<PAGE> 1
As Filed Pursuant to Rule 424(b)(2)
Registration No. 333-55921
PROSPECTUS SUPPLEMENT
(To Prospectus dated October 19, 1998)
$400,000,000
K N Energy, Inc.
[KN ENERGY LOGO]
6.45% SENIOR NOTES DUE 2001
------------------------
Interest payable on May 31 and November 30
------------------------
The Senior Notes are not redeemable before maturity.
------------------------
INVESTING IN THE SENIOR NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-9.
------------------------
PRICE 99.928% AND ACCRUED INTEREST, IF ANY
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS K N ENERGY
-------- ------------- -----------
<S> <C> <C> <C>
Per Senior Note................................... 99.928% .350% 99.578%
Total............................................. $399,712,000 $1,400,000 $398,312,000
</TABLE>
We concurrently offered 9,310,000 8.25% Premium Equity Participating Security
Units -- PEPS(SM) Units with this offering of Senior Notes.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The Underwriters expect to deliver the Senior Notes to purchasers on November
25, 1998.
------------------------
MORGAN STANLEY DEAN WITTER MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
JEFFERIES & COMPANY, INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
PETRIE PARKMAN & CO.
November 19, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-1
Risk Factors................................................ S-9
Use of Proceeds............................................. S-13
The Acquisition and the Financing Plan...................... S-14
Capitalization.............................................. S-18
Unaudited Pro Forma Consolidated Financial Statements....... S-19
Selected Historical Financial Information for K N Energy.... S-24
Selected Historical Financial Information for MidCon........ S-26
The Company................................................. S-27
Regulation.................................................. S-34
Description of the Senior Notes............................. S-39
Underwriters................................................ S-41
Experts..................................................... S-43
Legal Matters............................................... S-43
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>
------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with information different from that
contained or incorporated by reference in this prospectus supplement and the
accompanying prospectus. We are offering to sell the Senior Notes, and seeking
offers to buy the Senior Notes, only in jurisdictions where offers and sales are
permitted. The information contained or incorporated by reference in this
prospectus supplement and the accompanying prospectus is accurate only as of the
date of this prospectus supplement and the date of the accompanying prospectus,
regardless of the time of delivery of this prospectus supplement or any sales of
the Senior Notes.
ii
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this document and does
not contain all of the information you need to consider in making your
investment decision. To understand all of the terms of this offering and for a
more complete understanding of the business of K N Energy, you should read
carefully this entire document, the accompanying prospectus and the documents
incorporated by reference in this document and the prospectus. Except as
otherwise noted, all information in this document assumes no exercise of the
underwriters' over-allotment option with respect to our concurrent offering of
PEPS Units.
In addition to those described below, we use certain defined terms in this
document for ease of reading and to avoid repetition. You should be aware that
capitalized terms used in this documents will have the meanings given to them in
this document. When we use the terms the "Company", "K N Energy", "K N", "we" or
"us", we are referring to K N Energy, Inc. together with its consolidated
subsidiaries, including MidCon Corp., unless the context otherwise requires.
When we use the term "MidCon", we are referring to MidCon Corp. together with
its consolidated subsidiaries, unless the context otherwise requires. All
volumes of natural gas referred to in this document are stated at a pressure
base of 14.73 pounds per square inch and 60 degrees Fahrenheit and, in most
cases, are rounded to the nearest major multiple. As used in this document,
"Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means
billion cubic feet, "MMGal" means million gallons and "Bbls" means barrels. We
use the term "NGLs" to refer to natural gas liquids, which consist of ethane,
propane, butane, iso-butane and natural gasoline.
BACKGROUND
On January 30, 1998, we purchased the capital stock of MidCon from
Occidental Petroleum Corporation ("Occidental") for $2.1 billion in cash and a
$1.39 billion short-term note (the "Substitute Note"). We initially used letters
of credit issued under a $4.5 billion bank facility as collateral for the
Substitute Note, which must be paid in full on January 4, 1999. In March and
April of 1998, we replaced a portion of these letters of credit with U.S.
government securities purchased with the net proceeds from underwritten
offerings of our common stock and debt securities as well as trust preferred
securities of a wholly-owned subsidiary trust. As the final step in our
permanent financing of the acquisition of MidCon, we are concurrently offering
$400.0 million of senior notes and 9,310,000 PEPS Units. We will use the net
proceeds from this senior notes offering to (i) reduce short-term borrowings,
(ii) pay the transaction fees and expenses and underwriters' discount of the
offering of PEPS Units and (iii) pay the premium amount paid in conjunction with
the purchase of United States Treasury Notes which form a part of the PEPS
Units. We will not receive any proceeds from the PEPS Units offering until
settlement of the associated stock purchase contracts. We will repay the
Substitute Note when it comes due with the U.S. government securities ($1.09
billion as of September 30, 1998) purchased to collateralize the Substitute Note
and borrowings under our bank facility.
BUSINESS DESCRIPTION
We are one of the largest integrated natural gas companies in the United
States. We own and operate:
- approximately 25,000 miles of interstate, intrastate and offshore
pipeline;
- approximately 11,700 miles of gathering and processing pipeline;
- approximately 7,200 miles of local distribution pipeline;
- 22 gas processing facilities with 1.8 Bcf per day of processing capacity;
and
- 16 storage facilities with storage capacity of more than 250 Bcf of
working gas.
We have pipeline assets in 16 states with access to several of the largest
natural gas markets in the United States, including Chicago, Houston, Kansas
City and Denver. We also have access to the major natural gas supply basins in
the United States, including those in the Mid-Continent, West Texas, Rocky
Mountain and Gulf Coast regions. We are one of the largest owners and operators
of natural gas storage assets in both our supply and market areas.
S-1
<PAGE> 4
We are also one of the largest transporters and marketers of natural gas in
the United States with average transportation volumes of approximately 6.2 Bcf
of natural gas per day and average sales volumes of approximately 4.3 Bcf of
natural gas per day during the nine months ended September 30, 1998.
On a pro forma basis, after giving effect to our acquisition of MidCon, the
prior offerings completed in March and April of 1998, the concurrent offering of
PEPS Units and this senior notes offering, for the year ended December 31, 1997,
we had operating revenues of $5.2 billion, operating income of $361.3 million
and net income of $96.2 million. On the same pro forma basis, for the nine
months ended September 30, 1998, we had operating revenues of $3.5 billion,
operating income of $292.0 million and net income of $59.5 million. At September
30, 1998, we had $9.7 billion in assets.
BUSINESS STRATEGY
Our strategy is to enhance our assets and operations in all segments of the
energy "value stream". We plan to achieve this goal by:
- increasing our access to supplies of natural gas which we gather and
process in our upstream gathering and processing facilities;
- increasing the transportation of gas through our midstream transmission
pipelines; and
- marketing gas to a broad range of downstream end-users, including
utility, residential, commercial, agricultural and industrial customers.
We believe that we have developed several competitive strengths that will
enable us to successfully implement our strategy. These strengths include:
- an extensive natural gas infrastructure from the wellhead to the burner
tip;
- access to natural gas supplies in several of the largest domestic natural
gas producing areas;
- access to natural gas markets in some of the largest natural gas
consuming areas in the Mid-Continent, the Rocky Mountain states and
Texas;
- a management team which combines an entrepreneurial spirit with
significant leadership experience in the natural gas industry and in
other deregulating industries;
- a strong track record of quickly and successfully integrating
acquisitions; and
- a commitment to providing superior customer service.
The key elements of our strategy include the following:
- Optimize Operation of Our Assets -- Over the past several years, we have
consistently improved the operation of our assets. We believe we can
continue to improve operations further through the integration and
consolidation of our assets with those of MidCon. For example, we have
identified opportunities to improve the operation of our assets by
connecting pipelines to nearby gathering facilities, relocating
processing facilities and reconfiguring certain operations to increase
throughput and lower operating costs.
- Aggressively Pursue New Markets -- We will continue to pursue
opportunities to increase our market share along our pipeline systems. We
are currently executing this strategy by expanding our marketing presence
in Kansas City through the construction of an additional lateral pipeline
and in the Denver metropolitan area through the planned construction of a
new pipeline. We believe there are many other similar opportunities to
approach new markets along our pipelines which have been historically
underserved.
