.0 Bcf per day of processing capacity. As of December 31, 1998, the Bushton plant accounted for approximately 37% of the Company's total processing capacity. 4 5 In addition to the Hugoton Basin system, the Company's Wattenberg system, located in northeastern Colorado, includes gathering and interstate transmission lines with total system throughput of approximately 150 MMcf per day. The Company's West Texas system, located primarily in western Texas and the Texas Panhandle, includes gathering lines and 11 gas processing plants, with total system throughput of approximately 125 MMcf per day. The Company also owns gathering facilities in the Powder River, Big Horn and Wind River basins of Wyoming and the Piceance and Uintah basins of western Colorado and eastern Utah, with combined gathering throughput of approximately 220 MMcf per day. In addition, K N owns a 49% equity interest in the Red Cedar Gathering System in the northern San Juan basin of Colorado, with total system throughput of approximately 440 MMcf per day. This system is also connected to the Company's jointly owned Coyote Gulch processing plant and TransColorado pipeline. In January 1996, K N and Tom Brown, Inc. ("Tom Brown") formed Wildhorse Energy Partners, LLC ("Wildhorse"), a joint venture limited liability company currently owned 55% by K N and 45% by Tom Brown, to provide gathering, processing, storage and marketing services to Rocky Mountain oil and gas producers and others. Pursuant to this joint venture, Tom Brown has dedicated all of its uncommitted Rocky Mountain gas production to Wildhorse, and the Company has contributed certain gas marketing and storage contracts. CONTRACTS AND CUSTOMERS. The Company's gathering and processing facilities perform a wide range of services for its customers, including gathering gas at the wellhead or other natural gas field aggregation points, transporting gas and processing gas to extract NGLs and marketing those NGLs to NGL pipelines, end users and marketers. The Company's customers primarily include oil and gas producers, gatherers and transporters. Revenues from the Company's gathering and processing business are generated through gathering and processing fees charged to producers or other third parties which are based on negotiated rates. In addition, revenues are generated through the marketing of NGLs processed at the Company's plants and the marketing of third-party NGLs. The Company processes gas under three types of contractual arrangements, each with varying degrees of commodity risk: fee based, percent of proceeds and keep whole. For the year ended December 31, 1998, as a percentage of total gas throughput, 20%, 51% and 29% of the Company's contracts were fee based, percent of proceeds and keep whole, respectively. In addition, K N purchases approximately 11% of the gas it processes at the wellhead and takes title to the gas. In general, fee based contracts are for a term of seven to twelve years and are based on a flat fee for processing. Fee based contracts eliminate the Company's exposure to commodity price risk for a particular volume of gas since the producer retains title to the gas and NGLs. Under percent of proceeds contracts, which are generally for a term of one to ten years, K N processes the gas and then sells the resulting NGLs and residual gas at market prices for the producer, while keeping a percentage of the proceeds for itself. Given the Company's economic interest in a portion of the residual gas and NGLs, percent of proceeds contracts entail some commodity risk. Keep whole contracts entail significant commodity risk. Under these contracts, which are generally for a term of one to five years, K N agrees to take a certain volume of raw gas from the producer, process it and return gas with a Btu content equivalent to the input gas to the producer. The processed NGLs are then marketed by K N for its own account. As a result of K N's obligation under keep whole contracts to market the NGLs produced and reimburse producers for shrinkage of the gas during processing and deliver the equivalent Btu content as explained preceding, K N is exposed to fluctuations in both the price of processed natural gas as a buyer and to NGLs prices as a seller, as well as the spread between the two. The "keep whole" component of such contracts benefits the Company when the value of the NGLs is greater as a liquid than as a portion of the residue gas stream. However, when the value of the NGLs is lower as a liquid than as a portion of the residue gas stream, the Company may be adversely impacted. 5 6 The recent weakness in NGLs prices, coupled with the relative strength of gas prices, has significantly reduced the margins on K N's keep whole contracts. In addition, weak NGL prices overall have hurt the Upstream segment's margins. In an effort to reduce the fluctuations in margins inherent in processing gas under keep whole contracts, the Company has engaged in certain hedging transactions. Pursuant to its Board of Directors' approved trading policy, the Company manages its commodity exposure through continued monitoring of its exposure and maintenance of proper controls in order to ensure compliance with the volumetric, mark-to-market and value-at-risk restrictions contained in the policy. MIDSTREAM BUSINESS SEGMENT K N's Midstream segment consists of natural gas transportation and storage as well as bundled sales transactions for K N's interstate and intrastate pipelines. Within this segment, the Company operates nearly 25,000 miles of interstate and intrastate natural gas pipelines and associated storage and supply lines which are strategically located at the center of the North American pipeline grid. K N's transportation network provides access to the major gas supply areas in the Gulf of Mexico, the Gulf Coast, the Permian Basin, the Mid-Continent, the Rocky Mountains and western Canada, as well as the major consumer markets in the Midwest and along the Gulf Coast. TRANSPORTATION FACILITIES. K N's natural gas transmission business is comprised of both interstate and intrastate pipelines. These operations are conducted principally through three major subsidiary pipeline companies: Natural Gas Pipeline Company of America ("NGPL"), MidCon Texas Pipeline Operator, Inc. ("MidCon Texas") and K N Interstate Gas Transmission Co. ("KNI"). K N also operates intrastate systems in West Texas, Colorado and Wyoming. Through NGPL, K N owns and operates approximately 12,200 miles of interstate pipelines, field system lines and related facilities, consisting primarily of two major interconnected transmission pipelines terminating in the Chicago metropolitan area. The system is powered by 61 compressor stations in mainline and storage service having an aggregate of approximately 1.0 million horsepower. NGPL's system has over 1,700 points of interconnection with 31 interstate pipelines, 24 intrastate pipelines and 54 local distribution companies ("LDCs") and end users, thereby providing significant flexibility in the receipt and delivery of gas. One of NGPL's primary pipelines, the "Amarillo Line", originates in the West Texas and New Mexico producing areas and is comprised of approximately 6,600 miles of mainline and various small-diameter pipelines. The other major pipeline, the "Gulf Coast Line", originates in the Gulf Coast areas of Texas and Louisiana and consists of approximately 4,300 miles of mainline and various small-diameter pipelines. These two main pipelines are connected at points in Texas and Oklahoma by NGPL's 230-mile Amarillo/Gulf Coast pipeline. In addition, subsidiaries of NGPL own interests in several regulated natural gas pipeline systems which are accounted for as equity investments. These pipelines include High Island Offshore System, U-T Offshore System and Stingray offshore pipeline in the Gulf of Mexico, and the Trailblazer pipeline which moves gas from production basins in southwestern Wyoming and northwestern Colorado to Mid-Continent pipelines. Through MidCon Texas, the Company operates an intrastate pipeline system principally located in the Texas Gulf Coast area. This pipeline is leased from Occidental under a 30-year lease which commenced on December 31, 1996. The system includes approximately 2,600 miles of pipelines, supply lines, sales laterals and related facilities. The MidCon Texas pipeline system transports natural gas from producing fields in South Texas, the Gulf Coast and the Gulf of Mexico to markets in southeastern Texas and, through interconnections with NGPL and 22 other intrastate and interstate pipelines, to markets throughout the United States. A subsidiary of MidCon Gas Services Corp. ("MidCon Gas") owns a separate Texas intrastate pipeline system (the "Palo Duro System") that includes approximately 400 miles of pipeline and related facilities. The Palo Duro System is leased to a nonaffiliate. 6 7 Through KNI, the Company owns and operates over 6,600 miles of transmission lines in Wyoming, Colorado, Kansas and Nebraska. The system is powered by 120 compressor stations in mainline and storage service having an aggregate of approximately 127,000 horsepower. Through the Company's West Texas system, located primarily in western Texas and the Texas Panhandle, the Company provides transportation and storage services to the Company's affiliated marketing organization and to LDCs, industrial and irrigation markets. This 4,800 mile pipeline and storage system is interconnected with eight interstate pipelines in the West Texas region. Through American Gas Storage, L.P. ("American Gas Storage"), the Company provides the region's only storage facility with 16 Bcf (3 Bcf salt cavern) of high deliverability storage capability. Through Rocky Mountain Natural Gas Company and Northern Gas Company, the Company provides transportation services to the Company's affiliated LDCs as well as to irrigators, grain dryers, gas producers and industrial customers in Colorado and Wyoming, respectively. These two systems include approximately 1,400 miles of transmission lines. In addition, K N is a fifty-fifty joint venture partner with Questar in the TransColorado pipeline. The TransColorado pipeline, which was completed in February 1999,is expected to provide the Company with increased flexibility in accessing multiple natural gas basins in the Rocky Mountain region. This pipeline extends 290 miles from the Piceance Basin in Colorado to Blanco, New Mexico, and has a capacity of 300 MMcf per day. CONTRACTS AND CUSTOMERS. The Company's interstate pipeline system provides transportation and storage services to affiliates, third-party natural gas distribution utilities and other shippers. Pursuant to transportation agreements and FERC tariff provisions, K N offers its customers firm and interruptible transportation and no-notice services. Under K N's tariffs, firm transportation customers pay reservation charges each month plus a commodity charge based on actual volumes transported. Interruptible transportation customers pay a commodity charge based upon actual volumes transported. Reservation and commodity charges are both based upon geographical location, time of year and distance of the transportation service provided. Under no-notice service, customers pay a fee for the right to have up to a specified volume of natural gas transported but, unlike with firm transportation service, are able to meet their peak day requirements without making specific nominations. NGPL's revenues have historically been higher in the first and fourth quarters of the year, reflecting higher system utilization during the colder months. During the winter months, NGPL collects higher transportation commodity revenue, higher interruptible transportation revenue, winter only capacity revenue and higher peak rates on certain contracts. NGPL's principal delivery market area encompasses the states of Illinois, Indiana and Iowa and portions of Wisconsin, Nebraska, Kansas, Missouri and Arkansas. NGPL is one of the largest transporters of gas to the Chicago market and the Company believes that its cost of service is one of the most competitive in the region. In 1998, NGPL delivered an average of 4.1 Bcf per day of natural gas to this market. Given its strategic location at the center of the North American pipeline grid, the Company believes that Chicago is likely to continue to be a major natural gas trading hub for the rapidly growing markets in the Midwest and Northeast. Substantially all of NGPL's pipeline capacity to Chicago is committed under firm transportation contracts ranging from one to five years. As of December 31, 1998, approximately 81% of the total transportation volume committed under NGPL's firm transportation contracts had remaining terms of less than three years. K N continues to actively pursue the renegotiation, extension and/or replacement of expiring contracts. During 1999, contracts representing 30% of NGPL's total system capacity are scheduled to expire. 7 8 Unlike NGPL, MidCon Texas acts as a merchant provider of natural gas as well as a transporter. Principal customers of MidCon Texas include the electric and natural gas utilities that serve the Houston area and industrial customers located along the Houston Ship Channel and in the Beaumont/Port Arthur area. Contract terms for the major utilities will expire between 2002 and 2004. Other contracts vary in length from month-to-month to five or more years. During 1998, MidCon Texas delivered an average of 1.735 Bcf per day of natural gas to this area. The transport and storage customers of K N's West Texas intrastate system include electric utilities, irrigators, industrials, LDCs and gas marketers. Approximately 53% of the transport is performed for the Company's marketing affiliate. Contract terms range from month-to-month to five or more years. Approximately 13% of KNI's contracts expire within one year, 34% expire within one to five years and 53% expire in more than five years. Over 90% of the system's firm transport capacity is currently subscribed, with firm transport demand revenues accounting for more than 90% of the revenues on the system. STORAGE Through NGPL, the Company is one of the nation's largest natural gas storage operators with approximately 600 Bcf of total natural gas storage capacity, over 200 Bcf of working gas capacity and up to 3.9 Bcf per day of peak deliverability from its facilities, which are located near the markets NGPL serves. NGPL owns and operates nine underground storage fields in four states. These storage assets complement the Company's pipeline facilities and allow K N to optimize deliveries on its pipelines and meet peak delivery requirements in its principal markets. NGPL provides firm and interruptible gas storage service pursuant to storage agreements and FERC-approved tariffs. Firm storage customers pay a monthly demand charge irrespective of actual volumes stored. Interruptible storage customers pay a monthly commodity charge based upon actual volumes of gas stored. Through MidCon Texas, the Company also developed a salt dome storage facility located near Markham, Texas with a subsidiary of NIPSCO Industries, Inc. ("NIPSCO"). The facility has two salt dome caverns and approximately 8.3 Bcf of total storage capacity, over 5.7 Bcf of working gas capacity and up to 500 MMcf per day of peak deliverability. The storage facility is leased by a partnership in which subsidiaries of MidCon Texas and NIPSCO are equal partners. MidCon Texas has executed a 20-year sublease with the partnership under which it has rights to 50% of the facility's working gas capacity, 85% of its withdrawal capacity and approximately 70% of its injection capacity. Through KNI, the Company provides storage services to its customers from its Huntsman Storage Field in Cheyenne County, Nebraska. The facility has 39.4 Bcf of total storage capacity, 7.9 Bcf of working gas capacity, and up to 101 MMcf of peak withdrawal capacity. Through Northern Gas Company, the Company provides storage services in Wyoming to its customers from its three storage fields, Oil Springs, Bunker Hill and Kirk Ranch, with a combined 29.7 Bcf of total storage capacity, 11.7 Bcf of working gas capacity, and up to 36 MMcf of peak withdrawal capacity. Through Wildhorse, the Company has 10.1 Bcf of total storage capacity in Pitkin and Mesa Counties in Colorado, 2.7 Bcf of working gas capacity, and up to 15 MMcf of peak withdrawal capacity. Through American Gas Storage, the Company provides storage services from two gas reservoirs and three salt caverns located in Gaines County, Texas, through which the Company has a combined 25.2 Bcf of total storage capacity, 16.4 Bcf of working gas capacity, and up to 500 MMcf of peak withdrawal capacity. 8 9 Through AOG Gas Transmission Co., L.P., the Company provides storage services from the Stratton Ridge salt dome located in Brazoria County, Texas. The Company has 6.0 Bcf of total storage capacity, 3.5 Bcf of working gas capacity, and up to 150 MMcf of peak withdrawal capacity. DOWNSTREAM BUSINESS SEGMENT K N's Downstream operations principally consist of energy marketing, regulated natural gas distribution, merchant power and distributed generation. In addition, this segment also includes unregulated retail services and the supplying of an array of products and services for the deregulated energy market through en*able, a fifty-fifty joint venture between K N and PacifiCorp Holdings Corp. ("PacifiCorp"). ENERGY MARKETING In the energy marketing area, the Company performs a merchant function whereby the Company purchases gas supplies at the wellhead, combines such gas with other supplies of gas, and markets the aggregated gas to consumers. In addition, the Company provides gas marketing and supply services, including certain storage services, to producers, various LDCs 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. The Company's natural gas marketing customers include LDCs, industrial, commercial and agricultural end users, electric utilities, Company affiliates, and other marketers located both on and off K N's pipeline systems. The Company's Downstream segment sells an average of approximately 3.4 Bcf of gas per day to third parties. Natural gas is purchased by K N's Downstream business segment from various sources, including gas producers, gas processing plants and pipeline interconnections. 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. Natural gas is sold to marketing customers pursuant to short-term agreements with both fixed and index-based pricing. In conjunction with its merchant function, the Company engages in price risk management activities in the energy financial instruments market to hedge certain of its price and basis risk exposure. The Company buys and sells gas and crude oil futures 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 its Board of Directors' approved trading policy, the Company manages its commodity exposure through constant monitoring of its exposure and maintenance of proper controls in order to ensure compliance with the volumetric, mark-to-market and value-at-risk restrictions contained in the policy. RETAIL NATURAL GAS DISTRIBUTION As of December 31, 1998, the Company's retail natural gas business served over 216,000 customers in Colorado, Nebraska and Wyoming through approximately 7,400 miles of distribution pipelines. The Company's intrastate pipelines, distribution facilities and retail sales in Colorado and Wyoming are subject to the regulatory authority of each state's utility commission. In Nebraska, retail gas sales rates for residential and small commercial customers are regulated by each municipality served. 9 10 The Company's retail operations in Nebraska, Wyoming and northeastern Colorado serve areas that are primarily rural and agriculturally based where gas is used primarily for space heating, crop irrigation, grain drying and processing of agricultural products. In much of Nebraska, the winter heating load is balanced by irrigation requirements in the summer and grain drying in the fall. To support its domestic retail business, the Company utilizes its underground storage facilities to provide gas for load balancing and peak system demand. Storage services for the Company's retail natural gas services are provided by three facilities in Wyoming owned by Northern Gas Company, one facility in Colorado owned by Wildhorse, and one facility located in Nebraska and owned by KNI. The peak natural gas withdrawal capacity available for the Company's retail business is approximately 99 MMcf per day. The Company's domestic retail natural gas business relies on the Company's interstate pipeline systems, the intrastate pipelines it operates and third-party pipelines for transportation and storage services required to serve its markets. The gas supply requirements for K N's domestic retail natural gas business are met through a combination of purchases from marketing affiliates and third-party suppliers. In May 1997, the Mexico Energy Regulatory Commission awarded a franchise to Gas Natural De Noroeste ("GNN"), a joint venture in which K N has a 75% interest, to construct and operate an LDC in the cities of Hermosillo, Guaymas and Empalme in western Mexico. The franchise grants GNN exclusive rights in the region for 12 years and distribution rights for 30 years. Pursuant to this franchise, GNN will construct a distribution system to connect at least 26,250 residential, commercial and industrial customers by June 2002. Construction began in April 1998, with a projected capital investment of $21.3 million. On September 30, 1998, GNN opened its distribution system and began supplying 2.5 MMcf of natural gas per day to industrial customers. GNN's approved rates of return are 16.9%, with exchange rate protection for dollar/peso conversion. RETAIL SERVICES en*able has been developed as a energy deregulation "superstore," offering a wide array of turnkey and individualized solutions to the energy industry and others that desire to compete in a deregulated energy market. en*able sells a full range of services through Simple Choice which, in partnership with local utilities, provides consumers an opportunity to purchase home, entertainment, energy and communication products and services with "one call, one bill and one check." Through licensing agreements, Simple Choice offers utilities across the country a means of reinforcing their brand and developing greater customer loyalty. en*able is a limited liability company owned equally by K N Energy and PacifiCorp. en*able was founded in January 1997 to develop and deliver effective means of creating more substantial customer relationships to energy providers across the nation through the Simple Choice brand, and other back office and marketing support efforts. en*able's wholly owned subsidiary, Orcom Solutions, is a developer of customer care software solutions. POWER SERVICES K N's new power service businesses position the Company to take advantage of the rapidly changing energy industry and leverage markets with cross commodity opportunities in convergent energy markets. The Company plans to acquire and develop gas-fired merchant power generation assets, develop and implement distributive generation strategy, optimize electric activities in K N's facilities, monitor and participate in industry restructuring and leverage value stream assets to create new revenue streams. The Company is currently in the process of site selection and permitting for a 510 megawatt power plant in Lake County, Illinois. K N's acquisition of interests in Thermo provided K N with its first electric generation assets as well as the 10 11 knowledge and expertise of Thermo's management necessary to undertake the development of merchant power plants along its pipeline assets. Thermo has interests in four independent power plants in Colorado representing approximately 380 megawatts of electric generation capacity with access to approximately 130 BCF of natural gas reserves. REGULATION FEDERAL AND STATE REGULATION Both the performance of interstate transportation and storage services by natural gas companies, including interstate pipeline companies, and the rates charged for such services, are regulated by the FERC under the Natural Gas Act and, to a lesser extent, the Natural Gas Policy Act. Legislative and regulatory changes began in 1978 with the passage of the Natural Gas Policy Act, pursuant to which the process of deregulation of gas sold at the wellhead was commenced. The restructuring of the natural gas industry continued with the adoption of (i) Order 380 in 1984, which eliminated purchasers' minimum bill obligations to the pipelines, thus making gas purchased from third parties, particularly on the spot market, more economically attractive relative to gas purchased from pipelines and (ii) Order 436 in 1985, which provided that interstate transportation of gas under blanket or self-implementing authority must be provided on an open-access, non-discriminatory basis. After Order 436 was partially overturned in federal court, the FERC issued Order 500 in August 1987 as an interim rule intended to readopt the basic thrust of the regulations promulgated by Order 436. Order 500 was amended by Orders 500 A through L. The FERC's stated purpose in issuing Orders 436 and 500, as amended, was to create a more competitive environment in the natural gas marketplace. This purpose continued with Order 497, issued in June 1988, which set forth new standards and guidelines imposing certain constraints on the interaction of interstate pipelines and their marketing affiliates and imposing certain disclosure requirements regarding that interaction. Order 636, issued in April 1992, as amended, was a continuation of the FERC's efforts to improve the competitive structure of the pipeline industry and maximize the consumer benefits of a competitive structure of the pipeline industry and a competitive wellhead gas market. In Order 636, the FERC required interstate pipelines that perform open access transportation under blanket certificates to "unbundle" or separate their traditional merchant sales services from their transportation and storage services and to provide comparable transportation and storage services with respect to all gas supplies whether purchased from the pipeline or from other merchants such as marketers or producers. The pipelines must now separately state the applicable rates for each unbundled service (i.e., for the gas commodity, transportation and storage). Specifically, Order 636 contains the following procedures to increase competition in the industry: (i) requiring the unbundling of sales services from other services, meaning that only a separately identified merchant affiliate of the pipeline could sell gas at points of entry into the pipeline system; (ii) permitting holders of firm capacity to release all or a part of their capacity for resale by the pipeline either to the highest bidder or, under short-term or maximum rate releases, to shippers in a prepackaged release, with revenues in both instances credited to the releasing shipper; (iii) allowing shippers to use as secondary points other receipt points and delivery points on the system, subject to the rights of other shippers to use those points as their primary receipt and delivery points; (iv) the issuance of blanket sales certificates to interstate pipelines for unbundled services; (v) the continuation of pregranted abandonment of previously committed pipeline sales and transportation services, subject to certain rights of first refusal, which should make unused pipeline capacity available to other shippers and clear the way for excess transportation services to be reallocated to the marketplace; (vi) requiring that firm and interruptible transportation services be provided by the pipelines to all parties on a comparable basis; and (vii) generally 11 12 requiring that pipelines derive transportation rates using a straight-fixed-variable rate method which places all fixed costs in a fixed reservation fee that is payable without regard to usage, as opposed to the previously used modified fixed-variable method that allocated a part of the pipelines' fixed costs to the usage fee. The FERC's stated position is that the straight-fixed-variable method promotes the goal of a competitive national gas market by increasing the cost of unnecessarily holding firm capacity rather than releasing it, and is consistent with its directive to unbundle the pipelines' traditional merchant sales services. Order 636 has been affirmed in all material respects upon judicial review and the Company's own FERC orders approving its unbundling plans are final and not subject to any pending judicial review. NGPL has been a party to a number of contracts that required NGPL to purchase natural gas at prices in excess of the prevailing market price. As a result of Order 636 prohibiting interstate pipelines from using their gas transportation and storage facilities to market gas to sales customers, NGPL no longer had a sales market for the gas it is required to purchase under these contracts. Order 636 went into effect on NGPL's system on December 1, 1993. NGPL has agreed to pay substantial transition costs to reform these contracts with gas suppliers. Under settlement agreements reached by NGPL and its former sales customers, NGPL recovered from those customers over a four-year period beginning December 1, 1993, a significant amount of the gas supply realignment "GSR" costs. The FERC has also permitted NGPL to implement a tariff mechanism to recover additional portions of its GSR costs in rates charged to transportation customers that were not party to the settlements. In July 1996, a Federal appellate court remanded Order 636 to the FERC for further explanation of aspects of its decision regarding recovery of GSR costs by interstate pipelines. Because of the settlements and FERC orders authorizing NGPL's GSR cost recovery mechanism, the remand is not expected to have any significant impact on NGPL. The FERC has allowed GSR rates to go into effect on December 1, 1997, subject to refund, to recover any shortfall in recoveries of GSR costs allocated to interruptible transportation. However, the FERC rejected NGPL's filing for rehearing that NGPL be allowed to recoup a portion of any shortfall on title transfers and interruptible transportation to pooling points. GATHERING AND PROCESSING SERVICES Under the Natural Gas Act, facilities used for, and operations involving, the production and gathering of natural gas are exempt from the FERC's jurisdiction, while facilities used for and operations involving interstate transmission are not exempt. However, the FERC's determination of what constitutes exempt gathering facilities as opposed to jurisdictional transmission facilities has evolved over time. Under current law, facilities which otherwise are classified as gathering may be subject to ancillary FERC rate and service jurisdiction when owned by an interstate pipeline company and used in connection with interstate transportation or jurisdictional sales. The FERC determines jurisdictional status 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, Oklahoma 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. 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 Company plans to transfer MidCon's gathering facilities to a wholly-owned subsidiary in order to make such facilities nonjurisdictional. 12 13 INTRASTATE TRANSPORTATION AND MARKETING SERVICES 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 that allow increased access to interstate transportation services, without the necessity of obtaining prior FERC authorization for each transaction. A key 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. 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 has resulted 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. On June 1, 1995, NGPL filed a general rate case with the FERC to establish new rates as well as new or revised services. The FERC permitted NGPL to place new rates into effect, subject to refund, on December 1, 1995. This date corresponded to the effective date of new transportation and storage agreements between NGPL and its principal local distribution customers. Major issues in the rate case included the terms and conditions of new services, throughput levels used in the design of rates, discounting adjustments, levels of depreciation rates and return on investment, and the levels used in the design of fuel rates. In May 1996, NGPL filed with the FERC an offer of settlement to resolve the remaining issues in the proceeding. On November 3, 1997, the FERC approved a settlement of this rate case substantially consistent with what NGPL proposed. The FERC's order approving the settlement is final and not subject to rehearing or judicial review. In January 1997, Amoco Production Company and Amoco Energy Trading Corporation ("Amoco") filed a complaint against NGPL before the FERC contending that NGPL had improperly provided its affiliate, MidCon Gas, transportation service on preferential terms, seeking termination of currently effective contracts and the imposition of civil penalties. A subsequent FERC staff audit made proposed findings that NGPL had favored MidCon Gas, which NGPL has challenged. In July 1997, Amoco and NGPL agreed to a settlement of this proceeding. Amoco filed to withdraw its complaint subject to the FERC's procedures. Several intervenors opposed the withdrawal of the complaint and NGPL filed an answer to that opposition. By orders issued January 16, 1998 (the "January Order"), the FERC ruled that NGPL had violated certain of the FERC's regulations regarding its business relationships with its affiliate, MidCon Gas. Relying upon its authority under the Natural Gas Policy Act, the FERC provided notice to NGPL that, in addition to other remedial action, it proposed to assess civil penalties of $8,840,000. Such orders also required NGPL to take certain other actions, including making a new tariff filing, and imposed certain restrictions on the sharing of employees by NGPL and MidCon Gas. The FERC proposed to suspend one-half of the penalty provided that for two years following the date of the order NGPL does not violate specified sections of the FERC's regulations. The Company and other parties sought rehearing in February 1998. The Company also made several filings in compliance with the January Order, including payment of the $4.42 million civil penalty. On March 26, 1998, the FERC issued an order denying all rehearing requests, including those of several parties which had argued for more onerous penalties or restrictions. The Company and the Interstate Natural Gas Association of America sought further rehearing and clarification in April 1998. On May 27, 1998, the FERC issued an order denying rehearing, but granting, in part, the petitioners' request for clarification. The Company has sought judicial review of the FERC's orders in the 13 14 U.S. Court of Appeals for the District of Columbia. The Company does not believe the ultimate resolution of these issues will have a material adverse affect on its operations and results. In January 1998, KNI filed a rate case requesting an increase in its rates that would result in additional annual revenues of $30.2 million. The filing included the costs of KNI's newly constructed Pony Express pipeline facilities. 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. The administrative law judge issued an order dated November 5, 1998 finding that KNI had not made a prima facie case for rolled-in treatment of the Pony Express pipeline facilities. KNI and others sought FERC review of the order, and on March 3, 1999, the FERC issued an order affirming the decision of the administrative law judge. The order held that the Pony Express costs should be removed from the case, that KNI should charge rates applicable to its preexisting system to Pony Express shippers, that certain refunds were due, and that KNI can file in the future for rolled-in or incremental rate treatment of the Pony Express facilities. Additional proceedings are ongoing before the FERC to resolve differences. The Company will pursue a negotiated resolution of any differences but the Company cannot predict with certainty whether the regulatory proceedings will be resolved through a negotiated settlement or through administrative litigation. The Company's interstate pipeline business could be adversely affected by an unsatisfactory outcome. RETAIL NATURAL GAS SERVICES Certain of the Company's intrastate pipelines, storage, distribution and/or retail sales in Colorado, Texas and Wyoming are under the regulatory authority of each state's utility commission. In Nebraska, certain retail gas sales rates for residential and small commercial customers are regulated by the municipality served. In certain of the incorporated communities in which the Company provides retail natural gas services, the Company operates under franchises granted by the applicable municipal authorities. The duration of theses 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 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. 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. In November 1997, the Company announced a similar plan to give residential and small commercial customers in Nebraska a choice of natural gas suppliers. This program, the Nebraska Choice Gas program, became effective June 1, 1998. As of December 31, 1998, the plan had been approved by 176 communities, representing approximately 95,000 customers served by the Company in Nebraska. 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 or human health and safety. 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. These laws and regulations can also impose liability for remedial costs on the owner or operator of properties or the generators of waste materials, regardless of fault. Moreover, the recent trends toward stricter standards in environmental legislation and regulation are likely to continue. 14 15 The U.S. Environmental Protection Agency ("EPA") recently published a final rule addressing transport of ground level ozone. The rule affects 22 Eastern and Midwestern states, including Illinois and Missouri in which the Company operates gas compression facilities. The rule requires reductions in emissions of nitrogen oxide, a precursor to ozone formation, from various emission sources, including utility and non-utility sources. The rule requires that the affected states prepare and submit State Implementation Plans to the EPA by September 1999, reflecting how the required emissions reductions will be achieved. Emission controls are required to be installed by May 1, 2003. This rule will likely result in the Company, as well as its competitors, being required to install some form of new emissions control technology on certain equipment it operates. Another impact from the rule is that it may result in broad increased use of natural gas, as other sources of nitrogen oxide air emissions, including utilities, seek to achieve the reductions required under the rule. The State Implementation Plans which will effectuate this rule have yet to be proposed or promulgated, and will require detailed analysis before their final economic impact can be ascertained. While additional capital costs are likely to result from this rule, based on currently available information, the Company does not believe that these costs will have a material adverse effect on its business, financial position or results of operations. On February 6, 1998, the EPA published in the Federal Register a proposed standard to limit emissions of hazardous air pollutants ("HAPs") from oil and natural gas production as well as from natural gas transmission and storage facilities. This is a Maximum Achievable Control Technology ("MACT") standard, and is mandated under section 112 of the 1990 Amendments to the Clean Air Act. The proposed MACT standard requires that the affected facilities reduce emissions of HAPs by 95%. This new standard will require the Company to achieve this reduction either by process modifications or by installing new emissions control technology. The MACT standard will affect the Company and its competitors in a like manner. The USEPA has stated that the standard will be promulgated in its final form by May 15, 1999. The rule will allow most affected sources three years to come into compliance. The rule in its final form will require detailed analysis to determine its overall affect on the Company. While additional capital costs are likely to result from this rule, the Company believes that the rule will not have a material adverse effect on the Company's 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. Other Amounts spent by the Company during 1998, 1997 and 1996 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. 15 16 ITEM 3: LEGAL PROCEEDINGS 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 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. On February 5, 1999, the Federal District Court granted summary judgment regarding some of Grynberg's antitrust and state law claims, while allowing other claims to proceed to trial. The Company's potential liability 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 business, 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, the Company and RMNG, along with over 70 other natural gas companies, were served by Jack J. Grynberg, acting on behalf of the Government of the United States, with a Civil False Claims Act lawsuit alleging mismeasurement of the heating content and volume of natural gas resulting in underpayment of royalties to the federal government. The Company and the other named companies filed a motion to dismiss the lawsuit on grounds of improper joinder and lack of jurisdiction. The motion was granted in 1997, but the court gave Mr. Grynberg leave to refile this action in a court with proper jurisdiction. Mr. Grynberg appealed the dismissal of the action based on improper joinder, and the D.C. Court of Appeals affirmed the joinder decision in October 1998. Mr. Grynberg has filed a new case, modified somewhat from his original action, in Federal District Court, District of Colorado. The Company has not yet been served in this new action, which is under seal pending federal governmental reviews of the merits. The Department of Justice has not yet made a decision regarding whether to intervene in this new case. The Company has engaged in both formal and informal discussions with the Government regarding this case. The Company believes it has a meritorious position in this matter, and does not expect this lawsuit to have a material adverse effect on the Company's business, financial position or results of operations. Pursuant to certain acquisition agreements involving Cabot Corporation ("Cabot"), Cabot indemnified the Company for certain environmental liabilities associated with assets in Texas, Oklahoma and New Mexico acquired from American Oil and Gas Corporation. Issues arose concerning Cabot's indemnification obligations, and the Company and Cabot entered into binding arbitration to resolve all issues in dispute. The binding decision of the arbitrators resulted in the requirement that Cabot pay the Company for a substantial portion of past and future environmental related costs associated with the properties. In December 1998, the Company recorded a charge of approximately $7.2 million representing both previously incurred costs which were not awarded in the arbitration and the recognition of a liability for the Company's share of estimated future costs. As a result of this settlement, the Company will have no future expense associated with this matter. The Company does not expect its potential exposure for the remaining liabilities to have a material adverse effect on the Company's business, financial position or results of operations. The Company believes it has meritorious defenses to all lawsuits and legal proceedings in which it is a defendant and will vigorously defend against them. Based on its evaluation of the above matters, and after consideration of reserves established, the Company believes that the resolution of such matters will not have a material adverse effect on the Company's business, financial position or results of operations. 16 17 EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification and Business Experience of Executive Officers
Name Age Position and Business Experience - ------------------------------------------------- --- ------------------------------------------------------ Morton C. Aaronson............................... 40 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.................................. 51 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................................. 45 Vice President and Controller since December 1997. Vice President and Controller, NorAm Energy Corp. from December 1989 to August 1997. Larry D. Hall.................................... 56 Chairman of the Board since April 1996. Chief Executive Officer since July 1994. President from May 1988 to July 1998. Chief Operating Officer from May 1988 to July 1994. Director since 1984. Rose M. Robeson.................................. 38 Vice President and Treasurer since April 1998. Assistant Treasurer from 1996 to 1998. Assistant Treasurer of Total Petroleum, Inc. from 1992 to 1996. Clyde E. McKenzie................................ 51 Vice President and Chief Financial Officer since April 1996. Vice President and Treasurer, Apache Corporation from 1988 to 1996. Iain "Skip" Paterson............................. 45 Vice President, Human Resources since July 1998. Director of Human Resources for BellSouth Cellular Corp. from June 1992 to June 1998. John F. Riordan................................. 63 Director since February 1998. Vice Chairman of the Board from February 1998 to February 1999. 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.
