<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration no. 333-44421-01
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 23, 1998)
$175,000,000
K N Capital Trust III
[KN ENERGY LOGO]
7.63% CAPITAL SECURITIES
(Liquidation Amount $1,000 Per Capital Security)
Fully and unconditionally guaranteed to the extent set forth herein by
K N Energy, Inc.
------------------------
The 7.63% Capital Securities offered hereby (the "Capital Securities")
represent undivided beneficial ownership interests in the assets of K N Capital
Trust III, a statutory business trust created under the laws of the State of
Delaware ("K N Capital Trust III" or the "Trust"). K N Energy, Inc., a Kansas
corporation (the "Company," "K N" or "K N Energy"), will directly or indirectly
own all the common securities (the "Common Securities" and, together with the
Capital Securities, the "Trust Securities") representing undivided beneficial
ownership interests in the assets of the Trust. The Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds of the sale
thereof in 7.63% Junior Subordinated Debentures (the "Subordinated Debentures")
of K N Energy in an aggregate principal amount equal to the aggregate
liquidation amount of the Trust Securities. The Subordinated Debentures will
mature on April 15, 2028 (the "Stated Maturity"). The Subordinated Debentures
when issued will be unsecured, subordinated obligations of K N Energy as
described herein. Upon an event of default under the Declaration (as defined
herein), the holders of Capital Securities will have a preference over the
holders of the Common Securities with respect to payments in respect of
distributions and payments upon redemption, liquidation and otherwise.
On January 30, 1998, the Company acquired all of the outstanding capital
stock of MidCon Corp. from Occidental Petroleum Corporation for $2.1 billion in
cash and a short-term note in the aggregate principal amount of $1.39 billion.
The Company will use the net proceeds from the sale of the Capital Securities
offered hereby to purchase U.S. government securities to replace letters of
credit issued in connection with such acquisition.
(continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-10 FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE CAPITAL SECURITIES.
------------------------
THESE CAPITAL SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $1,000 A CAPITAL SECURITY
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) TRUST(3)(4)
--------- -------------- -----------
<S> <C> <C> <C>
Per Security.......................... $1,000 (3) $1,000
Total................................. $175,000,000 (3) $175,000,000
</TABLE>
- ------------
(1) Plus accumulated distributions, if any, from April 28, 1998.
(2) The Company and the Trust have each agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended. See "Underwriters."
(3) In view of the fact that the proceeds of the sale of the Capital
Securities will be used to purchase the Subordinated Debentures, the
Company has agreed to pay to the Underwriters, as compensation for their
arranging the investment therein of such proceeds, $10.00 per Capital
Security (or $1,750,000 in the aggregate). See "Underwriters."
(4) Before deducting estimated expenses of $150,000 payable by the Company.
------------------------
The Capital Securities are offered, subject to prior sale, when, as and if
accepted by the Underwriters and subject to approval of certain legal matters by
Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Capital Securities will be made in book-entry form through the
book-entry facilities of The Depository Trust Company on or about April 28,
1998, against payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
J.P. MORGAN & CO.
PETRIE PARKMAN & CO.
April 23, 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CAPITAL
SECURITIES. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH
THIS OFFERING, AND MAY BID FOR, AND PURCHASE THE CAPITAL SECURITIES IN THE OPEN
MARKET. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
------------------------
(continued from previous page)
Holders of the Capital Securities are entitled to receive cumulative cash
distributions at an annual rate of 7.63% of the liquidation amount of $1,000 per
Capital Security, accumulating from the first date that any Capital Securities
are issued and payable semi-annually in arrears, subject to the deferral
provisions described below, on April 15 and October 15 of each year, commencing
October 15, 1998 ("distributions"). The payment of distributions out of monies
held by the Trust, payments on liquidation of the Trust and payments on the
redemption of Capital Securities, as set forth below, are guaranteed by K N
Energy (the "Guarantee") on a subordinated basis and to the extent described
herein. The Guarantee covers payments of distributions and other payments on the
Capital Securities only if and to the extent that the Trust has funds available
therefor, which will not be the case unless K N Energy has made corresponding
payments of interest or principal or other payments on the Subordinated
Debentures held by the Trust. The Guarantee, when taken together with K N
Energy's obligations under the Subordinated Debentures, the Declaration and the
Indenture, including its liabilities to pay costs, expenses, debts and
obligations of the Trust (other than with respect to the Trust Securities),
provides a full and unconditional guarantee, on a subordinated basis, of amounts
due on the Capital Securities in accordance with their terms. See "Risk
Factors -- Risks Relating to the Capital Securities -- Limitations of the
Guarantee."
The obligations of K N Energy under the Subordinated Debentures are
subordinate and junior in right of payment to all present and future Senior
Indebtedness (as defined herein) of K N Energy and pari passu with its 8.56%
Series B Junior Subordinated Deferrable Interest Debentures due April 15, 2027
(the "1997 Subordinated Debentures"), which were issued in October 1997 in the
aggregate principal amount of $103,100,000. The obligations of K N Energy under
the Guarantee are pari passu with its guarantee (the "1997 Guarantee") in
relation to the 8.56% Series B Capital Trust Pass-through Securities of K N
Capital Trust I (the "1997 Capital Securities"), which were issued in October
1997 in the aggregate liquidation amount of $100,000,000 and subordinate and
junior in right of payment to all Senior Indebtedness of K N Energy.
The Subordinated Debentures purchased by the Trust may be subsequently
distributed pro rata to holders of the Trust Securities in connection with the
dissolution of the Trust, upon the occurrence of certain events.
The distribution rate and the distribution payment dates and other payment
dates for the Capital Securities will correspond to the interest rate and
interest payment dates and other payment dates of the Subordinated Debentures,
which will be the sole assets of the Trust. As a result, if principal and
interest are not paid on the Subordinated Debentures, no amounts will be paid on
the Capital Securities.
So long as K N Energy shall not be in default in the payment of interest on
the Subordinated Debentures, K N Energy has the right to defer payments of
interest on the Subordinated Debentures by extending the interest payment period
on the Subordinated Debentures at any time, and from time to time, for up to 10
consecutive semi-annual periods (each, an "Extension Period"), provided that no
Extension Period shall extend beyond the Stated Maturity of the Subordinated
Debentures. If interest payments are so deferred, distributions on the Capital
Securities will also be deferred but will continue to accumulate (to the extent
permitted by applicable law) at the distribution rate, compounded semi-annually.
During any Extension Period, holders of Capital Securities will be required to
include deferred interest in
ii
<PAGE> 3
(continued from previous page)
their gross income for United States federal income tax purposes in advance of
receipt of the cash distributions with respect to such deferred interest
payments. There could be multiple Extension Periods of varying lengths
throughout the term of the Subordinated Debentures. See "Risk Factors -- Risks
Relating to the Capital Securities -- Delay of Interest Payments," "Description
of the Subordinated Debentures -- Option to Extend Interest Payment Period,"
"Description of the Capital Securities -- Distributions," and "Certain United
States Federal Income Tax Consequences -- Interest Income and Original Issue
Discount."
The Capital Securities are subject to mandatory redemption (i) at the
Stated Maturity upon repayment of the Subordinated Debentures at a redemption
price equal to the principal amount of, plus accrued interest on, the
Subordinated Debentures (the "Maturity Redemption Price"), (ii) in whole but not
in part, contemporaneously with the optional prepayment of the Subordinated
Debentures upon the occurrence and continuation of a Tax Event (as defined
herein) or an Investment Company Event (as defined herein) at a redemption price
equal to the Optional Prepayment Price (as defined herein) of the Subordinated
Debentures (the "Optional Redemption Price") and (iii) in whole or in part at
any time, contemporaneously with the optional prepayment by the Company of the
Subordinated Debentures, at the Optional Redemption Price. Both of the Maturity
Redemption Price and the Optional Redemption Price may be referred to herein as
the "Redemption Price." See "Description of the Capital
Securities -- Redemption." The Subordinated Debentures are prepayable prior to
the maturity of the Subordinated Debentures at the option of the Company (i) if
a Tax Event or Investment Company Event has occurred and is continuing at any
time within 90 days of the occurrence of such Tax Event or Investment Company
Event, in whole, but not in part, or (ii) at any time in whole or in part, in
each case at a prepayment price (the "Optional Prepayment Price") equal to the
greater of (A) 100% of the principal amount of the Subordinated Debentures or
(B) the sum, as determined by the Quotation Agent (as defined herein), of the
present value of (x) 100% of the principal amount of the Subordinated Debentures
that would be payable on April 15, 2028 and (y) scheduled payments of interest
from the prepayment date to April 15, 2028, in each case discounted to the
prepayment date on a semi-annual basis (assuming a 360-day year consisting of
twelve 30-day months) at the Adjusted Treasury Rate (as defined herein), plus,
in each case, accrued interest thereon to the date of prepayment. See
"Description of the Subordinated Debentures -- Optional Prepayment."
In the event of the involuntary liquidation, dissolution or winding up of
the Trust, the holders of the Capital Securities will be entitled to receive,
after satisfaction of liabilities to creditors of the Trust as provided by
applicable law, for each Capital Security a liquidation amount of $1,000 plus
accumulated and unpaid distributions thereon to the date of payment, unless, in
connection with such dissolution, the Subordinated Debentures are distributed to
the holders of the Capital Securities. See "Description of the Capital
Securities -- Liquidation Distribution Upon Dissolution."
The Capital Securities represent a series of the Preferred Securities of
the Trust described in the Prospectus dated April 23, 1998 included herein.
The Capital Securities will be evidenced by one or more global securities
in fully registered form, without coupons (collectively, the "Global Security").
The Global Security will be deposited on or about April 28, 1998 with a
custodian for, and with title to such security registered in the name of a
nominee of, The Depository Trust Company ("DTC"). Beneficial interests in the
Global Security will be shown on, and transfers thereof will be effected only
through, records maintained by DTC and its participants. Trading in beneficial
interests in the Global Security will settle in immediately available funds. See
"Description of the Capital Securities -- Form, Denomination and Registration."
------------------------
iii
<PAGE> 4
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER, AGENT OR DEALER. THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF CAPITAL
SECURITIES OFFERED HEREBY, NOR DO THEY CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT
WITH THE ACCOMPANYING PROSPECTUS NOR ANY OFFER OR SALE MADE HEREBY SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
OR THEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF OR THEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-1
Risk Factors................................................ S-10
Use of Proceeds............................................. S-16
The Acquisition and the Financing Plan...................... S-17
Capitalization.............................................. S-20
Accounting Treatment........................................ S-21
Unaudited Pro Forma Consolidated Financial Statements....... S-22
Selected Historical Financial Information for K N Energy.... S-28
Selected Historical Financial Information for MidCon........ S-30
The Combined Company........................................ S-32
K N Energy, Inc............................................. S-35
MidCon Corp................................................. S-39
Regulation.................................................. S-43
K N Capital Trust III....................................... S-48
Description of the Capital Securities....................... S-49
Description of the Guarantee................................ S-58
Description of the Subordinated Debentures.................. S-61
Relationship Among the Capital Securities, the Subordinated
Debentures and the Guarantee.............................. S-71
Certain United States Federal Income Tax Consequences....... S-72
ERISA Considerations........................................ S-76
Underwriters................................................ S-78
Experts..................................................... S-79
Legal Matters............................................... S-79
PROSPECTUS
Available Information....................................... 3
Incorporation of Certain Documents by Reference............. 4
K N Energy, Inc. ........................................... 4
The Trust................................................... 4
Use of Proceeds............................................. 6
Ratios of Earnings to Fixed Charges......................... 6
Description of the Preferred Securities..................... 7
Description of the Trust Debentures......................... 7
Description of the Guarantee................................ 13
Relationship Among the Preferred Securities, the Trust
Debentures and the Guarantee.............................. 15
Description of the Debt Securities.......................... 16
Description of Capital Stock................................ 28
Description of Stock Purchase Contracts and Stock Purchase
Units..................................................... 31
Book-Entry Issuance......................................... 32
Plan of Distribution........................................ 33
Legal Matters............................................... 35
Experts..................................................... 35
</TABLE>
iv
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
The following information does not purport to be complete and is qualified
in its entirety by the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus or incorporated by
reference herein or therein. As used in this Prospectus Supplement and the
accompanying Prospectus "the Company," "K N" and "K N Energy" refer to K N
Energy, Inc., together with its consolidated subsidiaries (including MidCon),
unless the context otherwise requires. As used in this Prospectus Supplement,
"MidCon" refers to MidCon Corp., together with its consolidated subsidiaries,
unless the context otherwise requires. All volumes of natural gas referred to
herein are stated at a pressure base of 14.73 pounds per square inch absolute
and at 60 degrees Fahrenheit and, in most instances, are rounded to the nearest
major multiple. The term "Mcf" means thousand cubic feet, the term "MMcf" means
million cubic feet, the term "Bcf" means billion cubic feet and the term "Tcf"
means trillion cubic feet. The term "MMBtus" means million British thermal units
("Btus"). "NGLs" refers to natural gas liquids, which consist of ethane,
propane, butane, iso-butane and natural gasoline. The term "Bbls" means barrels.
Prospective investors should carefully consider the matters discussed under the
caption "Risk Factors."
INTRODUCTION
On January 30, 1998, K N Energy acquired all of the outstanding capital
stock of MidCon from Occidental Petroleum Corporation ("Occidental") (the
"Acquisition") for $2.1 billion in cash and a short-term note in the aggregate
principal amount of $1.39 billion (the "Substitute Note"), which was
collateralized at the closing by letters of credit issued under a $4.5 billion
Bank Facility (as defined herein). As a result of the Acquisition, MidCon became
a wholly-owned subsidiary of K N Energy. The total amount of funds required by K
N to complete the Acquisition, pay related fees and expenses and repay
borrowings under the Company's existing credit facility was approximately $2,518
million and was financed with borrowings made under the Bank Facility. The
Company used the net proceeds from the underwritten public offering in March
1998 of 12,500,000 shares of common stock, par value $5.00 per share, of the
Company (the "Equity Offering") and from the concurrent underwritten public
offerings of senior notes of varying maturities in an aggregate principal amount
of $2.35 billion (the "Debt Offerings" and, together with the Equity Offering,
the "Prior Offerings") to refinance borrowings under the Bank Facility incurred
in connection with the Acquisition and to purchase U.S. government securities to
replace a portion of the letters of credit that collateralize the Substitute
Note. The Company will use the net proceeds from this offering of the Capital
Securities (this "Offering") to purchase U.S. government securities to replace
an additional portion of the letters of credit that collateralize the Substitute
Note. The Company intends to purchase additional U.S. government securities to
replace completely the letters of credit in the second quarter of 1998 through
the sale of mandatorily convertible preferred capital trust securities of a
subsidiary trust (the "Additional Offering") and additional borrowings under the
Bank Facility. The Additional Offering, the Offering, the Prior Offerings and
the Company's borrowings under the Bank Facility are hereinafter referred to as
the "Financing Plan".
THE COMPANIES
K N ENERGY
K N Energy is an integrated energy services provider whose operations
include the gathering, processing, transportation and storage of natural gas and
the marketing of natural gas and NGLs. As of December 31, 1997, the Company
operated over 12,300 miles of interstate and intrastate pipelines and over 8,800
miles of gathering and processing pipeline that connect major supply areas with
major consuming areas in the Western and Mid-Continent United States. The
Company also owned or operated at such date 19 natural gas processing plants
with total processing capacity of approximately 1.7 Bcf per day, including the
Bushton complex in the Hugoton Basin, one of the largest natural gas extraction
facilities in the United States, and 7 storage facilities with 827 MMcf per day
of withdrawal capacity. As of December 31, 1997, the Company's regulated retail
natural gas business served over 210,000 customers in Colorado, Nebraska and
Wyoming (excluding customers served by the Company's Kansas natural gas
distribution assets which were sold in March 1998). The Company also markets
innovative products and services, such as the Simple Choice(sm)
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("Simple Choice") menu of products and call center services designed for
residential consumers, utilities, and small businesses through its 50% owned
EN-able(sm), LLC ("EN-able") affiliate.
The Company's principal offices are located at 370 Van Gordon Street,
Lakewood, CO 80228, and its telephone number is (303) 989-1740.
MIDCON CORP.
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 strategically located in the center of the North American pipeline
grid. These pipeline assets include two major interconnected transmission
pipelines terminating in the Chicago area: one originating in West Texas and the
other in the Gulf Coast areas of Texas and Louisiana, as well as a major
intrastate pipeline located in Texas. In 1997, MidCon delivered an average of
over 6.1 Bcf per day of natural gas. MidCon is one of the largest and lowest
cost transporters of natural gas to the Chicago market and in 1997 delivered an
average of 2.6 Bcf per day of natural gas to the Chicago metropolitan area,
representing 60% of the total natural gas delivered to that market during the
same period. MidCon is also one of the nation's largest storage operators with
approximately 600 Bcf of total natural gas storage capacity near its major
markets, over 200 Bcf of working gas and up to 4.4 Bcf per day of peak
deliverability from its facilities as of December 31, 1997. MidCon also
purchases electricity from electric utilities and other electric power producers
and marketers and resells the electricity to wholesale and end-use customers.
THE COMBINED COMPANY
As a result of the Acquisition, K N Energy is one of the largest integrated
natural gas companies in the United States. On a pro forma basis as of December
31, 1997, the Company owned and/or operated over 26,000 miles of interstate,
intrastate and offshore natural gas transmission pipeline, approximately 10,000
miles of gathering pipeline, approximately 7,200 miles of local distribution
pipeline (excluding K N's Kansas natural gas distribution assets which were sold
in March 1998) and 16 storage facilities with storage capacity of more than 250
Bcf of working gas. On a pro forma basis, the Company also is one of the largest
transporters and marketers of natural gas in the United States with average
sales volumes of approximately 3.7 Bcf of natural gas per day and average
transportation volumes of approximately 5.2 Bcf of natural gas per day. On a pro
forma basis as of December 31, 1997, the Company had $9.0 billion in assets, and
pro forma for the year ended December 31, 1997, the Company had operating
revenues of $5.2 billion, operating income of $357.4 million and net income of
$96.1 million.
In addition to significantly increasing the Company's size and scope of
operations as well as its geographic presence, management believes the
Acquisition also provides K N with a strong platform for future growth. The
Company now has pipeline assets in 16 states and access to several of the
largest natural gas markets in the United States, including Chicago, Houston,
Kansas City and Denver. In addition, the Company has access to natural gas
supplies in the major natural gas supply basins in the United States, including
those in the Mid-Continent, West Texas, Rocky Mountain and Gulf Coast regions.
As a result of the Acquisition, the Company is also one of the nation's largest
owners and operators of natural gas storage assets in both supply and market
areas. Management believes these assets are strategically located and will allow
the Company to become a major supplier of storage service, particularly in the
Chicago market. Management believes that the Acquisition also significantly
broadens the Company's retail presence in both the residential and small
business market segments.
BUSINESS STRATEGY
The Company's objective is to enhance its assets and operations along all
segments of the natural gas "value stream" by increasing access to supplies of
natural gas for the Company's upstream gathering and processing facilities,
delivering that supply through K N's midstream transmission pipelines and
marketing that supply to a broad range of downstream end users, including
utility, residential, commercial, agricultural and industrial customers. The
Company believes that it has developed several competitive strengths that will
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<PAGE> 7
enable it to continue to successfully implement this strategy, including: (i)
extensive natural gas infrastructure from the wellhead to the burner tip, (ii)
access to natural gas supplies in several of the largest domestic natural gas
producing areas, (iii) access to natural gas markets in some of the largest
natural gas consuming areas in the Midwest, Texas and the Rocky Mountains, (iv)
a management team which combines an entrepreneurial spirit with significant
experience in the natural gas industry, (v) a strong track record of quickly and
successfully integrating acquisitions and (vi) a commitment to providing
superior customer service. Management believes the Acquisition is consistent
with the Company's strategy. The key elements of the Company's strategy include
the following:
Optimize operation of the Company's assets. Over the past several years, K
N has been able to generate significant value through the improved operation of
its assets. With the Acquisition, the Company has identified several
opportunities for the optimization of operations through the integration and
consolidation of MidCon's assets with those of K N. By connecting pipelines to
proximate gathering facilities, relocating processing facilities and
reconfiguring certain operations, the Company believes it can increase
throughputs, lower costs and thereby significantly improve the operating results
of these assets. Specifically, K N plans to integrate and consolidate its
gathering, processing and intrastate pipelines in West Texas with MidCon's
assets in the region. K N also plans to build an interconnect between the
Amarillo Line of MidCon's Natural Gas Pipeline Company of America ("NGPL")
pipeline and K N's Bushton natural gas processing plant. In addition, the
Company believes that the combination of K N's supply area storage with MidCon's
market area storage provides additional opportunities for the Company to
arbitrage regional and seasonal natural gas price differentials.
Aggressively pursue new markets. K N will continue to pursue opportunities
to gain additional market share along the MidCon and K N pipeline systems. K N
is currently executing this strategy by expanding its marketing presence in the
Denver metropolitan area through the proposed construction of the Front Runner
Pipeline, and in Kansas City through the construction of an additional lateral
pipeline. Both of these cities represent markets that the Company believes have
been historically underserved by gas pipelines and that are easily reached
through extensions of K N's current pipelines. The Company believes that, given
MidCon's pipeline system and its low-cost position, the Acquisition also
provides significant additional opportunities to continue to access new markets
and significantly increase the Company's market share.
Leverage regulated assets by developing complementary unregulated
businesses. K N seeks to build or acquire unregulated businesses that
complement its core regulated assets. A key component of K N's growth has been
its ability to evolve from a 99% regulated entity in 1990 to a 48% regulated
entity at December 31, 1997 based on operating income. As an example of this
strategy, K N has successfully taken advantage of several unregulated gathering,
processing and marketing opportunities in the Rocky Mountains and Midwest in
conjunction with the development and operation of its regulated Pony Express
Pipeline. Management believes that MidCon's assets, which are largely regulated,
present additional opportunities for K N to continue to pursue this strategy.
For the year ended December 31, 1997, approximately 70% of the Company's pro
forma operating income was derived from regulated assets, compared with
approximately 48% for K N's historical business on a stand-alone basis. The
Company's goal is to increase the operating income derived from unregulated
assets to approximately 50% over time. The Company also believes it can improve
the profitability of certain of MidCon's gathering assets through a spin-down of
such assets from a regulated affiliate to unregulated affiliates. By
transferring these assets to unregulated affiliates, the Company believes it
will be able to achieve increased operational flexibility, lower costs and take
advantage of opportunities to increase system throughput.
Pursue strategic acquisitions, alliances, joint ventures and
partnerships. K N will continue to pursue acquisitions and strategic alliances
that create new business opportunities and enhance its existing operations. The
Company maintains a highly disciplined approach to acquisitions in order to
identify investments that logically expand K N's business into contiguous
markets, help increase economies of scale and provide opportunities to leverage
regulated businesses by developing complementary unregulated businesses. The
Company has established a number of strategic alliances, joint ventures and
partnerships to reach its goals. For example, the Wildhorse Energy Partners, LLC
("Wildhorse") gathering and marketing joint venture with
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Tom Brown, Inc. ("TBI"), pursuant to which TBI has dedicated all of its
uncommitted Rocky Mountain gas production, has enhanced the Company's access to
gas supply. The Company also formed a partnership to develop the TransColorado
pipeline and provide increased market access for isolated Rocky Mountain gas. In
1997, the Company and PacifiCorp Holdings, Inc. formed EN-able, a joint venture
to exploit retail opportunities presented by deregulation of the retail electric
and gas utility industries. The Company believes that the Acquisition provides
not only a significant platform from which to pursue additional complementary
acquisitions, but also greatly enhances the value of K N as a potential partner.
Maintain and enhance the Company's position as a low-cost provider. The
Company is a low-cost provider of natural gas gathering, processing and
transportation services and is constantly seeking opportunities to reduce costs
further without compromising safety or sacrificing customer service. Recent
operational changes consistent with this strategy include re-routing gas from
high cost plants into the more efficient Bushton system and the exchange of
underperforming assets in Texas for transmission assets needed to transport new
gathering volumes and which enhanced the performance of other K N assets. NGPL
is currently one of the lowest cost transporters of gas in the Mid-Continent
region and as a result, management believes that the Company is now in an even
stronger position to preserve or increase market share than its higher-cost
competitors, particularly in the event that additional gas comes into the
Chicago market from Canada. In addition, the increased access to additional
supply sources from MidCon's pipelines should support K N's low-cost position.
The Company also expects to realize annual operating and administrative savings
beginning in 1998 primarily due to the consolidation of operations and
activities that are duplicative with those of MidCon and improved utilization of
assets.
Expand the Company's retail presence. In order to take advantage of the
rapidly changing competitive landscape in the utility industry, the Company has
developed value-added products and services to offer to its customers beyond the
traditional energy commodity. As part of this strategy, K N developed Simple
Choice which offers consumers, through their local utilities, a bundled package
of energy, communications and entertainment products serviced through one call
and itemized on one bill. The Simple Choice package of services is marketed to
other utilities through the Company's EN-able joint venture with PacifiCorp
Holdings, Inc. By licensing Simple Choice to other gas, electric and water
utilities, EN-able creates partnerships that allow utility partners to play a
broader role in providing a range of products and services to the home, and
allows EN-able to build a larger retail presence in the marketplace more quickly
than it could on its own. EN-able also provides back-office support to its
utility partners, including infrastructure support for customer care and billing
functions and marketing channels.
RECENT DEVELOPMENTS
The Company has entered into agreements to acquire interests in the Thermo
group of companies which are engaged in the business of developing and operating
gas fired cogeneration facilities in the Rocky Mountain region. The total
purchase price is $160 million, payable in stock and cash over a period of three
years. The assets are subject to existing non-recourse indebtedness in the
amount of $110 million. The consummation of the acquisition is subject to
obtaining certain consents and the satisfaction of certain other conditions.
S-4
<PAGE> 9
THE OFFERING
The Issuer.......................... K N Capital Trust III, a Delaware
business trust. The sole assets of
the Trust will consist of the
Subordinated Debentures.
Offering Price...................... $1,000 per Capital Security
(Liquidation Amount $1,000), plus any
accumulated distributions.
Distributions....................... Distributions on the Capital Securities
will accumulate from the first date
of issuance and will be payable at
the annual rate of 7.63% of the
liquidation amount of $1,000 per
Capital Security. Subject to the
distribution deferral provisions
described below, distributions will
be payable semi-annually in arrears
on each April 15 and October 15,
commencing October 15, 1998.
Extension Periods................... The ability of the Trust to pay
distributions on the Capital
Securities is solely dependent on the
receipt of interest payments from K N
Energy on the Subordinated
Debentures. K N Energy has the right
at any time, and from time to time,
to defer the interest payments due on
the Subordinated Debentures for
successive Extension Periods not
exceeding 10 consecutive semi-annual
periods and, in any case, not
extending beyond the Stated Maturity.
During an Extension Period,
semi-annual distributions on the
Capital Securities will be deferred
by the Trust (but will continue to
accumulate at the distribution rate,
compounded semi-annually) until the
end of such Extension Period. If a
deferral of an interest payment
occurs, the holders of the Capital
Securities will be required to accrue
income for United States federal
income tax purposes in advance of any
corresponding cash distribution. See
"Risk Factors -- Risks Relating to
the Capital Securities -- Delay of
Interest Payments," "Description of
the Capital Securities --
Distributions," "Description of the
Subordinated Debentures -- Option to
Extend Interest Payment Period" and
"Certain United States Federal Income
Tax Consequences -- Interest Income
and Original Issue Discount."
During any period in which interest
payments on the Subordinated
Debentures are deferred, interest
will continue to accrue on the
Subordinated Debentures with interest
thereon at the same interest rate,
compounded semi-annually. K N Energy
has agreed, among other things, not
to declare or pay any dividends on
its capital stock during any
Extension Period, subject to certain
exceptions. See "Risk
Factors -- Risks Relating to the
Capital Securities -- Delay of
Interest Payments" and "Description
of the Subordinated
Debentures -- Option to Extend
Interest Payment Period."
S-5
<PAGE> 10
Liquidation Preference.............. In the event of any liquidation of the
Trust, holders will be entitled to
receive $1,000 per Capital Security
plus an amount equal to any accrued
and unpaid distributions thereon to
the date of payment, unless the
Subordinated Debentures are
distributed to such holders. See
"Description of the Capital
Securities -- Liquidation
Distribution Upon Dissolution."
Optional Distribution of
Subordinated Debentures........... The Company, as the holder of the
outstanding Common Securities, will
have the right at any time to
dissolve the Trust and, after
satisfaction of the liabilities to
creditors of the Trust as provided by
applicable law, cause the
Subordinated Debentures to be
distributed to the holders of the
Capital Securities and Common
Securities in liquidation of the
Trust, subject to the Institutional
Trustee having received an opinion of
counsel to the effect that such
distribution will not be a taxable
event to holders of Capital
Securities. See "Description of the
Capital Securities -- Liquidation
Distribution Upon Dissolution."
Redemption.......................... The Capital Securities are subject to
mandatory redemption (i) in whole but
not in part at the Stated Maturity
upon repayment of the Subordinated
Debentures, (ii) in whole but not in
part at any time contemporaneously
with the optional prepayment by the
Company of the Subordinated
Debentures upon the occurrence and
continuation of a Tax Event or an
Investment Company Event and (iii) in
whole or in part at any time
contemporaneously with the optional
prepayment by the Company of the
Subordinated Debentures, in each case
at the applicable Redemption Price.
See "Description of the Capital
Securities -- Redemption" and
"Description of the Subordinated
Debentures -- Optional Prepayment."
Guarantee........................... K N Energy will irrevocably and
unconditionally guarantee, on a
subordinated basis and to the extent
set forth herein, the payment in full
of (i) any accumulated and unpaid
distributions that are required to be
paid on the Capital Securities to the
extent the Trust has funds available
therefor, (ii) the amount payable
upon redemption of the Capital
Securities to the extent the Trust
has funds available therefor and
(iii) the liquidation amount of the
Capital Securities to the extent the
Trust has assets available for
distribution to holders of Capital
Securities. The Guarantee will be
unsecured, and will rank pari passu
in right of payment with the 1997
Guarantee and will be subordinate and
junior to all Senior Indebtedness of
K N. The Guarantee covers payments of
distributions and other payments on
the Capital Securities only if and to
the extent that the Trust has funds
available therefor, which will not be
the case unless K N Energy has made
corresponding
S-6
<PAGE> 11
payments of interest or principal or
other payments on the Subordinated
Debentures held by the Trust. See
"Description of the Guarantee." The
Guarantee, when taken together with K
N Energy's obligations under the
Declaration, including its
obligation, as borrower, under the
Indenture, to pay costs, expenses,
debts and obligations of the Trust
(other than with respect to the Trust
Securities), provides a full and
unconditional guarantee, on a
subordinated basis, of amounts due on
the Capital Securities in accordance
with their terms.
Subordinated Debentures of K N
Energy.............................. The Subordinated Debentures will mature
on April 15, 2028 and will bear
interest at the rate of 7.63% per
annum, payable semi-annually in
arrears. The Subordinated Debentures
will have provisions with respect to
interest, prepayment and certain
other terms substantially similar or
analogous to those of the Capital
Securities. See "Description of the
Subordinated Debentures" and "Risk
Factors -- Risks Relating to the
Capital Securities -- Subordinate
Ranking of Obligations Under the
Guarantee and Subordinated
Debentures."
Form, Denomination and
Registration........................ The Capital Securities will be issued
in fully registered form, without
coupons, in denominations of $1,000
and any integral multiples thereof.
Initially, the Capital Securities
will be represented by the Global
Security deposited on behalf of DTC
and registered in the name of a
nominee of DTC. See "Description of
the Capital Securities -- Form,
Denomination and Registration."
Use of Proceeds..................... All of the proceeds from the sale of
the Capital Securities will be
invested by the Trust in the
Subordinated Debentures of K N Energy
issued pursuant to the Indenture. K N
intends to use the net proceeds from
the Offering to purchase U.S.
government securities to replace a
portion of the letters of credit
issued under the Bank Facility that
collateralize the Substitute Note.
See "The Acquisition and Financing
Plan" and "Use of Proceeds."
ERISA Considerations................ Prospective investors should carefully
consider the matter discussed under
the caption "ERISA Considerations."
RISK FACTORS
Prospective investors should carefully consider all the information set
forth and incorporated by reference herein and in the accompanying Prospectus
and, in particular, should evaluate the specific factors set forth under "Risk
Factors" before purchasing any of the Capital Securities offered hereby.
S-7
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents summary historical statement of operations
data for each of K N Energy and MidCon for the year ended December 31, 1997 and
pro forma summary financial information for K N Energy for the year ended
December 31, 1997 assuming that the Acquisition, the Prior Offerings and the
Offering occurred at January 1, 1997. The historical information for both K N
and MidCon has been derived from audited financial statements. The unaudited pro
forma balance sheet information at December 31, 1997 is presented as if the
Acquisition, the Prior Offerings and the Offering had occurred on that date. The
unaudited pro forma statement of operations data are not necessarily indicative
of the financial results that would have occurred had the Acquisition, the Prior
Offerings and the Offering been consummated on the date indicated, nor are they
necessarily indicative of future financial results. The information set forth
below should be read in conjunction with the historical financial statements of
each of K N Energy and MidCon and the notes thereto incorporated by reference
herein and the "Unaudited Pro Forma Consolidated Financial Statements" included
elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
HISTORICAL
---------------------------
K N MIDCON PRO FORMA
---------- ---------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues...................................... $2,145,118 $3,045,081 $5,190,199
Operating costs and expenses............................ 2,002,869 2,832,648 4,832,762
---------- ---------- ----------
Operating income........................................ 142,249 212,433 357,437
Other income and (deductions):
Interest expense...................................... (43,495) (241,838) (255,740)
Minority interests.................................... (8,706) -- (8,706)
Other, net............................................ 23,110 23,469 51,538
---------- ---------- ----------
Income (loss) before income taxes....................... 113,158 (5,936) 144,529
Income taxes............................................ 35,661 (1,426) 48,402
---------- ---------- ----------
Net income (loss)....................................... 77,497 (4,510) 96,127
Preferred stock dividends............................... 350 -- 350
---------- ---------- ----------
Earnings available for common shares.................... $ 77,147 $ (4,510) $ 95,777
========== ========== ==========
Diluted earnings per common share....................... $ 2.45 -- $ 2.17
Number of shares used in computing diluted earnings per
common share.......................................... 31,538 -- 44,038
Dividends per common share.............................. $ 1.09 -- $ 1.09
OTHER FINANCIAL DATA:
EBITDA(1)............................................... $ 212,647 $ 385,501 $ 607,907
Capital expenditures and acquisitions................... 429,683 95,598 --
Depreciation and amortization........................... 55,994 149,599 207,638
</TABLE>
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<PAGE> 13
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------
HISTORICAL
------------------------
K N MIDCON PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 22,471 $ 14,122 $ 22,471
Current assets......................... 576,530 977,155 1,871,138
Investments in U.S. government
securities........................... -- -- 633,157(4)
Total assets........................... 2,305,805 6,527,668 8,984,002
Current liabilities.................... 796,811 898,015 2,545,322
ESOP debt.............................. -- 1,372,458 --
Long-term debt......................... 553,816 1,600,000 2,903,816
K N-obligated mandatorily redeemable
preferred capital trust securities of
subsidiary trust holding solely
debentures of K N.................... 100,000 -- 275,000
Minority interests in equity of
subsidiaries......................... 47,303 7,331 54,634
Preferred stock........................ 7,000 -- 7,000
Common stockholders' equity............ 606,132 736,471 1,230,007
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------
K N MIDCON COMBINED
---------- ----------- ----------
<S> <C> <C> <C>
OPERATING DATA:
Miles of pipeline
Interstate........................... 6,970 10,527 17,497
Intrastate........................... 5,367 2,617 7,984
Offshore............................. -- 695 695
Gathering and processing(2).......... 8,829 1,211 10,040
Distribution(3)...................... 8,724 -- 8,724
Gas processing plants
Number of plants..................... 19 4 23
Total processing capacity (MMcf per
day)............................... 1,695 750 2,445
Natural gas storage facilities
Number of storage facilities......... 7 9 16
Total withdrawal capacity (MMcf per
day)............................... 827 4,400 5,227
</TABLE>
- ---------------
(1) EBITDA represents net income plus income taxes, interest expense,
depreciation, and amortization expense. EBITDA is not presented as an
indicator of the Company's operating performance, an indicator of cash
available for discretionary spending or as a measure of liquidity. EBITDA
may not be comparable to other similarly titled measures of other companies.
(2) Excludes MidCon pipeline (769 miles of pipeline) that is owned but not
operated by MidCon.
(3) Includes K N's Kansas natural gas distribution assets (1,572 miles of
pipeline) which were sold in March 1998.
(4) Represents the purchase of U.S. government securities which, combined with
the letters of credit issued under the Bank Facility, will satisfy K N's
obligation to collateralize the Substitute Note.
S-9
<PAGE> 14
RISK FACTORS
Prospective purchasers of the Capital Securities should carefully review
the information contained elsewhere in this Prospectus Supplement or in the
accompanying Prospectus or incorporated by reference herein or therein and
should particularly consider the following matters.
RISKS RELATING TO K N ENERGY
Acquisition of MidCon; Integration of Businesses of K N Energy and MidCon
The Acquisition significantly increased the size of K N's operations. This
significant increase in size substantially increases the demands placed upon the
Company's management, including demands resulting from the need to integrate
operations of MidCon with those of K N. The Company believes that a key benefit
to be realized from the Acquisition will be the integration of its and MidCon's
assets. There can be no assurance, however, that K N Energy will not encounter
difficulties in integrating MidCon's operations with its own or that the
expected benefits will be realized from such integration. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separated organizations; integrating different strategies and
integrating personnel with disparate business backgrounds and corporate
cultures. There can be no assurance that K N Energy and MidCon will be able to
integrate effectively or in a timely manner. Nor can there be any assurance
that, even if integrated, the Company's product and service offerings will be
successful. Among the factors considered by K N Energy in connection with the
Acquisition were the opportunities for synergies expected to be achieved from
the Acquisition. However, there can be no assurance that K N Energy will achieve
the desired levels of synergies and related revenue growth and cost savings when
anticipated or at all. Failure to achieve the desired levels of synergies could
have a material adverse effect on the business, results of operations, liquidity
and financial condition of K N Energy.
In connection with the Acquisition, the Company became obligated with
respect to MidCon's liabilities including, without limitation, liabilities with
respect to environmental matters, liabilities (including liabilities with
respect to retiree welfare benefits) under MidCon's employee benefits plans and
the obligations of Occidental's insurance subsidiary with respect to insurance
policies previously issued to MidCon. Pursuant to the stock purchase agreement
for the Acquisition (the "Agreement"), Occidental has indemnified the Company
with respect to some of these liabilities, including all liabilities with
respect to MidCon's employee stock ownership plan. However, there can be no
assurance that any of these liabilities will not adversely affect the Company's
results of operations or financial condition. The representations and warranties
contained in the Agreement generally survive the closing of the Acquisition for
one year. There can be no assurance that liabilities will not arise that are not
covered by Occidental's indemnity of K N or that such liabilities may not arise
following such one-year period. See "The Acquisition and the Financing Plan."
Effect of Substantial Leverage
K N Energy incurred substantial additional indebtedness in connection with
the Acquisition. After giving effect to the Acquisition, the Prior Offerings and
the Offering, as of December 31, 1997, K N Energy would have had total debt of
$4,329.4 million and stockholders' equity (including the 8.56% Series B Capital
Trust Securities of K N Capital Trust I and the Capital Securities) of $1,512.0
million, resulting in a total debt to total capital ratio of 74.1% (71.0% net of
U.S. government securities held as collateral). In addition, depending on
prevailing financial, economic and market conditions K N Energy may be unable to
consummate the Additional Offering necessary to replace completely the remaining
letters of credit issued under the Bank Facility in accordance with the
Financing Plan. Accordingly, the amount of outstanding indebtedness may be
greater than contemplated under the Financing Plan. The Company has refinanced
approximately $3.0 billion of borrowings and extensions of credit under the Bank
Facility with the proceeds of the Prior Offerings. Failure to refinance the
remaining $500 million of extensions of credit under the Bank Facility within
364 days of the closing of the Acquisition will result in an event of default
under the Bank Facility and could result in acceleration of the indebtedness
under the Bank Facility. See "Capitalization" and "The Acquisition and the
Financing Plan -- The Financing Plan." K N Energy may also incur additional
indebtedness in the future, including in connection with other acquisitions,
although its ability to do so will be
S-10
<PAGE> 15
restricted by the Bank Facility. See "The Acquisition and the Financing
Plan -- Description of Bank Facility."
K N Energy's leverage may have important consequences to holders of the
Capital Securities, including: (i) limiting K N Energy's ability to obtain
additional financing to fund future working capital requirements, capital
expenditures, debt service requirements, acquisitions or other general corporate
requirements; (ii) requiring a substantial portion of K N Energy's cash flow
from operations to be dedicated to payment of principal and interest on its
indebtedness, thereby reducing the funds available for operations and future
business opportunities; (iii) placing K N Energy at a competitive disadvantage
to companies with which it competes that may be less leveraged; and (iv)
increasing K N Energy's vulnerability to adverse economic and industry
conditions. In addition, since certain of K N Energy's borrowings may be at
variable rates of interest, K N Energy will be vulnerable to increases in
interest rates, which could have a material adverse effect on K N Energy's
results of operations, liquidity and financial condition. K N Energy's ability
to make scheduled payments of the principal of, to pay interest on or to
refinance its indebtedness depends on its future performance, which to a certain
extent is subject to economic, financial, competitive and other factors beyond
its control. There can be no assurance that K N Energy's business will continue
to generate cash flow from operations in the future sufficient to service its
debt and make necessary capital expenditures. If unable to generate such cash
flow, K N Energy may be required to adopt one or more alternatives, such as
selling assets, restructuring debt or obtaining additional equity capital. There
can be no assurance that any of these strategies could be effected on
satisfactory terms or without substantial additional expense to K N Energy.
These and other factors could have a material adverse effect on the results of
operations, liquidity and financial condition of K N Energy.
The Bank Facility imposes financial and other restrictions on K N Energy
and also requires K N Energy to make payments in respect of the
collateralization of the Substitute Note. See "The Acquisition and the Financing
Plan -- Description of Bank Facility." Covenants contained in the Bank Facility
and relating to certain other indebtedness of K N limit, among other things, the
incurrence of funded indebtedness by K N and its subsidiaries, and impose
minimum net worth requirements and, in the event of a downgrade in the ratings
of K N's long-term senior unsecured debt, impose minimum EBITDA/interest
requirements. There can be no assurance that the requirements of the Bank
Facility or such other indebtedness will be met in the future. Failure to comply
with such covenants may result in a default with respect to the related debt
under the Bank Facility or such other indebtedness and could lead to
acceleration of such debt or any instruments evidencing indebtedness that
contain cross-acceleration or cross-default provisions. In such a case, there
can be no assurance that K N Energy would be able to refinance or otherwise
repay such indebtedness.
Risks Relating to Acquisition Strategy
A substantial portion of the Company's growth over the last several years
has been attributable to acquisitions. A principal component of the Company's
strategy is to continue to acquire assets or businesses that are logical
extensions of its existing assets or businesses in order to increase the
efficiency of its existing assets. See "The Combined Company -- Business
Strategy." The Company's ability to achieve its goals will be dependent upon a
number of factors, including the Company's ability to identify acceptable
acquisition candidates, consummate acquisitions on favorable terms, successfully
integrate acquired businesses, increase its gas throughput into new markets and
obtain financing to support its growth. There can be no assurance that the
Company will be successful in implementing its acquisition strategy or that such
strategy will improve operating results.
Competition
The Company competes with other pipeline companies, marketers and brokers
of varying size, resources and experience as well as with producers who are able
to market gas directly to wholesale and end-use markets. Factors influencing the
competitive environment include (i) regulatory changes that provide greater
access to markets by gas producers and marketers, (ii) the ability of certain
markets to switch to alternative fuels at favorable prices, and (iii) increased
pipeline and gas storage capacity in the United States. In addition, natural gas
competes with fuel oil, coal, propane and electricity as an energy source in the
areas served by the
S-11
<PAGE> 16
Company's interstate pipeline system and retail natural gas business. The
Company expects that such competition will increase as a result of the continued
implementation of Federal Energy Regulatory Commission (the "FERC") Order 636
and state retail unbundling initiatives. In addition, the Company's gas
gathering, processing and marketing operations depend in large part on the
ability of the Company to assess and respond to changing market conditions in
negotiating gas purchase and sale agreements and to obtain satisfactory margins
between the purchase price of its natural gas supply and the sales price for
such residual gas volumes and the NGLs processed.