- Leverage Regulated Assets by Developing Complementary Unregulated
Businesses -- We believe that our regulated businesses provide a stable
base for earnings. We also seek to build or acquire unregulated
businesses to complement this base of regulated assets. For example, we
have expanded our unregulated gathering, processing and marketing
activities in the Rocky Mountains and Midwest in
S-2
<PAGE> 5
conjunction with the development and operation of our regulated Pony
Express Pipeline. As a result of our acquisition of MidCon and its large
base of regulated assets, we believe that there are substantial
additional opportunities for us to continue to pursue this strategy.
- Pursue Strategic Acquisitions, Alliances, Joint Ventures and
Partnerships -- We will continue to pursue acquisitions and strategic
alliances that create new business opportunities and enhance our existing
operations. We maintain a highly disciplined approach to acquisitions
that focuses on investments that:
- logically expand our business into neighboring markets;
- help increase economies of scale; and
- provide opportunities to develop unregulated businesses that are
complementary to, and increase the value of, our regulated businesses.
- Maintain and Enhance Our Position as a Competitive-Cost Provider -- We
believe we are one of the lowest cost providers of natural gas
transportation services, and we constantly seek opportunities to reduce
costs further without compromising safety or sacrificing customer
service. Our lower-cost position in the Mid-Continent region puts us in a
stronger position than our higher-cost competitors to preserve or
increase market share, particularly in the likely event that additional
natural gas comes into the Chicago market from Canada. In the future, we
believe that we can continue to reduce costs, primarily from the
consolidation of existing operations with those of MidCon and from the
improved operation of our assets.
- Expand Our Retail Presence -- In order to take advantage of the rapidly
changing competitive landscape in our industry, we have developed an
energy marketing service through a 50% interest in EN-able(SM), a joint
venture with PacifiCorp Holdings, Inc. that offers marketing,
communications, entertainment and energy solutions to local utilities.
EN-able has developed a program called Simple Choice(SM), which packages
together energy, home, communication and entertainment services, all
payable on one bill branded by the local utility.
------------------------
We maintain our principal offices at 370 Van Gordon Street, Lakewood,
Colorado 80228-8304, and our telephone number is (303) 989-1740.
S-3
<PAGE> 6
THE SENIOR NOTES OFFERING
SECURITIES................. We are offering (the "Senior Notes Offering") 6.45%
Senior Notes due November 30, 2001 (the "Senior
Notes").
PRINCIPAL AMOUNT........... $400,000,000
MATURITY DATE.............. November 30, 2001
INTEREST RATE.............. 6.45% per annum, accruing from November 25, 1998.
INTEREST PAYMENT DATES..... Each May 31 and November 30, beginning May 31,
1999.
REDEMPTION................. The Senior Notes are not redeemable prior to
maturity.
RANKING.................... The Senior Notes will rank equal to all of our
other existing and future senior unsecured
indebtedness.
GENERAL INDENTURE
PROVISIONS................. The indenture includes the following provisions:
- The indenture limits our ability to merge or
consolidate with another company, or transfer or
sell all or substantially all of our assets.
- The indenture limits our ability to create
liens.
- The indenture limits our ability to enter into
sale and leaseback transactions.
- The indenture does not, however, limit the
amount of debt that we may issue or provide
holders with any protection should there be a
highly leveraged transaction involving our
company.
MORE INFORMATION ON THE
SENIOR NOTES............... To understand all of the terms of these Senior
Notes, you should read this entire prospectus
supplement, the accompanying prospectus and the
documents incorporated by reference in this
prospectus supplement and the prospectus, including
the indenture.
USE OF PROCEEDS............ We will use the net proceeds from the Senior Notes
Offering to (i) reduce our short-term borrowings,
(ii) pay the transaction fees and expenses and
underwriters' discount of the offering of PEPS
Units and (iii) pay the premium amount paid in
conjunction with the purchase of United States
Treasury Notes which form a part of the PEPS Units.
PEPS UNITS................. We offered (the "PEPS Units Offering") 9,310,000
8.25% Premium Equity Participating Securities
Units -- PEPS(SM) Units (the "PEPS Units")
concurrently with the Senior Notes Offering.
RISK FACTORS
You should carefully consider all the information set forth and
incorporated by reference herein and in the accompanying prospectus and, in
particular, you should read the section entitled "Risk Factors" for a
description of some of the risks involved in investing in the Senior Notes
before purchasing any of the Senior Notes offered hereby.
S-4
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables present summary historical and pro forma financial and
operating data for K N and MidCon. The historical financial data for K N and
MidCon for the year ended December 31, 1997 are derived from their respective
audited financial statements which are incorporated by reference herein. The
historical financial and operating data for K N and MidCon as of and for the
nine months ended September 30, 1998 are derived from unaudited financial
statements which, in our opinion, include all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation of the results
of operations and financial condition for such periods. Results for the nine
months ended September 30, 1998 are not necessarily indicative of results that
may be expected for the entire year. The financial and operating data set forth
below should be read in conjunction with, and are qualified by reference to, the
consolidated historical financial statements of the Company, and related notes
thereto, which are incorporated by reference herein and the "Unaudited Pro Forma
Consolidated Financial Statements" included elsewhere in this prospectus
supplement.
The unaudited pro forma financial data for K N for the year ended December
31, 1997 and for the nine months ended September 30, 1998 assume that the
acquisition of MidCon, the offerings of common stock and debt securities of
varying maturities of the Company in March 1998, the offering of trust preferred
securities of a wholly-owned subsidiary trust in April 1998, the Senior Notes
Offering and the PEPS Units Offering occurred at January 1, 1997 and January 1,
1998, respectively. The unaudited pro forma balance sheet data as of September
30, 1998 assume that the Senior Notes Offering and the PEPS Units Offering had
occurred on that date. The unaudited pro forma balance sheet data do not include
the number of shares of common stock issuable upon settlement of the purchase
contracts which form a part of the PEPS Units on November 30, 2001 (the "Final
Settlement Date"). The pro forma adjustments are based on available information
and certain assumptions that we believe are reasonable. The pro forma financial
data are not necessarily indicative of the financial results that would have
occurred had the acquisition of MidCon, the offerings of common stock and debt
securities of varying maturities of the Company in March 1998, the offering of
trust preferred securities of a wholly-owned subsidiary trust in April 1998, the
Senior Notes Offering and the PEPS Units Offering been consummated on the dates
indicated, nor are they necessarily indicative of future financial results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------- ---------------------------------------
HISTORICAL HISTORICAL
----------------------- -------------------------
K N MIDCON PRO FORMA K N MIDCON(1) PRO FORMA
---------- ---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues............... $2,148,981 $3,045,081 $5,194,062 $3,251,292 $ 268,055 $3,519,347
Operating costs and expenses..... 2,002,869 2,832,648 4,832,762 2,988,524 239,510 3,227,380
---------- ---------- ---------- ---------- ---------- ----------
Operating income................. 146,112 212,433 361,300 262,768 28,545 291,967
Other income and (deductions):
Interest expense............... (43,495) (241,838) (224,921) (178,340) (22,443) (209,340)
Minority interests............. (8,706) -- (22,059) (11,390) (162) (15,832)
Other, net..................... 19,247 23,469 27,703 28,032 1,250 27,461
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes.......................... 113,158 (5,936) 142,023 101,070 7,190 94,256
Income taxes..................... 35,661 (1,426) 45,841 37,398 2,660 34,783
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................ 77,497 (4,510) 96,182 63,672 4,530 59,473
Preferred stock dividends........ 350 -- 350 263 -- 263
---------- ---------- ---------- ---------- ---------- ----------
Earnings available for common
shares......................... $ 77,147 $ (4,510) $ 95,832 $ 63,409 $ 4,530 $ 59,210
========== ========== ========== ========== ========== ==========
Diluted earnings per common
share.......................... $ 2.45 -- $ 2.18 $ 1.50 -- $ 1.31
Number of shares used in
computing diluted earnings
per common share............... 31,538 -- 44,038 42,150 -- 45,309
Dividends per common share....... $ 1.09 -- $ 1.09 $ 0.84 -- $ 0.84
OTHER FINANCIAL DATA:
EBITDA(2)........................ $ 212,647 $ 385,501 $ 574,582 $ 421,608 $ 42,807 $ 458,714
Capital expenditures and
acquisitions................... 429,683 95,598 -- 2,402,601 4,371 --
Depreciation and amortization.... 55,994 149,599 207,638 142,198 13,174 155,118
</TABLE>
S-5
<PAGE> 8
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------
HISTORICAL PRO FORMA
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 25,081 $ 25,081
Current assets............................................ 2,168,747 2,168,747
Investments in U.S. government securities................. 1,088,601 1,088,601
Total assets.............................................. 9,688,521 9,690,671
Current liabilities....................................... 3,055,513 2,683,246
Long-term debt............................................ 2,905,688 3,305,688
K N-obligated mandatorily redeemable preferred capital
trust securities of subsidiary trusts holding solely
debentures of K N....................................... 275,000 275,000
Minority interests in equity of subsidiaries.............. 67,966 67,966
Preferred stock........................................... 7,000 7,000
Common stockholders' equity............................... 1,263,544 1,212,399
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C>
OPERATING DATA:
Miles of pipeline
Interstate.............................................. 16,199
Intrastate.............................................. 8,420
Offshore................................................ 361
Gathering and processing(3)............................. 11,742
Distribution............................................ 7,237
Gas processing plants
Number of plants........................................ 22
Total processing capacity (MMcf per day)................ 1,823
Natural gas storage facilities
Number of storage facilities............................ 16
Total withdrawal capacity (MMcf per day)................ 5,362
</TABLE>
- ---------------
(1) Represents MidCon's results of operations for January 1998. MidCon's results
of operations for the eight months ended September 30, 1998 are included in
K N's historical results of operations.