17 18 John H. Weber.................................... 43 President and Chief Operating Officer since August 1998. Executive Vice President of Aeroquip-Vickers and President Vickers, Incorporated from August 1996 to August 1998. Executive Vice President of Vickers, Incorporated from January 1996 to August 1996. Group Vice President - Industrial of Vickers, Incorporated from 1994 to August 1996. General Manager Industrial Motors of General Electric Company from 1992 to 1994. H. Rickey Wells.................................. 42 Executive Vice President since November 1998. Vice President - Business Operations from April 1996 to November 1998. Vice President, Operations from June 1988 to April 1996. Martha B. Wyrsch................................. 41 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. 18 19 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. All amounts have been restated to reflect the three-for-two split of the Company's common stock effective December 31,1998.
1998 1997 ---- ---- Market Price Data (Low-High-Close) Quarter Ended: March 31 $33.328 - $39.375 - $39.375 $24.078 - $27.828 - $26.328 June 30 $32.797 - $40.328 - $36.125 $24.578 - $28.750 - $28.078 September 30 $25.000 - $36.125 - $34.172 $26.000 - $31.953 - $30.500 December 31 $22.328 - $34.922 - $24.250 $27.328 - $36.000 - $36.000 Dividends Quarter Ended: March 31 $0.1867 $0.1800 June 30 $0.1867 $0.1800 September 30 $0.1867 $0.1800 December 31 $0.2000 $0.1867 Common Stockholders Year-end 9,659 10,090
19 20 ITEM 6: SELECTED FINANCIAL DATA FIVE-YEAR REVIEW K N ENERGY, INC. AND SUBSIDIARIES
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In Thousands, Except Per Share Amounts) OPERATING REVENUES: Upstream Gathering and Processing $ 604,830 $ 553,932 $ 357,533 $ 208,071 $ 228,098 Midstream Sales, Transportation and Storage 1,504,644 231,108 266,737 303,382 209,449 Downstream Retail and Marketing 2,801,335 1,669,945 1,164,512 869,609 863,820 Gas and Oil Production -- -- -- 7,437 11,328 Intersegment Eliminations (522,966) (306,004) (348,300) (277,101) (221,418) ----------- ----------- ----------- ----------- ----------- Total Operating Revenues $ 4,387,843 $ 2,148,981 $ 1,440,482 $ 1,111,398 $ 1,091,277 =========== =========== =========== =========== =========== OPERATING INCOME $ 344,551 $ 146,112 $ 134,801 $ 115,362 $ 54,879 Other Income and (Deductions) (246,290) (32,954) (35,085) (33,790) (30,058) ----------- ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 98,261 113,158 99,716 81,572 24,821 Income Taxes 38,272 35,661 35,897 29,050 9,500 ----------- ----------- ----------- ----------- ----------- NET INCOME 59,989 77,497 63,819 52,522 15,321 Less - Preferred Stock Dividends 350 350 398 492 630 ----------- ----------- ----------- ----------- ----------- EARNINGS AVAILABLE FOR COMMON STOCK $ 59,639 $ 77,147 $ 63,421 $ 52,030 $ 14,691 =========== =========== =========== =========== =========== DILUTED EARNINGS PER COMMON SHARE $ 0.92 $ 1.63 $ 1.43 $ 1.22 $ 0.35 =========== =========== =========== =========== =========== DIVIDENDS PER COMMON SHARE $ 0.76 $ 0.73 $ 0.70 $ 0.67 $ 0.51 =========== =========== =========== =========== =========== NUMBER OF SHARES USED IN COMPUTING DILUTED EARNINGS PER COMMON SHARE 64,636 47,307 44,436 42,540 42,066 =========== =========== =========== =========== =========== TOTAL ASSETS $ 9,612,212 $ 2,305,805 $ 1,629,720 $ 1,257,457 $ 1,172,384 =========== =========== =========== =========== =========== CAPITAL EXPENDITURES $ 256,514 $ 311,093 $ 119,987 $ 79,313 $ 70,511 =========== =========== =========== =========== =========== ACQUISITIONS $ 3,781,517 $ 153,756 $ 155,909 $ 35,897 $ 31,363 =========== =========== =========== =========== =========== CAPITALIZATION: Common Stockholders' Equity $ 1,216,821 25% $ 606,132 48% $ 519,794 55% $ 426,760 57% $ 393,686 54% Preferred Stock 7,000 -- 7,000 -- 7,000 1% 7,000 1% 7,000 1% Preferred Stock Subject to Mandatory Redemption -- -- -- -- -- -- 572 -- 1,715 -- Preferred Capital Trust Securities 275,000 6% 100,000 8% -- -- -- -- -- -- Long-Term Debt 3,300,025 69% 553,816 44% 423,676 44% 315,564 42% 334,644 45% ----------- --- ----------- --- ----------- --- ----------- --- ----------- --- Total Capitalization $ 4,798,846 100% $ 1,266,948 100% $ 950,470 100% $ 749,896 100% $ 737,045 100% =========== === =========== === =========== === =========== === =========== === BOOK VALUE PER COMMON SHARE $ 17.74 $ 12.63 $ 11.44 $ 10.13 $ 9.52 =========== =========== =========== =========== ===========
20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion should be read in conjunction with the accompanying consolidated financial statements and related notes. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has engaged in acquisition and divestiture transactions which may affect the comparison of results between periods. All per share amounts reflect the impact of the December 31, 1998, three-for-two common stock split as discussed in Note 7 (D) to the accompanying consolidated financial statements. On February 22, 1999, Sempra Energy ("Sempra," an energy services holding company based in San Diego, California) and the Company announced that their respective boards of directors had approved a definitive agreement under which Sempra and the Company would combine in a stock and cash transaction. This merger is conditioned, among other things, upon the approvals of shareholders of both companies as well as certain regulatory approvals, including approvals of the Federal Energy Regulatory Commission and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. For additional information, see Note 1 to the accompanying consolidated financial statements. CONSOLIDATED FINANCIAL RESULTS
1998 1997 1996 --------- --------- --------- (Dollars In Millions Except Per Share Amounts) Operating Revenues $ 4,387.8 $ 2,149.0 $ 1,440.5 Gross Margin 987.8 421.1 378.7 Operating Income 344.6 146.1 134.8 Net Income 60.0 77.5 63.8 Diluted Earnings Per Share $ 0.92 $ 1.63 $ 1.43 Return on Average Common Equity 5.4% 13.7% 13.4%
The Company's results for 1998 reflect increases from 1997 of 104.2 percent in operating revenues, 134.6 percent in gross margin and 135.9 percent in operating income. These increases are due, in large part, to the inclusion of the results of operations of MidCon Corp. ("MidCon") beginning with its January 30, 1998, acquisition date. The operating revenues, gross margin and operating income associated with each of the Company's business segments were negatively affected during 1998 by (i) low natural gas liquids ("NGLs") prices and associated reduced processing margins and (ii) reduced pipeline basis differentials reflecting, in part, weather-related reduction in demand as further described within the individual segment discussions which follow. In addition, the results of operations for 1998 include (i) $5.8 million of pre-tax expense ($3.5 million after tax or $0.05 per diluted share) associated with the January 30, 1998, acquisition of MidCon by K N and (ii) the negative impact of items totaling approximately $27.8 million before tax ($17.0 million after tax or $0.26 per diluted share). The pre-tax loss associated with these items includes (i) $7.2 million attributable to settlement of the arbitration of certain environmental litigation as a result of which the Company will have no future expense associated with this matter, (ii) a loss of $3.1 million resulting from the sale of several under-performing natural gas processing facilities, (iii) write-downs totaling approximately $8.8 million due to the revaluation of certain natural gas due from third-parties and in underground storage and NGLs inventories to reflect current market values, (iv) $3.7 million in increased allowances for uncollectible accounts receivable and (v) $5.0 million of increased provisions for regulatory refund obligations. These charges were partially offset by the $8.5 million pre-tax ($5.2 million after tax or $0.08 per diluted share) gain from the sale of the Company's Kansas distribution properties and the 21 22 $10.9 million pre-tax ($6.7 million after tax or $0.10 per diluted share) gain from the sale of certain microwave towers. There was a significant increase in interest expense in 1998 and an increase in the effective tax rate, see "Other Income and (Deductions)" and "Income Taxes" elsewhere herein. Earnings per diluted share for 1998 declined by 43.6 percent from 1997 reflecting, in addition to the decline in 1998 net income, an increase of 36.6 percent in average shares outstanding, largely due to the March 1998 common stock issuance associated with the acquisition of MidCon (see Notes 2(D) and 7(D) to the accompanying consolidated financial statements). RESULTS OF OPERATIONS Reflecting the Company's strategy of extracting margins from the various segments of the energy value stream, the Company has segregated its results of operations into "Upstream," "Midstream" and "Downstream" components. The Company's Upstream operations consist of (i) natural gas gathering, (ii) natural gas processing and (iii) NGLs extraction and marketing activities. Midstream operations consist of transportation, storage and bundled sales transactions for K N's interstate and intrastate pipelines. Downstream activities principally consist of energy marketing, regulated natural gas distribution and electric power generation and sales. For comparative purposes, the Company's previously reported segment results have been restated to conform to the current presentation. The following segment data are before intersegment eliminations.
UPSTREAM GATHERING AND PROCESSING 1998 1997 1996 - --------------------------------- -------- -------- -------- (Dollars In Millions Except Per Gallon Amounts) Operating Revenues Gas Sales $ 219.8 $ 156.2 $ 102.5 Natural Gas Liquids Sales 251.0 275.9 188.2 Gathering, Transportation and Other 134.0 121.8 66.8 -------- -------- -------- 604.8 553.9 357.5 -------- -------- -------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 473.7 391.0 244.5 Operations and Maintenance 111.8 77.6 54.3 Depreciation and Amortization 26.3 16.9 14.5 Taxes, Other Than Income Taxes 11.4 9.6 5.6 -------- -------- -------- 623.2 495.1 318.9 -------- -------- -------- Operating (Loss) Income $ (18.4) $ 58.8 $ 38.6 ======== ======== ======== Systems Throughput (Trillion Btus) Gas Sales 116.8 70.7 60.6 Gathering and Transportation 343.5 298.4 280.2 -------- -------- -------- 460.3 369.1 340.8 ======== ======== ======== Natural Gas Liquids Sales (Million Gallons) 902.7 717.4 464.6 ======== -------- -------- Average Sales Price/Gallon $ 0.28 $ 0.38 $ 0.41 ======== ======== ========
Operating revenues and operating expenses for Upstream increased by $50.9 million and $128.1 million, respectively, from 1997 to 1998 due primarily to the effect of a full year of the results of operations of the Bushton processing facility. Upstream operating income decreased from income of $58.8 million in 1997 to a loss of $18.4 million in 1998. This net decrease of $77.2 million included $14.0 million of positive contribution from the 1998 operating results of assets which were not included in 1997 operating results, including assets acquired with the MidCon, Red Cedar Gathering Company and Interenergy Corporation acquisitions. This positive impact was more than offset by approximately $91.2 million of negative variance associated with assets owned and operated during both periods. Approximately 55 percent of this negative variance was attributable to decreased NGLs prices during 1998. The addition of the Bushton facility in April 1997 was accretive to 1997 earnings. However, due in part to its contract mix, this acquisition increased Upstream's sensitivity to NGLs 22 23 prices and to the spread between NGLs prices and natural gas prices. The remaining negative variance was principally due to the impacts of (i) increased 1998 downtime resulting from plant turnaround and installation of additional measurement facilities, (ii) operational problems in 1998 associated with deficient vendor performance, (iii) reduced 1998 pipeline basis differentials which negatively affected joint venture marketing activities, (iv) 1998 NGLs storage inventory write-downs and (v) reduced 1998 revenues from the sale of NGLs marketing rights and processing agreements. The significant increases in 1997 operating revenues, costs and expenses and volumetric data over 1996 largely reflect the acquisition of the Bushton gathering and processing assets effective April 1, 1997. Increased 1997 operating income from the Bushton assets was partially offset by lower 1997 NGLs prices received at other processing facilities.
MIDSTREAM SALES, TRANSPORTATION AND STORAGE 1998 1997 1996 - ------------------------------------------- -------- -------- -------- (Dollars In Millions) Operating Revenues Transportation and Storage $ 652.5 $ 126.5 $ 112.8 Gas Sales 832.8 92.7 140.3 Other 19.3 11.9 13.6 -------- -------- -------- 1,504.6 231.1 266.7 -------- -------- -------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 754.9 94.7 134.2 Operations and Maintenance 209.6 54.6 56.4 Depreciation and Amortization 155.0 27.6 24.9 Taxes, Other Than Income Taxes 33.0 8.7 8.1 -------- -------- -------- 1,152.5 185.6 223.6 -------- -------- -------- Operating Income $ 352.1 $ 45.5 $ 43.1 ======== ======== ======== Systems Throughput (Trillion Btus) 2,421.2 503.2 529.7 ======== ======== ========
Midstream operating income increased from $45.5 million in 1997 to $352.1 million in 1998. This increase in operating income, as well as the significant increases in operating revenues, operating expenses and throughput shown in the preceding table, was principally attributable to the inclusion in 1998 of the operating results of (i) the interstate and intrastate pipeline operations of assets acquired with MidCon (see Note 2 (D) to the accompanying consolidated financial statements) and (ii) the Pony Express Pipeline, which began full operation in the fourth quarter of 1997. There was no significant variance attributable to the operating results of assets owned in both periods. The Pony Express Pipeline accounted for the majority of the improvement in Midstream operating income from 1996 to 1997. Additionally, 1997 operating results were positively affected by increased gas supply requirements for the Company's retail natural gas services and other wholesale customers. These gas supply requirements increased in 1997 principally due to colder weather and higher irrigation demand in the northern portions of the Company's operating area. These positive impacts were partially offset by reduced 1997 wholesale irrigation demand in the Texas intrastate market area and the transfer of the Casper processing plant to the Upstream segment in August 1997. 23 24
DOWNSTREAM RETAIL AND MARKETING 1998 1997 1996 - ------------------------------- -------- -------- -------- (Dollars In Millions) Operating Revenues Gas Sales $2,719.9 $1,552.4 $1,117.5 Transportation and Other 81.4 117.5 47.0 -------- -------- -------- 2,801.3 1,669.9 1,164.5 -------- -------- -------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 2,686.8 1,547.1 1,030.6 Operations and Maintenance 76.9 63.9 63.4 Depreciation and Amortization 14.6 11.5 11.8 Taxes, Other Than Income Taxes 6.3 5.6 5.6 -------- -------- -------- 2,784.6 1,628.1 1,111.4 -------- -------- -------- Operating Income $ 16.7 $ 41.8 $ 53.1 ======== ======== ======== Gas Sales (Trillion Btus) 1,253.5 564.1 439.2 ======== ======== ========
Downstream operating income decreased from $41.8 million in 1997 to $16.7 million in 1998 primarily due to a decrease in earnings from commodity marketing and other factors as described following. Operating income for 1998 included $8.0 million of income from certain new assets and businesses not included in 1997, including K N Power, the Thermo Companies ("Thermo"), K N Telecommunications and the Company's interest in the Hermosillo, Mexico, natural gas distribution system. Additionally, 1998 results, as compared to 1997, were positively affected by the fact that 1997 results included approximately $4.0 million of power marketing losses (the Company is not currently engaged in power marketing). However, these favorable variances were more than offset by (i) a $4.6 million decrease attributable to equity in losses of en*able and (ii) a decrease of $26.8 million in operating income from commodity marketing, which reflected (1) $6.4 million of adjustments to write down certain natural gas due from third parties and in underground storage to their current market values, (2) $3.7 million of increased provision for uncollectible accounts receivable, (3) reduced 1998 sales of gas in storage and (4) depressed 1998 basis differentials and milder weather which have a negative impact on certain sales margins due to the costs associated with transportation commitments. Downstream results were positively affected in 1997, relative to 1996, by increased sales of gas in storage, sales of certain non-strategic gas supply and increases in space-heating and irrigation loads in the northern portions of the Company's operating area. These positive impacts were more than offset by (i) $4.0 million of 1997 power marketing losses, (ii) reduced 1997 wholesale irrigation demand in the Texas intrastate markets and (iii) expenses incurred during 1997 to centralize the Company's marketing activities in Houston, Texas.
OTHER INCOME AND (DEDUCTIONS) 1998 1997 1996 - ----------------------------- ------- ------- ------- (In Millions) Interest Expense, Net $(247.2) $ (43.5) $ (35.9) Minority Interests (16.2) (8.7) (2.9) Other, Net 17.1 19.2 3.7 ------- ------- ------- $(246.3) $ (33.0) $ (35.1) ======= ======= =======
The increase of $203.7 million in "Interest Expense, Net" from 1997 to 1998 was principally due to incremental debt associated with the MidCon acquisition and construction costs associated with the Pony Express Pipeline. The increase in net expense associated with "Minority Interests" in 1998, relative to 1997, was principally due to the dividend requirements associated with the $175 million of Capital Trust Securities issued in April 1998. The $2.1 million decrease in "Other, Net" from 1997 to 1998 reflects the fact that 1998 included (i) a $10.9 million gain from the sale of certain microwave towers, (ii) an $8.5 million gain from the sale of the Company's Kansas natural gas distribution properties, (iii) the recognition of $7.2 million in costs related to the settlement of the arbitration of certain environmental claims, as a result of which the Company will have no future expense associated 24 25 with this matter, (iv) approximately $5.0 million of expense reflecting an increased provision for regulatory refund obligations, (v) a loss of approximately $3.1 million from the sale of certain natural gas processing facilities and (vi) $13 million of other miscellaneous income items, while 1997 included approximately $7.0 million of income related to the sale of a 50 percent interest in en*able, $3.7 million of gains from the sale of non-strategic gathering systems, $4.5 million of equity financing costs associated with the Pony Express Pipeline and $4.0 million of other miscellaneous income items. The increase in "Interest Expense, Net" in 1997, relative to 1996, was the result of additional long-term debt issued in 1997 and higher levels of short-term debt, principally to fund capital expenditures. The increase in net expenses associated with "Minority Interests" in 1997 was primarily due to the dividend requirements associated with the $100 million of Capital Trust Securities issued in April 1997. The change in "Other, Net" from 1996 to 1997 was principally due to the items recorded in 1997 as described preceding.
INCOME TAXES 1998 1997 1996 - ------------ ------- ------- ------- (Dollars In Millions) Provision $ 38.3 $ 35.7 $ 35.9 ======= ======= ======= Effective Tax Rate 38.9% 31.5% 36.0% ======= ======= =======
The $2.6 million net increase in income tax expense from 1997 to 1998 reflected a decrease of approximately $4.7 million attributable to a decrease in 1998 pre-tax income and an increase of approximately $7.3 million attributable to an increase in the 1998 effective tax rate. This increased 1998 effective tax rate was principally due to (i) certain 1997 adjustments as described following and (ii) an increase in the 1998 effective state tax rate attributable to the addition of the results of operations of MidCon. The $0.2 million net decrease in income tax expense from 1996 to 1997 reflected an increase of approximately $4.8 million attributable to an increase in 1997 pre-tax income and a decrease of approximately $5.0 million attributable to a decrease in the 1997 effective tax rate, principally due to the successful resolution of certain issues from prior years' federal income tax filings. 25 26 LIQUIDITY AND CAPITAL RESOURCES The following table illustrates the sources of the Company's invested capital. The balances at December 31, 1998, reflect the incremental capital associated with the acquisition of MidCon, including the post-acquisition refinancings completed in 1998 (see Notes 2 (D) and 7 to the accompanying consolidated financial statements).
DECEMBER 31 1998 1997 1996 ---------- ---------- ---------- (Dollars In Thousands) Long-Term Debt $3,300,025 $ 553,816 $ 423,676 Common Equity 1,216,821 606,132 519,794 Preferred Stock 7,000 7,000 7,000 Capital Trust Securities 275,000 100,000 - ---------- ---------- ---------- Capitalization 4,798,846 1,266,948 950,470 Short-Term Debt 1,702,013(1) 359,951 156,271 ---------- ---------- ---------- Invested Capital $6,500,859 $1,626,899 $1,106,741 ========== ========== ========== Capitalization: Long-Term Debt 68.8% 43.7% 44.6% Common Equity 25.4% 47.8% 54.7% Preferred Stock 0.1% 0.6% 0.7% Capital Trust Securities 5.7% 7.9% - Invested Capital: Total Debt(2) 76.9% 56.2% 52.4% Equity, Including Capital Trust Securities 23.1% 43.8% 47.6%
- -------------------------------------------------------------------------------- (1) Includes the $1,394,846 Substitute Note assumed in conjunction with the acquisition of MidCon. This note was repaid on January 4, 1999. (2) If the government securities held as collateral were offset against the related debt, the ratio of total debt to invested capital at December 31, 1998, would be 72.3 percent. The following discussion of cash flows should be read in conjunction with the accompanying Consolidated Statements of Cash Flows and related supplemental disclosures. Net Cash Flows From Operating Activities "Net Cash Flows From Operating Activities" decreased from $97.5 million in 1997 to $95.3 million in 1998, a decrease of $2.2 million or 2.3 percent. This decrease was principally attributable to the net impact of (i) an increase of approximately $65.5 million in cash used to increase net working capital in 1998, largely due to the net use of cash resulting from the changes in accounts receivable and accounts payable, (ii) the increase in earnings before non-cash charges and credits for 1998, (iii) increased 1998 cash used for gas in underground storage and (iv) the 1998 receipt of $27.5 million in settlement of a gas contract. "Net Cash Flows From Operating Activities" increased from $75.6 million in 1996 to $97.5 million in 1997, an increase of $21.9 million. This increase was principally attributable to the same factors resulting in the reported increase in earnings between these years. Net Cash Flows From Investing Activities "Net Cash Flows Used in Investing Activities" increased from $496.6 million in 1997 to $3.5 billion in 1998, an increase of approximately $3.0 billion, principally due to (i) the $2.2 billion of net cash paid in 1998 and (ii) the net use of cash for the purchases of approximately $1.1 billion of U.S. government securities as collateral for the Substitute Note, in each case in conjunction with the acquisition of MidCon. In addition, cash outflows for 26 27 acquisitions other than MidCon were approximately $104.5 million less in 1998 than in 1997 and proceeds from sales of facilities increased by approximately $55.2 million in 1998. "Net Cash Flows Used in Investing Activities" increased from $257.3 million in 1996 to $496.6 million in 1997, an increase of $239.3 million principally due to (i) the 1997 completion of the Pony Express Pipeline and construction of transmission laterals into the Kansas City metropolitan area, (ii) the acquisition of the Bushton facilities in April 1997 and (iii) the acquisition of an interest in the Red Cedar Gathering Company, also in December 1997. Net Cash Flows From Financing Activities "Net Cash Flows From Financing Activities" increased from $411.2 million in 1997 to approximately $3.4 billion in 1998, an increase of approximately $3.0 billion. This increase reflected reduced 1998 cash from short-term borrowings and the 1998 receipt of (i) $2.75 billion from the public sale of debt securities, (ii) $650 million from the public sale of common stock and (iii) $175 million from the public sale of Capital Trust Securities (in each case representing the refinancing of acquisition debt associated with the purchase of MidCon), net of associated issuance costs of approximately $78.2 million (see Note 7 to the accompanying consolidated financial statements). In addition, 1998 cash used for dividends and long-term debt retirement increased by $17.3 million and $8.0 million, respectively. In March 1998, K N issued 12.5 million shares (18.75 million shares after adjustment for the December 1998 three-for-two stock split) of common stock in an underwritten public offering, receiving net proceeds of approximately $624.6 million. Also in March 1998, K N issued $2.35 billion principal amount of debt securities of varying maturities and interest rates in an underwritten public offering, receiving net proceeds of approximately $2.34 billion. The net proceeds from these two offerings were used to refinance borrowings under the MidCon acquisition financing arrangements and to purchase U.S. government securities to collateralize a portion of the Substitute Note. In April 1998, K N sold $175 million of 7.63% Capital Securities due April 15, 2028, in an underwritten offering, with the net proceeds of $173.1 million used to purchase U.S. government securities to further collateralize the Substitute Note. In November 1998, K N completed the concurrent underwritten public offerings of $400 million of 3-year senior notes and $460 million principal amount of premium equity participating security units ("PEPS"). The $397.4 million of net proceeds from the senior notes offering were used to retire a portion of K N's then-outstanding short-term borrowings. The proceeds from the PEPS offering was used to purchase U.S. treasury securities on behalf of the PEPS owners, which securities are the property of the PEPS owners and will be held as collateral to fund the obligation of the PEPS holders to purchase K N common stock at the end of a three-year period. For additional information on each of these financings, including terms of the specific securities and the associated accounting treatment, see Note 7 to the accompanying consolidated financial statements. "Net Cash Flows From Financing Activities" increased from $177.8 million in 1996 to $411.2 million in 1997, an increase of approximately $233.4 million. This increase was principally attributable to (i) additional long-term debt issued in 1997, (ii) the issuance of $100 million of Capital Trust Securities in April 1997 and (iii) net increases in short-term borrowing in 1997. These increases were partially offset by decreased 1997 cash from the issuance of common stock. On January 4, 1999, K N repaid the $1.4 billion Substitute Note payable to Occidental Petroleum as part of the MidCon acquisition. The note was repaid using the proceeds of approximately $1.1 billion from the sale of U.S. government securities which had been held as collateral, with the balance of the funds provided by an increase in short-term borrowings. 27 28 The Company's principal sources of short-term liquidity are its $1 billion revolving bank facilities (see Note 7 to the accompanying consolidated financial statements). At December 31, 1998, the Company had $297.0 million of commercial paper issued and outstanding (which is backed by the bank facilities). At February 17, 1999, short-term borrowings had increased to approximately $593 million, principally due to funds borrowed in conjunction with repayment of the Substitute Note as described preceding. The bank facilities include covenants which are common in such arrangements, including requirements that (i) the ratio of the Company's total debt to total capitalization not exceed 74 percent initially (upon issuance of common stock to the holders of the PEPS at the maturity thereof, the ratio will be reduced to 67 percent) and (ii) the Company's consolidated net worth (inclusive of trust preferred securities) be at least equal to the sum of $1.236 billion plus 50 percent of consolidated net income earned for each fiscal quarter ending after December 30, 1998. Certain of the Company's operating lease arrangements provide that, in the event that the rating of K N's senior debt is lowered below investment grade by both of the two major rating agencies, the Company would be required to post letters of credit in support of its remaining lease payments. Although the Company currently has no information to indicate that such downgrades will occur, given the Company's current level of borrowing and utilization of its letter of credit facility, the posting of these additional letters of credit in support of lease obligations would place the Company in default under the terms of its revolving credit facility. The Company currently believes that, should such a default occur, it could obtain a waiver of the applicable default provisions or modification of such provisions to allow the facility to remain in place, although the pricing would likely increase. Capital Expenditures and Commitments Capital expenditures decreased from $311.1 million in 1997 to $256.5 million in 1998. This decrease was due principally to the fact that 1997 capital expenditures included the costs for completion of the Pony Express Pipeline and associated transmission laterals. The 1999 capital expenditure budget totals approximately $160 million. Approximately $44.3 million of this amount had been committed for the purchase of plant and equipment at December 31, 1998. Principal acquisitions or investments made during 1998 included the MidCon and Thermo acquisitions and the pressure reduction program in the Hugoton basin. Major asset sales during 1998 included the sale of the Company's Kansas natural gas distribution properties, certain microwave towers and certain under-performing natural gas gathering and processing facilities. See Note 2 to the accompanying consolidated financial statements for more information on these acquisitions, investments and sales. COMMON STOCK SPLIT AND DIVIDEND ACTION On November 9, 1998, the Board of Directors of K N Energy, Inc. approved a 7.1 percent increase in the quarterly dividend and a three-for-two split of the Company's common stock. The regular quarterly dividend was declared at $0.30 per common share, an increase from $0.28 per common share. Giving effect to the stock split, the quarterly dividend is $0.20 per common share. The stock split was distributed and the increase in dividend was paid concurrently on December 31, 1998, to shareholders of record at the close of business on December 15, 1998. REGULATION On January 23, 1998, K N Interstate Gas Transmission Co. ("KNI") filed a general rate case with the Federal Energy Regulatory Commission ("FERC") requesting a $30.2 million increase in annual revenues. As a result of FERC action, KNI was allowed to place its rates into effect on August 1, 1998, subject to refund, and KNI has recorded provisions 28 29 for refund based on its expectation of ultimate resolution. KNI is currently following the procedural schedule established for the rate case and a hearing on its proposed rates is currently scheduled to commence on July 20, 1999. On December 29, 1998, Rocky Mountain Natural Gas Company ("RMNG"), a wholly owned subsidiary of K N Energy, Inc., received a "show cause" order from the Colorado Public Utilities Commission (the "Commission"). The Commission has concluded that there is reason to believe that RMNG's rates may be excessive and has ordered further investigation. A procedural schedule has been established and a hearing is scheduled to commence on June 1, 1999. 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, but not limited to, futures and options contracts and fixed-price swaps. 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. Pursuant to a policy 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 condensate sales, gas purchases, system use and storage in order to protect profit margins, and is not to engage in speculative trading. Commodity-related activities of the risk management group are monitored by the Company's Risk Management Committee, which is charged with the review and enforcement of the Board of Directors' risk management policy. 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. 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. 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 measures the risk of price changes in the natural gas and NGLs markets utilizing a Value-at-Risk ("VAR") model. VAR is a statistical measure of how much the marked-to-market value of a portfolio could change during a period of time, within a certain level of statistical confidence. The Company utilizes a closed form model to evaluate risk on a daily basis. The VAR computations utilize a confidence level of 97.7 percent for the resultant price movement and a holding period of one day chosen for the calculation. The confidence level used means that there is a 97.7 percent probability that the mark-to-market losses for a single day will not exceed the VAR number presented. Instruments evaluated by the model include forward physical gas, storage and transportation contracts and financial products including commodity futures and options contracts, fixed price swaps, basis swaps and over-the-counter options. VAR at December 31, 1998, was $5.8 million and averaged $4.6 million for 1998. The Company's calculated VAR exposure represents an estimate of the reasonably possible net losses that would be recognized on the Company's portfolio of derivatives assuming hypothetical movements in future market rates, and is not necessarily indicative of actual results that may occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated. Actual gains and losses may differ from estimates due to actual fluctuations in market rates, operating exposures and the timing thereof, as well as changes in the Company's portfolio of derivatives during the year. 29 30 The Company's Treasury Department manages the Company's interest rate exposure, utilizing interest rate swaps, caps or similar derivatives within Board-established policy. None of these interest rate derivatives is leveraged. The Company currently is not hedging its interest rate exposure resulting from its short-term borrowings. The market risk related to short-term borrowings from a one percent change in interest rates would result in an approximate $5.9 million impact on pre-tax income, based on current short-term borrowing levels. There are recently issued accounting pronouncements that change the accounting and reporting requirements for certain risk management activities (see Note 9 to the accompanying consolidated financial statements). OUTLOOK/FORWARD-LOOKING INFORMATION General Certain information contained herein may 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, state and international regulatory developments, the timing and extent of changes in commodity prices for oil, natural 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, weather-related factors and conditions of capital markets and equity markets during the periods covered by the forward-looking statements. All of these factors are difficult to predict and many are beyond the Company's control. Readiness for Year 2000 The following is a discussion of the Year 2000 problem and its potential impact on the Company. The Securities and Exchange Commission ("SEC") has issued specific guidelines for public companies regarding their disclosure of the Year 2000 problem. The guidelines require more detailed disclosure of each company's analysis of and approach to the Year 2000 problem. As a result, the Company is providing the following disclosure; however, the length and detail contained in this disclosure, relative to the other disclosures contained herein, is not an indication of the Company's view of the relative risk of the Year 2000 problem to the Company. Some computers and programs, and some devices containing computer chips ("embedded chips") store or process dates containing the Year 2000 as "00." This can result in inaccurate date-related calculations. It is expected that once the Year 2000 arrives, computers, computer programs and devices with embedded chips that have not been modified to correct this problem will not function normally. The Company relies on a number of automated systems to conduct its operations and to transact its business, as is common among large diversified energy companies. In addition, certain of the Company's pipelines and processing equipment and related systems contain electric controls or other devices containing embedded chips. These controls may also be adversely affected by this problem. In 1997, the Audit Committee of the Company's Board of Directors (the "Audit Committee") established a Year 2000 project to address the Year 2000 problem. In that year, the Company established a Year 2000 Executive Steering Committee (the "Year 2000 Committee") and a Year 2000 Project Management Office (the "Year 2000 Project Management Office"). The Year 2000 project is an ongoing effort monitored by the Audit Committee. 30 31 The Audit Committee has adopted a Year 2000 Plan (the "Plan") and will oversee its implementation by receiving periodic reports from the Year 2000 Committee and directly from management. The Audit Committee is prepared to require management to make additional efforts, including amending the Plan as necessary, to fulfill the Audit Committee's goal of taking reasonable steps to minimize injury to people, damage to property, disruption to the Company's delivery of products and services, supporting systems and business operations, and other risks associated with the Year 2000 problem. The Year 2000 Committee is charged with directing the implementation of the Plan in accordance with resolutions of the Audit Committee and under the direction of the Company's designated senior executives. The Year 2000 Committee oversees the Year 2000 Project Management Office, headed by the Year 2000 Project Coordinator. The Year 2000 Committee keeps the Audit Committee informed of the Company's progress in implementing the Plan and of significant updates that are made to the Plan. The Year 2000 Committee communicates the Audit Committee's directives concerning the Plan to management and executives, and oversees the implementation of those directives. The Year 2000 Project Management Office works closely with the Company's Readiness Teams comprised of members of the Company's operating units. The teams have been organized to further implement the Plan throughout the Company. The Project Management Office, among other things, promotes exchange of information about Year 2000 problems and solutions, assists in disseminating information about the Company's policies governing communications concerning Year 2000 issues and serves as a conduit between the various Readiness Teams and the Year 2000 Committee. The aim of the Plan is to take reasonable steps to prevent the Company's mission critical functions from being impaired due to the Year 2000 problem. "Mission critical" describes those systems, devices, functions and external entities that are of material importance to maintaining the Company's capacity to deliver and account for products and services without interruption, and to maintain the Company's supporting business operations with no material disruption or diminution in quality. Each of the Company's operating units is in various stages of implementing the Plan to address the Year 2000 problem. These efforts include: o an assessment of potential problems; o an inventory of systems and areas which may need to be corrected; o remediation and implementation, with priority given to mission critical items; o the testing of such systems and devices; and o developing contingency plans in case the Company cannot correct the problem in time, or in the event certain facets of the Year 2000 problem go undetected or do not manifest themselves until after January 1, 2000. Specifically, the Company is in the process of correcting programmable code, replacing non-Year 2000-ready embedded chips, installing Year 2000-ready releases of certain vendor-supplied computer systems and, in some cases, replacing existing systems with new internally or externally developed software in advance of December 31, 1999. The Company has completed an inventory of affected items in the non-information technology area and is assessing the results. The Company has begun testing and currently has found very few items that are likely to suffer adverse effects from the Year 2000 problem. The Company expects testing and remediation of mission critical items to be substantially completed by mid-1999. 31 32 For the Company's Plan to be successful, the Company must rely for some purposes on outside contractors. There is a risk that those contractors will not complete their work prior to the Year 2000. The Company is developing alternative ways to conduct its business if such deadlines are not met. However, any alternative may involve additional expense and may not be implemented in time to avoid the Year 2000 problem. Ultimately, these alternatives may not be successful. The Company also relies on suppliers, business partners and other external entities which may or may not be addressing their own problems associated with the Year 2000 problem. The Company has sent out questionnaires to external entities to determine what steps they have taken to correct any Year 2000 problems they may have. The Company has no control over such external entities' efforts, so the Company has developed contingency plans in case such external entities do not complete their efforts before the Year 2000. The Company estimates that the direct costs the Company has incurred or will incur in 1998, 1999 and 2000 associated with assessing, inventorying, remediating and testing internally developed computer applications, hardware and equipment, including embedded chip systems and third-party developed software, to be between $5 million and $7 million. In addition, as part of the integration of the Company's systems with the systems of MidCon, the Company has begun modifying certain of its computer systems for the combined company or purchasing computer systems from third parties. These computer systems will address the Year 2000 problem and are expected to be operational prior to December 31, 1999. The costs for these computer systems are expected to be between $23 million and $25 million, the majority of which will be capitalized. The SEC's guidelines also require the Company to address the most reasonably likely worst case scenarios resulting from the Year 2000 problem. As a result of the Year 2000 problem, the Company may be faced with: failure of electrical, gas and similar services and supplies from utilities, disruption of telecommunications facilities, interruptions in the nation's transportation systems and failure of a substantial number of the Company's mission critical hardware and software systems. In addition, the Company's key suppliers or customers may experience their own Year 2000 problems in a way that materially adversely affects the Company's ability to do business without interruption or disruption. As a result of the cumulative impact of these events, the Company's business may be materially adversely affected. The adverse impact of these events occurring can not be quantified at this time. The Company is in the process of developing contingency plans to address issues associated with the reasonably likely worst case scenarios. The Company expects to have such contingency plans substantially completed by the end of June 1999. The Company will then refine and update its contingency plans for the remainder of 1999. The Company does not believe that the direct costs associated with the Year 2000 problem will be material to its business, financial position or results of operations. Litigation and Environmental The Company's anticipated environmental capital costs and expenses for 1999, including expected costs for voluntary remediation efforts, are approximately $8.4 million. A substantial portion of the Company's environmental costs are either recoverable through insurance and indemnification provisions or have previously recorded liabilities associated with them. Refer to Notes 4(A) and 4(B) to the accompanying consolidated financial statements for additional information on the Company's pending litigation and environmental matters. The Company believes it has established adequate reserves such that the resolution of pending litigation and environmental matters will not have a material adverse impact on the Company's business, financial position or results of operations. 