As FERC Order 636 continues to be implemented, increased competition for
market share has led to the announcement of new pipeline projects for increased
capacity. Given the major supplies of gas in the Rocky Mountains, San Juan Basin
and Western Canada, and the relatively high natural gas prices in the Midwest
and Northeast, the major projects have focused on constructing new pipelines
which transport gas from Western Canada to the Midwest (including Northern
Border, Alliance and Transvoyageur), and new pipelines which redirect gas from
the Midwest to the Northeast and Eastern Canada (including Independence/Market
Link (in which MidCon has an interest), Millenium, Eastern Express,
Spectrum/Excelsior, Tristate and Vector). While proposals for the projects
mentioned above have been announced or filed with regulatory authorities, it is
unlikely that all of them will ultimately be completed. Nevertheless, given its
strategic location at the center of the North American pipeline grid, Chicago is
likely to develop into a major natural gas trading hub for the rapidly growing
demand markets in the Midwest and Northeast. To the extent additional pipeline
capacity into Chicago is constructed, the Company's financial position and
results of operations could be adversely affected. The Company intends to try to
mitigate any negative impact over time with additional market growth and
expansion of capacity to move volumes east of Chicago to the heavily populated
northeastern corridor of the United States.
Fluctuating Commodity Prices
The products of K N's natural gas processing operations, including NGLs,
residue gas and related by-products, are commodities. As such, their prices are
often subject to material changes in response to relatively minor changes in
supply and demand, general economic conditions and other market conditions over
which K N has no control. Other market conditions affecting the Company's
natural gas processing business include the availability and prices of
alternative energy and feedstock sources, government regulation, industry-wide
inventory levels, the seasons, the weather and the impact of energy conservation
efforts.
A decrease in the difference between NGL and natural gas prices results in
lower unit margins on natural gas volumes processed, and may result in lower
volumes processed, or lower recoveries of certain NGLs (primarily ethane) at
certain plants. Generally, the prices contained in natural gas processing supply
contracts are tied to a current or index price and, therefore, adjust with
changes in overall market conditions. In addition, K N is contractually able to
mitigate the effect of contracting processing margins by reducing recoveries
until the margin between NGL and natural gas prices improves. A prolonged
contraction of the margin between NGLs and natural gas could materially
adversely affect the financial condition and results of K N's natural gas
processing operations.
Regulation; Pending Regulatory Proceedings
K N Energy and MidCon are both regulated by the FERC in accordance with the
Natural Gas Act of 1938, as amended (the "Natural Gas Act") and the Natural Gas
Policy Act of 1978, as amended (the "Natural Gas Policy Act"). The FERC
regulates the interstate transportation of natural gas, including, among other
things, rates and charges allowed natural gas companies, construction,
extensions and abandonments of facilities and service, rates of depreciation and
amortization and accounting systems. As a result of the Acquisition,
approximately 70% of the operating income of K N will be derived from regulated
assets. Although the Company has in the past successfully converted to
unregulated status certain existing gathering and processing assets and intends
to take similar action with respect to certain assets of MidCon, there can be no
assurance that the Company will receive the requisite approvals to "spin down"
such assets, or once converted to unregulated status, that the FERC will not
attempt to reassert jurisdiction over such assets. See "Regulation -- Federal
and State Regulation."
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<PAGE> 17
In addition, K N Energy and MidCon are currently parties to various
regulatory and rate proceedings relating to the establishment of rates for
service, terms and conditions of service, authorizations to own and construct
new facilities as well as complaints from customers relating to the
implementation of each company's tariff governing authorized services. There
have also been proceedings from time to time relating to cost recovery issues
arising out of contract expirations, gas supply realignment and other transition
issues. Both companies regularly attempt to reach comprehensive settlements with
the parties in pending cases which would resolve the issues in a given matter.
Both companies to date have been successful in resolving major rate and
certificate cases arising out of significant restructuring of the regulated
industries. It is contemplated that each company will continue to pursue a
business strategy which will pursue settlement of regulatory proceedings where
settlement is prudent. While negotiated settlement of such disputes is
encouraged by the FERC and state regulatory bodies, such settlements remain
subject to the FERC or state regulatory review and approval. Whether the FERC or
state regulators will approve such settlements in the form filed or whether a
particular regulatory proceeding will be otherwise resolved in a manner
satisfactory to the Company cannot be predicted with certainty, and the business
of the Company could be adversely affected thereby. For a description of certain
regulatory proceedings in which K N Energy and MidCon are currently involved,
see "Regulation -- Federal and State Regulation."
The Company's operations and properties, including those of MidCon acquired
in the Acquisition, are also 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 or safety
protection. Numerous governmental departments issue rules and regulations to
implement and enforce such laws which are often difficult and costly to comply
with and which carry substantial penalties for failure to comply. 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 trends toward stricter standards in environmental
legislation and regulation are expected to continue. The Company expects to
incur certain costs to comply with environmental laws and regulations. See
"Regulation -- Environmental Regulation."
While the Company is not aware of any environmental liabilities or
conditions that would have a material adverse effect on the business, results of
operations or financial condition of the Company, there is an inherent risk of
the incurrence of environmental or safety costs and liabilities in the business
of the Company due to its handling of natural gas and other regulated substances
and 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.
RISKS RELATING TO THE CAPITAL SECURITIES
Subordinate Ranking of Obligations Under the Guarantee and Subordinated
Debentures
K N Energy's obligations under the Guarantee are pari passu in right of
payment with the 1997 Guarantee and are subordinate and junior in right of
payment to all present and future Senior Indebtedness (as defined herein) of K N
Energy to the same extent as the Subordinated Debentures. The obligations of K N
Energy under the Subordinated Debentures are subordinate and junior in right of
payment to all present and future Senior Indebtedness of K N Energy, including
indebtedness under the Bank Facility, and pari passu with the Company's
obligations under the 1997 Subordinated Debentures. No payment of principal
(including redemption payments, if any), premium, if any, or interest on the
Subordinated Debentures may be made if (i) any Senior Indebtedness of K N Energy
is not paid when due and any applicable grace period with respect to such
default has ended with such default not having been cured or waived or ceasing
to exist or (ii) the maturity of any Senior Indebtedness has been accelerated
because of a default. K N Energy also may not make any payment upon or in
respect of the Subordinated Debentures if a default in the payment of the
principal, premium, if any, interest or other obligations in respect of Senior
Indebtedness occurs and is continuing beyond any applicable period of grace.
There are no terms in the Capital Securities, the Subordinated Debentures or the
Guarantee that limit K N Energy's ability to incur additional indebtedness,
including indebtedness that ranks senior to the Subordinated Debentures and the
Guarantee, or to grant security interests to secure outstanding or new
indebtedness. On a pro forma basis, after giving effect to the Offering, the
Prior Offerings and the Acquisition, at December 31, 1997, the Company had
approximately
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<PAGE> 18
$4.3 billion aggregate principal amount of Senior Indebtedness outstanding
(excluding guarantees and letter of credit obligations). See "Description of the
Guarantee -- Status of the Guarantee" and "Description of the Subordinated
Debentures -- Subordination."
Limitations of the Guarantee
The Guarantee Trustee (as defined herein) will hold the Guarantee for the
benefit of the holders of the Capital Securities. Under the Guarantee, K N
Energy guarantees payments to the holders of the Capital Securities to the
extent of the lesser of (a) the aggregate of the liquidation amount and all
accumulated and unpaid distributions on the Capital Securities to the date of
the payment to the extent the Trust has funds available therefor or (b) the
amount of assets of the Trust remaining available for distribution, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, to holders of the Capital Securities in liquidation of the Trust. Because
the Guarantee is limited by the amount of the funds in the Trust, if K N Energy
were to default on its obligation to pay amounts payable on the Subordinated
Debentures, the Trust would lack available funds for the payment of
distributions or amounts payable on redemption of the Capital Securities or
otherwise, and, in such event, holders of the Capital Securities would not be
able to rely upon the Guarantee for payment of such amounts. Instead, holders of
the Capital Securities would rely on the enforcement (a) by the Institutional
Trustee (as defined herein) of its rights as registered holder of the
Subordinated Debentures against K N Energy pursuant to the terms of the
Subordinated Debentures or (b) by such holder of its right of Direct Action (as
defined herein) against K N Energy as described below to enforce payments on the
Subordinated Debentures. See "Description of the Guarantee -- Events of
Default." The Declaration provides that each holder of Capital Securities, by
acceptance thereof, agrees to the provisions of the Guarantee, including the
subordination provisions thereof, and the Indenture.
Limitation of Enforcement of Certain Rights by Holders of Capital Securities
If (i) the Trust fails to pay distributions in full on the Capital
Securities (other than pursuant to a deferral) or (ii) a Declaration Event of
Default (as defined herein) occurs and is continuing, then the holders of
Capital Securities would rely on the enforcement by the Institutional Trustee of
its rights as a holder of the Subordinated Debentures against K N Energy. In
addition, the holders of a majority in liquidation amount of the Capital
Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Institutional Trustee
or to direct the exercise of any trust or power conferred upon the Institutional
Trustee under the Declaration, including the right to direct the Institutional
Trustee to exercise the remedies available to it as a holder of the Subordinated
Debentures. If the Institutional Trustee fails to enforce its rights under the
Subordinated Debentures, a holder of Capital Securities may institute a legal
proceeding directly against K N Energy to enforce the Institutional Trustee's
rights under the Subordinated Debentures without first instituting any legal
proceeding against the Institutional Trustee or any other person or entity.
Notwithstanding the foregoing, if a Declaration Event of Default has occurred
and is continuing and such event is attributable to the failure of K N Energy to
pay interest or principal on the Subordinated Debentures on the date such
interest or principal is otherwise payable (or in the case of prepayment, on the
prepayment date), then a holder of Capital Securities may directly institute a
proceeding for enforcement of payment to such holder of the principal of or
interest on the Subordinated Debentures having a principal amount equal to the
aggregate liquidation amount of the Capital Securities of such holder (a "Direct
Action") on or after the respective due date specified in the Subordinated
Debentures. In connection with such Direct Action, K N Energy will be subrogated
to the rights of such holders of Capital Securities under the Declaration to the
extent of any payment made by K N Energy to such holder of Capital Securities in
such Direct Action. The holders of Capital Securities will not be able to
exercise directly any other remedy available to the holders of Subordinated
Debentures. See "Description of the Capital Securities -- Declaration Events of
Default."
Delay of Interest Payments
So long as K N Energy shall not be in default in the payment of interest on
the Subordinated Debentures, K N Energy has the right under the Indenture to
defer payments of interest on the Subordinated Debentures by extending the
interest payment period at any time, and from time to time, on the Subordinated
Debentures.
S-14
<PAGE> 19
As a consequence of such an extension, semi-annual distributions on the Capital
Securities would be deferred by the Trust during any such Extension Period.
Prior to the termination of any such Extension Period, K N Energy may further
extend such Extension Period; provided, that any such Extension Period, together
with all such previous and further extensions thereof, may not exceed 10
consecutive semi-annual periods or extend beyond the maturity of the
Subordinated Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due, K N Energy may commence a new Extension Period,
subject to the above requirements. See "Description of the Capital
Securities -- Distributions" and "Description of the Subordinated
Debentures -- Option to Extend Interest Payment Period."
Should K N Energy exercise its right to defer payments of interest by
extending the interest payment period, each holder of Capital Securities will be
required to accrue income (as original issue discount ("OID")) in respect of the
deferred and compounded interest allocable to its Capital Securities for United
States federal income tax purposes, which will be allocated but not distributed,
to holders of record of Capital Securities. As a result, each such holder of
Capital Securities will recognize income for United States federal income tax
purposes in advance of the receipt of cash and will not receive the cash from
the Trust related to such income if such holder disposes of its Capital
Securities prior to the record date for the date on which distributions of such
amounts are made. K N Energy has no current intention of exercising its right to
defer payments of interest by extending the interest payment period of the
Subordinated Debentures. See "Certain United States Federal Income Tax
Consequences -- Interest Income and Original Issue Discount."
Should K N Energy determine to exercise such right in the future, the
market price of the Capital Securities is likely to be materially adversely
affected. A holder that disposes of its Capital Securities during an Extension
Period, therefore, might not receive the same return on its investment as a
holder that continues to hold its Capital Securities. In addition, as a result
of the existence of K N Energy's right to defer interest payments, the market
price of the Capital Securities (which represent undivided beneficial ownership
interests in the Subordinated Debentures) may be more volatile than other
securities that do not have such interest deferral rights.
Tax Event or Investment Company Event
Upon the occurrence and continuation of a Tax Event or an Investment
Company Event, the Company has the right to prepay the Subordinated Debentures
in whole (but not in part) within 90 days following the occurrence of such Tax
Event or Investment Company Event and therefore cause a mandatory redemption of
the Capital Securities at the Optional Redemption Price. See "Description of the
Capital Securities -- Redemption."
A "Tax Event" means the receipt by the Company and the Trust of an opinion
of counsel, who shall not be an officer or employee of the Company or its
affiliates, to the effect that, as a result of any amendment to, or change
(including any announced proposed change) in, the laws (or any regulations
thereunder) of the United States or any other relevant political subdivision or
taxing authority, or as a result of any official administrative written decision
or action or pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which proposed
change, pronouncement, action or decision is announced on or after the date of
this Prospectus Supplement, there is more than an insubstantial risk that (i)
the Trust is, or will be within 90 days of the date of such opinion of counsel,
subject to United States federal income tax with respect to income received or
accrued on the Subordinated Debentures, (ii) interest payable by the Company on
the Subordinated Debentures is not, or within 90 days of the date of such
opinion of counsel, will not be, deductible by the Company, in whole or in part,
for United States federal income tax purposes, or (iii) the Trust is, or will be
within 90 days of the date of such opinion of counsel, subject to more than a de
minimis amount of taxes, duties or other governmental charges.
An "Investment Company Event" means the receipt by the Company and the
Trust of an opinion of counsel, who shall not be an officer or employee of the
Company or its affiliates, to the effect that, as a result of the occurrence of
a change in law or regulation or change in interpretation or application of law
or regulation by any legislative body, court, government agency or regulatory
authority (a "Change in 1940 Act Law"), the Trust is or will be considered an
Investment Company that is required to be registered under the Investment
Company Act of 1940, as amended, which Change in 1940 Act Law becomes effective
on or after the date of this Prospectus Supplement.
S-15
<PAGE> 20
Distribution of Subordinated Debentures Upon Dissolution of the Trust
The Company will have the right to dissolve the Trust at any time and,
after satisfaction of liabilities to creditors as required by law, cause the
Subordinated Debentures to be distributed to the holders of the Capital
Securities in liquidation of the Trust. The exercise of such right is subject to
the Company having received an opinion of counsel to the effect that such
distribution will not be a taxable event to holders of Capital Securities. See
"Description of the Capital Securities -- Liquidation Distribution Upon
Dissolution."
Absence of Voting Rights
Except for limited rights regarding replacement of the Institutional
Trustee, holders of the Capital Securities will not have any voting rights with
respect to K N Energy's governance, nor will they be entitled to vote to
appoint, remove or replace, or to increase or decrease the number of, K N
Trustees or Administrators (as defined herein), which voting rights are vested
exclusively in the holder of the Common Securities. See "Description of the
Capital Securities -- Voting Rights."
Absence of Public Market
There is no existing market for the Capital Securities and there can be no
assurance as to (i) the liquidity of any markets that may develop for the
Capital Securities or (ii) the ability of the holders to sell their Capital
Securities or (iii) at what price holders of the Capital Securities will be able
to sell their respective securities. Future trading prices of the Capital
Securities will depend on many factors including, among other things, prevailing
interest rates, the Company's operating results, and the market for similar
securities. The Underwriters have informed the Trust and the Company that the
Underwriters intend to make a market in the Capital Securities. However, the
Underwriters are not obligated to do so and any such market making activity may
be terminated at any time without notice to the holders of the Capital
Securities. In addition, such market making activity will be subject to the
limits of the Securities Act. The Company and the Trust do not intend to apply
for listing of the Capital Securities on any securities exchange or for
quotation through the NASD Automated Quotation System.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the captions "Prospectus Supplement
Summary," "Risk Factors," "Unaudited Pro Forma Consolidated Financial
Statements," "The Combined Company," "K N Energy, Inc.," "MidCon Corp." and
elsewhere in this Prospectus Supplement include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). 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, other federal and state regulatory
developments, the timing and extent of changes in commodity prices for oil, gas,
NGLs, electricity and interest rates, the extent of the Company's success in
acquiring natural gas facilities, the ability of the Company to successfully
integrate MidCon and other acquisition candidates into its operations, the
timing and success of efforts to develop power, pipeline and other projects,
political developments in foreign countries and conditions of the capital
markets and equity markets during the periods covered by the forward-looking
statements.
USE OF PROCEEDS
All of the proceeds from the sale of the Capital Securities will be
invested by the Trust in Subordinated Debentures of K N Energy pursuant to the
Indenture. The net proceeds of the Offering are estimated to be approximately
$173.1 million. K N intends to use such net proceeds to purchase U.S. government
securities to replace a portion of the letters of credit issued under the Bank
Facility currently collateralizing the Substitute Note. All of the borrowings
and extensions of credit under the Bank Facility mature on January 29, 1999
other than borrowings under the $400 Million Facility (as defined herein) which
matures on January 30, 2003. See "The Acquisition and the Financing Plan."
S-16
<PAGE> 21
THE ACQUISITION AND THE FINANCING PLAN
THE ACQUISITION
Pursuant to the Agreement, on January 30, 1998, the Company paid
approximately $2.1 billion in cash and issued the Substitute Note in an
aggregate principal amount of approximately $1.39 billion to Occidental to
acquire the outstanding shares of capital stock of MidCon (the "MidCon Shares")
and a note in a like aggregate principal amount issued to Occidental by MidCon's
employee stock ownership plan (the "ESOP Note"). In connection with the planned
termination of MidCon's employee stock ownership plan following the Acquisition,
the ESOP Note was cancelled. The Substitute Note is required to be paid in full
on January 4, 1999 and bears interest at a rate equal to 5.798%. The Company is
required to collateralize the Substitute Note plus an amount equal to 105 days
of accrued interest with U.S. government securities or one or more letters of
credit, or a combination thereof. Such amounts were initially collateralized
with letters of credit which the Company replaced in part with U.S. government
securities purchased with the proceeds of the Prior Offerings. The Company
intends to replace the remaining letters of credit with U.S. government
securities purchased with the proceeds of the Offering, the Additional Offering
and additional borrowings under the Bank Facility. See "Use of Proceeds" and
"-- The Financing Plan."
The Agreement contains representations and warranties of each of Occidental
and the Company, which survive the closing for one year (except as to certain
tax matters, which survive for two years), and customary covenants. In
connection with its acquisition of the MidCon Shares, the Company became
obligated with respect to MidCon's liabilities, including, without limitation,
liabilities with respect to environmental matters, liabilities under MidCon's
benefit plans for active and retired employees and the obligations of
Occidental's insurance subsidiary with respect to insurance policies previously
issued to MidCon. Each party has agreed to indemnify the other party for certain
losses or liabilities incurred as a result of a breach of representation or
warranty or covenant and, in the case of Occidental, to indemnify the Company
for certain losses or liabilities arising out of MidCon's employee stock
ownership plan.
As a result of various regulatory requirements, prior to the consummation
of the Acquisition, MidCon dividended all of the issued and outstanding capital
stock of MidCon Power Services Corp. ("MidCon Power"), a wholly-owned subsidiary
of MidCon, to Occidental. K N and Occidental have entered into a separate stock
transfer agreement for the acquisition of all the issued and outstanding capital
stock of MidCon Power by K N. The acquisition of the MidCon Power capital stock
by K N was contingent on the FERC approving the transaction, which approval was
received on March 2, 1998. The acquisition of MidCon Power closed in March 1998.
THE FINANCING PLAN
The total amount of funds required by K N Energy to complete the
Acquisition, including payment of related transaction costs, was approximately
$2,518 million, which was financed through borrowings under Credit Agreements,
dated as of January 30, 1998 (the "Bank Facility"), among the Company, Morgan
Guaranty Trust Company of New York ("Morgan Guaranty") and a syndicate of other
lenders. The Bank Facility replaced the Company's Amended and Restated Credit
Agreement, dated as of March 7, 1997, among the Company, Morgan Guaranty and a
syndicate of other lenders (the "1997 Credit Agreement"). In addition, the
Company issued the Substitute Note which, pursuant to the Agreement, was
collateralized by letters of credit issued under the Bank Facility. The Company
was required to refinance certain amounts under the Bank Facility within 364
days following the consummation of the Acquisition. As of the date of this
Prospectus Supplement, approximately $500 million of such amount has not yet
been refinanced.
S-17
<PAGE> 22
At the closing of the Acquisition, the financing was provided as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Borrowings under the Bank Facility........................ $2,504.0
Cash on hand at MidCon.................................... 14.1
--------
Total sources of funds............................ $2,518.1
========
USES OF FUNDS:
Cash consideration to Occidental.......................... $2,103.9
Repay borrowings under the 1997 Credit Agreement.......... 329.2
Estimated transaction costs............................... 60.0
Working capital adjustment (estimate)..................... 25.0
--------
Total uses of funds............................... $2,518.1
========
</TABLE>
The Company refinanced indebtedness incurred under the Bank Facility in
connection with the Acquisition and purchased U.S. government securities to
replace a portion of the letters of credit under the Bank Facility
collateralizing the Substitute Note with the proceeds of the Prior Offerings in
March 1998. The Company intends to purchase U.S. government securities to
replace an additional portion of the letters of credit issued under the Bank
Facility through this Offering. The Company intends to purchase additional U.S.
government securities to replace completely the letters of credit
collateralizing the Substitute Note through the issuance of approximately $400
million of mandatorily convertible preferred capital trust securities of a
subsidiary trust and additional borrowings under the Bank Facility during the
second quarter of 1998. There can be no assurance that the Company will be able
to complete the Additional Offering. See "Risk Factors -- Risks Relating to K N
Energy -- Effect of Substantial Leverage." The following table sets forth the
sources and uses of funds in connection with the Prior Offerings, the Offering
and the Additional Offering.
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Proceeds from the Equity Offering......................... $ 650.0
Proceeds from the Debt Offerings.......................... 2,350.0
Proceeds from the Offering................................ 175.0
Proceeds from the Additional Offering..................... 400.0
--------
Total sources of funds............................ $3,575.0
========
USES OF FUNDS:
Repayment of borrowings under the Bank Facility........... $2,130.4
Purchase of U.S. government securities as collateral for
the Substitute Note.................................... 1,394.8
Estimated fees and expenses............................... 49.8
--------
Total uses of funds............................... $3,575.0
========
</TABLE>
DESCRIPTION OF BANK FACILITY
The description set forth below does not purport to be complete and is
qualified in its entirety by reference to certain agreements setting forth the
principal terms of the Bank Facility which are filed as exhibits to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, which
is incorporated by reference herein.
The Bank Facility initially provided for indebtedness in an aggregate
principal amount not to exceed $4.5 billion and consisted of the following
credit facilities: (a) an approximately $1.39 billion letter of credit facility
S-18
<PAGE> 23
(which was reduced by approximately $866.1 million in March 1998) providing for
the issuance of letters of credit for the benefit of Occidental to support the
Substitute Note (the "L/C Facility"); (b) a $2.1 billion revolving credit
facility (which was prepaid and terminated in March 1998) providing for
revolving loans to the Company in an aggregate principal amount not to exceed
$2.1 billion (the "$2.1 Billion Facility"); (c) a $400 million revolving credit
facility providing for revolving loans to the Company and the issuance of
letters of credit for the account of the Company in an aggregate principal
amount at any time not to exceed $400 million (of which not more than $100
million may be represented by letters of credit) (the "$400 Million Facility");
and (d) a $600 million revolving credit facility providing for revolving loans
to the Company in an aggregate principal amount at any time not to exceed $600
million (the "$600 Million Facility"). The L/C Facility and the $2.1 Billion
Facility may be used solely in connection with the Acquisition. The $400 Million
Facility and the $600 Million Facility may be used for general corporate
purposes and replace the 1997 Credit Agreement.
The L/C Facility and the $600 Million Facility have maturities of 364 days.
The $400 Million Facility has a maturity of five years. The $2.1 Billion
Facility was prepaid and terminated in March 1998 with a portion of the net
proceeds of the Prior Offerings. The remainder of the net proceeds of the Prior
Offerings were used to replace a portion of the borrowings and extensions of
credit under the L/C Facility. The Company intends to refinance completely
indebtedness incurred and extensions of credit under the Bank Facility in
connection with the Acquisition through the Offering, the Additional Offering
and other borrowings. See "-- The Financing Plan" and "Capitalization."
At the Company's option, revolving credit commitments may be permanently
reduced, in whole or in part, at any time in minimum amounts of $10 million or
any larger multiples of $1 million. At the Company's option, the interest rates
per annum applicable to the Bank Facility will be either LIBOR, Adjusted CD or
Base Rate and, in the case of both the $400 Million Facility and the $600
Million Facility, Money Market Absolute and Money Market LIBOR (each as defined
in the Bank Facility) plus, in the case of LIBOR and Adjusted CD, an agreed upon
margin based on credit ratings assigned to the long-term senior unsecured debt
of the Company by Moody's Investors Service, Inc. ("Moody's") and Standard and
Poor's Ratings Services ("S&P") and, in the case of Money Market LIBOR, a margin
over or under LIBOR determined for the applicable interest period. As used
herein, the term "Base Rate" means the higher of Morgan Guaranty's prime rate or
the federal funds rate plus 0.50%.
Letter of credit fees are based on the credit ratings described in the
immediately preceding paragraph. The Company is also required to pay a per annum
utilization fee equal to 12.5 basis points on all borrowings if 50% or more of
such facility is outstanding at the time of such borrowing.
The Bank Facility covenants include, without limitation, a limit on total
consolidated subsidiary debt to 10% of the Company's total consolidated debt, a
limitation on total consolidated debt to 87% percent of total capitalization at
the closing of the Acquisition (67% after the consummation of the Prior
Offerings, the Offering and the Additional Offering), a limitation on
consolidated debt of any material subsidiary to 65% of the consolidated total
capitalization of such material subsidiary, a restriction on liens on the assets
of the Company or its subsidiaries and a minimum consolidated net worth
requirement of at least $570 million plus (i) 50% of incremental consolidated
net income and (ii) 80% of any increase in net worth resulting from the issuance
of certain securities. In the event of a downgrade by either of S&P or Moody's
to below BBB- or Baa3, respectively, financial covenants will include a minimum
EBITDA to interest requirement.
S-19
<PAGE> 24
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
K N at December 31, 1997 (i) on a historical basis, (ii) as adjusted for (a) the
Prior Offerings, the Offering and application of the proceeds therefrom and (b)
the acquisition of MidCon, including the incurrence of borrowings under the Bank
Facility in connection with the Acquisition and (iii) as adjusted for the
Additional Offering. See "The Acquisition and the Financing Plan". There can be
no assurance that the Company will be able to complete the Additional Offering,
or that the proceeds from the Additional Offering will be as currently
contemplated. This table should be read in conjunction with the consolidated
financial statements of K N and MidCon incorporated by reference herein and the
"Unaudited Pro Forma Consolidated Financial Statements" and the notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------------------
ADJUSTMENTS AS ADJUSTED
FOR THE PRIOR FOR THE PRIOR ADJUSTMENTS AS ADJUSTED
OFFERINGS, THE OFFERINGS, THE FOR THE FOR THE
K N OFFERING AND THE OFFERING AND THE ADDITIONAL ADDITIONAL
HISTORICAL ACQUISITION ACQUISITION OFFERING OFFERING
------------- ---------------- ---------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Securities held as collateral for
Substitute Note................... -- $ 460,057(1) $ 633,157 $ 373,689(6) $1,394,846
========== ==========
173,100(2) 388,000(7)
Short-term debt:
Current maturities of long-term
debt............................ $ 30,751 $ 30,751 $ 30,751
Borrowings under 1997 Credit
Agreement....................... 329,200 $ (329,200)(3) -- --
Borrowings under Bank Facility.... -- 2,174,852(3) -- 373,689(6) 373,689
329,200(3)
(2,340,234)(4)
(163,818)(1)
Substitute Note due January 1,
1999............................ -- 1,394,846(5) 1,394,846 1,394,846
---------- ---------- ----------
Total short-term debt....... $ 359,951 $1,425,597 $1,799,286
========== ========== ==========
Long-term debt...................... $ 553,816 2,350,000(4) $2,903,816 $2,903,816
K N-obligated mandatorily redeemable
preferred capital trust securities
of subsidiary trusts holding
solely debentures of K N(8)....... 100,000 175,000(2) 275,000 275,000
K N-obligated mandatorily
convertible preferred capital
trust securities of subsidiary
trust holding solely debentures of
K N(8)............................ -- -- 388,000(7) 388,000
Stockholders' equity:
Preferred stock (200,000 Class A
shares authorized, 70,000
outstanding and 2,000,000 Class
B shares authorized, none
outstanding).................... 7,000 7,000 7,000
Common stock (50,000,000 shares
authorized, 32,024,557
outstanding)(9)................. 160,123 62,500(1) 222,623 222,623
Additional paid-in capital........ 270,678 561,375(1) 832,053 832,053
Retained earnings................. 185,658 185,658 185,658
Deferred compensation............. (9,203) (9,203) (9,203)
Treasury stock.................... (1,124) (1,124) (1,124)
---------- ---------- ----------
Total stockholders' equity...... 613,132 1,237,007 1,237,007
---------- ---------- ----------
Total capitalization........ $1,266,948 $4,415,823 $4,803,823
========== ========== ==========
</TABLE>
- ---------------
(1) Gives effect to the issuance of 12,500,000 shares of Common Stock at a
public offering price of $52 per share which occurred on March 10, 1998, and
the application of the net proceeds of $623.9 million to (i) the reduction
of acquisition debt and (ii) the purchase of U.S. government securities to
collateralize in part the Substitute Note.
(2) Gives effect to the issuance of $175.0 million of mandatorily redeemable
preferred capital trust securities offered hereby and application of the net
proceeds of $173.1 million to purchase U.S. government securities to replace
an additional portion of the letters of credit that collateralize the
Substitute Note.
(3) Gives effect to acquisition debt totalling approximately $2.5 billion,
including $329.2 million which was used to repay amounts borrowed under the
1997 Credit Agreement.
S-20
<PAGE> 25
(4) Gives effect to the issuance of $2.35 billion principal amount of long-term
debt securities which occurred on March 9, 1998, and application of the net
proceeds of $2.34 billion to the reduction of borrowings under the Bank
Facility.
(5) Pursuant to the Agreement, the Company issued the Substitute Note to
Occidental for the total principal amount due on the ESOP Note of $1,386
million plus accrued interest to the date of closing, which totalled
approximately $8.8 million. The Substitute Note matures on January 1, 1999
and was initially collateralized by letters of credit issued under the L/C
Facility. It is currently the Company's intention to completely
collateralize the Substitute Note with U.S. government securities. See Notes
(6) and (7).
(6) Gives effect to incremental borrowings under the Bank Facility and
application of the proceeds to purchase U.S. government securities to
collateralize completely the Substitute Note.
(7) Gives effect to the issuance of $400 million of mandatorily convertible
preferred capital trust securities and application of the net proceeds of
$388 million to purchase U.S. government securities to collateralize in part
the Substitute Note.
(8) The sole assets of the trusts are or will be debentures of K N. Upon
prepayment of such debentures, the related capital securities will be
mandatorily redeemable.
(9) In February 1998, K N Energy's board of directors approved an increase in
the number of authorized shares of Common Stock to 150,000,000, which
increase was approved by shareholders in April 1998.
ACCOUNTING TREATMENT
The financial statements of the Trust will be consolidated into the
Company's consolidated financial statements, with the Capital Securities treated
as a minority interest and shown in the Company's consolidated balance sheet as
"K N-Obligated Mandatorily Redeemable Preferred Capital Trust Securities of
Subsidiary Trust Holding Solely Debentures of K N." The financial statement
footnotes of the Company will reflect that the sole asset of the Trust will be
$180.5 million principal amount of the Subordinated Debentures, bearing interest
at 7.63% per annum and maturing on April 15, 2028. All future reports filed by
the Company under the Exchange Act will present information regarding the Trust
in the manner described above. Distributions to Capital Security holders will be
included in "minority interests" on the Company's consolidated statement of
income.
S-21
<PAGE> 26
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
Acquisition, the Prior Offerings and to the Offering. The unaudited pro forma
condensed balance sheet as of December 31, 1997 is presented as if the
Acquisition, the Prior Offerings and the Offering had occurred on that date. The
unaudited pro forma condensed statement of income for the year ended December
31, 1997 assumes that the Acquisition, the Prior Offerings and the Offering
occurred at January 1, 1997. The Acquisition was recorded as a purchase for
accounting purposes and, accordingly, the assets acquired and liabilities
assumed have been reflected at their estimated respective fair market values.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of K N and MidCon and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of K N
incorporated herein by reference. See "Incorporation of Certain Documents by
Reference" in the accompanying Prospectus. The unaudited pro forma condensed
statement of income is not necessarily indicative of the financial results that
would have occurred had the Acquisition been consummated on the date indicated,
nor is it necessarily indicative of future financial results.
The pro forma adjustments are based on preliminary assumptions and
estimates made by K N's management and do not reflect adjustments for
anticipated operating efficiencies and cost savings which K N expects to achieve
as a result of the Acquisition. The actual allocation of the consideration paid
by K N for MidCon may differ from that reflected in the unaudited pro forma
combined condensed financial statements after a more extensive review of the
fair market values of the assets acquired and liabilities assumed has been
completed. Amounts allocated will be based upon the estimated fair values at the
closing date of the Acquisition, which amounts could vary significantly from the
amounts at December 31, 1997.
S-22
<PAGE> 27
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
HISTORICAL PRO FORMA
------------------------- ---------------------------
K N ENERGY MIDCON ADJUSTMENTS COMBINED
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents................................ $ 22,471 $ 14,122 $ (14,122)(a) $ 22,471
U.S. Government Securities............................... -- -- 460,057(b) 633,157
173,100(c)
Restricted Deposits...................................... 11,339 19,074 30,413
Accounts Receivable...................................... 409,937 479,086 889,023
Materials and Supplies................................... 13,476 16,938 30,414
Gas in Underground Storage............................... 33,558 33,730 67,288
Prepaid Gas.............................................. 5,507 -- 5,507
Other Prepaid Expenses................................... 16,687 7,774 24,461
Net Properties to Be Dividended, Net of Tax.............. -- 301,582 (301,582)(d) --
Gas Imbalances and Other................................. 63,555 104,849 168,404
---------- ----------- ----------- -----------
576,530 977,155 317,453 1,871,138
Investments................................................ 149,869 49,829 199,698
Property, Plant and Equipment.............................. 1,971,601 7,058,124 (128,245)(e) 8,901,480
Accumulated Depreciation and Amortization.................. (550,626) (1,622,325) (2,172,951)
---------- ----------- ----------- -----------
Net Property, Plant and Equipment.......................... 1,420,975 5,435,799 (128,245) 6,728,529
Long-Term Receivable -- Occidental Petroleum............... -- 50,345 (50,345)(f) --
Deferred Charges and Other Assets.......................... 158,431 14,540 9,766(g) 184,637
1,900(c)
---------- ----------- ----------- -----------
Total Assets....................................... $2,305,805 $ 6,527,668 $ 150,529 $ 8,984,002
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt..................... $ 30,751 -- $ 30,751
Notes Payable............................................ 329,200 -- $2,174,852(a) --
(163,818)(b)
(2,340,234)(g)
(329,200)(h)
329,200(h)
Substitute Note.......................................... -- -- 1,394,846(i) 1,394,846
Accounts Payable......................................... 334,418 $ 316,756 651,174
Accrued Expenses......................................... 37,264 -- 100,000(e) 137,264
Accrued Taxes............................................ 7,445 -- 7,445
Dividend Payable......................................... -- 301,582 (301,582)(d) --
Current portion of ESOP Debt............................. -- 13,568 (13,568)(j) --
Gas Imbalances and Other................................. 57,733 266,109 323,842
---------- ----------- ----------- -----------
796,811 898,015 850,496 2,545,322
Deferred Liabilities, Credits and Reserves:
Deferred Income Taxes.................................... 168,583 1,684,548 (46,168)(e) 1,756,618
(50,345)(f)
Other.................................................... 26,160 228,845 (43,400)(k) 211,605
---------- ----------- ----------- -----------
194,743 1,913,393 (139,913) 1,968,223
ESOP Debt.................................................. -- 1,372,458 (1,372,458)(j) --
Long-Term Debt............................................. 553,816 1,600,000 (1,600,000)(l) 2,903,816
2,350,000(g)
K N-Obligated Mandatorily Redeemable Preferred Capital
Trust Securities of Subsidiary Trust holding solely
debentures of K N........................................ 100,000 -- 175,000(c) 275,000
Minority Interests in Equity of Subsidiaries............... 47,303 7,331 54,634
Stockholders' Equity:
Preferred Stock.......................................... 7,000 -- 7,000
Common Stock............................................. 160,123 14 (14)(m) 222,623
62,500(b)
Additional Paid-in Capital............................... 270,678 2,001,938 (2,001,938)(m) 832,053
561,375(b)
Retained Earnings........................................ 185,658 81,906 (81,906)(m) 185,658
Unearned ESOP Shares..................................... -- (1,347,387) 1,347,387(m) --
Deferred Compensation.................................... (9,203) -- (9,203)
Treasury Stock........................................... (1,124) -- (1,124)
---------- ----------- ----------- -----------
Total Common Stockholders' Equity.................. 606,132 736,471 (112,596) 1,230,007
---------- ----------- ----------- -----------
Total Stockholders' Equity......................... 613,132 736,471 (112,596) 1,237,007
---------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity......... $2,305,805 $ 6,527,668 $ 150,529 $ 8,984,002
========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
S-23
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ ---------------------------
K N ENERGY MIDCON ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenues...................... $2,145,118 $3,045,081 $5,190,199
---------- ---------- ----------
Operating Costs and Expenses:
Gas Purchases and Other Costs of
Sales.............................. 1,724,671 2,540,928 4,265,599
Operations and Maintenance............ 198,274 111,824 $ (4,800)(j) 305,298
Depreciation and Amortization......... 55,994 149,599 2,045(n) 207,638
Taxes, Other Than Income Taxes........ 23,930 30,297 54,227
---------- ---------- --------- ----------
Total Operating Costs and
Expenses.................... 2,002,869 2,832,648 (2,755) 4,832,762
---------- ---------- --------- ----------
Operating Income........................ 142,249 212,433 2,755 357,437
---------- ---------- --------- ----------
Other Income and (Deductions):
Interest Expense...................... (43,495) (241,838) 16,056(o) (255,740)
13,537(p)
Minority Interests.................... (8,706) -- (8,706)
Other, Net............................ 23,110 23,469 (13,507)(p) 51,538
(726)(g)
(63)(c)
(13,353)(c)
8,915(c)
23,693(b)
---------- ---------- --------- ----------
Total Other Income and (Deductions)..... (29,091) (218,369) 34,552 (212,908)
---------- ---------- --------- ----------
Income Before Income Taxes.............. 113,158 (5,936) 37,307 144,529
Income Taxes............................ 35,661 (1,426) 14,167(q) 48,402
---------- ---------- --------- ----------
Net Income.............................. 77,497 (4,510) 23,140 96,127
Less -- Preferred Stock Dividends....... 350 -- 350
---------- ---------- --------- ----------
Earnings Available For Common Stock..... $ 77,147 $ (4,510) $ 23,140 $ 95,777
---------- ---------- --------- ----------
Diluted Earnings Per Common Share....... $ 2.45 $ 2.17
Number of Shares Used in Computing
Diluted Earnings Per Common Share..... 31,538 12,500(b) 44,038
Dividends Per Common Share.............. $ 1.09 $ 1.09*
</TABLE>
- ---------------
* Represents K N's historical dividends per common share
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
S-24
<PAGE> 29
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(a) Acquisition debt is calculated based on the following assumptions:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Cash Consideration Paid at Closing........................ $2,103,974
Transaction Costs......................................... 60,000
Working Capital Adjustment (estimated).................... 25,000
Less:
MidCon Cash Balance at December 31, 1997.................. (14,122)
----------
Total Acquisition Debt............................ $2,174,852
==========
</TABLE>
The acquisition debt, shown as a current liability in the accompanying
unaudited Pro Forma Condensed Balance Sheet, was refinanced with the
net proceeds of the Prior Offerings. See Notes (b) and (g).
(b) To record the Equity Offering and application of the net proceeds of
$623.9 million to (i) reduce short-term borrowings under the Bank
Facility utilized to effect the Acquisition and (ii) purchase U.S.
government securities to replace a portion of the letters of credit
that collateralize the Substitute Note.
(c) To record the Offering and application of the net proceeds to purchase
U.S. government securities to replace an additional portion of the
letters of credit that collateralize the Substitute Note. Distributions
on the Capital Securities issued in the Offering are assumed to be
payable at an annual rate of 7.63%. The U.S. government securities are
assumed to earn interest at 5.15%.
(d) Gives pro forma effect to the January 1, 1998 dividend by MidCon to a
subsidiary of Occidental Petroleum Corporation of MidCon's 49% interest
in a limited partnership which owns MidCon Texas Pipeline Corp.
(e) The following preliminary allocation of purchase price to assets
acquired and liabilities assumed reflects the assumption that current
assets and current liabilities are carried at historical amounts which
approximate their fair market value. The fair market value of property,
plant and equipment includes a gas plant acquisition adjustment of
approximately $3.8 billion which represents the excess of the estimated
fair market value of MidCon's interstate pipeline assets over their
recorded historical cost for regulatory purposes, which will be
amortized over 35 years (approximately the estimated remaining life of
MidCon's interstate pipeline assets).
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
CALCULATION OF PURCHASE PRICE:
Cash Consideration Paid at Closing........................ $2,103,974
Substitute Note Payable to Occidental..................... 1,394,846
Transaction Costs......................................... 60,000
Working Capital Adjustment (estimated).................... 25,000
----------
Total............................................. $3,583,820
==========
PRELIMINARY ALLOCATION OF PURCHASE PRICE
Cash and Cash Equivalents................................. $ 14,122
Restricted Deposits....................................... 19,074
Accounts Receivable....................................... 479,086
</TABLE>
S-25
<PAGE> 30
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Materials and Supplies.................................... 16,938
Gas in Underground Storage................................ 33,730
Other Prepaid Expenses.................................... 7,774
Gas Imbalances and Other.................................. 104,849
Investments............................................... 49,829
Deferred Charges and Other Assets......................... 14,540
Property, Plant and Equipment, Net(*)..................... 5,307,554
Accounts Payable.......................................... (316,756)
Gas Imbalances and Other.................................. (266,109)
Deferred Income Taxes(**)................................. (1,588,035)
Other Non-Current Liabilities............................. (185,445)
Accrued Expenses.......................................... (100,000)
Minority Interest in Unconsolidated Subsidiaries.......... (7,331)
----------
Total............................................. $3,583,820
==========
</TABLE>
- ---------------
(*) The fair market value assigned by K N, inclusive of the gas plant
acquisition adjustment, is less than MidCon's historical book value
(which included a gas plant acquisition adjustment of approximately
$3.9 billion) by approximately $128.2 million.
(**) The accumulated deferred income taxes associated with the assets
being acquired and the liabilities being assumed (after K N's
allocation of purchase price) are less than MidCon's historical
accumulated deferred income taxes by approximately $46.2 million.
(f) To eliminate the receivable and corresponding deferred taxes associated
with deferred intercompany gains which were settled at closing.
(g) To record the Debt Offerings and application of the net proceeds of
$2,340.2 million to reduce short-term borrowings under the Bank
Facility.
(h) Reflects the utilization of additional borrowings under the Bank
Facility to repay the borrowings outstanding under the 1997 Credit
Agreement.
(i) In accordance with the terms of the Agreement, K N issued the
Substitute Note to Occidental for the total of the principal due on the
ESOP Note plus interest accrued to date of closing, a total of $1,394.8
million, bearing interest at approximately 5.80% and maturing on
January 4, 1999. K N collateralized the Substitute Note with letters of
credit under the Bank Facility at the closing of the Acquisition, and
subsequently purchased U.S. government securities with the proceeds of
the Prior Offerings to replace a portion of the letters of credit used
to collateralize the Substitute Note. It is K N's intention to purchase
U.S. government securities with the proceeds of the Additional Offering
and other funds as required to replace the L/C Facility.
(j) Gives pro forma effect to the termination of MidCon's Employee Stock
Ownership Plan instituted in November 1996, including cancellation of
the related debt and removal of the associated administrative expenses.
(k) Represents the elimination of the deferred net gain recorded in
conjunction with MidCon's postretirement benefit plan.
(l) Gives pro forma effect to the elimination of MidCon's long-term payable
to Occidental recorded in conjunction with a November 30, 1996 dividend
declaration of $1.6 billion.
S-26
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- (CONTINUED)
(m) Represents the elimination of the historical equity balances of MidCon.