(2) 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.
(3) Excludes 769 miles of pipeline that is owned but not operated by us.
S-6
<PAGE> 9
BUSINESS SEGMENT ANALYSIS
The following table presents selected unaudited information by business
segment for K N and MidCon. For the nine months ended September 30, 1998, the
MidCon information only includes results for the month of January 1998 because
the K N results for the nine months ended September 30, 1998 include the results
of MidCon for the months of February through September. The combined information
is the result obtained by adding the relevant K N and MidCon results together,
and does not include any pro forma adjustments to reflect the impact of the
acquisition of MidCon by K N. These combined results may not be indicative of
the results which would have been obtained had K N and MidCon been combined as
of an earlier date or the results which may be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1997 SEPTEMBER 30, 1997
------------------------------------ ------------------------------------
K N MIDCON(1) COMBINED K N MIDCON(1) COMBINED
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Upstream........... $ 553,932 $ 52,200 $ 606,132 $ 397,369 $ 42,900 $ 440,269
Midstream.......... 231,108 1,596,400 1,827,508 166,789 1,135,700 1,302,489
Downstream......... 1,669,945 1,606,500 3,276,445 1,026,779 1,031,600 2,058,379
Intersegment
eliminations..... (306,004) -- (306,004) (225,154) -- (225,154)
OPERATING INCOME
(LOSS):
Upstream........... 58,848 (8,700) 50,148 43,671 (5,200) 38,471
Midstream.......... 45,469 328,300 373,769 32,707 207,200 239,907
Downstream......... 41,795 (80,500) (38,705) 23,167 (37,000) (13,833)
Merger-related
costs............ -- -- -- -- -- --
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
-----------------------------------
K N MIDCON(2) COMBINED
---------- --------- ----------
<S> <C> <C> <C>
OPERATING REVENUES:
Upstream........... $ 447,084 $ 2,007 $ 449,091
Midstream.......... 1,079,908 92,883 1,172,791
Downstream......... 2,108,641 194,306 2,302,947
Intersegment
eliminations..... (384,341) (21,140) (405,481)
OPERATING INCOME
(LOSS):
Upstream........... (11,985) 369 (11,616)
Midstream.......... 259,150 45,184 304,334
Downstream......... 21,366 (17,008) 4,358
Merger-related
costs............ (5,763) -- (5,763)
</TABLE>
- ---------------
(1) MidCon's results for the year ended December 31, 1997 and for the nine
months ended September 30, 1997 exclude the results of operations for
businesses which have not been continued by K N.
(2) Represents MidCon's results of operations for January 1998. MidCon's results
of operations for the eight months ended September 30, 1998 are included in
K N's historical results of operations.
S-7
<PAGE> 10
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth our consolidated ratios of earnings to fixed
charges for the periods shown.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- --------------------------------
1998 1997 1996 1995 1994 1993
------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1.43 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 expenses, 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. The ratio of earnings to fixed
charges for the nine months ended September 30, 1998 is not necessarily
indicative of such ratio that would be expected for the full year ended December
31, 1998.
S-8
<PAGE> 11
RISK FACTORS
You should read carefully this entire document, the accompanying prospectus
and the documents incorporated by reference in this document and the prospectus
before investing in the Senior Notes.
WE ARE SUBSTANTIALLY LEVERAGED
We incurred substantial indebtedness in connection with the acquisition of
MidCon. Had such acquisition, the prior offerings in March and April of 1998,
the concurrent PEPS Units Offering and the Senior Notes Offering occurred on or
prior to September 30, 1998, on that date we would have had total debt of
$5,100.7 million ($5,104.4 million if the underwriters' over-allotment option
with respect to the PEPS Units Offering is exercised in full) and stockholders'
equity of $1,219.4 million ($1,211.8 million if such underwriters'
over-allotment option is exercised in full). This amount of stockholders' equity
includes the 8.56% Series B Capital Trust Securities of K N Capital Trust I and
the 7.63% Capital Securities of K N Capital Trust III (the "Capital Securities")
aggregating $275.0 million. Based upon this level of debt and amount of
stockholders' equity, the total debt to total capitalization ratio on September
30, 1998, would have been 77.3% (72.9% if you exclude the U.S. government
securities held as collateral for a portion of the Substitute Note). Assuming a
full exercise of the underwriters' over-allotment option with respect to the
PEPS Units Offering, the total debt to total capitalization ratio on September
30, 1998 would have been 77.4% (73.0% if you exclude the U.S. government
securities held as collateral for a portion of the Substitute Note). We have
refinanced approximately $3.1 billion of borrowings and extensions of credit
under our bank facility with the proceeds from our prior offerings in March and
April of 1998. See "Capitalization" and "Unaudited Pro Forma Consolidated
Financial Statements."
In the future we may incur additional indebtedness, including in connection
with future acquisitions. However, our bank facility limits our ability to incur
additional indebtedness. See "The Acquisition and the Financing
Plan -- Description of Bank Facility."
Our level of leverage may have important consequences on your investment in
the Senior Notes. These consequences include:
- limiting our ability to obtain additional financing, which, in turn, may
affect our ability to fund future working capital requirements, capital
expenditures, debt service requirements, acquisitions and other general
corporate requirements;
- requiring us to use a substantial portion of the cash generated by our
operations to pay principal and interest on our indebtedness, meaning
that we will have less funds available for operations and future business
opportunities;
- placing us at a competitive disadvantage with companies that have a lower
level of leverage; and
- making us more vulnerable to adverse economic and industry conditions;
for example, some of our borrowings are at variable rates of interest. An
increase in interest rates could have a material adverse effect on our
results of operations, liquidity and financial condition.
Our ability to make scheduled payments of principal and interest on our
indebtedness and to refinance our indebtedness depends on our future
performance. We do not have complete control over our future performance,
because it is subject to economic, financial, competitive and other factors. It
is possible that in the future our business may fail to generate sufficient cash
flow from operations to allow us to service our debt and make necessary capital
expenditures. If this situation occurs, we may have to sells assets, restructure
debt or obtain additional equity capital. We can give no assurances that we
could accomplish these strategies or do so without additional expense.
Our bank facility imposes financial and other restrictions on us that:
- limit our total indebtedness in relation to our total capitalization;
- impose minimum net worth requirements; and
- impose minimum EBITDA/interest requirements if the rating of our
long-term senior unsecured debt is reduced below investment grade.
S-9
<PAGE> 12
It is possible that we may fail to meet these restrictions. Such a failure
could result in a default under our bank facility or other indebtedness. A
default under our bank facility could lead to acceleration of our debt that is
subject to cross-acceleration or cross-default provisions. If our debt is
accelerated, we may be unable to refinance or otherwise repay it.
OUR ACQUISITION STRATEGY MAY BE DIFFICULT TO ACHIEVE
A large part of our growth over the last several years has resulted from
acquisitions. A principal part of our strategy is to continue to acquire assets
or businesses that are logical extensions of our existing assets or businesses.
This strategy, however, will not necessarily improve our operating results and
may be difficult to achieve because of the following factors:
- a lack of acceptable acquisition candidates;
- the inability to complete acquisitions on favorable terms;
- a lack of financing; and
- failure to successfully integrate acquired businesses.