32 33 New Business Venture With its 1998 Thermo acquisition (see Note 2 (B) to the accompanying consolidated financial statements), the Company obtained its first electric generation assets. In addition, the Company has announced plans to participate in the investment of $2.5 billion over the next three to five years to build gas-fired electric generation plants. The Company plans to obtain a significant amount of non-recourse financing and partner with electricity companies to build plants totaling 5,000 megawatts of electric generation capacity along its current natural gas pipeline systems. Significant Operating Variables The Company's principal exposure to price variability is with NGLs processing margins. The Company attempts to mitigate this exposure by an appropriate mix of "percent of proceeds," "keep whole" and "fee based" processing agreements and by the use of financial hedging instruments (see "Risk Management," elsewhere herein). Under current agreements with producers, a one cent change in average processing margins affects pre-tax operating income by approximately $5.5 million. The Company also has exposure to variation in natural gas prices and basis differentials, which can affect gross margins in its Midstream sales, transportation and storage and Downstream retail and marketing businesses. Basis differential is a term that refers to the difference in natural gas prices between two locations or two points in time. These price differences can be affected by, among other things, natural gas supply and demand, available transportation capacity, storage inventories and deliverability, prices of alternative fuels and weather conditions. In December 1998, the Northern Border Pipeline began operations on its 700 million cubic feet per day ("cfd") expansion project from Canadian supply areas into the Chicago market area, which is the terminus of NGPL's main pipeline system. In addition, the Alliance Pipeline, a joint venture of several energy companies, is currently planning a 1.3 billion cfd pipeline to transport natural gas from Canada into the Chicago market area. The in-service date for the Alliance pipeline is uncertain but may be between late 2000 and 2002. In addition, various pipelines have proposed projects to take gas out of the Chicago area to market areas in the Northeast United States. It is currently unknown what impact, if any, this additional pipeline capacity will have on gas prices and basis differentials for delivery points in the upper Midwest. 33 34 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, 1998 and 1997, and the related consolidated statements of income, comprehensive income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Denver, Colorado February 2, 1999 34 35 CONSOLIDATED STATEMENTS OF INCOME K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (In Thousands Except Per Share Amounts) OPERATING REVENUES: Upstream Gathering and Processing $ 604,830 $ 553,932 $ 357,533 Midstream Sales, Transportation and Storage 1,504,644 231,108 266,737 Downstream Retail and Marketing 2,801,335 1,669,945 1,164,512 Intersegment Eliminations (522,966) (306,004) (348,300) ----------- ----------- ----------- Total Operating Revenues 4,387,843 2,148,981 1,440,482 ----------- ----------- ----------- OPERATING COSTS AND EXPENSES: Gas Purchases and Other Costs of Sales 3,400,044 1,727,902 1,061,748 Operations and Maintenance 390,883 195,043 173,400 Depreciation and Amortization 195,916 55,994 51,212 Taxes, Other Than Income Taxes 50,686 23,930 19,321 Merger-related Costs 5,763 -- -- ----------- ----------- ----------- Total Operating Costs and Expenses 4,043,292 2,002,869 1,305,681 ----------- ----------- ----------- OPERATING INCOME 344,551 146,112 134,801 ----------- ----------- ----------- OTHER INCOME AND (DEDUCTIONS): Interest Expense, Net (247,180) (43,495) (35,933) Minority Interests (16,167) (8,706) (2,946) Other, Net 17,057 19,247 3,794 ----------- ----------- ----------- Total Other Income and (Deductions) (246,290) (32,954) (35,085) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 98,261 113,158 99,716 Income Taxes 38,272 35,661 35,897 ----------- ----------- ----------- NET INCOME 59,989 77,497 63,819 Less - Preferred Stock Dividends 350 350 398 ----------- ----------- ----------- EARNINGS AVAILABLE FOR COMMON STOCK $ 59,639 $ 77,147 $ 63,421 =========== =========== =========== BASIC EARNINGS PER COMMON SHARE $ 0.93 $ 1.66 $ 1.45 =========== =========== =========== DILUTED EARNINGS PER COMMON SHARE $ 0.92 $ 1.63 $ 1.43 =========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31 -------------------------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (In Thousands) NET INCOME $ 59,989 $ 77,497 $ 63,819 Unrealized (Loss) Gain on Equity Securities, Net of Tax (6,697) (1,492) 5,735 ---------- ---------- ---------- COMPREHENSIVE INCOME $ 53,292 $ 76,005 $ 69,554 ========== ========== ==========
The accompanying notes are an integral part of these statements. 35 36 CONSOLIDATED BALANCE SHEETS K N ENERGY, INC. AND SUBSIDIARIES
DECEMBER 31 ------------------------------------ 1998 1997 ---------- ---------- (Dollars In Thousands) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 21,955 $ 22,471 Restricted Deposits 9,096 11,339 U.S. Government Securities 1,092,415 - Accounts Receivable 693,044 409,937 Inventories 144,831 47,034 Gas Imbalances 85,349 16,687 Other 46,812 69,062 ---------- ---------- 2,093,502 576,530 ---------- ---------- INVESTMENTS 252,543 149,869 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET 7,023,176 1,420,975 ---------- ---------- DEFERRED CHARGES AND OTHER ASSETS 242,991 158,431 ---------- ---------- TOTAL ASSETS $9,612,212 $2,305,805 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current Maturities of Long-Term Debt $ 10,167 $ 30,751 Notes Payable 297,000 329,200 Substitute Note 1,394,846 - Accounts Payable 489,414 334,418 Accrued Taxes 18,914 7,445 Gas Imbalances 74,857 57,733 Payable for Purchase of Thermo Companies 86,799 - Other 247,465 37,264 ---------- ---------- 2,619,462 796,811 ---------- ---------- OTHER LIABILITIES AND DEFERRED CREDITS: Deferred Income Taxes 1,699,072 168,583 Other 431,565 26,160 ---------- ---------- 2,130,637 194,743 ---------- ---------- LONG-TERM DEBT 3,300,025 553,816 ---------- ---------- K N-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL TRUST SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF K N 275,000 100,000 ---------- ---------- MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 63,267 47,303 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 2, 4 AND 12) STOCKHOLDERS' EQUITY: Preferred Stock 7,000 7,000 ---------- ---------- Common Stock- Authorized - 150,000,000 Shares, Par Value $5 Per Share Outstanding - 68,597,308 and 31,996,075 Shares, After Deducting 48,598 and 28,482 Shares Held in Treasury 343,230 160,123 Additional Paid-in Capital 694,223 266,435 Retained Earnings 193,925 185,658 Other (14,557) (6,084) ---------- ---------- Total Common Stockholders' Equity 1,216,821 606,132 ---------- ---------- Total Stockholders' Equity 1,223,821 613,132 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,612,212 $2,305,805 ========== ==========
The accompanying notes are an integral part of these statements. 36 37 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY K N ENERGY, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 --------------------------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ------ ------ (Dollars In Thousands) COMMON STOCK: Beginning Balance 32,024,557 $ 160,123 30,295,792 $ 151,479 28,097,749 $ 140,489 Sales of Common Stock 12,500,000 62,500 - - 1,715,000 8,575 Exercise of Common Stock Warrants - - 642,232 3,211 - - Acquisition of Businesses 689,810 3,449 544,604 2,723 - - Employee and Executive Benefit Plans 549,570 2,758 541,929 2,710 483,043 2,415 Common Stock Split 22,881,969 114,400 - - - - ----------- ----------- ----------- ----------- ----------- ----------- Ending Balance 68,645,906 343,230 32,024,557 160,123 30,295,792 151,479 ----------- ----------- ----------- ----------- ----------- ----------- ADDITIONAL PAID-IN CAPITAL: Beginning Balance 266,435 223,167 176,910 Sale of Common Stock, Net 558,053 - 44,591 Costs Related to PEPS Offering (62,150) - - Exercise of Common Stock Warrants - 8,060 - Redemption and Cancellation of Common Stock Warrants - - (7,420) Acquisition of Businesses 30,985 21,411 1,648 Employee and Executive Benefit Plans 15,371 13,797 7,438 Common Stock Split (114,471) - - ----------- ----------- ----------- Ending Balance 694,223 266,435 223,167 ----------- ----------- ----------- RETAINED EARNINGS: Beginning Balance 185,658 142,578 109,895 Net Income 59,989 77,497 63,819 Cash Dividends: Common (51,372) (34,067) (30,738) Preferred (350) (350) (398) ----------- ----------- ----------- Ending Balance 193,925 185,658 142,578 ----------- ----------- ----------- OTHER: DEFERRED COMPENSATION: Beginning Balance (9,203) (2,908) (222) Executive Benefit Plans (1,483) (6,295) (2,686) ----------- ----------- ----------- Ending Balance (10,686) (9,203) (2,908) ----------- ----------- ----------- TREASURY STOCK: Beginning Balance (28,482) (1,124) (7,216) (257) (10,739) (312) Treasury Stock Acquired (60,994) (2,834) (53,190) (2,096) (220,178) (7,069) Acquisition of Businesses 39,970 1,801 - - 34,282 1,183 Dividend Reinvestment Plan 17,135 740 31,924 1,229 189,419 5,941 Common Stock Split (16,227) - - - - - ----------- ----------- ----------- ----------- ----------- ----------- Ending Balance (48,598) (1,417) (28,482) (1,124) (7,216) (257) ----------- ----------- ----------- ----------- ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE INCOME (NET OF TAX): Beginning Balance 4,243 5,735 - Unrealized (Loss) Gain on Equity Securities (6,697) (1,492) 5,735 ----------- ----------- ----------- Ending Balance (2,454) 4,243 5,735 ----------- ----------- ----------- TOTAL OTHER (48,598) (14,557) (28,482) (6,084) (7,216) 2,570 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL COMMON STOCKHOLDERS' EQUITY 68,597,308 $ 1,216,821 31,996,075 $ 606,132 30,288,576 $ 519,794 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. 37 38 CONSOLIDATED STATEMENTS OF CASH FLOWS K N ENERGY, INC. AND SUBSIDIARIES INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER 31 ------------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 59,989 $ 77,497 $ 63,819 Adjustments to Reconcile Net Income to Net Cash Flows From Operating Activities: Depreciation and Amortization, Excluding Amortization of Gas Plant Acquisition Adjustment 97,999 55,994 51,212 Deferred Income Taxes 21,255 17,155 16,443 Deferred Purchased Gas Costs 468 (17,146) (8,109) (Gain) Loss on Sale of Facilities (17,667) (4,860) 491 Proceeds from Buyout of Contractual Gas Obligations 27,500 - - Changes in Gas in Underground Storage (56,126) (3,167) (22,056) Changes in Other Working Capital Items (81,400) (15,902) (2,496) Changes in Deferred Revenues 36,026 (5,736) (13,883) Other, Net 7,225 (6,332) (9,811) ----------- ----------- ----------- NET CASH FLOWS FROM OPERATING ACTIVITIES 95,269 97,503 75,610 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (256,514) (311,093) (119,987) Cash Paid for Acquisition of MidCon, Net of Cash Acquired (2,198,263) - - Other Acquisitions (14,047) (118,590) (147,137) Investments (9,755) (89,307) (2,136) Sale of U.S. Government Securities 1,062,453 - - Purchase of U.S. Government Securities (2,154,868) - - Proceeds from Sales of Assets 77,584 22,433 11,922 ----------- ----------- ----------- NET CASH FLOWS USED IN INVESTING ACTIVITIES (3,493,410) (496,557) (257,338) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-Term Debt, Net (32,687) 199,900 41,300 Long-Term Debt, Issued 2,750,000 150,000 125,000 Long-Term Debt, Retired (35,787) (27,832) (18,170) Common Stock Issued in Public Offering 650,000 - 55,309 Mandatorily Redeemable Trust Securities Issued 175,000 100,000 - Preferred Stock Redemption - - (572) Other Common Stock Issued 13,437 19,091 6,359 Redemption and Cancellation of Common Stock Warrants - - (7,420) Treasury Stock, Issued 740 1,229 5,941 Treasury Stock, Acquired (2,834) (2,096) (7,069) Cash Dividends, Common (51,372) (34,067) (30,738) Cash Dividends, Preferred (350) (350) (398) Minority Interests, Contributions 10,872 7,823 13,586 Minority Interests, Distributions (1,175) (212) (2,182) Securities Issuance Costs (78,219) (2,300) (3,133) ----------- ----------- ----------- NET CASH FLOWS FROM FINANCING ACTIVITIES 3,397,625 411,186 177,813 ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents (516) 12,132 (3,915) Cash and Cash Equivalents at Beginning of Year 22,471 10,339 14,254 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year $ 21,955 $ 22,471 $ 10,339 =========== =========== ===========
The accompanying notes are an integral part of these statements. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Event Subsequent to Date of Auditors' Report (Unaudited) On February 22, 1999, Sempra Energy ("Sempra") and the Company announced that their respective boards of directors had unanimously approved a definitive agreement (the "Agreement") under which Sempra and the Company would combine in a stock-and-cash transaction valued in the aggregate at $6.0 billion. Sempra is an energy services holding company based in San Diego, California, serving 21 million customers through natural gas and electric distribution, as well as a broad range of energy-related products and services throughout the United States, Canada, Mexico and other countries in Latin America. Under the terms of the Agreement, Sempra will acquire all of the Company's outstanding common shares (the "K N Shares") for a combination of shares of Sempra common stock (the "Sempra Shares") and cash as described following. The Company's shareholders will have the option to elect to receive for each of their K N Shares either (i) .7805 Sempra Shares plus $7.50, (ii) 1.115 Sempra Shares or (iii) $25.00, subject to pro-ration, such that 70 percent of the K N Shares will be converted into Sempra Shares and 30 percent of the K N Shares will be converted into cash. This merger is conditioned, among other things, upon the approvals of shareholders of both companies, the Federal Energy Regulatory Commission and the state commissions of Colorado and Wyoming and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Closing is currently expected in six to eight months. (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 16 states in the Rocky Mountain and Mid-Continent regions, with principal operations in Arkansas, Colorado, Illinois, Iowa, Kansas, Nebraska, Oklahoma, Texas and Wyoming. The Company also owns a natural gas distribution system in the Mexican state of Sonora. During 1998, the Company made significant acquisitions (see Note 2). Energy services include: gathering, processing, storing, transporting and marketing natural gas, providing retail natural gas distribution services, providing field services to natural gas producers, marketing natural gas liquids ("NGLs"), and generating and selling electricity. 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 Energy, Inc. 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 39 40 the circumstances in which the application of generally accepted accounting principles is affected by the economic effects of regulation. Regulatory assets and liabilities represent probable future revenues or expenses to the Company associated with certain charges and credits which will be recovered from or refunded to customers through the ratemaking process. The following regulatory assets and liabilities are reflected in the accompanying Consolidated Balance Sheets:
DECEMBER 31 --------------------------------- 1998 1997 ------- ------- (In Thousands) REGULATORY ASSETS: Employee Benefit Costs $ 2,956 $ 1,348 Debt Refinancing Costs 2,337 2,682 Deferred Income Taxes 19,176 754 Purchased Gas Costs 30,021 53,790 Pony Express Electrical Costs 3,820 - Plant Acquisition Adjustments 454 454 Rate Regulation and Application Costs 3,554 601 ------- ------- Total Regulatory Assets 62,318 59,629 ------- ------- REGULATORY LIABILITIES: Employee Benefit Costs 2,958 - Deferred Income Taxes 33,983 3,718 Purchased Gas Costs 23,110 5,195 ------- ------- Total Regulatory Liabilities 60,051 8,913 ------- ------- NET REGULATORY ASSETS $ 2,267 $50,716 ======= =======
As of December 31, 1998, $48.6 million of the Company's regulatory assets and $56.1 million of the Company's regulatory liabilities were being recovered from or refunded to customers through rates over periods ranging from 1 to 15 years. Approximately $7.4 million of the regulatory assets at December 31, 1998, have been included in rates subject to refund, pending the outcome of a current rate case. Approximately $3.0 million of the Company's regulatory assets at December 31, 1998, are included in rate base and are earning 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 Basic earnings per share is computed based on the monthly weighted-average number of common shares outstanding during each period. The weighted-average number of common shares used in computing basic earnings per share was 64,021,000 for 1998, 46,588,500 for 1997 and 43,653,000 for 1996. Diluted earnings per share is computed based on the monthly weighted-average number of common shares outstanding during the periods and the assumed exercise or conversion of securities convertible into common stock for which the effect of conversion or exercise would be dilutive (stock options and warrants) using the treasury stock method. Dilutive securities assumed to have been converted or exercised totaled 614,500 for 1998, 718,500 for 1997 and 783,000 for 1996. Weighted-average shares outstanding and all per share amounts in the accompanying consolidated financial statements and these notes have been restated to reflect a three-for-two split of the Company's common stock (see Note 7 (D)). 40 41 (F) Restricted Deposits The Company uses energy financial instruments to reduce 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 9). (G) Inventories
DECEMBER 31 ------------------------------------ 1998 1997 --------- --------- (In Thousands) Gas in Underground Storage (Current) $ 106,971 $ 33,558 Natural Gas Liquids 11,226 900 Materials and Supplies 26,634 12,576 --------- --------- $ 144,831 $ 47,034 ========= =========
Inventories are accounted for using the following methods, with the percent of the total dollars at December 31, 1998, shown in parentheses: average cost (91.1%), last-in, first-out (8.3%) and first-in, first-out (0.6%). All non-utility inventories held for resale are valued at the lower of cost or market. 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 gas stored for third parties in the accompanying consolidated financial statements. (H) Investments Investments consist primarily of equity method investments in unconsolidated subsidiaries and joint ventures, and include ownership interests in net profits and net cash flows. In addition, the Company has an investment in Tom Brown, Inc. ("TBI") common and convertible preferred stock. Equity in earnings of investments accounted for under the equity method totaling $21.7 million and $3.9 million for 1998 and 1997, respectively, are included in operating revenues (within the appropriate business segment) in the accompanying Consolidated Statements of Income. (I) 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, administrative and general costs. Expenditures that 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 non-utility property, plant and equipment, and utility property, plant and equipment constituting an operating unit or system, when 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 41 42 recorded. However, currently unforeseen events and changes in circumstances could require the recognition of impairment losses at some future date. (J) Depreciation and Amortization Depreciation is computed based on the straight-line method over the estimated useful lives of assets, ranging from 3 to 40 years for each of the Upstream, Midstream and Downstream segments. (K) Interest Expense, Net "Interest Expense, Net" as presented in the accompanying Consolidated Statements of Income is net of (i) the debt component of the allowance for funds used during construction ("AFUDC - Interest") and (ii) interest income related to government securities (collectively, "Interest Income"), as shown in the following table:
1998 1997 1996 ---- ---- ---- (In Millions) AFUDC - Interest $ 5.4 $ 7.8 $ 1.8 Interest Income $46.4 $ - $ -
As discussed in Note 2, in conjunction with the January 30, 1998, acquisition of MidCon Corp., the Company was required by the definitive stock purchase agreement to assume the Substitute Note for $1.4 billion and to collateralize the Substitute Note with bank letters of credit, a portfolio of government securities or a combination of the two. As a result, the Company has a significant amount of interest income ($27.4 million representing cash received during 1998) associated with the issuance of the Substitute Note, which has been reported together with the related interest expense as described preceding. (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. "Other, Net," presented as a component of "Net Cash Flows From Operating Activities" in the accompanying Consolidated Statements of Cash Flows includes, among other things, the amortization of the gas plant acquisition adjustment recorded in conjunction with the acquisition of MidCon, undistributed equity in earnings of unconsolidated subsidiaries and joint ventures and other non-cash charges and credits to income. CHANGES IN OTHER WORKING CAPITAL ITEMS (NET OF ACQUISITION AND DISPOSITION EFFECTS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1998 1997 1996 ---- ---- ---- (In Thousands) Accounts Receivable $ 85,241 $ (80,609) $ (89,466) Non-gas Inventories (13,733) (1,777) 4,761 Other Current Assets 21,288 (7,656) (43,847) Accounts Payable (187,303) 82,504 83,934 Other Current Liabilities 13,107 (8,364) 42,122 --------- --------- --------- $ (81,400) $ (15,902) $ (2,496) ========= ========= =========
42 43 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1998 1997 1996 ---- ---- ---- (In Thousands) CASH PAID DURING THE YEAR FOR: Interest (Net of Amount Capitalized/Received)* $189,929 $ 41,986 $ 31,748 ======== ======== ======== Distributions on Preferred Capital Trust Securities $ 14,754 $ 4,066 $ - ======== ======== ======== Income Taxes $ 39,756 $ 15,823 $ 14,156 ======== ======== ========
* See Note 1 (K). During 1998, the Company acquired MidCon Corp. and interests in assets from the Thermo Companies in transactions that included both cash and non-cash components. In December 1997, the Company acquired Interenergy Corporation in a largely non-cash transaction. For additional information on these transactions, see Note 2. (M) Accounts Receivable The caption "Accounts Receivable" in the accompanying Consolidated Balance Sheets is presented net of allowances for doubtful accounts of $10.8 million and $1.7 million at December 31, 1998 and 1997, respectively. 2. ACQUISITIONS, INVESTMENTS AND SALES (A) Sale of Microwave Facilities In September 1998, the Company sold certain of its microwave towers and associated land and equipment to Boston-based American Tower Corp. for $14.6 million. The sale resulted in a pre-tax gain of $10.9 million ($6.7 million after tax or $0.10 per diluted share) included in the accompanying Consolidated Statements of Income under the caption "Other, Net." (B) Thermo Companies During the third quarter of 1998, the Company completed its acquisition of interests in four independent power plants in Colorado from the Denver-based Thermo Companies ("Thermo"), representing approximately 380 megawatts of electric generation capacity and access to approximately 130 Bcf of natural gas reserves. These generating facilities are located in Ft. Lupton, Colorado (272 megawatts) and Greeley, Colorado (108 megawatts) and sell their power output to Public Service Company of Colorado under long-term agreements. Payment for these interests will be made over a two-year period, with the initial payment of 689,810 shares (not adjusted for the December 1998 three-for-two stock split) of K N common stock having been made on October 21, 1998. The second installment payment was made on January 4, 1999, consisting of 833,623 shares of K N common stock and $15 million in cash. The remaining payments (in 1999 and 2000) will be made in a combination of cash and common stock as agreed to by the Company and Thermo, with the default mix being 50 percent stock and 50 percent cash. In conjunction with this transaction accounted for as a purchase, at December 31, 1998, K N had recorded a current liability of $86.8 million (shown in the accompanying Consolidated Balance Sheets as "Payable for Purchase of Thermo Companies") and a long-term liability of $31.4 million (included in the accompanying Consolidated Balance Sheets within the caption "Other" under the heading "Other Liabilities and Deferred Credits") representing the remaining purchase obligation. The Company's investment in Thermo is shown in the accompanying Consolidated Balance Sheets at December 31, 1998, under "Investments" ($67.3 million) and "Deferred Charges and Other Assets" ($79.9 million), with the majority of the remaining balance shown as additions to "Property, Plant and Equipment," and lesser amounts included with other asset and liability accounts. 43 44 (C) Sale of Kansas Distribution Properties In March 1998, the Company completed the sale of its Kansas retail natural gas distribution properties, located in 58 Kansas communities and serving approximately 30,000 residential, commercial and industrial customers, to Midwest Energy, Inc., a customer-owned cooperative based in Hays, Kansas. The Company received approximately $24 million in cash in conjunction with the sale and recorded a pre-tax gain of approximately $8.5 million (approximately $5.2 million after tax or $0.08 per diluted share). Concurrently with the sale, the Company received $27.5 million in cash in exchange for the release of the purchaser from certain contractual gas purchase obligations, which amount will be amortized as an offset to expense over a period of years as the associated volumes are sold. (D) MidCon Corp. On January 30, 1998, pursuant to a definitive stock purchase agreement (the "Agreement"), the Company acquired all of the outstanding shares of capital stock of MidCon Corp. ("MidCon") from Occidental Petroleum Corporation ("Occidental") for $2.1 billion in cash and the assumption of a $1.4 billion note (the "Substitute Note"), at which time MidCon became a wholly owned subsidiary of K N Energy, Inc. (the "Acquisition"). The Substitute Note bore interest at 5.798 percent, was repaid January 4, 1999, and was required to be collateralized by U.S. government securities, letters of credit or a combination of the two. In conjunction with the Acquisition, the Company also assumed MidCon's obligation to lease the MidCon Texas intrastate pipeline system under a 30-year operating lease, requiring average annual lease payments of approximately $30 million. The Acquisition was initially financed through a combination of credit agreements (see Note 7). MidCon is engaged in the purchase, gathering, processing, transmission, storage and sale of natural gas to utilities, municipalities, and industrial and commercial users. MidCon's pipeline system includes over 13,000 miles of natural gas pipelines located in the center of the North American pipeline grid, with access to major supply and market areas. MidCon is also one of the nation's largest natural gas storage operators and owns and operates several natural gas gathering and natural gas processing facilities. The Acquisition was accounted for as a purchase for accounting purposes and, accordingly, the MidCon assets acquired and liabilities assumed have been preliminarily recorded at their respective estimated fair market values as of the acquisition date. The final fair market values will be assigned after completion of the review of the relevant assets, liabilities and issues identified as of the acquisition date. The preliminary allocation of purchase price has resulted in the recognition of a gas plant acquisition adjustment of approximately $3.9 billion, principally representing the excess of the assigned fair market value of the assets of Natural Gas Pipeline Company of America ("NGPL"), a wholly owned subsidiary of MidCon, over the historical cost for ratemaking purposes. This gas plant acquisition adjustment, none of which is currently being recognized for ratemaking purposes, is being amortized over 36 years, approximately the estimated remaining useful life of NGPL's interstate pipeline system. For the year ended December 31, 1998, approximately $97.9 million of such amortization was charged to expense. The assets, liabilities and results of operations of MidCon are included with those of the Company beginning with the January 30, 1998, acquisition date. Historical information for periods prior to January 30, 1998, does not reflect any impact associated with the MidCon acquisition. The following pro forma information gives effect to the acquisition of MidCon as if the business combination had occurred at the beginning of each period presented. The pro forma adjustments which have been made are based on a preliminary allocation of the purchase price to assets acquired and liabilities assumed. In addition, no pro forma adjustments to prior periods have been made for the post-acquisition refinancings completed by K N. This unaudited pro forma information should be read in conjunction with the accompanying consolidated financial statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and with 44 45 the unaudited pro forma consolidated financial statements and related notes previously filed with the Securities and Exchange Commission. This pro forma information is not necessarily indicative of the financial results which would have occurred had the Acquisition taken place on the dates indicated, nor is it necessarily indicative of future financial results.
DECEMBER 31 UNAUDITED PRO FORMA FINANCIAL INFORMATION 1998 1997 - ----------------------------------------- ---- ---- (Dollars In Millions Except Per Share Amounts) Operating Revenues $4,655.9 $5,194.1 Net Income $ 65.6 $ 78.8 Diluted Earnings Per Common Share $ 1.01 $ 1.67 Number of Shares Used in Computing Diluted Earnings Per Common Share (In Thousands) 64,636 47,307
(E) Red Cedar In December 1997, the Company 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. K N owns a 49 percent interest, which is accounted for under the equity method. Red Cedar is jointly owned with the Southern Ute Indian Tribe. See Note 12 for information related to K N's corporate guarantee of Red Cedar debt. (F) Interenergy In December 1997, the Company acquired Interenergy Corporation ("Interenergy"), a diversified energy company providing natural gas gathering, processing and marketing services in the Rocky Mountain and Mid-Continent regions. In a transaction accounted for as a purchase, the Company exchanged 544,604 shares (not adjusted for the December 1998 three-for-two stock split) of K N common stock for all of the outstanding shares of Interenergy. (G) Bushton In March 1997, the Company 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. The processing facilities at Bushton are subject to operating leases (which expire in 2012) requiring semi-annual payments averaging $23.1 million per year for the remaining term of the leases. Under certain conditions, the terms of these leases would require the posting of letters of credit (see Note 12). (H) TransColorado Pipeline Project After receiving required regulatory approvals, the TransColorado Gas Transmission Company ("TransColorado"), an enterprise jointly owned by K N and Questar Corp., began construction in July 1998 of a 280-mile-long natural gas pipeline project which includes two compressor stations and extends from near Rangely, Colorado, to its southern terminus at the Blanco Hub near Aztec, New Mexico. The pipeline is 45 46 expected to be completed and placed in service in early 1999 at a cost of approximately $280 million and have transmission capacity of approximately 300 million cubic feet of natural gas per day. On October 14, 1998, TransColorado entered into a $200 million revolving credit agreement with a group of commercial banks. See Note 12 for information related to K N's corporate guarantee of TransColorado debt. 3. REGULATORY MATTERS (A) Rate Matters On January 23, 1998, K N Interstate Gas Transmission Co. ("KNI") filed a general rate case with the Federal Energy Regulatory Commission ("FERC") requesting a $30.2 million increase in annual revenues. As a result of the FERC action, KNI was allowed to place its rates into effect on August 1, 1998, subject to refund, and provisions for refund have been recorded based on its expectation of ultimate resolution. KNI is currently following the procedural schedule established for the rate case, and a hearing on its proposed rates is currently scheduled to commence on July 20, 1999. On December 29, 1998, Rocky Mountain Natural Gas Company ("RMNG"), a wholly owned subsidiary of K N Energy, Inc. received a "show cause" order from the Colorado Public Utilities Commission (the "Commission"). The Commission has concluded that there is reason to believe that RMNG's rates may be excessive and may require further investigation. A procedural schedule has been established and a hearing is scheduled to commence on June 1, 1999. (B) Retail Unbundling In November 1997, the Company announced a plan to give residential and small commercial customers in Nebraska a choice of natural gas suppliers. This program, the Nebraska Choice Gas program, became effective June 1, 1998. This program separates, or "unbundles," the natural gas purchases from other utility services. As of December 31, 1998, the plan had been approved by 176 communities, representing approximately 95,000 customers served by the Company in Nebraska. In June 1996, after receiving Wyoming Public Service Commission approval for a pilot program, the Company implemented a similar plan for approximately 10,500 residential and commercial customers in 10 Wyoming communities. 4. ENVIRONMENTAL AND LEGAL MATTERS (A) Environmental Matters The U.S. Environmental Protection Agency (the "EPA") recently published a final rule addressing transport of ground level ozone. The rule affects 22 Eastern and Midwestern states, including Illinois and Missouri in which the Company operates gas compression facilities. The rule requires reductions in emissions of nitrogen oxide, a precursor to ozone formation, from various emission sources, including utility and non-utility sources. The rule requires that the affected states prepare and submit State Implementation Plans to the EPA by September 1999, reflecting how the required emissions reductions will be achieved. Emission controls are required to be installed by May 1, 2003. This rule will likely result in the Company, as well as its competitors, being required to install some form of new emissions control technology on certain equipment it operates. Another impact from the rule is that it may result in broad increased use of natural gas, as other sources of nitrogen oxide air emissions, including utilities, seek to achieve the reductions required under the rule. The State Implementation Plans which will effectuate this rule have yet to be proposed or promulgated, and will require detailed analysis before their final economic impact can be ascertained. While additional capital costs are likely to result from this rule, based on currently available information, the Company does not believe that these costs will have a material adverse effect on its business, financial position or results of operations. 46 47 On February 6, 1998, the EPA published in the Federal Register a proposed standard to limit emissions of hazardous air pollutants ("HAPs") from oil and natural gas production as well as from natural gas transmission and storage facilities. This is a Maximum Achievable Control Technology ("MACT") standard, and is mandated under section 112 of the 1990 Amendments to the Clean Air Act. The proposed MACT standard requires that the affected facilities reduce emissions of HAPs by 95 percent. This new standard will require the Company to achieve this reduction either by process modifications or by installing new emissions control technology. The MACT standard will affect the Company and its competitors in a like manner. The EPA has stated that the standard will be promulgated in its final form by May 15, 1999. The rule will allow most affected sources three years to come into compliance. The rule in its final form will require detailed analysis to determine its overall effect on the Company. While additional capital costs are likely to result from this rule, the Company believes that the rule will not have a material adverse effect on the Company's business, financial position or results of operations. In connection with the Company's acquisition of MidCon in January 1998, Occidental indemnified the Company against certain liabilities, including litigation and the failure of MidCon to be in compliance with applicable laws, which, in each case, 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 effect on its business, financial position or results of operations. Pursuant to certain acquisition agreements involving Cabot Corporation ("Cabot"), Cabot indemnified the Company for certain environmental liabilities associated with assets in Texas, Oklahoma and New Mexico acquired from American Oil and Gas Corporation. Issues arose concerning Cabot's indemnification obligations, and the Company and Cabot entered into binding arbitration to resolve all issues in dispute. The binding decision of the arbitrators resulted in the requirement that Cabot pay the Company for a substantial portion of past and future environmental related costs associated with the properties. In December 1998, the Company recorded a charge of approximately $7.2 million representing both previously incurred costs which were not awarded in the arbitration and the recognition of a liability for the Company's share of estimated future costs. As a result of this settlement, the Company will have no future expense associated with this matter. The Company does not expect its potential exposure for the remaining liabilities to have a material adverse effect on the Company's 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. (B) Litigation Matters 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 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 47 48 enhance or maintain an existing monopoly. Grynberg also asserts certain causes of action relating to a gas purchase contract. In February 1999, the Federal District Court granted summary judgment regarding some of Grynberg's antitrust and state law claims, while allowing other claims to proceed to trial. The Company's potential liability 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 business, 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, the Company and RMNG, along with over 70 other natural gas companies, were served by Jack J. Grynberg, acting on behalf of the Government of the United States, with a Civil False Claims Act lawsuit alleging mismeasurement of the heating content and volume of natural gas resulting in underpayment of royalties to the federal government. The Company and the other named companies filed a motion to dismiss the lawsuit on grounds of improper joinder and lack of jurisdiction. The motion was granted in 1997, but the court gave Mr. Grynberg leave to refile this action in a court with proper jurisdiction. Mr. Grynberg appealed the dismissal of the action based on improper joinder, and the D.C. Court of Appeals affirmed the joinder decision in October 1998. Mr. Grynberg has filed a new case, modified somewhat from his original action, in Federal District Court, District of Colorado. The Company has not yet been served in this new action, which is under seal pending federal governmental reviews of the merits. The Department of Justice has not yet made a decision regarding whether to intervene in this new case. The Company has engaged in both formal and informal discussions with the Government regarding this case. The Company believes it has a meritorious position in this matter, and does not expect this lawsuit to have a material adverse effect on the Company's business, financial position or results of operations. The Company believes it has meritorious defenses to all lawsuits and legal proceedings in which it is a defendant and will vigorously defend against them. Based on its evaluation of the above matters, and after consideration of reserves established, the Company believes that the resolution of such matters will not have a material adverse effect on the Company's business, financial position or results of operations. 5. PROPERTY, PLANT AND EQUIPMENT Investments in property, plant and equipment, at cost, and accumulated depreciation and amortization ("Accumulated D&A"), detailed by business segment, are as follows:
DECEMBER 31, 1998 ------------------------------------------------------------------ PROPERTY, PLANT ACCUMULATED AND EQUIPMENT D&A NET --------------- ----------- ----------- (In Thousands) Upstream Gathering and Processing $ 643,840 $ 148,814 $ 495,026 Midstream Sales, Transportation and Storage 6,657,285* 490,503 6,166,782* Downstream Retail and Marketing 466,207 104,839 361,368 ----------- --------- ----------- $ 7,767,332* $ 744,156 $ 7,023,176* =========== ========= ===========
*The increase in property, plant and equipment from December 31, 1997, to December 31, 1998, is largely due to the January 30, 1998, acquisition of MidCon and includes a gas plant acquisition adjustment (see Note 2).