(n) The pro forma adjustment to depreciation and amortization consists of
the following:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Elimination of MidCon's historical depreciation and
amortization........................................... $(149,599)
K N's recomputed depreciation and amortization, see Note
(e).................................................... 151,644
---------
Total............................................. $ 2,045
=========
</TABLE>
(o) The pro forma adjustment to interest expense consists of the following:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Elimination of MidCon's historical interest expense on its
ESOP Note.............................................. $(110,500)
Elimination of MidCon's historical interest expense on its
$1.6 billion payable to Occidental..................... (128,200)
Interest Expense on the Debt Offerings at 6.78%, see Note
(g).................................................... 159,330
Interest Expense at 5.80% on the Substitute Note, see
Note(i)................................................ 80,873
Interest savings associated with the repayment of $329.2
million outstanding under the 1997 Credit Agreement.... (22,320)
Fee for letter of credit at 0.625% used to collateralize
the Substitute Note, see Note(i)....................... 4,761
---------
Total............................................. $ (16,056)
=========
</TABLE>
(p) To eliminate facility fees and interest income associated with MidCon's
participation in a sale of receivables facility, which participation
terminated concurrently with closing of the Acquisition.
(q) Represents the tax effect at the effective rate (equal to (i) the
statutory federal income tax rate plus (ii) the statutory state income
tax rate, net of federal income tax benefit) for all pre-tax pro forma
adjustments not representing permanent book/tax differences.
S-27
<PAGE> 32
SELECTED HISTORICAL FINANCIAL INFORMATION FOR K N ENERGY
The following table sets forth selected financial data for K N for each of
the five fiscal years in the period ended December 31, 1997. This data should be
read in conjunction with the historical financial statements and related notes
of K N incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues
Gathering, processing and marketing services.............. $ 730,895 $ 838,474 $ 854,462 $1,191,292 $1,866,327
Interstate transportation and storage services............ 99,838 21,044 22,217 25,352 23,757
Retail natural gas services............................... 212,905 220,431 227,282 223,838 255,034
Gas and oil production.................................... 5,321 11,328 7,437 -- --
---------- ---------- ---------- ---------- ----------
Total operating revenues............................ 1,048,959 1,091,277 1,111,398 1,440,482 2,145,118
Operating costs and expenses................................ 968,085 1,036,398 996,036 1,305,681 2,002,869
---------- ---------- ---------- ---------- ----------
Operating income............................................ 80,874 54,879 115,362 134,801 142,249
Other income and (deductions):
Interest expense.......................................... (30,513) (31,605) (34,211) (35,933) (43,495)
Minority interests........................................ 292 (659) (905) (2,946) (8,706)
Other, net................................................ (1,185) 2,206 1,326 3,794 23,110
---------- ---------- ---------- ---------- ----------
Income before income taxes.................................. 49,468 24,821 81,572 99,716 113,158
Income taxes................................................ 18,599 9,500 29,050 35,897 35,661
---------- ---------- ---------- ---------- ----------
Net income.................................................. 30,869 15,321 52,522 63,819 77,497
Preferred stock dividends................................... 853 630 492 398 350
---------- ---------- ---------- ---------- ----------
Earnings available for common stock......................... $ 30,016 $ 14,691 $ 52,030 $ 63,421 $ 77,147
========== ========== ========== ========== ==========
Number of shares used in computing diluted earnings per
common share.............................................. 27,424 28,044 28,360 29,624 31,538
Diluted earnings per common share........................... $ 1.09 $ 0.52 $ 1.83 $ 2.14 $ 2,45
Dividends per common share.................................. 0.51 0.76 1.01 1.05 1.09
OTHER FINANCIAL DATA:
Net cash flows from operating activities.................... $ 67,943 $ 91,212 $ 132,249 $ 75,610 $ 97,503
EBITDA(1)................................................... 124,625 106,704 165,674 186,861 212,647
Capital expenditures and acquisitions....................... 148,301 101,742 111,258 267,124 429,683
Depreciation, depletion and amortization.................... 44,644 50,278 49,891 51,212 55,994
Ratio of earnings to fixed charges(2)....................... 2.41x 1.69x 3.07x 3.21x 2.72x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 14,353 $ 20,613 $ 14,254 $ 10,339 $ 22,471
Current assets.............................................. 312,856 279,314 306,799 461,694 576,530
Total assets................................................ 1,169,275 1,172,384 1,257,457 1,629,720 2,305,805
Current liabilities......................................... 263,331 255,770 329,838 498,616 796,811
Long-term debt.............................................. 335,190 334,644 315,564 423,676 553,816
K N-obligated mandatorily redeemable preferred capital trust
securities of subsidiary trust holding solely debentures
of K N.................................................... -- -- -- -- 100,000
Minority interests in equity of subsidiaries................ 13,775 13,231 14,277 26,333 47,303
Preferred stock............................................. 7,000 7,000 7,000 7,000 7,000
Common stockholders' equity................................. 391,462 393,686 426,760 519,794 606,132
</TABLE>
S-28
<PAGE> 33
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interstate natural gas transportation volumes (Bcf)......... 131 135 156 157 177
Gathering, processing and marketing services
Gas sales volumes (Bcf)................................... 290 353 408 430 574
Gathered volumes (Bcf).................................... 222 287 306 313 423
Natural gas liquid sales (MM Gal)......................... 241 375 388 470 717
Retail natural gas services
Gas sales volumes (Bcf)................................... 42 41 39 35 39
Transportation volumes (Bcf).............................. 15 19 27 33 35
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
-----------------
<S> <C> <C> <C>
Miles of pipeline
Interstate................................................ 6,970
Intrastate................................................ 5,367
Gathering and processing.................................. 8,829
Distribution(3)........................................... 8,724
Gas processing plants
Number of plants.......................................... 19
Total processing capacity (MMcf per day).................. 1,695
Natural gas storage facilities
Number of storage facilities.............................. 7
Total withdrawal capacity (Bcf per day)................... 0.8
</TABLE>
- ---------------
(1) EBITDA represents net income plus income taxes, interest expense,
depreciation, and amortization expense. EBITDA is not presented as an
indicator of the Company's operating performance, an indicator of cash
available for discretionary spending or as a measure of liquidity. EBITDA
may not be comparable to other similarly titled measures of other companies.
(2) Respecting the computation of the ratio of earnings to fixed charges see
"Ratios of Earnings to Fixed Charges" in the accompanying Prospectus.
(3) Including K N's Kansas natural gas distribution assets which were sold in
March 1998.
S-29
<PAGE> 34
SELECTED HISTORICAL FINANCIAL INFORMATION FOR MIDCON
The following table sets forth selected financial data for MidCon for each
of the five fiscal years in the period ended December 31, 1997. This data should
be read in conjunction with the historical financial statements and related
notes of MidCon incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Gas sales, transportation, storage and other operating
revenues............................................... $2,403,185 $2,109,834 $2,038,444 $2,574,211 $3,045,081
Interest and other income................................ 261,598 24,486 11,686 1,187 13,115
Earnings of pipeline ventures............................ 10,760 13,100 18,155 12,716 11,799
---------- ---------- ---------- ---------- ----------
Total revenues..................................... 2,675,543 2,147,420 2,068,285 2,588,114 3,069,995
Costs and other deductions
Cost of sales............................................ 1,787,552 1,561,331 1,473,370 1,981,235 2,540,928
Selling, general, administrative and other operating
expenses............................................... 103,883 109,556 167,235 108,347 111,824
Depreciation............................................. 274,551 191,672 193,112 177,511 149,599
Taxes other than income taxes............................ 45,470 45,585 42,357 46,226 30,297
Interest expense......................................... 2,103 8,101 23,286 79,626 241,838
Other.................................................... 1,414 1,802 1,646 2,000 1,445
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.......................... $ 460,570 $ 229,373 $ 167,279 $ 193,169 $ (5,936)
========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
Net cash provided by operating activities.................. $ 306,205 $ 454,383 $ 167,305 $ 267,073 $ 175,320
EBITDA(1).................................................. 737,224 429,146 383,677 450,306 385,501
Capital expenditures....................................... 64,831 92,656 150,229 146,883 95,598
Depreciation............................................... 274,551 191,672 193,112 177,511 149,599
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 4,600 $ 8,098 $ 10,414 $ 4,258 $ 14,122
Current assets......................................... 597,471 730,683 561,748 1,033,007 977,155
Total assets........................................... 7,276,792 7,330,820 7,095,494 6,652,362 6,527,668
Current liabilities.................................... 581,902 533,622 513,620 961,614 898,015
ESOP debt.............................................. -- -- -- 1,386,026 1,372,458
Long-term debt......................................... 83,462 32,802 874,899 1,632,696 1,600,000
Minority interests in equity of subsidiaries........... 12,985 5,870 5,349 8,076 7,331
Common stockholder's equity............................ 4,228,001 4,372,210 3,328,038 692,641 736,471
</TABLE>
S-30
<PAGE> 35
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
NGPL
Transportation volumes (Bcf).............................. 1,408 1,318 1,318 1,284 1,095
MidCon Texas
Sales volumes (Bcf)....................................... 211 198 238 239 269
Transportation volumes (Bcf).............................. 201 215 215 271 302
MidCon Gas Services
Sales volumes (Bcf)....................................... 211 351 410 460 561
MidCon Gas Products
Natural gas liquids sales volumes (MM Gal)................ 179 124 160 174 136
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
------------------
<S> <C>
Miles of pipeline(2)
Interstate................................................ 10,527
Intrastate................................................ 2,617
Offshore.................................................. 695
Gathering and processing.................................. 1,980
Gas processing plants
Number of plants.......................................... 4
Total processing capacity (MMcf per day).................. 750
Natural gas storage facilities
Number of storage facilities.............................. 9
Total withdrawal capacity (Bcf per day)................... 4.4
</TABLE>
- ---------------
(1) EBITDA represents net income plus income taxes, interest expense,
depreciation, and amortization expense. EBITDA is not presented as an
indicator of MidCon's operating performance, an indicator of cash available
for discretionary spending or as a measure of liquidity. EBITDA may not be
comparable to other similarly titled measures of other companies.
(2) Includes pipeline that is either owned or operated.
S-31
<PAGE> 36
THE COMBINED COMPANY
As a result of the Acquisition, K N Energy is one of the largest integrated
natural gas companies in the United States. On a pro forma basis as of December
31, 1997, the Company owned and/or operated over 26,000 miles of interstate,
intrastate and offshore natural gas transmission pipeline, approximately 10,000
miles of gathering pipeline, approximately 7,200 miles of local distribution
pipeline (excluding K N's Kansas natural gas distribution assets which were sold
in March 1998) and 16 storage facilities with storage capacity of more than 250
Bcf of working gas. On a pro forma basis, the Company is also one of the largest
transporters and marketers of natural gas in the United States with average
sales volumes of approximately 3.7 Bcf of natural gas per day and average
transportation volumes of approximately 5.2 Bcf of natural gas per day. On a pro
forma basis as of December 31, 1997, the Company had $9.0 billion in assets, and
pro forma for the year ended December 31, 1997, the Company had operating
revenues of $5.2 billion, operating income of $357.4 million and net income of
$96.1 million.
In addition to significantly increasing the Company's size and scope of
operations as well as its geographic presence, management believes the
Acquisition also provides K N with a strong platform for future growth. On a pro
forma basis, the Company now has pipeline assets in 16 states and access to
several of the largest natural gas markets in the United States, including
Chicago, Houston, Kansas City and Denver. In addition, the combined company has
access to natural gas supplies in the major natural gas supply basins in the
United States, including those in the Mid-Continent, West Texas, Rocky Mountain
and Gulf Coast regions. As a result of the Acquisition, the Company is also one
of the nation's largest owners and operators of natural gas storage assets in
both supply and market areas. Management believes these assets are strategically
located and will allow the Company to become a major supplier of storage
service, particularly in the Chicago market. Management believes the Acquisition
also significantly broadens the Company's retail presence in both the
residential and small business market segments.
BUSINESS STRATEGY
The Company's strategy is to enhance its assets and operations along all
segments of the natural gas "value stream" by increasing access to supplies of
natural gas for the Company's upstream gathering and processing facilities,
delivering that supply through K N's midstream transmission pipelines and
marketing that supply to a broad range of downstream end users, including
utility, residential, commercial, agricultural and industrial customers. The
Company believes that it has developed several competitive strengths that will
enable it to continue to successfully implement this strategy, including: (i)
extensive natural gas infrastructure from the wellhead to the burner tip, (ii)
access to natural gas supplies in several of the largest domestic natural gas
producing areas, (iii) access to natural gas markets in some of the largest
natural gas consuming areas in the Midwest, Texas and the Rocky Mountains, (iv)
a management team which combines an entrepreneurial spirit with significant
experience in the natural gas industry, (v) a strong track record of quickly and
successfully integrating acquisitions and (vi) a commitment to provide superior
customer service. Management believes the Acquisition is consistent with the
Company's strategy. The key elements of the Company's strategy include the
following:
Optimize operation of the Company's assets
Over the past several years, K N has been able to generate significant
value through the improved operation of its assets. With the Acquisition, the
Company has identified several opportunities for the optimization of operations
through the integration and consolidation of MidCon's assets with those of K N.
By connecting pipelines to proximate gathering facilities, relocating processing
facilities and reconfiguring certain operations, the Company believes it can
increase throughput, lower costs and thereby significantly improve operating
results of these assets. Specifically, K N plans to integrate and consolidate
its gathering, processing and intrastate pipelines in West Texas with MidCon's
assets in the region. K N also plans to build an interconnect between the
Amarillo Line of MidCon's NGPL pipeline and K N's Bushton natural gas processing
plant. In addition, the Company believes that the combination of K N's supply
area storage with MidCon's market area storage provides additional opportunities
for the Company to arbitrage regional and seasonal natural gas price
differentials.
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Aggressively pursue new markets
K N will continue to pursue opportunities to gain additional market share
along the MidCon and K N pipeline systems. K N is currently executing this
strategy by expanding its marketing presence in the Denver metropolitan area
through the proposed construction of the Front Runner Pipeline, and in Kansas
City through the construction of an additional lateral pipeline. Both of these
cities represent markets that the Company believes have been historically
underserved by gas pipelines and that are easily reached through extensions of K
N's current pipelines. The Company believes that, given MidCon's pipeline system
and its low-cost position, the Acquisition also provides significant additional
opportunities to continue to access new markets and significantly increases the
Company's market share.
Leverage regulated assets by developing complementary unregulated businesses
K N seeks to build or acquire unregulated businesses that complement its
core regulated assets. A key component of K N's growth has been its ability to
evolve from a 99% regulated entity in 1990 to a 48% regulated entity at December
31, 1997, based on operating income. As an example of this strategy, K N has
successfully taken advantage of several unregulated gathering, processing and
marketing opportunities in the Rocky Mountains and Midwest in conjunction with
the development and operation of its regulated Pony Express Pipeline. Management
believes that MidCon's assets, which are largely regulated, present additional
opportunities for K N to continue to pursue this strategy. For the year ended
December 31, 1997, approximately 70% of the Company's pro forma operating income
was derived from regulated assets, compared with approximately 48% for K N's
historical business on a stand-alone basis. The Company's goal is to increase
the operating income derived from unregulated assets to approximately 50% over
time. The Company also believes it can improve the profitability of certain of
MidCon's gathering assets through a spin-down of such assets from a regulated
affiliate to unregulated affiliates. By transferring these assets to unregulated
affiliates, the Company believes it will be able to increase operational
flexibility, lower costs, and take advantage of opportunities to increase system
throughput.
Pursue strategic acquisitions, alliances, joint ventures and partnerships
K N will continue to pursue acquisitions and strategic alliances that
create new business opportunities and enhance its existing operations. The
Company maintains a highly disciplined approach to acquisitions in order to
identify investments that logically expand K N's business into contiguous
markets, help increase economies of scale or provide opportunities to leverage
regulated businesses by developing complementary unregulated businesses. The
Company has established a number of strategic alliances, joint ventures and
partnerships to reach its goals. For example, the Wildhorse gathering and
marketing joint venture with TBI, pursuant to which TBI has dedicated all of its
uncommitted Rocky Mountain gas production, has enhanced the Company's access to
gas supply. The Company also formed a partnership to develop the TransColorado
pipeline and provide increased market access for isolated Rocky Mountain gas. In
1997, the Company and PacifiCorp Holdings, Inc. formed EN-able, a joint venture
to exploit retail opportunities presented by deregulation of the retail electric
and gas utility industries. The Company believes that the Acquisition provides
not only a significant platform from which to pursue additional complementary
acquisitions, but also greatly enhances the value of K N as a potential partner.
Maintain and enhance the Company's position as a low-cost provider
The Company is a low-cost provider of natural gas gathering, processing and
transportation services and is constantly seeking opportunities to further
reduce costs without compromising safety or sacrificing customer service. Recent
operational changes consistent with this strategy include re-routing gas from
high cost plants into the more efficient Bushton complex and the exchange of
underperforming assets in Texas for transmission assets needed to transport new
gathering volumes and which enhanced the performance of other K N assets. NGPL
is currently one of the lowest cost transporters of gas in the Mid-Continent
region and, as a result, management believes that the Company is now in an even
stronger position to preserve or increase market share than its higher-cost
competitors, particularly in the event that additional gas comes into the
Chicago market from Canada. In addition, the increased access to additional
supply sources from MidCon's pipelines
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should support K N's low-cost position. The Company expects to realize annual
operating and administrative savings beginning in 1998 due primarily to the
consolidation of operations and activities that are duplicative with those of
MidCon and improved utilization of assets.
Expand the Company's retail presence
In order to take advantage of the rapidly changing competitive landscape in
the utility industry, the Company has developed value-added products and
services to offer to customers beyond the traditional energy commodity. As part
of this strategy, K N developed Simple Choice which offers consumers, through
their local utilities, a bundled package of energy, communications and
entertainment products serviced through one call and itemized on one bill. The
Simple Choice package of services is marketed to other utilities through the
Company's EN-able joint venture with PacifiCorp Holdings, Inc. By licensing
Simple Choice to other gas, electric and water utilities, EN-able creates
partnerships that allow utility partners to play a broader role in providing a
range of products and services to the home, and allows EN-able to build a larger
retail presence in the marketplace more quickly than it could on its own.
EN-able also provides back-office support to its utility partners, including
infrastructure support for customer care and billing functions and marketing
channels.
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K N ENERGY, INC.
OVERVIEW
K N Energy is an integrated energy services provider with operations that
include the gathering, processing, transportation and storage of natural gas and
the marketing of natural gas and NGLs. The Company's operations are organized
into three segments: (i) gathering, processing and marketing services (including
intrastate transmission and storage in Texas), (ii) interstate transportation
and storage, and (iii) retail natural gas services. As described further below,
certain of the Company's operations are regulated by various federal and state
entities. For the year ended December 31, 1997, approximately 48% of the
Company's operating income was derived from regulated assets.
GATHERING, PROCESSING AND MARKETING SERVICES
The Company provides natural gas gathering, processing, storage,
transportation, marketing, field services and supply services, to a variety of
customers. Within this business segment, the Company owns and operates
approximately 12,900 miles of pipeline in nine states and operates 19 gas
processing plants in five states and natural gas storage facilities in West
Texas and on the Gulf Coast. For the year ended December 31, 1997, this business
segment accounted for approximately 52.3% of consolidated operating income.
Revenues from the Company's gathering, processing, storage, transportation,
marketing and supply activities are generated in four different ways. First, the
Company performs a merchant function whereby the Company purchases gas at the
wellhead, combines such gas with other supplies of gas, and markets the
aggregated gas to consumers. Second, the Company gathers, transports and/or
processes gas for producers or other third parties who retain title to the gas.
Third, the Company processes gas into NGLs and markets NGLs. Fourth, the Company
provides gas marketing and supply services, including certain storage services,
to producers, various natural gas resellers and end users. The Company also
arranges the purchase and transportation of producers' excess or uncommitted gas
to end users, acts as shipper or agent for the end users, administers
nominations and provides balancing assistance when needed.
In conjunction with its merchant function, the Company engages in price
risk management activities in the energy financial instruments market to hedge
its price and basis risk exposure. The Company buys and sells gas and crude oil
futures positions on the New York Mercantile Exchange and Kansas City Board of
Trade and uses over-the-counter energy swaps and options for the purpose of
reducing adverse price exposure to gas supply costs or specific market margins.
Pursuant to its Board of Directors' approved guidelines, the Company engages in
these activities only as a hedging mechanism against pre-existing or anticipated
physical gas and condensate sales, gas purchases, system use, and storage in
order to protect profit margins, and is prohibited from engaging in speculative
trading.
Gas Gathering and Processing
The Company's gathering and processing subsidiaries operate pipeline
systems in seven Mid-Continent and Rocky Mountains states. These subsidiaries
perform various services for customers including, among others, gathering gas at
the wellhead or other field aggregation points, transporting gas on an
intrastate basis at negotiated rates, processing gas to extract NGLs, and
marketing natural gas and NGLs.
Based on average throughput, the Company's largest gathering operation is
its Hugoton Basin system in Kansas which gathers approximately 530 MMcf per day,
making K N the largest gatherer in this basin. The Hugoton Basin system
interconnects with several gas processing plants in the area including K N's
Bushton plant. The Company's Wattenberg System in northeastern Colorado, which
includes gathering and transmission lines, has current throughput of
approximately 150 MMcf per day. K N's West Texas System is located primarily in
western Texas and the Texas Panhandle. This system, which includes gathering,
intrastate transmission and storage pipelines, six gas processing plants, and
one storage facility, has gathering throughput of approximately 140 MMcf per
day. The Company also owns gathering facilities in the Powder River and Wind
River Basins of Wyoming and the Piceance and Uinta Basins of western Colorado
and eastern Utah with combined throughput of approximately 130 MMcf per day.
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<PAGE> 40
In addition to the above systems, K N recently acquired two gathering
systems in the Rocky Mountains which gather in aggregate approximately 460 MMcf
per day. In December 1997, K N purchased an equity interest in the Red Cedar
Gathering System in the San Juan Basin of New Mexico. The Red Cedar system
gathers approximated 440 MMcf per day of natural gas and is connected to the
Company's jointly-owned Coyote Gulch processing plant and to the TransColorado
pipeline. Also in December 1997, K N acquired Interenergy Corporation, a closely
held provider of natural gas services in the Rocky Mountain area. The
Interenergy assets include pipelines which gather approximately 20 MMcf per day,
a gas processing plant in Wyoming and an interest in a gas processing plant in
North Dakota.
In 1996, Wildhorse, a joint venture between K N and TBI, purchased
gathering and processing assets of Williams Field Services in western Colorado
and eastern Utah. The acquisition of these assets provided Wildhorse access to
existing TBI production, to approximately 240,000 acres of undeveloped leasehold
held by TBI in the Piceance Basin, and to undeveloped third-party acreage
throughout the Piceance and Uinta basins. The assets acquired included
approximately 950 miles of natural gas gathering lines, two processing plants, a
carbon dioxide treatment plant and a dew point control plant. For the year ended
December 31, 1997, these facilities processed and treated approximately 70 MMcf
of natural gas per day.
At December 31, 1997, the Company's gathering, processing and marketing
segment operated 19 natural gas processing plants, including the Bushton
complex, one of the largest NGLs extraction facilities in the United States. On
a daily basis, these plants process approximately 1.4 Bcf of natural gas (and
have capacity to process 1.7 Bcf of natural gas per day) and produce more than
2.4 million gallons of NGLs. NGLs are sold by the Company on a contractual basis
to various NGL pipelines, end users and marketers at index-based prices.
Marketing
In 1997, the Company's natural gas marketing customers included local
distribution companies, industrial, commercial and agricultural end users,
electric utilities, Company affiliates, and other marketers located both on and
off K N's pipeline systems. Natural gas is purchased by K N's gathering,
processing and marketing business from various sources, including gas producers,
gas processing plants and pipeline interconnections. For the year ended December
31, 1997, the Company's gathering, processing and marketing operations sold an
average of approximately 1.6 Bcf of natural gas per day before intersegment
eliminations.
As is customary in the industry, most of the Company's gas purchase
agreements are for periods of one year or less, and many are for periods of 60
days or less. Various agreements permit the purchaser or the supplier to
renegotiate the purchase price or discontinue the purchase under certain
circumstances. Purchase volume obligations under many of the agreements utilized
by this business segment are generally "best efforts" and do not have
traditional take-or-pay provisions. However, certain agreements require the
Company to prepay for, or to receive, minimum quantities of natural gas.
The Company owns a storage facility located in Gaines County, Texas, which
had a working storage capacity of 16.4 Bcf of natural gas at December 31, 1997
and withdrawal capacity of 525 MMcf per day. This facility has traditionally
been used to meet peak day requirements of the West Texas system. K N also has
lease rights in the Stratton Ridge facility located in Brazoria County, Texas,
including a peak day natural gas withdrawal capacity of 150 MMcf per day at
December 31, 1997.
K N Field Services
K N Field Services, Inc. ("KNFS") provides field operations services to gas
and oil industry customers who own production, gathering, processing and
transportation assets. To the extent possible, KNFS uses the existing
infrastructure and labor force employed in the Company's own systems to serve
its clients. Among the services KNFS provides are well tending, site services,
corrosion monitoring, compression operations and maintenance, safety training,
gathering and pipeline operations and maintenance, measurement, pressure and
flow monitoring, water hauling and line locating.
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<PAGE> 41
INTERSTATE TRANSPORTATION AND STORAGE SERVICES
The Company's interstate pipeline system provides transportation and
storage services to affiliates, third-party natural gas distribution utilities,
and other shippers. For the year ended December 31, 1997, this business segment
accounted for approximately 24.6% of consolidated operating income. As of
December 31, 1997, the Company's interstate pipeline system consisted of
approximately 6,900 miles of transmission lines and one storage field.
The Company provides both firm and interruptible transportation and
no-notice services to its customers. Under no-notice service, customers are able
to meet their peak day requirements without making specific nominations as
required by firm and interruptible transportation service tariffs. The local
distribution companies and other shippers may release their unused firm
transportation capacity rights to other shippers. It is the Company's experience
that this released capacity has, to a large extent, replaced interruptible
transportation on the Company's interstate pipeline system. Firm transportation
customers pay a monthly reservation charge plus a commodity charge based on
actual volumes transported. Interruptible transportation is billed on the basis
of volumes shipped.
In 1996, K N purchased a crude oil pipeline (renamed the Pony Express
Pipeline) running from Lost Cabin in central Wyoming to Freeman, Missouri near
Kansas City, and converted it to natural gas transport service. The line became
operational in August 1997 and, under its current configuration, has a maximum
capacity of 255 MMcf per day. The Pony Express Pipeline provides access to
significant natural gas reserves principally from the Denver-Julesburg, Wind
River and Powder River Basins and is a catalyst for the development of the
market hub at Rockport, Colorado. As a complement to this pipeline, in November
1996 the Company acquired one 20-year contract and one 19-year contract to
provide firm transportation capacity of 230 MMcf of natural gas per day to the
Kansas City metropolitan area. This project reflects the Company's ongoing
strategy to balance regulated pipeline projects with the corresponding potential
for greater returns from other nonregulated business segments.
The Company is a one-half joint venture partner in the TransColorado Gas
Transmission Pipeline Co. ("TransColorado"). TransColorado's pipeline is
expected to provide increased flexibility in accessing multiple natural gas
basins in the Rocky Mountain region. Though only a portion of the pipeline is
currently operational, when completed, the TransColorado Pipeline will extend
290 miles, from the Piceance Basin of Colorado to Blanco, New Mexico, and will
have an initial capacity of 300 MMcf per day. The TransColorado Pipeline will
operate as an interstate pipeline regulated by the FERC.
The Company's interstate pipeline system provides storage services to its
customers through its Huntsman Storage Field in Cheyenne County, Nebraska. The
facility had a peak natural gas withdrawal capacity of 100 MMcf per day at
December 31, 1997.
RETAIL NATURAL GAS SERVICES
The Company provides retail natural gas services to residential,
commercial, agricultural and industrial customers for space heating, crop
irrigation, drying, and processing of agricultural products. The Company's
EN-able joint venture also has a 24-hour Customer Service Center in Scottsbluff,
Nebraska, which centralizes customer service calls, service start-up and billing
calls, service dispatch and remittance operations for the three-state region.
For the year ended December 31, 1997, this business segment accounted for
approximately 23.1% of consolidated operating income.
Regulated Retail Services
The Company's retail natural gas business operated approximately 1,500
miles of intrastate natural gas transmission, gathering and storage facilities
as of December 31, 1997. These intrastate pipeline systems serve industrial
customers and much of the Company's retail natural gas business in Colorado and
Wyoming. As of December 31, 1997, the Company's retail natural gas business
served over 210,000 customers in Colorado, Nebraska and Wyoming through
approximately 7,200 miles of distribution pipelines (excluding the Company's
Kansas natural gas distribution assets which were sold in March 1998).
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<PAGE> 42
The Company's underground storage facilities are used to provide natural
gas for load balancing and peak system demand. Storage services for the
Company's retail natural gas services segment are provided by three facilities
owned in Wyoming, one facility in Colorado owned and operated by Wildhorse and a
storage facility located in Nebraska and owned by the Company's interstate
pipeline system. The peak day natural gas withdrawal capacity available for this
segment at December 31, 1997 was 103 MMcf per day.
The Company's retail operations in Nebraska, Wyoming and northeastern
Colorado serve areas that are primarily rural and agriculturally based. In much
of Nebraska, the winter heating load is balanced by irrigation requirements in
summer months and grain drying in the fall. The economy in the western Colorado
service territory continues to grow as a result of growth in mountain resort
communities and development of retirement communities.
Gas Purchases and Supply
The Company's retail natural gas business relies on the Company's
interstate pipeline system, the intrastate pipeline systems it operates, and
third-party pipelines for transportation and storage services required to serve
its markets. Its gas supply requirements are being met through a combination of
purchases from wholly-owned marketing subsidiaries and third-party suppliers.
The gas supply for the retail natural gas business segment comes primarily
from basins in Kansas, Montana, Wyoming, Colorado, New Mexico and western
Nebraska which include under-developed basins that represent significant proved
reserves. The Company's gas supplies are strategically located with respect to
existing and planned pipeline capacity, giving the Company access to gas for its
retail customer base.
Certain gas purchase contracts contain take-or-pay clauses which require
that a certain purchase level be attained each contract year, or the Company
must make a payment which is generally equal to the contract price multiplied by
the deficient volume. All such payments are fully recoupable under the terms of
the gas purchase contracts and the existing regulatory rules. To date, no
buy-out or buy-down payments relating to take-or-pay contracts have been made by
this business segment. See "-- Gathering, Processing and Marketing
Services -- Marketing."
Unregulated Retail Services
In September 1996, the Company, through its subsidiary K N Services, Inc.
("KNS"), began marketing its Simple Choice package of products and services. In
addition to natural gas service, under Simple Choice, customers can order
satellite TV, appliance protection, long-distance telephone service, wireless
Internet access and other products and services with one call, paid for with one
monthly payment, and backed by one service guarantee. Simple Choice was launched
in Scottsbluff, Nebraska, where the Company also opened its first Simple Choice
General Store.
In early 1997, K N and PacifiCorp jointly formed EN-able to market the
Simple Choice brand to K N's approximately 200,000 and PacifiCorp's
approximately 1.5 million customers as well as to other utilities. EN-able is
engaged in efforts to create Simple Choice partnerships and licensing agreements
with other utilities. An integral part of the Simple Choice package is
outsourced billing and customer service for third-party utilities. To enhance
this capability, early in 1997 KNS and PacifiCorp's subsidiary, PacifiCorp
Holdings, Inc., acquired Orcom Systems, Inc., the software development company
that designed the billing system which supports the Simple Choice brand of
products and services.
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MIDCON CORP.
OVERVIEW
MidCon is engaged in the purchase, gathering, processing, transmission,
storage and sale of natural gas to utilities, municipalities and industrial and
commercial users. MidCon also purchases electricity from electric utilities, and
other electric power producers and marketers and resells the electricity to
wholesale and end-use customers.
MidCon's operations are conducted through its principal subsidiaries: NGPL,
which owns and operates a major interstate pipeline transmission system and
related assets; MidCon Texas Pipeline Operator, Inc. ("MidCon Texas"), which
operates an intrastate pipeline system in Texas; MidCon Gas Services Corp.
("MidCon Gas"), which purchases and sells natural gas and arranges for the
transportation and storage of such gas; MidCon Power Services Corp. ("MidCon
Power"), which purchases electricity from electric utilities and other electric
power producers and marketers, resells electricity to wholesale customers and
arranges for the transmission of such power; mc(2) Inc. ("mc(2)"), which markets
natural gas and electricity at the retail level; and MidCon Gas Products Corp.
("MidCon Gas Products"), which gathers and processes natural gas. In addition,
MidCon also has equity investments in several other natural gas pipelines.
INTERSTATE AND INTRASTATE TRANSPORTATION SERVICES
MidCon's pipeline subsidiaries operate over 13,000 miles of natural gas
pipelines which are strategically located in the center of the North American
pipeline grid. This pipeline network provides access not only to the major
supply areas in the Gulf of Mexico, the Gulf Coast, the Permian Basin, the
Mid-Continent, the Rocky Mountains and Western Canada, but also to the major
consuming markets in the Midwest and along the Gulf Coast.
Transportation and Sales
NGPL owns and operates over 10,000 miles of pipeline, consisting 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 LDCs and end-users, thereby providing
significant flexibility in the receipt and delivery of gas. One pipeline --
known as the "Amarillo Line" -- originates in the West Texas and New Mexico
producing areas and is comprised of approximately 5,200 miles of mainline and
various small-diameter pipelines. The other pipeline -- known as the "Gulf Coast
Line" -- originates in the Gulf Coast areas of Texas and Louisiana and consists
of approximately 4,900 miles of mainline and various small-diameter pipelines.
These two main pipelines are connected at points in Texas and Oklahoma by NGPL's
240-mile Amarillo/Gulf Coast ("A/G") pipeline. In addition, a 105-mile pipeline
runs from the Arkoma Basin gas producing area of eastern Oklahoma to the A/G
pipeline.
MidCon Texas operates an intrastate pipeline system, located primarily in
the Texas Gulf Coast area, which it leases from an Occidental affiliate 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 and has 22 interconnects with other pipelines. A subsidiary of 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.
Pursuant to transportation agreements and FERC tariff provisions, NGPL
offers both firm transportation service and interruptible transportation
service. Under NGPL's tariff, firm transportation customers pay reservation
charges each month, irrespective of volumes actually 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.
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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 natural gas to the Chicago
market, and its cost of service is one of the lowest in the region. In 1997,
NGPL delivered an average of 2.6 Bcf per day of natural gas, representing 60% of
the total natural gas delivered to the Chicago metropolitan area during the same
period. Given its strategic location at the center of the North American
pipeline grid, Chicago is likely to continue to be a major natural gas trading
hub for the rapidly growing demand markets in the Midwest and Northeast.
Approximately 100% of NGPL's pipeline capacity to Chicago is committed under
firm transportation services. As of November 1, 1997, approximately 22% of the
total volume committed to be transported under NGPL's firm transportation
contracts had remaining terms in excess of 3 years.
In January 1997, NGPL and a subsidiary of NIPSCO Industries, Inc.
("NIPSCO") completed construction of a 100 MMcf per day pipeline interconnection
in the Chicago metropolitan area between their respective pipeline systems, thus
providing NGPL with additional access to markets east of Chicago.
Unlike NGPL, MidCon Texas acts as a merchant provider of natural gas as
well as a transporter. Texas is the largest producer of and the largest
consuming market for natural gas in the United States. 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. For 1997, MidCon Texas delivered an average of
1.6 Bcf per day of natural gas, representing approximately 16% of the total
natural gas deliveries in Texas and about 35% of the total deliveries in the
Houston market.
Deliveries of gas by MidCon's pipelines include both volumes sold by the
pipelines and their marketing affiliates and volumes owned by others which are
transported. The following table sets forth the gas volumes sold to, or
transported for, nonaffiliates by NGPL, MidCon Texas and MidCon Gas for each of
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996 1997
----- ----- ----- -----
(IN BCF)
<S> <C> <C> <C> <C>
NGPL
Transportation............................ 1,318 1,318 1,284 1,095
MidCon Texas
Sales..................................... 198 238 239 269
Transportation............................ 215 215 271 302
MidCon Gas Services
Sales..................................... 351 410 460 561
</TABLE>
Sales volumes shown in the foregoing table for MidCon Texas include sales
deliveries by a marketing affiliate to nonaffiliates. The table does not include
gas transported by NGPL for affiliates for sale to nonaffiliates of
approximately 220 Bcf, 221 Bcf, 220 Bcf and 256 Bcf for the years ended December
31, 1994, 1995, 1996 and 1997, respectively. The table also does not show
volumes of gas that have been auctioned by NGPL following the termination of its
traditional gas sales service on December 1, 1993.
NGPL also furnishes transportation service for others to and from many
other locations on its pipeline system and, in recent years, has increased
transportation deliveries to markets outside the Chicago metropolitan area.
Competition for such service may be provided by one or more other pipelines,
depending upon the nature of the transportation service required. Transportation
rates, service options and available pipeline capacity and, in some cases, the
availability of, and rates for, storage services are the key factors in
determining NGPL's ability to compete for particular transportation business.
In 1996, Trailblazer Pipeline Company ("Trailblazer"), a regulated natural
gas transmission business funded by a general partnership in which a subsidiary
of NGPL owns a one-third interest, signed 10-year agreements with six shippers
for additional firm transportation service. To accommodate these additional
service requirements, Trailblazer installed compression to increase pipeline
capacity by approximately 104 MMcf per day. The new compression facilities went
into service during the summer of 1997. Trailblazer's
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system runs from eastern Colorado to eastern Nebraska and transports gas
produced in the Rocky Mountains. NGPL is the operator of the pipeline.
Trailblazer moved approximately 200 Bcf of gas in 1997.
Subsidiaries of MidCon also own interests in several regulated natural gas
pipeline systems which are accounted for as equity investments. In the Gulf
Coast area, these subsidiaries own 20% to 50% of three pipeline ventures that
operate approximately 550 miles of pipeline in the Gulf of Mexico and NGPL owns
interests, of varying percentages, in approximately 250 miles of jointly-owned
supply laterals that also operate in the Gulf of Mexico. The joint ventures
transport gas onshore from producers in the offshore Louisiana and Texas areas
for various customers. Onshore, NGPL subsidiaries own interests of 18 and
33 1/3%, in Overthrust Pipeline Company and Trailblazer, respectively, that
operate approximately 520 miles of pipelines in Wyoming, Colorado and Nebraska.
Storage
NGPL is one of the nation's largest storage operators with approximately
600 Bcf of total natural gas storage capacity, over 200 Bcf of working gas, and
up to 4.4 Bcf per day of peak deliverability from its facilities which are
strategically located near the markets MidCon services. NGPL owns and operates
nine underground storage fields in four states to provide services to NGPL's
customers and to support pipeline deliveries during the winter when demand for
natural gas is higher.
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.
MidCon Texas also developed a salt dome storage facility located near
Markham, Texas with a subsidiary of NIPSCO. The facility has two salt dome
caverns and an estimated 8.3 Bcf of total capacity, 5.7 Bcf of working storage
capacity and 500 MMcf per day of withdrawal capacity. The storage facility is
leased by a partnership in which subsidiaries of MidCon 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.
These storage assets further complement the pipeline facilities and allow
MidCon to optimize deliveries on its pipelines and meet peak delivery
requirements in its principal markets.
GATHERING, PROCESSING AND MARKETING SERVICES
MidCon, through its subsidiaries, is engaged in the gathering and
processing of natural gas. These subsidiaries process natural gas in four
facilities and own and operate four gathering systems located in Texas and New
Mexico. During 1997, MidCon subsidiaries produced approximately 8.8 MBbls per
day of natural gas liquids and gathered 160 MMcf per day of natural gas.
MidCon Texas purchases its gas supplies from producers and, to a lesser
extent, from other pipeline companies or their subsidiaries. MidCon Gas
purchases gas supplies primarily from producers and other gas marketers. MidCon
Gas maintains inventories of gas supplies in storage facilities of its
affiliates and other pipeline companies. MidCon Gas uses futures contracts,
options and swaps to hedge the impact of natural gas price fluctuations.
MidCon Power was formed in 1995 to provide marketing services to the
electric power industry and to prepare for anticipated opportunities as the
electric power market begins to unbundle. MidCon Power began trading wholesale
power in late 1995. In 1997, MidCon Power traded over 4.4 million megawatt
hours.
RETAIL NATURAL GAS SERVICES
MidCon formed mc(2) in February 1997 to extend its skills in marketing
natural gas and electricity to retail customers including small industrial,
commercial and, as regulation ultimately allows, residential end-users. These
customer groups constitute over one-half of the natural gas and two-thirds of
the electricity consumed in the United States annually and MidCon believes that
substantial opportunities exist for selling natural gas
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supply products that are simple, reliable and cost-competitive. In providing
energy services, mc(2) works in a coordinated effort with MidCon Gas and MidCon
Power, with these two entities acting as exclusive energy providers to mc(2).
In February 1997 mc(2) initiated its service in the market area surrounding
Chicago, an area where MidCon has a strong competitive position, and the New
York City metropolitan market, an area where unbundling efforts and utility
tariffs provide opportunities for profit. Mc(2) currently serves over 10,000
commercial natural gas customers in Illinois, Pennsylvania, New York and New
Jersey and has begun marketing in Ohio. Several thousand customers were added in
August 1997 when mc(2) acquired certain assets of Norstar Energy Limited
Partnership ("Norstar"). The former Norstar customers account for annual sales
of about 8 Bcf of natural gas.
In September 1997, mc(2) began offering electric service to commercial
customers by participating in Pennsylvania's statewide pilot program, one of the
first of its kind in the nation. The plan allows up to 5% of each customer class
at each utility to self-nominate a supplier other than the local electric
utility. By aggressively focusing on two key markets during a two-week
nomination window, mc(2) signed up over 400 businesses served by three utilities
in Pittsburgh and Philadelphia.
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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 division 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
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 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 order approving its
unbundling plan is 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
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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, Processing and Marketing Services
Under the Natural Gas Act, facilities used for and operations involving the
production and gathering of natural gas are exempt from the FERC's jurisdiction,
while facilities used for and operations involving interstate transmission are
not exempt. However, the FERC's determination of what constitutes exempt
gathering facilities as opposed to jurisdictional transmission facilities has
evolved over time. Under current law, facilities which otherwise are classified
as gathering may be subject to ancillary FERC rate and service jurisdiction when
owned by an interstate pipeline company and used in connection with interstate
transportation or jurisdictional sales.
The FERC has historically distinguished between facilities owned by
noninterstate pipeline companies, such as the Company's gathering facilities, on
a fact-specific basis.
The issue of state jurisdiction over gathering activities has previously
been raised before the Colorado Public Utilities Commission, Kansas Corporation
Commission, New Mexico Public Service Commission, Texas Railroad Commission and
Wyoming Public Service Commission, as well as before state legislative bodies.
The Company is closely monitoring developments in this area.
As part of its corporate reorganization, the Company requested, was granted
authority and in 1994 transferred substantially all of its gathering facilities
to a wholly-owned subsidiary. The FERC determined that after the transfer the
gathering facilities would be nonjurisdictional, but the FERC reserved the right
to reassert jurisdiction if the Company was found to be operating the facilities
in an anti-competitive manner or contrary to open access principles. The Company
plans to transfer MidCon's gathering facilities to a wholly owned subsidiary in
order to make such facilities nonjurisdictional. See "The Combined
Company -- Business Strategy."
The operations of the Company's intrastate pipeline and marketing
subsidiaries located primarily in Texas are affected by FERC rules and
regulations issued pursuant to the Natural Gas Act and the Natural Gas Policy
Act. Of particular importance are regulations which allow increased access to
interstate transportation services, without the necessity of obtaining prior
FERC authorization for each transaction. The most important element of the
program is nondiscriminatory access, under which a regulated pipeline must
agree, under certain conditions, to transport gas for any party requesting such
service.
The interstate gas marketing activities of the Company's various marketing
and pipeline subsidiaries are conducted either as unregulated first sales or
pursuant to blanket certificate authority granted by the FERC under the Natural
Gas Act.
Certain of the Company's (including MidCon Texas') intrastate pipeline
services and assets are subject to regulation by the Texas Railroad Commission.
Interstate Transportation and Storage Services
Facilities for the transportation of natural gas in interstate commerce and
for storage services in interstate commerce are subject to regulation by the
FERC under the Natural Gas Act and the Natural Gas Policy Act. The acquisition
of MidCon's interstate natural gas pipeline system results in a significant
increase in the percentage of the Company's assets subject to regulation by the
FERC. See "The Combined Company --
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Business Strategy." 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 December 1, 1992, NGPL filed with the FERC for a general rate increase
to recover higher operating costs. The FERC permitted NGPL to put the new rates
into effect on June 1, 1993, subject to refund. In November 1994, NGPL filed a
proposed settlement of the rate case with the FERC. The settlement was approved
by the FERC in January 1995. This settlement resulted in refunds being made to
customers of approximately $128 million in 1995.