We have substantially completed the integration of our historical
operations with those of MidCon. However, we may not achieve the desired levels
of synergies we anticipated when acquiring MidCon. If so, we may fail to achieve
the anticipated levels of revenue growth and cost savings. Such a failure could
have a material adverse effect on our business, results of operations, liquidity
and financial condition.
In acquiring MidCon, we became obligated for some of MidCon's liabilities.
These liabilities relate to environmental matters, employee benefit plans
(including retiree welfare benefits) and insurance plans previously issued to
MidCon by Occidental's insurance subsidiary. Occidental has agreed to indemnify
us for some of these liabilities, but not all of them. For example, the
indemnity covers all liabilities relating to MidCon's stock ownership plan. It
is possible that even with the indemnity from Occidental, some of these assumed
liabilities may adversely effect our results of operations or financial
condition.
Furthermore, additional liabilities relating to MidCon or its affiliates
may arise. If these liabilities occur within one year of the date of the
acquisition, they may be covered by Occidental's indemnity. Such liabilities,
however, may not be covered by the indemnity or may arise after the one-year
period. See "The Acquisition and the Financing Plan."
WE OPERATE IN A COMPETITIVE INDUSTRY
We compete with other pipeline companies, marketers and brokers of varying
size, resources and experience as well as producers who are able to market gas
directly to wholesale end-use markets. The competitive environment is influenced
by several factors including:
- regulatory changes that provide greater access to markets to gas
producers and marketers;
- the greater ability of certain of our markets to switch to alternative
fuels (including fuel oil, coal, propane and electricity) at favorable
prices due to Federal Energy Regulation Commission ("FERC") Order 636 and
state unbundling initiatives; and
- increased pipeline and gas storage capacity in the United States.
It is likely that new projects will be built in the Chicago area, since
Chicago is at the center of the North American pipeline grid. Proposals for
several projects have already been announced or filed with regulatory
authorities. The construction of additional pipeline capacity into Chicago could
have an adverse effect on our financial position and results of operations.
S-10
<PAGE> 13
WE MAY BE ADVERSELY AFFECTED BY FLUCTUATING COMMODITY PRICES
The products of our gas processing activities, including NGLs, residue gas
and related by-products, are commodities. The prices for these commodities can
change materially because of changes in economic and market conditions that are
beyond our control, including:
- changes in supply and demand;
- the availability and prices of alternative energy and feedstock sources;
- government regulation;
- industry-wide inventory levels;
- the seasons and the weather; and
- energy conservation efforts.
A decrease in the difference between NGL and natural gas prices results in
lower margins on volumes processed. This decrease may result in lower volumes of
natural gas processed at some of our plants. We process gas under three types of
contracts, with different degrees of commodity risk: fixed fee, percentage-of-
proceeds and keep-whole. Keep-whole contracts have significant commodity risk.
Under these contracts, we agree to process a certain volume of raw gas and
return gas of equivalent Btu content to the producer. The processed NGLs are
then marketed by us. Because under these contracts we must market the NGLs
produced and cover any shrinkage of the original volume, we are exposed to
increases in the price of natural gas and decreases in the price of NGLs, as
well as the spread between the two. Generally 20% to 40% of the original natural
gas volume is lost to shrinkage. For the nine months ended September 30, 1998,
our keep-whole contracts accounted for approximately 30% of our upstream
segment's total throughput. A sustained reduction of the margin between NGL and
natural gas prices could have a material adverse effect on our natural gas
processing operations.
WE MAY BE ADVERSELY AFFECTED BY THE YEAR 2000 PROBLEM
Most current computer codes and programs store the year 2000 as "00". This
year value can result in inaccurate date-related calculations. It is expected
that once the year 2000 arrives, computer programs that have not been modified
to correct this problem may not function normally. We rely on a number of
automated systems to conduct our operations and transact our business, as is
common among large diversified energy companies. In addition, certain of our
pipeline and processing equipment and related systems contain electric controls
containing embedded chips. These electric controls may also be affected by this
problem.
We are currently evaluating the extent of the year 2000 problem in our
business and we have developed a plan to address each area of concern. Each of
our operating units is in various stages of implementing our plan to deal with
the problem, which includes:
- an assessment of potential problems;
- an inventory of systems and areas which may need to be corrected;
- remediation and implementation, as necessary;
- the testing of such systems; and
- developing contingency plans in case we can not correct the problem in
time.
Specifically, we are in the process of correcting programming code,
replacing non-year 2000-ready embedded chips, installing year 2000-ready
releases of certain vendor-supplied computer systems and, in some cases,
replacing existing systems with new internally or externally developed software
in advance of December 31, 1999.
We have completed an inventory of affected items in the non-information
technology area and are assessing the results. We have begun testing and
currently have found very few impacted items. We expect testing and remediation
to be completed by mid-1999.
For our plan to be successful, we must rely on outside contractors. There
is a risk that those contractors will not complete their work prior to the year
2000. We are developing alternative ways to conduct our
S-11
<PAGE> 14
business if such deadlines are not met. However, any alternative may involve
additional expense and may not be implemented in time to avoid the year 2000
problem. Ultimately, these alternatives may not be successful.
We also rely on suppliers, business partners and other third parties which
may or may not be addressing their own problems associated with the year 2000.
We have started to make inquiries of such third parties to determine what steps
they have taken to correct any year 2000 problems they may have. We have no
control over their efforts, so we have started to develop contingency plans in
case these third parties do not complete their efforts before the year 2000. We
do not believe that the direct costs associated with this problem will be
material to our business, financial condition or results of operations.
As a result of the year 2000 problem, we may lose electricity to our
facilities, lose our telecommunications connection or face interruptions to the
nation's transportation systems. In addition, our key suppliers may experience
their own year 2000 problems in a way that materially adversely affects our
ability to do business without interruption or disruption. As a result of the
cumulative impact of these events, our business may be adversely affected. The
adverse impact of these events occurring can not be quantified at this time. We
are in the process of developing contingency plans to address issues associated
with the reasonably likely worst case scenarios. We expect to have those
contingency plans formulated by the end of June 1999.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the captions "Prospectus Supplement
Summary," "Risk Factors," "Unaudited Pro Forma Consolidated Financial
Statements," "The Company" 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"). Statements that are
predictive in nature, that depend upon or refer to future events or conditions
or that include words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates" and similar expressions are forward-looking statements.
Although we believe that these statements are based upon reasonable assumptions,
we 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 our success in acquiring natural gas facilities, our
ability to achieve desired synergies from the Acquisition, our ability to
successfully integrate other acquisition candidates into our 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.
S-12
<PAGE> 15
USE OF PROCEEDS
The proceeds of the Senior Notes Offering are estimated to be approximately
$397.9 million (net of underwriters' discount, estimated offering expenses and
discount on Senior Notes of approximately $2.1 million). We intend to use these
proceeds to (i) reduce short-term borrowings, (ii) pay the transaction fees and
expenses and underwriters' discount of the PEPS Units Offering estimated to be
approximately $12.76 million and (iii) pay the premium amount of $12.82 million
paid in conjunction with the purchase of the United States Treasury Notes which
form a part of the PEPS Units. As of September 30, 1998, the Company had $755.5
million of short-term borrowings outstanding, with an approximate weighted
average annual interest rate of 5.98%.
S-13
<PAGE> 16
THE ACQUISITION AND THE FINANCING PLAN
THE ACQUISITION
Pursuant to the stock purchase agreement (the "Agreement") for the
acquisition of MidCon (the "Acquisition"), 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 a portion of the proceeds of (i) the offering of
common stock of the Company in March 1998 (the "Equity Offering"), (ii) the
offering of debt securities of the Company of varying maturities in March 1998
(the "Debt Offerings") and (iii) the offering of the Capital Securities in April
1998 (the "Capital Securities Offering" and, together with the Equity Offering
and the Debt Offerings, the "Prior Offerings"). See "-- 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.
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
is 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 $351 million of such amounts have not yet been
refinanced.
S-14
<PAGE> 17
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. As
the final step in the Company's permanent financing of the Acquisition, the
Company is concurrently offering the Senior Notes and 9,310,000 PEPS Units. The
Company will use the net proceeds from this Senior Notes Offering to (i) reduce
short-term borrowings, (ii) pay transaction fees and expenses and underwriters'
discount of the PEPS Units Offering and (iii) pay the premium amount paid in
conjunction with the purchase of United States Treasury Notes which form a part
of the PEPS Units. The Company will not receive any proceeds from the PEPS Units
Offering until settlement of the Purchase Contracts. The Company will repay the
Substitute Note when it comes due with a combination of the U.S. government
securities purchased to collateralize the Substitute Note and borrowings under
the Bank Facility. See "Risk Factors -- We Are Substantially Leveraged." The
following table sets forth the sources and uses of funds in connection with
borrowings under the Bank Facility, the Prior Offerings, the Senior Notes
Offering and the PEPS Units Offering.