DECEMBER 31, 1997 ------------------------------------------------------------------ PROPERTY, PLANT ACCUMULATED AND EQUIPMENT D&A NET --------------- ----------- ----------- (In Thousands) Upstream Gathering and Processing $ 555,596 $ 135,859 $ 419,737 Midstream Sales, Transportation and Storage 1,115,971 307,455 808,516 Downstream Retail and Marketing 300,034 107,312 192,722 ----------- --------- ----------- $ 1,971,601 $ 550,626 $ 1,420,975 =========== ========= ===========
48 49 6. 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:
1998 1997 1996 -------- -------- -------- (Dollars In Thousands) TAXES CURRENTLY PAYABLE: Federal $ 12,645 $ 15,932 $ 17,685 State 4,372 2,574 1,769 -------- -------- -------- Total 17,017 18,506 19,454 -------- -------- -------- TAXES DEFERRED: Federal 19,657 16,497 15,601 State 1,598 658 842 -------- -------- -------- Total 21,255 17,155 16,443 -------- -------- -------- TOTAL TAX PROVISION $ 38,272 $ 35,661 $ 35,897 ======== ======== ======== EFFECTIVE TAX RATE 38.9% 31.5% 36.0% ======== ======== ========
The difference between the statutory federal income tax rate and the Company's effective income tax rate is summarized as follows:
1998 1997 1996 ------ ------ ------ FEDERAL INCOME TAX RATE 35.0% 35.0% 35.0% INCREASE (DECREASE) AS A RESULT OF: State Income Tax, Net of Federal Benefit 3.9% 1.9% 1.7% Adjustments to Prior Year Accruals* - (5.1%) - Other - (0.3%) (0.7%) ------ ------ ------ EFFECTIVE TAX RATE 38.9% 31.5% 36.0% ====== ====== ======
*Adjustments relate to the successful resolution of certain issues from prior years' income tax filings. 49 50 Deferred tax assets and liabilities result from the following:
DECEMBER 31 1998 1997 ---------- --------- (Dollars In Thousands) DEFERRED TAX ASSETS: Postretirement Benefits $ 44,506 $ 2,294 Gas Supply Realignment Deferred Receipts 36,478 - Vacation Accrual 4,930 2,008 State Taxes 68,332 5,722 Contract Impairments 11,075 - Operating and Misc. Reserves 7,583 2,281 Alternative Minimum Tax Credits 16,620 6,780 Other 26,501 701 ---------- --------- TOTAL DEFERRED TAX ASSETS 216,025 19,786 ---------- --------- DEFERRED TAX LIABILITIES: Property, Plant and Equipment 1,904,706 168,707 Rate Matters 550 8,420 Prepaid Pension 3,560 2,814 Stock Investments 1,809 3,556 Other 4,472 4,872 ---------- --------- TOTAL DEFERRED TAX LIABILITIES 1,915,097 188,369 ---------- --------- NET DEFERRED TAX LIABILITIES $1,699,072 $ 168,583 ========== =========
7. FINANCING (A) Notes Payable On March 7, 1997, the Company's existing revolving credit agreement with seven commercial banks was amended to include a total of 11 banks and to increase the amount to $350 million (the "Pre-Acquisition Facility"). Effective with the acquisition of MidCon on January 30, 1998, the Pre-Acquisition Facility was replaced with a $4.5 billion credit facility (the "Bank Facility") consisting of (i) a $1.4 billion 364-day credit facility (the "L/C Facility") to support the note issued to Occidental in conjunction with the purchase of MidCon, (ii) a $2.1 billion, 364-day revolving facility (the "Acquisition Facility"), (iii) 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 (iv) a 364-day $600 million revolving credit facility (the "$600 million Facility"). The L/C Facility and the Acquisition Facility could be used only in conjunction with the acquisition of MidCon. In addition to the working capital and acquisition components of the Bank Facility, K N assumed a short-term note for $1.4 billion payable to Occidental (the "Substitute Note"), which, pursuant to the Agreement, was initially collateralized by letters of credit issued under a commitment for that purpose within the Bank Facility. The $2.1 billion Acquisition Facility was repaid in its entirety and cancelled on March 10, 1998. The Substitute Note was repaid on January 4, 1999. On January 5, 1999, K N cancelled the remaining letters of credit used to collateralize the Substitute Note. On January 8, 1999, the $600 million Facility was replaced with a new 364-day facility which is essentially the same as the previous agreement. The bank facilities include covenants which are common in such arrangements, including requirements that (i) the ratio of the Company's total debt to total capitalization not exceed 74 percent initially (upon issuance of common stock to the holders of the premium equity participating security units ("PEPS") at the maturity thereof, the ratio will be reduced to 67 percent) and (ii) the Company's consolidated net worth (inclusive of trust preferred securities) be at least equal to the sum of $1.236 billion plus 50 percent of consolidated net income earned for each fiscal quarter ending after December 30, 1998. 50 51 Under the credit agreements described preceding, K N agreed to pay a facility fee based on the total commitment, at a rate which varies based on K N's senior debt rating. Facility fees paid in 1998 and 1997 were $1.7 million and $0.3 million, respectively. At December 31, 1998, there were no amounts outstanding under the Bank Facility as amended, compared with $100 million at December 31, 1997, under the Pre-Acquisition Facility. Commercial paper issued by K N and supported by short-term credit facilities are unsecured short-term notes with maturities not to exceed 270 days from the date of issue. During 1998, all commercial paper was redeemed within 180 days, with interest rates ranging from 4.95 to 6.75 percent. Commercial paper outstanding at December 31, 1998 and 1997, respectively, was $297.0 million and $229.2 million. The weighted-average interest rates on short-term borrowings outstanding at December 31, 1998 and 1997, respectively, were 5.70 percent and 6.87 percent. Average short-term borrowings outstanding during 1998 and 1997 were $732.9 million and $212.6 million, respectively. During 1998 and 1997, the weighted-average interest rates on short-term borrowings outstanding were 5.91 percent (excluding the Substitute Note) and 5.74 percent, respectively. (B) Long-Term Debt
DECEMBER 31 ------------------------------ 1998 1997 ----------- ---------- (In Thousands) DEBENTURES: 6.50% Series, Due 2013 $ 50,000 $ 50,000 7.85% Series, Due 2022 26,631 26,684 8.75% Series, Due 2024 75,000 75,000 7.35% Series, Due 2026 125,000 125,000 6.67% Series, Due 2027 150,000 150,000 7.25% Series, Due 2028 500,000 - 7.45% Series, Due 2098 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 SENIOR NOTES: 7.27%, Due 1999-2002 20,000 25,000 11.846% (AOG) - 11,875 6.45%, Due 2001 400,000 - 6.45%, Due 2003 500,000 - 6.65%, Due 2005 500,000 - 6.80%, Due 2008 300,000 - Reset Put Securities, 6.30%, Due 2021 400,000 - Medium-Term Notes, 9.98%, Due 1999 3,000 7,000 Other 16,318 14,965 Unamortized Debt Discount (5,757) (957) Current Maturities of Long-Term Debt (10,167) (30,751) ----------- ---------- Total Long-Term Debt $ 3,300,025 $ 553,816 =========== ==========
Maturities of long-term debt for the five years ending December 31, 2003, are as follows:
YEAR AMOUNT - ---- ------ (In Thousands) 1999 $ 10,167 2000 7,167 2001 408,167 2002 10,417 2003 507,167
In November 1998, the Company completed an underwritten public offering of $400 million of three-year senior notes (the "Senior Notes") bearing an interest rate of 6.45 percent. The net proceeds of approximately $397.4 million were used to retire a portion of K N's then-outstanding short-term borrowings. Concurrently with the 51 52 Senior Notes offering, the Company sold $460 million principal amount of PEPS in an underwritten public offering. The PEPS essentially are contracts (i) requiring the holders to purchase K N common stock at the end of a three-year period coinciding with the maturity of the Senior Notes and (ii) providing for payment of a contract fee of 2.375 percent to the PEPS holders by the Company during the three-year period. Payment of all or any part of the contract fees may be deferred by the Company until no later than the end of the three-year period and any portion so deferred will accrue interest at the annual rate of 8.25 percent until paid. The net cash proceeds from the sale of the PEPS, together with additional funds provided by the Company, were used to purchase U.S. treasury securities (the "Collateral") on behalf of the PEPS owners. The Collateral is the property of the PEPS holders and is pledged to the collateral agent, for the benefit of the Company, in support of the obligation of the PEPS holders to purchase K N common stock. The face value of the PEPS is not recorded in the accompanying Consolidated Balance Sheets. The $29.4 million present value of the contract fee payable to the PEPS holders has been recorded as a liability and as a reduction to paid-in capital. During the period in which the contract fees are payable, accretion of the $3.4 million of discount initially recorded will increase the liability and further decrease paid-in capital. In addition, paid-in capital has been reduced for the issuance costs associated with the PEPS and the premium paid upon purchase of the Collateral, which amounts total approximately $32.8 million. In March 1998, the Company received net proceeds of approximately $2.34 billion from the public offerings of senior debt securities of varying maturities with principal totaling $2.35 billion. The net proceeds from these offerings were used to refinance borrowings under the Bank Facility and to purchase U.S. government securities to replace a portion of the letters of credit that collateralized the Substitute Note. Following are the principal amounts, maturity dates and coupon rates for the senior debt securities issued: $500 million - 6.45% Senior Notes due March 1, 2003 $500 million - 6.65% Senior Notes due March 1, 2005 $300 million - 6.80% Senior Notes due March 1, 2008 $500 million - 7.25% Senior Debentures due March 1, 2028 $150 million - 7.45% Senior Debentures due March 1, 2098 $400 million - 6.30% Reset Put Securities due March 1, 2021 The 2003 Senior Notes and the 2005 Senior Notes are not redeemable prior to maturity. The 2008 Senior Notes, 2028 Senior Debentures and 2098 Senior Debentures are redeemable in whole or in part, at the option of the Company at any time, at redemption prices defined in the associated prospectus supplement. The Reset Put Securities due March 1, 2021 (the "2021 REPS") are subject to mandatory redemption from the then-existing holders on March 1, 2001, either (i) through the exercise of a call option by Morgan Stanley & Co. International Limited (the "Callholder") or (ii) in the event the Callholder does not exercise the call option, the automatic exercise of a mandatory put by First Trust National Association on behalf of the holders. The $12 million of proceeds received by K N from the Callholder as consideration for the call option are being amortized as an adjustment to the effective interest rate on the 2021 REPS. If the Callholder elects to exercise the call option, the interest rate will be reset at that time. On October 27, 1997, the Company sold $150 million of 6.67% debentures maturing on November 1, 2027, in an underwritten public offering. 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 outstanding short-term indebtedness. 52 53 At December 31, 1998 and 1997, the carrying amount of the Company's long-term debt was $3.3 billion and $585.5 million, respectively. The estimated fair values of the Company's long-term debt December 31, 1998 and 1997 are shown in Note 13. (C) Capital Securities In April 1998, the Company sold $175 million of 7.63% Capital Trust Securities maturing on April 15, 2028, in an underwritten public offering. The sale was effected through a wholly owned business trust, K N Capital Trust III. The Company used the net proceeds from the offering to purchase U.S. government securities to replace a portion of the letters of credit that collateralized the Substitute Note. In April 1997, the Company sold $100 million of 8.56% Capital Trust Securities maturing on April 15, 2027, in an underwritten public offering. The sale was effected through a wholly owned business trust, K N Capital Trust I. The Company used the net proceeds from the sale to reduce outstanding short-term indebtedness. The transactions and balances of K N Capital Trust I and K N Capital Trust III are included in the Company's consolidated financial statements, with the Capital Securities treated as a minority interest, shown in the Company's Consolidated Balance Sheets under the caption "K N-Obligated Mandatorily Redeemable Preferred Capital Trust Securities of Subsidiary Trust Holding Solely Debentures of K N." See Note 13 for the fair value of these securities. (D) Common Stock On November 9, 1998, the Board of Directors of K N Energy, Inc. approved a 7.1 percent increase in the quarterly dividend and a three-for-two split of the Company's common stock. The quarterly dividend was declared at $0.30 per common share, an increase from $0.28 per common share. Giving effect to the stock split, the quarterly dividend is $0.20 per common share. The stock split was distributed and the increase in dividend was paid concurrently on December 31, 1998, to shareholders of record at the close of business on December 15, 1998. The par value of the stock did not change. Weighted-average shares outstanding and all per share amounts in the accompanying consolidated financial statements and these notes have been restated to reflect the stock split. In March 1998, the Company received net proceeds of approximately $624.6 million from a public offering of 12.5 million shares (18.75 million shares after adjustment for the December 1998 three-for-two stock split) of its common stock. The net proceeds from this offering were used to refinance borrowings under the Bank Facility and to purchase U.S. government securities to replace a portion of the letters of credit that collateralized the Substitute Note. On June 11, 1997, Cabot exercised the remaining warrants held by it and purchased, in an unregistered offering, 642,232 shares (not adjusted for the December 1998 three-for-two stock split) of K N's common stock, which were issued to Cabot Specialty Chemicals, Inc., in exchange for Cabot's payment of $11.3 million. 8. 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. 53 54 (A) Class A $5.00 Preferred Stock At both December 31, 1998 and 1997, 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, 1998 or 1997. 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. (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. 9. RISK MANAGEMENT The Company uses two types of risk management instruments - energy financial instruments and interest rate swaps - as discussed following. 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. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (the "Statement"). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. If the derivatives meet these criteria, the Statement allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally designate a derivative as a hedge and document and assess the effectiveness of derivatives associated with transactions that receive hedge accounting. The Statement is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). The Statement cannot be applied retroactively. The Statement must be applied to (i) derivative instruments and (ii) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997, (and, at the company's election, before January 1, 1998). K N 54 55 has not yet quantified the impacts of adopting the Statement on its financial position or results of operations and has not determined the timing of or method of adoption of the Statement. In December 1998, the Emerging Issues Task Force ("EITF") issued EITF 98-10, Accounting for Energy Trading and Risk Management Activities. This consensus establishes accounting for energy trading activities prior to the adoption of the Statement. EITF 98-10 requires that energy contracts associated with trading activities be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. The effects of initial application of EITF 98-10 are required to be reported as a cumulative effect of a change in accounting principle. Financial statements for periods prior to initial adoption of EITF 98-10 may not be restated. EITF 98-10 is effective for fiscal years beginning after December 15, 1998. Given the Company's restrictive policy with respect to the use of energy derivatives as discussed following, the Company does not expect any material impact from the application of EITF 98-10 to its operations. (A) Energy Financial Instruments The Company uses energy financial instruments to reduce 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 policy, 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 policy. Changes in fair value for trading activities are recognized currently in earnings within the caption "Other, Net" under the heading "Other Income and (Deductions)" in the Consolidated Statements of Income. 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 which the underlying physical transactions occur. Purchases of commodity contracts and over-the-counter swaps and options require 75 percent of the contract amount to be placed in margin accounts. At December 31, 1998, the Company had $9.1 million in such margin accounts, which amounts are shown as "Restricted Deposits" in the accompanying Consolidated Balance Sheets. 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 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. 55 56 Following is selected information concerning the Company's risk management activities:
DECEMBER 31, 1998 ----------------- COMMODITY OVER-THE-COUNTER CONTRACTS SWAPS AND OPTIONS TOTAL --------- ----------------- ----- (In Thousands) Deferred Net (Loss) / Gain $ (4,643) $ 1,457 $ (3,186) Contract Amounts $ 38,070 $ (39,344) $ (1,274) Credit Exposure of Loss $ - $ 10,833 $ 10,833 (Billions of Cubic Feet) Notional Volumetric Positions: Long 30.2 159.9 190.1 Notional Volumetric Positions: Short 28.8 146.8 175.6 Net Notional Totals to Occur in 1999 1.0 12.3 13.3 Net Notional Totals to Occur in 2000 & Beyond 0.4 0.8 1.2
Deferred net losses are reflected in "Deferred Charges and Other Assets" in the accompanying Consolidated Balance Sheets and will be matched with the corresponding 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, none of which agreements is leveraged. Settlement amounts payable or receivable under these agreements is 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. 10. 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. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. This statement revises employers' disclosures about pension and other postretirement benefit plans and requires additional information on changes in the benefit obligations and fair values of plan assets. Restatement of disclosures for earlier periods provided for comparative purposes is required. Plan assets consist primarily of pooled fixed income, equity, bond and money market funds. Plan assets include securities of the Company valued at $5.0 million as of December 31, 1998. 56 57 Net periodic pension cost includes the following components:
1998 1997 1996 -------- -------- -------- (In Thousands) Service Cost $ 4,859 $ 3,462 $ 3,289 Interest Cost 7,537 7,155 6,756 Expected Return on Assets (11,812) (10,276) (9,217) Net Amortization and Deferral (864) (311) (130) -------- -------- -------- Net Periodic Pension (Benefit) Cost $ (280) $ 30 $ 698 ======== ======== ========
The following table sets forth the reconciliation of the beginning and ending balances of the pension benefit obligation:
1998 1997 --------- --------- (In Thousands) Benefit Obligation at Beginning of Year $(106,383) $ (97,182) Service Cost (4,859) (3,462) Interest Cost (7,537) (7,155) Actuarial Loss (8,477) (4,573) Benefits Paid 6,180 5,989 --------- --------- Benefit Obligation at End of Year $(121,076) $(106,383) ========= =========
The following table sets forth the reconciliation of the beginning and ending balances of the fair value of the plans' assets, the plans' funded status and amounts recognized under the caption "Other Current Assets" in the Company's Consolidated Balance Sheets:
DECEMBER 31 --------------------------- 1998 1997 --------- --------- (In Thousands) Fair Value of Plan Assets at Beginning of Year $ 141,423 $ 123,749 Actual Return on Plan Assets During the Year 8,740 23,663 Benefits Paid During the Year (6,180) (5,989) --------- --------- Fair Value of Plan Assets at End of Year 143,983 141,423 Benefit Obligation at End of Year (121,076) (106,383) --------- --------- Plan Assets in Excess of Projected Benefit Obligation 22,907 35,040 Unrecognized Net Gain (12,619) (24,669) Prior Service Cost Not Yet Recognized in Net Periodic Pension Costs 218 138 Unrecognized Net Asset (989) (1,136) --------- --------- Prepaid Pension Cost $ 9,517 $ 9,373 ========= =========
The rate of increase in future compensation and the expected long-term rate of return on plan assets were 3.5 percent and 8.5 percent, respectively, for both 1998 and 1997. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 6.75 percent and 7.25 percent for 1998 and 1997, respectively. The Company makes discretionary annual contributions to the K N Energy, Inc. Profit Sharing and Savings Plan (the "Profit Sharing Plan"), a defined contribution plan. Contributions are made in the year following the year for which the contribution amount is calculated. The Company's contribution amount is determined by comparing actual results for that year to a predetermined graduated scale of annual operating goals. No contribution was made to the Profit Sharing Plan for 1998. For 1997 and 1996, the Company contributed amounts equal to seven percent and the ten percent maximum of eligible employee compensation, respectively. The 1997 and 1996 contributions were $5.3 million and $6.6 million, respectively, 50 percent of which was in the form of Company stock. 57 58 In January 1998, the Company acquired the MidCon Retirement Plan ("MRA") as part of its acquisition of MidCon (see Note 2 (D)). The MRA is a defined contribution plan. Contributions to the plan are based on age and earnings. Effective January 1, 1999, the MRA was merged into the Profit Sharing Plan, at which time eligible MidCon employees joined the Company's defined benefit pension plans. In 1998, the Company contributed $4.6 million to the MRA. (B) Other Postretirement Employee Benefits The Company has a defined benefit postretirement plan providing medical and life insurance benefits upon retirement for eligible employees and their eligible dependents, including former MidCon employees who met the eligibility requirements on the date of acquisition of MidCon (see note 2 (D)). The Company acquired the postretirement medical and life insurance plans of already retired employees of MidCon as a result of the acquisition of MidCon. These plans were "grandfathered" in by the Company as of the acquisition date and no new employees have or will be added to these plans subsequent to the acquisition date. The Company funds the future expected postretirement benefit cost under the plan by making payments to Voluntary Employee Benefit Association trusts. The Company's funding policy is to contribute amounts within the deductibility 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:
1998 1997 1996 ------- ------ ------ (In Thousands) Service Cost $ 592 $ 205 $ 324 Interest Cost 6,425 1,394 1,392 Expected Return on Assets (2,854) (159) (114) Net Amortization and Deferral 919 811 894 Curtailment Gain (1,569) - - ------ ------ ------ Net Periodic Postretirement Benefit Cost $3,513 $2,251 $2,496 ====== ====== ======
The following table sets forth the reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation ("APBO"):
1998 1997 --------- --------- (In Thousands) Benefit Obligation at Beginning of Year $ (19,768) $ (19,421) Service Cost (592) (205) Interest Cost (6,425) (1,394) Actuarial Gain/(Loss) (7,663) 99 Benefits Paid 11,812 1,761 Retiree Contributions (2,060) (608) Transfer from MidCon Plan (78,861) - Curtailment 1,569 - --------- --------- Benefit Obligation at End of Year $(101,988) $ (19,768) ========= =========
58 59 The following table sets forth the reconciliation of the beginning and ending balances of the fair value of plan assets, the plan's funded status and the amounts included under the caption "Other" in the category "Other Liabilities and Deferred Credits" in the Company's Consolidated Balance Sheets:
DECEMBER 31 --------------------------- 1998 1997 --------- --------- (In Thousands) Fair Value of Plan Assets at Beginning of Year $ 3,569 $ 3,192 Actual Return on Plan Assets* 4,850 159 Contributions by Employer * 2,368 720 Retiree Contributions* 1,207 - Benefits Paid* (883) (502) Transfer from MidCon Plan* 34,253 - --------- --------- Fair Value of Plan Assets at End of Year 45,364 3,569 Benefit Obligation at End of Year (101,988) (19,768) --------- --------- Excess of Projected Benefit Obligation Over Plan Assets (56,624) (16,199) Unrecognized Net (Gain)/Loss 3,790 (681) Unrecognized Net Obligations at Transition 13,007 13,936 --------- --------- Accrued Expense $ (39,827) $ (2,944) ========= =========
* Represents activity during the year indicated. The weighted-average discount rate used in determining the actuarial present value of the APBO was 6.75 percent in 1998 and 7.25 percent in 1997. The assumed health care cost trend rate was 7 percent for 1998 and beyond. A one-percentage-point increase (decrease) in the assumed health care cost trend rate for each future year would have increased (decreased) the aggregate of the service and interest cost components of the 1998 net periodic postretirement benefit cost by approximately $24,000 ($26,000) and would have increased (decreased) the APBO as of December 31, 1998, by approximately $249,000 ($251,000). 11. 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 Stock 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"). All per share amounts and shares outstanding or exercisable presented in this note have been restated to reflect the impact of the December 31, 1998, three-for-two common stock split as discussed in Note 7 (D). The Company accounts for its plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company recorded compensation expense totaling $3.1 million, $2.4 million and $0.8 million for 1998, 1997 and 1996, respectively, relating to restricted stock grants awarded under the plans. 59 60 Had compensation cost for these plans been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company's net income and diluted earnings per share would have been reduced to the following pro forma amounts:
1998 1997 1996 ------- ------- ------- (In Thousands Except Per Share Amounts) NET INCOME: As Reported $59,989 $77,497 $63,819 ======= ======= ======= Pro Forma $55,887 $73,028 $62,497 ======= ======= ======= EARNINGS PER DILUTED SHARE: As Reported $ 0.92 $ 1.63 $ 1.43 ======= ======= ======= Pro Forma $ 0.86 $ 1.53 $ 1.40 ======= ======= =======
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Additionally, the pro forma amounts include $0.6 million, $0.4 million and $0.4 million related to the purchase discount offered under the ESP Plan for 1998, 1997 and 1996, respectively. The Company may sell up to 2,400,000 shares of stock to its eligible employees under the ESP Plan. Employees purchased 163,799 shares, 132,202 shares and 131,422 shares for plan years 1998, 1997 and 1996, respectively, and have purchased 1,022,900 shares from inception through the 1998 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 1998, 1997 and 1996 was $5.94, $6.48 and $4.30, respectively.
OPTION SHARES GRANTED SHARES SUBJECT THROUGH EXPIRATION PLAN NAME TO THE PLAN 12/31/98 VESTING PERIOD PERIOD --------- -------------- ------------- -------------- ---------- 1982 Plan 1,332,788 1,332,788 Immediate 10 years 1982 Directors' Plan 186,590 186,590 Three years 10 years 1986 Plan 618,750 618,750 Immediate 10 years 1988 Plan 618,750 618,750 Immediate 10 years 1992 Directors' Plan 525,000 241,875 Immediate 10 years LTIP Plan 5,700,000 4,715,662 0 - 5 years 5 - 10 years AOG Plan 775,500 775,500 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. 60 61 At December 31, 1998, 236 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, 1998, 1997 and 1996, and changes during the years then ended is presented in the table and narrative below:
1998 1997 1996 ---- ---- ---- WTD AVG WTD AVG WTD AVG EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- ------ --------- ------ --------- ------ OUTSTANDING AT BEGINNING OF YEAR 3,220,065 $19.19 2,589,730 $18.52 1,746,765 $14.17 Granted 1,781,761 $31.40 1,128,603 $19.01 1,387,689 $21.07 Exercised (662,274) $16.46 (379,575) $14.11 (494,361) $10.59 Forfeited (121,361) $27.35 (118,693) $18.97 (50,363) $15.79 --------- ------ --------- ------ --------- ------ OUTSTANDING AT END OF YEAR 4,218,191 $24.38 3,220,065 $19.19 2,589,730 $18.52 ========= ====== ========= ====== ========= ====== EXERCISABLE AT END OF YEAR 1,794,112 $25.11 1,343,123 $19.75 907,443 $16.35 ========= ====== ========= ====== ========= ====== WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED $ 12.08 $ 10.47 $ 6.35 ========= ========= =========
The following table sets forth K N's December 31, 1998, 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 - $23.58 1,123,786 $ 9.35 5.82 years 498,961 $16.93 $23.79 - $30.65 1,627,759 $25.82 8.11 years 878,968 $25.41 $30.69 - $39.23 1,466,646 $34.31 9.33 years 416,183 $34.27 --------- --------- 4,218,191 $24.38 7.92 years 1,794,112 $25.11 ========= =========
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 .25 for grants in 1998, and .20 for grants in 1997 and 1996; and expected dividend yields of 3.5 percent for grants in 1998, and 2.5 percent for grants in 1997 and 1996. 12. COMMITMENTS AND CONTINGENT LIABILITIES (A) Leases The Company has entered into a number of operating leases, including those referred to in Note 2. 61 62 Expenses incurred under operating leases were $61.2 million in 1998, $33.0 million in 1997 and $22.3 million in 1996. Future minimum commitments under major operating leases as of December 31, 1998, are as follows:
YEAR AMOUNT - ---- ------ (In Thousands) 1999 $ 65,208 2000 68,928 2001 70,282 2002 86,045 2003 77,524 Thereafter 999,195 ---------- Total $1,367,182 ==========
Certain of the Company's operating lease arrangements provide that, in the event that the rating of K N's senior debt is lowered below investment grade by both of the two major rating agencies, the Company would be required to post letters of credit in support of its remaining lease payments. Although the Company currently has no information to indicate that such downgrades will occur, given the Company's current level of borrowing and utilization of its letter of credit facility, the posting of these additional letters of credit in support of lease obligations would place the Company in default under the terms of its revolving credit facility. The Company currently believes that, should such a default occur, it could obtain a waiver of the applicable default provisions or modification of such provisions to allow the facility to remain in place, although the pricing would likely increase. (B) Guarantees of Unconsolidated Subsidiaries' Debt The Company has executed various guarantees of unconsolidated subsidiaries' revolving credit agreements as follows:
MAXIMUM BORROWED FINAL SUBSIDIARY AMOUNT AT 12/31/98 MATURITY ---------- ------- ----------- -------- (In Millions) TransColorado $100 $80.0 10/13/01 Coyote Gas Treating, LLC $ 10 $ 9.1 12/31/99 Coyote Gas Treating, LLC $ 10 $ 8.0 06/30/00 Red Cedar $ 55 $55.0 10/31/10 Red Cedar $ 25 $ - 10/31/01
(C) Capital Expenditures Budget The consolidated capital expenditures budget for 1999 totals $160 million. Approximately $44.3 million had been committed for the purchase of plant and equipment at December 31, 1998. 62 63 13. 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 1998 1997 --------------------------- ---------------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE --------- --------- --------- --------- (In Millions) FINANCIAL ASSETS: TBI Class A Preferred Stock $ 26.5 $ (i) $ 25.6 $ (i) TBI Common Stock $ 9.2 $ 9.2 $ 17.7 $ 17.7 FINANCIAL LIABILITIES: Long-Term Debt $ 3,315.9 $ 3,395.9 $ 585.5 $ 622.1 Capital Securities $ 275.0 $ 297.6 $ 100.0 $ 100.7 Energy Financial Instruments, Net $ 3.2 $ 3.2 $ 11.8 $ 11.8 K N Class A $5.00 Preferred Stock $ 7.0 $ 5.3 $ 7.0 $ 6.0
(i) Fair values for TBI Class A Preferred Stock are not readily available. 14. BUSINESS SEGMENT INFORMATION K N Energy, Inc. has adopted a strategy of extracting profit from the energy value stream which extends from the purchase or production of the fuel through the sale of the energy to the end-user. Consistent with this strategy, K N manages its business and has segregated its activities into three business segments, "Upstream," "Midstream" and "Downstream," based on where in the value stream such activities are conducted. In general, these segments are also differentiated by the nature of their processes, their principal suppliers and their target markets and customers. The Company's Upstream operations consist of natural gas gathering, natural gas processing, and NGLs extraction and marketing; Midstream operations consist of transportation, storage and bundled sales transactions for K N's interstate and intrastate pipelines; Downstream operations principally consist of energy marketing, regulated natural gas distribution and electric power generation and sales. The accounting policies applied in the generation of segment information are generally the same as those described in Note 1 except that, in general, items below the "Operating Income" line are either not allocated to business segments or are not considered by Management in its evaluation of business unit performance. In addition, certain items included in operating income (such as the merger-related costs incurred in 1998) are not allocated to individual business segments. With adjustment for these items, the Company currently evaluates business segment performance primarily based on operating income in relation to the level of capital employed. In general, intersegment sales are accounted for at market prices, while asset transfers are made at either market value or, in some instances, book value. For comparative purposes, prior period results and balances have been reclassified to conform to the current presentation. 63 64 \ BUSINESS SEGMENT INFORMATION (Before Intersegment Eliminations)
YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------------------------------------------- UPSTREAM MIDSTREAM DOWNSTREAM OTHER CONSOLIDATED -------- --------- ---------- ----- ------------ (In Millions) Revenues from External Customers $ 480.1 $1,195.9 $2,690.1 $4,366.1 Equity in Earnings of Equity-Method Investees $ 13.6 $ 10.3 $ (2.2) $ 21.7 Intersegment Revenues $ 111.1 $ 298.5 $ 113.4 Depreciation and Amortization $ 26.3 $ 155.0 $ 14.6 $ 195.9 Operating Income $ (18.4) $ 352.1 $ 16.7 $ (5.8) (1) $ 344.6 Segment Assets(2) $ 711.5 $6,549.5 $1,227.7 $ 1,123.5 (3) $9,612.2 Investment in Equity-Method Investees(2) $ 67.1 $ 65.6 $ 86.9 $ 219.6 Capital Expenditures $ 119.3 $ 112.9 $ 24.3 $ 256.5 MidCon Acquisition $ 57.7 $3,029.2 $ 524.1 $3,611.0 Other Acquisitions $ 8.4 $ 6.9 $ 155.2 $ 170.5
YEAR ENDED DECEMBER 31, 1997 ----------------------------------------------------------------------------------- UPSTREAM MIDSTREAM DOWNSTREAM OTHER CONSOLIDATED -------- --------- ---------- ----- ------------ (In Millions) Revenues from External Customers $ 468.4 $ 86.9 $1,589.7 $2,145.0 Equity in Earnings of Equity-Method Investees $ 0.8 $ 4.9 $ (1.8) $ 3.9 Intersegment Revenues $ 84.7 $ 139.3 $ 82.0 Depreciation and Amortization $ 16.9 $ 27.6 $ 11.5 $ 56.0 Operating Income $ 58.8 $ 45.5 $ 41.8 $ 146.1 Segment Assets(2) $ 616.3 $ 911.2 $ 745.0 33.3 (3) $2,305.8 Investment in Equity-Method Investees(2) $ 78.5 $ 11.5 $ 14.6 $ 104.6 Capital Expenditures $ 71.3 $ 212.8 $ 27.0 $ 311.1 Acquisitions $ 118.8 $ 1.4 $ 33.6 $ 153.8
YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------------------------------------------- UPSTREAM MIDSTREAM DOWNSTREAM OTHER CONSOLIDATED -------- --------- ---------- ----- ------------ (In Millions) Revenues from External Customers $ 281.4 $ 150.0 $1,009.0 $1,440.4 Intersegment Revenues $ 76.1 $ 116.8 $ 155.4 Depreciation and Amortization $ 14.5 $ 24.9 $ 11.8 $ 51.2 Operating Income $ 38.6 $ 43.1 $ 53.1 $ 134.8 Segment Assets(2) $ 288.5 $ 828.3 $ 495.9 17.0 (3) $1,629.7 Investment in Equity-Method Investees(2) $ - $ 3.5 $ 0.7 $ 4.2 Capital Expenditures $ 18.1 $ 96.0 $ 5.9 $ 120.0 Acquisitions $ 61.8 $ 94.0 $ 0.1 $ 155.9
(1) Represents costs related to the MidCon Acquisition (see Note 2). (2) Balances at December 31 for the year indicated. (3) Other assets represent principally cash, restricted deposits and U.S. government securities. GEOGRAPHIC INFORMATION All but an insignificant amount of the Company's assets and operations are located in the continental United States. 64 65 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) K N ENERGY, INC. AND SUBSIDIARIES QUARTERLY OPERATING RESULTS FOR 1998 AND 1997
1998 FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- (In Thousands Except Per Share Amounts) Operating Revenues $1,166,522 $1,039,719 $1,045,051 $1,136,551 ========== ========== ========== ========== Operating Income $ 77,786 $ 92,090 $ 92,892 $ 81,783 ========== ========== ========== ========== Net Income (Loss) $ 22,508 $ 16,690 $ 24,474 $ (3,683) Preferred Stock Dividends 88 87 88 87 ---------- ---------- ---------- ---------- Earnings (Loss) Available for Common Stock $ 22,420 $ 16,603 $ 24,386 $ (3,770) ========== ========== ========== ========== Number of Common Shares Used In Computing Basic Earnings Per Share 52,635 67,170 67,493 68,442 ========== ========== ========== ========== Number of Common Shares Used In Computing Diluted Earnings Per Share 53,429 67,986 67,991 68,823 ========== ========== ========== ========== Basic Earnings (Loss) Per Common Share $ 0.43 $ 0.25 $ 0.36 $ (0.06) ========== ========== ========== ========== Diluted Earnings (Loss) Per Common Share $ 0.42 $ 0.24 $ 0.36 $ (0.05) ========== ========== ========== ==========
1997 FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- (In Thousands Except Per Share Amounts) Operating Revenues $ 488,842 $ 358,752 $ 518,189 $ 783,198 ========== ========== ========== ========== Operating Income $ 39,537 $ 25,325 $ 34,683 $ 46,567 ========== ========== ========== ========== Net Income $ 20,358 $ 10,872 $ 17,808 $ 28,459 Preferred Stock 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 45,777 46,181 47,058 47,337 ========== ========== ========== ========== Number of Common Shares Used In Computing Diluted Earnings Per Share 46,754 47,066 47,564 47,996 ========== ========== ========== ========== Basic Earnings Per Common Share $ 0.44 $ 0.23 $ 0.38 $ 0.60 ========== ========== ========== ========== Diluted Earnings Per Common Share $ 0.43 $ 0.23 $ 0.37 $ 0.59 ========== ========== ========== ==========
65 66 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification of Directors For information regarding the Directors, see the 1999 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" Section of the 1999 Proxy Statement. (E) Business Experience See Executive Officers of the Registrant under Part I. For business experience of the Directors, see the 1999 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" Sections in the 1999 Proxy Statement. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the 1999 Proxy Statement Sections: (i) relating to common stock owned by directors; (ii) "Executive Stock Ownership;" and (iii) "Principal Shareholders." 66 67 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (A) Transactions with Management and Others See "Relationship Between Certain Directors and the Company" section in the 1999 Proxy Statement. (B) Certain Business Relationships See "Relationship Between Certain Directors and the Company" section in the 1999 Proxy Statement. (C) Indebtedness of Management See "Relationship Between Certain Directors and the Company" section in the 1999 Proxy Statement. (D) Transactions with Promoters Not applicable. 67 68 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. K N ENERGY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1998 -------------------------------------------------------------------------------------- ADDITIONS ------------------------------- CHARGED TO DEDUCTIONS BALANCE AT CHARGED TO OTHER ACCOUNTS WRITE-OFF OF BEGINNING OF COST AND ACQUISITION OF UNCOLLECTIBLE BALANCE AT END PERIOD EXPENSES MIDCON ACCOUNTS OF PERIOD ------------ ---------- -------------- ------------- -------------- (In Millions) Allowance for Doubtful Accounts $1.7 $5.0 $5.8 $(1.7) $10.8 Note: Activity and balances prior to 1998 were not material.