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.
This settlement of the rate case has had a favorable impact of approximately $9
million on operating margin for the ten months ended October 31, 1997. 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 has favored MidCon Gas, which NGPL has
challenged. In July, 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 proposes 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 is proposing 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. 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 others can
seek judicial review of the FERC's order by filing an appeal with the U.S. Court
of Appeals within 60 days. 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, K N Interstate Gas Transmission Co. ("KNI") filed a rate
case requesting an increase in its rates which would result in additional annual
revenues of $30.2 million. The FERC, by an order dated February 26, 1998,
accepted the filing and suspended its effective date for the full five-month
period permitted by the Natural Gas Act thus permitting the rates to go into
effect subject to refund August 1, 1998. Various parties intervened in the
proceedings. There will be additional proceedings before the FERC to resolve
differences. As indicated under "Risk Factors -- Regulation; Pending Regulatory
Proceedings," 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.
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Retail Natural Gas Services
Certain of the Company's intrastate pipelines, storage, distribution and/or
retail sales in Colorado, Kansas, Texas and Wyoming are under the regulatory
authority of each state's utility commission. In Nebraska, retail gas sales
rates for residential and small commercial customers within a municipality are
regulated by each municipality served.
In certain of the incorporated communities in which the Company provides
natural gas services at retail, the Company operates under franchises granted by
the applicable municipal authorities. The duration of franchises varies. In
unincorporated areas, the Company's natural gas utility services are not subject
to municipal franchise. The Company has been issued various certificates of
public convenience and necessity by the regulatory commissions in Colorado,
Kansas and Wyoming authorizing it to provide natural gas utility services within
certain incorporated and unincorporated areas of those states.
Continuing regulatory change will provide energy consumers with increasing
choices among their suppliers. The Company emerged as a leader in providing for
customer choice by filing an application with the Wyoming Public Service
Commission in 1995 to allow 10,500 residential and commercial customers to
choose to purchase the gas from a qualified list of suppliers. The proposal
provided that the Company would continue to provide all other utility services.
In early 1996, the Wyoming Public Service Commission issued an order allowing
the Company to bring competition to these 10,500 residential and commercial
customers beginning in mid 1996. Choosing from a menu of three competing
suppliers, approximately 80% of the Company's customers chose to remain with the
Company. The experience gave the Company early and valuable experience in
competing in an unbundled environment and led to the development of new products
and services that add value to the natural gas commodity. The innovative program
was one of the first in the nation that allowed essentially all customers the
opportunity to exercise energy choice for natural gas. Similarly, the Company
has made voluntary filings with municipal authorities in Nebraska to provide its
retail customers with an opportunity to purchase gas from competing suppliers on
an unregulated basis. The Company will continue to provide all other gas utility
services. If municipal approvals are received, the program will be implemented
in 1998.
ENVIRONMENTAL REGULATION
The Company's operations and properties, including those of MidCon, 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.
In May 1997, the Nebraska Department of Environmental Quality ("NDEQ")
issued a violation notice to K N Interstate Gas Transmission Company ("KNI")
regarding historical Prevention of Significant Deterioration permitting issues
related to certain engines at the Big Springs, Nebraska, facility. KNI is in the
process of obtaining the proper permits at this time, and is also engaged in
discussions with NDEQ regarding settlement of the violation notice and a
$500,000 fine currently proposed by the NDEQ. The costs associated with this
matter are not expected to have a material adverse effect on the Company's
business, financial position or results of operations.
In connection with the Acquisition of MidCon, Occidental indemnified the
Company against certain liabilities, including litigation and the failure of
MidCon to be in compliance with applicable laws, in each case which would have a
material adverse effect on MidCon, for one year following the closing date. To
the extent that an environmental liability of MidCon is not covered by
Occidental's indemnity obligation or, to the extent that matters arise following
the termination of Occidental's indemnification obligation, the Company will be
responsible for MidCon's environmental liabilities. The Company does not expect
that such costs will have a material adverse impact on its business, financial
position or results of operations.
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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. A discussion of the environmental matters involving K N
Energy can be found in the Annual Report on Form 10-K for the year ended
December 31, 1997. See "Incorporation of Certain Documents by Reference" in the
accompanying Prospectus.
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K N CAPITAL TRUST III
The Trust is a statutory business trust created under Delaware law pursuant
to (i) the Declaration of Trust, dated as of January 15, 1998, as amended and
restated by the Amended and Restated Declaration of Trust to be dated as of
April 28, 1998 (the "Declaration"), to be executed by K N Energy, as sponsor
(the "Sponsor"), the trustees of the Trust (the "K N Trustees") and the
administrators of the Trust (the "Administrators") and (ii) the filing of a
certificate of trust with the Secretary of State of the State of Delaware on
January 15, 1998. Upon issuance of the Capital Securities, the purchasers
thereof will own all of the Capital Securities. K N Energy will directly or
indirectly acquire all of the Common Securities, which will have an aggregate
liquidation amount equal to 3% of the total capital of K N Capital Trust III. K
N Capital Trust III exists for the exclusive purposes of (i) issuing the Trust
Securities representing undivided beneficial ownership interests in the assets
of the Trust, (ii) investing the gross proceeds of the Trust Securities in the
Subordinated Debentures and (iii) engaging in only those other activities
necessary or incidental thereto.
The Trust's business and affairs will be conducted by the K N Trustees and
the Administrators, as set forth in the Declaration. Pursuant to the
Declaration, the number of K N Trustees will initially be two. One K N Trustee
will be a financial institution that maintains its principal place of business
in the State of Delaware (the "Delaware Trustee"). The other K N Trustee (the
"Institutional Trustee") will be a financial institution that is unaffiliated
with K N Energy and will serve as institutional trustee under the Declaration
and as indenture trustee for the purposes of compliance with the provisions of
the Trust Indenture Act. Initially, Wilmington Trust Company, a Delaware banking
corporation, will be the Institutional Trustee until removed or replaced by the
holder of the Common Securities (or, if a Declaration Event of Default has
occurred and is continuing, by the holders of a majority in liquidation amount
of the Capital Securities). Wilmington Trust Company will act as trustee (the
"Guarantee Trustee") under the Guarantee and as Debt Trustee (as defined herein)
under the Indenture. Initially, Wilmington Trust Company will also act as
Delaware Trustee. See "Description of the Capital Securities -- Voting Rights."
The Administrators will be three individuals who are employees or officers of or
affiliated with K N Energy and will act as administrators with respect to the
Trust. The Administrators will be selected by the holders of a majority in
liquidation amount of the Common Securities. The Administrators will have only
those ministerial duties set forth in the Declaration with respect to
accomplishing the purposes of the Trust and are not intended to be trustees or
fiduciaries with respect to the Trust or the holders of Capital Securities.
The Institutional Trustee will hold title to the Subordinated Debentures
for the benefit of the holders of the Trust Securities, and the Institutional
Trustee will have the power to exercise all rights, powers and privileges under
the Indenture as the holder of the Subordinated Debentures. In addition, the
Institutional Trustee will maintain exclusive control of a segregated
non-interest bearing bank account (the "Institutional Account") to hold all
payments made in respect of the Subordinated Debentures for the benefit of the
holders of the Trust Securities. The Institutional Trustee will make payments of
distributions and payments on liquidation, redemption and otherwise to the
holders of the Trust Securities out of funds from the Institutional Account. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Capital Securities. K N Energy, as the direct or indirect holder of all the
Common Securities, will have the right to appoint, remove or replace any
Administrator and to increase or decrease the number of Administrators. Holders
of a majority in liquidation amount of Common Securities (or, if a Declaration
Event of Default has occurred and is continuing, by the holders of a majority in
liquidation amount of the Capital Securities) will have the right to replace the
Institutional Trustee, provided that the successor Institutional Trustee shall
be a corporation with trust powers organized under the laws of the United States
or any State thereof with a combined capital and surplus of at least $50
million. Pursuant to the Indenture, K N Energy, as borrower, will pay all fees
and expenses related to K N Capital Trust III and the offering of the Trust
Securities. See "Description of the Subordinated Debentures -- Miscellaneous"
and "-- Trust Costs and Expenses."
The rights of the holders of the Capital Securities, including economic
rights, rights to information and voting rights, are set forth in the
Declaration and the Delaware Business Trust Act (the "Trust Act"). The
Declaration, the Indenture and the Guarantee also are qualified under and
incorporate by reference the terms of the Trust Indenture Act.
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DESCRIPTION OF THE CAPITAL SECURITIES
The Capital Securities will be issued pursuant to the terms of the
Declaration. The Declaration incorporates by reference terms of the Trust
Indenture Act and is qualified under the Trust Indenture Act. The Institutional
Trustee, Wilmington Trust Company, will act as indenture trustee for the Capital
Securities under the Declaration for purposes of compliance with the provisions
of the Trust Indenture Act. The terms of the Capital Securities will include
those stated in the Declaration and those made part of the Declaration by the
Trust Indenture Act. The following summary of the material terms and provisions
of the Capital Securities is subject to, and qualified in its entirety by
reference to, the Declaration, the Trust Act and the Trust Indenture Act.
GENERAL
The Declaration authorizes the Administrators to issue, on behalf of the
Trust, the Trust Securities, which represent undivided beneficial ownership
interests in the assets of the Trust. All of the Common Securities will be
owned, directly or indirectly, by K N Energy. The Common Securities rank pari
passu, and payments will be made thereon on a pro rata basis, with the Capital
Securities, except that upon the occurrence and during the continuance of a
Declaration Event of Default, the rights of the holders of the Common Securities
to receive payments of periodic distributions and payments upon liquidation,
redemption and otherwise will be subordinated to the rights of the holders of
the Capital Securities. The Declaration does not permit the issuance by the
Trust of any securities other than the Trust Securities or the incurrence of any
indebtedness by the Trust. Pursuant to the Declaration, the Institutional
Trustee will hold the Subordinated Debentures purchased by the Trust for the
benefit of the holders of the Trust Securities. The payment of distributions out
of money held by the Trust, and payments upon redemption of the Capital
Securities or liquidation of the Trust out of money held by the Trust, are
guaranteed by K N Energy to the extent described under "Description of the
Guarantee." The Guarantee will be held by Wilmington Trust Company, the
Guarantee Trustee, for the benefit of the holders of the Capital Securities. The
Guarantee does not cover payment of distributions when the Trust does not have
sufficient available funds to pay such distributions. In such event, the remedy
of a holder of Capital Securities is to vote to direct the Institutional Trustee
to enforce the Institutional Trustee's rights under the Subordinated Debentures
or, in certain limited circumstances, to take Direct Action. See "-- Declaration
Events of Default."
DISTRIBUTIONS
Distributions on the Capital Securities will be fixed at a rate per annum
of 7.63% of the stated liquidation amount of $1,000 per Capital Security.
Distributions in arrears for more than one semi-annual period will accrue
interest thereon at the distribution rate, compounded semi-annually (to the
extent permitted by applicable law). The term "distribution" as used herein
includes any such interest payable unless otherwise stated. The amount of
distributions payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months.
Distributions on the Capital Securities will be cumulative, will accumulate
from the first date that any Capital Securities are issued, and will be payable
semi-annually in arrears on April 15 and October 15 of each year, commencing
October 15, 1998, when, as and if available for payment. Distributions will be
made by the Institutional Trustee, except as otherwise described below.
So long as K N Energy shall not be in default in the payment of interest on
the Subordinated Debentures, K N Energy has the right under the Indenture to
defer payments of interest on the Subordinated Debentures by extending the
interest payment period from time to time on the Subordinated Debentures, which,
if exercised, would defer semi-annual distributions on the Capital Securities
(though such distributions would continue to accumulate at the distribution
rate, compounded semi-annually, since interest would continue to accrue on the
Subordinated Debentures) during any such Extension Period. Such right to extend
the interest payment period for the Subordinated Debentures is limited, in the
case of any extension, to a period not exceeding 10 consecutive semi-annual
periods and such period may not extend beyond the maturity of the Subordinated
Debentures. In the event that K N Energy exercises this right, then (a) K N
Energy shall not
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declare or pay dividends on, make distributions with respect to, or redeem,
purchase or acquire, or make a liquidation payment with respect to, any of its
capital stock (other than (i) purchases or acquisitions of shares of K N Energy
Common Stock in connection with satisfaction by K N Energy or any of its
subsidiaries of their respective obligations under any benefit plans for
directors, officers, agents or employees or the Company's dividend reinvestment
or director, officer, agent or employee stock purchase plans, (ii) as a result
of a reclassification of K N Energy's capital stock or the exchange or
conversion of one class or series of K N Energy's capital stock for another
class or series of capital stock, (iii) the purchase of fractional interests in
shares of K N Energy's capital stock pursuant to the conversion or exchange
provisions of such K N Energy capital stock or the security being converted or
exchanged for K N Energy capital stock, (iv) dividends or distributions in
shares of, or options, warrants or rights to subscribe for or purchase shares
of, capital stock of the Company or (v) any declaration of a dividend in
connection with the implementation or extension of a stockholders' rights plan,
or the issuance of stock under any such plan (including the existing such plan)
in the future, or the redemption or repurchase of any such rights pursuant
thereto)), (b) K N Energy shall not make any payment of interest, principal or
premium, if any, on, or repay, repurchase or redeem, any debt securities issued
by K N Energy that rank pari passu with or junior to the Subordinated Debentures
and (c) K N Energy shall not make any guarantee payments with respect to any
guarantee by the Company of any securities of any subsidiary of the Company if
such guarantee ranks pari passu with or junior in right of payment to the
Subordinated Debentures. Prior to the termination of any such Extension Period,
K N Energy may further extend the interest payment period; provided, that any
such Extension Period, together with all such previous and further extensions,
may not exceed 10 consecutive semi-annual periods or extend beyond the maturity
of the Subordinated Debentures. Upon the termination of any Extension Period and
the payment of all amounts then due, K N Energy may commence a new Extension
Period, subject to the above requirements. See "Description of the Subordinated
Debentures -- Option to Extend Interest Payment Period" and "-- Certain
Covenants." If distributions are deferred, the deferred distributions and
accrued interest thereon shall be paid to holders of record of the Capital
Securities as they appear on the books and records of the Trust on the record
date next following the termination of such deferral period.
Distributions on the Capital Securities must be paid on the dates payable
to the extent that the Trust has funds available for the payment of such
distributions. The Trust's funds available for distribution to the holders of
the Capital Securities will be limited to payments received from K N Energy on
the Subordinated Debentures. Distributions on the Capital Securities will not be
made to the extent that payments are not made in respect of the Subordinated
Debentures. See "Description of the Subordinated Debentures." The payment of
distributions out of monies held by the Trust is guaranteed by K N Energy to the
extent set forth under "Description of the Guarantee."
Distributions on the Capital Securities will be payable to the holders
thereof as they appear on the books and records of the Trust on relevant record
dates, which will be one Business Day prior to the relevant payment dates. Such
distributions will be paid through the Institutional Trustee who will hold
amounts received in respect of the Subordinated Debentures for the benefit of
the holders of the Trust Securities. Subject to any applicable laws and
regulations and the provisions of the Declaration, each such payment will be
made as described under "-- Form, Denomination and Registration." In the event
that the Capital Securities do not continue to remain in book-entry-only form,
the record date for each distribution shall be 15 days prior to the relevant
payment date. In the event that any date on which distributions are to be made
on the Capital Securities is not a Business Day, then payment of the
distributions payable on such date will be made on the next succeeding day that
is a Business Day (and without any interest or other payment in respect of any
such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on such record date.
A "Business Day" shall mean any day other than Saturday, Sunday or any other day
on which banking institutions in New York, New York or Wilmington, Delaware are
permitted or required by any applicable law to close.
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REDEMPTION
Upon the repayment in full at the Stated Maturity or prepayment in whole
(or in part) of the Subordinated Debentures, the proceeds from such repayment or
prepayment shall be applied by the Institutional Trustee to redeem a Like Amount
(as defined below) of the Trust Securities, upon not less than 30 nor more than
60 days' notice of a date of redemption (the "Redemption Date"), at the
applicable Redemption Price, which shall be equal to (i) in the case of the
repayment of the Subordinated Debentures at the Stated Maturity, the Maturity
Redemption Price (equal to the principal of, and accrued interest on, the
Subordinated Debentures), (ii) in the case of the optional prepayment of the
Subordinated Debentures upon the occurrence and continuation of a Tax Event or
an Investment Company Event, at the Optional Redemption Price (equal to the
Optional Prepayment Price in respect of the Subordinated Debentures) (see
"Description of the Subordinated Debentures -- Optional Prepayment"), and (iii)
in the case of the optional prepayment of the Subordinated Debentures, the
Optional Redemption Price.
The Company will have the right to prepay the Subordinated Debentures in
whole or in part from time to time at any time at the Optional Prepayment Price.
See "Description of the Subordinated Debentures -- Optional Payment."
"Like Amount" means (i) with respect to redemption of Trust Securities,
Trust Securities having a liquidation amount equal to the principal amount of
Subordinated Debentures to be paid in accordance with their terms and (ii) with
respect to a distribution of Subordinated Debentures upon liquidation of the
Trust, means Subordinated Debentures having a principal amount equal to the
liquidation amount of the Trust Securities to the holder to whom such
Subordinated Debentures are distributed.
REDEMPTION PROCEDURES FOR REDEMPTION BY THE TRUST
In the event of any redemption in part, the Trust shall not be required to
(i) issue, register the transfer of or exchange any Capital Securities during a
period beginning at the opening of business 15 days before any selection for
redemption of Capital Securities and ending at the close of business on the
earliest date on which the relevant notice of redemption is deemed to have been
given to all holders of Capital Securities to be so redeemed or (ii) register
the transfer of or exchange any Capital Securities so selected for redemption,
in whole or in part, except for the unredeemed portion of any Capital Securities
being redeemed in part.
If the Trust gives a notice of redemption in respect of Capital Securities
(which notice will be irrevocable), then, by 12:00 noon, New York City time, on
the redemption date, provided that K N Energy has paid to the Institutional
Trustee a sufficient amount of cash in connection with the related redemption of
the Subordinated Debentures, the Trust will irrevocably deposit with DTC funds
sufficient to pay the amount payable on redemption of all book-entry
certificates and will give DTC irrevocable instructions and authority to pay
such amount in respect of Capital Securities represented by the Global Security
and will irrevocably deposit with the paying agent for the Capital Securities
funds sufficient to pay such amount in respect of any certificated Capital
Securities and will give such paying agent irrevocable instructions and
authority to pay such amount to the holders of certificated Capital Securities
upon surrender of their certificates. If notice of redemption shall have been
given and funds deposited as required, then, immediately prior to the close of
business on the redemption date, distributions will cease to accumulate and all
rights of holders of such Capital Securities so called for redemption will
cease, except the right of the holders of such Capital Securities to receive the
Redemption Price plus accumulated and unpaid distributions on the Capital
Securities to be redeemed, but without interest on such Redemption Price. In the
event that any date fixed for redemption of Capital Securities is not a Business
Day, then payment of the Redemption Price payable on such date will be made on
the next succeeding day that is a Business Day (without any interest or other
payment in respect of any such delay) except that, if such Business Day falls in
the next calendar year, such payment will be made on the immediately preceding
Business Day. In the event that payment of the Redemption Price in respect of
Capital Securities is improperly withheld or refused and not paid either by the
Trust, or by K N Energy pursuant to the Guarantee, distributions on such Capital
Securities will continue to accumulate at the then applicable rate from the
original redemption date to the date of payment, in which case the actual
payment date will be considered the date fixed for redemption for purposes of
calculating the Redemption Price.
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In the event that fewer than all of the outstanding Capital Securities are
to be redeemed, the Capital Securities will be redeemed pro rata and pro rata
with the Common Securities (except that if a Declaration Event of Default shall
have occurred and be continuing, the Capital Securities will have priority over
the Common Securities).
Subject to the foregoing and applicable law (including, without limitation,
United States federal securities laws), K N Energy or its subsidiaries may at
any time, and from time to time, purchase outstanding Capital Securities by
tender, in the open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The Company will have the right to dissolve the Trust at any time and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, cause the Subordinated Debentures to be distributed to the
holders of the Trust Securities in liquidation of the Trust. Such right is
subject to the Company having received an opinion of counsel to the effect that
such distribution will not be a taxable event to holders of Capital Securities
for United States federal income tax purposes.
Under current United States federal income tax law and interpretations and
assuming, as expected, the Trust is treated as a grantor trust, a distribution
of the Subordinated Debentures would not be a taxable event to holders of the
Capital Securities. However, if a Tax Event were to occur that would cause the
Trust to be subject to United States federal income tax with respect to income
received or accrued on the Subordinated Debentures, a distribution of the
Subordinated Debentures by the Trust could be a taxable event to the Trust and
the holders of Capital Securities, in which event the Trust would not be
permitted to distribute the Subordinated Debentures but the Company could, at
its option, redeem the Subordinated Debentures and distribute the resulting cash
in liquidation of the Trust. See "United States Federal Income Tax
Consequences -- Distribution of Subordinated Debentures or Cash upon Liquidation
of the Trust."
The Trust shall automatically dissolve upon the first to occur of: (i)
certain events of bankruptcy or a receivership of the Company, (ii) dissolution
or liquidation of the Company, (iii) distribution of a Like Amount of
Subordinated Debentures to the holders of the Trust Securities following the
exercise of the Company's option to give written direction to the Institutional
Trustee to dissolve the trust, subject to the requirement that the Company
receive an opinion of counsel to the effect that such distribution will not be a
taxable event to holders of Capital Securities for United States federal income
tax purposes, (iv) redemption of all of the Trust Securities as described above
under "-- Redemption," (v) the entry of an order for the dissolution of the
Trust by a court of competent jurisdiction and (vi) the expiration of the term
of the Trust on April 15, 2029.
If dissolution occurs as described in clause (i), (ii), (iii), (v) or (vi)
above, the Trust shall be liquidated by the K N Trustees as expeditiously as the
K N Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities a Like Amount of the Subordinated Debentures,
unless such distribution is determined by the Institutional Trustee not to be
practicable, in which event such holders will be entitled to receive out of the
liquidation of the assets of the Trust available for distribution to holders,
after satisfaction of liabilities to creditors of the Trust as provided by
applicable law, an amount equal to the aggregate of the liquidation amount of
the Trust Securities plus accumulated and unpaid distributions thereon to the
date of payment (such amount being the "Liquidation Distribution"). If such
Liquidation Distribution can be paid only in part because the Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Trust on the Trust
Securities shall be paid on a pro rata basis. The holder(s) of the Common
Securities will be entitled to receive Liquidation Distributions upon any such
liquidation pro rata with the holders of the Capital Securities, except that if
a Declaration Event of Default has occurred and is continuing, the Capital
Securities shall have a priority over the Common Securities. See "-- Declaration
Events of Default."
If the Company elects not to prepay the Subordinated Debentures prior to
the Stated Maturity and if there is no early dissolution of the Trust, the
Capital Securities will remain outstanding until the repayment of the
Subordinated Debentures at the Stated Maturity.
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After any liquidation date is fixed for any distribution of Subordinated
Debentures to holders of the Trust Securities (i) the Trust Securities will no
longer be deemed to be outstanding, (ii) DTC or its nominee, as the record
holder of the Capital Securities, will receive a registered global certificate
or certificates representing the Subordinated Debentures to be delivered upon
such distribution and (iii) any certificates representing Capital Securities not
held by DTC or its nominee will be deemed to represent Subordinated Debentures
having a principal amount equal to the liquidation amount of such Capital
Securities, and bearing accrued and unpaid interest in an amount equal to the
accumulated and unpaid distributions on such Capital Securities until such
certificates are presented to the Administrators or their agent for
cancellations whereupon the Company will issue to such holders, and the
Debenture Trustee will authenticate, certificates representing such Subordinated
Debentures.
There can be no assurance as to the market prices for the Capital
Securities or the Subordinated Debentures that may be distributed in exchange
for the Trust Securities if a dissolution and liquidation of the Trust were to
occur. Accordingly, the Capital Securities, or the Subordinated Debentures that
the investor may receive on liquidation of the Trust, may trade at a discount to
the price that the investor initially paid to purchase the Capital Securities.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Indenture Event of Default")
constitutes an event of default under the Declaration with respect to the Trust
Securities (a "Declaration Event of Default"); provided, that pursuant to the
Declaration, the holder of the Common Securities will be deemed to have waived
any Declaration Event of Default with respect to the Common Securities until all
Declaration Events of Default with respect to the Capital Securities have been
cured, waived or otherwise eliminated. Until such Declaration Events of Default
with respect to the Capital Securities have been so cured, waived or otherwise
eliminated, the Institutional Trustee will be acting solely on behalf of the
holders of the Capital Securities and only the holders of the Capital Securities
will have the right to direct the Institutional Trustee with respect to certain
matters under the Declaration, and therefore the Indenture.
If the Institutional Trustee fails to enforce its rights under the
Subordinated Debentures, any holder of Capital Securities may, to the fullest
extent permitted by law, institute a Direct Action. Notwithstanding the
foregoing, if a Declaration Event of Default has occurred and is continuing and
such event is attributable to the failure of K N Energy to pay interest or
principal on the Subordinated Debentures on the date such interest or principal
is otherwise payable (or in the case of redemption, the redemption date), then a
holder of Capital Securities may institute a Direct Action for payment on or
after the respective due date specified in the Subordinated Debentures. In
connection with such Direct Action, K N Energy will be subrogated to the rights
of such holders of Capital Securities under the Declaration to the extent of any
payment made by K N Energy to such holder of Capital Securities in such Direct
Action. The holders of Capital Securities will not be able to exercise directly
any other remedy available to the holders of the Subordinated Debentures.
Upon the occurrence of a Declaration Event of Default, the Institutional
Trustee as the sole holder of the Subordinated Debentures will have the right
under the Indenture to declare the principal of and accrued and unpaid interest
on the Subordinated Debentures to be immediately due and payable. K N Energy and
the Trust are each required to file annually with the Institutional Trustee an
officer's certificate as to its compliance with all conditions and covenants
under the Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act and under the Trust
Indenture Act, and as otherwise required by law and the Declaration, the holders
of the Capital Securities will have no voting rights.
Subject to the requirement of the Institutional Trustee obtaining a tax
opinion in certain circumstances set forth in the last sentence of the next
paragraph, the holders of a majority in aggregate liquidation amount of the
Capital Securities will have the right to direct the time, method and place of
conducting any proceeding
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for any remedy available to the Institutional Trustee, or direct the exercise of
any trust or power conferred upon the Institutional Trustee under the
Declaration, including the right to direct the Institutional Trustee, as holder
of the Subordinated Debentures, to (i) exercise the remedies available under the
Indenture with respect to the Subordinated Debentures, (ii) waive any past
Indenture Event of Default that is waivable under the Indenture, (iii) exercise
any right to rescind or annul a declaration that the principal of all the
Subordinated Debentures shall be due and payable or (iv) consent to any
amendment, modification or termination of the Indenture or the Subordinated
Debentures where such consent shall be required; provided, that if an Indenture
Event of Default has occurred and is continuing, the holders of 25% of the
aggregate liquidation amount of the Capital Securities may direct the
Institutional Trustee to declare the principal of and interest on the
Subordinated Debentures immediately due and payable; provided, further, that,
where a consent or action under the Indenture would require the consent or
action of holders of more than a majority in principal amount of the
Subordinated Debentures (a "Super-Majority") affected thereby, only the holders
of at least such Super-Majority in aggregate liquidation amount of the Capital
Securities may direct the Institutional Trustee to give such consent or take
such action. The Institutional Trustee shall not revoke any action previously
authorized or approved by a vote of the holders of the Capital Securities.
The Institutional Trustee shall notify all holders of the Capital
Securities of any notice of default received from the Debt Trustee with respect
to the Subordinated Debentures. Such notice shall state that such Indenture
Event of Default also constitutes a Declaration Event of Default. Except with
respect to directing the time, method and place of conducting a proceeding for a
remedy, the Institutional Trustee shall not take any of the actions described in
clauses (i), (ii), (iii) or (iv) above unless the Institutional Trustee has
obtained an opinion of independent tax counsel to the effect that, as a result
of such action, the Trust will not fail to be classified as a grantor trust for
United States federal income tax purposes and each holder of Trust Securities
will not fail to be treated as owning undivided beneficial interests in the
Subordinated Debentures.
In the event the consent of the Institutional Trustee, as the holder of the
Subordinated Debentures, is required under the Indenture with respect to any
amendment, modification or termination of the Indenture, the Institutional
Trustee shall request the direction of the holders of the Trust Securities with
respect to such amendment, modification or termination and shall vote with
respect to such amendment, modification or termination as directed by a majority
in liquidation amount of the Trust Securities voting together as a single class;
provided, that where a consent under the Indenture would require the consent of
a Super-Majority, the Institutional Trustee may only give such consent at the
direction of the holders of at least the proportion in liquidation amount of the
Trust Securities that the relevant Super-Majority represents of the aggregate
principal amount of the Subordinated Debentures outstanding. The Institutional
Trustee shall be under no obligation to take any such action in accordance with
the directions of the holders of the Trust Securities unless the Institutional
Trustee has obtained an opinion of independent tax counsel experienced in such
matters to the effect that for purposes of United States federal income tax the
Trust will not be classified as other than a grantor trust and each holder of
Trust Securities will not fail to be treated as owning undivided beneficial
interests in the Subordinated Debentures.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Capital Securities may be
given at a separate meeting of holders of Capital Securities convened for such
purpose, at a meeting of all of the holders of Trust Securities or pursuant to
written consent. The Administrators will cause a notice of any meeting at which
holders of Capital Securities are entitled to vote to be mailed to each holder
of record of Capital Securities. Each such notice will include a statement
setting forth the following information; (i) the date of such meeting; (ii) a
description of any resolution proposed for adoption at such meeting on which
such holders are entitled to vote; and (iii) instructions for the delivery of
proxies. Prompt notice of the taking of action without a meeting shall be given
to the Holders of the Capital Securities entitled to vote who have not consented
in writing. No vote or consent of the holders of Capital Securities will be
required for the Trust to redeem and cancel Capital Securities or distribute
Subordinated Debentures in accordance with the Declaration.
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Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities that are owned at such time by K N Energy or any entity directly
controlling or controlled by, or under direct or indirect common control with, K
N Energy shall not be entitled to vote or consent and shall, for purposes of
such vote or consent, be treated as if such Capital Securities were not
outstanding.
The procedures by which holders of Capital Securities may exercise their
voting rights are described below. See "-- Form, Denomination and Registration."
Holders of the Capital Securities will have no rights to appoint or remove
the Administrators, who may be appointed, removed or replaced solely by K N
Energy as the indirect or direct holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the
Administrators (and in certain circumstances the Institutional Trustee);
provided, that, if any proposed amendment provides for, or the Administrators
otherwise propose to effect, (i) any action that would adversely affect the
powers, preferences or special rights of the Trust Securities, whether by way of
amendment to the Declaration or otherwise or (ii) the liquidation, dissolution,
winding-up or termination of the Trust other than pursuant to the terms of the
Declaration, then the holders of the Trust Securities voting together as a
single class will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of a least
a majority in liquidation amount of the Trust Securities affected thereby;
provided, further, that, if any amendment or proposal referred to in clause (i)
above would adversely affect only the Capital Securities or the Common
Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of a majority in liquidation amount of such class of
Trust Securities.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified for purposes of United States federal income taxation as other
than a grantor trust, (ii) reduce or otherwise adversely affect the powers of
the Institutional Trustee or (iii) cause the Trust to be deemed an "investment
company" that is required to be registered under the 1940 Act.
MERGERS, CONSOLIDATIONS OR AMALGAMATION OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any corporation or other body except as
described below or otherwise described in "-- Liquidation Distribution Upon
Dissolution." The Trust may, with the consent of the Administrators and without
the consent of the holders of the Trust Securities, consolidate, amalgamate,
merge with or into, or be replaced by a trust organized as such under the laws
of any State; provided, that (i) such successor entity either (x) expressly
assumes all of the obligations of the Trust under the Trust Securities or (y)
substitutes for the Trust Securities other securities having substantially the
same terms as the Trust Securities (the "Successor Securities"), so long as the
Successor Securities rank the same as the Trust Securities rank with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) K N
Energy expressly acknowledges a trustee of such successor entity possessing the
same powers and duties as the Institutional Trustee as the holder of the
Subordinated Debentures, (iii) such merger, consolidation, amalgamation or
replacement does not cause the Capital Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (iv) such merger, consolidation, amalgamation or replacement does
not adversely affect the holders of the Trust Securities (including any
Successor Securities) in any material respect, (v) such successor entity has a
purpose substantially identical to that of the Trust, (vi) prior to such merger,
consolidation, amalgamation or replacement, K N Energy has received an opinion
of independent counsel to the Trust experienced in such matters to the effect
that: (A) such merger, consolidation, amalgamation or replacement does not
adversely affect the holders of the Trust Securities (including any Successor
Securities) in any material respect,
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(B) following such merger, consolidation, amalgamation or replacement, neither
the Trust nor such successor entity will be required to register as an
investment company under the 1940 Act and (C) following such merger,
consolidation, amalgamation or replacement, the Trust (or such successor entity)
will continue to be classified as a grantor trust for United States federal
income tax purposes and (vii) K N Energy guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Trust shall not, except
with the consent of holders of 100% in liquidation amount of the Trust
Securities, consolidate, amalgamate, merge with or into, or be replaced by any
other entity or permit any other entity to consolidate, amalgamate, merge with
or into, or replace it, if such consolidation, amalgamation, merger or
replacement would cause the Trust or the successor entity to be classified as
other than a grantor trust for United States federal income tax purposes.
NOTICES
Notices to holders under the Declaration shall be given by first class mail
to the address of each holder as it appears on the books and records of the
Trust, provided that any notice of redemption required to be given to all
holders shall also be given by release made to Reuters Economic Services and
Bloomberg Business News.
FORM, DENOMINATION AND REGISTRATION
The Capital Securities will be issued in fully registered form, without
coupons, in denominations of $1,000 liquidation amount and any integral multiple
thereof.
Global Capital Security; Book-Entry Form
The Capital Securities will initially be evidenced by one or more global
Capital Securities (collectively, the "Global Security"), which will be
deposited with, or on behalf of, DTC and registered in the name of Cede & Co.
("Cede"), as DTC's nominee. Except as set forth below, the Global Security may
be transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.
Holders of Capital Securities may hold their interests in the Global
Security directly through DTC if such holders are participants in DTC, or
indirectly through organizations that are participants in DTC ("Participants").
Transfers between Participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in immediately available funds.
The laws of some jurisdictions may require that certain persons take physical
delivery of securities in definitive form. Consequently, the ability to transfer
beneficial interests in the Global Security to such persons may be limited.
Holders of Capital Securities who are not Participants may beneficially own
interests in the Global Security held by DTC only through Participants or
certain banks, brokers, dealers, trust companies and other parties that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly ("Indirect Participants"). So long as Cede, as the nominee of DTC,
is the registered owner of the Global Security, Cede for all purposes will be
considered the sole holder of the Global Security. Except as provided below,
owners of beneficial interests in the Global Security will not be entitled to
have certificates registered in their names, will not receive or be entitled to
receive physical delivery of certificates in definitive registered form, and
will not be considered the holders hereof.
Distributions on the Global Security will be made to Cede, the nominee for
DTC, as the registered owner of the Global Security by wire transfer of
immediately available funds. None of K N Energy, the Trust or any K N Trustees
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
K N Energy has been informed by DTC that DTC's practice is to credit
Participant's accounts on the relevant payment date with payments in amounts
proportionate to their respective beneficial interests in the Capital Securities
represented by the Global Security as shown on the records of DTC (adjusted as
necessary so that such payments are made with respect to whole Capital
Securities only), unless DTC has reason to believe that it will not receive
payment on such payment date. Payments by Participants to owners of
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beneficial interests in Capital Securities represented by the Global Security
held through such Participants will be the responsibility of such Participants,
as is now the case with securities held for the accounts of customers registered
in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in the Capital Securities represented by the Global
Security to pledge such interest to persons or entities that do not participate
in the DTC system, or otherwise take actions in respect of such interest, may be
affected by the lack of a physical certificate evidencing such interest.
None of K N Energy, the Trust or any K N Trustee (or any registrar or
paying agent) will have any responsibility for the performance by DTC or its
Participants or Indirect Participants of their respective obligations under the
rules and procedures governing their operations. DTC has advised K N Energy that
it will take any action permitted to be taken by a holder of Capital Securities,
only at the direction of one or more Participants to whose account with DTC
interests in the Global Security are credited, and only in respect of the
Capital Securities represented by the Global Security as to which such
Participant or Participants has or have given such direction.
DTC has advised K N Energy and the Trust as follows: DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes to the accounts of its Participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations such as the Underwriters. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with, a Participant, either directly or indirectly.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants and Indirect Participants to beneficial
owners will be governed by arrangements among them, subject to any statutory or
regulatory requirements that may be in effect from time to time. Redemption
notices shall be sent to Cede. If less than all of the Capital Securities are
being redeemed, DTC will reduce the amount of the interest of each Participant
in such Capital Securities in accordance with its procedures.
Although voting with respect to the Capital Securities is limited, in those
cases where a vote is required, neither DTC nor Cede will itself consent or vote
with respect to Capital Securities. Under its usual procedures, DTC would mail
an Omnibus Proxy to the Trust as soon as possible after the record date. The
Omnibus Proxy assigns Cede's consenting or voting rights to those Participants
to whose accounts the Capital Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy). K N Energy and the
Trust believe that the arrangements among DTC, the Participants and Indirect
Participants, and beneficial owners will enable the beneficial owners to
exercise rights equivalent in substance to the rights that can be directly
exercised by a holder of a beneficial interest in the Trust.
DTC may discontinue providing its services as securities depositary with
respect to the Capital Securities at any time by giving reasonable notice to the
Trust. Under such circumstances, in the event that a successor securities
depositary is not obtained, certificates for the Capital Securities are required
to be printed and delivered in denominations of $1,000 and any integral multiple
thereof. Additionally, the Administrators (with the consent of K N Energy) may
decide to discontinue use of the system of book-entry transfers through DTC (or
any successor depositary) with respect to the Capital Securities. In that event,
certificates for the Capital Securities will be printed and delivered in
denominations of $1,000 and any integral multiple thereof.
The information set forth above concerning DTC and DTC's book-entry system
has been obtained from sources that K N Energy and the Trust believe to be
reliable, but neither K N Energy nor the Trust takes responsibility for the
accuracy thereof.
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INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE
The Institutional Trustee, prior to the occurrence of a default with
respect to the Trust Securities and after the curing of any defaults that may
have occurred, undertakes to perform only such duties as are specifically set
forth in the Declaration and, after default, shall exercise the same degree of
care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provisions, the Institutional Trustee is under no
obligation to exercise any of the powers vested in it by the Declaration at the
request of any holder of Capital Securities, unless offered reasonable indemnity
by such holder against the costs, expenses and liabilities that might be
incurred thereby. The holders of Capital Securities will not be required to
offer such indemnity in the event such holders, by exercising their voting
rights, direct the Institutional Trustee to take any action it is empowered to
take under the Declaration following a Declaration Event of Default. The
Institutional Trustee also serves as trustee under the Guarantee and the
Indenture.
Paying Agent, Registrar and Transfer Agent
The Institutional Trustee will act as Registrar, Transfer Agent and Paying
Agent for the Capital Securities.
Registration of transfers of Capital Securities will be effected without
charge by or on behalf of the Trust, but upon payment (with the giving of such
indemnity as the Trust or K N Energy may require) in respect of any tax or other
government charges that may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Capital Securities after such Capital Securities have been called
for redemption.
GOVERNING LAW
The Declaration and the Capital Securities will be governed by, and
construed in accordance with, the laws of the State of Delaware.
MISCELLANEOUS
The Administrators are authorized and directed to operate the Trust in such
a way so that the Trust will not be required to register as an "investment
company" under the 1940 Act or characterized as other than a grantor trust for
United States federal income tax purposes. K N Energy is authorized and directed
to conduct its affairs so that the Subordinated Debentures will be treated as
indebtedness of K N Energy for United States federal income tax purposes. In
this connection, K N Energy and the Administrators are authorized to take any
action, not inconsistent with applicable law, the certificate of trust of the
Trust or the articles of incorporation of K N Energy, that each of K N Energy
and the Administrators determine in their discretion to be necessary or
desirable to achieve such end, as long as such action does not adversely affect
the interests of the holders of the Capital Securities or vary the terms
thereof.
Holders of the Capital Securities have no preemptive rights.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee, which
will be executed and delivered by K N Energy for the benefit of the holders from
time to time of Capital Securities. The summary does not purport to be complete
and is subject in all respects to the provisions of, and is qualified in its
entirety by reference to, the Guarantee. The Guarantee incorporates by reference
the terms of the Trust Indenture Act and is qualified under the Trust Indenture
Act. Wilmington Trust Company, as the Guarantee Trustee, will hold the Guarantee
for the benefit of the holders of the Capital Securities.
GENERAL
Pursuant to and to the extent set forth in the Guarantee, K N Energy will
agree to pay in full to the holders of the Capital Securities (except to the
extent paid by the Trust), as and when due, regardless of any
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defense, right of set off or counterclaim that the Trust may have or assert, the
following payments (the "Guarantee Payments"), without duplication: (i) any
accumulated and unpaid distributions that are required to be paid on the Capital
Securities to the extent the Trust has funds available therefor, (ii) the
Redemption Price, plus accumulated and unpaid distributions, with respect to any
Capital Securities called for redemption by the Trust, to the extent the Trust
has funds available therefor and (iii) upon a voluntary or involuntary
liquidation, dissolution, winding-up or termination of the Trust (other than in
connection with the distribution of Subordinated Debentures to the holders of
Capital Securities or the redemption of all the Capital Securities), the lesser
of (a) the aggregate of the liquidation amount and all accumulated and unpaid
distributions on the Capital Securities to the date of payment to the extent the
Trust has funds available therefor and (b) the amount of assets of the Trust
remaining available for distribution to holders of Capital Securities upon the
liquidation of the Trust. The holders of a majority in liquidation amount of the
Capital Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee or
to direct the exercise of any trust or power conferred upon the Guarantee
Trustee under the Guarantee. If the Guarantee Trustee fails to enforce the
Guarantee, any holder of Capital Securities may directly institute a legal
proceeding against K N Energy to enforce the obligations of K N Energy under the
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity. If K N Energy were to default
on its obligation to pay amounts payable on the Subordinated Debentures, the
Trust would lack available funds for the payment of distributions or amounts
payable on redemption of the Capital Securities or otherwise, and in such event
holders of the Capital Securities would not be able to rely upon the Guarantee
for payment of such amounts. Instead, a holder of the Capital Securities would
be required to rely on the enforcement (1) by the Institutional Trustee of its
rights, as registered holder of the Subordinated Debentures, against K N Energy
pursuant to the terms of the Subordinated Debentures or (2) by such holder of
Capital Securities of its right against K N Energy to enforce payment on
Subordinated Debentures. See "Description of the Subordinated Debentures." The
Declaration provides that each holder of Capital Securities, by acceptance
thereof, agrees to the provisions of the Guarantee, including the subordination
provisions thereof, and the Indenture.
The Guarantee will not apply to any payment of distributions or Redemption
Price, or to payments upon the dissolution, winding-up or termination of the
Trust, except to the extent the Trust shall have funds available therefor. If K
N Energy does not make interest payments on the Subordinated Debentures, the
Trust will not pay distributions on the Capital Securities and will not have
funds available therefor. See "Risk Factors -- Risks Relating to the Capital
Securities -- Limitations of the Guarantee" and "Description of the Subordinated
Debentures." The Guarantee, when taken together with K N Energy's obligations
under the Subordinated Debentures, the Indenture and the Declaration, including
its obligations under the Indenture to pay costs, expenses, debts and
liabilities of the Trust (other than with respect to the Trust Securities) will
provide a full and unconditional guarantee on a subordinated basis by K N Energy
of payments due on the Capital Securities.
K N Energy has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities
(the "Common Securities Guarantee") to the same extent as the Guarantee, except
that upon the occurrence and during the continuation of a Declaration Event of
Default, holders of Capital Securities shall have priority over holders of
Common Securities with respect to distributions and payments on liquidation,
redemption or otherwise.