<TABLE>
<CAPTION>
PRIOR SENIOR NOTES
OFFERINGS OFFERING AND
AND PEPS UNITS
BORROWINGS OFFERING COMBINED
---------- ------------ --------
(IN MILLIONS)
<S> <C> <C> <C>
SOURCES OF FUNDS:
Proceeds from the Equity Offering......................... $ 650.0 -- $ 650.0
Proceeds from the Debt Offerings.......................... 2,350.0 -- 2,350.0
Proceeds from the Capital Securities Offering............. 175.0 -- 175.0
Borrowings under the Bank Facility........................ 123.2 -- 123.2
Proceeds from the Senior Notes Offering................... -- $400.0 400.0
Proceeds (deficit) of the PEPS Units Offering (before
underwriting fees)..................................... -- (12.8) (12.8)
-------- ------ --------
Total sources..................................... $3,298.2 $387.2 $3,685.4
======== ====== ========
USES OF FUNDS:
Repayment of short-term debt.............................. $2,100.0 $372.3 $2,472.3
Purchase of U.S. government securities as collateral for
the Substitute Note.................................... 1,088.6 -- 1,088.6
Estimated fees, expenses and discount on Senior Notes..... 109.6 14.9 124.5
-------- ------ --------
Total uses of funds............................... $3,298.2 $387.2 $3,685.4
======== ====== ========
</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
(which was reduced by approximately $1.04 billion as of September 30, 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
S-15
<PAGE> 18
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 complete the refinancing
of the indebtedness incurred and extensions of credit under the Bank Facility in
connection with the Acquisition through this Senior Notes Offering. 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 are 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 and 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 a limit on total consolidated
subsidiary debt to 10% of the Company's total consolidated debt, a limitation on
total consolidated debt to 88.4375% percent of total capitalization at the
closing of the Acquisition (74% after the consummation of the Prior Offerings,
the Senior Notes Offering and the PEPS Units 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to spend approximately $300 million on capital
expenditures in 1998, of which $205.3 million had been spent as of September 30,
1998. Of the $300 million budgeted amount, scheduled maintenance, safety and
environmental expenditures are estimated to be $92 million and business growth
or expansion expenditures are estimated to be $208 million. Although the Company
has yet to finalize a budget for 1999, it anticipates that capital expenditures
will be at approximately the same levels as for 1998.
In addition to the foregoing capital expenditures, a Company subsidiary
holds a 50% interest in the TransColorado Gas Transmission Company
("TransColorado"), a joint venture with Questar Pipeline Co. ("Questar"), which
is currently constructing Phase 2 of the 290-mile TransColorado pipeline. The
total projected cost of Phase 2 is $260 million, which will be financed with 30%
equity and 70% debt. TransColorado has secured a $200 million revolving credit
facility for this project. The Company will guarantee 50% of this debt and has
contributed 50% of the equity for this project.
The Company is also committed to fund the remaining purchase price of the
acquisition of the Thermo companies ("Thermo"), whereby the Company acquired
various ownership and operating interests in certain cogeneration facilities, as
well as the right to acquire additional ownership and operating interests in
cogeneration facilities. The total purchase price is $160 million, of which
$34.3 million has been paid to date in the form of Common Stock. The balance of
the purchase price will be paid over the next two years with a combination of
cash and Common Stock, subject to negotiation between the parties. The maximum
amount of cash the Company will be obligated to pay is $62.5 million.
S-16
<PAGE> 19
With the exception of the TransColorado pipeline, the Company plans to
finance its capital expenditure requirements primarily with internally generated
cash flow and its existing working capital facilities. At September 30, 1998,
the Company had a $1.0 billion working capital facility (consisting of the $600
Million Facility and the $400 Million Facility, each as described herein) for
general corporate purposes, including to back up the Company's $750 million
commercial paper program. As of September 30, 1998, the Company had $100 million
outstanding under its working capital facility and $655.5 million of commercial
paper issued and outstanding. As of September 30, 1998, the combined weighted
average annual interest rate of such short-term borrowings was 5.98%. The
Company will use the U.S. government securities and borrowings under its Bank
Facility to repay the Substitute Note in January 1999.
The Company is currently negotiating the refinancing of the $600 Million
Facility which expires on January 29, 1999. Although there can be no assurances,
the Company expects to receive commitments to fund the refinancing by the end of
1998.
S-17
<PAGE> 20
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
K N at September 30, 1998 (i) on a historical basis and (ii) as adjusted for the
Senior Notes Offering and application of the net proceeds therefrom and the PEPS
Units Offering. See "The Acquisition and the Financing Plan." This table should
be read in conjunction with the consolidated financial statements of K N
incorporated by reference herein and the "Unaudited Pro Forma Consolidated
Financial Statements" and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------------------
ADJUSTMENTS AS ADJUSTED
FOR THE FOR THE
SENIOR NOTES OFFERING SENIOR NOTES OFFERING
K N AND THE AND THE
HISTORICAL PEPS UNITS OFFERING PEPS UNITS OFFERING
---------- --------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities held as collateral for Substitute Note(1)..... $1,088,601 $1,088,601
========== ==========
Short-term debt:
Current maturities of long-term debt................... $ 16,952 $ 16,952
Borrowings under Bank Facility
and commercial paper program......................... 755,499 (397,850)(2) 383,232
12,760(5)
12,823(5)
Substitute Note due January 4, 1999.................... 1,394,846 1,394,846
---------- ----------
Total short-term debt............................ $2,167,297 $1,795,030
========== ==========
Long-term debt........................................... $2,905,688 400,000(2) $3,305,688
K N-obligated mandatorily redeemable preferred capital
trust securities of subsidiary trusts holding solely
debentures of K N(3)................................... 275,000 275,000
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
Common stock (150,000,000 shares authorized, 45,033,635
shares outstanding)(4)............................... 225,168 225,168
Additional paid-in capital............................. 839,822 (25,562)(5) 788,677
(12,760)(5)
(12,823)(5)
Retained earnings...................................... 211,427 211,427
Deferred compensation.................................. (11,169) (11,169)
Treasury stock......................................... (1,704) (1,704)
---------- ----------
Total stockholders' equity........................... 1,270,544 1,219,399
---------- ----------
Total capitalization............................. $4,451,232 $4,800,087
========== ==========
</TABLE>
- ---------------
(1) 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 4, 1999
and is collateralized by a combination of letters of credit issued under the
L/C Facility and U.S. government securities.
(2) Gives effect to the issuance of $400.0 million of Senior Notes offered in
the Senior Notes Offering and application of the $397.9 million of net
proceeds to reduce short-term debt.
(3) The sole assets of the trusts are debentures of K N. Upon prepayment of such
debentures, the related capital securities will be mandatorily redeemable.
(4) This table does not include the number of shares of common stock, par value
$5.00 per share, of the Company (the "Common Stock") issuable from the PEPS
Units Offering upon settlement of the purchase contracts which form a part
of the PEPS Units on the Final Settlement Date.
(5) Represents (i) the present value of contract fees payable to holders of PEPS
Units by the Company (the "Contract Fees") of $25.6 million, (ii)
transaction fees and expenses and underwriters' discount on the PEPS Units
Offering of $12.76 million and (iii) the premium of $12.82 million paid in
conjunction with the purchase of the Treasury Notes which form a part of the
PEPS Units (both (ii) and (iii) will be paid from the proceeds of the Senior
Notes Offering). Contract Fees are payable semi-annually at an assumed rate
of 2.375% of the stated amount of the PEPS Units. The present value of the
Contract Fees payable to holders of PEPS Units was calculated using an
assumed discount rate of 6.45%.
S-18
<PAGE> 21
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed balance sheet as of September 30, 1998 is
presented as if the Senior Notes Offering and the PEPS Units Offering had
occurred on that date. The unaudited pro forma condensed balance sheet as of
September 30, 1998 does not include shares of Common Stock of the Company
issuable from the PEPS Units Offering upon settlement of the purchase contracts
which form a part of the PEPS Units on the Final Settlement Date. The unaudited
pro forma condensed statements of income for the year ended December 31, 1997
and for the nine months ended September 30, 1998 assume that the Acquisition,
the Prior Offerings, the Senior Notes Offering and the PEPS Units Offering
occurred at January 1, 1997 and at January 1, 1998, respectively. 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
statements of income are not necessarily indicative of the financial results
that would have occurred had the Acquisition, the Prior Offerings, the Senior
Notes Offering and the PEPS Units Offering been consummated on the date
indicated, nor are they 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
after September 30, 1998 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.