68 69 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)* 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)* 69 70 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)* Directors and Executives Deferred Compensation Plan effective January 1, 1998 for executive officers and directors of the Company (Attached hereto as Exhibit 10(aa). Management Deferred Compensation Plan effective January 1, 1998 for senior management of the Company (Attached hereto as Exhibit 10(bb). (b) Reports on Form 8-K On October 7, 1998, a Current Report on Form 8-K/A was filed to present an unaudited pro forma consolidated income statement for K N Energy, Inc. and MidCon Corp. for the six months ended June 30, 1998 and related notes. On October 9, 1998, a Current Report on Form 8-K was filed to present selected historical segment information for the Company. On November 24, 1998, a Current Report on Form 8-K was filed to report the issuance on or about November 25, 1998, of 10,706,000 of the Company's 8.25% Premium Equity Participating Security Units. * Incorporated herein by reference. 70 71 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) Date: March 9, 1999 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, 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
71 72 Exhibit Index
Page Number ----------- List of Executive Compensation Plans and Arrangements 69-70 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 (Exhibit 2(b) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 2(c) - Agreement and Plan of Merger among Sempra Energy, Cardinal Acquisition Corp. and the Company dated as of February 20, 1999 (Exhibit 99.1 Current Report on Form 8-K Dated February 20, 1999)* 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 From 10-K for the year ended December 31, 1996)* Exhibit 3(c) - By-Laws of the Company, as amended on February 10, 1998 (Attached as Exhibit 3(c))** 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 (Exhibit 4(e) to the Annual Report on Form 10-K for the year ended December 31, 1997)* 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 (Exhibit 4(f) to the Annual; Report on Form 10-K for the year ended December 31, 1997)* 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 (Exhibit 4(g) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 4(h) - $1,394,846,122 Reimbursement Agreement
73 Exhibit Index
Page Number ----------- among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 4(e) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 4(i) - Purchase Contract Agreement dated as of November 25, 1998, between the Company and U.S. Bank Trust National Association, as Purchase Contract Agent for the PEPS Units (Exhibit 4.4 Current Report on Form 8-K Dated November 24, 1998)* Exhibit 4(j) - Amendment No. 1 to Credit Agreements dated as of November 6, 1998, 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(j))** Exhibit 4(k) - $600,000,000 364 Day-Credit Agreement dated as of January 8, 1999, 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(k)) ** Exhibit 4(l) - Amendment No. 2 to the $400,000,000 Five-Year Credit Agreement among K N Energy, Inc., dated as of January 8, 1999, 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(l)) ** Exhibit 10(a) - Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(b) - 1982 Stock Option Plan for Non- employee Directors of the Company with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(c) - 1982 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(d) - 1986 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(e) - 1988 Incentive Stock Option Plan for key employees of the Company (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(f) - Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, 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
74 Exhibit Index
Page Number ----------- of Participation Agreement regarding the Plan (Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee Directors of the Company with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* Exhibit 10(j) - 1994 K N Energy, Inc. Long-Term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)* Exhibit 10(k) - K N Energy, Inc. 1996 Executive Incentive Plan (Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(l) - K N Energy, Inc. Nonqualified Deferred Compensation Plan (Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(m) - K N Energy, Inc. Nonqualified Retirement Income Restoration Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(n) - K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan (Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(o) - Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (Exhibit 10(p) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(p) - Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Exhibit 10(q) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(q) - Amended and Restated Basket Agreement dated as of June 30, 1990, by and between American Pipeline Company ("APC"), Cabot and Cabot Transmission Corporation (Exhibit 10.5(a) to the Annual Report on Form 10-K for American Oil and Gas Corporation ("AOG") for the year ended December 31, 1993)* Exhibit 10(r) - First Amendment to Amended and Restated Omnibus Acquisition Agreement and Amended and Restated Basket Agreement dated as of March 31, 1992 by and among AOG, APC, Cabot and Cabot Transmission (Exhibit 10.5(d) to the Annual Report on Form 10-K for AOG for the year ended December 31, 1993)* Exhibit 10(s) - Rights Agreement between K N Energy, Inc. and the Bank of New York, as Rights Agent, dated as of August 21, 1995 (Exhibit 1 on 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
75 Exhibit Index
Page Number ----------- (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. (Exhibit 10(y) to the Annual Report on Form 10-K for the year ended December 31, 1997)* 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. (Exhibit 10(z) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 10(aa) - Directors and Executives Deferred Compensation Plan effective January 1, 1998 for executive officers and directors of the Company (Attached hereto as Exhibit 10(aa)).** Exhibit 10(bb) - Management Deferred Compensation Plan effective January 1, 1998 for senior management of the Company (Attached hereto as Exhibit 10(bb)).** Exhibit 10(cc) - Amendment No. 1 to Rights Agreement between the Company and the Bank of New York, as Rights Agent, dated as of September 8, 1998 (Attached hereto as Exhibit 10(cc)).** Exhibit 12 - Ratio of Earnings to Fixed Charges 76 Exhibit 13 - 1998 Annual Report to Shareholders*** 77 Exhibit 21 - Subsidiaries of the Registrant 78-80 Exhibit 23 - Consent of Independent Public Accountants 81 Exhibit 27 - Financial Data Schedule****
* Incorporated herein by reference. ** Included in SEC and NYSE copies only. *** Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this annual report on Form 10-K. **** Included in SEC copy only. EX-3.(C) 2 BY-LAWS OF THE COMPANY, AD AMENDED ON 2/10/98 1 K N ENERGY, INC. (Formerly Kansas-Nebraska Natural Gas Company, Inc.) ---ooOoo--- B Y - L A W S As Amended to February 10, 1998 Effective February 10, 1998 ---ooOoo--- ARTICLE I OFFICES Section 1. Offices. The registered office shall be at 205 F Street in the City of Phillipsburg, County of Phillips, State of Kansas. The Company's principal executive office shall be at 370 Van Gordon Street, Lakewood, Colorado 80228-8304 (mailing address: Post Office Box 281304, Lakewood, Colorado 80228-8304). Section 2. Additional Offices. The corporation may also have offices at such other places both within and without the State of Kansas as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETING OF STOCKHOLDERS Section 1. Time and Place. The annual meeting of the shareholders for the election of directors and all special 2 meetings of shareholders for that or for any other purpose may be held at such time and place within or without the State of Kansas as shall be stated in the notice of the meeting, or in a duly executed waiver of notice thereof. Section 2. Annual Meeting. The annual meeting of the shareholders shall be held each year at a time to be determined by the Board of Directors, at which meeting the shareholders shall elect a Board of Directors, and transact such other business as may be properly brought before the meeting. Section 3. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute may be called by the Chairman of the Board, if any, the President or the Board of Directors, and shall be called by the President or the Secretary at the request in writing of a majority of the directors, or at the request in writing of shareholders owning at least fifty-one percent (51%) in amount of the shares of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 4. Notice. Written notice of the place, date and hour of any annual or special meeting of shareholders shall be given personally or by mail to each shareholder entitled to vote thereat, not less than ten (10) nor more than fifty (50) days prior to the meeting. 2 3 The notice shall state in addition, the purpose or purposes for which the meeting is called, and by, or at whose direction it is being issued. Section 5. Quorum. Except as otherwise provided by the Articles of Incorporation, the holders of a majority of the shares of the Corporation issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be necessary to and shall constitute a quorum for the transaction of business at all meetings of the shareholders. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat present in person or represented by proxy shall have power to adjourn the meeting from time to time, but not for more than thirty (30) days, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Section 6. Voting. At any meeting of the shareholders every shareholder having the right to vote shall be entitled to vote in person, or by proxy. Except as otherwise provided by law or the Articles of Incorporation, each shareholder of record shall be entitled, as to each proposal, to one vote for each share of stock standing in his name on the books of the Corporation on the date fixed as the record date for the 3 4 determination of its shareholders entitled to vote. All elections of directors shall be by written ballot and shall be determined by a plurality vote, and, except as otherwise provided by law or the Articles of Incorporation, all other matters shall be determined by vote of a majority of the shares present or represented at such meeting and voting on such questions. Section 7. Proxies. Every proxy must be executed in writing by the shareholder or by his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except in those cases where an irrevocable proxy is permitted by law. Section 8. Consents. Whenever by any provision of law or of the Articles of Incorporation, the vote of shareholders at a meeting thereof is required or permitted to be taken in connection with any corporate action, the meeting and vote of shareholders may be dispensed with, if all the shareholders who would have been entitled to vote upon the action if such meeting were held, shall consent in writing to such corporate action being taken. Section 9. Presiding Officer. Meetings of the shareholders shall be presided over by the Chairman of the Board, if any, or if he is not present, by the President, or, if he is not present, 4 5 by a Vice President or, if neither the Chairman of the Board, the President nor a Vice President is present, by a chairman to be chosen at the meeting. The Secretary of the Company or, if he is not present, an Assistant Secretary of the Company or, if neither the Secretary nor an Assistant Secretary is present, a secretary to be chosen at the meeting, shall act as secretary of the meeting. Section 10. Notice of Shareholder Business. At an annual meeting of shareholders, only such business shall be conducted as shall have been properly brought before the meeting (a) by or at the direction of the Board of Directors or (b) by a shareholder who is a shareholder of record at the time of giving such notice, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 40 days prior to the meeting. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at 5 6 the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder with respect to the matters set forth in this Section. ARTICLE III DIRECTORS Section 1. Number and Tenure. The whole Board of Directors of the Corporation shall consist of fifteen members, with one 6 7 position on the Board being reserved for Charles W. Battey for a period of one year ending at the Annual Meeting of Shareholders in 1999, at which time the number of members on the Board of Directors of the Corporation shall be reduced to consist of fourteen members. The directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, which were first approved at the annual meeting of shareholders in 1975; Class I shall consist of three directors whose initial term of office shall expire in 1994, Class II shall consist of four directors whose initial term of office shall expire in 1995, and Class III shall consist of three directors whose initial term of office shall expire in 1996. Each director shall hold office until his successor is duly elected and qualified or until his resignation in writing has been filed with the corporation. At each annual election, the successors of the class of directors whose terms shall expire that year shall be elected to hold office for a term of three years, so that the term of office of one class of directors shall expire in each year, except where the Board of Directors determines that a newly elected director shall be elected by the shareholders to fill a vacancy of a directorship created subsequent to the previous annual meeting, such director shall be elected to hold office for the balance of the term of the class of directors of which he is to be a member, as determined by the Board of Directors, and until his successor is elected and qualified. 7 8 Section 2. Vacancies. A vacancy on the Board of Directors or a newly created directorship may be filled by a majority of the remaining directors, though less than a quorum, or by the sole director, by election of a new director, who at the time of his election shall be designated as a member of one of the classes of directors and shall hold office until the next election of the class of which he has become a member, unless his term of office is terminated by death, resignation, or otherwise. Section 3. Resignation, Retirement; Removal. Any director may resign at any time. Any director who experiences a change in his personal or business circumstances or principal employment shall immediately tender his resignation as a director of the Corporation to the Executive Committee of the Board of Directors. Any director who is not an employee of the Corporation shall retire his position as a director at the annual meeting of the shareholders of the Corporation next occurring after such director attains the age of 72 years. The Board of Directors may by unanimous vote of other directors then in office, remove a director with or without cause. The shareholders entitled to vote for the election of directors may remove a director, with cause as provided in the Articles of Incorporation. 8 9 Section 4. Advisory Directors and Directors Emeritus. The Board of Directors by a vote of a majority of the directors present and entitled to vote, at any regular or special meeting at which a quorum is present, may designate such number of persons as it may from time to time determine, as an "Advisory Director" or may designate a former member of the Board as a "Director Emeritus," if such former member is willing to so serve. Each Advisory Director and each Director Emeritus shall serve, subject to the pleasure of the regular Board of Directors, until the next succeeding annual meeting of the regular Board of Directors, following the annual meeting of the stockholders, at which such regular directors are elected, unless he shall have resigned. Each Advisory Director and each Director Emeritus shall be notified of all regular or special meetings of the regular Board of Directors, shall be entitled to attend and participate therein, but shall not be entitled to vote. Each Advisory Director and each Director Emeritus shall be reimbursed for any necessary expenses of attending directors' meetings. Section 5. Nomination of Director Candidates. (a) Eligibility to Make Nominations. Nominations of candidates for election as directors of the Corporation at any meeting of shareholders called for election of directors, in whole or in part (an "Election Meeting"), may be made by the Board of Directors or by any shareholder who is a shareholder of 9 10 record at the time of giving notice, who shall be entitled to vote at such Election Meeting and who complies with the notice procedures set forth in this Section. (b) Procedure for Nominations by Shareholders. Nominations, other than those made by the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary. To be timely, shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 40 days prior to the date of the Election Meeting. Such shareholder's notice shall set forth (i) the name, age, business address and residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of capital stock of the Corporation which are beneficially owned by each such nominee and (iv) such other information concerning each such nominee as would be required, under the rules of the SEC, in a proxy statement soliciting proxies for the election of such nominees. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such nominee. Such notice shall also set forth as to the shareholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such shareholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such shareholder. 10 11 (c) Meeting Procedures. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 5, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (d) Substitution of Nominees. In the event that a person is validly designated as a nominee to the Board and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee. (e) Securities Exchange Act of 1934. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder with respect to the matters set forth in this Section. 11 12 ARTICLE IV MEETINGS OF THE BOARD OF DIRECTORS Section 1. Place. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Kansas. Section 2. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 3. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, if any, or by the President on two days' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the Chairman, President or Secretary in like manner and on like notice on the written request of two directors. Section 4. Quorum. At all meetings of the Board of Directors a majority of the entire Board shall be necessary to and constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors the 12 13 directors present thereat may adjourn the meeting from time to time until a quorum shall be present. Notice of such adjournment shall be given to any directors who were not present and, unless announced at the meeting, to the other directors. Section 5. Consents. Unless otherwise restricted by the Articles of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or of such committee as the case may be, consent thereto in writing and such written consent is filed with the minutes of the Board or committee. Such consents may be in counterpart so that each member will have signed a consent, but all members need not sign the same document. Section 6. Compensation. Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board of Directors an annual fee, plus a fee and expenses for attendance at meetings may be allowed, provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 7. Presiding Officer. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or, if he is not present, by the President or, if he is not present, by a chairman to be chosen at the meeting. The 13 14 Secretary of the Company, or, if he is not present, an Assistant Secretary of the Company, or, if neither the Secretary nor an Assistant Secretary is present, a secretary to be chosen at the meeting, shall act as secretary of the meeting. ARTICLE V COMMITTEES OF DIRECTORS Section 1. Designation. The Board of Directors, by resolution adopted by a majority of the whole Board, may designate from among its members one or more committees, each consisting of two or more directors, each of which, to the extent provided in such resolution, shall have and may exercise the powers of the Board of Directors in the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee. Section 2. Tenure; Reports. Each such committee shall serve at the pleasure of the Board. It shall keep minutes of its meetings and report the same to the Board. 14 15 ARTICLE VI EXECUTIVE COMMITTEE Section 1. Appointment and Authority. The Board of Directors may by resolution or resolutions passed by a majority of the whole Board create and designate an Executive Committee consisting of the officer who is designated as Chief Executive Officer and two or more other directors of the Company who shall hold office subject to the pleasure of the Board of Directors, and the Board shall have the power at any time to remove any of the members of the Executive Committee and to appoint to the Committee other directors in lieu of the directors so removed. The Chief Executive Officer shall serve as Chairman of the Executive Committee. During the intervals between the meetings of the Board of Directors the Executive Committee shall possess and may exercise the powers delegated by the Board of Directors, including the power to authorize the seal of the Company to be affixed to all papers which may require it, to authorize the payment of dividends, to authorize the issuance of stock, to serve as a nominating committee for the Board of Directors and to approve resolutions necessary for the day-to-day operations of the Company; provided, however, that the Executive Committee shall not have power to amend these By-Laws or to fill vacancies on the Board of Directors or to fill vacancies in, or to change 15 16 the membership of, said Committee. The Executive Committee shall also have and may exercise all the powers of the Board of Directors except as aforesaid whenever a quorum of the Board shall fail to be present at any meeting of the Board. Section 2. Report of Action Taken. All action of the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision and alteration by the Board, provided that no rights of third parties shall be affected by any such revision or alteration. Regular minutes of the proceedings of the Executive Committee shall be kept in a book provided for that purpose. Section 3. Quorum and Procedure. A majority of the members of the Executive Committee shall be necessary to constitute a quorum, and, in every case, an affirmative vote of a majority of the members shall be necessary for the passage of any resolution. It shall fix its own rules of procedure and shall meet as provided by such rules or by resolution of the Board, and it shall also meet at the call of the Chairman or of any two members of the Committee. Should the Executive Committee fail to fix its own rules therefor, the provisions of these By-Laws, pertaining to the calling of meetings and conduct of business by the Board of Directors, shall apply as nearly as may be. Section 4. Consent. Unless otherwise restricted by statute, the Articles of Incorporation or these By-Laws, any 16 17 action required or permitted to be taken at any meeting of the Executive Committee thereof may be taken without a meeting, if a written consent thereto is signed by each member of the Executive Committee, and such written consent is filed with the minutes of proceedings of the Executive Committee. Such consents may be in counterpart so that each member will have signed a consent but all members need not sign the same document. ARTICLE VII NOTICES Section 1. Form; Delivery. Notices to directors and shareholders shall be in writing and delivered personally or mailed to the directors or shareholders at their addresses appearing on the books of the Corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram. Section 2. Waiver. Whenever any notice is required to be given under the provisions of the statutes or of the Articles of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. In addition, any shareholder attending a meeting of shareholders in person or by proxy without protesting at the beginning of the meeting the lack of notice thereof to 17 18 him, and any director attending a meeting of the Board of Directors without protesting prior to the meeting or at its commencement such lack of notice shall be conclusively deemed to have waived notice of such meeting. ARTICLE VIII OFFICERS Section 1. Executive Officers. The executive officers of the Corporation shall be a President and one or more Vice Presidents, a Secretary, a Treasurer and may include a Chairman of the Board. Section 2. Designation; Term of Office; Removal. All officers shall be elected by the Board of Directors and shall hold office for such term as may be prescribed by the Board or until their successors are chosen and qualified or until their resignation is filed in the office of the Secretary, whichever first occurs. Any officer elected by the Board may be removed with or without cause at any time by the Board. Section 3. Authority and Duties. All officers, as between themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided in these By-Laws, or, to the extent not so provided, by the Board of Directors. 18 19 Section 4. Compensation. The compensation of all officers of the Corporation shall be fixed by the Board of Directors and the compensation of agents shall either be so fixed or shall be fixed by officers thereunto duly authorized. Section 5. Vacancies. If an office becomes vacant for any reason, the Board of Directors shall fill such vacancy. Any officer so elected by the Board shall serve only until such time as the unexpired term of his predecessor shall have expired unless re-elected or reappointed by the Board. Section 6. The Chairman of the Board. The Chairman of the Board of Directors, if there be a Chairman, shall preside at all meetings of the shareholders and directors and shall have such other powers and duties as may from time to time be assigned by the Board including designation as Chief Executive Officer if the President is not so designated. Section 7. The President. The President shall be the Chief Executive Officer of the Corporation unless the Chairman of the Board is so designated, in which event the President shall be Chief Operating Officer of the Corporation. In the absence of the Chairman of the Board, or if there be no Chairman, he shall preside at all meetings of the shareholders and directors. The Chief Executive Officer, whether the Chairman of the Board or the President, shall be ex officio a member of all standing committees, shall have general and active management and control 19 20 of the business and affairs of the Corporation subject to the control of the Board of Directors, and shall see that all orders and resolutions of the Board are carried into effect. Section 8. Vice Presidents. The Vice Presidents in the order of their seniority or in any other order determined by the Board, shall in the absence or disability of the President, perform the duties and exercise the powers of the President, and shall generally assist the President and perform such other duties as the Board of Directors or the President shall prescribe. Section 9. The Secretary. The Secretary shall attend all meetings of the Board and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall act. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary or Assistant Treasurer. He shall keep in safe custody the certificate books 20 21 and shareholder records and such other books and records as the Board may direct and shall perform all other duties incident to the office of the Secretary. Section 10. Assistant Secretaries. The Assistant Secretaries, if any, in order of their seniority or in any other order determined by the Board shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Directors or the Secretary shall prescribe. Section 11. The Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. He shall establish and execute programs for the provision of the capital required by the Company, including negotiating the procurement of capital and maintaining the 21 22 required financial arrangements. He shall establish and maintain an adequate market for the Company's securities and, in connection therewith, maintain adequate liaison with investment bankers, financial analysts and shareholders. He shall maintain adequate sources for the Company's current borrowings from commercial banks and other lending institutions. He shall maintain banking arrangements to receive, have custody of and disburse the Company's moneys and securities. He shall invest the Company's funds as required and establish and coordinate policies for investment in pension and other similar trusts. Section 12. Assistant Treasurers. The Assistant Treasurers, if any, in the order of their seniority or in any other order determined by the Board, shall in the absence or disability of the Treasurer, perform the duties and exercise the power of the Treasurer and shall perform such other duties as the Board of Directors or the Treasurer shall prescribe. ARTICLE IX CERTIFICATE OF SHARES Section 1. Form; Signature. The certificates for shares of the Corporation shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each 22 23 certificate shall exhibit the registered holder's name and the number and class of shares, and shall be signed by the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, and shall bear the seal of the Corporation or a facsimile thereof. Where any such certificate is countersigned by a transfer agent or by a registrar other than the Corporation, the signature of any such officer may be a facsimile signature. In case any officer who signed, or whose facsimile signature or signatures were placed on any such certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 2. Lost Certificates. The Board of Directors may direct a new share certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity 23 24 against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 3. Registration of Transfer. Upon surrender to the Corporation or any transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation, or such transfer agent to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Registered Shareholders. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends or other distributions, and to vote as such owner, and to hold liable for calls a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or legal claim to or interest in such share or shares on the part of any other person. Section 5. Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the 24 25 purpose of any other action affecting the interests of shareholders, the Board of Directors may fix, in advance, a record date. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting, nor more than sixty (60) days prior to any other action. In each such case, except as otherwise provided by law, only such persons as shall be shareholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting and any adjournment thereof, or to express such consent or dissent, or to receive payment of such dividend, or such allotment of rights, or otherwise to be recognized as shareholders for the related purpose, notwithstanding any registration of transfer of shares on the books of the Corporation after any such record date so fixed. ARTICLE X GENERAL PROVISIONS Section 1. Dividends. Subject to the provisions of the Articles of Incorporation, if any, dividends upon the outstanding shares of the Corporation may be declared by the Board of Directors at any regular or special meeting, pursuant to law and may be paid in cash, in property, or in shares of the Corporation. 25 26 Section 2. Reserves. Before payment of any dividends, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 3. Annual Statement. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. Section 4. Instruments Under Seal. All deeds, bonds, mortgages, contracts, and other instruments requiring a seal may be signed in the name of the Corporation by the President or by any other officer authorized to sign such instrument by the President or the Board of Directors. Section 5. Checks. All checks or demands for money and notes or other instrument evidencing indebtedness or obligation of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 26 27 Section 6. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January of each year and shall end on the thirty-first day of December following. Section 7. Seal. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Kansas 1927." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE XI AMENDMENTS Section 1. These By-Laws may be altered or repealed at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors if notice of such alteration or repeal be contained in the notice of such special meeting. ARTICLE XII SPECIAL MANAGEMENT PROVISIONS Section 1. General. The provisions of this Article XII of the By-Laws have been adopted by the Board of Directors of the Corporation pursuant to that certain Agreement of Merger by and between the Corporation, KNE Acquisition Corporation, a Delaware corporation, and American Oil and Gas Corporation, a Delaware 27 28 corporation dated March 24, 1994 (the "Merger Agreement"). Capitalized terms used in this Article XII not otherwise defined herein shall have the meaning ascribed to them in the Merger Agreement. The provisions of this Article XII shall be effective from and after the Effective Time notwithstanding any other provisions of these By-Laws to the contrary. In the event of a conflict between the provisions of this Article XII and other provisions of the By-Laws, the provisions of this Article XII shall control. Section 2. Cabot Director. For so long as Cabot Corporation shall continue to own beneficially (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission) 10% or more of the issued and outstanding voting stock of the Corporation, Cabot Corporation shall have the right to designate one person to serve as an advisory director of the Corporation. In the event beneficial ownership of Cabot Corporation of the issued and outstanding voting stock of the Corporation falls below 10% but constitutes more than 5%, the Board of Directors shall appoint the Cabot Corporation advisory director as a full director, to serve the then remaining term of a Class II director. For so long as Cabot Corporation continues to own beneficially less than 10% but more than 5% of the issued and outstanding voting stock of the Corporation, the Board of Directors shall nominate a Cabot Corporation designee (provided 28 29 that such nominee is otherwise qualified as required by these By-Laws) for election by the Corporation's stockholders as a director. The Corporation shall at all times during which Cabot Corporation shall beneficially own in excess 10% of the issued and outstanding voting stock of the Corporation, maintain a vacancy on its Board of Directors for such Cabot designee. Section 3. Vacancies in Certain Offices. Any vacancy arising following the Effective Time and prior to the Corporation's Annual Meeting of Stockholders in 1996, in the offices of the Chairman of the Board, Vice-Chairman of the Board, President, Chief Executive Officer or Chief Operating Officer, or on the Management Committee or the Chairman of the Management Committee, shall be filled by the Board of Directors upon recommendation by a Special Nominating Committee of the Board of Directors. The Board of Directors shall by majority vote establish a Special Nominating Committee in the event of a vacancy in any of the foregoing positions. The Special Nominating Committee shall consist of four directors, two of whom shall be designated by the Board of Directors from the directors of the Corporation who served as a director prior to the Effective Time, and two of whom shall be designated by the directors designated by American Oil and Gas Corporation in the Merger Agreement. 29 30 Section 4. Continuation of Retirement Policy. The Corporation shall continue its present retirement policy that officers of the Corporation (including the Chairman of the Board, Vice-Chairman of the Board, President and Chief Executive Officer or Chief Operating Officer) shall be ineligible and cease to serve as an officer of the Corporation as of the first of the month coincident with or next following his or her 65th birthday. Section 5. Super-Majority Vote. For purposes of this Article XII, the term "Super-Majority Vote" shall mean the affirmative vote of at least 12 of a 14-member Board of Directors; at least 11 of a 13-member Board of Directors; at least 10 of a 12-member Board of Directors; at least 9 of an 11-member Board of Directors; or in all other cases, the affirmative vote of a number of directors equal to at least 85% of the total number of directors. A Super-Majority Vote shall be required for the following actions to be taken by the Board of Directors; (i) amendment, modification or revocation of any provision of this Article XII; (ii) amendment, modification or revocation of the current retirement policy of the Corporation; and (iii) any increase in the number of members to serve on the Board of Directors; provided that, no Super-Majority Vote shall be required for any such action taken by the Board of Directors from and after the date of the annual stockholders meeting for 1997. 30 31 I hereby certify that the foregoing are the By-Laws of K N Energy, Inc. as the same were adopted at the meeting of the Board of Directors on May 20, 1975, and subsequently amended at meetings of the Board of Directors on November 20, 1975, November 8, 1978, August 5, 1983, November 11, 1983, November 16, 1984, January 9, 1988, March 24, 1989, August 10, 1989, January 20, 1991, November 10, 1993, June 24, 1994, July 13, 1994, April 11, 1996, February 10, 1998, and are still in force and effect on this 10th day of February, 1998. /s/ Martha B. Wyrsch --------------------------------------- Martha B. Wyrsch Secretary 31 EX-4.(J) 3 AMENDMENT NO. 1 TO CREDIT AGREEMENTS 1 CONFORMED COPY AMENDMENT NO. 1 TO CREDIT AGREEMENTS AMENDMENT dated as of November 6, 1998 to (i) the Amended and Restated Five-Year Credit Agreement, (ii) the Amended and Restated 364-Day Credit Agreement and (iii) the Amended and Restated Reimbursement Agreement, each dated as of January 30, 1998 (the "Credit Agreements") among KN ENERGY, INC. (the "Borrower"), the BANKS party thereto (the "Banks") 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, the parties hereto desire to amend the Credit Agreements as set forth below; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreements has the meaning assigned to such term in the Credit Agreements. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in each Credit Agreement shall, after this Amendment becomes effective, refer to such Credit Agreement as amended hereby. SECTION 2. Amendment. Section 5.07(a) of each Credit Agreement is amended by changing the figure "87.00%" to "88.4375%". SECTION 3. Representations of Borrower. The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 4 of each Credit Agreement will be true on and as of the Amendment Effective Date and (ii) no Default under any Credit Agreement will have occurred and be continuing on such date. SECTION 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 5. Counterparts. This Amendment 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. 2 SECTION 6. Effectiveness. This Amendment shall become effective as of the date of the Credit Agreements on the date (the "Amendment Effective Date") when the Administrative Agent shall have received from each of the Borrower and the Required Banks under each Credit Agreement a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Administrative Agent) that such party has signed a counterpart hereof. 2 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. K N ENERGY, INC. By /s/ Rose M. Robeson --------------------------------- Title: Vice President & Treasurer 4 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Diana H. Imhof --------------------------------- Title: Vice President BANK OF AMERICA NT & SA By /s/ David C. Rubenking --------------------------------- Title: Senior Vice President THE CHASE MANHATTAN BANK By /s/ Mary Jo. Woodford --------------------------------- Title: Vice President NATIONSBANK, N.A. By /s/ David C. Rubenking --------------------------------- Title: Senior Vice President 5 COMMERZBANK AG LOS ANGELES BRANCH By /s/ Christian Jagenberg --------------------------------- Title: SVP & Manager By /s/ John Korthuis --------------------------------- Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By /s/ Alan C. Brown --------------------------------- Title: First Vice President SOCIETE GENERALE SOUTHWEST AGENCY By /s/ Richard A. Erbert --------------------------------- Title: Vice President 6 BAYERISCHE HYPO-und VEREINSBANK AG, LOS ANGELES AGENCY By /s/ Christine Taylor -------------------------------- Title: Vice President & Manager By /s/ Jarunee Hanpachern -------------------------------- Title: Asst. Vice President THE NORTHERN TRUST COMPANY By /s/ John E. Burda -------------------------------- Title: Second Vice President THE BANK OF NOVA SCOTIA By /s/ Jon Burckin -------------------------------- Title: Relationship Manager BARCLAYS BANK PLC By /s/ Salvatore Esposito -------------------------------- Title: Director 7 CANADIAN IMPERIAL BANK OF COMMERCE By /s/ Michael A.G. Corkum -------------------------------- Title: Authorized Signatory CREDIT LYONNAIS NEW YORK BRANCH By /s/ Philippe Soustra -------------------------------- Title: Senior Vice President FIRST UNION NATIONAL BANK By /s/ Michael J. Kolosowsky -------------------------------- Title: Vice President TORONTO DOMINION (TEXAS), INC. By /s/ Alva J. Jones -------------------------------- Title: Vice President 8 UNION BANK of SWITZERLAND, HOUSTON AGENCY By -------------------------------- Title: By -------------------------------- Title: THE BANK OF NEW YORK By /s/ John N. Watt -------------------------------- Title: Vice President CITIBANK, N.A. By /s/ J. Christopher Lyons -------------------------------- Title: Attorney-in-Fact U.S. BANK NATIONAL ASSOCIATION d/b/a Colorado National Bank By /s/ Mark E. Thompson -------------------------------- Title: Vice President 9 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By /s/ Robert Preminger -------------------------------- Title: Assistant Treasurer By /s/ Henry J. Karsch, Jr. -------------------------------- Title: Assistant Treasurer KBC BANK N.V. By /s/ Robert Snauffer -------------------------------- Title: First Vice President By /s/ Marcel Claes -------------------------------- Title: Deputy General Manager ROYAL BANK OF CANADA By /s/ Gil J. Benard -------------------------------- Title: Senior Manager 10 WESTDEUTSCHE LANDESBANK GIROZENTRALE By /s/ Robert D. Wieser -------------------------------- Title: Vice President By /s/ Elisabeth R. Wilds -------------------------------- Title: Associate WACHOVIA BANK, N.A. By /s/ Michael S. Sims -------------------------------- Title: Vice President WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By /s/ Richard P. Stults -------------------------------- Title: Vice President THE BANK OF TOKYO-MITSUBISHI LTD. By /s/ Ichiro Otani -------------------------------- Title: Deputy General Manager 11 THE LONG-TERM CREDIT BANK OF JAPAN LIMITED By /s/ Sadao Muraoka -------------------------------- Title: Head of Southwest Region NORWEST BANK COLORADO, N.A. By /s/ Thomas M. Foncannon -------------------------------- Title: Senior Vice President 12 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By /s/ Diana H. Imhof ----------------------------------- Title: Vice President EX-4.(K) 4 $600,000,000 364 DAY-CREDIT AGREEMENT 1 CONFORMED COPY $600,000,000 364-DAY CREDIT AGREEMENT dated as of January 8, 1999 among K N Energy, Inc., The Banks Listed Herein, and Morgan Guaranty Trust Company of New York, as Administrative Agent ---------------- The Chase Manhattan Bank NationsBank, N.A., Co-Documentation Agents The First National Bank of Chicago, Senior Managing Agent J. P. Morgan Securities Inc., Lead Arranger Chase Securities, Inc. NationsBanc Montgomery Securities LLC Co-Arrangers 2 TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions.......................................................................1 SECTION 1.02. Accounting Terms and Determinations..............................................14 SECTION 1.03. Types of Borrowings..............................................................14 ARTICLE 2 THE CREDITS SECTION 2.01. Commitments to Lend..............................................................15 SECTION 2.02. Notice of Committed Borrowing....................................................15 SECTION 2.03. Money Market Borrowings..........................................................16 SECTION 2.04. Notice to Banks; Funding of Loans................................................20 SECTION 2.05. Notes............................................................................21 SECTION 2.06. Maturity of Loans................................................................21 SECTION 2.07. Interest Rates...................................................................21 SECTION 2.08. Facility Fees....................................................................25 SECTION 2.09. Optional Termination or Reduction of Commitments.................................25 SECTION 2.10. Scheduled Termination of Commitments.............................................25 SECTION 2.11. Optional Prepayments.............................................................25 SECTION 2.12. General Provisions as to Payments................................................26 SECTION 2.13. Funding Losses...................................................................27 SECTION 2.14. Computation of Interest and Fees.................................................27 SECTION 2.15. Regulation D Compensation........................................................27 ARTICLE 3 CONDITIONS SECTION 3.01. Effectiveness....................................................................28 SECTION 3.02. Borrowings.......................................................................29 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power....................................................30 SECTION 4.02. Corporate and Governmental Authorization; No Contravention.......................30 SECTION 4.03. Binding Effect...................................................................30 SECTION 4.04. Financial Information............................................................31
i 3 SECTION 4.05. Litigation.......................................................................31 SECTION 4.06. Compliance with ERISA............................................................31 SECTION 4.07. Environmental Matters............................................................32 SECTION 4.08. Taxes............................................................................32 SECTION 4.09. Subsidiaries.....................................................................32 SECTION 4.10. Not an Investment Company........................................................33 SECTION 4.11. Full Disclosure..................................................................33 SECTION 4.12. Year 2000 Readiness..............................................................33 ARTICLE 5 COVENANTS SECTION 5.01. Information......................................................................34 SECTION 5.02. Payment of Obligations...........................................................36 SECTION 5.03. Maintenance of Property; Insurance...............................................36 SECTION 5.04. Conduct of Business and Maintenance of Existence.................................37 SECTION 5.05. Compliance with Laws.............................................................37 SECTION 5.06. Inspection of Property, Books and Records........................................38 SECTION 5.07. Debt.............................................................................38 SECTION 5.08. Minimum Net Worth................................................................38 SECTION 5.09. Negative Pledge..................................................................38 SECTION 5.10. Consolidations, Mergers and Sales of Assets......................................39 SECTION 5.11. Use of Proceeds..................................................................40 SECTION 5.12. Transactions with Affiliates.....................................................40 ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default................................................................40 SECTION 6.02. Notice of Default................................................................43 ARTICLE 7 THE AGENTS SECTION 7.01. Appointment and Authorization....................................................43 SECTION 7.02. Administrative Agent and Affiliates..............................................43 SECTION 7.03. Action by Administrative Agent...................................................43 SECTION 7.04. Consultation with Experts........................................................43 SECTION 7.05. Liability of Administrative Agent................................................43 SECTION 7.06. Indemnification..................................................................44 SECTION 7.07. Credit Decision..................................................................44 SECTION 7.08. Successor Administrative Agent...................................................44 SECTION 7.09. Agents' Fees.....................................................................45 SECTION 7.10. Other Agents.....................................................................45
ii 4 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.........................45 SECTION 8.02. Illegality.......................................................................46 SECTION 8.03. Increased Cost and Reduced Return................................................46 SECTION 8.04. Taxes............................................................................48 SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans........................50 SECTION 8.06. Substitution of Bank.............................................................50 ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices..........................................................................51 SECTION 9.02. No Waivers.......................................................................51 SECTION 9.03. Expenses; Indemnification........................................................51 SECTION 9.04. Sharing of Set-offs..............................................................52 SECTION 9.05. Amendments and Waivers...........................................................52 SECTION 9.06. Successors and Assigns...........................................................53 SECTION 9.07. Designated Lender................................................................54 SECTION 9.08. Collateral.......................................................................56 SECTION 9.09. Governing Law; Submission to Jurisdiction........................................56 SECTION 9.10. Counterparts; Integration........................................................56 SECTION 9.11. WAIVER OF JURY TRIAL.............................................................56