CERTAIN COVENANTS OF K N ENERGY
In the Guarantee, K N Energy has covenanted that, so long as any Capital
Securities remain outstanding, if (i) K N Energy has exercised its option to
defer interest payments on the Subordinated Debentures by extending the interest
payment period and such extension shall be continuing, (ii) K N Energy shall be
in default with respect to its payment or other obligations under the Guarantee
or (iii) there shall have occurred and be continuing any event that, with the
giving of notice, would constitute a Declaration Event of Default, then K N
Energy (a) shall not declare or pay dividends on, make distributions with
respect to, or redeem, purchase or acquire, or make a liquidation payment with
respect to, any of its capital stock (other than (i) purchases or acquisitions
of shares of K N Energy Common Stock in connection with satisfaction by K N
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Energy or any of its subsidiaries of their respective obligations under any
benefit plans for directors, officers, agents or employees or the Company's
dividend reinvestment or director, officer, agent or employee stock purchase
plans, (ii) as a result of a reclassification of K N Energy's capital stock or
the exchange or conversion of one class or series of K N Energy's capital stock
for another class or series of capital stock, (iii) the purchase of fractional
interests in shares of K N Energy's capital stock pursuant to the conversion or
exchange provisions of such K N Energy capital stock or the security being
convened or exchanged for K N Energy capital stock, (iv) dividends or
distributions in shares of, or options, warrants or rights to subscribe for or
purchase, shares of capital stock of the Company or (v) any declaration of a
dividend in connection with the implementation or extension of a stockholders'
rights plan, or the issuance of stock under any such plan (including the
existing such plan) in the future, or the redemption or repurchase of any such
rights pursuant thereto)), (b) shall not make any payment of interest, principal
or premium, if any, on, or repay, repurchase or redeem, any debt securities
issued by K N Energy that rank pari passu with or junior to the Subordinated
Debentures and (c) shall not make any guarantee payments with respect to any
guarantee by the Company of any securities of any subsidiary of the Company if
such guarantee ranks pari passu with or junior in right of payment to the
Subordinated Debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of Capital Securities (in which case no vote will be
required) the Guarantee may be amended only with the prior approval of the
holders of at least a majority in liquidation amount of all the outstanding
Capital Securities. The manner of obtaining any such approval of holders of the
Capital Securities will be as set forth under "Description of the Capital
Securities -- Voting Rights." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of K N Energy and shall inure to the benefit of the holders of
the Capital Securities then outstanding. Except in connection with any permitted
merger or consolidation of K N Energy with or into another entity or any
permitted sale, transfer or lease of K N Energy's assets to another entity as
described under "Description of the Subordinated Debentures -- Certain
Covenants," K N Energy may not assign its rights or delegate its obligations
under the Guarantee without the prior approval of the holders of at least a
majority in liquidation amount of the Capital Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to each holder of Capital Securities upon
(i) full payment of the Redemption Price with respect to all Capital Securities,
(ii) upon distribution of the Subordinated Debentures held by the Trust to the
holders of the Capital Securities or (iii) upon dissolution of the Trust and
will terminate completely upon full payment of the amounts payable in accordance
with the Declaration.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of K N
Energy to perform any of its payment or other obligations thereunder.
The holders of a majority in liquidation amount of Capital Securities
relating to the Guarantee have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Capital Securities. If the
Guarantee Trustee fails to enforce the Guarantee, any holder of Capital
Securities relating to such Guarantee may institute a legal proceeding directly
against K N Energy to enforce the Guarantee Trustee's rights under the
Guarantee, without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity. Notwithstanding the foregoing,
if K N Energy has failed to make a guarantee payment, a holder of Capital
Securities may directly institute a proceeding against K N Energy for
enforcement of the Guarantee for such payment. K N Energy waives any right or
remedy to require that any action be brought first against the Trust or any
other person or entity before proceeding directly against K N Energy.
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STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of K N Energy and
will rank pari passu with the 1997 Guarantee and any guarantee hereafter entered
into by K N Energy in respect of any preferred or preference stock of any
affiliate of K N Energy and subordinate and junior in right of payment to all
present and future Senior Indebtedness of K N Energy to the same extent as the
Subordinated Debentures. The terms of the Capital Securities provide that each
holder of Capital Securities issued by the Trust by acceptance thereof agrees to
the subordination provisions and other terms of the Guarantee relating thereto.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the guarantor to enforce its rights under the guarantee without instituting a
legal proceeding against any other person or entity).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, undertakes to perform only such duties as are specifically set
forth in the Guarantee and, after default with respect to the Guarantee, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of Capital Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
GOVERNING LAW
The Guarantee will be governed by, and construed in accordance with, the
laws of the State of New York.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
Set forth below is a description of the specific terms of the Subordinated
Debentures in which the Trust will invest the proceeds from the issuance and
sale of the Trust Securities. The following description does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Indenture, to be dated as of April 28, 1998 (as supplemented by the First
Supplemental Indenture to be dated as of April 28, 1998, the "Indenture"),
between K N Energy and Wilmington Trust Company, as Trustee (the "Debt
Trustee"). Certain capitalized terms used herein are defined in the Indenture.
The Indenture has been qualified under the Trust Indenture Act.
GENERAL
The Subordinated Debentures will be issued as unsecured debt under the
Indenture. The Subordinated Debentures will be limited in aggregate principal
amount to $180,500,000, such amount being the sum of the aggregate liquidation
amount of the Capital Securities and the capital contributed by K N Energy in
exchange for the Common Securities (the "K N Energy Payment").
The Subordinated Debentures are not subject to a sinking fund provision.
The entire principal amount of the Subordinated Debentures will mature and
become due and payable, together with any accrued and unpaid interest thereon
including compound interest, if any, on April 15, 2028.
If Subordinated Debentures are distributed to holders of Capital Securities
in liquidation of such holders' interests in the Trust, such Subordinated
Debentures will initially be issued in the same form as the Capital Securities
that such Subordinated Debentures replace. Under certain limited circumstances,
Subordinated Debentures may be issued in certificated form in exchange for the
Global Security. See "-- Book-Entry and Settlement." In the event that
Subordinated Debentures are issued in certificated form, such Subordinated
Debentures will be in denominations of $1,000 and integral multiples thereof and
may be transferred or exchanged at the offices described below. Payments on
Subordinated Debentures represented by the Global Security will be made to DTC,
a successor depositary or, in the event that no depositary is used, to a paying
agent for the Subordinated Debentures. With respect to Subordinated Debentures
issued in certificated form,
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principal and interest will be payable, the transfer of the Subordinated
Debentures will be registrable and Subordinated Debentures will be exchangeable
for Subordinated Debentures of other denominations of a like aggregate principal
amount at the corporate trust office of the Institutional Trustee at Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19801; provided,
that payment of interest may be made at the option of K N Energy by check mailed
to the address of the holder entitled thereto or by wire transfer to an account
appropriately designated by the holder entitled thereto. Notwithstanding the
foregoing, so long as the holder of any Subordinated Debenture is the
Institutional Trustee, the payment of principal and interest on such
Subordinated Debenture will be made at such place and to such account as may be
designated by the Institutional Trustee.
The Indenture does not contain provisions that afford holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction involving K N Energy that would adversely affect such holders.
INTEREST
Each Subordinated Debenture shall bear interest at the rate of 7.63% per
annum from the first date of original issuance, payable semi-annually in arrears
on April 15 and October 15 of each year (each an "Interest Payment Date"),
commencing October 15, 1998 to the person in whose name such Subordinated
Debenture is registered, subject to certain exceptions, on the Business Day next
preceding such Interest Payment Date. At any time when Subordinated Debentures
are not held solely in book-entry form, the record date for each Interest
Payment Date shall be 15 days prior to such Interest Payment Date.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. The amount of interest payable for
any period shorter than a full semi-annual period for which interest is computed
will be computed on the basis of the actual number of days elapsed per 30-day
month. In the event that any date on which interest is payable on the
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day is in the next succeeding calendar year, then
such payment shall be made on the immediately preceding Business Day, in each
case with the same force and effect as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as K N Energy shall not be in default in the payment of interest on
the Subordinated Debentures, K N Energy shall have the right at any time, and
from time to time, during the term of the Subordinated Debentures to defer
payments of interest by extending the interest payment period for a period not
exceeding 10 consecutive semi-annual periods, not to extend beyond the maturity
of the Subordinated Debentures, at the end of which Extension Period, K N Energy
shall pay all interest then accrued and unpaid together with interest thereon
compounded semi-annually ("Additional Interest") at the rate specified for the
Subordinated Debentures to the extent permitted by applicable law; provided,
that during any such Extension Period, (a) K N Energy shall not declare or pay
dividends on, make any distribution with respect to, or redeem, purchase,
acquire or make a liquidation payment with respect to any of its capital stock
(other than (i) purchases or acquisitions of shares of K N Energy Common Stock
in connection with satisfaction by K N Energy or any of its subsidiaries of
their respective obligations under any benefit plans for directors, officers,
agents or employees or the Company's dividend reinvestment or director, officer,
agent or employee stock purchase plans, (ii) as a result of a reclassification
of K N Energy's capital stock or the exchange or conversion of one class or
series of K N Energy's capital stock for another class or series of capital
stock, (iii) the purchase of fractional interests in shares of K N Energy's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged for K N Energy capital stock,
(iv) dividends or distributions in the form of shares of, or options, warrants
or rights to subscribe for or purchase, shares of capital stock of the Company
or (v) any declaration of a dividend in connection with the implementation or
extension of a stockholders' rights plan, or the issuance of stock under any
such plan (including the existing such plan) in the future, or the redemption or
repurchase of any such rights pursuant thereto)), (b) K N Energy shall not make
any payment of interest, principal or premium, if any, on, or repay, repurchase
or redeem, any debt securities issued by K N Energy that rank pari passu with or
junior to the
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Subordinated Debentures and (c) K N shall not make any guarantee payments with
respect to any guarantee by the Company of any securities of any subsidiary of
the Company if such guarantee ranks pari passu with or junior in right of
payment to the Subordinated Debentures. Prior to the termination of any such
Extension Period, K N Energy may further extend the interest payment period;
provided, that any such Extension Period, together with all such previous and
further extensions, may not exceed 10 consecutive semi-annual periods or extend
beyond the maturity of the Subordinated Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due, K N Energy may
commence a new Extension Period, subject to the terms set forth in this section.
No interest during an Extension Period, except at the end thereof, shall be due
and payable, but the Company may prepay at any time all or any portion of the
interest accrued during an Extension Period. K N Energy has no present intention
of exercising its right to defer payments of interest by extending the interest
payment period on the Subordinated Debentures. If the Institutional Trustee
shall be the sole holder of the Subordinated Debentures, K N Energy shall give
the Administrators and the Institutional Trustee notice of its selection of such
Extension Period one Business Day prior to the earlier of (i) the next
succeeding date distributions on the Capital Securities are payable or (ii) if
applicable, the date the Administrators are required to give notice to any
applicable self-regulatory organization or to holders of the Capital Securities
of the record date or the date such distribution is payable, but in any event at
least one Business Day before such record date..
TRUST COSTS AND EXPENSES
In the Indenture the Company, as borrower, has agreed to pay all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust (including, but not limited to, all costs and expenses
relating to the organization of the Trust, the fees and expenses of the K N
Trustees and the Administrators and all costs and expenses relating to the
operation of the Trust (other than with respect to the Trust Securities)) and to
pay any and all taxes, duties, assessments or other governmental charges of
whatever nature (other than United States federal withholding taxes) imposed by
the United States or any other taxing authority, so that the net amounts
received and retained by the Trust after paying any such debts, obligations,
costs, expenses, taxes, duties, assessments or other governmental charges will
be equal to the amounts the Trust would have received had no such debts,
obligations, costs, expenses, taxes, duties, assessments or other governmental
charges been incurred by or imposed on the Trust. The foregoing obligations of
the Company are for the benefit of, and shall be enforceable by, any person to
whom any such debts, obligations, costs, expenses, taxes, duties, assessments or
other governmental charges are owed (each, a "Creditor") whether or not such
Creditor has received notice thereof. Any such Creditor may enforce such
obligations of the Company directly against the Company, and the Company
irrevocably waives any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Company. The Company shall execute such additional agreements as may be
necessary or desirable to give full effect to the foregoing.
SUBORDINATION
The Indenture provides that the Subordinated Debentures are subordinated
and junior in right of payment to all Senior Indebtedness of K N Energy and pari
passu with the 1997 Subordinated Debentures. No payment of principal (including
redemption payments, if any), premium, if any, or interest on the Subordinated
Debentures may be made (i) if any Senior Indebtedness of K N Energy is not paid
when due and any applicable grace period with respect to such default has ended
and such default has not been cured or waived or ceased to exist or (ii) if the
maturity of any Senior Indebtedness of K N Energy has been accelerated because
of a default. In addition, in the event of the acceleration of the maturity of
the Subordinated Debentures, holders of Senior Indebtedness are entitled to full
payment of amounts due or to become due on such Senior Indebtedness before the
holders of the Subordinated Debentures are entitled to receive any payment.
Upon any distribution of assets of K N Energy to creditors upon any
dissolution, winding-up, liquidation or reorganization, whether voluntary or
involuntary, or in bankruptcy, insolvency, receivership or other proceedings,
all principal, premium, if any, and interest due or to become due on all Senior
Indebtedness of K N Energy must be paid in full before the holders of
Subordinated Debentures are entitled to receive or
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retain any payment. Upon satisfaction of all claims of all Senior Indebtedness
then outstanding, the rights of the holders of the Subordinated Debentures will
be subrogated to the rights of the holders of Senior Indebtedness of K N Energy
to receive payments or distributions applicable to Senior Indebtedness until all
amounts owing on the Subordinated Debentures are paid in full.
The term "Senior Indebtedness" means, with respect to K N Energy, (i) the
principal, premium, if any, and interest in respect of (A) indebtedness of such
obligor for money borrowed under any credit agreements, notes, guarantees or
similar documents and (B) indebtedness evidenced by securities, debentures,
bonds or other similar instruments issued by such obligor including, without
limitation, all indebtedness and all obligations of the obligor to pay fees and
other amounts, under the Bank Facility, and any refinancing of the Bank Facility
in the bank credit market (including institutional participants therein),
including interest accruing on or after a bankruptcy or similar event, whether
or not an allowed claim therein, (ii) all capital lease obligations of such
obligor, (iii) all obligations of such obligor issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such obligor and
all obligations of such obligor under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business),
(iv) all obligations of such obligor for the reimbursement on any letter of
credit, bankers' acceptance, security purchase facility or similar credit
transaction, (v) all obligations of such obligor (contingent or otherwise) with
respect to an interest rate or other swap, cap or collar agreements, oil or gas
commodity hedge transactions or other similar instruments or agreements or
foreign currency hedge, exchange, purchase or similar instruments or agreements,
(vi) all obligations of the types referred to in clauses (i) through (v) above
of other persons for the payment of which such obligor is responsible or liable
as obligor, guarantor or otherwise and (vii) all obligations of the types
referred to in clauses (i) through (vi) above of other persons secured by any
lien on any property or asset of such obligor (whether or not such obligation is
assumed by such obligor), whether outstanding on the date of the Indenture or
thereafter created, incurred, assumed, guaranteed or in effect guaranteed by
such obligor, except for (1) any such indebtedness that is by its terms
expressly subordinated to or pari passu with the Subordinated Debentures and (2)
any indebtedness between or among such obligor or its affiliates, including the
1997 Subordinated Debentures and the 1997 Guarantee and all other debt
securities and guarantees in respect of those debt securities, issued to any
trust, or a trustee of such trust, partnership or other entity affiliated with K
N Energy that is a financing vehicle of K N Energy (a "financing entity") in
connection with the issuance by such financing entity of preferred securities or
other securities that rank pari passu with, or junior to, the Capital
Securities. Such Senior Indebtedness shall continue to be Senior Indebtedness
and be entitled to the benefits of the subordination provisions irrespective of
any deferrals, renewals, extensions or refundings of, or amendments,
modifications, supplements or waivers of any term of such Senior Indebtedness.
There are no terms in the Capital Securities, the Subordinated Debentures,
the Indenture or the Guarantee that limit K N Energy's ability to incur
additional indebtedness, including Senior Indebtedness or to grant security
interests to secure outstanding or new indebtedness.
CERTAIN COVENANTS
In the Indenture, K N Energy has covenanted that, so long as any
Subordinated Debentures are outstanding, if (i) there shall have occurred any
event that would constitute an Event of Default, (ii) K N Energy shall be in
default with respect to its payment of any obligations under the Guarantee or
the Common Securities Guarantee, or (iii) K N Energy shall have given notice of
its election to defer interest payments on the Subordinated Debentures by
extending the interest payment period and such period, or any extension thereof,
shall be continuing, then K N Energy (a) shall not declare or pay dividends on,
make distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of shares of K N Energy Common Stock in connection
with satisfaction by K N Energy or any of its subsidiaries of their respective
obligations under any benefit plans for directors, officers, agents or employees
or the Company's dividend reinvestment or director, officer, agent or employee
stock purchase plans, (ii) as a result of a reclassification of K N Energy's
capital stock or the exchange or conversion of one class or series of K N
Energy's capital stock for another class or series of capital stock, (iii) the
purchase of fractional interests in shares of K N Energy's capital stock
pursuant to the
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conversion or exchange provisions of K N Energy's capital stock or the security
being converted or exchanged for K N Energy capital stock, (iv) dividends or
distributions in shares of, or options, warrants or rights to subscribe for or
purchase, shares of capital stock of the Company or (v) any declaration of a
dividend in connection with the implementation or extension of a stockholders'
rights plan, or the issuance of stock under any such plan (including the
existing such plan) in the future, or the redemption or repurchase of any such
rights pursuant thereto)), (b) shall not make any payment of interest, principal
or premium, if any, on, or repay, repurchase or redeem, any debt securities
issued by K N Energy that rank pari passu with or junior to the Subordinated
Debentures and (c) shall not make any guarantee payments with respect to any
guarantee by the Company of any securities of any subsidiary of the Company if
such guarantee ranks pari passu with or junior in right of payment to the
Subordinated Debentures.
K N Energy has covenanted (i) to directly or indirectly maintain 100%
ownership of the Common Securities; provided, that any permitted successor of K
N Energy under the Indenture may succeed to K N Energy's ownership of such
Common Securities, (ii) to use its reasonable efforts to cause the Trust (x) to
remain a statutory business trust, except in connection with the distribution of
Subordinated Debentures to the holders of Trust Securities in liquidation of the
Trust, the redemption of all of the Trust Securities, or certain mergers,
consolidations or amalgamations, each as permitted by the Declaration, (y) to
continue to be classified as a grantor trust for United States federal income
tax purposes and (z) to continue to qualify for an exemption from registration
under the Investment Company Act of 1940, as amended and (iii) to use its
reasonable efforts to cause each holder of Trust Securities to be treated as
owning an undivided beneficial interest in the Subordinated Debentures.
K N Energy may not merge or consolidate or sell or convey all or
substantially all of its assets unless the continuing corporation (if other than
K N Energy) is a domestic corporation and assumes K N Energy's obligations on
the Subordinated Debentures and under the Indenture, and unless after giving
effect to such transaction K N Energy or such continuing corporation would not
be in default under the Indenture.
OPTIONAL PREPAYMENT
The Company may, at its option, prepay the Subordinated Debentures (i) if a
Tax Event or Investment Company Event has occurred and is continuing, at any
time within 90 days of the occurrence of such Tax Event or Investment Company
Event, in whole, but not in part, or (ii) at any time in whole or in part. In
each case the Subordinated Debentures will be prepaid at a prepayment price (the
"Optional Prepayment Price") equal to the greater of (A) 100% of the principal
amount of the Subordinated Debentures or (B) the sum, as determined by a
Quotation Agent (as defined below), of the present value of (x) 100% of the
principal amount of the Subordinated Debentures that would be payable on April
15, 2028 and (y) scheduled payments of interest from the prepayment date to
April 15, 2028 (the "Remaining Life"), in each case discounted to the prepayment
date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day
months) at the Adjusted Treasury Rate, plus, in each case, accrued interest
thereon to the date of prepayment.
Notice of any prepayment will be mailed at least 30 days but not more than
60 days before the prepayment date to each holder of Subordinated Debentures to
be prepaid at its registered address. Unless the Company defaults in payment of
the prepayment price, on and after the prepayment date interest ceases to accrue
on such Subordinated Debentures called for prepayment.
The proceeds of any such prepayment will be used by the Institutional
Trustee to redeem a Like Amount of Trust Securities. See "Description of the
Capital Securities -- Redemption."
If the Trust becomes subject to any additional taxes, duties or other
governmental charges (other than United States withholding taxes)as a result of
a Tax Event, under the Indenture the Company, as borrower, will be responsible
for such taxes, duties or charges. See "-- Trust Costs and Expenses."
"Adjusted Treasury Rate" means, with respect to any date of prepayment, (A)
in the case of a Tax Event or an Investment Company Event, the Treasury Rate,
plus (i) 1.00% if such prepayment date occurs on or prior to April 15, 1999, and
(ii) .50% thereafter, or (B) in the case of any other optional redemption, the
Treasury Rate plus .25%.
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"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately preceding week, appearing in the most recently
published statistical release designated "H.15(519)" or any successor
publication which is published weekly by the Federal Reserve Board and which
establishes yields on actively traded United States Treasury securities adjusted
to constant maturity under the caption "Treasury Constant Maturities," for the
maturity corresponding to the Remaining Life (if no maturity is within three
months before or after the Remaining Life, yields for the two published
maturities most closely corresponding to the Remaining Life shall be determined
and the Treasury Rate shall be interpolated or extrapolated from such yields on
a straight-line basis, rounding to the nearest month) or (ii) if such release
(or any successor release) is not published during the week preceding the
calculation date or does not contain such yields, the rate per annum equal to
the semi-annual equivalent yield to maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
such prepayment date. The Treasury Rate shall be calculated on the third
Business Day preceding the prepayment date.
"Comparable Treasury Issue" means, with respect to any prepayment date, the
United States Treasury security selected by the Quotation Agent has having a
maturity comparable to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the Remaining
Life. If no United States Treasury security has a maturity which is within a
period from three months before to three months after the Remaining Life, the
two most closely corresponding United States Treasury securities shall be used
as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month using such
securities.
"Quotation Agent" means Morgan Stanley & Co. Incorporated and its
successors.
"Reference Treasury Dealer" means (i) Morgan Stanley & Co. Incorporated and
J.P. Morgan Securities Inc. and their respective successors; provided, however,
that if either of the foregoing shall cease to be a primary U.S. government
securities dealer in New York City (a "Primary Treasury Dealer"), the Company
shall substitute therefor another Primary Treasury Dealer and (ii) three other
Primary Treasury Dealers selected by the Debt Trustee after consultation with
the Company.
"Comparable Treasury Price" means with respect to any prepayment date, (A)
the average of five Reference Treasury Dealer Quotations for such prepayment
date, after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (B) if the Debt Trustee obtains fewer than five such Reference
Treasury Dealer Quotations, the average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any prepayment date, the average, as determined by
the Debt Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Debt Trustee by such Reference Treasury Dealer at 5:00 p.m., New
York City time, on the third Business Day preceding such prepayment date.
"Tax Event" means the receipt by the Company and the Trust of an opinion of
tax counsel, who shall not be an officer or employee of the Company or its
affiliates, to the effect that, as a result of any amendment to, or change
(including any announced proposed change) in, the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
written decisions or pronouncement or judicial decision or action interpreting
or applying such laws or regulations, which amendment or change is effective or
which proposed change, pronouncement, action or decision is announced on or
after the date of this Prospectus Supplement, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the date
of such opinion of counsel, subject to United States federal income tax with
respect to income received or accrued on the Subordinated Debentures, (ii)
interest payable by the Company on the Subordinated Debentures is not, or within
90 days of the date of such opinion of counsel, will not be, deductible by the
Company, in whole or in part, for United States federal income tax purposes, or
(iii) the Trust is, or will be within 90 days of the date of such opinion of
counsel, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
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"Investment Company Event" means the receipt by the Company and the Trust
of an opinion of counsel, who shall not be an officer or employee of the Company
or its affiliates, to the effect that, as a result of the occurrence of a change
in law or regulation or change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in 1940 Act Law"), the Trust is or will be considered an
investment company that is required to be registered under the Investment
Company Act of 1940, as amended, which Change in 1940 Act Law becomes effective
on or after the date of this Prospectus Supplement.
INDENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of Default"
with respect to the Subordinated Debentures: (i) failure for 30 days to pay
interest on the Subordinated Debentures, including any interest in respect
thereof when due; provided that a valid extension of an interest payment period
will not constitute a default in the payment of interest for this purpose; (ii)
failure to pay principal of or premium, if any, on the Subordinated Debentures
when due whether at maturity, upon redemption, by declaration or otherwise;
provided that a valid extension of maturity will not constitute a default in the
payment of principal or premium, if any, for this purpose; (iii) failure to
observe or perform any other covenant contained in the Indenture for 90 days
after notice to K N Energy by the Debt Trustee or by the holders of not less
than 25% in aggregate outstanding principal amount of the Subordinated
Debentures; (iv) the dissolution, winding up or termination of the Trust, except
in connection with the distribution of Subordinated Debentures to the holders of
Capital Securities in liquidation of the Trust upon the redemption of all
outstanding Capital Securities or in connection with certain mergers,
consolidations or amalgamations permitted by the Declaration; or (v) certain
events in bankruptcy, insolvency or reorganization of K N Energy.
If any of the Indenture Events of Default specified in clauses (i), (ii),
(iii) (if the Event of Default specified in clause (iii) is with respect to less
than all series of Debentures then Outstanding) or (iv) above shall occur and be
continuing, the Debt Trustee or the holders of not less than 25% in aggregate
principal amount of the Subordinated Debentures of such series then Outstanding
(each such series voting as a separate class) may declare the principal of and
interest on the Subordinated Debentures due and payable immediately. If an Event
of Default described in clause (iii) (if the Event of Default specified in
clause (iii) relates to all series of Subordinated Debentures then Outstanding)
shall occur and be continuing then, unless the principal of all Subordinated
Debentures of all series shall have already become due and payable, either the
Debt Trustee or the holders of not less than 25% in aggregate principal amount
of all the Subordinated Debentures of all series then Outstanding (treated as
one class) may declare the entire principal of all Subordinated Debentures of
all series then Outstanding and interest accrued thereon, if any, due and
payable immediately. If any Indenture Event of Default specified in clause (v)
above shall occur and be continuing, the principal amount of the outstanding
Subordinated Debentures shall automatically become due and payable without any
action on the part of the Debt Trustee or any Holder; provided, that, after such
acceleration, but before a judgment or decree based on acceleration, the holders
of a majority in aggregate principal amount of outstanding Subordinated
Debentures may, under certain circumstances, rescind and annul such acceleration
if all Indenture Events of Default, other than the nonpayment of accelerated
principal, have been cured or waived as provided in the Indenture.
A default under any other indebtedness of K N Energy would not constitute
an Indenture Event of Default under the Subordinated Debentures.
Subject to the provisions of the Indenture relating to the duties of the
Debt Trustee in case an Indenture Event of Default occurs and is continuing, the
Debt Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any holders of Subordinated
Debentures, unless such holders shall have offered to the Debt Trustee
reasonable indemnity. Subject to such provisions for the indemnification of the
Debt Trustee, the holders of a majority in aggregate principal amount of the
outstanding Subordinated Debentures will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debt Trustee, or exercising any trust or power conferred on the Debt Trustee.
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No holder of any Subordinated Debenture will have any right to institute
any proceeding with respect to the Indenture or for any remedy thereunder,
unless such holder shall have previously given to the Debt Trustee written
notice of a continuing Indenture Event of Default and, if the Institutional
Trustee is not the sole holder of Subordinated Debentures, unless the holders of
at least 25% in aggregate principal amount of the outstanding Subordinated
Debentures shall also have made written request, and offered reasonable
indemnity, to the Debt Trustee to institute such proceeding as Debt Trustee, and
the Debt Trustee shall have, within 60 days after its receipt of such notice,
request an offer of indemnity, failed to institute such proceeding in its own
name; provided, however, that the Debt Trustee shall not have received from the
holders of a majority in aggregate principal amount of the outstanding
Subordinated Debentures a direction inconsistent with such request. However,
such limitations do not apply to a suit instituted by a holder of a Subordinated
Debenture for enforcement of payment of the principal of or interest on such
Subordinated Debenture on or after the respective due dates expressed in such
Subordinated Debenture.
An Indenture Event of Default also constitutes a Declaration Event of
Default. The holders of Capital Securities in certain circumstances have the
right to direct the Institutional Trustee to exercise its rights as the holder
of the Subordinated Debentures. See "Description of the Capital
Securities -- Declaration Events of Default" and "-- Voting Rights."
Notwithstanding the foregoing, if an Indenture Event of Default has occurred and
is continuing and such event is attributable to the failure of K N Energy to pay
interest or principal on the Subordinated Debentures on the date such interest
or principal is otherwise payable (or in the case of redemption, the redemption
date), then a holder of Capital Securities may institute a Direct Action for
payment on or after the respective due date specified in the Subordinated
Debentures of the principal or interest on the Subordinated Debentures having an
aggregate principal amount equal to the aggregate liquidation amount of the
Capital Securities of such holder. Notwithstanding any payments made to such
holder of Capital Securities by K N Energy in connection with a Direct Action, K
N Energy shall remain obligated to pay the principal of or interest on the
Subordinated Debentures held by the Trust or the Institutional Trustee of the
Trust, and K N Energy, in its capacity as the holder of the Common Securities,
or any successor holder, shall be subrogated to the holder of such Capital
Securities to the extent of any payments made by K N Energy, in its capacity as
issuer of the Subordinated Debentures, to such holder in any Direct Action;
provided, however that KN Energy, in its capacity as the holder of the Common
Securities, may not exercise any such right of subrogation so long as an Event
of Default with respect to the Capital Securities has occurred and is
continuing. The holders of Capital Securities will not be able to exercise
directly any other remedy available to the holders of the Subordinated
Debentures.
The Indenture contains provisions permitting the holders of a majority in
aggregate principal amount of the Subordinated Debentures, on behalf of all of
the holders of the Subordinated Debentures, to waive any past default in the
performance of any of the covenants contained in the Indenture, except a default
in the payment of principal or interest on any of the Subordinated Debentures.
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of Capital Securities in connection with the
involuntary or voluntary dissolution, winding-up or liquidation of the Trust,
the Subordinated Debentures will be issued in the same form as the Capital
Securities that such Subordinated Debentures replace. Except under the limited
circumstances described below, Subordinated Debentures represented by the Global
Security will not be exchangeable for, and will not otherwise be issuable as,
Subordinated Debentures in definitive form. The Global Security may not be
transferred except by DTC to a nominee of DTC or by a nominee of DTC to DTC or
another nominee of DTC or to successor depositary or its nominee. The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in the Global Security.
Except as provided below, owners of beneficial interests in the Global
Security will not be entitled to receive physical delivery of Subordinated
Debentures in definitive form and will not be considered the holders (as defined
in the Indenture) thereof for any purpose under the Indenture, and the Global
Security representing Subordinated Debentures shall not be exchangeable, except
for another Global Security of like denomination and tenor to be registered in
the name of DTC or its nominee or to a successor depositary or its nominee.
Accordingly, each beneficial owner must rely on the procedures of DTC or if such
person is not a
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Participant, on the procedures of the Participant through which such person owns
its interest to exercise any rights of a holder under the Indenture.
If Subordinated Debentures are distributed to holders of Capital Securities
in liquidation of such holders' interests in the Trust and such Subordinated
Debentures are represented by the Global Security, DTC will act as securities
depositary for the Subordinated Debentures represented by such Global Security.
For a description of DTC and the specific terms of the depositary arrangements,
see "Description of the Capital Securities -- Form, Denomination and
Registration -- Global Capital Security; Book-Entry Form." As of the date of
this Prospectus Supplement, the description therein of DTC's book-entry system
and DTC's practices as they relate to purchases, transfers, notices and payments
with respect to the Capital Securities apply in all material respects to any
debt obligations represented by one or more global securities held by DTC. K N
Energy may appoint a successor to DTC or any successor depositary in the event
DTC or such successor depositary is unable or unwilling to continue as a
depositary for such global securities.
None of K N Energy, the Trust, the Institutional Trustee, any paying agent
and any other agent of K N Energy or the Debt Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Security representing Subordinated Debentures or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
The Global Security shall be exchangeable for Subordinated Debentures
registered in the names of persons other than DTC or its nominee only if (i) DTC
notifies K N Energy that it is unwilling or unable to continue as a depositary
for the Global Security and no successor depositary shall have been appointed,
(ii) DTC, at any time, ceases to be a clearing agency registered under the
Exchange Act when DTC is required to be so registered to act as such depositary
and no successor depositary shall have been appointed, (iii) there shall have
occurred and be continuing an Event of Default, or any event which after notice
or lapse of time or both would be an Event of Default under the Indenture, or
(iv) K N Energy, in its sole discretion, determines that the Global Security
shall be so exchangeable. If the Global Security is exchangeable pursuant to the
preceding sentence, it shall be exchangeable for Subordinated Debentures
registered in such names as DTC shall direct. It is expected that such
instructions will be based upon directions received by DTC from its Participants
with respect to ownership of beneficial interests in the Global Security.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
K N Energy, the Trust and the holders of the Capital Securities (by the
acceptance of a beneficial ownership interest in a Capital Security) have agreed
to treat the Subordinated Debentures as indebtedness for all United States tax
purposes and the Capital Securities as evidence of an indirect beneficial
ownership interest in the Subordinated Debentures.
MODIFICATIONS AND AMENDMENTS OF THE INDENTURE
The Indenture contains provisions permitting K N Energy and the Debt
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Subordinated Debentures, to modify
the Indenture or the rights of the holders of Subordinated Debentures; provided,
however, that no such modification may, without the consent of the holder of
each outstanding Subordinated Debenture affected thereby, (i) extend the stated
maturity of the Subordinated Debentures or reduce the principal amount thereof,
or reduce the rate or extend the time for payment of interest thereon, or reduce
any premium payable upon the redemption thereof, or adversely affect the
subordination provisions of the Indenture, or (ii) reduce the percentage in
aggregate principal amount of outstanding Subordinated Debentures, the holders
of which are required to consent to any such supplemental indenture.
In addition, K N Energy and the Debt Trustee may execute, without the
consent of any holder of Subordinated Debentures, any supplemental indenture to
cure any ambiguities, to comply with the Trust Indenture Act and for certain
other customary purposes.
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DEFEASANCE AND DISCHARGE
The Indenture provides that the Company, at the Company's option: (a) will
be discharged from any and all obligations in respect of the Subordinated
Debentures (except for certain obligations to register the transfer or exchange
of Subordinated Debentures, replace stolen, lost or mutilated Subordinated
Debentures, maintain paying agencies and hold moneys for payment in trust) or
(b) need not comply with certain restrictive covenants of the Indenture, in each
case if, among other things, the Company deposits, in trust with the Debt
Trustee, money or U.S. government obligations which through the payment of
interest thereon and principal thereof in accordance with their terms will
provide money, in an amount sufficient to pay all the principal of, and interest
and premium, if any, on the Subordinated Debentures on the dates such payments
are due in accordance with the terms of such Subordinated Debentures and
delivers to the Indenture Trustee an opinion of counsel to the effect that the
deposit and related defeasance would not cause the holders of the Subordinated
Debentures to recognize income, gain or loss for United States federal income
tax purposes.
INFORMATION CONCERNING THE DEBT TRUSTEE
The Debt Trustee, prior to default, undertakes to perform only such duties
as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Debt Trustee
is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Subordinated Debentures, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities that might be incurred thereby. The Debt Trustee is not required to
expend or risk its own funds or otherwise incur personal financial liability in
the performance of its duties if the Debt Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
The Indenture also contains limitations on the right of the Debt Trustee,
as a creditor of K N Energy, to obtain payment of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. In addition, the Debt Trustee may be deemed to have a conflicting
interest and may be required to resign as Debt Trustee if at the time of a
default under the Indenture it is a creditor of K N Energy. K N Energy may from
time to time maintain deposit accounts and conduct its banking transactions with
the Debt Trustee in the ordinary course of business.
GOVERNING LAW
The Indenture and the Subordinated Debentures will be governed by, and
construed in accordance with. the laws of the State of New York.
MISCELLANEOUS
The Indenture provides that K N Energy, as borrower, will pay all fees and
expenses related to (i) the offering of the Trust Securities and the
Subordinated Debentures, (ii) the organization, maintenance and dissolution of
the Trust, (iii) the retention of the K N Trustees and Administrators and (iv)
the enforcement by the Institutional Trustee of the rights of the holders of the
Capital Securities.
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RELATIONSHIP AMONG THE CAPITAL SECURITIES,
THE SUBORDINATED DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Trust Securities evidencing undivided beneficial interests in the assets of
the Trust, and to invest the proceeds from such issuance and sale in the
Subordinated Debentures.
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover distributions
and payments due on the Trust Securities because of the following factors: (i)
the aggregate principal amount of Subordinated Debentures will be equal to the
sum of the aggregate liquidation amount of the Trust Securities; (ii) the
interest rate and the interest and other payment dates on the Subordinated
Debentures will match the distribution rate and distribution and other payment
dates for the Capital Securities; (iii) pursuant to the Indenture, K N Energy,
as borrower, shall pay, and the Trust shall not be obligated to pay, directly or
indirectly, all costs, expenses, debts and obligations of the Trust (other than
with respect to the Trust Securities); and (iv) the Declaration further provides
that the K N Trustees shall not take or cause or permit the Trust to, among
other things, engage in any activity that is not consistent with the purposes of
the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Capital Securities (to the extent funds therefor are
available) are guaranteed by K N Energy as and to the extent set forth under
"Description of the Guarantee." If K N Energy does not make interest payments on
the Subordinated Debentures purchased by the Trust, it is expected that the
Trust will not have sufficient funds to pay distributions on the Capital
Securities. The Guarantee is a full guarantee on a subordinated basis with
respect to the Capital Securities issued by the Trust from the time of its
issuance but does not apply to any payment of distributions unless and until the
Trust has sufficient funds for the payment of such distributions. The Guarantee
covers the payment of distributions and other payments on the Capital Securities
only if and to the extent that K N Energy has made a payment of interest or
principal on the Subordinated Debentures held by the Trust as its sole asset.
See "Risk Factors -- Risks Relating to the Capital Securities -- Limitations of
the Guarantee." The Guarantee, when taken together with K N Energy's obligations
under the Subordinated Debentures, the Indenture and the Declaration, including
its obligations, as borrower, to pay costs, expenses, debts and liabilities of
the Trust (other than with respect to the Trust Securities), provides a full and
unconditional guarantee on a subordinated basis of amounts payable on the
Capital Securities.
If K N Energy fails to make interest or other payments on the Subordinated
Debentures when due (after giving effect to any Extension Period), the
Declaration provides a mechanism whereby a holder of the Capital Securities,
using the procedures described in "Description of the Capital
Securities -- Voting Rights," may direct the Institutional Trustee to enforce
its rights under the Subordinated Debentures. Notwithstanding the foregoing, if
a Declaration Event of Default has occurred and is continuing and such event is
attributable to the failure of K N Energy to pay principal or interest on the
Subordinated Debentures on the respective dates such principal or interest is
payable (or, in the case of redemption, on the redemption date), then a holder
of Capital Securities may institute a Direct Action for payment on or after the
respective due date specified in the Subordinated Debentures. In connection with
such Direct Action, K N Energy will be subrogated to the rights of such holder
of Capital Securities under the Declaration to the extent of any payment made by
K N Energy to such holder of Capital Securities in such Direct Action. K N
Energy, under the Guarantee, acknowledges that the Guarantee Trustee shall
enforce the Guarantee on behalf of the holders of the Capital Securities. If K N
Energy fails to make payments under the Guarantee, the Guarantee provides a
mechanism whereby the holders of the Capital Securities may direct the Guarantee
Trustee to enforce its rights thereunder. If the Guarantee Trustee fails to
enforce the Guarantee, any holder of Capital Securities may institute a legal
proceeding directly against K N Energy to enforce such holder's right to receive
payment under the Guarantee without first instituting a legal proceeding against
the Trust, the Guarantee Trustee or any other person or entity.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Simpson Thacher & Bartlett, special United States federal
income tax counsel to the Company and the Trust ("Tax Counsel"), the following
summary accurately describes the material United States federal income tax
consequences that may be relevant to the purchase, ownership and disposition of
the Capital Securities. Unless otherwise stated, this summary deals only with
Capital Securities held as capital assets by United States Persons (defined
below) who purchase the Capital Securities upon original issuance at their
original offering price. As used herein, a "United States Person" means (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) any trust if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more United States
Persons have the authority to control all the substantial decisions of such
trust. The tax treatment of a holder may vary depending on his, her or its
particular situation. This summary does not address all the tax consequences
that may be relevant to a particular holder or to holders who may be subject to
special tax treatment, such as banks, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
tax-exempt investors or foreign investors. In addition, this summary does not
include any description of any alternative minimum tax consequences or the tax
laws of any state, local or foreign government that may be applicable to a
holder of Capital Securities. This summary is based on the Internal Revenue Code
of 1986, as amended (the "Code"), the Treasury regulations promulgated
thereunder and administrative and judicial interpretations thereof, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis.
The authorities on which this summary is based are subject to various
interpretations and the opinions of Tax Counsel are not binding on the Internal
Revenue Service ("IRS") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought by the Company from
the IRS with respect to the transactions described herein. Accordingly, there
can be no assurance that the IRS will not challenge the opinions expressed
herein or that a court would not sustain such a challenge. Nevertheless, Tax
Counsel has advised that it is of the view that, if challenged, the opinions
expressed herein would be sustained by a court with jurisdiction in a properly
presented case.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE CAPITAL
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE CAPITAL SECURITIES
UPON THE OCCURRENCE OF CERTAIN TAX EVENTS SEE "DESCRIPTION OF THE SUBORDINATED
DEBENTURES -- TAX EVENT OR INVESTMENT COMPANY EVENT PREPAYMENT."
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Tax Counsel is
of the opinion that under current law and assuming full compliance with the
terms of the Declaration and other documents, and based upon certain facts and
assumptions contained in such opinion, the Trust will be classified as a grantor
trust for United States federal income tax purposes and not as an association
taxable as a corporation. Accordingly, for United States federal income tax
purposes, each beneficial owner (a "holder") of Capital Securities generally
will be treated as owning an undivided beneficial interest in the Subordinated
Debentures and, thus, will be required to include in its gross income its pro
rata share of the interest income or original issue discount ("OID") that is
paid or accrued on the Subordinated Debentures. See "-- Interest Income and
Original Issue Discount."
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CLASSIFICATION OF THE SUBORDINATED DEBENTURES
The Company, the Trust and the holders of the Capital Securities (by
acceptance of a beneficial interest in a Capital Security) will agree to treat
the Subordinated Debentures as indebtedness for all United States tax purposes.
Recently, a petition was filed in the United States Tax Court as a result of a
challenge by the IRS of the petitioner's treatment as indebtedness of a loan
issued in circumstances with certain similarities to the issuance of the
Subordinated Debentures. Nevertheless, in connection with the issuance of the
Subordinated Debentures, Tax Counsel is of the opinion that under current law,
and based on certain representations, facts and assumptions set forth in such
opinion, the Subordinated Debentures will be classified as indebtedness for
United States federal income tax purposes.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations, the Subordinated Debentures will not
be considered to have been issued with OID within the meaning of section 1273(a)
of the Code. Accordingly, except as set forth below, stated interest on the
Subordinated Debentures generally will be taxable to a holder as ordinary income
at the time it is paid or accrued in accordance with such holder's regular
method of tax accounting.
If, however, the Company exercises its right to defer payments of interest
on the Subordinated Debentures, the Subordinated Debentures will become OID
instruments at such time and all holders will be required to accrue the stated
interest on the Subordinated Debentures on a daily economic accrual basis (using
the constant-yield-to-maturity method of accrual described in section 1272 of
the Code) during the Extension Period even though the Company will not pay such
interest until the end of the Extension Period, and even though some holders may
use the cash method of tax accounting. Moreover, thereafter the Subordinated
Debentures will be taxed as OID instruments for as long as they remain
outstanding. Thus, even after the end of the Extension Period, all holders would
be required to continue to include the stated interest on the Subordinated
Debentures (and any de minimis OID) in income on a daily economic accrual basis,
regardless of their method of tax accounting and in advance of receipt of the
cash attributable to such interest income. Under the OID economic accrual rules,
a holder would accrue an amount of interest income each year that approximates
the stated interest payments called for under the terms of the Subordinated
Debentures, and actual cash payments of interest on the Subordinated Debentures
would not be reported separately as taxable income. Any amount of OID included
in a holder's gross income (whether or not during an Extension Period) with
respect to a Capital Security will increase such holder's tax basis in such
Capital Security, and the amount of distributions received by a holder in
respect of such accrued OID will reduce the tax basis of such Capital Security.
The Treasury regulations described above have not yet been addressed in any
rulings or other interpretations by the IRS, and it is possible that the IRS
could take a contrary position. If the IRS were to assert successfully that the
stated interest on the Subordinated Debentures was OID regardless of whether the
Company exercises its option to defer payments of interest on such Subordinated
Debentures, all holders of Capital Securities would be required to include such
stated interest in income on a daily economic accrual basis as described above.
Corporate holders of Capital Securities will not be entitled to a
dividends-received deduction with respect to any income recognized by such
holders with respect to the Capital Securities.