S-19
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
THE SENIOR NOTES
OFFERING
AND THE
PEPS UNITS
HISTORICAL OFFERING PRO FORMA
---------- ----------------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 25,081 $ 25,081
Restricted Deposits....................................... 44,291 44,291
U.S. Government Securities................................ 1,088,601 1,088,601
Accounts Receivable....................................... 625,270 625,270
Materials and Supplies.................................... 43,906 43,906
Gas in Underground Storage................................ 158,745 158,745
Prepaid Gas............................................... 6,646 6,646
Other Prepaid Expenses.................................... 23,726 23,726
Gas Imbalances and Other.................................. 152,481 152,481
---------- ----------
2,168,747 2,168,747
Investments................................................. 293,931 293,931
Property, Plant and Equipment............................... 7,732,136 7,732,136
Accumulated Depreciation and Amortization................... (679,906) (679,906)
---------- ----------
Net Property, Plant and Equipment........................... 7,052,230 7,052,230
Deferred Charges and Other Assets........................... 173,613 2,150(a) 175,763
---------- --------- ----------
Total Assets........................................ $9,688,521 $ 2,150 $9,690,671
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt...................... $ 16,952 $ 16,952
Notes Payable............................................. 755,499 $(397,850)(a) 383,232
12,760(b)
12,823(b)
Substitute Note........................................... 1,394,846 1,394,846
Accounts Payable.......................................... 430,947 430,947
Accrued Expenses.......................................... 86,049 86,049
Accrued Taxes............................................. 39,142 39,142
Payable for Purchase of Thermo Companies.................. 121,074 121,074
Gas Imbalances and Other.................................. 211,004 211,004
---------- --------- ----------
3,055,513 (372,267) 2,683,246
Deferred Liabilities, Credits and Reserves:
Deferred Income Taxes..................................... 1,691,685 1,691,685
Other..................................................... 422,125 25,562(b) 447,687
---------- --------- ----------
2,113,810 25,562 2,139,372
Long-Term Debt.............................................. 2,905,688 400,000(a) 3,305,688
K N-Obligated Mandatorily Redeemable Preferred Capital Trust
Securities of Subsidiary Trusts Holding Solely Debentures
of K N.................................................... 275,000 275,000
Minority Interests in Equity of Subsidiaries................ 67,966 67,966
Stockholders' Equity:
Preferred Stock........................................... 7,000 7,000
Common Stock.............................................. 225,168 225,168
Additional Paid-in Capital................................ 839,822 (12,760)(b) 788,677
(12,823)(b)
(25,562)(b)
Retained Earnings......................................... 211,427 211,427
Deferred Compensation..................................... (11,169) (11,169)
Treasury Stock............................................ (1,704) (1,704)
---------- --------- ----------
Total Common Stockholders' Equity................... 1,263,544 (51,145) 1,212,399
---------- --------- ----------
Total Stockholders' Equity.......................... 1,270,544 (51,145) 1,219,399
---------- --------- ----------
Total Liabilities and Stockholders' Equity.......... $9,688,521 $ 2,150 $9,690,671
========== ========= ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
S-20
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ---------------------------
K N ENERGY MIDCON* ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenues........................ $3,251,292 $268,055 $3,519,347
---------- -------- ----------
Operating Costs and Expenses:
Gas Purchases and Other Costs of
Sales................................ 2,518,202 194,382 2,712,584
Operations and Maintenance.............. 282,625 28,200 $ (400)(c) 310,425
Depreciation and Amortization........... 142,198 13,174 (254)(d) 155,118
Taxes, Other Than Income Taxes.......... 39,736 3,754 43,490
Merger and Restructuring Costs.......... 5,763 5,763
---------- -------- -------- ----------
Total Operating Costs and
Expenses...................... 2,988,524 239,510 (654) 3,227,380
---------- -------- -------- ----------
Operating Income.......................... 262,768 28,545 654 291,967
---------- -------- -------- ----------
Other Income and (Deductions):
Interest Expense........................ (178,340) (22,443) (17,022)(e) (209,340)
1,128(f)
4,479(g)
2,858(h)
Minority Interests...................... (11,390) (162) (4,280)(h) (15,832)
Other, Net.............................. 28,032 1,250 (1,126)(f) 27,461
(137)(i)
(20)(h)
(538)(a)
---------- -------- -------- ----------
Total Other Income and (Deductions)....... (161,698) (21,355) (14,658) (197,711)
---------- -------- -------- ----------
Income Before Income Taxes................ 101,070 7,190 (14,004) 94,256
Income Taxes.............................. 37,398 2,660 (5,275)(j) 34,783
---------- -------- -------- ----------
Net Income................................ 63,672 4,530 (8,729) 59,473
Less -- Preferred Stock Dividends......... 263 -- 263
---------- -------- -------- ----------
Earnings Available For Common Stock....... $ 63,409 $ 4,530 $ (8,729) $ 59,210
========== ======== ======== ==========
Diluted Earnings Per Common Share......... $ 1.50 $ 1.31
Number of Shares Used in Computing Diluted
Earnings Per Common Share............... 42,150 3,159(g) 45,309
Dividends Per Common Share................ $ 0.84 $ 0.84**
</TABLE>
- ---------------
* Represents MidCon's results of operations for January 1998. MidCon's results
of operations for the eight months ended September 30, 1998 are included in K
N's historical results of operations.
** Represents K N's historical dividends per common share
See Notes to Unaudited Pro Forma Combined Condensed Financial Statements
S-21
<PAGE> 24
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...................... $2,148,981 $3,045,081 $5,194,062
---------- ---------- ----------
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)(c) 305,298
Depreciation and Amortization......... 55,994 149,599 2,045(d) 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........................ 146,112 212,433 2,755 361,300
---------- ---------- --------- ----------
Other Income and (Deductions):
Interest Expense...................... (43,495) (241,838) 14,267(e) (224,921)
13,537(f)
23,693(g)
8,915(h)
Minority Interests.................... (8,706) -- (13,353)(h) (22,059)
Other, Net............................ 19,247 23,469 (13,507)(f) 27,703
(726)(i)
(63)(h)
(717)(a)
---------- ---------- --------- ----------
Total Other Income and (Deductions)..... (32,954) (218,369) 32,046 (219,277)
---------- ---------- --------- ----------
Income Before Income Taxes.............. 113,158 (5,936) 34,801 142,023
Income Taxes............................ 35,661 (1,426) 11,606(j) 45,841
---------- ---------- --------- ----------
Net Income (Loss)....................... 77,497 (4,510) 23,195 96,182
Less -- Preferred Stock Dividends....... 350 -- 350
---------- ---------- --------- ----------
Earnings Available For Common Stock..... $ 77,147 $ (4,510) $ 23,195 $ 95,832
---------- ---------- --------- ----------
Diluted Earnings Per Common Share....... $ 2.45 $ 2.18
Number of Shares Used in Computing
Diluted Earnings Per Common Share..... 31,538 12,500(g) 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-22
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(a) To record the Senior Notes Offering and application of the net proceeds
to reduce short-term borrowings. Interest on the Senior Notes issued in
the Senior Notes Offering is payable at an annual rate of 6.45%.
(b) To record (i) the present value of Contract Fees payable to holders of
PEPS Units of $25.6 million, (ii) transaction fees and expenses and
underwriters' discount on the PEPS Units Offering of $12.76 million and
(iii) the premium of $12.82 million paid in conjunction with the
purchase of the United States Treasury Notes which form a part of the
PEPS Units (both (ii) and (iii) will be paid from the proceeds of the
Senior Notes Offering). Contract Fees are payable semi-annually at a
rate of 2.375% of the stated amount of the PEPS Units. The present
value of the Contract Fees payable to holders of PEPS Units was
calculated using a discount rate of 6.45%.
(c) To record the pro forma effect of the removal of the administrative
expenses associated with the termination of MidCon's Employee Stock
Ownership Plan instituted in November 1996.