iii 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 KANSAS COUNSEL FOR THE BORROWER EXHIBIT E-2 - 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 EXHIBIT H - DESIGNATION AGREEMENT iv 6 364-DAY CREDIT AGREEMENT AGREEMENT dated as of January 8, 1999 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 hereby 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 2.03. "Adjusted CD Rate" has the meaning set forth in Section 2.07(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, the Co-Documentation Agents and the Senior Managing Agent, and "Agents" means any combination of them, as the context may require. 7 "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 2.07(b). "Assignee" has the meaning set forth in Section 9.06(c). "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(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 1997 Form 10-K" means the Borrower's annual report on Form 10-K for 1997, 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, 1998 as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrowing" has the meaning set forth in Section 1.03. "CD Base Rate" has the meaning set forth in Section 2.07(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. 2 8 "CD Margin" has the meaning set forth in Section 2.07(b). "CD Reference Banks" means Morgan Guaranty Trust Company of New York, NationsBank, N.A. and The Chase Manhattan Bank. "Co-Documentation Agent" means each of The Chase Manhattan Bank and NationsBank, N.A., in its capacity as a co-documentation agent in respect of this Agreement, and "Co-Documentation Agents" means all of them. "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 2.09 and 2.10. "Committed Loan" means a loan made by a Bank pursuant to Section 2.01. "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. "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. 3 9 "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 5.10 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. 4 10 "Designated Lender" means with respect to each Designating Bank, each Eligible Designee designated by such Designating Bank pursuant to Section 9.07(a). "Designating Bank" means, with respect to each Designated Lender, the Bank that designated such Designated Lender pursuant to Section 9.07(a). "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 2.07(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Eligible Designee" means a special purpose corporation that (i) is organized under the laws of the United States or any state thereof, (ii) is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and (iii) issues (or the parent of which issues) commercial paper rated at least A-1 or the equivalent thereof by S & P or P-1 or the equivalent thereof by Moody's. "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, 5 11 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 2.07(c). "Euro-Dollar Reference Banks" means the principal London offices of Morgan Guaranty Trust Company of New York, NationsBank, N.A. and The Chase Manhattan Bank. "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 6.01. 6 12 "Existing Agreement" means the Amended and Restated 364-Day Credit Agreement dated as of January 30, 1998, as amended, among the Borrower, the banks party thereto and Morgan Guaranty Trust Company of New York, as agent for such banks. "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 8.01(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 9.03(b). 7 13 "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; 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; (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 8 14 (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 2.03; 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 2.03; 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; 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 2.03. 9 15 "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 2.07(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 2.03(d). 10 16 "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 8.01(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 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "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 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "Parent" means, with respect to any Bank, any Person controlling such Bank. 11 17 "Participant" has the meaning set forth in Section 9.06(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 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. "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 12 18 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. "Senior Managing Agent" means The First National Bank of Chicago in its capacity as a senior managing agent in respect of this Agreement. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "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. "Termination Date" means January 6, 2000, 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, $275,000,000 of such securities outstanding at 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. 13 19 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 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 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 14 20 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 3.02(c)) 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. 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, 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 2.01, 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 15 21 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, (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 9.01 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. 16 22 (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 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. 17 23 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 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 18 24 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 9.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the 19 25 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 2.04 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 2.07 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. 20 26 (c Upon receipt of each Bank's Note pursuant to Section 3.01(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, 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. 21 27 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 22 28 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. 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. (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 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). 23 29 (e Subject to Section 8.01(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 2.07(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 2.03. 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 2.03. 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 8.01 shall apply. SECTION 2.8. Facility 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). 24 30 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 8.01(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. 25 31 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 9.01. 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 2.07(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 2.04(a) or 2.11(d), the Borrower shall reimburse each Bank within 15 days after demand for any resulting 26 32 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 (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. 27 33 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 2.05; (c) opinions of 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 and E-2 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; (e) evidence satisfactory to the Administrative Agent of the payment of all principal of and interest on any loans outstanding under, and of all fees accrued under, the Existing Agreement up to but excluding the Effective Date; (f) evidence satisfactory to the Administrative Agent 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; and (g) 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 28 34 and binding on all parties hereto. The Banks which are parties to the Existing Agreement, constituting the "Required Banks" under the Existing Agreement, and the Borrower agree that the Commitments under the Existing Agreement shall terminate automatically on the Effective Date without need for further action by any party to the Existing Agreement. 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 Effective Date shall have occurred on or prior to January 11, 1999; (b) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be; (c) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (d) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (e) the fact that the representations and warranties of the Borrower contained in this Agreement (except, in the case of a Refunding Borrowing, the representations and warranties set forth in Sections 4.04(c), 4.05 and 4.07 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 (c), (d) and (e) 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 29 35 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, 1997 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 1997 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, 1998 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). 30 36 (c) Since September 30, 1998 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 31 37 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. SECTION 4.12. Year 2000 Readiness. The Borrower has (i) initiated a review and assessment of all areas within the business and operations of the Borrower and each of its Subsidiaries (including those areas affected by suppliers 32 38 and vendors) that could be adversely affected by the "Year 2000 Problem"(that is, the risk that computer applications used by it or any of its subsidiaries (or their respective suppliers and vendors) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis and (iii) to date, implemented such plan in accordance with such timetable. The Borrower reasonably believes that all mission-critical computer applications that are material to the business or operations of the Borrower or any of its Subsidiaries will on a timely basis be able to perform properly date-sensitive functions for all dates before and from and after January 1, 2000, except to the extent that a failure to do so could not reasonably be expected to have any material adverse effect on the business, financial position, results of operations or prospects of the Borrower and its Subsidiaries taken 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 100 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 50 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 33 39 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 5.07 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; 34 40 (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. Information required to be delivered pursuant to clauses 5.01(a), 5.01(b), 5.01(f) or 5.01(g) above shall be deemed to have been delivered on the date on which the Borrower provides notice to the Banks that such information has been posted on the Borrower's website on the Internet at the website address listed on the signature pages hereof, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Banks without charge; provided that (i) such notice may be included in a certificate delivered pursuant to clause 5.01(c) 35 41 and (ii) the Borrower shall deliver paper copies of the information referred to in clauses 5.01(a), 5.01(b), 5.01(f) or 5.01(g) to any Bank which requests such delivery. 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 5.03 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 5.04 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 36 42 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 5.10 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 74.0% of Consolidated Total Capitalization. (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. 37 43 SECTION 5.8. Minimum Net Worth. Consolidated Net Worth will at no time be less than an amount equal to the sum of (a) $1,236,000,000 plus (b) 50% of Consolidated Net Income for each fiscal quarter of the Borrower ending after December 30, 1998 and at or prior to such time (but only if such Consolidated Net Income for such fiscal quarter is a positive amount). SECTION 5.9. 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 assets of any Person existing at the time such Person becomes a Subsidiary and not created in contemplation of such event; (c) 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; (d) 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; (e) statutory or common law Liens of or upon deposits of cash in favor of banks or other depository institutions; and (f) 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 5.10. 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: 38 44 (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 5.11. 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 5.12. 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: (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; 39 45 (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.07 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; (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; 40 46 (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 41 47 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 6.01(c) or 6.01(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. 42 48 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 43 49 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 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 of the Co-Documentation Agents or the Senior Managing Agent, in its capacity as such an Agent. 44 50 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 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 45 51 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 46 52 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. (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 8.03, 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 47 53 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 8.04, 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 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 8.04) 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 9.01, 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 8.04) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) 48 54 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 8.04(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 8.04(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 8.04, 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 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 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 49 55 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 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, 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 50 56 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 exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. The 51 57 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: (a) 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; or (b) unless signed by a Designated Lender or its Designating Bank, subject any Designated Lender to any additional obligation hereunder or otherwise affect its rights hereunder as described in Section 9.07. 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 52 58 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 9.05(a) 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, unless the Administrative Agent otherwise agrees in writing) 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, 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 if at the time an Event of Default shall be continuing, no such consent of the Borrower 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 8.04. 53 59 (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 8.03 or 8.04 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 8.02, 8.03 or 8.04 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. Designated Lender. (a) Subject to the terms and conditions set forth in this Section 9.07(a), any Bank may from time to time elect to designate an Eligible Designee to provide all or any part of Loans to be made by such Bank pursuant to this Agreement, provided the designation of an Eligible Designee by any Bank for purposes of this Section 9.07(a) shall be subject to the approval of the Borrower and the Administrative Agent, which consent shall not be unreasonably withheld. Upon the execution by parties to each such designation of an agreement substantially in the form of Exhibit H hereto (a "Designation Agreement") and the acceptance thereof by the Borrower and the Administrative Agent, the Eligible Designee shall become a Designated Lender for purposes of this Agreement. The Designating Bank shall thereafter have the right to permit such Designated Lender to provide all or a portion of the Loans to be made by such Designating Bank pursuant to Section 2.01 or 2.03, and the making of such Loans or portion thereof shall satisfy the obligation of the Designating Bank to the same extent, and as if, such Loan were made by the Designating Bank. As to any Loan made by it, each Designated Lender shall have all the rights a Bank making such Loan would have had under this Agreement and otherwise provided, (x) that all voting rights under this Agreement shall be exercised solely by the Designating Bank and (y) each Designating Bank shall remain solely responsible to the other parties hereto for its obligations under this Agreement, including all obligations of a Bank in respect of Loans made by its Designated Lender. No additional Note shall be required with regard to Loans provided by a Designated Lender; provided, however, to the extent any Designated Lender shall advance funds, the Designating Bank shall be deemed to hold the Note in its possession as an agent for such Designated Lender to the extent of the Loan funded by such Designated Lender. Such Designating Bank shall act as administrative agent for its Designated Lender and give and receive notices and other communications hereunder. Any payments for the account of any Designated Lender shall be paid to its Designating Bank as administrative agent for such Designated Lender and neither the Borrower nor the Administrative Agent shall be responsible for any Designating Bank's application of any such payments. In addition, any Designated Lender may (i) with notice to, 54 60 but without the prior written consent of the Borrower and the Administrative Agent, assign all or portions of its interest in any Loans to its Designating Bank or to any financial institutions consented to by the Borrower and the Administrative Agent (it being understood that such consent shall not be unreasonably withheld) providing liquidity and/or credit facilities to or for the account of such Designated Lender to support the funding or maintenance of Loans made by such Designated Lender and (ii) subject to advising any such Person that such information is to be treated as confidential in accordance with such Person's customary practices for dealing with confidential, non-public information, disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any guarantee, surety, credit or liquidity enhancement to such Designated Lender. (b) Each party to this Agreement hereby agrees that it shall not institute against, or join any other person in instituting against, any Designated Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other proceedings under any federal or state bankruptcy or similar law, for one year and a day after the payment in full of all outstanding senior indebtedness of any Designated Lender; provided that the Designating Bank for each Designated Lender hereby agrees to indemnify, save, and hold harmless each other party hereto for any loss, cost, damage and expense arising out of their inability to institute any such proceeding against such Designated Lender. This Section 9.07(b) shall survive the termination of this Agreement. SECTION 9.8. 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 9.9. 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 9.10. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same 55 61 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. SECTION 9.11. 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. 56 62 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/ Rose M. Robeson ----------------------------------- Title: Vice President and Treasurer 370 Van Gordon Street Lakewood, CO 80228-8304 Attention: Rose Robeson Facsimile number: 303-763-3155 63 Commitments: Administrative Agent $35,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Stacey L. Haimes ------------------------------------ Title: Vice President Co-Documentation Agents $35,000,000 THE CHASE MANHATTAN BANK By: /s/ Peter M. Ling ------------------------------------ Title: Vice President $35,000,000 NATIONSBANK, N.A. By: /s/ David C. Rubenking ------------------------------------ Title: Senior Vice President Senior Managing Agent $35,000,000 THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Alan C. Brown ------------------------------------ Title: First Vice President Managing Agents $30,000,000 ABN AMRO BANK N.V. By: /s/ Robert J. Cunningham ------------------------------------ Title: Group Vice President By: /s/ Jamie A. Conn ------------------------------------ Title: Vice President 64 $30,000,000 CITIBANK, N.A. By: /s/ Mark Stanfield Packard ------------------------------------ Title: Vice President $30,000,000 COMMERZBANK AG, LOS ANGELES BRANCH By: /s/ Christian Jagenberg ------------------------------------ Title: Senior Vice President and Manager By: /s/ Carl Kemmerer ------------------------------------ Title: Assistant Treasurer $30,000,000 CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Philippe Soustra ------------------------------------ Title: Senior Vice President $30,000,000 CREDIT SUISSE FIRST BOSTON By: /s/ James P. Moran ------------------------------------ Title: Director By: /s/ Douglas E. Maher ------------------------------------ Title: Vice President $30,000,000 FIRST UNION NATIONAL BANK By: /s/ Michael J. Kolosowsky ------------------------------------ Title: Vice President 65 $30,000,000 TORONTO DOMINION (TEXAS), INC. By: /s/ Alva J. Jones ------------------------------------ Title: Vice President Co-Agents $27,000,000 BAYERISCHE HYPO-und VEREINSBANK AG, LOS ANGELES AGENCY By: /s/ Jarunee Hanpachern ------------------------------------ Title: Assistant Vice President By: /s/ Pamela J. Gillons ------------------------------------ Title: Associate Director $27,000,000 NORWEST BANK DENVER, N.A. By: /s/ Thomas M. Foncannon ------------------------------------ Title: Senior Vice President $27,000,000 THE BANK OF NOVA SCOTIA By: /s/ Jon Burckin ------------------------------------ Title: Relationship Manager $27,000,000 U.S. BANK NATIONAL ASSOCIATION By: /s/ Charles S. Searle ------------------------------------ Title: Senior Vice President Participants $21,000,000 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Michael E. Higgins ------------------------------------ Title: Vice President 66 By: /s/ Robert Preminger ------------------------------------ Title: Assistant Treasurer $21,000,000 SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Richard A. Erbert ------------------------------------ Title: Vice President $21,000,000 THE BANK OF NEW YORK By: /s/ Ian K. Stewart ------------------------------------ Title: Senior Vice President $21,000,000 THE NORTHERN TRUST COMPANY By: /s/ John E. Burda ------------------------------------ Title: Second Vice President $21,000,000 WACHOVIA BANK, N.A. By: /s/ Michael Sims ------------------------------------ Title: Vice President $21,000,000 WESTDEUTSCHE LANDESBANK GIROZENTRALE By: /s/ Richard J. Pearse ------------------------------------ Title: Managing Director By: /s/ Elisabeth R. Wilds ------------------------------------ Title: Associate 67 $16,000,000 THE BANK OF TOKYO-MITSUBISHI, LTD. By: /s/ David L. Denbina, P.E. ------------------------------------ Title: Vice President and Manager Total Commitments $600,000,000 ============ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: /s/ Stacey L. Haimes ------------------------------------ Title: Vice President 60 Wall Street New York, New York 10260-0060 Attention: Stacey L. Haimes Facsimile number: 212-648-5018 68 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 Status I II III IV V ==================================================================================================== Euro-Dollar Margin Utilization < 25% 0.40% 0.50% 0.70% 0.925% 1.20% Utilization > 25% 0.525% 0.625% 0.825% 1.05% 1.325% - ==================================================================================================== CD Margin Utilization < 25% 0.525% 0.625% 0.825% 1.05% 1.325% Utilization > 25% 0.65% 0.75% 0.95% 1.175% 1.45% - ==================================================================================================== Facility Fee Rate 0.10% 0.125% 0.175% 0.20% 0.30% ====================================================================================================
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 , the Borrower's commercial paper is rated A2 or higher by S&P and P2 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, no other Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status exists at any date. 69 "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 25%. The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities and/or commercial paper, as the case may be, 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. 70 EXHIBIT A NOTE New York, New York January 8, 1999 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. 71 This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of January 8, 1999 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: 72 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------------------------- Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 73 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 8, 1999 among the Borrower, the Banks listed on the signature pages thereof and the Administrative Agent We hereby give notice pursuant to Section 2.03 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. 74 Terms used herein have the meanings assigned to them in the Credit Agreement. K N ENERGY, INC. By ----------------------------- Title: 75 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 364-Day Credit Agreement dated as of January 8, 1999 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 76 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. 77 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 8, 1999 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%). 78 EXHIBIT E-1 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 8, 1999 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 3.01(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. 79 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, 2 80 EXHIBIT E-2 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 8, 1999 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 3.01(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 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 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 the United States of America or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or 81 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. 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. 4. 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. 5. 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 federal laws of the United States of America. 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. In rendering the opinion in paragraph 3 above, (i) insofar as such opinion involves matters governed by the laws of the State of Kansas, I have relied, without independent investigation, upon the opinion of Polsinelli, White, Vardeman & Shalton, delivered to you pursuant to Section 3.01(c) of the Credit Agreement and (ii) insofar as such opinion includes matters governed by the laws of the State of New York, I have assumed such laws are the same as the laws of the State of Colorado. 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 my prior written consent. Very truly yours, 2 82 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 8, 1999 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 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 83 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 3.01(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, 2 84 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 8, 1999 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 85 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. 2 86 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 9.06(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 9.06(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. 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: 3 87 K N ENERGY, INC. By --------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By --------------------------------- Title: 4 88 EXHIBIT H DESIGNATION AGREEMENT Dated _____, 19__ Reference is made to the $600,000,000 364-Day Credit Agreement dated as of January 8, 1999 ([as amended or otherwise modified from time] to time, the "Credit Agreement") 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. Terms defined in the Credit Agreement are used herein as therein defined. _______ (the "Designator"), _______ (the "Designee"), and the Borrower, agree as follows: 1. The Designator hereby designates the Designee, and the Designee hereby accepts such designation, as its Designated Lender under the Credit Agreement. 2. The Designator makes no representations or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Designee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Article 5 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Designation Agreement; (ii) agrees that it will, independently and without reliance upon the Agents, the Designator 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 it may be permitted to take under the Credit Agreement; (iii) confirms that it is an Eligible Designee; (iv) appoints and authorizes the Designator as its administrative agent and attorney-in-fact and grants the Designator an irrevocable power of attorney to receive payments made for the benefit of the Designee under the Credit Agreement and to deliver and receive all communications and notices under the Credit Agreement, if any, that Designee is obligated to deliver or has the right to receive thereunder; (v) acknowledges that it is subject to and bound by the confidentiality provisions of the Credit Agreement (except as permitted under Section 9.07(a) thereof); and (vi) acknowledges that the Designator retains the sole right and responsibility to vote under the Credit Agreement, including, without limitation, the right to approve any 89 amendment, modification or waiver of any provision of the Credit Agreement, and agrees that the Designee shall be bound by all such votes, approvals, amendments, modifications and waivers and all other agreements of the Designator pursuant to or in connection with the Credit Agreement, all subject to Section 9.05(b) of the Credit Agreement. 4. Following the execution of this Designation Agreement by the Designator, the Designee and the Borrower, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Designation Agreement shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on the signature page hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date (a) the Designee shall have the right to make Loans as a Bank pursuant to Section 2.01 or 2.03 of the Credit Agreement and the rights of a Bank related thereto and (b) the making of any such Loans by the Designee shall satisfy the obligations of the Designator under the Credit Agreement to the same extent, and as if, such Loans were made by the Designator. 6. This Designation Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties have caused this Designation Agreement to be executed by their respective officers hereunto duly authorized, as of the date first above written. Effective Date*: ______ , ____ [NAME OF DESIGNATOR] By: --------------------------- Name: ------------------------- Title: ------------------------ - --------------------- *This date should be no earlier than the date of acceptance by the Administrative Agent. 2 90 [NAME OF DESIGNEE] By: --------------------------- Name: ------------------------- Title: ------------------------ K N ENERGY, INC. By: --------------------------- Name: ------------------------- Title: ------------------------ Accepted and Approved this __ day of _____, ____ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By: ------------------------------------ Title: 3 EX-4.(L) 5 AMENDMENT NO. 2 TO $400,000,000 FIVE-YEAR CREDIT 1 CONFORMED COPY AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT dated as of January 8, 1999 to the Amended and Restated Five-Year Credit Agreement dated as of January 30, 1998 (as heretofore amended, the "Credit Agreement") among K N ENERGY, INC. (the "Borrower"), the BANKS party thereto (the "Banks") 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, the parties hereto desire to amend the Credit Agreement as set forth below; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to such Credit Agreement as amended hereby. SECTION 2. Amendments to the Credit Agreement. (a) Definitions. (i) Section 1.01 is amended by the addition in its appropriate alphabetical position of the following defined terms: "PEPS Units" means the 8.25% Premium Equity Participating Security Units issued by the Borrower in November 1998. (b) Updated Financial Information. Each reference to "1996" in Section 4.04(a) and in the definition of "Borrower's 1996 Form 10-K" is changed to "1997." Each reference to "1997" in Section 4.04(b) and (c) and in the definition of "Borrower's Latest Form 10-Q" is changed to "1998". (c) Year 2000 Readiness. Article 4 is amended by inserting the following Section 4.13: 2 Section 4.13. Year 2000 Readiness. The Borrower has (i) initiated a review and assessment of all areas within the business and operations of the Borrower and each of its Subsidiaries (including those areas affected by suppliers and vendors) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by it or any of its subsidiaries (or their respective suppliers and vendors) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis and (iii) to date, implemented such plan in accordance with such timetable. The Borrower reasonably believes that all mission-critical computer applications that are material to the business or operations of the Borrower or any of its Subsidiaries will on a timely basis be able to perform properly date-sensitive functions for all dates before and from and after January 1, 2000, except to the extent that a failure to do so could not reasonably be expected to have any material adverse effect on the business, financial position, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole. (d) Information. (i) Section 5.01 is amended by changing the respective numbers of days specified in subsections (a) and (b) to"100" and "50". (ii) Section 5.01 is further amended by the addition of the following concluding paragraph: Information required to be delivered pursuant to clauses 5.01(a), 5.01(b), 5.01(f) or 5.01(g) above shall be deemed to have been delivered on the date on which the Borrower provides notice to the Banks that such information has been posted on the Borrower's website on the Internet at the website address listed on the signature pages hereof, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Banks without charge; provided that (i) such notice may be included in a certificate delivered pursuant to clause 5.01(c) and (ii) the Borrower shall deliver paper copies of the information referred to in clauses 5.01(a), 5.01(b), 5.01(f) or 5.01(g) to any Bank which requests such delivery. (e) Debt. Section 5.07(a) is amended to read in its entirety as follows: (a) Consolidated Debt of the Borrower will at no time exceed the MLP of Consolidated Total Capitalization. "MLP" means Maximum Leverage Percentage, which is 74.00%, subject to adjustment after the date hereof as follows: upon issuance of common equity securities pursuant to 2 3 the PEPS Units at the maturity thereof, the MLP will be reduced to 67.00%. (f) Minimum Net Worth. Section 5.08 is amended to read in its entirety as follows: SECTION 5.08. Minimum Net Worth. Consolidated Net Worth will at no time be less than an amount equal to the sum of (a) $1,236,000,000 plus (b) 50% of Consolidated Net Income for each fiscal quarter of the Borrower ending after December 30, 1998 (but only if such Consolidated Net Income for such fiscal quarter is a positive amount). (g) Minimum Interest Coverage Ratio. Section 5.09 is deleted and reserved for future use. (h) Successors and Assigns. Section 9.06 (c) is amended by inserting immediately after the number "$10,000,000" the words ", unless the Administrative Agent otherwise agrees in writing". (i) Pricing Schedule. (i) The table in the Pricing Schedule of the Credit Agreement is amended to read as follows:
Level Level Level Level Level Status I II III IV V - ------------------------------------------------------------------------------------- Euro-Dollar Margin Utilization < 25% 0.375% 0.475% 0.675% 0.875% 1.125% Utilization > 25% 0.500% 0.600% 0.800% 1.000% 1.250% - CD Margin Utilization < 25% 0.500% 0.600% 0.800% 1.000% 1.250% Utilization > 25% 0.625% 0.725% 0.925% 1.125% 1.375% - Facility Fee Rate 0.125% 0.150% 0.200% 0.250% 0.375%
(ii) The definition of "Level II Status" is amended to read in its entirety as follows: "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 the Borrower's commercial paper is rated A2 or higher by S&P and P2 or higher by Moody's and (ii) Level I Status does not exist. 3 4 (iii) The definition of "Level V Status" is amended to read in its entirety as follows: "Level V Status" exists at any date if, at such date no other Status exists. (iv) The definition of "Level VI Status" is deleted. (v) The definition of "Status" is amended to read in its entirety as follows: "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status exists at any date. (vi) The definition of "Utilization" is amended to read in its entirety as follows: "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 or Letter of Credit Liabilities remain outstanding following termination of the Commitments, Utilization shall be deemed to be in excess of 25%. (vii) The definition of "Related Agreement" is deleted. (viii) The concluding paragraph of the Pricing Schedule is amended to read in its entirety as follows: The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities or commercial paper, as the case may be, 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. SECTION 3. Representations of Borrower. The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 4 of the Credit Agreement will be true on and as of the Amendment Effective Date and (ii) no Default under the Credit Agreement will have occurred and be continuing on such date. 4 5 SECTION 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 5. Counterparts. This Amendment 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. SECTION 6. Effectiveness. This Amendment shall become effective as of the date hereof on the date (the "Amendment Effective Date") when the Administrative Agent shall have received from each of the Borrower and the Required Banks a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Administrative Agent) that such party has signed a counterpart hereof. 5 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. K N ENERGY, INC. By /s/ Rose M. Robeson ------------------------------------ Title: Vice President and Treasurer 7 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Stacey L. Haimes ---------------------------------------- Title: Vice President BANK OF AMERICA NT & SA By /s/ David C. Rubenking ---------------------------------------- Title: Senior Vice President THE CHASE MANHATTAN BANK By /s/ Peter M. Ling ---------------------------------------- Title: Vice President NATIONSBANK, N.A. By /s/ David C. Rubenking ---------------------------------------- Title: Senior Vice President 8 COMMERZBANK AG LOS ANGELES BRANCH By /s/ Christian Jagenberg ---------------------------------------- Title: Senior Vice President and Manager By /s/ Carl Kemmerer ---------------------------------------- Title: Assistant Treasurer THE FIRST NATIONAL BANK OF CHICAGO By /s/ Alan C. Brown ---------------------------------------- Title: First Vice President SOCIETE GENERALE SOUTHWEST AGENCY By /s/ Richard A. Erbert ---------------------------------------- Title: Vice President 9 BAYERISCHE HYPO-und VEREINSBANK AG, LOS ANGELES AGENCY By /s/ Jarunee Hanpachern ---------------------------------------- Title: Assistant Vice President By /s/ Pamela J. Gillons ---------------------------------------- Title: Associate Director THE NORTHERN TRUST COMPANY By /s/ John E. Burda ---------------------------------------- Title: Second Vice President THE BANK OF NOVA SCOTIA By /s/ Jon Burckin ---------------------------------------- Title: Relationship Manager 10 BARCLAYS BANK PLC By ---------------------------------------- Title: CANADIAN IMPERIAL BANK OF COMMERCE By ---------------------------------------- Title: By ---------------------------------------- Title: CREDIT LYONNAIS NEW YORK BRANCH By /s/ Philippe Soustra ---------------------------------------- Title: Senior Vice President FIRST UNION NATIONAL BANK By /s/ Michael J. Kolosowsky ---------------------------------------- Title: Vice President 11 TORONTO DOMINION (TEXAS), INC. By /s/ Alva J. Jones ---------------------------------------- Title: Vice President UBS, AG, Stamford Branch By /s/ Robert W. Casey, Jr. ---------------------------------------- Title: Executive Director By /s/ Eric C. Hanson ---------------------------------------- Title: Associate Director THE BANK OF NEW YORK By /s/ Ian K. Stewart ---------------------------------------- Title: Senior Vice President CITIBANK, N.A. By /s/ Mark Stanfield Packard ---------------------------------------- Title: Vice President 12 U.S. BANK NATIONAL ASSOCIATION By /s/ Charles S. Searle ---------------------------------------- Title: Senior Vice President DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By /s/ Michael E. Higgins ---------------------------------------- Title: Vice President By /s/ Robert Preminger ---------------------------------------- Title: Assistant Treasurer KBC BANK N.V. By /s/ Marcel Claes ---------------------------------------- Title: Deputy General Manager By /s/ Michael V. Curran ---------------------------------------- Title: Vice President 13 WESTDEUTSCHE LANDESBANK GIROZENTRALE By /s/ Richard J. Pearse ---------------------------------------- Title: Managing Director By /s/ Elisabeth R. Wilds ---------------------------------------- Title: Associate WACHOVIA BANK, N.A. By /s/ Michael Sims ---------------------------------------- Title: Vice President WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By /s/ Greg Petruska ---------------------------------------- Title: Vice President THE BANK OF TOKYO-MITSUBISHI LTD. By /s/ David L. Denbina, P.E. ---------------------------------------- Title: Vice President and Manager 14 THE LONG-TERM CREDIT BANK OF JAPAN LIMITED By /s/ Sadao Muraoka ---------------------------------------- Title: Head of Southwest Region NORWEST BANK COLORADO, N.A. By /s/ Thomas M. Foncannon ---------------------------------------- Title: Senior Vice President EX-10.(AA) 6 DIRECTORS & EXECUTIVES DEFERRED COMPENSATION PLAN 1 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ EFFECTIVE JANUARY 1, 1998 COPYRIGHT(C) 1997 BY COMPENSATION RESOURCE GROUP, INC. ALL RIGHTS RESERVED 2 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ TABLE OF CONTENTS
Page ---- Purpose ......................................................................................................1 ARTICLE 1 Definitions....................................................................................1 ARTICLE 2 Eligibility, Enrollment, Commencement of Participation.........................................9 2.1 Eligibility....................................................................................9 2.2 Enrollment Requirements........................................................................9 2.3 Commencement of Participation..................................................................9 2.4 Termination of Participation and/or Deferrals..................................................10 ARTICLE 3 Deferral Commitments/Company Matching/Crediting/Taxes..........................................10 3.1 Minimum Deferrals..............................................................................10 3.2 Maximum Deferrals..............................................................................11 3.3 Election to Defer; Effect of Election Form.....................................................11 3.4 Withholding of Annual Deferral Amounts.........................................................12 3.5 Annual Company Matching Amount.................................................................12 3.6 Annual Company Profit Sharing Account..........................................................13 3.7 Stock Option Amount............................................................................13 3.8 Restricted Stock Amount........................................................................13 3.9 Investment of Trust Assets.....................................................................13 3.10 Sources of Stock...............................................................................13 3.11 Vesting........................................................................................14 3.12 Crediting/Debiting of Account Balances.........................................................15 3.13 FICA and Other Taxes...........................................................................18 3.14 Distribution...................................................................................18 ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election....................19 4.1 Short-Term Payout..............................................................................19 4.2 Other Benefits Take Precedence Over Short-Term.................................................19 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies..........................19 4.4 Withdrawal Election............................................................................19 ARTICLE 5 Retirement Benefit.............................................................................20 5.1 Amount of Retirement Benefit...................................................................20 5.2 Payment of Retirement Benefit..................................................................20 5.3 Death Prior to Completion of Retirement Benefit................................................20
-i- 3 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 6 Pre-Retirement Survivor Benefit................................................................21 6.1 Amount of Pre-Retirement Survivor Benefit......................................................21 6.2 Payment of Pre-Retirement Survivor Benefit.....................................................21 ARTICLE 7 Termination Benefit............................................................................21 7.1 Amount of Termination Benefit..................................................................21 7.2 Payment of Termination Benefit.................................................................21 ARTICLE 8 Disability Waiver and Benefit..................................................................22 8.1 Disability Waiver..............................................................................22 8.2 Continued Eligibility; Disability Benefit......................................................22 ARTICLE 9 Beneficiary Designation........................................................................23 9.1 Beneficiary....................................................................................23 9.2 Beneficiary Designation; Change; Spousal Consent...............................................23 9.3 Acknowledgement................................................................................23 9.4 No Beneficiary Designation.....................................................................23 9.5 Doubt as to Beneficiary........................................................................23 9.6 Discharge of Obligations.......................................................................24 ARTICLE 10 Leave of Absence...............................................................................24 10.1 Paid Leave of Absence..........................................................................24 10.2 Unpaid Leave of Absence........................................................................24 ARTICLE 11 Termination, Amendment or Modification.........................................................24 11.1 Termination....................................................................................24 11.2 Amendment......................................................................................25 11.3 Plan Agreement.................................................................................25 11.4 Effect of Payment..............................................................................25 ARTICLE 12 Administration.................................................................................26 12.1 Committee Duties...............................................................................26 12.2 Agents.........................................................................................26 12.3 Binding Effect of Decisions....................................................................26 12.4 Indemnity of Committee.........................................................................26 12.5 Employer Information...........................................................................26