DISTRIBUTION OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
As described under the caption "Description of the Capital
Securities -- Liquidation Distribution Upon Dissolution," Subordinated
Debentures may be distributed to holders in exchange for the Capital Securities
and in liquidation of the Trust. Under current law, such a distribution would be
non-taxable, and will result in the holder receiving directly its pro rata share
of the Subordinated Debentures previously held indirectly through the Trust,
with a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such holder had in its Capital Securities before such
distribution. If, however, a Tax Event were to occur that would cause the Trust
to be subject to United States federal income tax with respect to income accrued
or received on the Subordinated Debentures, the distribution of the Subordinated
Debentures to holders would
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be a taxable event to the Trust and to each holder, in which event the Trust
would not be permitted to distribute the Subordinated Debentures but the Company
could, at its option, redeem the Subordinated Debentures, which would be taxable
to the Trust, and distribute the resulting cash in liquidation of the Trust,
which would be taxable to the holders as described below in "-- Sales of Capital
Securities".
A holder would accrue interest in respect of the Subordinated Debentures
received from the Trust in the manner described above under "-- Interest Income
and Original Issue Discount."
Under certain other circumstances described herein (see "Description of
Capital Securities"), the Subordinated Debentures may be redeemed for cash, with
the proceeds of such redemption distributed to holders in redemption of their
Capital Securities. Under current law, such a redemption would constitute a
taxable disposition of the redeemed Capital Securities for United States federal
income tax purposes, and a holder would recognize gain or loss as if it sold
such redeemed Capital Securities for cash. See "-- Sales of Capital Securities."
SALES OF CAPITAL SECURITIES
A holder that sells Capital Securities will recognize gain or loss equal to
the difference between the amount realized by the holder on the sale or
redemption of the Capital Securities (except to the extent that such amount
realized is characterized as a payment in respect of accrued but unpaid interest
on such holder's allocable share of the Subordinated Debentures that such holder
has not included in income previously) and the holder's adjusted tax basis in
the Capital Securities sold or redeemed. Such gain or loss generally will be a
capital gain or loss and generally will be a long-term capital gain or loss if
the Capital Securities have been held for more than one year. Capital gains of
individuals derived with respect to capital assets held for more than one year
are eligible for reduced rates of taxation depending upon the holding period of
such capital assets. Holders should consult their own tax advisors regarding the
capital gains rates applicable to them. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
NON-UNITED STATES HOLDERS
As used herein, the term "Non-United States Holder" means any person that
is not a United States Person. As discussed above, the Capital Securities will
be treated as evidence of an indirect beneficial ownership interest in the
Subordinated Debentures. See "-- Classification of the Trust." Thus, under
present United States federal income tax law, and subject to the discussion
below concerning backup withholding:
(a) no withholding of United States federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal or interest (which for purposes of this discussion includes any
OID) on the Capital Securities (or the Subordinated Debentures) to a
Non-United States Holder, provided (i) that the beneficial owner of the
Capital Securities ("Beneficial Owner") does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder, (ii) the Beneficial Owner is not a
controlled foreign corporation that is related to the Company through stock
ownership, (iii) the Beneficial Owner is not a bank whose receipt of
interest on the Subordinated Debentures is described in section
881(c)(3)(A) of the Code and (iv) the Beneficial Owner satisfies the
statement requirement (described generally below) set forth in section
871(h) and section 881(c) of the Code and the regulations thereunder; and
(b) no withholding of United States federal income tax will be
required with respect to any gain realized by a Non-United States Holder
upon the sale or other disposition of the Capital Securities (or the
Subordinated Debentures).
To satisfy the requirement referred to in (a)(iv) above, the Beneficial
Owner, or a financial institution holding the Capital Securities on behalf of
such owner, must provide, in accordance with specified procedures, to the Trust
or its paying agent, a statement to the effect that the Beneficial Owner is not
a United States Person. These requirements will be met if (1) the Beneficial
Owner provides his name and address, and
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certifies, under penalties of perjury, that it is not a United States Person
(which certification may be made on an IRS Form W-8 (or successor form)) or (2)
a financial institution holding the Capital Securities on behalf of the
Beneficial Owner certifies, under penalties of perjury, that such statement has
been received by it and furnishes a paying agent with a copy thereof. Under
recently finalized Treasury regulations (the "Final Regulations"), the statement
requirement referred to in (a)(iv) above may also be satisfied with other
documentary evidence for interest paid after December 31, 1999 with respect to
an offshore account or through certain foreign intermediaries.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of premium, if
any, and interest (including any OID) made to such Non-United States Holder will
be subject to a 30% United States withholding tax unless the Beneficial Owner
provides the Company or its paying agent, as the case may be, with a properly
executed (1) IRS Form 1001 (or successor form) claiming an exemption from, or a
reduction of, such withholding tax under the benefit of a tax treaty or (2) IRS
Form 4224 (or successor form) stating that interest paid on the Capital
Securities (or the Subordinated Debentures) is not subject to such withholding
tax because it is effectively connected with the Beneficial Owner's conduct of a
trade or business in the United States. Under the Final Regulations, Non-United
States Holders will generally be required to provide IRS Form W-8 in lieu of IRS
Form 1001 and IRS Form 4224, although alternative documentation may be
applicable in certain situations.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest on the Capital Securities (or Subordinated
Debentures) is effectively connected with the conduct of such trade or business,
the Non-United States Holder, although exempt from the withholding tax discussed
above, will be subject to United States federal income tax on such interest on a
net income basis in the same manner as if it were a United States Person. In
addition, if such Non-United States Holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, subject to adjustments. For this
purpose, such interest would be included in such foreign corporation's earnings
and profits.
Any gain realized upon the sale or other disposition of the Capital
Securities (or the Subordinated Debentures) generally will not be subject to
United States federal income tax unless (i) such gain is effectively connected
with a trade or business in the United States of the Non-United States Holder,
(ii) in the case of a Non-United States Holder who is an individual, such
individual is present in the United States for 183 days or more in the taxable
year of such sale, exchange or retirement, and certain other conditions are met,
or (iii) in the case of any gain representing accrued interest on the
Subordinated Debentures, the requirements described above are not satisfied.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Income on the Capital Securities held of record by United States Persons
(other than corporations and other exempt holders) will be reported annually to
such holders and to the IRS. Such income will be reported to holders on Forms
1099, which should be mailed to the holders of record prior by January 31
following each calendar year.
"Backup withholding" at a rate of 31% will apply to payments of interest to
non-exempt United States Persons unless the holder furnishes its taxpayer
identification number in the manner prescribed in applicable Treasury
regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions.
No information reporting or backup withholding will be required with
respect to payments made by the Trust or any paying agent to Non-United States
Holders if a statement described in (a)(iv) under "Non-United States Holders"
has been received and the payor does not have actual knowledge that the
beneficial owner is a United States Person.
In addition, backup withholding and information reporting will not apply if
payments of the principal, interest, OID or premium on the Capital Securities
(or the Subordinated Debentures) are paid or collected by a foreign office of a
custodian, nominee or other foreign agent on behalf of the Beneficial Owner, or
if a foreign
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office of a broker (as defined in applicable Treasury regulations) pays the
proceeds of the sale of the Capital Securities (or the Subordinated Debentures)
to the owner thereof. If, however, such nominee, custodian, agent or broker is,
for United States federal income tax purposes, a United States Person, a
controlled foreign corporation or a foreign person that derives 50% or more of
its gross income for certain periods from the conduct of a trade or business in
the United States, or, after December 31, 1999, if such nominee, custodian,
agent or broker is a foreign partnership, in which one or more United States
Persons, in the aggregate, own more than 50% of the income or capital interests
in the partnership or if the partnership is engaged in a trade or business in
the United States, such payments will not be subject to backup withholding but
will be subject to information reporting, unless (1) such custodian, nominee,
agent or broker has documentary evidence in its records that the Beneficial
Owner is not a United States Person and certain other conditions are met or (2)
the Beneficial Owner otherwise establishes an exemption.
Payment of the proceeds from disposition of Capital Securities (or
Subordinated Debentures) to or through a United States office of a broker is
subject to information reporting and backup withholding unless the holder or
beneficial owner establishes an exemption from information reporting and backup
withholding.
Any amounts withheld from a holder of the Capital Securities under the
backup withholding rules generally will be allowed as a refund or a credit
against such holder's United States federal income tax liability, provided the
required information is furnished to the IRS.
ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
(a "Plan") subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the Capital Securities. Accordingly, among other factors, the fiduciary
should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the documents
and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code ("Parties in Interest") with respect to such Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or
administrative exemption. Employee benefit plans that are governmental plans (as
defined in Section 3(32) of ERISA), certain church plans (as defined in Section
3(32) of ERISA) and foreign plans (as described in Section 4(b)(5) of ERISA) are
not subject to the requirements of ERISA or Section 4975 of the Code.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of an entity would be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code if
"plan assets" of the investing Plans were used to acquire an equity interest in
such entity and no exception were applicable under the Plan Assets Regulation.
An "equity interest" is defined under the Plan Assets Regulation as any interest
in an entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features and
specifically includes a beneficial interest in a trust.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of an entity would not be deemed to be "plan assets" of investing Plans
if, immediately after the most recent acquisition of any equity interest in such
entity, less than 25% of the value of each class of equity interests in such
entity were held by Plans, other employee benefit plans not subject to ERISA or
Section 4975 of the Code (such as governmental, church and foreign plans), and
entities holding assets deemed to be "plan assets" of any Plan (collectively,
"Benefit Plan Investors"). No assurance can be given by the Underwriters that
the value of the Capital Securities of each entity held by Benefit Plan
investors will be less than 25% of the total value of such Capital Securities of
the Trust at the completion of this offering or thereafter, and no monitoring or
other measures
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will be taken with respect to the satisfaction of the conditions to this
exception. All of the Common Securities will be purchased and held by K N
Energy.
Certain transactions involving the Trust could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of the
Code with respect to a Plan if the Capital Securities of the Trust were acquired
with "plan assets" of such Plan and assets of the Trust were deemed to be "plan
assets" of Plans investing in the Trust. For example, if K N Energy is a Party
in Interest with respect to an investing Plan (either directly or by reason of
its ownership of its subsidiaries), extensions of credit between K N Energy and
the Trust (as represented by the Subordinated Debentures and the Guarantees)
would likely be prohibited by Section 406(a)(1)(B) of ERISA and Section
475(c)(1)(B) of the Code, unless exemptive relief were available under an
applicable administrative exemption (see below).
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief for direct or indirect prohibited transactions
resulting from the purchase or holding of the Capital Securities, assuming that
assets of the Trust were deemed to be "plan assets" of Plans investing in the
Trust (see above). Those class exemptions are PTCE 96-23 (for certain
transactions determined by in-house asset managers), PTCE 95-60 (for certain
transactions involving insurance company general accounts), PTCE 91-38 (for
certain transactions involving bank collective investment funds), PTCE 90-1 (for
certain transactions involving insurance company separate accounts), and PTCE
84-14 (for certain transactions determined by independent qualified asset
managers).
Because the Capital Securities may be deemed to be equity interests in the
Trust for purposes of applying ERISA and Section 4975 of the Code, the Capital
Securities may not be purchased or held by any Plan, any entity whose underlying
assets include "plan assets" by reason of any Plan's investment in the entity (a
"Plan Asset Entity") or any person investing "plan assets" of any Plan, unless
such purchaser or holder is eligible for the exemptive relief available under
PTCE 96-23, 95-60, 91-38, 90-1, or 84-14. Any purchaser or holder of the Capital
Securities or any interest therein will be deemed to have represented by its
purchase, holding or disposition thereof that it either (a) is not a Plan or a
Plan Asset Entity and is not purchasing such securities on behalf of or with
"plan assets" of any Plan or (b) is exempt under PTCE 96-23, 95-60, 91-38, 90-1
or 84-14 with respect to such purchase, holding or disposition. Such
representation shall be deemed made on each day from and including the date on
which such purchaser or holder acquires its interest in the Capital Securities
through and including the date on which such purchaser or holder disposes of its
interest in the Capital Securities. In addition, any purchaser or holder of the
Capital Securities will be deemed to have approved the appointment of the
Institutional Trustee and the purchase and holding of the Subordinated
Debentures by the Trust.
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in nonexempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing Capital
Securities on behalf of or with "plan assets" of any Plan consult with their
counsel regarding the potential consequences if the assets of the Trust were
deemed to be "plan assets" and the availability of exemptive relief under the
PTCE 6-23, 95-60, 91-38, 90-1 or 84-14.
Any purchaser or holder of the Capital Securities or any interest therein
will be deemed to have represented by its purchase, holding or disposition
thereof that it either (a) is not a Plan or a Plan Asset Entity and is not
purchasing such securities on behalf of or with "plan assets" of a Plan or (b)
is exempt under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 with respect to such
purchase, holding or disposition.
If the purchaser is using for its purchase of the Capital Securities the
assets of an employee benefit plan subject to Title I to ERISA, or of a plan or
individual retirement account subject to Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code" and any such employee benefit plan, plan or
individual retirement account, an "ERISA Plan"), the purchase shall constitute a
representation by such person that (i) if the Company is a "party in interest"
or a "disqualified person" with respect to such ERISA Plan, then such security
is being acquired pursuant to an exemption from the prohibited transaction rules
under ERISA and the Code, and (ii) the Company is not a "fiduciary," within the
meaning of Section 3(21) of ERISA and the regulations thereunder, with respect
to such person's interest in the Capital Securities or the Subordinated
Debentures.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement, dated the date hereof (the "Underwriting Agreement"), the
Underwriters named below have severally agreed to purchase, and the Trust has
agreed to sell to them, severally, the respective liquidation amounts of the
Capital Securities set forth opposite their names below:
<TABLE>
<CAPTION>
LIQUIDATION
AMOUNT OF
CAPITAL
UNDERWRITERS SECURITIES
------------ ------------
<S> <C>
Morgan Stanley & Co. Incorporated........................... $ 58,400,000
J.P. Morgan Securities Inc.................................. 58,300,000
Petrie Parkman & Co., Inc................................... 58,300,000
------------
Total............................................. $175,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Capital Securities are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. Under the terms and conditions of the Underwriting Agreement,
the Underwriters are committed to take and pay for all of the Capital Securities
offered hereby, if any are taken.
The initial purchase price for the Capital Securities will be the initial
offering price set forth on the cover page of this Prospectus Supplement (the
"Capital Securities Offering Price"). The Underwriters propose to offer the
Capital Securities at the Capital Securities Offering Price, and all or part to
certain dealers at a price that represents a concession not in excess of $6.00
per Capital Security. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $2.50 per Capital Security to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed by the Underwriters named on the cover
page hereof.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Subordinated Debentures issued by the
Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriters arranging the investment therein of such
proceeds an amount of $10.00 per Capital Security (or $1,750,000 in the
aggregate) for the accounts of the Underwriters.
The Company does not intend to apply for listing of the Capital Securities
on a national securities exchange, but has been advised by the Underwriters that
they presently intend to make a market in the Capital Securities, as permitted
by applicable laws and regulations. The Underwriters are not obligated, however,
to make a market in the Capital Securities and any such market-making may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of or trading markets
for, the Capital Securities.
In order to facilitate the offering of the Capital Securities, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Capital Securities. Specifically, the Underwriters may
overallot in connection with the offering, creating a short position in the
Capital Securities for their own account. In addition, to cover overallotments
or to stabilize the price of the Capital Securities, the Underwriters may bid
for, and purchase, the Capital Securities in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an underwriter
or a dealer for distributing the Capital Securities in the offering, if the
syndicate repurchases previously distributed Capital Securities in transactions
to cover syndicate short positions in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
Capital Securities above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
The Company and the Trust have agreed in the Underwriting Agreement that,
during the period beginning on the date of this Prospectus Supplement and
continuing to and including the closing date of the Offering, neither will
offer, sell, contract to sell or otherwise dispose of any Capital Securities,
any beneficial interest in the assets of the Trust, or any other securities of
the Company or the Trust or any similar trust affiliated with the Company which
are substantially similar to the Capital Securities, or that are convertible
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into or exchangeable for, or otherwise represent a right to acquire, any such
securities, except in the Offering or with the prior written consent of Morgan
Stanley & Co. Incorporated.
The Company and the Trust have agreed to indemnify the Underwriters and
certain other persons against certain liabilities, including liabilities under
the Securities Act.
The Underwriters have performed various investment banking services for the
Company in the past and may do so from time to time in the future. Morgan
Stanley & Co. Incorporated and Petrie Parkman & Co., Inc. each advised K N
Energy with regard to the Acquisition for which they each received customary
compensation. Morgan Stanley & Co. Incorporated participated as an underwriter
in the Debt Offerings and the Equity Offering and Petrie Parkman & Co., Inc.
participated as an underwriter in the Equity Offering, both receiving customary
compensation therefor. J.P. Morgan Securities Inc. served as an underwriter of
the Company's public offering of debentures in October 1997 and of the Debt
Offerings and the Equity Offering, and received customary compensation therefor,
and is a syndication agent under the Bank Facility. Morgan Guaranty Trust
Company of New York, an affiliate of J.P. Morgan Securities Inc., is the
administrative agent and a lender under the Bank Facility. The proceeds of the
sale of the Capital Securities will be used to refinance indebtedness under the
Bank Facility. Because more than 10% of the net proceeds of the Offering will be
paid to affiliates of members of the National Association of Securities Dealers
(the "NASD"), the Offering is being made pursuant to Rule 2710(c)(8) of the
Conduct Rules of the NASD.
EXPERTS
The consolidated financial statements of K N Energy, Inc. and subsidiaries
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, incorporated by reference herein, have been audited by
Arthur Andersen LLP, independent public accountants, as stated in their report
with respect thereto, and are incorporated by reference herein in reliance upon
the authority of said firm as experts in accounting and auditing in giving said
report.
The consolidated financial statements of MidCon Corp. and subsidiaries as
of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, incorporated by reference herein, have been audited by
Arthur Andersen LLP, independent public accountants, as stated in their report
with respect thereto, and are incorporated by reference herein in reliance upon
the authority of said firm as experts in accounting and auditing in giving said
report.
LEGAL MATTERS
The validity of the Capital Securities will be passed upon on behalf of K N
Energy and the Trust by Richards, Layton & Finger, P.A., special Delaware
counsel to K N Energy and the Trust. The validity of the Subordinated Debentures
and the Guarantee and certain matters relating thereto will be passed upon for K
N Energy and the Trust by Simpson Thacher & Bartlett, New York, New York.
Certain legal matters will be passed upon for the Underwriters by Davis Polk &
Wardwell, New York, New York. Simpson Thacher & Bartlett and Davis Polk &
Wardwell will rely on Richards, Layton & Finger, P.A. as to matters of Delaware
law and Polsinelli, White, Vardeman & Shalton as to matters of Kansas law.
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PROSPECTUS
$4,000,000,000
K N Energy, Inc.
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
TRUST DEBENTURES
DEBT SECURITIES
COMMON STOCK
K N Capital Trust III
PREFERRED SECURITIES
Guaranteed as set forth herein by
K N Energy, Inc.
------------------------
K N Energy, Inc. ("K N", "K N Energy" or the "Company") may offer and sell
from time to time, together or separately: (i) Stock Purchase Contracts ("Stock
Purchase Contracts") to purchase shares of common stock, par value $5.00 per
share ("Common Stock"), of the Company; (ii) Stock Purchase Units ("Stock
Purchase Units"), each representing ownership of a Stock Purchase Contract and
Preferred Securities (as defined below) or debt obligations of third parties,
including U.S. Treasury securities, securing the holder's obligation to purchase
Common Stock under the Stock Purchase Contracts; (iii) its debentures (the
"Trust Debentures") to be purchased with the proceeds from the sale of preferred
securities representing undivided beneficial ownership interests in the assets
of K N Capital Trust III ("Preferred Securities"), a statutory business trust
created under the laws of the State of Delaware (the "Trust"); (iv) in addition
to the Trust Debentures, its debentures, notes and other debt securities in one
or more series, which may be either senior debt securities or subordinated debt
securities ("Debt Securities"); and (v) Common Stock. In addition the Trust may
offer its Preferred Securities. The aggregate initial offering price of all of
the Securities (as defined below) which may be sold pursuant to this Prospectus
will not exceed $4,000,000,000 or, if applicable, the equivalent thereof in any
other currency or currency unit. The Securities will be offered in amounts, at
prices and on terms to be determined in light of market conditions at the time
of sale and set forth in a supplement to this Prospectus (a "Prospectus
Supplement"). The Stock Purchase Contracts, Stock Purchase Units, Trust
Debentures, Debt Securities, Common Stock and Preferred Securities are
collectively called the "Securities."
(continued on next page)
------------------------
The Securities may be sold directly by the Company, or in the case of the
Preferred Securities, the Trust, to investors, through agents designated from
time to time or to or through underwriters or dealers. See "Plan of
Distribution." If any agents of the Company or, in the case of the Preferred
Securities, the Trust, or any underwriters are involved in the sale of any
Securities in respect of which this Prospectus is being delivered, the names of
such agents or underwriters and any applicable commissions or discounts will be
set forth in a Prospectus Supplement. The net proceeds to the Company from such
sale also will be set forth in a Prospectus Supplement. See "Use of Proceeds."
------------------------
The Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "KNE." Any Common Stock sold pursuant to a Prospectus
Supplement will be listed on such exchange, subject to official notice of
issuance. The Prospectus Supplement will state whether any Securities offered
thereby will be listed on any national securities exchange. If such Securities
are not listed on any national securities exchange, there can be no assurance
that there will be a secondary market for any such Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
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April 23, 1998
<PAGE> 85
(continued from previous page)
Certain specific terms of the particular Securities in respect of which
this Prospectus is being delivered will be set forth in an applicable Prospectus
Supplement, including, where applicable, (i) in the case of Stock Purchase
Contracts, the number of shares of Common Stock issuable thereunder, the
purchase price of the Common Stock, the date or dates on which the Common Stock
is required to be purchased by the holders of the Stock Purchase Contracts, any
periodic payments required to be made by the Company to the holders of the Stock
Purchase Contracts or vice versa, and the terms of the offering and sale
thereof, (ii) in the case of Stock Purchase Units, the specific terms of the
Stock Purchase Contracts and any Preferred Securities or debt obligations of
third parties securing the holder's obligation to purchase the Common Stock
under the Stock Purchase Contracts, and the terms of the offering and sale
thereof, (iii) in the case of Trust Debentures or Debt Securities, the specific
designation, aggregate principal amount, authorized denominations, ranking as
senior or subordinated, maturity, interest payment dates, interest rate (which
may be fixed or variable) or method of calculating interest, if any, applicable
Extension Period (as defined below) or interest deferral terms, if any, place or
places where principal, premium, if any, and interest, if any, will be payable,
any terms for mandatory or optional redemption, any sinking fund provisions,
terms for any conversion or exchange into other securities, initial offering or
purchase price, methods of distribution and any other special terms, and (iv) in
the case of Preferred Securities, the specific title, aggregate amount, stated
liquidation preference, number of securities, the rate of payment of periodic
cash distributions ("distributions" or "Distributions") or method of calculating
such rate, applicable Extension Period or distribution deferral terms, if any,
place or places where distributions will be payable, any terms of redemption,
initial offering or purchase price, methods of distribution and any other
special terms. If so specified in the applicable Prospectus Supplement, the
Securities offered thereby may be issued in whole or in part in the form of one
or more temporary or permanent global securities ("Global Securities").
Unless otherwise set forth in the applicable Prospectus Supplement, the
Trust Debentures will be senior unsecured obligations of the Company and will
rank pari passu in right of payment with all of the Company's other senior
unsecured obligations. If provided in an accompanying Prospectus Supplement, the
Company will have the right to defer payments of interest on the Trust
Debentures by extending the interest payment period thereon at any applicable
time or from time to time for such number of consecutive interest payment
periods (which shall not extend beyond the stated maturity (the "Stated
Maturity") of the Trust Debentures) with respect to each deferral period as may
be specified in such Prospectus Supplement (each, an "Extension Period"). See
"Description of the Trust Debentures -- Option to Extend Interest Payment
Period."
The Company will be the owner of the common securities (the "Common
Securities," and, together with the Preferred Securities, the "Trust
Securities") of the Trust. The payment of distributions with respect to the
Preferred Securities and payments on liquidation or redemption with respect to
the Preferred Securities, in each case out of funds held by the Trust, will be
irrevocably guaranteed by the Company to the extent described herein (the
"Guarantee"). Certain payments in respect of the Common Securities may also be
guaranteed by the Company. See "Description of the Guarantee." Unless otherwise
set forth in the applicable Prospectus Supplement, the obligations of the
Company under the Guarantee will be senior unsecured obligations of the Company
and will rank pari passu with all of the Company's other senior unsecured
obligations. Concurrently with the issuance by the Trust of the Preferred
Securities, the Trust will invest the proceeds thereof and any contributions
made in respect of the Common Securities in the Trust Debentures, which will
have terms corresponding to the terms of the Preferred Securities. The Trust
2
<PAGE> 86
(continued from previous page)
Debentures will be the sole assets of the Trust, and payments under the Trust
Debentures and those made by the Company in respect of fees and expenses
incurred by the Trust will be the only revenue of the Trust. Upon the occurrence
of certain events as are described herein and in the accompanying Prospectus
Supplement, the Company may redeem the Trust Debentures and cause the redemption
of the Trust Securities. In addition, if provided in the applicable Prospectus
Supplement, the Company may dissolve the Trust at any time and, after
satisfaction of the liabilities to creditors of the Trust as provided by
applicable law, cause the Trust Debentures to be distributed to the holders of
the Trust Securities in liquidation of their interest in the Trust.
Taken together, the Company's obligations under the Trust Debentures, the
Debenture Indenture (as defined herein), the Declaration (as defined herein) and
the Guarantee, in the aggregate, have the effect of providing a full,
irrevocable and unconditional guarantee of payments of distributions and other
amounts due on the Preferred Securities. See "Relationship Among the Preferred
Securities, the Trust Debentures and the Guarantee."
------------------------
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following Regional Offices of the Commission: Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and New York Regional Office, Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission, Washington, D.C. 20549 at
prescribed rates. The Commission maintains a Website that contains reports,
proxy and information statements and other materials that are filed through the
Commission's Electronic Data Gathering Analysis and Retrieval System. The
Website can be accessed at http://www.sec.gov. In addition, reports, proxy
statements and other information concerning the Company can be inspected at the
NYSE, 20 Broad Street, New York, New York 10005, on which exchange the Common
Stock is listed.
This Prospectus constitutes a part of three Registration Statements on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company and the Trust with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus omits
certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement for further information
with respect to the Company and the securities offered hereby. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
No separate financial statements of the Trust have been included herein.
The Company and the Trust do not consider that such financial statements would
be material to holders of the Preferred Securities because the Trust is a newly
formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than its holding as trust assets the Trust Debentures and the issuance of
the Trust Securities. See "The Trust," "Description of the Trust Debentures,"
"Description of the Preferred Securities" and "Description of the Guarantee."
The Trust is currently not subject to the information reporting
requirements of the Exchange Act.
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<PAGE> 87
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-6446) pursuant to the Exchange Act are incorporated by reference and made a
part hereof:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1997;
(b) the Company's Current Reports on Form 8-K dated January 5, 1998,
January 16, 1998, as amended by the Current Report on Form 8-K/A dated
February 12, 1998, and March 6, 1998; and
(c) the description of the Preferred Share Purchase Rights and the
Common Stock contained in the Company's Registration Statements on Form
8-A.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this Prospectus and
prior to the termination of the offering of the Securities pursuant hereto,
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of filing of such document. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to any person, including any
beneficial owner of Securities, to whom this Prospectus is delivered, upon
written or oral request of such person, a copy of any and all of the documents
referred to above which have been incorporated by reference in this Prospectus
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Such requests should be directed
to the office of the Vice President and Treasurer, K N Energy, Inc., 370 Van
Gordon Street, P.O. Box 281304, Lakewood, Colorado 80228-8304, telephone number
(303) 989-1740.
K N ENERGY, INC.
K N Energy is an integrated energy services provider whose operations
include the gathering, processing, transportation and storage of natural gas and
the marketing of natural gas and natural gas liquids. The Company also markets
innovative products and services, such as the Simple Choice(sm) menu of products
and call center services designed for residential consumers, utilities, and
small businesses through its 50% owned en-able(sm), LLC affiliate.
K N was incorporated under the laws of the State of Kansas in 1927. The
address of its principal executive offices is 370 Van Gordon Street, P. O. Box
281304, Lakewood, Colorado 80228-8304 and its telephone number is (303)
989-1740.
Additional information concerning the Company and its subsidiaries is
included in the Company reports and other documents incorporated by reference in
this Prospectus. See "Available Information" and "Incorporation of Certain
Documents by Reference."
THE TRUST
The Trust is a statutory business trust created under Delaware law pursuant
to (i) a declaration of trust, dated as of January 15, 1998, and entered into by
the Company, as sponsor (the "Sponsor") and the trustee named herein and (ii)
the filing of a certificate of trust with the Secretary of State of the State of
Delaware on January 15, 1998. The declaration will be amended and restated in
its entirety (as so amended and restated,
4
<PAGE> 88
the "Declaration"), substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, as of the date the
Preferred Securities of such Trust are initially issued. The Declaration will be
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). Upon issuance of the Preferred Securities, the purchasers
thereof will own all of the Preferred Securities. K N Energy will directly or
indirectly acquire all of the Common Securities, which will have an aggregate
liquidation amount equal to 3% of the total capital of the Trust. The Preferred
Securities rank pari passu, and payments will be made thereon on a pro rata
basis, with the Common Securities, except that upon the occurrence and during
the continuance of a Declaration Event of Default, the rights of the holders of
the Common Securities to receive payments of periodic distributions and payments
upon liquidation, redemption and otherwise will be subordinated to the rights of
the holders of the Preferred Securities. The Trust exists for the exclusive
purposes of (i) issuing the Trust Securities representing undivided beneficial
interests in the assets of the Trust, (ii) investing the gross proceeds of the
Trust Securities in the Trust Debentures and (iii) engaging in only those other
activities necessary or incidental thereto.
The Trust's business and affairs will be conducted by the K N Trustees (as
defined below) and the administrators ("Administrators"), as set forth in the
Declaration. Pursuant to the Declaration, the number of K N Trustees will
initially be two. One trustee will be a financial institution that maintains its
principal place of business in the State of Delaware (the "Delaware Trustee").
The other trustee (the "Institutional Trustee" and, together with the Delaware
Trustee, the "K N Trustees") will be a financial institution that is
unaffiliated with K N Energy and will serve as institutional trustee under the
Declaration and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act. Initially, Wilmington Trust Company, a
Delaware banking corporation, will be both the Delaware Trustee and the
Institutional Trustee until removed or replaced by the holder of the Common
Securities (or in certain circumstances the holders of a majority in liquidation
amount of the Preferred Securities). Wilmington Trust Company will act as
trustee (the "Guarantee Trustee") under the Guarantee and as Debenture Trustee
(as defined herein) under the Debenture Indenture (as defined herein). The
Administrators will be three individuals who are employees or officers of or
affiliated with K N Energy and will act as administrators with respect to the
Trust. The Administrators will be selected by the holders of a majority in
liquidation amount of the Common Securities. The Administrators will have only
those ministerial duties set forth in the Declaration with respect to
accomplishing the purposes of the Trust and are not intended to be trustees or
fiduciaries with respect to the Trust or the holders of Preferred Securities.
The Institutional Trustee will hold title to the Trust Debentures for the
benefit of the holders of the Trust Securities, and the Institutional Trustee
will have the power to exercise all rights, powers and privileges under the
Debenture Indenture as the holder of the Trust Debentures. In addition, the
Institutional Trustee will maintain exclusive control of a segregated
non-interest bearing bank account (the "Property Account") to hold all payments
made in respect of the Trust Debentures for the benefit of the holders of the
Trust Securities. The Institutional Trustee will make payments of distributions
and payments on liquidation, redemption and otherwise to the holders of the
Trust Securities out of funds from the Property Account. The Guarantee Trustee
will hold the Guarantee for the benefit of the holders of the Preferred
Securities. K N Energy, as the direct or indirect holder of all the Common
Securities, will have the right to appoint, remove or replace any Administrator
and to increase or decrease the number of Administrators. Holders of the Common
Securities will have the right to replace the Institutional Trustee (or, upon
the occurrence and continuance of an event of default under the Declaration, the
holders of a majority in liquidation amount of the Preferred Securities),
provided that the successor Institutional Trustee shall be a corporation with
trust powers organized under the laws of the United States or any State thereof
with a combined capital and surplus of at least $50 million. Pursuant to the
Debenture Indenture, K N Energy, as borrower, will pay all fees and expenses
related to the Trust and the offering of the Trust Securities. See "Description
of the Trust Debentures -- Miscellaneous."
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the
Declaration and the Delaware Business Trust Act (the "Trust Act"). The principal
place of business of the Trust is c/o K N Energy, Inc., 370 Van Gordon Street,
P.O. Box 281304, Lakewood, Colorado 80228-8304, and its telephone number is
(303) 989-1740.
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<PAGE> 89
USE OF PROCEEDS
Except as may otherwise be described in the Prospectus Supplement relating
to an offering of Securities, the net proceeds from the sale of the Securities
(including Trust Debentures issued to the Trust in connection with the
investment by the Trust of all of the proceeds from the sale of the Preferred
Securities) offered pursuant to this Prospectus and such Prospectus Supplement
(the "Offered Securities") will be used by the Company to refinance indebtedness
incurred in connection with the acquisition of MidCon Corp. from Occidental
Petroleum Corporation. The remainder of the net proceeds will be used for
general corporate purposes. Any specific allocation of the net proceeds of an
offering of Securities by the Company to a specific purpose will be determined
at the time of such offering and will be described in the related Prospectus
Supplement.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges for the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
2.72 3.21 3.07 1.69 2.41
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings are the sum of net income, taxes
and fixed charges. Fixed charges are interest, amortization of debt discount,
premium and expense, preferred stock dividends of a subsidiary, and the
estimated interest portion of rental charges. The allowance for borrowed funds
used during construction recognized for gas utility operations has been added to
fixed charges and is included in earnings.
6
<PAGE> 90
DESCRIPTION OF THE PREFERRED SECURITIES
The Trust may issue only one series of Preferred Securities having terms
described in the Prospectus Supplement relating thereto. The Declaration
authorizes the Administrators of the Trust to issue on behalf of the Trust one
series of Preferred Securities. The Declaration will be qualified as an
indenture under the Trust Indenture Act. The Preferred Securities will have such
terms, including distributions, redemption, voting, liquidation rights and such
other preferred, deferred or other special rights or such restrictions as shall
be set forth in the Declaration or made part of the Declaration by the Trust
Indenture Act or the Trust Act. Reference is made to any Prospectus Supplement
relating to the Preferred Securities of the Trust for specific terms, including
(i) the specific designation of the Preferred Securities, (ii) the number of
Preferred Securities, (iii) the annual distribution rate (or method of
calculation thereof) for Preferred Securities, the date or dates upon which such
distributions shall be payable and the record date or dates for the payment of
such distributions, (iv) whether distributions of Preferred Securities shall be
cumulative, and, in the case of Preferred Securities having such cumulative
distribution rights, the date or dates or method of determining the date or
dates from which distributions of Preferred Securities shall be cumulative, (v)
the amount or amounts which shall be paid out of the assets of the Trust to the
holders of Preferred Securities upon voluntary or involuntary dissolution,
winding-up or termination of the Trust, (vi) the obligation or right, if any, of
the Trust to purchase or redeem Preferred Securities and the price or prices at
which, the period or periods within which and the terms and conditions upon
which Preferred Securities shall or may be purchased or redeemed, in whole or in
part, pursuant to such obligation or right, (vii) the voting rights, if any, of
Preferred Securities in addition to those required by law, including the number
of votes per Preferred Security and any requirement for the approval by the
holders of Preferred Securities, as a condition to specified actions or
amendments to the Declaration, (viii) the terms and conditions, if any, upon
which Preferred Securities issued by the Trust may be converted into Common
Stock of the Company, including the conversion price per share and the
circumstances, if any, under which such conversion right will expire, (ix) the
terms and conditions, if any, upon which the Trust Debentures may be distributed
to holders of Trust Securities, (x) if applicable, any securities exchange upon
which the Preferred Securities shall be listed, and (xi) any other relevant
rights, preferences, privileges, limitations or restrictions of Preferred
Securities issued by the Trust consistent with the Declaration or with
applicable law. All Preferred Securities offered hereby will be guaranteed by
the Company as and to the extent set forth below under "Description of the
Guarantee." Certain United States federal income tax considerations applicable
to the offering of the Preferred Securities will be described in the Prospectus
Supplement relating thereto.
In connection with the issuance of the Preferred Securities, the Trust will
issue Common Securities. The Declaration authorizes the Administrators of the
Trust to issue on behalf of the Trust the Common Securities having such terms
including distributions, redemption, voting, liquidation rights or such
restrictions as shall be set forth therein. The terms of the Common Securities
issued by the Trust will be substantially identical to the terms of the
Preferred Securities issued by the Trust and the Common Securities will rank
pari passu, and payments will be made thereon on a pro rata basis with the
Preferred Securities except that if an event of default under the Declaration (a
"Declaration Event of Default") occurs and is continuing, the rights of the
holders of the Common Securities to payments in respect of distributions and
payments upon liquidation, redemption and maturity will be subordinated to the
rights of the holders of the Preferred Securities. A Declaration Event of
Default will occur upon a Debenture Indenture Event of Default (as defined
below). Except in certain limited circumstances, the Common Securities issued by
the Trust will also carry the right to vote and to appoint, remove or replace
any of the K N Trustees of the Trust. All of the Common Securities of the Trust
will be directly or indirectly owned by the Company.
DESCRIPTION OF THE TRUST DEBENTURES
The Trust Debentures are to be issued under an indenture, as supplemented
or amended from time to time (as so supplemented or amended, the "Debenture
Indenture"), between the Company and Wilmington Trust Company, as trustee (the
"Debenture Trustee"). This summary of certain terms and provisions of the Trust
Debentures and the Debenture Indenture is not necessarily complete, and
reference is hereby made to the copy of the form of the Debenture Indenture
which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, and to the Trust Indenture Act. Whenever particular
defined terms of the
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<PAGE> 91
Debenture Indenture are referred to in this Section or in a Prospectus
Supplement, such defined terms are incorporated herein or therein by reference.
The Company's Debt Securities are separately described in this Prospectus
under the caption "Description of the Debt Securities."
GENERAL
Unless otherwise specified in the applicable Prospectus Supplement, the
Trust Debentures will be issued as unsecured debt under the Debenture Indenture
and will rank pari passu in right of payment with all of the Company's other
senior unsecured obligations. Except as otherwise provided in the applicable
Prospectus Supplement, the Debenture Indenture does not limit the incurrence or
issuance of other secured or unsecured debt of the Company, whether under the
Debenture Indenture, any other indenture that the Company may enter into in the
future or otherwise.
The Trust Debentures will be issuable in one series pursuant to an
indenture supplemental to the Debenture Indenture or a resolution of the
Company's Board of Directors or a committee thereof.
Unless otherwise stated in the applicable Prospectus Supplement, the
obligations of K N Energy under the Trust Debentures will be senior to its 8.56%
Series B Junior Subordinated Deferrable Interest Trust Debentures due April 15,
2027 (the "1997 Subordinated Trust Debentures"), which were issued in October
1997 in the aggregate principal amount of $103,100,000 and the obligations of K
N Energy under the Guarantee will be senior to its guarantee (the "1997
Guarantee") in relation to the 8.56% Series B Capital Trust Pass-through
Securities of K N Capital Trust I (the "1997 Capital Securities"), which were
issued in October 1997 in the aggregate liquidation amount of $100,000,000.
The Trust Debentures may be distributed pro rata to the holders of such
Trust Securities in connection with the dissolution of the Trust upon the
occurrence of certain events described herein or in the Prospectus Supplement
relating to the Trust Securities. Only one series of Trust Debentures will be
issued to the Trust or a K N Trustee of such Trust in connection with the
issuance of Trust Securities by the Trust.
The applicable Prospectus Supplement will describe the following terms of
the Trust Debentures: (i) the title of the Trust Debentures; (ii) any limit upon
the aggregate principal amount of the Trust Debentures; (iii) the date on which
the principal of the Trust Debentures is payable or the method of determination
thereof; or the right, if any, of the Company to defer payment of principal;
(iv) the rate, if any, at which the Trust Debentures shall bear interest
(including reset rates, if any, and the method by which any such rate will be
determined), the Interest Payment Dates on which any such interest shall be
payable, the right, if any, of the Company to defer or extend an Interest
Payment Date and the regular record date for any interest payable on any
Interest Payment Date or the method by which any of the foregoing shall be
determined; (v) the place where the principal of and premium, if any, and
interest, if any, on the Trust Debentures will be payable and where, subject to
the terms of the Debenture Indenture as described below under "-- Denominations,
Registration and Transfer," the Trust Debentures may be presented for
registration of transfer or exchange and the place or places where notices and
demands to or upon the Company in respect of the Trust Debentures and the
Debenture Indenture may be made ("Place of Payment"); (vi) any period or periods
within, or date or dates on which, the price or prices at which and the terms
and conditions upon which Trust Debentures may be redeemed, in whole or in part,
at the option of the Company or a holder thereof; (vii) the obligation or the
right, if any, of the Company or a holder thereof to redeem, purchase or repay
the Trust Debentures and the period or periods within which, the price or prices
at which, the currency or currencies (including currency unit or units) in which
and the other terms and conditions upon which the Trust Debentures shall be
redeemed, repaid or purchased, in whole or in part, pursuant to such obligation;
(viii) the denominations in which any Trust Debentures shall be issuable if
other than denominations of $1,000 and any integral multiple thereof; (ix) if
other than in U.S. Dollars, the currency or currencies (including currency unit
or units) in which the principal of (and premium, if any) and interest, if any,
on the Trust Debentures shall be payable, or in which the Trust Debentures shall
be denominated; (x) any additions, modifications or deletions in the Events of
Default or covenants of the Company specified in the Debenture Indenture with
respect to the Trust Debentures; (xi) if other than the principal amount
thereof, the portion of the principal
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<PAGE> 92
amount of Trust Debentures that shall be payable upon declaration of
acceleration of the maturity thereof; (xii) any additions or changes to the
Debenture Indenture with respect to a series of Trust Debentures as shall be
necessary to permit or facilitate the issuance of such series in bearer form,
registrable or not registrable as to principal, and with or without interest
coupons; (xiii) any index or indices used to determine the amount of payments of
principal of and premium, if any, on the Trust Debentures and the manner in
which such amounts will be determined; (xiv) the terms and conditions relating
to the issuance of a temporary Global Security representing all of the Trust
Debentures of such series and exchange of such temporary Global Security for
definitive Trust Debentures of such series; (xv) whether the Trust Debentures of
the series shall be issued in whole or in part in the form of one or more Global
Securities and, in such case, the depositary for such Global Securities; (xvi)
the appointment of any trustee, registrar, paying agent or agents; (xvii) the
terms and conditions of any obligation or right of the Company or a holder to
convert or exchange Trust Debentures into Preferred Securities or other
securities; (xviii) the relative degree, if any, to which such Trust Debentures
of the series shall be senior to or be subordinated to other series of such
Trust Debentures or other indebtedness of the Company in right of payment,
whether such other series of Trust Debentures or other indebtedness are
outstanding or not; and (xix) any other terms of the Trust Debentures not
inconsistent with the provisions of the Debenture Indenture. (Section 2.1)
Unless otherwise indicated in the applicable Prospectus Supplement, the Trust
Debentures will not be subject to any sinking fund.
Trust Debentures may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time of
issuance is below market rates. Certain material United States federal income
tax consequences and special considerations applicable to any such Trust
Debentures will be described in the applicable Prospectus Supplement.
If the purchase price of any of the Trust Debentures is payable in one or
more foreign currencies or currency units or if any Trust Debentures are
denominated in one or more foreign currencies or currency units or if the
principal of, premium, if any, or interest, if any, on any Trust Debentures is
payable in one or more foreign currencies or currency units, the restrictions,
elections, certain material United States federal income tax considerations,
specific terms and other information with respect to such issue of Trust
Debentures and such foreign currency or currency units will be set forth in the
applicable Prospectus Supplement.
If any index is used to determine the amount of payments of principal,
premium, if any, or interest on any series of Trust Debentures, certain material
United States federal income tax, accounting and other considerations applicable
thereto will be described in the applicable Prospectus Supplement.