(d) The pro forma adjustment to depreciation and amortization consists of
the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of MidCon's historical
depreciation and amortization............ $(149,599) $(13,174)
K N's recomputed depreciation and
amortization*............................ 151,644 $ 12,920
--------- --------
Total............................... $ 2,045 $ (254)
========= ========
</TABLE>
- ---------------
* The depreciation and amortization is calculated on a property, plant and
equipment balance that 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, amortized over 35 years
(approximately the estimated remaining life of MidCon's interstate pipeline
assets).
(e) The pro forma adjustment to interest expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of MidCon's historical interest expense on
its ESOP Note........................................ $(110,500) $ (9,183)
Elimination of MidCon's historical interest expense on
its $1.6 billion payable to Occidental............... (128,200) (10,533)
Interest Expense at 6.78% on the Debt Offerings......... 159,330 30,120
Interest Expense at 5.8% on the Substitute Note......... 80,873 6,739
Interest Expense at 6.45% on $400 million of long-term
debt from the Senior Notes Offering.................. 25,800 19,350
Interest savings associated with the repayment of $329.2
million outstanding under the 1997 Credit
Agreement............................................ (22,320) (1,860)
Interest savings associated with repayment of short-term
borrowings using proceeds from the Senior Notes
Offering............................................. (24,011) (18,008)
Fee for letter of credit at .625% used to collateralize
the Substitute Note.................................. 4,761 397
--------- --------
Total........................................... $ (14,267) $ 17,022
========= ========
</TABLE>
(f) 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.
(g) To record the issuance of 12,500,000 shares of Common Stock and the
interest income associated with the U.S. government securities
purchased with the net proceeds from the Equity Offering.
(h) To record distribution expense, amortization of issuance costs and the
interest income associated with the U.S. government securities
purchased with the net proceeds from the Capital Securities.
(i) To record the amortization of issuance costs of the Debt Offerings.
(j) 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-23
<PAGE> 26
SELECTED HISTORICAL FINANCIAL INFORMATION FOR K N ENERGY
The selected consolidated historical financial data set forth below as of
and for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 were
derived from the consolidated historical financial statements of K N, including
the notes thereto, which have been audited by Arthur Andersen LLP, independent
certified public accountants. The selected consolidated historical financial and
operating data as of and for the nine months ended September 30, 1998 were
derived from the unaudited consolidated historical financial statements of K N
which, in the opinion of management, include all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation of K N's
consolidated results of operations and financial condition for such periods. The
operating results for the nine months ended September 30, 1998 are not
necessarily indicative of results to be expected for the full fiscal year. The
selected consolidated historical financial and operating data set forth below
should be read in conjunction with, and are qualified in their entirety by, the
consolidated historical financial statements of K N, and the related notes
thereto, which are incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
-------------------------------------------------------------- ENDED SEPTEMBER 30,
1993 1994 1995 1996 1997 1998(1)
---------- ---------- ---------- ---------- ---------- -------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues
Upstream gathering and processing
services........................... (2) (2) $ 215,508 $ 357,533 $ 553,932 $ 447,084
Midstream transportation and storage
services........................... 303,382 266,737 231,108 1,079,908
Downstream retail and marketing
services........................... 869,609 1,164,512 1,669,945 2,108,641
Intersegment eliminations............ (277,101) (348,300) (306,004) (384,341)
---------- ---------- ---------- ----------
Total operating revenues....... $1,048,959 $1,091,277 1,111,398 1,440,482 2,148,981 3,251,292
Operating costs and expenses........... 968,085 1,036,398 996,036 1,305,681 2,002,869 2,988,524
---------- ---------- ---------- ---------- ---------- ----------
Operating income....................... 80,874 54,879 115,362 134,801 146,112 262,768
Other income and (deductions):
Interest expense..................... (30,513) (31,605) (34,211) (35,933) (43,495) (178,340)
Minority interests................... 292 (659) (905) (2,946) (8,706) (11,390)
Other, net........................... (1,185) 2,206 1,326 3,794 19,247 28,032
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes............. 49,468 24,821 81,572 99,716 113,158 101,070
Income taxes........................... 18,599 9,500 29,050 35,897 35,661 37,398
---------- ---------- ---------- ---------- ---------- ----------
Net income............................. 30,869 15,321 52,522 63,819 77,497 63,672
Preferred stock dividends.............. 853 630 492 398 350 263
---------- ---------- ---------- ---------- ---------- ----------
Earnings available for common stock.... $ 30,016 $ 14,691 $ 52,030 $ 63,421 $ 77,147 $ 63,409
========== ========== ========== ========== ========== ==========
Number of shares used in computing
diluted earnings per common share.... 27,424 28,044 28,360 29,624 31,538 42,150
Diluted earnings per common share...... $ 1.09 $ 0.52 $ 1.83 $ 2.14 $ 2.45 $ 1.50
Dividends per common share............. 0.51 0.76 1.01 1.05 1.09 0.84
OTHER FINANCIAL DATA:
Net cash flows from operating
activities........................... $ 67,943 $ 91,212 $ 132,249 $ 75,610 $ 97,503 $ 3,095
EBITDA(3).............................. 124,625 106,704 165,674 186,861 212,647 421,608
Capital expenditures and
acquisitions......................... 148,301 101,742 111,258 267,124 429,683 2,402,601
Depreciation, depletion and
amortization......................... 44,644 50,278 49,891 51,212 55,994 142,198
Ratio of earnings to fixed
charges(4)........................... 2.41x 1.69x 3.07x 3.21x 2.72x 1.43x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------- AS OF SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ---------- -------------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 14,353 $ 20,613 $ 14,254 $ 10,339 $ 22,471 $ 25,081
Current assets.......................... 312,856 279,314 306,799 461,694 576,530 2,168,747
Total assets............................ 1,169,275 1,172,384 1,257,457 1,629,720 2,305,805 9,688,521
Current liabilities..................... 263,331 255,770 329,838 498,616 796,811 3,055,513
Long-term debt.......................... 335,190 334,644 315,564 423,676 553,816 2,905,688
K N-obligated mandatorily redeemable
preferred capital trust securities of
subsidiary trusts holding solely
debentures of K N..................... -- -- -- -- 100,000 275,000
Minority interests in equity of
subsidiaries.......................... 13,775 13,231 14,277 26,333 47,303 67,966
Preferred stock......................... 9,858 8,715 7,572 7,000 7,000 7,000
Common stockholders' equity............. 391,462 393,686 426,760 519,794 606,132 1,263,544
</TABLE>
S-24
<PAGE> 27
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------- SEPTEMBER 30,
1996 1997 1998
----- ----- -------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING DATA:
Upstream:
Gas sales (Bcf)........................................... 60.6 70.7 79.8
Gathered volumes (Bcf).................................... 280.2 303.4 262.8
Natural gas liquid sales (MMGal).......................... 464.6 717.4 672.8
Midstream:
System throughput (Bcf)................................... 529.7 503.2 1,699.5
Downstream:
Gas sales (Bcf)........................................... 439.2 564.1 934.1
Transportation (Bcf)...................................... 19.2 20.4 16.2
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
Miles of pipeline
Interstate................................................ 16,199
Intrastate................................................ 8,420
Offshore.................................................. 361
Gathering and processing(5)............................... 11,742
Distribution.............................................. 7,237
Gas processing plants
Number of plants.......................................... 22
Total processing capacity (MMcf per day).................. 1,823
Natural gas storage facilities
Number of storage facilities.............................. 16
Total withdrawal capacity (MMcf per day).................. 5,362
</TABLE>
- ---------------
(1) Includes MidCon's results of operations for the eight months ended September
30, 1998 following the Acquisition.
(2) The Company restated its segment reporting beginning in 1995.
(3) 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.
(4) Respecting the computation of the ratio of earnings to fixed charges see
"Ratios of Earnings to Fixed Charges" in this prospectus supplement.
(5) Excludes 769 miles of pipeline that is owned but not operated by K N.
S-25
<PAGE> 28
SELECTED HISTORICAL FINANCIAL INFORMATION FOR MIDCON
The selected consolidated historical financial data set forth below as of
and for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 were
derived from the consolidated historical financial statements of MidCon,
including the notes thereto, which have been audited by Arthur Andersen LLP,
independent certified public accountants. The selected consolidated historical
financial and operating data set forth below should be read in conjunction with,
and are qualified in their entirety by, the consolidated historical financial
statements of MidCon, and the related notes thereto, which are 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>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Natural Gas Pipeline Company of America
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 (MMGal)................ 179 124 160 174 136
</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.