-ii- 4 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 13 Other Benefits and Agreements.................................................................16 13.1 Coordination with Other Benefits..............................................................16 ARTICLE 14 Claims Procedures.............................................................................27 14.1 Presentation of Claim.........................................................................27 14.2 Notification of Decision......................................................................27 14.3 Review of a Denied Claim......................................................................27 14.4 Decision on Review............................................................................28 14.5 Legal Action..................................................................................28 ARTICLE 15 Trust.........................................................................................28 15.1 Establishment of the Trust....................................................................28 15.2 Interrelationship of the Plan and the Trust...................................................28 15.3 Distributions From the Trust..................................................................29 15.4 Stock Transferred to the Trust................................................................29 ARTICLE 16 Miscellaneous.................................................................................29 16.1 Status of Plan................................................................................29 16.2 Unsecured General Creditor....................................................................29 16.3 Employer's Liability..........................................................................29 16.4 Nonassignability..............................................................................29 16.5 Not a Contract of Employment..................................................................30 16.6 Furnishing Information........................................................................30 16.7 Terms.........................................................................................30 16.8 Captions......................................................................................30 16.9 Governing Law.................................................................................30 16.10 Notice........................................................................................30 16.11 Successors....................................................................................31 16.12 Spouse's Interest.............................................................................31 16.13 Validity......................................................................................31 16.14 Incompetent...................................................................................31 16.15 Court Order...................................................................................31 16.16 Distribution in the Event of Taxation.........................................................32 16.17 Insurance.....................................................................................32 16.18 Legal Fees To Enforce Rights After Change in Control..........................................32
-iii- 5 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ K N ENERGY, INC. DIRECTORS AND EXECUTIVES DEFERRED COMPENSATION PLAN Effective January 1, 1998 PURPOSE The purpose of the K N Energy, Inc. Directors and Executives Deferred Compensation Plan (the "Plan") is to provide specified benefits to a select group of management and highly compensated Employees and Directors who contribute materially to the continued growth, development and future business success of K N Energy, Inc., a Kansas corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 DEFINITIONS For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of (i) the Deferral Account balance, (ii) the vested Company Matching Account balance, (iii) the Company Profit Sharing Account balance, (iv) the Stock Option Account balance and (v) the Restricted Stock Account balance. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.2 "Annual Incentive" shall mean any compensation, in addition to Base Annual Salary relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, payable to a Participant as an Employee under any Employer's Annual Incentive, bonus or cash incentive plans, excluding stock options and restricted stock. 1.3 "Annual Company Matching Amount" for any one Plan Year shall be the amount determined in accordance with Section 3.5. 1.4 "Annual Company Profit Sharing Amount" for any one Plan Year shall be the amount determined in accordance with Section 3.6. -1- 6 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ 1.5 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary, Annual Incentive and Director's Fees that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.6 "Annual Installment Method" shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: The Account Balance of the Participant shall be calculated as of the close of business on the last business day of the year. The annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a 10 year Annual Installment Method, the first payment shall be 1/10 of the Account Balance, calculated as described in this definition. The following year, the payment shall be 1/9 of the Account Balance, calculated as described in this definition. Each annual installment shall be paid on or as soon as practicable after the last business day of the applicable year. 1.7 "Annual Restricted Stock Amount" shall mean, with respect to a Participant for any one Plan Year, the value of unvested restricted stock under any K N Energy, Inc. stock incentive plan, deferred in accordance with Section 3.8 of this Plan. 1.8 "Annual Stock Option Amount" shall mean, with respect to a Participant for any one Plan Year, the amount of Qualifying Gains deferred on Eligible Stock Option exercise in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date of such Eligible Stock Option exercise. 1.9 "Base Annual Salary" shall mean the annual cash compensation relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, excluding bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. -2- 7 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ 1.10 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.11 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.12 "Board" shall mean the board of directors of the Company. 1.13 "Change in Control" shall mean the occurrence of one or more of the following events: (a) any "person," as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities and twenty-five percent (25%) or more of the seats on the Board of Directors of the Company comes under the control of that same 30% beneficial owner; or (b) during any period of two consecutive years (not including any period prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has or has threatened to enter into an agreement with the Company to effect a transaction described in (a), (c) or (d) of this Paragraph) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason other than normal retirement, death or disability to constitute at least a majority thereof, or (c) the shareholders of the Company approve a merger or consolidation of the Company with any other person, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities for the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, and (ii) a merger in which no "person" (as defined above) acquires more than 30% of the combined -3- 8 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ voting power of the Company's then outstanding securities and twenty-five percent (25%) or more of the seats on the Board of Directors of the Company comes under the control of that same 30% beneficial owner, or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). 1.14 "Chief Executive Officer" shall mean the chief executive officer of the Company. 1.15 "Claimant" shall have the meaning set forth in Section 14.1. 1.16 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.17 "Committee" shall mean the committee described in Article 12. 1.18 "Company" shall mean K N Energy, Inc., a Kansas corporation, and any successor to all or substantially all of the Company's assets or business. 1.19 "Company Matching Account" shall mean (i) the sum of all of a Participant's Annual Company Matching Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Company Matching Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Matching Account. 1.20 "Company Profit Sharing Account" shall mean (i) the sum of all of a Participant's Annual Company Profit Sharing Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Company Profit Sharing Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Profit Sharing Account. 1.21 "Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred -4- 9 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ pursuant to this limitation shall continue to be credited/debited with additional amounts in accordance with Section 3.12 below, even if such amount is being paid out in installments. The amounts so deferred and amounts credited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. 1.22 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account. 1.23 "Director" shall mean any member of the board of directors of any Employer. 1.24 "Director's Fees" shall mean the annual fees paid by any Employer, including retainer fees and meetings fees, as compensation for serving on the board of directors. 1.25 "Disability" shall mean a period of disability during which a Participant qualifies for permanent disability benefits under the Participant's Employer's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant is "permanently and totally disabled" as that term is defined under Code Section 22(e)(3). 1.26 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.27 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.28 "Eligible Stock Option" shall mean one or more non-qualified stock option(s) selected by the Committee in its sole discretion and exercisable under a plan or arrangement of any Employer permitting a Participant under this Plan to defer gain with respect to such option. 1.29 "Employee" shall mean a person who is an employee of any Employer. 1.30 "Employer(s)" shall mean the Company and any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor. -5- 10 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ 1.31 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.32 "Participant" shall mean for all purposes of this Plan other than the Annual Profit Sharing Amount any Employee or Director (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. For purposes of the Annual Profit Sharing Amount, "Participant" shall mean any Employee (i) who is selected to participate in the Plan, (ii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iii) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (iv) who commences participation in the Plan, and (v) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce. 1.33 "Plan" shall mean the Company's Directors and Executives Deferred Compensation Plan, effective January 1, 1998, into which the Company's 1987 Director's Deferred Fee Plan, as amended, and a portion of the Company's Non-Qualified Profit Sharing Restoration Plan, have been merged effective January 1, 1998, all of which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time. 1.34 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant. 1.35 "Plan Year" shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year. 1.36 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.37 "Qualifying Gain" shall mean the value accrued upon exercise of an Eligible Stock Option (i) using a Stock-for-Stock payment method and (ii) having an aggregate fair market value -6- 11 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ in excess of the total Stock purchase price necessary to exercise the option. In other words, the Qualifying Gain upon exercise of an Eligible Stock Option equals the total market value of the shares (or share equivalent units) acquired minus the total stock purchase price. For example, assume a Participant elects to defer the Qualifying Gain accrued upon exercise of an Eligible Stock Option to purchase 1000 shares of Stock at an exercise price of $20 per share, when Stock has a current fair market value of $25 per share. Using the Stock-for-Stock payment method, the Participant would deliver 800 shares of Stock (worth $20,000) to exercise the Eligible Stock Option and receive, in return, 800 shares of Stock plus a Qualifying Gain (in this case, in the form of an unfunded and unsecured promise to pay money or property in the future) equal to $5,000 (i.e., the current value of the remaining 200 shares of Stock). 1.38 "Restricted Stock" shall mean unvested shares of restricted stock selected by the Committee in its sole discretion and awarded to the Participant under any K N Energy, Inc. stock incentive plan. 1.39 "Restricted Stock Account" shall mean (i) the sum of the Participant's Annual Restricted Stock Amounts, plus (ii) amounts credited/debited in accordance with all the applicable crediting/debiting provisions of this Plan that relate to the Participant's Restricted Stock Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Restricted Stock Account. 1.40 "Restricted Stock Amount" shall mean, for any grant of Restricted Stock, the amount of such Restricted Stock deferred in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date such Restricted Stock would otherwise vest, but for the election to defer. 1.41 "Retirement", "Retire(s)" or "Retired" for purposes of the Company Profit Sharing Account, shall have the same meaning as such term(s) have in the K N Energy, Inc. Profit Sharing Plan, as it may be amended from time to time. For all other purposes under this Plan, such term(s) shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five (55) with ten (10) Years of Service; and shall mean with respect to a Director who is not an Employee, severance of his or her directorships with all Employers on or after the later of (y) the attainment of age seventy (70), or (z) in the sole discretion of the Committee, an age later than age seventy (70). If a Participant is both an Employee and a Director, Retirement shall not occur until he or she Retires as both an Employee and a Director, which Retirement shall be deemed to be a Retirement as a Director; provided, however, that such a Participant may elect, at least three years prior to Retirement and in accordance with the policies and procedures established by the Committee, to Retire for purposes of this Plan at the time he -7- 12 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ or she Retires as an Employee, which Retirement shall be deemed to be a Retirement as an Employee. 1.42 "Retirement Benefit" shall mean the benefit set forth in Article 5. 1.43 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.44 "Stock" shall mean K N Energy, Inc. common stock, $5 par value, or any other equity securities of the Company designated by the Committee. 1.45 "Stock Option Account" shall mean the sum of (i) the Participant's Annual Stock Option Amounts, plus (ii) amounts credited/debited in accordance with all the applicable crediting/debiting provisions of this Plan that relate to the Participant's Stock Option Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Stock Option Account. 1.46 "Stock Option Amount" shall mean, for any Eligible Stock Option, the amount of Qualifying Gains deferred in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day closest to the date of exercise of such Eligible Stock Option. 1.47 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.48 "Termination of Employment" shall mean the severing of employment with all Employers, or service as a Director of all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. If a Participant is both an Employee and a Director, a Termination of Employment shall occur only upon the termination of the last position held; provided, however, that such a Participant may elect, at least three years before Termination of Employment and in accordance with the policies and procedures established by the Committee, to be treated for purposes of this Plan as having experienced a Termination of Employment at the time he or she ceases employment with an Employer as an Employee. 1.49 "Trust" shall mean one or more trusts established pursuant to that certain Nonqualified Benefit Plans Trust Agreement, dated as of February 28, 1996 between the Company and the trustee named therein, as amended from time to time. 1.50 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a -8- 13 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.51 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. ARTICLE 2 ELIGIBILITY, ENROLLMENT, COMMENCEMENT OF PARTICIPATION 2.1 ELIGIBILITY. An Employee's eligibility for participation in this Plan shall be determined on an individual basis by recommendation from the Chief Executive Officer and approval by the Committee. Any Employee who satisfies all of the requirements of the preceding sentence, and who in addition is affected by the limitations of either Section 401(a)(17) or Section 415 of the Code with respect to the allocation of Company contributions under the K N Energy, Inc. Profit Sharing Plan, shall be eligible to participate in the Company Profit Sharing Amount under this Plan. In addition, Directors shall be eligible to participate in this Plan with respect to their Director's Fees. Notwithstanding the foregoing, however, no Employee shall be selected for participation in this Plan unless he or she qualifies as a member of a select group of management or as a highly compensated employee of the Company. 2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected Employee or Director shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within 30 days after he or she is selected and becomes eligible to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. 2.3 COMMENCEMENT OF PARTICIPATION. Provided an Employee or Director selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee or Director shall commence participation in the Plan on the first day of the Plan Year following the day on which the Employee or Director completes all enrollment requirements. If an Employee or a Director fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee or Director shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. -9- 14 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ 2.4 TERMINATION OF PARTICIPATION AND DEFERRALS. If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections and (iii) immediately distribute the Participant's then Account Balance as a Termination Benefit and terminate the Participant's participation in the Plan. ARTICLE 3 DEFERRAL COMMITMENTS/COMPANY MATCHING/CREDITING/TAXES 3.1 MINIMUM DEFERRALS. (a) BASE ANNUAL SALARY, ANNUAL INCENTIVE AND DIRECTOR'S FEES. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary, Annual Incentive and Director's Fees in the following minimum amounts for each deferral elected:
---------------------------------- -------------------------- DEFERRAL MINIMUM AMOUNT ---------------------------------- -------------------------- Base Annual Salary and/or Annual Incentive $2,000 ---------------------------------- -------------------------- Directors Fees $ 0 ---------------------------------- --------------------------
If an election is made for less than a stated minimum amount, or if no election is made, the amount deferred for that category of deferral shall be zero. (b) STOCK OPTION AMOUNT. For each Eligible Stock Option, a Participant may elect to defer, as his or her Stock Option Amount, the following minimum percentage of Qualifying Gain with respect to exercise of the Eligible Stock Option:
-------------------------------- ----------------------------- DEFERRAL MINIMUM PERCENTAGE -------------------------------- ----------------------------- Qualifying Gain 10% -------------------------------- -----------------------------
provided, however, that such Stock Option Amount shall be no less than the lesser of $20,000 or 100% of such Qualifying Gain. (c) RESTRICTED STOCK AMOUNT. For Restricted Stock, a Participant may elect to defer, as his or her Restricted Stock Amount, the following minimum percentage of the Participant's Restricted Stock: -10- 15 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================
------------------------------ ------------------------------ DEFERRAL MINIMUM PERCENTAGE ------------------------------ ------------------------------ Restricted Stock 10% ------------------------------ ------------------------------
provided, however, that the Annual Restricted Stock Amount shall be no less than the lesser of $20,000 or 100% of the Participant's Restricted Stock. 3.2 MAXIMUM DEFERRAL. (a) BASE ANNUAL SALARY, ANNUAL INCENTIVE AND DIRECTORS FEES. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary, Annual Incentive and Directors Fees up to the following maximum percentages for each deferral elected:
------------------------------ ----------------------------- DEFERRAL MAXIMUM PERCENTAGE ------------------------------ ----------------------------- Base Annual Salary 90% ------------------------------ ----------------------------- Annual Incentive 90% ------------------------------ ----------------------------- Directors Fees 100% ------------------------------ -----------------------------
For each Eligible Stock Option, a Participant may elect to defer, as his or her Stock Option Amount, Qualifying Gain up to the following maximum percentage with respect to exercise of the Eligible Stock Option:
------------------------------ ------------------------------ DEFERRAL MAXIMUM PERCENTAGE ------------------------------ ------------------------------ Qualifying Gain 100% ------------------------------ ------------------------------
Stock Option Amounts may also be limited by other terms or conditions set forth in the stock option plan or agreement under which such options are granted. 3.3 ELECTION TO DEFER; EFFECT OF ELECTION FORM. (a) FIRST PLAN YEAR. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. (b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the -11- 16 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year. (c) STOCK OPTION DEFERRAL. For an election to defer gain upon an Eligible Stock Option exercise to be valid: (i) a separate Election Form must be completed and signed by the Participant with respect to the Eligible Stock Option; (ii) the Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date the Participant elects to exercise the Eligible Stock Option; (iii) the Eligible Stock Option must be exercised using a Stock-for-Stock payment method; and (iv) the Stock actually or constructively delivered by the Participant to exercise the Eligible Stock Option must have been owned by the Participant during the entire six (6) month period prior to its delivery. (d) RESTRICTED STOCK. For an election to defer Restricted Stock Amounts to be valid: (i) a separate irrevocable Election Form must be completed and signed by the Participant, with respect to such Restricted Stock; and (ii) such Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date such Restricted Stock vests under the terms of the K N Energy, Inc. stock incentive plan. (e) SECURITIES LAW COMPLIANCE. Notwithstanding anything in this Plan to the contrary, no deferral election, exercise of an option, or form of consideration or payment that would otherwise constitute a non-exempt violation of Section 16(b) of the Exchange Act shall be permitted. 3.4 WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Annual Incentive and Directors Fees portion of the Annual Deferral Amount shall be withheld at the time the Annual Incentive or Directors Fees are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. 3.5 ANNUAL COMPANY MATCHING AMOUNT. An Employee's Annual Company Matching Amount for any Plan Year shall be equal to a percentage of the Employee's Annual Deferral Amount for such Plan Year, up to an amount that does not exceed 15% of the Employee's Base Annual Salary. The matching percentage to be applied to the Employee's Annual Deferral Amount shall be based on the Company's annual attainment of performance objectives announced prior to the commencement of the Plan Year during which the match will be earned. If a Participant is not employed by an Employer as of the last business day of a Plan Year other than by reason of his or her Retirement or death, the Annual Company -12- 17 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ Matching Amount for such Plan Year shall be zero. In the event of Retirement or death, a Participant shall be credited with the Annual Company Matching Amount, if any, for the Plan Year in which he or she Retires or dies. 3.6 ANNUAL COMPANY PROFIT SHARING AMOUNT. A Participant's Annual Profit Sharing Amount for any Plan Year shall be equal to the difference, if any, between (i) the contribution that the Company would have made to the K N Energy, Inc. Profit Sharing Plan and that would have been allocated to the Participant's account in such plan if there were no limitations due to Code Section 415 and 401(a)(17), and (ii) the Company contribution that was actually allocated to such Participant's account in such plan. 3.7 STOCK OPTION AMOUNT. Subject to any terms and conditions imposed by the Committee, Participants may elect to defer, under the Plan, Qualifying Gains attributable to an Eligible Stock Option exercise. Stock Option Amounts shall be credited/debited to the Participant on the books of the Employer at the time Stock would otherwise have been delivered to the Participant pursuant to the Eligible Stock Option exercise, but for the election to defer. 3.8 RESTRICTED STOCK AMOUNT. Subject to any terms and conditions imposed by the Committee, Participants may elect to defer, under the Plan, Restricted Stock Amounts. Restricted Stock Amounts shall be credited/debited to the Participant on the books of the Employer in connection with such an election at the time the Restricted Stock would otherwise vest under the terms of the K N Energy, Inc. stock incentive plan, but for the election to defer. 3.9 INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, including the disposition of Stock and reinvestment of the proceeds in one or more investment vehicles designated by the Committee. 3.10 SOURCES OF STOCK. If Stock is credited under the Plan in the Trust in connection with an Eligible Stock Option exercise or in connection with a deferral of Restricted Stock, the shares so credited shall be deemed to have originated, and shall be counted against the number of shares reserved, under such other plan, program or arrangement. -13- 18 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ 3.11 VESTING. (a) A Participant shall at all times be 100% vested in his or her Deferral Account, Stock Option Account and Restricted Stock Account. (b) A Participant shall be vested in his or her Company Matching Account as follows: (i) with respect to all benefits under this Plan other than the Termination Benefit, a Participant's vested Company Matching Account shall equal 100% of such Participant's Company Matching Account; and (ii) with respect to the Termination Benefit, a Participant's Company Matching Account shall vest on the basis of the Participant's Years of Service at the time the Participant experiences a Termination of Employment, in accordance with the following schedule:
--------------------------------------------- -------------------------------------------- YEARS OF SERVICE AT DATE OF VESTED PERCENTAGE OF TERMINATION OF EMPLOYMENT COMPANY MATCHING ACCOUNT --------------------------------------------- -------------------------------------------- Less than 1 year 0% --------------------------------------------- -------------------------------------------- 1 year or more, but less than 2 25% --------------------------------------------- -------------------------------------------- 2 years or more, but less than 3 50% --------------------------------------------- -------------------------------------------- 3 years or more, but less than 4 75% --------------------------------------------- -------------------------------------------- 4 years or more 100% --------------------------------------------- --------------------------------------------
(c) A Participant shall be vested in his or her Company Profit Sharing Account at any time to the same extent that he or she is vested in his or her Company contributions account under the K N Energy, Inc. Profit Sharing Plan, as amended from time to time. (d) Notwithstanding anything to the contrary contained in this Section 3.11, in the event of a Change in Control, a Participant's Company Matching Account shall immediately become 100% vested (if it is not already vested in accordance with the above vesting schedules). (e) Notwithstanding subsection (d), the vesting schedule for a Participant's Company Matching Account shall not be accelerated to the extent that the Committee determines that such acceleration would cause the deduction limitations of Section 280G of the Code to become effective. In the event that all of a Participant's Company Matching Account is not vested pursuant to such a determination, the Participant may request independent verification of the Committee's calculations with respect to the application of Section 280G. In such case, the Committee must provide to the Participant within 15 business days of such a request an opinion from -14- 19 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ a nationally recognized accounting firm selected by the Participant (the "Accounting Firm"). The opinion shall state the Accounting Firm's opinion that any limitation in the vested percentage hereunder is necessary to avoid the limits of Section 280G and contain supporting calculations. The cost of such opinion shall be paid for by the Company. 3.12 CREDITING/DEBITING OF ACCOUNT BALANCES. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules: (a) ELECTION OF MEASUREMENT FUNDS FOR DEFERRAL ACCOUNT, COMPANY MATCHING ACCOUNT BALANCE AND PROFIT SHARING ACCOUNT BALANCE. A Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.12(c) below) to be used to determine the additional amounts to be credited to his or her Deferral Account, Company Matching Account and Company Profit Sharing Account balance for the first calendar quarter in which the Participant commences participation in the Plan and continuing thereafter for each subsequent calendar quarter in which the Participant participates in the Plan, unless changed in accordance with the next sentence. Commencing with the first calendar quarter that follows the Participant's commencement of participation in the Plan and continuing thereafter for each subsequent calendar quarter in which the Participant participates in the Plan, no later than the next to last business day of the calendar quarter, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the additional amounts to be credited to his or her Deferral Account, Company Matching Account and Company Profit Sharing Account balance, or to change the portion of his or her Deferral Account, Company Matching Account and Company Profit Sharing Account balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply to the next calendar quarter and continue thereafter for each subsequent calendar quarter in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. (b) PROPORTIONATE ALLOCATION. In making any election described in Section 3.12(a) above, the Participant shall specify on the Election Form, in increments of five percentage points (5%), the percentage of his or her Deferral Account Balance, Company Matching Account and Company Profit Sharing Account balance to be allocated to a Measurement Fund (as if the Participant was making an investment in -15- 20 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ that Measurement Fund with that portion of his or her Deferral Account, Company Matching Account and Company Profit Sharing Account balance). (c) MEASUREMENT FUNDS FOR DEFERRAL ACCOUNT, COMPANY MATCHING ACCOUNT AND COMPANY PROFIT SHARING ACCOUNT BALANCE. The Participant may elect one or more measurement funds, based on certain mutual funds (the "Measurement Funds") made available by the Company, for the purpose of crediting additional amounts to his or her Deferral Account, Company Matching Account and Company Profit Sharing Account balance. The portion of a Participant's Deferral Account, if any, that is attributable to a Director's deferral of Director's Fees may be deemed invested in the Company Stock Measurement Fund (the "Company Stock Measurement Fund") at all times prior to distribution, for the purpose of crediting additional amounts to his or her Deferral Account balance. Amounts deemed invested in the Company Stock Measurement Fund shall be credited or debited, based on the performance of the Company's common stock, as if 100% of any such amounts had been invested in Stock, with any dividends declared and paid on such Stock deemed to be reinvested in additional Stock. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. Each such action will take effect as of the first day of the calendar quarter that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change. (d) MANDATORY COMPANY STOCK MEASUREMENT FUND FOR STOCK OPTION AND RESTRICTED STOCK ACCOUNT BALANCE. Notwithstanding anything to the contrary contained in this Section 3.12, a Participant's Stock Option Account and Restricted Stock Account balance must be deemed invested in the Company Stock Measurement Fund at all times prior to distribution, for the purpose of crediting additional amounts to his or her Stock Option Account and Restricted Stock Account balance. Amounts deemed invested in the Company Stock Measurement Fund shall be credited or debited, based on the performance of the Company's common stock, as if 100% of any such amounts had been invested in Stock, with any dividends declared and paid on such Stock deemed to be reinvested in additional Stock. (e) CREDITING OR DEBITING METHOD. The performance of each Measurement Fund (either positive or negative) will be determined by the Committee, in its sole discretion, based on the performance of the Measurement Funds themselves. A Participant's Account Balance shall be credited or debited on a daily basis based on the performance of each Measurement Fund selected or required by the Participant, as though (i) a Participant's Account Balance were invested in the Measurement -16- 21 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ Fund(s) selected or required by the Participant, in the percentages applicable to such calendar quarter, as of the close of business on the first business day of such calendar quarter, at the closing price on such date; (ii) the portion of the Annual Deferral Amount that was actually deferred during any calendar quarter were invested in the Measurement Fund(s) selected or required by the Participant, in the percentages applicable to such calendar quarter, no later than the close of business on the business day on which such amounts are actually deferred from the Participant's Base Annual Salary through reductions in his or her payroll, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant's Account Balance ceased being invested in the Measurement Fund(s), in the percentages applicable to such calendar quarter, no earlier than the business day of the distribution, at the closing price on such date. The Participant's Annual Company Matching Amount shall be credited to his or her Company Matching Account for purposes of this Section 3.12(e) as of the close of business on the first business day in February of the Plan Year following the Plan Year to which it relates. The Participant's Annual Company Profit Sharing Amount shall be credited to his or her Company Profit Sharing Account for purposes of this Section 3.12(e) as of the close of business on the first business day in February of the Plan Year following the Plan Year to which it relates. The Participant's Annual Stock Option Amount(s) and Restricted Stock Amount(s) shall be credited to his or her Stock Option Account or Restricted Stock Account, as the case may be, no later than the close of business on the business day on which the Eligible Stock Option was exercised or otherwise disposed of or the Restricted Stock would vest under the terms of the K N Energy, Inc. stock incentive plan, but for the election to defer. (f) NO ACTUAL INVESTMENT. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company. -17- 22 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ 3.13 FICA AND OTHER TAXES. (a) ANNUAL DEFERRAL AMOUNTS. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount to comply with this Section 3.13. (b) COMPANY MATCHING AMOUNTS. When a participant becomes vested in a portion of his or her Company Matching Account, the Participant's Employer(s) shall withhold from the Participant's Base Annual Salary and Bonus that is not deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant's Company Matching Account to comply with this Section 3.13. (c) COMPANY PROFIT SHARING AMOUNTS. When a Participant becomes vested in a portion of his or her Company Profit Sharing Account, the Participant's Employer(s) shall withhold from the Participant's Base Annual Salary and Bonus that is not deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant's Company Profit Sharing Account to comply with this Section 3.13. (d) ANNUAL STOCK OPTION AMOUNTS AND ANNUAL RESTRICTED STOCK AMOUNTS. For each Plan Year in which an Annual Stock Option Amount or Annual Restricted Stock Amount is being first withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary, Bonus, Qualifying Gains and Restricted Stock that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Stock Option Amount or Annual Restricted Stock Amount. If necessary, the Committee may reduce the Annual Stock Option Amount or Annual Restricted Stock Amount to comply with this Section 3.13. 3.14 DISTRIBUTIONS. Distributions that are made pursuant to this Plan may, in the sole discretion of the Committee, be made in cash or in kind, including in shares of the common stock of the Company. The Participant's Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. -18- 23 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 4 SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES; WITHDRAWAL ELECTION 4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to such Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount plus amounts credited or debited in the manner provided in Section 3.12 above on that amount, determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment). Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid out during a period beginning 1 day and ending 60 days after the last day of any Plan Year designated by the Participant that is at least three Plan Years after the Plan Year in which the Annual Deferral Amount is actually deferred. By way of example, if a three year Short-Term Payout is elected for Annual Deferral Amounts that are deferred in the Plan Year commencing January 1, 1998, the three year Short-Term Payout would become payable during a 60 day period commencing January 1, 2002. 4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus amounts credited or debited thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article. 4.3 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation. 4.4 WITHDRAWAL ELECTION. A Participant (or, after a Participant's death, his or her Beneficiary) may elect, at any time, to withdraw all of his or her Account Balance, calculated as if there had occurred a Termination of Employment as of the day of the election, less a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time, before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. -19- 24 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ If made before Retirement, Disability or death, a Participant's Withdrawal Amount shall be his or her Account Balance calculated as if there had occurred a Termination of Employment as of the day of the election. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan in the future. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. ARTICLE 5 RETIREMENT BENEFIT 5.1 AMOUNT OF RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance. 5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to an Annual Installment Method of 5, 10 or 15 years. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least 1 year prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. Any lump sum payment shall be made no later than 60 days after the date the Participant Retires. Any installment payments shall commence no later than 60 days after the last day of the Plan Year in which the Participant Retires. Any payment made shall be subject to the Deduction Limitation. 5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary over the remaining number of years and in the same amounts as that benefit would have been paid to the Participant had the Participant survived. -20- 25 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 6 PRE-RETIREMENT SURVIVOR BENEFIT 6.1 AMOUNT OF PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability. 6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or pursuant to an Annual Installment Method of 5, 10 or 15 years. The Participant may annually change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. If a Participant does not make any election with respect to the payment of the Pre-Retirement Survivor Benefit, then such benefit shall be paid in a lump sum. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, payment of the Pre-Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or pursuant to an Annual Installment Method of not more than 5 years. Any lump sum payment shall be made no later than 60 days after the date the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. Any installment payments shall commence no later than 60 days after the last day of the Plan Year in which the Committee is provided with proof satisfactory to the Committee of the Participant's death. Any payment made shall be subject to the Deduction Limitation. ARTICLE 7 TERMINATION BENEFIT 7.1 AMOUNT OF TERMINATION BENEFIT. Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability. 7.2 PAYMENT OF TERMINATION BENEFIT. If the Participant's Account Balance at the time of his or her Termination of Employment is less than $25,000, payment of his or her Termination Benefit shall be paid in a lump sum. If his or her Account Balance at such time is equal to or greater than that amount, the Committee, in its sole discretion, may cause the Termination Benefit to be paid in a lump sum or in substantially equal annual installment -21- 26 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ payments over a period of time that does not exceed two years in duration. Any lump sum payment shall be made no later than 60 days after the date the date of the Participant's Termination of Employment. Any installment payments shall commence no later than 60 days after the last day of the Plan Year in which the Participant experiences the Termination of Employment. Any payment made shall be subject to the Deduction Limitation. ARTICLE 8 DISABILITY WAIVER AND BENEFIT 8.1 DISABILITY WAIVER. (a) WAIVER OF DEFERRAL. A Participant who is determined by the Committee to be suffering from a Disability shall be (i) excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary, Annual Incentive and Director's Fees for the Plan Year during which the Participant first suffers a Disability and (ii) excused from fulfilling any existing unvested Restricted Stock Amount or unexercised Stock Option Amount commitments. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan. (b) RETURN TO WORK. If a Participant returns to employment, or service as a Director, with an Employer, after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount, Stock Option Amount and Restricted Stock Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 8.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed, or in the service of an Employer as a Director, and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right to, in its sole and absolute discretion and for purposes of this Plan only, and must in the case of a Participant who is otherwise eligible to Retire, deem the Participant to have experienced a Termination of Employment, or in the case of a Participant who is eligible to Retire, to have Retired, at any time (or in the case of a Participant who is eligible to Retire, as soon as practicable) after such Participant is determined to be suffering a Disability, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee's determination; provided, however, that should the Participant otherwise have been eligible to Retire, he or she shall be paid in accordance with Article 5. The Disability Benefit shall -22- 27 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ be paid in a lump sum within 60 days of the Committee's exercise of such right. Any payment made shall be subject to the Deduction Limitation. ARTICLE 9 BENEFICIARY DESIGNATION 9.1 BENEFICIARY. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 9.3 ACKNOWLEDGMENT. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent. 9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations -23- 28 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. ARTICLE 10 LEAVE OF ABSENCE 10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 11 TERMINATION, AMENDMENT OR MODIFICATION 11.1 TERMINATION. Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to discontinue its sponsorship of the Plan and to terminate the Plan at any time with respect to any or all of its participating Employees and Directors, by action of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer, or in the service of that Employer as Directors, shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or pursuant to an Annual Installment Method of up to 15 years, with amounts credited and debited during the installment period as provided herein. If the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum. After a Change in -24- 29 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.2 AMENDMENT. Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the action of its board of directors; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the consent of the Participant. 11.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. -25- 30 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 12 ADMINISTRATION 12.1 COMMITTEE DUTIES. This Plan shall be administered by a Committee which shall consist of the compensation committee of the Board, or such committee as the Compensation Committee of the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company. 12.2 AGENTS. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 12.4 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless the members of the Committee, and any Employee to whom the duties of the Committee may be delegated, against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members or any such Employee. 12.5 EMPLOYER INFORMATION. To enable the Committee to perform its functions, each Employer shall supply full and timely information to the Committee on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require. ARTICLE 13 OTHER BENEFITS AND AGREEMENTS 13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to -26- 31 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 14 CLAIMS PROCEDURES 14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3 below. 14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): -27- 32 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ (a) may review pertinent documents; (b) may submit written comments or other documents; and (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 DECISION ON REVIEW. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 15 TRUST 15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and each Employer shall at least annually transfer over to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Deferral Amounts, Annual Company Matching Amounts, Annual Company Profit Sharing Amounts, Annual Stock Option Amounts and Annual Restricted Stock Amounts for such Employer's Participants for all periods prior to the transfer, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer. 15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. -28- 33 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ 15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan. 15.4 STOCK TRANSFERRED TO THE TRUST. Notwithstanding any other provision of this Plan or the Trust: (i) if Trust assets are distributed to a Participant in a distribution which reduces the Participant's Stock Option Account balance under this Plan, such distribution must be made in the form of Stock during every 6 month period beginning on the date an Eligible Stock Option of the Participant is exercised, to the extent of the Qualifying Gain deferred in accordance with Section 3.7 with respect to that Eligible Stock Option; and (ii) any Stock transferred to the Trust in accordance with Sections 3.7 or 3.8 may not be otherwise distributed or disposed of by the Trustee until at least 6 months after the date such Stock is transferred to the Trust. ARTICLE 16 MISCELLANEOUS 16.1 STATUS OF PLAN. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employee" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. 16.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.3 EMPLOYER'S LIABILITY. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 16.4 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a -29- 34 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise, except as otherwise required by applicable law. 16.5 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time. 16.6 FURNISHING INFORMATION. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.7 TERMS. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.8 CAPTIONS. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.9 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Colorado without regard to its conflicts of laws principles. 16.10 NOTICE. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: -30- 35 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ Administrative Committee --------------------------------------------------------------- K N Energy, Inc. Directors and Executives Deferred Compensation Plan --------------------------------------------------------------- 370 Van Gordon Street --------------------------------------------------------------- Lakewood, Colorado 80228-8304 --------------------------------------------------------------- Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 16.11 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. 16.12 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.13 VALIDITY. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.14 INCOMPETENT. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.15 COURT ORDER. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made -31- 36 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ by a Participant, to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse. 16.16 DISTRIBUTION IN THE EVENT OF TAXATION. (a) IN GENERAL. If, for any reason, all or any portion of a Participant's benefits under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. (b) TRUST. If the Trust terminates in accordance with Section 3.6(e) of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. 16.17 INSURANCE. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance. 16.18 LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of a Participant's Employer (which might then be composed of new members) or a shareholder of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company, the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations -32- 37 K N ENERGY, INC. Directors and Executives Deferred Compensation Plan Master Plan Document ================================================================================ under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant's Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant's Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction. IN WITNESS WHEREOF, the Company has signed this Plan document as of ________, 199_. "Company" K N Energy, Inc., a Kansas corporation By: /s/ Martha B. Wyrsch ---------------------------------------- Title: Vice President, General Counsel and ------------------------------------- Secretary ------------------------------------- -33- EX-10.(BB) 7 MANAGEMENT DEFERRED COMPENSATION PLAN 1 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ EFFECTIVE JANUARY 1, 1998 COPYRIGHT (C) 1997 BY COMPENSATION RESOURCE GROUP, INC. ALL RIGHTS RESERVED 2 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ TABLE OF CONTENTS