DENOMINATIONS, REGISTRATION AND TRANSFER
Unless otherwise specified in the applicable Prospectus Supplement, the
Trust Debentures will be issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. (Section 2.3) Trust
Debentures will be exchangeable for other Trust Debentures of the same issue, of
any authorized denominations of a like aggregate principal amount, the same
original issue date ("Original Issue Date"), the same Stated Maturity and
bearing the same interest rate. (Section 2.5)
Trust Debentures may be presented for exchange as provided above, and may
be presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed), at
the office of the appropriate Securities Registrar or at the office of any
transfer agent designated by the Company for such purpose with respect to any
series of Trust Debentures and referred to in the applicable Prospectus
Supplement, without service charge and upon payment of any taxes and other
governmental charges as described in the Debenture Indenture. The Company will
appoint the Debenture Trustee as Securities Registrar under the Debenture
Indenture. Such transfer or exchange will be effected upon the Security
Registrar or such transfer agent, as the case may be, being satisfied with the
documents of title and the identity of the person making the request. (Section
2.5) If the applicable Prospectus Supplement refers to any transfer agents (in
addition to the Securities Registrar) initially designated by the Company with
respect to the Trust Debentures, the Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, provided that the
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Company maintains a transfer agent in each Place of Payment for the Trust
Debentures. The Company may at any time designate additional transfer agents
with respect to the Trust Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange of
the Trust Debentures during a period beginning at the opening of business 15
days before the day of selection for redemption of the Trust Debentures, and
ending at the close of business on the day of mailing of the relevant notice of
redemption or (ii) transfer or exchange any Trust Debentures so selected for
redemption, except, in the case of any Trust Debentures being redeemed in part,
any portion thereof not to be redeemed. (Section 2.5)
OPTION TO EXTEND INTEREST PAYMENT PERIOD
If provided in the applicable Prospectus Supplement, the Company shall have
the right, at any time and from time to time during the term of the Trust
Debentures, to defer the payment of interest for such number of consecutive
interest payment periods as may be specified in the applicable Prospectus
Supplement, subject to the terms, conditions and covenants, if any, specified in
such Prospectus Supplement, provided that such Extension Period may not extend
beyond the Stated Maturity of the final installment of principal of the Trust
Debentures. Certain material United States federal income tax consequences and
special considerations applicable to the Trust Debentures will be described in
the applicable Prospectus Supplement.
CERTAIN COVENANTS
The Debenture Indenture contains certain covenants regarding, among other
matters, corporate existence, payment of taxes and reports to holders of the
Trust Debentures. If and to the extent indicated in the applicable Prospectus
Supplement, these covenants may be removed or additional covenants added with
respect to the Trust Debentures. (Article 9)
DEBENTURE INDENTURE EVENTS OF DEFAULT
The Debenture Indenture provides that any one or more of the following
described events, which has occurred and is continuing, constitutes a "Debenture
Indenture Event of Default" with respect to the Trust Debentures: (i) failure
for 30 days to pay interest on the Trust Debentures, including any compound
interest, in respect thereof or, any additional interest, if any, when due;
provided that a valid extension of an interest payment period will not
constitute a default in the payment of interest for this purpose; (ii) failure
to pay principal of or premium, if any, on the Trust Debentures when due whether
at maturity, upon redemption, by declaration or otherwise; (iii) failure to
observe or perform any other covenant contained in the Debenture Indenture for
90 days after notice to K N Energy by the Debenture Trustee or by the holders of
not less than 25% in aggregate outstanding principal amount of the Trust
Debentures; (iv) the dissolution, winding up or termination of the Trust, except
in connection with the distribution of Trust Debentures to the holders of
Preferred Securities in liquidation of the Trust upon the redemption of all
outstanding Preferred Securities or in connection with certain mergers,
consolidations or amalgamations permitted by the Declaration; or (v) certain
events in bankruptcy, insolvency or reorganization of K N Energy. (Section 4.1)
If any Debenture Indenture Event of Default shall occur and be continuing,
the Debenture Trustee or the holders of not less than 25% in aggregate principal
amount of the outstanding Trust Debentures may declare the principal of and
interest on the Trust Debentures due and payable immediately; provided, that,
after such acceleration, but before a judgment or decree based on acceleration,
the holders of a majority in aggregate principal amount of outstanding Trust
Debentures may, under certain circumstances, rescind and annul such acceleration
if all Debenture Indenture Events of Default, other than the nonpayment of
accelerated principal, have been cured or waived as provided in the Debenture
Indenture. (Section 4.2)
A default under any other indebtedness of K N Energy would not constitute a
Debenture Indenture Event of Default under the Trust Debentures.
Subject to the provisions of the Debenture Indenture relating to the duties
of the Debenture Trustee in case a Debenture Indenture Event of Default occurs
and is continuing, the Debenture Trustee will be under no
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obligation to exercise any of its rights or powers under the Debenture Indenture
at the request or direction of any holders of Trust Debentures, unless such
holders shall have offered to the Debenture Trustee reasonable indemnity.
Subject to such provisions for the indemnification of the Debenture Trustee, the
holders of a majority in aggregate principal amount of the outstanding Trust
Debentures will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
exercising any trust or power conferred on the Debenture Trustee. (Section 4.12)
No holder of any Trust Debentures will have any right to institute any
proceeding with respect to the Debenture Indenture or for any remedy thereunder,
unless such holder shall have previously given to the Debenture Trustee written
notice of a continuing Debenture Indenture Event of Default and, if the
Institutional Trustee is not the sole holder of Trust Debentures, unless the
holders of at least 25% in aggregate principal amount of the outstanding Trust
Debentures shall also have made written request, and offered reasonable
indemnity, to the Debenture Trustee to institute such proceeding as Debenture
Trustee, and the Debenture Trustee shall not have received from the holders of a
majority in aggregate principal amount of the outstanding Trust Debentures a
direction inconsistent with such request. (Section 4.7) However, such
limitations do not apply to a suit instituted by a holder of a Trust Debenture
for enforcement of payment of the principal of or interest on such Trust
Debenture on or after the respective due dates expressed in such Trust
Debenture. (Section 4.8)
The Debenture Indenture contains provisions permitting the holders of a
majority in aggregate principal amount of the Trust Debentures, on behalf of all
of the holders of the Trust Debentures, to waive any past default in the
performance of any of the covenants contained in the Debenture Indenture, except
a default in the payment of principal or interest on any of the Trust
Debentures. (Section 4.13)
MODIFICATIONS AND AMENDMENTS OF THE DEBENTURE INDENTURE
The Debenture Indenture contains provisions permitting K N Energy and the
Debenture Trustee, with the consent of the holders of not less than a majority
in aggregate principal amount of the outstanding Trust Debentures, to modify the
Debenture Indenture or the rights of the holders of Trust Debentures; provided,
however, that no such modification may, without the consent of the holder of
each outstanding Trust Debenture affected thereby, (i) extend the Stated
Maturity of the Trust Debentures or reduce the principal amount thereof, or
reduce the rate or extend the time for payment of interest thereon, or reduce
any premium payable upon the redemption thereof, or (ii) reduce the percentage
in aggregate principal amount of outstanding Trust Debentures, the holders of
which are required to consent to any such supplemental indenture. (Section 8.2)
In addition, K N Energy and the Debenture Trustee may execute, without the
consent of any holder of Trust Debentures, any supplemental indenture (i) to
cure any ambiguities, (ii) to comply with the Trust Indenture Act and (iii) for
certain other customary purposes. (Section 8.1)
SATISFACTION AND DISCHARGE; DEFEASANCE
Unless otherwise specified in the applicable Prospectus Supplement, when,
among other things, all Trust Debentures not previously delivered to the
Debenture Trustee for cancellation (i) have become due and payable or (ii) will
become due and payable at their Stated Maturity within one year, and the Company
deposits or causes to be deposited with the Debenture Trustee, as trust funds in
trust for the purpose, an amount in the currency or currencies in which the
Trust Debentures are payable sufficient to pay and discharge the entire
indebtedness on the Trust Debentures not previously delivered to the Debenture
Trustee for cancellation, for the principal (and premium, if any) and interest
to the date of the deposit or to the Stated Maturity, as the case may be, then
the Debenture Indenture will cease to be of further effect (except as to the
Company's obligations to pay all other sums due pursuant to the Debenture
Indenture, rights of registration of transfer or exchange of Trust Debentures
and rights with respect to temporary, and mutilated, lost or destroyed Trust
Debentures), and the Company will be deemed to have satisfied and discharged the
Debenture Indenture. (Section 3.1)
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Unless otherwise specified in the applicable Prospectus Supplement, the
Company may elect either (a) to terminate (and be deemed to have satisfied) all
its obligations with respect to any series of Trust Debentures (except for the
obligations to register the transfer or exchange of such Trust Debentures, to
replace mutilated, destroyed, lost or stolen Trust Debentures, to maintain an
office or agency in respect of the Trust Debentures and to compensate and
indemnify the Debenture Trustee ("defeasance")) or (b) to be released from its
obligations with respect to certain covenants, ("covenant defeasance"), upon the
deposit with the Debenture Trustee, in trust for such purpose, of money and/or
U.S. Government Obligations (as defined in the Debenture Indenture) which
through the payment of principal and interest in accordance with their terms
will provide money, in an amount sufficient (in the opinion of a nationally
recognized firm of independent public accountants) to pay principal of, interest
on and any other amounts payable in respect of the outstanding Trust Debentures.
(Sections 3.3, 3.4, 3.5 and 3.6) Such a trust may be established only if, among
other things, the Company has delivered to the Debenture Trustee an opinion of
counsel (as specified in the Debenture Indenture) with regard to certain
matters, including an opinion to the effect that the holders of such Trust
Debentures will not recognize income, gain or loss for United States federal
income tax purposes as a result of such deposit and discharge and will be
subject to United States federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such deposit and
defeasance or covenant defeasance, as the case may be, had not occurred.
(Section 3.6)
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Debenture Indenture and, after
default, shall exercise the same degree of care as a prudent individual would
exercise in the conduct of his or her own affairs. Subject to such provision,
the Debenture Trustee is under no obligation to exercise any of the powers
vested in it by the Debenture Indenture at the request of any holder of Trust
Debentures, unless offered reasonable indemnity by such holder against the
costs, expenses and liabilities that might be incurred thereby. The Debenture
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Debenture
Trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it. (Sections 5.1 and 5.2)
The Debenture Indenture also contains limitations on the right of the
Debenture Trustee, as a creditor of K N Energy, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any such
claim as security or otherwise. (Section 5.11) In addition, the Debenture
Trustee may be deemed to have a conflicting interest and may be required to
resign as Debenture Trustee if at the time of a default under the Debenture
Indenture it is a creditor of K N Energy. (Section 5.9) K N Energy may from time
to time maintain deposit accounts and conduct its banking transactions with the
Debenture Trustee in the ordinary course of business.
GOVERNING LAW
The Debenture Indenture and the Trust Debentures will be governed by, and
construed in accordance with, the laws of the State of New York. (Section 1.13)
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DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee, which
will be executed and delivered by K N Energy for the benefit of the holders from
time to time of Preferred Securities. The Guarantee will be qualified under the
Trust Indenture Act. Wilmington Trust Company, as the Guarantee Trustee, will
hold the Guarantee for the benefit of the holders of the Preferred Securities.
The following summary is not necessarily complete, and reference is hereby made
to the copy of the form of the Guarantee (including the definitions therein of
certain terms), which is filed as an exhibit to the Registration Statement of
which this Prospectus forms a part, and to the Trust Indenture Act. Whenever
particular defined terms of the Guarantee are referred to in this Prospectus,
such defined terms are incorporated herein by reference.
GENERAL
Pursuant to and to the extent set forth in the Guarantee, unless otherwise
specified in the applicable Prospectus Supplement, K N Energy will agree to pay
in full to the holders of the Preferred Securities (except to the extent paid by
the Trust), as and when due, regardless of any defense, right of set off or
counterclaim that the Trust may have or assert, the following payments (the
"Guarantee Payments"), without duplication: (i) any accumulated and unpaid
distributions that are required to be paid on the Preferred Securities to the
extent the Trust has funds available therefor, (ii) the Redemption Price, plus
accumulated and unpaid distributions, with respect to any Preferred Securities
called for redemption by the Trust, to the extent the Trust has funds available
therefor and (iii) upon a voluntary or involuntary liquidation, dissolution,
winding-up or termination of the Trust (other than in connection with the
distribution of Trust Debentures to the holders of Trust Securities or the
redemption of all the Preferred Securities), the lesser of (a) the aggregate of
the liquidation amount and all accumulated and unpaid distributions on the
Preferred Securities to the date of payment to the extent the Trust has funds
available therefor and (b) the amount of assets of the Trust remaining available
for distribution to holders of Preferred Securities upon the liquidation of the
Trust. The holders of a majority in liquidation amount of the Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee. If the Guarantee Trustee fails to enforce the Guarantee, any holder
of Preferred Securities may directly institute a legal proceeding against K N
Energy to enforce the obligations of K N Energy under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other person or entity. If K N Energy were to default on its obligation to
pay amounts payable on the Trust Debentures, the Trust would lack available
funds for the payment of distributions or amounts payable on redemption of the
Preferred Securities or otherwise, and in such event holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. Instead, a holder of the Preferred Securities would be required to rely
on the enforcement (1) by the Institutional Trustee of its rights, as registered
holder of the Trust Debentures, against K N Energy pursuant to the terms of the
Trust Debentures or (2) by such holder of Preferred Securities of its right
against K N Energy to enforce payment on the Trust Debentures. See "Description
of the Trust Debentures." The Declaration provides that each holder of Preferred
Securities, by acceptance thereof, if any, agrees to the provisions of the
Guarantee, including the subordination provisions thereof, if any, and the
Debenture Indenture.
The Guarantee will not apply to any payment of distributions or Redemption
Price, or to payments upon the dissolution, winding-up or termination of the
Trust, except to the extent the Trust shall have funds available therefor. If K
N Energy does not make interest payments on the Trust Debentures, the Trust will
not pay distributions on the Preferred Securities and will not have funds
available therefor. See "Description of the Trust Debentures." Unless otherwise
set forth in the applicable Prospectus Supplement, the Guarantee, when taken
together with K N Energy's obligations under the Trust Debentures, the Debenture
Indenture and the Declaration, including its obligations under the Debenture
Indenture to pay costs, expenses, debts and liabilities of the Trust (other than
with respect to the Trust Securities) will provide a full and unconditional
guarantee on a senior unsecured basis by K N Energy of payments due on the
Preferred Securities.
K N Energy has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities
(the "Common Securities Guarantee") to the same extent as
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the Guarantee, except that upon the occurrence and during the continuation of a
Declaration Event of Default, holders of Preferred Securities shall have
priority over holders of Common Securities with respect to distributions and
payments on liquidation, redemption or otherwise.
CERTAIN COVENANTS OF K N ENERGY
The Guarantee contains certain covenants regarding among other matters,
reports to Holders of the Preferred Securities and the Guarantee Trustee, and,
upon the occurrence of certain events, restrictions on the payment of dividends,
interest on debt securities and guarantee payments on other Company guarantees.
If and to the extent indicated in the applicable Prospectus Supplement, these
covenants may be removed or additional covenants added with respect to the
Guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of Preferred Securities (in which case no vote will be
required) the Guarantee may be amended only with the prior approval of the
holders of at least a majority in liquidation amount of all the outstanding
Preferred Securities. The manner of obtaining any such approval of holders of
the Preferred Securities will be as set forth in the applicable Prospectus
Supplement. All guarantees and agreements contained in the Guarantee shall bind
the successors, assigns, receivers, trustees and representatives of K N Energy
and shall inure to the benefit of the holders of the Preferred Securities then
outstanding. Except in certain circumstances, K N Energy may not assign its
rights or delegate its obligations under the Guarantee without the prior
approval of the holders of at least a majority in liquidation amount of the
Preferred Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to each holder of Preferred Securities upon
(i) full payment of the Redemption Price and accumulated and unpaid
distributions with respect to all Preferred Securities, (ii) upon distribution
of the Trust Debentures held by the Trust to the holders of the Preferred
Securities or (iii) upon liquidation of the Trust and will terminate completely
upon full payment of the amounts payable in accordance with the Declaration.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of K N
Energy to perform any of its payment or other obligations thereunder.
The holders of a majority in liquidation amount of Preferred Securities
relating to the Guarantee have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Preferred Securities. If the
Guarantee Trustee fails to enforce the Guarantee, any holder of Preferred
Securities relating to such Guarantee may institute a legal proceeding directly
against K N Energy to enforce the Guarantee Trustee's rights under the
Guarantee, without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity. Notwithstanding the foregoing,
if K N Energy has failed to make a guarantee payment, a holder of Preferred
Securities may directly institute a proceeding against K N Energy for
enforcement of the Guarantee for such payment. K N Energy waives any right or
remedy to require that any action be brought first against the Trust or any
other person or entity before proceeding directly against K N Energy.
STATUS OF THE GUARANTEE
Unless otherwise set forth in the applicable Prospectus Supplement, the
Guarantee will constitute an unsecured obligation of K N Energy and will rank
pari passu in right of payment to all other senior unsecured obligations of K N
Energy. The terms of the Preferred Securities provide that each holder of
Preferred Securities issued by the Trust by acceptance thereof agrees to the
other terms of the Guarantee relating thereto.
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The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the guarantor to enforce its rights under the guarantee without instituting a
legal proceeding against any other person or entity).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, undertakes to perform only such duties as are specifically set
forth in the Guarantee and, after default with respect to the Guarantee, shall
exercise the same degree of care as a prudent man would exercise in the conduct
of his own affairs. Subject to such provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of Preferred Securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred
thereby.
GOVERNING LAW
The Guarantee will be governed by, and construed in accordance with, the
laws of the State of New York.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE TRUST DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Trust Securities evidencing undivided beneficial ownership interests in the
assets of the Trust, and to invest the proceeds from such issuance and sale in
the Trust Debentures.
As long as payments of interest and other payments are made when due on the
Trust Debentures, such payments will be sufficient to cover distributions and
payments due on the Trust Securities because of the following factors: (i) the
aggregate principal amount of Trust Debentures will be equal to the sum of the
aggregate stated liquidation amount of the Trust Securities; (ii) the interest
rate and the interest and other payment dates on the Trust Debentures will match
the distribution rate and distribution and other payment dates for the Preferred
Securities; (iii) pursuant to the Debenture Indenture, K N Energy, as borrower,
shall pay, and the Trust shall not be obligated to pay, directly or indirectly,
all costs, expenses, debts and obligations of the Trust (other than with respect
to the Trust Securities); and (iv) the Declaration further provides that the K N
Trustees shall not take or cause or permit the Trust to, among other things,
engage in any activity that is not consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Preferred Securities (to the extent funds therefor are
available) are guaranteed by K N Energy as and to the extent set forth under
"Description of the Guarantee." If K N Energy does not make interest payments on
the Trust Debentures purchased by the Trust, it is expected that the Trust will
not have sufficient funds to pay distributions on the Preferred Securities. The
Guarantee is a full guarantee on a senior basis with respect to the Preferred
Securities issued by the Trust from the time of its issuance but does not apply
to any payment of distributions unless and until the Trust has sufficient funds
for the payment of such distributions. The Guarantee covers the payment of
distributions and other payments on the Preferred Securities only if and to the
extent that K N Energy has made a payment of interest or principal on the Trust
Debentures held by the Trust as its sole asset. The Guarantee, when taken
together with K N Energy's obligations under the Trust Debentures, the Debenture
Indenture and the Declaration, including its obligations to pay costs, expenses,
debts and liabilities of the Trust (other than with respect to the Trust
Securities), provides a full and unconditional guarantee on a senior basis of
amounts payable on the Preferred Securities.
Notwithstanding anything to the contrary in the Debenture Indenture, the
Company has the right to set-off any payment it is otherwise required to make
thereunder with and to the extent the Company has theretofore made, or is
concurrently on the date of such payment making, a payment under the Guarantee.
If the Guarantee Trustee fails to enforce the Guarantee, a holder of any
Preferred Security may institute a legal proceeding directly against the Company
to enforce its rights under the Guarantee without first instituting a legal
proceeding against the Guarantee Trustee, the Trust or any other person or
entity.
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The Trust's Preferred Securities evidence undivided beneficial ownership
interests in the assets of the Trust, and the Trust exists for the sole purpose
of issuing the Preferred Securities and Common Securities and investing the
proceeds thereof in Trust Debentures. A principal difference between the rights
of a holder of a Preferred Security and a holder of a Trust Debenture is that a
holder of a Trust Debenture will accrue, and (subject to the permissible
extension of the interest period) is entitled to receive, interest on the
principal amount of Trust Debentures held, while a holder of Preferred
Securities is only entitled to receive distributions if and to the extent the
Trust has funds available for the payment of such distributions.
Upon any voluntary or involuntary dissolution of the Trust involving the
liquidation of the Trust Debentures, the holders of Preferred Securities of the
Trust will be entitled to receive, out of assets held by the Trust, the
Liquidation Distribution in cash. See "Description of the Preferred Securities."
Upon any voluntary or involuntary liquidation or bankruptcy of the Company, the
Institutional Trustee as holder of the Trust Debentures would be entitled to
receive payment in full of principal and interest, before any stockholders of
the Company receive payments or distributions.
DESCRIPTION OF THE DEBT SECURITIES
The Debt Securities will constitute either senior or subordinated debt of
the Company and will be issued, in the case of Debt Securities that will be
senior debt ("Senior Debt Securities"), under an Indenture dated as of November
20, 1993 (the "Senior Debt Indenture"), between the Company and First Trust
National Association, as successor trustee, and, in the case of Debt Securities
that will be subordinated debt ("Subordinated Debt Securities"), under a
Subordinated Indenture dated as of May 15, 1996 (the "Subordinated Debt
Indenture"), between the Company and First Trust National Association, as
trustee. The Senior Debt Indenture and the Subordinated Debt Indenture are
sometimes hereinafter referred to individually as the "Debt Indenture" and
collectively as the "Debt Indentures." First Trust National Association (and any
successor thereto as trustee under the Debt Indentures) is hereinafter referred
to as the "Debt Trustee." The Debt Indentures are incorporated by reference in
the Registration Statement. The following summaries of certain provisions of the
Debt Indentures and the Debt Securities do not purport to be complete and such
summaries are subject to the detailed provisions of the applicable Debt
Indenture to which reference is hereby made for a full description of such
provisions, including the definition of certain terms used herein. Section
references in parentheses below are to sections in both Debt Indentures unless
otherwise indicated. Wherever particular sections or defined terms of the
applicable Debt Indenture are referred to, such sections or defined terms are
incorporated herein by reference as part of the statement made, and the
statement is qualified in its entirety by such reference. The Debt Indentures
are substantially identical, except for certain covenants of the Company and
provisions relating to subordination and conversion.
The Debt Securities may be issued from time to time in one or more series.
The following description of the Debt Securities sets forth certain general
terms and provisions of the Debt Securities of all series. The particular terms
of each series of Debt Securities offered by any Prospectus Supplement (the
"Offered Debt Securities") will be described therein.
The Company's Trust Debentures are separately described in this Prospectus
under the caption "Description of the Trust Debentures."
PROVISIONS APPLICABLE TO BOTH SENIOR AND SUBORDINATED DEBT SECURITIES
General. The Debt Securities will be unsecured senior or subordinated
obligations of the Company and may be issued from time to time in one or more
series. The Debt Indentures do not limit the amount of Debt Securities,
debentures, notes or other types of indebtedness that may be issued by the
Company or any of its subsidiaries nor do they restrict transactions between the
Company and its affiliates or the payment of dividends or other distributions by
the Company to its stockholders. The rights of the Company's creditors,
including holders of Debt Securities, will be limited to the assets of the
Company and will not be an obligation of any of its Subsidiaries. In addition,
other than as may be set forth in any Prospectus Supplement, the Debt Indentures
do not and the Debt Securities will not contain any covenants or other
provisions that are intended
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to afford holders of the Debt Securities special protection in the event of
either a change of control of the Company or a highly leveraged transaction by
the Company.
Reference is made to the Prospectus Supplement for the following terms of
and information relating to the Offered Debt Securities (to the extent such
terms are applicable to such Offered Debt Securities): (i) the title of the
Offered Debt Securities; (ii) classification as either Senior Debt Securities or
Subordinated Debt Securities; (iii) whether the Offered Debt Securities that
constitute Subordinated Debt Securities are convertible into Common Stock and,
if so, the terms and conditions upon which such conversion will be effected
including the initial conversion price or conversion rate and any adjustments
thereto in addition to or different from those described herein, the conversion
period and other conversion provisions in addition to or in lieu of those
described herein; (iv) any limit on the aggregate principal amount of the
Offered Debt Securities; (v) whether the Offered Debt Securities are to be
issuable as Registered Securities or Bearer Securities or both, whether any of
the Offered Debt Securities are to be issuable initially in temporary global
form and whether any of the Offered Debt Securities are to be in permanent
global form; (vi) the price or prices (expressed as a percentage of the
aggregate principal amount thereof) at which the Offered Debt Securities will be
issued; (vii) the date or dates on which the Offered Debt Securities will
mature; (viii) the rate or rates per annum (or the method by which such will be
determined) at which the Offered Debt Securities will bear interest, if any, and
the date from which any such interest will accrue; (ix) the Interest Payment
Dates on which any such interest on the Offered Debt Securities will be payable,
the Regular Record Date for any interest payable on any Offered Debt Securities
which are Registered Securities on any Interest Payment Date and the extent to
which, or the manner in which, any interest payable on a temporary global
Offered Debt Security on an Interest Payment Date will be paid; (x) any
mandatory or optional sinking fund or analogous provisions; (xi) each office or
agency where, subject to the terms of the Debt Indentures as described below
under "Payment and Paying Agents", the principal of and any premium and interest
on the Offered Debt Securities will be payable and each office or agency where,
subject to the terms of the Debt Indentures as described below under "-- Form,
Exchange, Registration and Transfer", the Offered Debt Securities may be
presented for registration of transfer or exchange; (xii) the right of the
Company to redeem the Offered Debt Securities at its option and the period or
periods, if any, within which and the price or prices at which the Offered Debt
Securities may, pursuant to any optional or mandatory redemption provisions, be
redeemed, in whole or in part, and the other detailed terms and provisions of
any such optional or mandatory redemption; (xiii) the denominations in which any
Offered Debt Securities which are Registered Securities will be issuable, if
other than denominations of $1,000 and any integral multiple thereof, and the
denomination or denominations in which any Offered Debt Securities which are
Bearer Securities will be issuable, if other than the denomination of $5,000;
(xiv) the currency or currencies (including composite currencies) in which
payment of principal of and any premium and interest on the Offered Debt
Securities is payable; (xv) any index used to determine the amount of payments
of principal of and any premium and interest on the Offered Debt Securities;
(xvi) information with respect to book-entry procedures, if any; (xvii) any
applicable United States federal income tax consequences; and (xviii) any other
terms of the Offered Debt Securities not inconsistent with the provisions of the
Debt Indentures. (Section 301) Any such Prospectus Supplement will also describe
any special provisions for the payment of additional amounts with respect to the
Offered Debt Securities.
Debt Securities may be issued as Original Issue Discount Securities. An
Original Issue Discount Security is a Debt Security, including any Zero-Coupon
Security, which is issued at a price lower than the amount payable upon the
Stated Maturity thereof and which provides that upon redemption or acceleration
of the maturity thereof an amount less than the amount payable upon the Stated
Maturity thereof and determined in accordance with the terms of such Debt
Security shall become due and payable. Special United States federal income tax
considerations applicable to Debt Securities issued at an original issue
discount, including Original Issue Discount Securities, and special United
States tax considerations and other terms and restrictions applicable to any
Debt Securities which are issued in bearer form, offered exclusively to United
States Aliens or denominated in other than United States dollars, will be set
forth in a Prospectus Supplement relating thereto.
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Form, Exchange, Registration and Transfer. Debt Securities of a series may
be issuable in definitive form solely as Registered Securities, solely as Bearer
Securities or as both Registered Securities and Bearer Securities. Unless
otherwise indicated in an applicable Prospectus Supplement, Bearer Securities
will have interest coupons attached. (Section 201) The Debt Indentures also
provide that Debt Securities of a series may be issuable in temporary or
permanent global form. (Section 201)
Registered Securities of any series will be exchangeable for other
Registered Securities of the same series of any authorized denominations and of
a like aggregate principal amount and tenor. In addition, if Debt Securities of
any series are issuable as both Registered Securities and Bearer Securities, at
the option of the Holder, and subject to the terms of the applicable Debt
Indenture, Bearer Securities (with all unmatured coupons, except as provided
below, and all matured coupons in default) of such series will be exchangeable
for Registered Securities of the same series of any authorized denominations and
of a like aggregate principal amount and tenor. Bearer Securities surrendered in
exchange for Registered Securities between a Regular Record Date or a Special
Record Date and the relevant date for payment of interest shall be surrendered
without the coupon relating to such date for payment of interest, and interest
accrued as of such date will not be payable in respect of the Registered
Security issued in exchange for such Bearer Security, but will be payable only
to the Holder of such coupon when due in accordance with the terms of the
applicable Debt Indenture. Bearer Securities will not be issued in exchange for
Registered Securities. (Section 305)
Debt Securities may be presented for exchange as provided above, and
Registered Securities may be presented for registration of transfer (with the
form of transfer endorsed thereon duly executed), at the office of the Security
Registrar or at the office of any transfer agent designated by the Company for
such purpose with respect to any series of Debt Securities and referred to in an
applicable Prospectus Supplement, without service charge and upon payment of any
taxes and other governmental charges as described in the Debt Indentures. Such
transfer or exchange will be effected upon the Security Registrar or such
transfer agent, as the case may be, being satisfied with the documents of title
and identity of the person making the request. The Debt Trustee will serve
initially as Security Registrar. (Section 305) If a Prospectus Supplement refers
to any transfer agents (in addition to the Security Registrar) initially
designated by the Company with respect to any series of Debt Securities, the
Company may at any time rescind the designation of any such transfer agent or
approve a change in the location through which any such transfer agent acts,
except that, if Debt Securities of a series are issuable solely as Registered
Securities, the Company will be required to maintain a transfer agent in each
Place of Payment for such series and, if Debt Securities of a series are also
issuable as Bearer Securities, the Company will be required to maintain (in
addition to the Security Registrar) a transfer agent in a Place of Payment for
such series located outside the United States. The Company may at any time
designate additional transfer agents with respect to any series of Debt
Securities. (Section 1002)
In the event of any redemption in part, the Company shall not be required
to (i) issue, register the transfer of or exchange Debt Securities of any series
during a period beginning at the opening of business 15 days prior to the
selection of Debt Securities of that series for redemption and ending on the
close of business on (A) if Debt Securities of the series are issuable only as
Registered Securities, the day of mailing of the relevant notice of redemption
and (B) if Debt Securities of the series are issuable as Bearer Securities, the
date of the first publication of the relevant notice of redemption or, if
Securities of the series are also issuable as Registered Securities and there is
no publication, the mailing of the relevant notice of redemption; (ii) register
the transfer of or exchange any Registered Security, or portion thereof, called
for redemption, except the unredeemed portion of any Registered Security being
redeemed in part; or (iii) exchange any Bearer Security called for redemption,
except to exchange such Bearer Security for a Registered Security of that series
and like tenor which is immediately surrendered for redemption. (Section 305)
Payment and Paying Agents. Unless otherwise indicated in an applicable
Prospectus Supplement, payment of principal of and any premium and interest on
Bearer Securities will be payable, subject to any applicable laws and
regulations, at the offices of such Paying Agents outside the United States as
the Company may designate from time to time, in the manner indicated in such
Prospectus Supplement. (Section 1002) Unless otherwise indicated in an
applicable Prospectus Supplement, payment of interest on Bearer Securities on
any Interest Payment Date will be made only against surrender to the Paying
Agent of the coupon relating to such Interest Payment Date. (Section 1001) No
payment with respect to any Bearer
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Security will be made at any office or agency of the Company in the United
States or by check mailed to any address in the United States or by transfer to
any account maintained with a bank located in the United States. Notwithstanding
the foregoing, payments of principal of and any premium and interest on Bearer
Securities denominated and payable in U.S. dollars will be made at the office of
the Company's Paying Agent in the Borough of Manhattan, The City of New York, if
(but only if) payment of the full amount thereof in U.S. dollars at all offices
or agencies outside the United States is illegal or effectively precluded by
exchange controls or other similar restrictions. (Section 1002)
Unless otherwise indicated in an applicable Prospectus Supplement, payment
of principal of and any premium and interest on Registered Securities will be
made at the office of such Paying Agent or Paying Agents as the Company may
designate from time to time, except that at the option of the Company payment of
any interest may be made by check mailed on or before the due date to the
address of the Person entitled thereto as such address shall appear in the
Security Register. (Sections 307, 1002) Unless otherwise indicated in an
applicable Prospectus Supplement, payment of any installment of interest on
Registered Securities will be made to the Person in whose name such Registered
Security is registered at the close of business on the Regular Record Date for
such interest. (Section 307)
Unless otherwise indicated in an applicable Prospectus Supplement, the Debt
Trustee, at its corporate trust office in Chicago, Illinois, will act as Paying
Agent for payments with respect to Debt Securities which are issuable solely as
Registered Securities and the Company will maintain a Paying Agent outside the
United States for payments with respect to Debt Securities (subject to
limitations described above in the case of Bearer Securities) which are issuable
solely as Bearer Securities or as both Registered Securities and Bearer
Securities. Any Paying Agents outside the United States and any other Paying
Agents in the United States initially designated by Company for the Debt
Securities will be named in an applicable Prospectus Supplement. The Company may
at any time designate additional Paying Agents or rescind the designation of any
Paying Agent or approve a change in the office through which any Paying Agent
acts, except that, if Debt Securities of a series are issuable solely as
Registered Securities, the Company will be required to maintain a Paying Agent
in each Place of Payment for such series and, if Debt Securities of a series are
issuable as Bearer Securities, the Company will be required to maintain (i) a
Paying Agent in the Borough of Manhattan, The City of New York for principal
payments with respect to any Registered Securities of the series (and for
payments with respect to Bearer Securities of the series in the circumstances
described above, but not otherwise), and (ii) a Paying Agent in a Place of
Payment located outside the United States where Debt Securities of such series
and any coupons appertaining thereto may be presented and surrendered for
payment. (Section 1002)
All monies paid by the Company to a Paying Agent for the payment of
principal of and any premium or interest on any Debt Security which remain
unclaimed at the end of two years after such principal, premium or interest
shall have become due and payable will (subject to applicable escheat laws) be
repaid to the Company, and the Holder of such Debt Security or any coupon will
thereafter look only to the Company for payment thereof. (Section 1003)
Global Debt Securities. Debt Securities of a series may be issued in whole
or in part in the form of one or more global Debt Securities that will be
deposited with, or on behalf of, a depository identified in the Prospectus
Supplement relating to such series. Global Debt Securities may be issued in
either registered or bearer form and in either temporary or permanent form.
(Section 203) Unless and until it is exchanged in whole or in part for the
individual Debt Securities represented thereby, a global Debt Security may not
be transferred except as a whole by the depository for such global Debt Security
to a nominee of such depository or by a nominee of such depository to such
depository or another nominee of such depository or by the depository or any
nominee to a successor depository or any nominee of such successor.
The specific terms of the depository arrangement with respect to a series
of Debt Securities and certain limitations and restrictions relating to a series
of Bearer Securities in the form of one or more global Debt Securities will be
described in the Prospectus Supplement relating to such series.
Events of Default. Any one of the following events constitutes an Event of
Default under each Debt Indenture with respect to Debt Securities of any series:
(a) failure to pay any interest on any Debt Security of
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that series when due, continued for 30 days; (b) failure to pay principal of or
any premium on any Debt Security of that series when due; (c) failure to deposit
any sinking fund payment, when due, in respect of any Debt Security of that
series; (d) failure to perform any other covenant of the Company in such Debt
Indenture (other than a covenant included in such Debt Indenture solely for the
benefit of series of any Debt Securities other than that series), continued for
90 days after written notice as provided in such Debt Indenture; (e) certain
events in bankruptcy, insolvency or reorganization involving the Company; and
(f) any other Event of Default provided with respect to Debt Securities of that
series. (Section 501)
If an Event of Default with respect to Debt Securities of any series at the
time Outstanding occurs and is continuing, either the Debt Trustee or the
Holders of at least 25% in aggregate principal amount of the Outstanding
Securities of that series by notice as provided in the applicable Debt Indenture
may declare the principal amount (or, if the Debt Securities of that series are
Original Issue Discount Securities, such portion of the principal amount as may
be specified in the terms of that series) of all the Debt Securities of that
series to be due and payable immediately. At any time after a declaration of
acceleration with respect to Debt Securities of any series has been made, but
before a judgment or decree for payment of money has been obtained by the Debt
Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Securities of that series may, under certain circumstances, rescind
and annul such acceleration. (Section 502)
Each Debt Indenture provides that, subject to the duty of the Debt Trustee
during default to act with the required standard of care, the Debt Trustee is
under no obligation to exercise any of its rights or powers under such Debt
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to the Debt Trustee reasonable indemnity. (Sections 601, 603)
Subject to such provisions for the indemnification of the Debt Trustee, the
Holders of a majority in aggregate principal amount of the Outstanding
Securities of any series have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debt Trustee, or
exercising any trust or power conferred on the Debt Trustee, with respect to the
Debt Securities of that series; provided, however, that the Debt Trustee is not
obligated to take any action unduly prejudicial to Holders not joining in such
direction or involving the Debt Trustee in personal liability. (Section 512)
The Company is required to furnish to the Debt Trustee annually a statement
as to the performance by the Company of its obligations under each Debt
Indenture and as to any default in such performance. (Section 1007)
Defeasance. If so specified with respect to any particular series of Debt
Securities issued under an Debt Indenture, the Company may discharge its
indebtedness and its obligations or certain of its obligations under such Debt
Indenture with respect to such series by depositing funds or obligations issued
or guaranteed by the United States of America with the Debt Trustee. (Sections
1301-1303)
Defeasance and Discharge. Each Debt Indenture provides that, if so
specified with respect to the Debt Securities of any series issued under such
Debt Indenture (other than convertible Subordinated Debt Securities), the
Company will be discharged from any and all obligations in respect of the Debt
Securities of such series (except for certain obligations relating to temporary
Debt Securities and exchange of Debt Securities, registration of transfer or
exchange of Debt Securities of such series, replacement of stolen, lost or
mutilated Debt Securities of such series, maintenance of paying agencies to hold
moneys for payment in trust and payment of additional amounts, if any, required
in consequence of United States withholding taxes imposed on payments to
non-United States persons) upon the deposit with the Trustee, in trust, of money
and/or U.S. Government Obligations which through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of (and premium, if any), and each
installment of interest on, the Debt Securities of such series on the Stated
Maturity of such payments in accordance with the terms of such Debt Indenture
and the Debt Securities of such series. (Sections 1302, 1304) Such a trust may
only be established if, among other things, the Company has delivered to the
Debt Trustee an Opinion of Counsel to the effect that (i) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling, or (ii) since the date of such Debt Indenture there has been a change in
applicable federal income tax law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders of such series
will not recognize
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income, gain or loss for United States federal income tax purposes as a result
of such deposit, defeasance and discharge, and will be subject to United States
federal income tax on the same amounts and in the same manner and at the same
times as would have been the case if such deposit, defeasance and discharge had
not occurred. (Section 1304) In the event of any such defeasance and discharge
of Debt Securities of such series, Holders of such series would be entitled to
look only to such trust fund for payment of principal of and any premium and any
interest on their Debt Securities until Maturity.
Covenant Defeasance. Each Debt Indenture also provides that, if so
specified with respect to the Debt Securities of any series issued thereunder,
the Company may omit to comply with certain restrictive covenants, including (in
the case of the Senior Debt Indenture) the covenant described under "Limitation
on Liens" below, but excluding (in the case of the Subordinated Debt Indenture)
any applicable obligation of the Company respecting the conversion of Debt
Securities of such series into Common Stock, and any such omission shall not be
an Event of Default with respect to the Debt Securities of such series, upon the
deposit with the Debt Trustee, in trust, of money and/or U.S. Government
Obligations which through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium, if any), and each installment
of interest on, the Debt Securities of such series on the Stated Maturity of
such payments in accordance with the terms of such Debt Indenture and the Debt
Securities of such series. The obligations of the Company under such Debt
Indenture and the Debt Securities of such series other than with respect to such
covenants shall remain in full force and effect. (Section 1303) Such a trust may
be established only if, among other things, the Company has delivered to the
Debt Trustee an Opinion of Counsel to the effect that the Holders of such series
will not recognize income, gain or loss for United States federal income tax
purposes as a result of such deposit and defeasance of certain obligations and
will be subject to United States federal income tax on the same amounts and in
the same manner and at the same time as would have been the case if such deposit
and defeasance had not occurred. (Section 1304)
Although the amount of money and U.S. Government Obligations on deposit
with the Debt Trustee would be intended to be sufficient to pay amounts due on
the Debt Securities of such series at the time of their Stated Maturity, in the
event the Company exercises its option to omit compliance with the covenants
defeased with respect to the Debt Securities of any series as described above,
and the Debt Securities of such series are declared due and payable because of
the occurrence of any Event of Default, such amount may not be sufficient to pay
amounts due on the Debt Securities of such series at the time of the
acceleration resulting from such Event of Default. The Company shall in any
event remain liable for such payments as provided in the applicable Debt
Indenture.
Federal Income Tax Consequences Relating to Defeasance. Under current
United States federal income tax law, defeasance and discharge would likely be
treated as a taxable exchange of Debt Securities to be defeased for an interest
in the defeasance trust. As a consequence, a holder would recognize gain or loss
equal to the difference between the holder's cost or other tax basis for such
Debt Securities and the value of the holder's interest in the defeasance trust,
and thereafter would be required to include in income the holder's share of the
income, gain or loss of the defeasance trust. Under current United States
federal income tax law, covenant defeasance would ordinarily not be treated as a
taxable exchange of such Debt Securities.