Page ---- Purpose...................................................................................................1 ARTICLE 1 Definitions....................................................................................1 ARTICLE 2 Eligibility, Enrollment, Commencement of Participation.........................................6 2.1 Eligibility....................................................................................6 2.2 Enrollment Requirements........................................................................6 2.3 Commencement of Participation..................................................................7 2.4 Termination of Participation and/or Deferrals..................................................7 ARTICLE 3 Deferral Commitments/Company Matching/Crediting/Taxes..........................................7 3.1 Minimum Deferrals..............................................................................7 3.2 Maximum Deferrals..............................................................................8 3.3 Election to Defer; Effect of Election Form.....................................................8 3.4 Withholding of Annual Deferral Amounts.........................................................8 3.5 Investment of Trust Assets.....................................................................8 3.6 Vesting........................................................................................8 3.7 Crediting/Debiting of Account Balances.........................................................9 3.8 FICA and Other Taxes..........................................................................10 3.9 Distribution..................................................................................11 ARTICLE 4 Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election......................................................................................11 4.1 Short-Term Payout.............................................................................11 4.2 Other Benefits Take Precedence Over Short-Term................................................11 4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.........................11 4.4 Withdrawal Election...........................................................................12 ARTICLE 5 Retirement Benefit............................................................................12 5.1 Amount of Retirement Benefit..................................................................12 5.2 Payment of Retirement Benefit.................................................................12 5.3 Death Prior to Completion of Retirement Benefit...............................................12 ARTICLE 6 Pre-Retirement Survivor Benefit...............................................................13 6.1 Amount of Pre-Retirement Survivor Benefit.....................................................13 6.2 Payment of Pre-Retirement Survivor Benefit....................................................13
-i- 3 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 7 Termination Benefit...........................................................................13 7.1 Amount of Termination Benefit.................................................................13 7.2 Payment of Termination Benefit................................................................13 ARTICLE 8 Disability Waiver and Benefit.................................................................14 8.1 Disability Waiver.............................................................................14 8.2 Continued Eligibility; Disability Benefit.....................................................14 ARTICLE 9 Beneficiary Designation.......................................................................15 9.1 Beneficiary...................................................................................15 9.2 Beneficiary Designation; Change; Spousal Consent..............................................15 9.3 Acknowledgement...............................................................................15 9.4 No Beneficiary Designation....................................................................15 9.5 Doubt as to Beneficiary.......................................................................15 9.6 Discharge of Obligations......................................................................16 ARTICLE 10 Leave of Absence..............................................................................16 10.1 Paid Leave of Absence.........................................................................16 10.2 Unpaid Leave of Absence.......................................................................16 ARTICLE 11 Termination, Amendment or Modification........................................................16 11.1 Termination...................................................................................16 11.2 Amendment.....................................................................................17 11.3 Plan Agreement................................................................................17 11.4 Effect of Payment.............................................................................17 ARTICLE 12 Administration................................................................................18 12.1 Committee Duties..............................................................................18 12.2 Agents........................................................................................18 12.3 Binding Effect of Decisions...................................................................18 12.4 Indemnity of Committee........................................................................18 12.5 Employer Information..........................................................................18 ARTICLE 13 Other Benefits and Agreements.................................................................18 13.1 Coordination with Other Benefits..............................................................18
-ii- 4 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 14 Claims Procedures.............................................................................19 14.1 Presentation of Claim.........................................................................19 14.2 Notification of Decision......................................................................19 14.3 Review of a Denied Claim......................................................................19 14.4 Decision on Review............................................................................20 14.5 Legal Action..................................................................................20 ARTICLE 15 Trust.........................................................................................20 15.1 Establishment of the Trust....................................................................20 15.2 Interrelationship of the Plan and the Trust...................................................20 15.3 Distributions From the Trust..................................................................21 ARTICLE 16 Miscellaneous.................................................................................21 16.1 Status of Plan................................................................................21 16.2 Unsecured General Creditor....................................................................21 16.3 Employer's Liability..........................................................................21 16.4 Nonassignability..............................................................................21 16.5 Not a Contract of Employment..................................................................21 16.6 Furnishing Information........................................................................22 16.7 Terms.........................................................................................22 16.8 Captions......................................................................................22 16.9 Governing Law.................................................................................22 16.10 Notice........................................................................................22 16.11 Successors....................................................................................23 16.12 Spouse's Interest.............................................................................23 16.13 Validity......................................................................................23 16.14 Incompetent...................................................................................23 16.15 Court Order...................................................................................23 16.16 Distribution in the Event of Taxation.........................................................23 16.17 Insurance.....................................................................................24 16.18 Legal Fees To Enforce Rights After Change in Control..........................................24
-iii- 5 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ K N ENERGY, INC. MANAGEMENT DEFERRED COMPENSATION PLAN Effective January 1, 1998 PURPOSE The purpose of the K N Energy, Inc. Management Deferred Compensation Plan (the "Plan") is to provide specified benefits to a select group of management and highly compensated Employees who contribute materially to the continued growth, development and future business success of K N Energy, Inc., a Kansas corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA. ARTICLE 1 DEFINITIONS For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Account Balance" shall mean, with respect to a Participant, a credit on the records of the Employer equal to the sum of the Deferral Account balance. The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan. 1.2 "Annual Incentive" shall mean any compensation, in addition to Base Annual Salary relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, payable to a Participant as an Employee under any Employer's Annual Incentive, bonus or cash incentive plans, excluding stock options and restricted stock. 1.3 "Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary and Annual Incentive that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event. 1.4 "Annual Installment Method" shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: The Account Balance of the Participant shall be calculated as of the close of business on the last -1- 6 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ business day of the year. The annual installment shall be calculated by multiplying this balance by a fraction, the numerator of which is one, and the denominator of which is the remaining number of annual payments due the Participant. By way of example, if the Participant elects a 10 year Annual Installment Method, the first payment shall be 1/10 of the Account Balance, calculated as described in this definition. The following year, the payment shall be 1/9 of the Account Balance, calculated as described in this definition. Each annual installment shall be paid on or as soon as practicable after the last business day of the applicable year. 1.5 "Base Annual Salary" shall mean the annual cash compensation relating to services performed during any calendar year, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year, excluding bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee. 1.6 "Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant. 1.7 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.8 "Board" shall mean the board of directors of the Company. 1.9 "Change in Control" shall mean the occurrence of one or more of the following events: (a) any "person," as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the -2- 7 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ combined voting power of the Company's then outstanding securities and twenty-five percent (25%) or more of the seats on the Board of Directors of the Company comes under the control of that same 30% beneficial owner; or (b) during any period of two consecutive years (not including any period prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has or has threatened to enter into an agreement with the Company to effect a transaction described in (a), (c) or (d) of this Paragraph) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason other than normal retirement, death or disability to constitute at least a majority thereof, or (c) the shareholders of the Company approve a merger or consolidation of the Company with any other person, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities for the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, and (ii) a merger in which no "person" (as defined above) acquires more than 30% of the combined voting power of the Company's then outstanding securities and twenty-five percent (25%) or more of the seats on the Board of Directors of the Company comes under the control of that same 30% beneficial owner, or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). 1.10 "Chief Executive Officer" shall mean the chief executive officer of the Company. 1.11 "Claimant" shall have the meaning set forth in Section 14.1. 1.12 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. 1.13 "Committee" shall mean the committee described in Article 12. 1.14 "Company" shall mean K N Energy, Inc., a Kansas corporation, and any successor to all or substantially all of the Company's assets or business. -3- 8 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 1.15 "Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited/debited with additional amounts in accordance with Section 3.7 below, even if such amount is being paid out in installments. The amounts so deferred and amounts credited thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control. 1.16 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account. 1.17 "Director" shall mean any member of the board of directors of any Employer. 1.18 "Disability" shall mean a period of disability during which a Participant qualifies for permanent disability benefits under the Participant's Employer's long-term disability plan, or, if a Participant does not participate in such a plan, a period of disability during which the Participant is "permanently and totally disabled" as that term is defined under Code Section 22(e)(3). 1.19 "Disability Benefit" shall mean the benefit set forth in Article 8. 1.20 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.21 "Employee" shall mean a person who is an employee of any Employer. -4- 9 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 1.22 "Employer(s)" shall mean the Company and any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor. 1.23 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.24 "Participant" shall mean for all purposes of this Plan any Employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce. 1.25 "Plan" shall mean the Company's Management Deferred Compensation Plan, effective January 1, 1998, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time. 1.26 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by both the Employer and the Participant. 1.27 "Plan Year" shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year. 1.28 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6. 1.29 "Retirement", "Retire(s)" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five (55) with ten (10) Years of Service. 1.30 "Retirement Benefit" shall mean the benefit set forth in Article 5. -5- 10 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 1.31 "Short-Term Payout" shall mean the payout set forth in Section 4.1. 1.32 "Termination Benefit" shall mean the benefit set forth in Article 7. 1.33 "Termination of Employment" shall mean the severing of employment with all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence 1.34 "Trust" shall mean one or more trusts established pursuant to that certain Nonqualified Benefit Plans Trust Agreement, dated as of February 28, 1996 between the Company and the trustee named therein, as amended from time to time. 1.35 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee. 1.36 "Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted. ARTICLE 2 ELIGIBILITY, ENROLLMENT, COMMENCEMENT OF PARTICIPATION 2.1 ELIGIBILITY. An Employee's eligibility for participation in this Plan shall be determined on an individual basis by recommendation from the Chief Executive Officer and approval by the Committee. Notwithstanding the foregoing, however, no Employee shall be selected for participation in this Plan unless he or she qualifies as a member of a select group of management or as a highly compensated employee of the Company. 2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected Employee shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within 30 days after he or she is selected and becomes eligible to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary. -6- 11 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 2.3 COMMENCEMENT OF PARTICIPATION. Provided an Employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee shall commence participation in the Plan on the first day of the Plan Year following the day on which the Employee completes all enrollment requirements. If an Employee fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents. 2.4 TERMINATION OF PARTICIPATION AND DEFERRALS. If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections and (iii) immediately distribute the Participant's then Account Balance as a Termination Benefit and terminate the Participant's participation in the Plan. ARTICLE 3 DEFERRAL COMMITMENTS/CREDITING/TAXES 3.1 MINIMUM DEFERRALS. (a) BASE ANNUAL SALARY AND ANNUAL INCENTIVE. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary and Annual Incentive in the following minimum amounts for each deferral elected:
------------------------- ------------------------ DEFERRAL MINIMUM AMOUNT ------------------------- ------------------------ Base Annual Salary and/or Annual Incentive $2,000 ------------------------- ------------------------
If an election is made for less than a stated minimum amount, or if no election is made, the amount deferred for that category of deferral shall be zero. -7- 12 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ MAXIMUM DEFERRAL. For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary and Annual Incentive up to the following maximum percentages for each deferral elected:
------------------------- ------------------------ DEFERRAL MINIMUM AMOUNT ------------------------- ------------------------ Base Annual Salary 90% ------------------------- ------------------------ Annual Incentive 90% ------------------------- ------------------------
3.3 ELECTION TO DEFER; EFFECT OF ELECTION FORM. (a) FIRST PLAN YEAR. In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee. (b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures, before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year. 3.4 WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Annual Incentive portion of the Annual Deferral Amount shall be withheld at the time the Annual Incentive is or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. 3.5 INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall be authorized, upon written instructions received from the Committee or investment manager appointed by the Committee, to invest and reinvest the assets of the Trust in accordance with the applicable Trust Agreement, in one or more investment vehicles designated by the Committee. 3.6 VESTING. A Participant shall at all times be 100% vested in his or her Deferral Account. -8- 13 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 3.7 CREDITING/DEBITING OF ACCOUNT BALANCES. In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant's Account Balance in accordance with the following rules: (a) ELECTION OF MEASUREMENT FUNDS. A Participant, in connection with his or her initial deferral election in accordance with Section 3.3(a) above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.7(c) below) to be used to determine the additional amounts to be credited to his or her Account Balance for the first calendar quarter in which the Participant commences participation in the Plan and continuing thereafter for each subsequent calendar quarter in which the Participant participates in the Plan, unless changed in accordance with the next sentence. Commencing with the first calendar quarter that follows the Participant's commencement of participation in the Plan and continuing thereafter for each subsequent calendar quarter in which the Participant participates in the Plan, no later than the next to last business day of the calendar quarter, the Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the additional amounts to be credited to his or her Account Balance, or to change the portion of his or her Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply to the next calendar quarter and continue thereafter for each subsequent calendar quarter in which the Participant participates in the Plan, unless changed in accordance with the previous sentence. (b) PROPORTIONATE ALLOCATION. In making any election described in Section 3.7(a) above, the Participant shall specify on the Election Form, in increments of five percentage points (5%), the percentage of his or her Account Balance to be allocated to a Measurement Fund (as if the Participant was making an investment in that Measurement Fund with that portion of his or her Account Balance). (c) MEASUREMENT FUNDS FOR ACCOUNT BALANCE. The Participant may elect one or more measurement funds, based on certain mutual funds (the "Measurement Funds") made available by the Company, for the purpose of crediting additional amounts to his or her Account Balance. As necessary, the Committee may, in its sole discretion, discontinue, substitute or add a Measurement Fund. Each such action will take effect as of the first day of the calendar quarter that follows by thirty (30) days the day on which the Committee gives Participants advance written notice of such change. -9- 14 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ (d) CREDITING OR DEBITING METHOD. The performance of each Measurement Fund (either positive or negative) will be determined by the Committee, in its sole discretion, based on the performance of the Measurement Funds themselves. A Participant's Account Balance shall be credited or debited on a daily basis based on the performance of each Measurement Fund selected or required by the Participant, as though (i) a Participant's Account Balance were invested in the Measurement Fund(s) selected or required by the Participant, in the percentages applicable to such calendar quarter, as of the close of business on the first business day of such calendar quarter, at the closing price on such date; (ii) the portion of the Annual Deferral Amount that was actually deferred during any calendar quarter were invested in the Measurement Fund(s) selected or required by the Participant, in the percentages applicable to such calendar quarter, no later than the close of business on the business day on which such amounts are actually deferred from the Participant's Base Annual Salary through reductions in his or her payroll, at the closing price on such date; and (iii) any distribution made to a Participant that decreases such Participant's Account Balance ceased being invested in the Measurement Fund(s), in the percentages applicable to such calendar quarter, no earlier than the business day of the distribution, at the closing price on such date. (e) NO ACTUAL INVESTMENT. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant's election of any such Measurement Fund, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant's Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund. In the event that the Company or the Trustee (as that term is defined in the Trust), in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant's Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; the Participant shall at all times remain an unsecured creditor of the Company. 3.8 FICA AND OTHER TAXES. For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary and Bonus that is not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount to comply with this Section 3.8. -10- 15 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 3.9 DISTRIBUTIONS. Distributions that are made pursuant to this Plan may, in the sole discretion of the Committee, be made in cash or in kind, including in shares of the common stock of the Company. The Participant's Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust. ARTICLE 4 SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES; WITHDRAWAL ELECTION 4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to such Annual Deferral Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the Annual Deferral Amount plus amounts credited or debited in the manner provided in Section 3.8 above on that amount, determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment). Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid out during a period beginning 1 day and ending 60 days after the last day of any Plan Year designated by the Participant that is at least three Plan Years after the Plan Year in which the Annual Deferral Amount is actually deferred. By way of example, if a three year Short-Term Payout is elected for Annual Deferral Amounts that are deferred in the Plan Year commencing January 1, 1998, the three year Short-Term Payout would become payable during a 60 day period commencing January 1, 2002. 4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM. Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus amounts credited or debited thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1 but shall be paid in accordance with the other applicable Article. 4.3 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES. If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation. -11- 16 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 4.4 WITHDRAWAL ELECTION. A Participant (or, after a Participant's death, his or her Beneficiary) may elect, at any time, to withdraw all of his or her Account Balance, calculated as if there had occurred a Termination of Employment as of the day of the election, less a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time, before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. If made before Retirement, Disability or death, a Participant's Withdrawal Amount shall be his or her Account Balance calculated as if there had occurred a Termination of Employment as of the day of the election. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan in the future. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation. ARTICLE 5 RETIREMENT BENEFIT 5.1 AMOUNT OF RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance. 5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or pursuant to an Annual Installment Method of 5, 10 or 15 years. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least 1 year prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. Any lump sum payment shall be made no later than 60 days after the date the Participant Retires. Any installment payments shall commence no later than 60 days after the last day of the Plan Year in which the Participant Retires. Any payment made shall be subject to the Deduction Limitation. 5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary over the remaining -12- 17 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ number of years and in the same amounts as that benefit would have been paid to the Participant had the Participant survived. ARTICLE 6 PRE-RETIREMENT SURVIVOR BENEFIT 6.1 AMOUNT OF PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability. 6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or pursuant to an Annual Installment Method of 5, 10 or 15 years. The Participant may annually change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. If a Participant does not make any election with respect to the payment of the Pre-Retirement Survivor Benefit, then such benefit shall be paid in a lump sum. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, payment of the Pre-Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or pursuant to an Annual Installment Method of not more than 5 years. Any lump sum payment shall be made no later than 60 days after the date the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. Any installment payments shall commence no later than 60 days after the last day of the Plan Year in which the Committee is provided with proof satisfactory to the Committee of the Participant's death. Any payment made shall be subject to the Deduction Limitation. ARTICLE 7 TERMINATION BENEFIT 7.1 AMOUNT OF TERMINATION BENEFIT. Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability. 7.2 PAYMENT OF TERMINATION BENEFIT. If the Participant's Account Balance at the time of his or her Termination of Employment is less than $25,000, payment of his or her Termination Benefit shall be paid in a lump sum. If his or her Account Balance at such time is equal to or greater than that amount, the Committee, in its sole discretion, may cause the -13- 18 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ Termination Benefit to be paid in a lump sum or in substantially equal annual installment payments over a period of time that does not exceed two years in duration. Any lump sum payment shall be made no later than 60 days after the date the date of the Participant's Termination of Employment. Any installment payments shall commence no later than 60 days after the last day of the Plan Year in which the Participant experiences the Termination of Employment. Any payment made shall be subject to the Deduction Limitation. ARTICLE 8 DISABILITY WAIVER AND BENEFIT 8.1 DISABILITY WAIVER. (a) WAIVER OF DEFERRAL. A Participant who is determined by the Committee to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary and Annual Incentive for the Plan Year during which the Participant first suffers a Disability. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan. (b) RETURN TO WORK. If a Participant returns to employment with an Employer, after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above. 8.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right to, in its sole and absolute discretion and for purposes of this Plan only, and must in the case of a Participant who is otherwise eligible to Retire, deem the Participant to have experienced a Termination of Employment, or in the case of a Participant who is eligible to Retire, to have Retired, at any time (or in the case of a Participant who is eligible to Retire, as soon as practicable) after such Participant is determined to be suffering a Disability, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee's determination; provided, however, that should the Participant otherwise have been eligible to Retire, he or she shall be paid in accordance with Article 5. The Disability Benefit shall be paid in a lump sum within 60 days of the Committee's exercise of such right. Any payment made shall be subject to the Deduction Limitation. -14- 19 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 9 BENEFICIARY DESIGNATION 9.1 BENEFICIARY. Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates. 9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death. 9.3 ACKNOWLEDGMENT. No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent. 9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction. 9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits. -15- 20 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 10 LEAVE OF ABSENCE 10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3. 10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld. ARTICLE 11 TERMINATION, AMENDMENT OR MODIFICATION 11.1 TERMINATION. Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, each Employer reserves the right to discontinue its sponsorship of the Plan and to terminate the Plan at any time with respect to any or all of its participating Employees, by action of its board of directors. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all of its Participants, an Employer shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or pursuant to an Annual Installment Method of up to 15 years, with amounts credited and debited during the installment period as provided herein. If the Plan is terminated with respect to less than all of its Participants, an Employer shall be required to pay such benefits in a lump sum. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; -16- 21 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ provided however, that the Employer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.2 AMENDMENT. Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the action of its board of directors; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or pursuant to an Annual Installment Method using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule). 11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the Employer may only amend or terminate such provisions with the consent of the Participant. 11.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. -17- 22 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 12 ADMINISTRATION 12.1 COMMITTEE DUTIES. This Plan shall be administered by a Committee which shall consist of the compensation committee of the Board, or such committee as the Compensation Committee of the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company. 12.2 AGENTS. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer. 12.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. 12.4 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless the members of the Committee, and any Employee to whom the duties of the Committee may be delegated, against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members or any such Employee. 12.5 EMPLOYER INFORMATION. To enable the Committee to perform its functions, each Employer shall supply full and timely information to the Committee on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee may reasonably require. ARTICLE 13 OTHER BENEFITS AND AGREEMENTS 13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's -18- 23 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided. ARTICLE 14 CLAIMS PROCEDURES 14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3 below. 14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; -19- 24 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ (b) may submit written comments or other documents; and (c) may request a hearing, which the Committee, in its sole discretion, may grant. 14.4 DECISION ON REVIEW. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and (c) such other matters as the Committee deems relevant. 14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. ARTICLE 15 TRUST 15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and each Employer shall at least annually transfer over to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Deferral Amounts for such Employer's Participants for all periods prior to the transfer, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the trust at the time of the transfer. 15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. 15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Plan. -20- 25 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ ARTICLE 16 MISCELLANEOUS 16.1 STATUS OF PLAN. The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employee" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent. 16.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future. 16.3 EMPLOYER'S LIABILITY. An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement. 16.4 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise, except as otherwise required by applicable law. 16.5 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer as an Employee or to interfere with the right of any Employer to discipline or discharge the Participant at any time. -21- 26 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 16.6 FURNISHING INFORMATION. A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary. 16.7 TERMS. Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply. 16.8 CAPTIONS. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.9 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of Colorado without regard to its conflicts of laws principles. 16.10 NOTICE. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below: Administrative Committee ------------------------------------------------ K N Energy, Inc. Management Deferred Compensation Plan ------------------------------------------------ 370 Van Gordon Street ------------------------------------------------ Lakewood, Colorado 80228-8304 ------------------------------------------------ Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant. 16.11 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries. -22- 27 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ 16.12 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. 16.13 VALIDITY. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. 16.14 INCOMPETENT. If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount. 16.15 COURT ORDER. The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse. 16.16 DISTRIBUTION IN THE EVENT OF TAXATION. (a) IN GENERAL. If, for any reason, all or any portion of a Participant's benefits under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the trustee of the Trust after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. -23- 28 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ (b) TRUST. If the Trust terminates in accordance with Section 3.6(e) of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions. 16.17 INSURANCE. The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance. 16.18 LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL. The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of a Participant's Employer (which might then be composed of new members) or a shareholder of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company, the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Participant's Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant's Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction. -24- 29 K N ENERGY, INC. Management Deferred Compensation Plan Master Plan Document ================================================================================ IN WITNESS WHEREOF, the Company has signed this Plan document as of ________, 199_. "Company" K N Energy, Inc., a Kansas corporation By: /s/ Martha B. Wyrsch ------------------------------- Title: Vice President, General Counsel ------------------------------- and Secretary ------------------------------- -25- EX-10.(CC) 8 AMENDMENT NO. 1 TO RIGHTS AGREEMENT 1 AMENDMENT NO. 1 TO RIGHTS AGREEMENT This Amendment No. 1 (the "Amendment") to the Rights Agreement (the "Rights Agreement") dated as of August 21, 1995 between K N Energy, Inc., a Kansas corporation (the "Company"), and The Bank of New York (the "Rights Agent"), is dated as of September 8, 1998. RECITALS The Company desires to amend the Rights Agreement to change the qualification requirements for successor rights agents. NOW THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: 1. Section 22. Change of Rights Agent, of the Rights Agreement is hereby amended to read as follows: "Section 22. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing to the Company. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent for the Common Shares of the Company and the Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the registered holder of a Right Certificate (or, prior to the Distribution Date, of Common Shares), then the Rights Agent or any registered holder of a Right Certificate (or, prior to the Distribution date, of Common Shares) may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (a) a corporation organized and doing business under the laws of the United States or of any state of the United States, which is authorized under such laws to exercise corporate trust or shareholder services powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million, or (b) an affiliate of a corporation described in clause (a) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such 2 appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent for the Common Shares and the Preferred Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 22, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. 2. All of the remaining terms and conditions of the Rights Agreement remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Rights Agreement to be duly executed, as of September 8, 1998. K N ENERGY, INC. By: /s/ Martha B. Wyrsch ----------------------------------- Martha B. Wyrsch, Vice President, General Counsel and Secretary THE BANK OF NEW YORK, As Rights Agent By: /s/ Frank A. Lado ------------------------------------ Its: Assistant Vice President 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 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (Dollars in Thousands) Earnings: Income From Continuing Operations per Statements of Income $ 59,989 $ 77,497 $ 63,819 $ 52,522 $ 15,321 Add: Interest and Debt Expense 252,585 51,248 37,760 34,316 32,009 Income Taxes 38,272 35,661 35,897 29,050 9,500 Portion of Rents Representative of the Interest Factor 31,428 12,473 7,417 5,082 3,492 Less: Undistributed Earnings of less than 50% Owned Unconsolidated Subsidiaries 17,623 3,875 - - - --------- --------- --------- --------- --------- Income as Adjusted $ 364,651 $ 173,004 $ 144,893 $ 120,970 $ 60,322 ========= ========= ========= ========= ========= Fixed Charges: Interest and Debt Expense per Statements of Income (Includes Amortization of Debt Discount, Premium and Expense) $ 247,180 $ 43,495 $ 35,933 $ 34,211 $ 31,815 Add: Interest Capitalized 5,405 7,753 1,827 105 338 Portion of Rents Representative of the Interest Factor 31,428 12,473 7,417 5,082 3,492 --------- --------- --------- --------- --------- Fixed Charges $ 284,013 $ 63,721 $ 45,177 $ 39,398 $ 35,645 ========= ========= ========= ========= ========= Ratio of Earnings to Fixed Charges 1.28 2.72 3.21 3.07 1.69 ========= ========= ========= ========= =========
EX-13 10 1998 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 K N ENERGY, INC. 1998 ANNUAL REPORT TO SHAREHOLDERS Interested persons may receive a copy of the Company's 1998 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 Blue Moon Holdings, LLC* ........................................................ Delaware Caprock Pipeline Company ........................................................ Delaware Compressor Pump & Engine Machine, Inc. .......................................... Wyoming Coyote Gas Treating Limited Liability Company* .................................. Colorado en*able, LLC* ................................................................... Delaware Energy Mountain Services......................................................... Colorado Evolve Solutions, L.L.C.*........................................................ Delaware FR Holdings, L.L.C.*............................................................. Colorado Gas Natural del Noroeste, S.A. de C.V ........................................... Mexico Interenergy Corporation.......................................................... Colorado Interenergy Distribution Corporation............................................. Colorado Interenergy Resources Corporation................................................ Colorado Interenergy Resources, L.P....................................................... Texas Interenergy Resources Corporation of New Mexico.................................. New Mexico KNFS Investments ................................................................ Colorado K N Cogeneration ................................................................ Colorado K N Energy Foundation*........................................................... Colorado K N Energy Igasamex, Inc......................................................... Delaware K N Energy International, Inc. .................................................. Delaware K N Energy de Mexico, S.A. de C.V ............................................... Mexico
2 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 Management Corp. ............................................................ Delaware K N Marketing, L.P. ............................................................. Texas K N Natural Gas, Inc. ........................................................... Colorado K N Power Company ............................................................... Colorado K N Processing, Inc. ............................................................ Delaware K N Services, Inc. .............................................................. Colorado K N Telecommunications, Inc...................................................... Colorado K N Thermo Acquisition, Inc...................................................... Colorado K N Thermo, LLC ................................................................. Colorado K N Trading, Inc. ............................................................... Delaware K N TransColorado, Inc. ......................................................... Colorado K N Wattenberg Transmission Limited Liability Company ........................... Colorado K N Weatherwise LLC*............................................................. Delaware K N WesTex Gas Service Company .................................................. Texas Lake Power, L.L.C ............................................................... Delaware mc(2) Inc. ...................................................................... Delaware MCN Gulf Processing Corp. ....................................................... Delaware MCN Properties Corp. ............................................................ Delaware MidCon 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 Marketing Corp. .......................................................... Delaware
3 MidCon Mexico Pipeline Corp. .................................................... Delaware MidCon NGL Corp. ................................................................ Delaware MidCon Power Services Corp....................................................... Delaware MidCon Texas Gas Services Corp. ................................................. Delaware MidCon Texas Pipeline Operator, Inc. ............................................ Delaware NALOCO, Inc. .................................................................... Delaware NATOCO, Inc. .................................................................... Delaware Natural Gas Pipeline Company of America ......................................... Delaware NGPL-Canyon Compression Co. ..................................................... Delaware NGPL Offshore Company ........................................................... Delaware NGPL-Overthrust Inc. ............................................................ Delaware NGPL-Trailblazer Inc. ........................................................... Delaware Northern Gas Company ............................................................ Wyoming Occidental Energy Development Corp. ............................................. Delaware Orcom Solutions, Inc.* .......................................................... Delaware Palo Duro Pipeline Company, Inc. ................................................ Delaware Panola/Rusk Gatherers ........................................................... Texas Red River Pipeline, L.P. ........................................................ Texas Red Rock Energy, LLC ............................................................ Delaware Rocky Mountain Natural Gas Company .............................................. Colorado Slurco Corporation .............................................................. Colorado TCP Gathering Co. ............................................................... Colorado Temple & Petty Construction Co., L.L.C........................................... Colorado Thermo Greeley L.L.C ............................................................ Colorado Thermo Salt Company, LLC......................................................... Colorado Thunder Creek Gas Services, L.L.C.*.............................................. Wyoming Valley Operating, Inc............................................................ Colorado Westar Transmission Company ..................................................... Delaware Wildhorse Energy Partners, LLC .................................................. Delaware
All of the subsidiaries named above are included in the consolidated financial statements of the Registrant included herein, 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, 333-08087 and 333-60839; and (iii) Registration Statements on Form S-3, File Nos. 2-84910, 33-26314, 33-23880, 33-42698, 33-44871, 33-45091, 33-46999, 33-54317, 33-69432, 333-04385, 333-40869, 333-44421, 333-55921 and 333-68257 of our report dated February 2, 1999, on the consolidated financial statements and schedule of K N Energy, Inc. and subsidiaries for the year ended December 31, 1998 included in this Form 10-K. /s/ Arthur Andersen LLP Denver, Colorado March 9, 1999 EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 21,955 1,092,415 703,857 10,813 144,831 2,093,502 7,767,332 744,156 9,612,212 2,619,462 3,300,025 0 7,000 343,230 873,591 9,612,212 4,387,843 4,387,843 3,400,044 4,043,292 0 5,023 247,180 98,261 38,272 59,989 0 0 0 59,989 0.93 0.92
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