Meetings, Modification and Waiver. Modifications and amendments of either
Debt Indenture may be made by the Company and the Debt Trustee with the consent
of the Holders of a majority in aggregate principal amount of the Outstanding
Securities of each series affected by such modification or amendment; provided,
however, that no such modification or amendment may, without consent of the
Holder of each Outstanding Security affected thereby, (a) change the Stated
Maturity of the principal of, or any installment of principal of or interest on,
any Debt Security, (b) change the Redemption Date with respect to any Debt
Security, (c) reduce the principal amount of, or premium or interest on, any
Debt Security, (d) change any obligation of the Company to pay additional
amounts, (e) reduce the amount of principal of an Original Issue Discount
Security payable upon acceleration of the Maturity thereof, (f) change the coin
or currency in which any Debt Security or any premium or interest thereon is
payable, (g) change the redemption right of any Holder, (h) impair the right to
institute suit for the enforcement of any payment on or with respect to any Debt
Security or any conversion right with respect thereto, (i) reduce the percentage
in principal amount of
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Outstanding Securities of any series, the consent of whose Holders is required
for modification or amendment of such Debt Indenture or for waiver of compliance
with certain provisions of such Debt Indenture or for waiver of certain
defaults, (j) reduce the requirements contained in such Debt Indenture for
quorum or voting, (k) change any obligation of the Company to maintain an office
or agency in the places and for the purposes required by such Debt Indenture,
(l) adversely affect the right to convert Subordinated Debt Securities, if
applicable, or (m) modify any of the above provisions. (Section 902)
The Subordinated Debt Indenture may not be amended to alter the
subordination of any outstanding Subordinated Debt Securities without the
consent of each holder of Senior Indebtedness (as defined below under
"-- Provisions Applicable Solely to Subordinated Debt Securities") then
outstanding that would be adversely affected thereby. (Section 907 of the
Subordinated Debt Indenture)
The Holders of a majority in aggregate principal amount of the Outstanding
Securities of each series may, on behalf of all Holders of that series, waive,
insofar as that series is concerned, compliance by the Company with certain
restrictive provisions of the Debt Indenture under which such series has been
issued. (Section 1008) The Holders of a majority in aggregate principal amount
of the Outstanding Securities of each series may, on behalf of all Holders of
that series, waive any past default under the applicable Debt Indenture with
respect to any Debt Securities of that series, except a default (a) in the
payment of principal of, or premium, if any, or any interest on any Debt
Security of such series or (b) in respect of a covenant or provision of such
Debt Indenture which cannot be modified or amended without the consent of the
Holder of each Outstanding Security of such series affected. (Section 513)
Each Debt Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Securities have given any request,
demand, authorization, direction, notice, consent or waiver thereunder or are
present at a meeting of the Holders for quorum purposes, (i) the principal
amount of an Original Issue Discount Security that is deemed to be Outstanding
will be the amount of the principal that would be due and payable as of the date
of such determination upon acceleration of the Maturity thereof, and (ii) the
principal amount of a Debt Security denominated in a foreign currency or
currency units will be the U.S. dollar equivalent, determined on the date of
original issuance of such Debt Security, of the principal amount of such Debt
Security or, in the case of an Original Issue Discount Security, the U.S. dollar
equivalent, determined on the date of original issuance of such Security, of the
amount determined as provided in (i) above. (Section 101)
Each Debt Indenture contains provisions for convening meetings of the
Holders of a series if Debt Securities of that series are issuable as Bearer
Securities. (Section 1401) A meeting may be called at any time by the Trustee,
and also, upon request, by the Company or the Holders of at least 10% in
aggregate principal amount of the Outstanding Securities of such series, in any
such case upon notice given in accordance with "-- Notices" below. (Section
1402) Except for any consent which must be given by the Holder of each
Outstanding Security affected thereby, as described above, any resolution
presented at a meeting (or adjourned meeting at which a quorum is present) may
be adopted by the affirmative vote of the Holders of a majority in aggregate
principal amount of the Outstanding Securities of that series; provided,
however, that any resolution with respect to any request, demand, authorization,
direction, notice, consent, waiver or other action which may be made, given or
taken by the Holders of a specified percentage, which is less than a majority,
in aggregate principal amount of the Outstanding Securities of a series may be
adopted at a meeting (or adjourned meeting duly reconvened at which a quorum is
present) by the affirmative vote of the Holders of such specified percentage in
aggregate principal amount of the Outstanding Securities of that series. Any
resolution passed or decision taken at any meeting of Holders of any series duly
held in accordance with the applicable Debt Indenture will be binding on all
Holders of that series and related coupons. The quorum at any meeting, and at
any reconvened meeting, will be Persons holding or representing a majority in
aggregate principal amount of the Outstanding Securities of a series. (Section
1404)
Consolidation, Merger and Sale of Assets. The Company, without the consent
of the Holders of any of the outstanding Debt Securities under either Debt
Indenture, may consolidate with or merge into, or convey, transfer or lease its
assets substantially as an entirety to, any Person which is a corporation,
partnership or trust organized and validly existing under the laws of any
domestic jurisdiction, provided that any successor Person
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assumes the Company's obligations on the Securities and under such Debt
Indenture, that after giving effect to the transaction no Event of Default, and
no event which, after notice or lapse of time, would become an Event of Default,
shall have occurred and be continuing, and that certain other conditions are
met. (Section 801)
Notices. Except as otherwise provided in the Debt Indentures, notices to
Holders of Bearer Securities will be given by publication at least twice in a
daily newspaper in The City of New York and in such other city or cities as may
be specified in such Bearer Securities. Notices to Holders of Registered
Securities will be given by mail to the addresses of such Holders as they appear
in the Security Register. (Section 106)
Title. Title to any Bearer Securities (including Bearer Securities in
permanent global form) and any coupons appertaining thereto will pass by
delivery. The Company, the Debt Trustee and any agent of the Company or the
Trustee may treat the bearer of any Bearer Security and the bearer of any coupon
and the registered owner of any Registered Security as the owner thereof
(whether or not such Debt Security or coupon shall be overdue and
notwithstanding any notice to the contrary) for the purpose of making payment
and for all other purposes. (Section 308)
Replacement of Securities and Coupons. Any mutilated Debt Security or a
Debt Security with a mutilated coupon appertaining thereto will be replaced by
the Company at the expense of the Holder upon surrender of such Debt Security to
the Debt Trustee. Debt Securities or coupons that became destroyed, stolen or
lost will be replaced by the Company at the expense of the Holder upon delivery
to the Debt Trustee of the Debt Security and coupons or evidence of destruction,
loss or theft thereof satisfactory to the Company and the Debt Trustee; in the
case of any coupon which becomes destroyed, stolen or lost, such coupon will be
replaced by issuance of a new Debt Security in exchange for the Debt Security to
which such coupon appertains. In the case of a destroyed, lost or stolen Debt
Security or coupon, an indemnity satisfactory to the Debt Trustee and the
Company may be required at the expense of the Holder of such Debt Security or
coupon before a replacement Debt Security will be issued. (Section 306)
Governing Law. The Debt Indentures, the Debt Securities and coupons will
be governed by, and construed in accordance with, the laws of the State of New
York. (Section 113)
Regarding the Trustee. First Trust National Association, the Debt Trustee
under each Debt Indenture, is also trustee under another indenture under which
several issues of the Company's debt securities are outstanding.
Each Debt Indenture contains certain limitations on the right of the Debt
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize for its own account on certain property received
in respect of any such claim as security or otherwise. (Section 613) The Debt
Trustee is permitted to engage in certain other transactions; however, if it
acquires any conflicting interest (as described in the Debt Indentures), it must
eliminate such conflict or resign. (Section 608)
Pursuant to the Trust Indenture Act, should a default occur with respect to
either the Senior Debt Securities or the Subordinated Debt Securities, First
Trust National Association would be required to resign as Debt Trustee under one
of the Debt Indentures within 90 days of such default unless such default were
cured, duly waived or otherwise eliminated.
PROVISIONS APPLICABLE SOLELY TO SENIOR DEBT SECURITIES
General. Senior Debt Securities will be issued under the Senior Debt
Indenture, and each series will rank pari passu as to the right of payment of
principal and any premium and interest with each other series issued thereunder
and will rank senior to all series of Subordinated Debt Securities that may be
issued.
Certain Definitions. For purposes of the following discussion, the
following definitions are applicable (Section 101 of the Senior Debt Indenture):
"Net Tangible Assets" means the total amount of assets appearing on a
consolidated balance sheet of the Company and its Subsidiaries less, without
duplication: (a) all current liabilities (excluding any thereof which are
extendible or renewable by their terms or replaceable or refundable pursuant to
enforceable commitments
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at the option of the obligor thereon without requiring the consent of the
obligee to a time more than 12 months after the time as of which the amount
thereof is being computed and excluding current maturities of long-term debt and
preferred stock); (b) all reserves for depreciation and other asset valuation
reserves but excluding reserves for deferred federal income taxes arising from
accelerated depreciation or otherwise; (c) all goodwill, trademarks, trade
names, patents and unamortized debt discount and expense and other like
intangible assets carried as an asset and (d) all appropriate adjustments on
account of minority interests of other Persons holding common stock in any
Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Principal Property" means any natural gas pipeline, natural gas
distribution system, natural gas gathering system or natural gas storage
facility located in the United States, except any such property that in the
opinion of the Board of Directors is not of material importance to the business
conducted by the Company and its consolidated Subsidiaries taken as a whole.
"Principal Subsidiary" means any Subsidiary which owns a Principal
Property.
"Subsidiary" means a corporation more than 50% of the outstanding stock of
which is owned, directly or indirectly, by the Company or by one or more
Subsidiaries, or by the Company and one or more other Subsidiaries. For the
purposes of this definition, "voting stock" means stock which ordinarily has
voting power for the election of directors, whether at all times or only so long
as no senior class of stock has such voting power by reason of any contingency.
Limitation on Liens. The Company covenants in the Senior Debt Indenture
that it will not, nor will it permit any Subsidiary to, issue, assume or
guarantee any debt for money borrowed ("Debt") if such Debt is secured by a
mortgage, pledge, security interest or lien (a "mortgage" or "mortgages") upon
any Principal Property of the Company or any Principal Subsidiary or upon any
shares of stock or indebtedness of any Principal Subsidiary (whether such
Principal Property, shares or indebtedness was owned on the date of the Senior
Debt Indenture or thereafter acquired) without in any such case effectively
providing that the Senior Debt Securities shall be secured equally and ratably
with (or prior to) such Debt, except that the foregoing restrictions shall not
apply to: (a) mortgages on any property acquired, constructed or improved by the
Company or any Principal Subsidiary after the date of the Senior Debt Indenture
which are created within 180 days after such acquisition (or in the case of
property constructed or improved, after the completion and commencement of
commercial operation of such property, whichever is later) to secure or provide
for the payment of the purchase price or cost thereof, provided that in the case
of such construction or improvement the mortgages shall not apply to any
property theretofore owned by the Company or any Subsidiary other than
theretofore unimproved real property; (b) existing mortgages on property
acquired (including mortgages on any property acquired from a Person which is
consolidated with or merged with or into the Company or a Subsidiary) or
mortgages outstanding at the time any corporation becomes a Subsidiary; (c)
mortgages in favor of domestic or foreign governmental bodies to secure advances
or other payments pursuant to any contract or statute or to secure indebtedness
incurred to finance the purchase price or cost of constructing or improving the
property subject to such mortgages, including mortgages to secure Debt of the
pollution control or industrial revenue bond type; (d) mortgages in favor of the
Company or any Principal Subsidiary; or (e) any extension, renewal or
replacement (or successive extensions, renewals or replacements), in whole or in
part, of any mortgage referred to in any of the foregoing clauses (a)-(d).
(Section 1006 of the Senior Debt Indenture)
Notwithstanding the foregoing, the Company and any Subsidiary may, without
securing the Senior Debt Securities, issue, assume or guarantee secured Debt
(which would otherwise be subject to the foregoing restrictions) in an aggregate
amount which, together with all other such Debt, does not exceed 10% of the Net
Tangible Assets, as shown on a consolidated balance sheet as of a date not more
than 90 days prior to the proposed transaction prepared by the Company in
accordance with generally accepted accounting principles. (Section 1006 of the
Senior Debt Indenture)
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PROVISIONS APPLICABLE SOLELY TO SUBORDINATED DEBT SECURITIES
Subordination. The Subordinated Debt Securities will be subordinate and
junior in right of payment, to the extent set forth in the Subordinated Debt
Indenture, to all Senior Indebtedness (as defined below) of the Company. If the
Company should default in the payment of any principal of or premium or interest
on any Senior Indebtedness when the same becomes due and payable, whether at
Stated Maturity or a date fixed for prepayment or by declaration of acceleration
or otherwise, then, upon written notice of such default to the Company by the
holders of such Senior Indebtedness or any trustee therefor and subject to
certain rights of the Company to dispute such default and subject to proper
notification of the Trustee, unless and until such default has been cured or
waived or ceases to exist, no direct or indirect payment (in cash, property,
securities, by set-off or otherwise) will be made or agreed to be made for
principal of, premium, if any, or interest, if any, on the Subordinated Debt
Securities, or in respect of any redemption, retirement, purchase or other
acquisition of the Subordinated Debt Securities other than those made in capital
stock of the Company (or cash in lieu of fractional shares thereof) pursuant to
any conversion right of the Subordinated Debt Securities or otherwise made in
capital stock of the Company. (Sections 1601, 1604 and 1605 of the Subordinated
Debt Indenture)
"Senior Indebtedness" is defined in Section 101 of the Subordinated Debt
Indenture as Indebtedness (as defined below) of the Company outstanding at any
time except (a) any Indebtedness as to which, by the terms of the instrument
creating or evidencing the same, it is provided that such Indebtedness is not
senior in right of payment to the Subordinated Debt Securities, (b) the
Subordinated Debt Securities, (c) any Indebtedness of the Company to a
wholly-owned Subsidiary of the Company, (d) interest accruing after the filing
of a petition initiating certain bankruptcy or insolvency proceedings unless
such interest is an allowed claim enforceable against the Company in a
proceeding under federal or state bankruptcy laws and (e) trade accounts
payable. "Indebtedness" is defined in Section 101 of the Subordinated Debt
Indenture as, with respect to any Person, (a) (i) the principal of and premium
and interest, if any, on indebtedness for money borrowed of such Person
evidenced by bonds, notes, debentures or similar obligations, including any
guaranty by such Person of any indebtedness for money borrowed of any other
Person, whether any such indebtedness or guaranty is outstanding on the date of
the Subordinated Debt Indenture or is thereafter created, assumed or incurred,
(ii) the principal of and premium and interest, if any, on indebtedness for
money borrowed, incurred, assumed or guaranteed by such Person in connection
with the acquisition by it or any of its subsidiaries of any other business,
properties or other assets and (iii) lease obligations which such Person
capitalizes in accordance with Statement of Financial Accounting Standards No.
13 promulgated by the Financial Accounting Standards Board or such other
generally accepted accounting principles as may be from time to time in effect,
(b) any other indebtedness of such Person, including any indebtedness
representing the balance deferred and unpaid of the purchase price of any
property or interest therein, including any such balance that constitutes a
trade account payable, and any guaranty, endorsement or other contingent
obligation of such Person in respect of any indebtedness of another, which is
outstanding on the date of the Subordinated Debt Indenture or is thereafter
created, assumed or incurred by such Person and (c) any amendments,
modifications, refundings, renewals or extensions of any indebtedness or
obligation described as Indebtedness in clause (a) or (b) above.
If (i) without the consent of the Company a court shall enter (A) an order
for relief with respect to the Company under the United States federal
bankruptcy laws, (B) a judgment, order or decree adjudging the Company a
bankrupt or insolvent, or (C) an order for relief for reorganization,
arrangement, adjustment or composition of or in respect of the Company under the
United States federal bankruptcy laws or state insolvency laws or (ii) the
Company shall institute proceedings for the entry of an order for relief with
respect to the Company under the United States federal bankruptcy laws or for an
adjudication of insolvency, or shall consent to the institution of bankruptcy or
insolvency proceedings against it, or shall file a petition seeking, or seek or
consent to reorganization, arrangement, composition or similar relief under any
applicable law, or shall consent to the filing of such petition or to the
appointment of a receiver, custodian, liquidator, assignee, trustee,
sequestrator or similar official in respect of the Company or of substantially
all of its property, or the Company shall make a general assignment for the
benefit of creditors, then all Senior Indebtedness (including any interest
thereon accruing after the commencement of any such proceedings) will first be
paid in full before
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any payment or distribution, whether in cash, securities or other property, is
made on account of the principal of, premium, if any, or interest, if any, on
the Subordinated Debt Securities. In such event, any payment or distribution on
account of the principal of, premium, if any, or interest, if any, on the
Subordinated Debt Securities, whether in cash, securities or other property
(other than securities of the Company or any other corporation provided for by a
plan of reorganization or readjustment the payment of which is subordinate, at
least to the extent provided in the subordination provisions with respect to the
Subordinated Debt Securities, to the payment of all Senior Indebtedness then
outstanding and to any securities issued in respect thereof under any such plan
of reorganization or readjustment), which would otherwise (but for the
subordination provisions) be payable or deliverable in respect of the
Subordinated Debt Securities will be paid or delivered directly to the holders
of Senior Indebtedness in accordance with the priorities then existing among
such holders until all Senior Indebtedness (including any interest thereon
accruing after the commencement of any such proceedings) has been paid in full.
If any payment or distribution on account of the principal of, premium, if any,
or interest, if any, on the Subordinated Debt Securities of any character,
whether in cash, securities or other property (other than securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment the payment of which is subordinate, at least to the extent
provided in the subordination provisions with respect to the Subordinated Debt
Securities, to the payment of all Senior Indebtedness then outstanding and to
any securities issued in respect thereof under any such plan of reorganization
or readjustment), shall be received by the Debt Trustee or any Holder of any
Subordinated Debt Securities in contravention of any of the terms of the
Subordinated Debt Indenture, such payment or distribution will be received in
trust for the benefit of, and will be paid over or delivered and transferred to,
the holders of the Senior Indebtedness then outstanding in accordance with the
priorities then existing among such holders for application to the payment of
all Senior Indebtedness remaining unpaid, to the extent necessary to pay all
such Senior Indebtedness in full. In the event of any such proceeding, after
payment in full of all sums owing with respect to Senior Indebtedness, the
Holders of Subordinated Debt Securities, together with the holders of any other
obligations of the Company ranking on a parity with the Subordinated Debt
Securities, will be entitled to be repaid from the remaining assets of the
Company the amounts at that time due and owing on account of unpaid principal of
or any premium or interest on the Subordinated Debt Securities and such other
obligations before any payment or other distribution, whether in cash, property
or otherwise, shall be made on account of any capital stock or obligations of
the Company ranking junior to the Subordinated Debt Securities and such other
obligations. (Section 1601 of the Subordinated Debt Indenture)
The Prospectus Supplement respecting any series of Subordinated Debt
Securities will set forth any subordination provisions applicable to such series
in addition to or different from those described above.
By reason of such subordination, in the event of the insolvency of the
Company, Holders of Senior Indebtedness and holders of other obligations of the
Company that are not subordinated to Senior Indebtedness may receive more,
ratably, than Holders of the Subordinated Debt Securities. Such subordination
will not prevent the occurrence of an Event of Default or limit the right of
acceleration in respect of the Subordinated Debt Securities.
Conversion. The Subordinated Debt Indenture may provide for a right of
conversion of Subordinated Debt Securities into Common Stock (or cash in lieu
thereof). (Sections 301 and 1501 of the Subordinated Debt Indenture) The
following provisions will apply to Debt Securities that are convertible
Subordinated Debt Securities unless otherwise provided in the Prospectus
Supplement for such Debt Securities.
The Holder of any convertible Subordinated Debt Securities will have the
right exercisable at any time set forth in the Prospectus Supplement, unless
previously redeemed or otherwise purchased by the Company, to convert such
Subordinated Debt Securities into shares of Common Stock at the conversion price
or conversion rate set forth in the Prospectus Supplement, subject to
adjustment. (Section 1502 of the Subordinated Debt Indenture) The holder of
convertible Subordinated Debt Securities may convert any portion thereof which
is $1,000 in principal amount or any integral multiple thereof. (Section 1502 of
the Subordinated Debt Indenture)
In certain events, the conversion price or conversion rate will be subject
to adjustment as set forth in the Subordinated Debt Indenture. Such events
include the issuance of shares of Common Stock of the Company
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<PAGE> 110
as a dividend or distribution on the Common Stock; subdivisions, combinations
and reclassifications of the Common Stock; the issuance to all holders of Common
Stock of rights or warrants entitling the holders thereof (for a period not
exceeding 45 days) to subscribe for or purchase shares of Common Stock at a
price per share less than the then current market price per share of Common
Stock (as determined pursuant to the Subordinated Debt Indenture); and the
distribution to substantially all holders of Common Stock of evidences of
indebtedness, equity securities (including equity interests in the Company's
Subsidiaries) other than Common Stock, or other assets (excluding cash dividends
paid from surplus) or subscription rights or warrants (other than those referred
to above). No adjustment of the conversion price or conversion rate will be
required unless an adjustment would require a cumulative increase or decrease of
at least 1% in such price or rate. (Section 1504 of the Subordinated Debt
Indenture) Certain adjustments in the conversion price or conversion rate in
accordance with the foregoing provisions may result in constructive
distributions to either holders of the Subordinated Debt Securities or holders
of Common Stock which would be taxable pursuant to Treasury Regulations issued
under section 305 of the Internal Revenue Code of 1986, as amended. The amount
of any such taxable constructive distribution would be the fair market value of
the Common Stock which is treated as having been constructively received, such
value being determined as of the time the adjustment resulting in the
constructive distribution is made.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based on the then
current market price for the Common Stock. (Section 1503 of the Subordinated
Debt Indenture) Upon conversion, no adjustments will be made for accrued
interest or dividends, and therefore convertible Subordinated Debt Securities
surrendered for conversion between the record date for an interest payment and
the Interest Payment Date (except convertible Subordinated Debt Securities
called for redemption on a redemption date during such period) must be
accompanied by payment of an amount equal to the interest thereon which the
registered holder is to receive. (Sections 1504 and 1502 of the Subordinated
Debt Indenture)
In the case of any consolidation or merger of the Company (with certain
exceptions) or any conveyance, transfer or lease of the properties and assets of
the Company substantially as an entirety to any Person, each Holder of
convertible Subordinated Debt Securities, after the consolidation, merger,
conveyance, transfer or lease, will have the right to convert such convertible
Subordinated Debt Securities only into the kind and amount of securities, cash
and other property which the Holder would have been entitled to receive upon or
in connection with such consolidation, merger, conveyance, transfer or lease, if
the Holder had held the Common Stock issuable upon conversion of such
convertible Subordinated Debt Securities immediately prior to such
consolidation, merger, conveyance, transfer or lease. (Section 1505 of the
Subordinated Debt Indenture)
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DESCRIPTION OF CAPITAL STOCK
GENERAL
K N is currently authorized by its Restated Articles of Incorporation, as
amended (the "K N Charter") to issue 50,000,000 shares of Common Stock, of which
32,024,557 were outstanding on December 31, 1997; 200,000 shares of Class A
Preferred Stock, no par value ("Class A Preferred Stock"), of which 70,000
shares were outstanding as Class A $5.00 Cumulative Preferred Stock on such
date; and 2,000,000 shares of Class B Preferred Stock, no par value ("Class B
Preferred Stock"), none of which were outstanding on such date.
The Board of Directors of K N is authorized by the K N Charter to provide,
without further stockholder action, for the issuance of one or more series of
Class A Preferred Stock and Class B Preferred Stock. The Board of Directors has
the power to fix various terms with respect to each such series, including
voting power, designations, preferences, dividend rates, conversion and exchange
provisions, redemption provisions and, in the case of the Class B Preferred
Stock, the amounts which holders are entitled to receive upon any liquidation,
dissolution or winding up of K N. Class A Preferred Stock and Class B Preferred
Stock will rank prior to the Common Stock with respect to both dividends and
distribution of assets on liquidation, dissolution or winding up of K N.
In the event of any liquidation, dissolution or winding up of K N, whether
voluntary or involuntary, the holders of shares of Class A Preferred Stock of
each series shall be entitled to receive in full out of the assets of K N the
sum of $100 per share of Class A Preferred Stock, plus any arrearages in
dividends thereon to the date fixed for the payment in liquidation, before any
distribution shall be made to the holders of shares of any stock junior to the
Class A Preferred Stock. K N may, at the option of the Board of Directors,
redeem the whole or any part of the Class A Preferred Stock, or of any series
thereof at any time or from time to time within the period during which such
stock is, according to the K N Charter, or the resolutions of the Board of
Directors providing for the issue thereof, redeemable, by paying the redemption
price thereof, including any arrearages in dividends thereon to the date fixed
for redemption. The Class A $5.00 Cumulative Preferred Stock is redeemable, in
whole or in part, at the option of K N at any time, or from time to time, at the
price of $105 per share plus accrued and unpaid dividends. This series has no
sinking fund requirements. Holders of shares of Class A $5.00 Cumulative
Preferred Stock are entitled to receive, when and as declared by the Board of
Directors of K N, cumulative preferential cash dividends at the annual rate of
$5.00 per share prior to the payment of any dividends or other distributions on
(or purchase or redemption of) the Class B Preferred Stock or the Common Stock.
In the event of any liquidation, dissolution or winding up of K N, whether
voluntary or involuntary, the holders of shares of Class B Preferred Stock of
each series shall be entitled to receive, subject to the prior rights of the
holders of shares of Class A Preferred Stock, the full preferential amount fixed
by the K N Charter, or by the resolutions of the Board of Directors providing
for the issue thereof, including any arrearages in dividends thereon to the date
fixed for the payment in liquidation, before any distribution shall be made to
the holders of shares of any stock junior to the Class B Preferred Stock.
Dividends may not be declared or paid or set apart for payment on any series of
Class B Preferred Stock, unless there shall be no arrearages in dividends on any
series of Class A Preferred Stock entitled to cumulative dividends for any past
dividend period and dividends in full for the current dividend period have been
paid or declared or set aside for payment on all Class A Preferred Stock.
In addition, the holders of the Class A Preferred Stock then outstanding
have the right to vote separately as a class with respect to (i) certain
amendments to the K N Charter or the By-Laws of K N which adversely affect the
voting powers, rights or preferences of the holders of shares of Class A
Preferred Stock, (ii) the creation of any class of stock or any security
convertible into or exchangeable for or evidencing the right to purchase any
stock ranking prior to or on a parity with, either as to dividends or upon
liquidation, the Class A Preferred Stock, or (iii) certain mergers or
consolidations of K N with or into any other corporation. For such actions to be
taken by K N, including increasing the authorized amount of any class of stock
ranking prior to the Class A Preferred Stock, the affirmative vote of the
holders of at least 50% of the shares of the Class A Preferred Stock then
outstanding would be required. The affirmative vote of at least 50% of the
shares of any
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series of Class A Preferred Stock then outstanding is required for K N to amend
the K N Charter or resolutions of the Board of Directors of K N providing for
the issue of such series of Class A Preferred Stock so as to affect adversely
the powers, preferences or rights of holders of Class A Preferred Stock of such
series. The holders of Class B Preferred Stock then outstanding also have the
right to a separate vote regarding (a) the events described in the first
sentence of this paragraph with regard to such Class B Preferred Stock,
requiring the affirmative vote of at least 50% of the shares of Class B
Preferred Stock then outstanding, and (b) amendments to the K N Charter, or to
resolutions of K N's Board of Directors providing for the issue of any series of
Class B Preferred Stock so as to affect adversely the powers, preferences or
rights of the holders of such series, requiring the affirmative vote of at least
50% of the shares of such series then outstanding.
If dividends are in arrears on the shares of any series of Class A
Preferred Stock to which the following provisions are made applicable pursuant
to the K N Charter or resolutions of K N's Board of Directors providing for the
issue of any such series (i) in an aggregate amount equal to three but less than
six full quarterly dividends, then the holders of the shares of all such series
of Class A Preferred Stock have the exclusive right, voting separately as a
class and without regard to series, to elect directors constituting one-third of
K N's Board of Directors or (ii) in an aggregate amount equal to six full
quarterly dividends, then such holders have the exclusive right, voting
separately as a class and without regard to series, to elect directors
constituting one-half of K N's Board of Directors plus one additional director,
in each case until all arrearages in dividends and dividends in full for the
current quarterly period have been paid on or declared and set aside for payment
on the shares of such series. These provisions are applicable to the Class A
$5.00 Cumulative Preferred Stock. The holders of any outstanding Class B
Preferred Stock would have the right to elect directors of K N similar to the
Class A $5.00 Cumulative Preferred Stock in the event of nondeclaration of
dividends, for the periods described above, on the Class B Preferred Stock if
the holders of the Class A $5.00 Cumulative Preferred Stock are not then
entitled to elect directors as described above.
All outstanding shares of Common Stock are, and any shares of Common Stock
newly issued under any Prospectus Supplement will be, validly issued, fully paid
and nonassessable. Holders of K N Common Stock and Class A $5.00 Cumulative
Preferred Stock are entitled to one vote for each share on all matters voted on
by stockholders. Holders of Common Stock, Class A Preferred Stock and Class B
Preferred Stock have no preemptive rights to subscribe for or purchase any
additional securities issued by K N. Subject to the preferential rights of the
holders of the Class A Preferred Stock and Class B Preferred Stock, the holders
of Common Stock are entitled to receive any dividends which may be declared by
the Board of Directors out of funds legally available therefor and to share pro
rata in the net assets of K N upon liquidation, dissolution or winding up.
Shares of Common Stock have no cumulative voting rights or redemption, sinking
fund or conversion privileges.
ANTI-TAKEOVER MATTERS
Charter and Bylaws. Certain provisions of the K N Charter and the By-Laws
of K N could have the effect of preventing a change in control of K N in certain
situations. These provisions generally provide for (a) the classification of the
Board of Directors of K N into three classes of as nearly an equal number as
possible, having staggered terms of three years each; (b) the removal of
directors only for cause or by unanimous vote of the remaining members of the
Board of Directors; (c) the filling of any vacancy on the Board of Directors by
the remaining directors then in office; (d) the limitation of the number of
directors to a minimum of nine and a maximum of 15, with the exact number to be
determined by the Board of Directors; (e) increasing the stockholder vote
required to amend, repeal or adopt any provision inconsistent with the foregoing
provisions under (a), (b) and (d) above to two-thirds of the outstanding voting
securities of K N; (f) the requirement that certain business combinations or
transactions involving K N and any beneficial owner of more than 5% of the
outstanding voting securities of K N be approved by holders of at least
twothirds of the outstanding voting securities of K N, including those held by
such beneficial owner, unless the business combination or transaction is (I)
approved by the Board of Directors before such beneficial owner became a holder
of more than 5% of K N's outstanding voting securities or (II) approved by
sufficient members of the Board of Directors to constitute a majority of the
members of the full Board of Directors in office prior to the time such
beneficial owner became a holder of more than 5% of K N's voting securities, or
(III) with an entity
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of which a majority of the outstanding shares of voting securities is owned by K
N and its subsidiaries; (g) increasing the stockholder vote required to amend,
repeal or adopt any provision inconsistent with the foregoing provision under
(f) above to two-thirds or more of the then outstanding shares of voting
securities of K N; (h) the requirement that certain business combinations or
transactions involving K N and any beneficial owner of 10% or more of the
outstanding voting securities of K N be approved by holders of at least 80% of
the outstanding voting securities of K N, including those held by such
beneficial owner, unless (I) the business combination or transaction is approved
by three-fourths of the Board of Directors then in office who are not associated
with or related to anyone who beneficially owns, and do not themselves own, 10%
or more of K N's voting securities or (II) certain conditions relating generally
to the fairness of the price to be received by stockholders of K N in such
business combination or transaction are satisfied; (i) increasing the
stockholder vote required to amend, repeal or adopt any provision inconsistent
with the foregoing provision under (h) above to 80% or more of the outstanding
voting securities of K N unless approved by an affirmative vote of three-fourths
of the Board of Directors then in office who are not associated with or related
to anyone who beneficially owns, and do not themselves own, 10% or more of K N's
voting securities; (j) certain procedural requirements for stockholder
nominations to the Board of Directors; and (k) the requirement that special
meetings of stockholders may only be called by stockholders owning 51% or more
of the outstanding voting securities of K N, by a majority of the Board of
Directors, the Chairman of the Board of Directors or the President of K N.
Shareholder Rights Plan. On August 17, 1995, the Board of Directors of K N
declared a dividend of one preferred share purchase right (a "Right") with
respect to each outstanding share of Common Stock held of record on September
15, 1995 or issued thereafter and prior to the date the Rights become
exercisable. Until the Rights become exercisable, they will be evidenced by
certificates for shares of Common Stock and will automatically trade with the
Common Stock. If and when the Rights become exercisable, Rights certificates
will be distributed and the Rights will become separately tradable. The full
terms of the Rights are set forth in the Rights Agreement, dated as of August
21, 1995 (the "Rights Agreement"), between the Company and The Bank of New York,
as Rights Agent. A copy of the Rights Agreement is filed as an exhibit to the
Registration Statement.
Each Right entitles the holder thereof to purchase from the Company one
one-thousandth of a share of Class B Junior Participating Series Preferred
Stock, without par value (the "Preferred Shares"), for a price of $80 per one
onethousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The Rights become exercisable upon the earlier of (i) ten business
days following a public announcement that a person or group of affiliated or
associated persons has acquired beneficial ownership of 20% or more of the
outstanding voting shares of the Company or (ii) ten business days following the
commencement or announcement of an intention to commence a tender or exchange
offer the consummation of which would result in the beneficial ownership by a
person or group of 20% or more of the outstanding voting shares of the Company.
The Rights will expire on the later of September 15, 2005 or the third
anniversary of the date on which the Rights became exercisable (the "Final
Expiration Date"), unless the Final Expiration Date is extended or the Rights
are earlier redeemed or exchanged by the Company as described below.
If a person or group were to acquire 20% or more of the voting shares of
the Company, each Right then outstanding (other than Rights beneficially owned
by the acquiring person, which would become null and void) would become a right
to buy that number of shares of Common Stock (or, under certain circumstances,
the equivalent number of one onethousandths of a Preferred Share) that at the
time of such acquisition would have a market value of two times the Purchase
Price of the Right. If the Company were acquired in a merger or other business
combination transaction or more than 50% of its consolidated assets or earning
power were sold, proper provision will be made so that holder of a Right will
thereafter have the right to receive, upon the exercise thereof at the then
current Purchase Price of the Right, that number of shares of common stock of
the acquiring company which at the time of such transaction would have a market
value of two times the Purchase Price of the Right.
At any time after the acquisition by a person or group of beneficial
ownership of 20% or more of the outstanding voting shares of the Company and
before the acquisition by a person or group of 50% or more of the outstanding
voting shares of the Company, the Board of Directors may, at its option, issue
shares of
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Common Stock (or Preferred Shares) in mandatory redemption of, and in exchange
for, all or part of the then outstanding and exercisable Rights (other than
Rights owned by such person or group, which would become null and void) at an
exchange ratio of one share of Common Stock (or one one-thousandth of a
Preferred Share) for each Right, subject to adjustment. In addition, the Company
is entitled to redeem all of the outstanding Rights at a price of $0.01 per
Right at any time prior to the first public announcement that a person or group
has become the beneficial owner of 20% or more of the outstanding voting shares
of the Company.
Until a Right is exercised, the holder thereof, as such, has no rights as a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends.
KANSAS BUSINESS COMBINATION ACT
K N is subject to Sections 17-12,100 et seq. of the Kansas Statutes
Annotated (the "K.S.A."), which imposes a three-year moratorium on business
combinations between a Kansas corporation and an "interested stockholder" (in
general, a stockholder owning 15% or more of a corporation's outstanding voting
stock) or an affiliate or associate thereof unless (a) prior to an interested
stockholder becoming such, the board of directors of the corporation has
approved either the business combination or the transaction by which the
interested stockholder became such; (b) upon consummation of the transaction
resulting in an interested stockholder becoming such, the interested stockholder
owns 85% of the voting stock that was outstanding at the time the transaction
commenced (excluding, from the calculation of outstanding shares, shares
beneficially owned by management, directors and certain employees stock plans);
or (c) on or after the date an interested stockholder becomes such, the business
combination is approved by (i) the Board of Directors and (ii) the affirmative
vote of the holders of at least 66 2/3% of the outstanding shares (other than
those shares beneficially owned by the interested stockholder) at a meeting of
stockholders.
KANSAS CONTROL SHARE ACQUISITIONS ACT
K N is also subject to Sections 17-1286 et seq. of the K.S.A. (the "Kansas
Control Share Acquisitions Act"), which applies to public corporations
incorporated in Kansas that have certain other connections with the state. The
Kansas Control Share Acquisitions Act relates principally to the acquisition of
"control shares" in such a corporation. Under the Kansas Control Share
Acquisitions Act, a control share acquisition is one that, except for the
operation of the Act, would raise the acquiring person's voting power in the
election of directors of the subject corporation to or above any of three
thresholds: one-fifth or more but less than one-third of all voting power;
one-third or more but less than a majority of all voting power; and at least a
majority of all voting power. Whenever a control share acquisition occurs, the
acquiring person has no voting rights with respect to those shares unless both a
majority of all outstanding shares and a majority of all such shares excluding
all "interested shares" (in general, shares beneficially controlled by the
acquiring person or any officer or inside director of the subject corporation)
approve the acquisition. If the control shares are accorded voting rights, then
dissenters' rights are available under the Kansas Control Share Acquisitions Act
to stockholders who did not vote in favor of the control share acquisition and
who comply with certain prescribed procedures. If the stockholders vote not to
accord voting rights to the control shares, however, then the issuing
corporation has a 60-day option to redeem all such shares at market value.
OTHER MATTERS
The Bank of New York serves as registrar and transfer agent for the Common
Stock and for the Class A $5.00 Cumulative Preferred Stock.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
The Company may issue Stock Purchase Contracts, including contracts
obligating holders to purchase from the Company, and the Company to sell to the
holders, a specified number of shares of Common Stock at a future date or dates.
The consideration per share of Common Stock may be fixed at the time the Stock
Purchase Contracts are issued or may be determined by reference to a specific
formula set forth in the Stock
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Purchase Contracts. The Stock Purchase Contracts may be issued separately or as
Stock Purchase Units consisting of a Stock Purchase Contract and Debt
Securities, Preferred Securities or debt obligations of third parties, including
U.S. Treasury securities, securing the holders' obligations to purchase the
Common Stock under the Stock Purchase Contracts. The Stock Purchase Contracts
may require the Company to make periodic payments to the holders of the Stock
Purchase Units or vice versa, and such payments may be unsecured or prefunded on
some basis. The Stock Purchase Contracts may require holders to secure their
obligations thereunder in a specified manner.
The applicable Prospectus Supplement will describe the terms of any Stock
Purchase Contracts or Stock Purchase Units. The description in the Prospectus
Supplement will not necessarily be complete, and reference will be made to the
Stock Purchase Contracts, and, if applicable, collateral arrangements and
depositary arrangements, relating to such Stock Purchase Contracts or Stock
Purchase Units. Certain material United States federal income tax considerations
applicable to the Stock Purchase Units and the Stock Purchase Contracts will be
discussed in the Prospectus Supplement relating thereto.
BOOK-ENTRY ISSUANCE
Unless otherwise specified in the applicable Prospectus Supplement, The
Depositary Trust Company ("DTC") will act as depositary for Securities issued in
the form of Global Securities. Such Securities will be issued only as
fully-registered securities registered in the name of Cede & Co. (DTC's
nominee). One or more fully-registered Global Securities will be issued for such
Securities representing in the aggregate the total number of such Securities,
and will be deposited with or on behalf of DTC.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its Participants deposit with DTC. DTC also facilitates
the settlement among Participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations ("Direct Participants"). DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain custodial
relationships with Direct Participants, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Commission.
Purchases of Securities within the DTC system must be made by or through
Direct Participants, which will receive a credit for such Securities on DTC's
records. The ownership interest of each actual purchaser of each Security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Securities. Transfers of ownership
interests in Securities issued in the form of Global Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in such Securities, except in the event that use of
the book-entry system for such Securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Securities
issued in the form of Global Securities; DTC's records reflect only the identity
of the Direct Participants to whose accounts such Securities are credited, which
may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
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Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. as the registered holder of
Securities issued in the form of Global Securities. If less than all of a series
of such Securities are being redeemed, DTC's current practice is to determine by
lot the amount of the interest of each Direct Participant to be redeemed.
Although voting with respect to Securities issued in the form of Global
Securities is limited to the holders of record of such Securities, in those
instances in which a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to such Securities. Under its usual procedures, DTC
would mail an omnibus proxy (the "Omnibus Proxy") to the issuer of such
Securities as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to whose
accounts such Securities are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
Payments in respect of Securities issued in the form of Global Securities
will be made by the issuer of such Securities to DTC. DTC's practice is to
credit Direct Participants' accounts on the relevant payment date in accordance
with their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices and will be the responsibility of such Participant and not
of DTC, the Institutional Trustee, either Trust or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payments to DTC are the responsibility of the issuer of the applicable
Securities, disbursement of such payments to Direct Participants is the
responsibility of DTC, and disbursements of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as depositary with respect to
any Securities at any time by giving reasonable notice to the issuer of such
Securities. In the event that a successor depositary is not obtained, individual
Security certificates representing such Securities are required to be printed
and delivered. The Company, at its option, may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor depositary).
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Trust and the Company believe to be
accurate, but the Trust and the Company assume no responsibility for the
accuracy thereof. Neither the Trust nor the Company has any responsibility for
the performance by DTC or its Participants of their respective obligations as
described herein or under the rules and procedures governing their respective
operations.
PLAN OF DISTRIBUTION
Any of the Securities being offered hereby may be sold in any one or more
of the following ways from time to time: (i) through agents; (ii) to or through
underwriters; (iii) through dealers; and (iv) directly by the Company or, in the
case of Preferred Securities, by the Trust to purchasers.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices.
Offers to purchase Securities may be solicited by agents designated by the
Company from time to time. Any such agent involved in the offer or sale of the
Securities in respect of which this Prospectus is delivered will be named, and
any commissions payable by the Company or the Trust to such agent will be set
forth, in the applicable Prospectus Supplement. Unless otherwise indicated in
such Prospectus Supplement, any such agent will be acting on a reasonable best
efforts basis for the period of its appointment. Any such agent may be
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deemed to be an underwriter, as that term is defined in the Securities Act, of
the Securities so offered and sold.
If Securities are sold by means of an underwritten offering, the Company
and, in the case of an offering of Preferred Securities, the Trust will execute
an underwriting agreement with an underwriter or underwriters at the time an
agreement for such sale is reached, and the names of the specific managing
underwriter or underwriters, as well as any other underwriters, the respective
amounts underwritten and the terms of the transaction, including commissions,
discounts and any other compensation of the underwriters and dealers, if any,
will be set forth in the applicable Prospectus Supplement which will be used by
the underwriters to make resales of the Securities in respect of which this
Prospectus is being delivered to the public. If underwriters are utilized in the
sale of any Securities in respect of which this Prospectus is being delivered,
such Securities will be acquired by the underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices
determined by the underwriters at the time of sale. Securities may be offered to
the public either through underwriting syndicates represented by managing
underwriters or directly by one or more underwriters. If any underwriter or
underwriters are utilized in the sale of Securities, unless otherwise indicated
in the applicable Prospectus Supplement, the underwriting agreement will provide
that the obligations of the underwriters are subject to certain conditions
precedent and that the underwriters with respect to a sale of such Securities
will be obligated to purchase all such Securities if any are purchased.
The Company or the Trust, as applicable, may grant to the underwriters
options to purchase additional Securities, to cover over-allotments, if any, at
the initial public offering price (with additional underwriting commissions or
discounts), as may be set forth in the Prospectus Supplement relating thereto.
If the Company or the Trust, as applicable, grants any over-allotment option,
the terms of such over-allotment option will be set forth in the Prospectus
Supplement for such Securities.
If a dealer is utilized in the sale of the Securities in respect of which
this Prospectus is delivered, the Company or the Trust, as applicable, will sell
such Securities to the dealer as principal. The dealer may then resell such
Securities to the public at varying prices to be determined by such dealer at
the time of resale. Any such dealer may be deemed to be an underwriter, as such
term is defined in the Securities Act, of the Securities so offered and sold.
The name of the dealer and the terms of the transaction will be set forth in the
Prospectus Supplement relating thereto.
Offers to purchase Securities may be solicited directly by the Company or
the Trust, as applicable, and the sale thereof may be made by the Company or the
Trust directly to institutional investors or others, who may be deemed to be
underwriters within the meaning of the Securities Act with respect to any resale
thereof. The terms of any such sales will be described in the Prospectus
Supplement relating thereto.
Securities may also be offered and sold, if so indicated in the applicable
Prospectus Supplement, in connection with a remarketing upon their purchase, in
accordance with a redemption or repayment pursuant to their terms, or otherwise,
by one or more firms ("remarketing firms"), acting as principals for their own
accounts or as agents for the Company or the Trust, as applicable. Any
remarketing firm will be identified and the terms of its agreement, if any, with
the Company or the Trust and its compensation will be described in the
applicable Prospectus Supplement. Remarketing firms may be deemed to be
underwriters, as that term is defined in the Securities Act, in connection with
the Securities remarketed thereby.
If so indicated in the applicable Prospectus Supplement, the Company or the
Trust, as applicable, may authorize agents and underwriters to solicit offers by
certain institutions to purchase Securities from the Company or the Trust at the
public offering price set forth in the applicable Prospectus Supplement pursuant
to delayed delivery contracts providing for payment and delivery on the date or
dates stated in the applicable Prospectus Supplement. Such delayed delivery
contracts will be subject to only those conditions set forth in the applicable
Prospectus Supplement. A commission indicated in the applicable Prospectus
supplement will be paid to underwriters and agents soliciting purchases of
Securities pursuant to delayed delivery contracts accepted by the Company or the
Trust, as applicable.
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Agents, underwriters, dealers and remarketing firms may be entitled under
relevant agreements with the Company or the Trust, as applicable, to
indemnification by the Company or the Trust against certain liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which such agents, underwriters, dealers and remarketing firms may
be required to make in respect thereof.
Each series of Securities will be a new issue and, other than the Common
Stock, which is listed on the New York Stock Exchange, will have no established
trading market. The Company may elect to list any series of Securities on an
exchange, and in the case of the Common Stock, on any additional exchange, but,
unless otherwise specified in the applicable Prospectus Supplement, the Company
shall not be obligated to do so. No assurance can be given as to the liquidity
of the trading market for any of the Securities.
Agents, underwriters, dealers and remarketing firms may be customers of,
engage in transactions with, or perform services for, the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
The validity of the Preferred Securities will be passed upon on behalf of K
N Energy and the Trust by Richards, Layton & Finger P.A., special Delaware
counsel to K N Energy and the Trust. The validity of the Trust Debentures, the
Guarantee, the Debt Securities and Stock Purchase Contracts and certain matters
relating thereto will be passed upon for K N Energy and the Trust by Simpson
Thacher & Bartlett (a partnership which includes professional corporations), New
York, New York. The validity of the Common Stock and the Stock Purchase Units
will be passed upon by Martha B. Wyrsch, General Counsel of the Company. As of
January 29, 1998, Ms. Wyrsch owned 2,553 shares of Common Stock and held options
to purchase an additional 32,299 shares of Common Stock. The validity of the
Offered Securities will be passed upon for any agents, dealers or underwriters
by counsel named in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of K N Energy, Inc. and subsidiaries
as of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, incorporated in this Prospectus and elsewhere in the
Registration Statement by reference to its Annual Report on Form 10-K for the
year ended December 31, 1996, as amended, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in accounting and auditing in giving said report.
The consolidated financial statements of MidCon Corp. and subsidiaries as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, incorporated in this Prospectus and elsewhere in the
Registration Statement by reference to the Current Report on Form 8-K filed with
the Commission on January 16, 1998, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in accounting and auditing in giving said report.
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[KN ENERGY LOGO]