S-26
<PAGE> 29
THE COMPANY
OVERVIEW
K N's operations are divided into three business segments, "Upstream",
"Midstream" and "Downstream", which are based on the points in the energy "value
stream" in which such activities are conducted. In general, these segments are
also differentiated by the nature of their processes, their principal suppliers
and their target markets and customers. K N's Upstream operations consist of
natural gas gathering and processing and natural gas liquids ("NGLs") extraction
and marketing. K N's Midstream operations consist of natural gas transportation
and storage as well as bundled sales transactions for K N's interstate and
intrastate pipelines. K N's Downstream operations principally consist of energy
marketing and regulated natural gas distribution. The following table presents
historical operating revenues and operating income for each business segment for
both K N and MidCon expressed as a percentage of total operating revenues and
operating income.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1997 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------------------- ------------------------------- -------------------------------
K N MIDCON(1) COMBINED(2) K N MIDCON(1) COMBINED(2) K N MIDCON(3) COMBINED(2)
----- --------- ----------- ----- --------- ----------- ----- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Upstream........... 25.8% 1.6% 11.2% 29.1% 1.9% 12.3% 13.8% 0.7% 12.8%
Midstream.......... 10.8 49.0 33.8 12.2 51.4 36.4 33.2 34.7 33.3
Downstream......... 77.7 49.4 60.6 75.2 46.7 57.6 64.9 72.5 65.4
Intersegment
eliminations..... (14.3) -- (5.6) (16.5) -- (6.3) (11.9) (7.9) (11.5)
----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== ===== ===== =====
OPERATING INCOME:
Upstream........... 40.3% (3.6)% 13.0% 43.9% (3.2)% 14.5% (4.5)% 1.3% (4.0)%
Midstream.......... 31.1 137.3 97.0 32.8 125.6 90.7 98.6 158.3 104.5
Downstream......... 28.6 (33.7) (10.0) 23.3 (22.4) (5.2) 8.1 (59.6) 1.5
Merger-related
expenses......... -- -- -- -- -- -- (2.2) -- (2.0)
----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) MidCon's results for the year ended December 31, 1997 and for the nine
months ended September 30, 1997 exclude the results of operations of
businesses which have not been continued by K N.
(2) The combined information is the result obtained by adding the relevant K N
and MidCon results together, and does not include any pro forma adjustments
to reflect the impact of the acquisition of MidCon by K N.
(3) Represents MidCon's results of operations for January 1998. MidCon's results
of operations for the eight months ended September 30, 1998 are included in
K N's historical results of operations.
UPSTREAM BUSINESS SEGMENT
K N's Upstream segment consists of natural gas gathering and processing and
NGLs extraction and marketing. Within this business segment, the Company owns
and operates approximately 8,800 miles of gathering and processing pipeline in
eleven states and operates 22 gas processing plants in five states, including
the Bushton complex, one of the largest NGL extraction facilities in the United
States. For the nine months ended September 30, 1998, the Company's plants
processed approximately 1.5 Bcf per day of natural gas (and had capacity to
process 1.8 Bcf per day) and produced over 2.4 million gallons of NGLs per day.
Facilities. The Company has an extensive network of gathering and
processing facilities located primarily in the Mid-Continent and Rocky Mountain
states and Texas. Based on average throughput, the Company's largest gathering
operation is its Hugoton Basin system located in Kansas, which gathers
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approximately 540 MMcf per day, making K N the largest gatherer in this basin.
The Hugoton Basin system interconnects with several gas processing plants in the
area, including K N's largest processing plant, Bushton, which K N acquired in
April 1997 and which has approximately 1.0 Bcf per day of processing capacity.
As of December 31, 1997, the Bushton plant accounted for approximately 56% of
the Company's total processing capacity.
In addition to the Hugoton Basin system, the Company's Wattenberg system,
located in northeastern Colorado, includes gathering and interstate transmission
lines with total system throughput of approximately 150 MMcf per day. The
Company's West Texas system, located primarily in western Texas and the Texas
panhandle, includes gathering lines and eight gas processing plants, with total
system throughput of approximately 125 MMcf per day. The Company also owns
gathering facilities in the Powder River, Big Horn and Wind River basins of
Wyoming and the Piceance and Uintah basins of western Colorado and eastern Utah,
with combined gathering throughput of approximately 220 MMcf per day. In
addition, K N owns a 49% equity interest in the Red Cedar Gathering System in
the northern San Juan basin of Colorado, with total system throughput of
approximately 440 MMcf per day. This system is also connected to the Company's
jointly owned Coyote Gulch processing plant and to the Company's TransColorado
pipeline.
In January 1996, K N and Tom Brown, Inc. ("Tom Brown") (in which the
Company has an approximately 10% equity interest) formed Wildhorse Energy
Partners, LLC ("Wildhorse"), a joint venture limited liability company currently
owned 55% by K N and 45% by Tom Brown, to provide gathering, processing, storage
and marketing services to Rocky Mountain oil and gas producers and others.
Pursuant to this joint venture, Tom Brown has dedicated all of its uncommitted
Rocky Mountain gas production to Wildhorse, and the Company has contributed
certain gas marketing contracts and storage contracts.
Contracts and Customers. The Company's gathering and processing facilities
perform a wide range of services for its customers, including gathering gas at
the wellhead or other natural gas field aggregation points, transporting gas and
processing gas to extract NGLs and marketing those NGLs to NGL pipelines, end
users and marketers. The Company's customers primarily include oil and gas
producers, gatherers and transporters. Revenues from the Company's gathering and
processing business are generated through gathering and processing fees charged
to producers or other third parties which are based on negotiated rates. In
addition, revenues are generated through the marketing of NGLs processed at the
Company's plants and the marketing of third party NGLs.
The Company processes gas under three types of contractual arrangements,
each with varying degrees of commodity risk: fixed fee, percentage-of-proceeds
and keep-whole. For the nine months ended September 30, 1998, as a percentage of
total gas throughput, 25%, 45% and 30% of the Company's contracts were fixed
fee, percentage-of-proceeds and keep-whole, respectively. In addition, K N
purchases approximately 6% of the gas it processes at the wellhead and takes
title to the gas. In general, fixed fee contracts are for a term of seven to
twelve years and are based on a flat fee for processing. Fixed fee contracts
eliminate the Company's exposure to commodity price risk for a particular volume
of gas since the producer retains title to the gas and NGLs. Under
percentage-of-proceeds contracts, which are generally for a term of one to ten
years, K N processes the gas and then sells the resulting NGLs and residual gas
at market prices for the producer, while keeping a percentage of the proceeds
for itself. Given the Company's economic interest in a portion of the residual
gas and NGLs, percentage-of-proceeds contracts entail some commodity risk.
Keep-whole contracts entail significant commodity risk. Under these
contracts, which are generally for a term of one to five years, K N agrees to
take a certain volume of raw gas from the producer, process it and return gas of
equivalent Btu content to the producer. The processed NGLs are then marketed by
K N for its own account. As a result of K N's need under keep-whole contracts to
market the NGLs produced and reimburse producers for shrinkage of the gas during
processing (generally in the amount of 20% to 40%), K N is exposed to
fluctuation in both the price of natural gas and NGL prices, as well as the
spread between the two. The "keep-whole" component of such contracts benefits
the Company when the value of the NGLs is greater as a liquid than as a portion
of the residue gas stream. However, when the value of the NGLs is lower as a
liquid than as a portion of the residue gas stream, the Company may be adversely
impacted.
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The recent weakness in NGL prices, coupled with the relative strength of
gas prices, has significantly reduced the margins on K N's keep-whole contracts.
In addition, weak NGL prices overall have hurt the Upstream segment's margins.
In an effort to reduce the fluctuations in margins inherent in processing gas
under keep-whole contracts, the Company has engaged in certain hedging
transactions. Pursuant to its Board of Directors' approved trading policy, the
Company manages its commodity exposure through continued monitoring of its
exposure and maintenance of proper controls in order to ensure compliance with
the volumetric, market-to-market and value-at-risk restrictions contained in the
policy.
MIDSTREAM BUSINESS SEGMENT
K N's Midstream segment consists of natural gas transportation and storage
as well as bundled sales transactions for K N's interstate and intrastate
pipelines. Within this segment, the Company operates over 25,000 miles of
interstate and intrastate natural gas pipelines and associated storage and
supply lines which are strategically located at the center of the North American
pipeline grid. K N's transportation network provides access to the major gas
supply areas in the Gulf of Mexico, the Gulf Coast, the Permian Basin, the Mid-
Continent, the Rocky Mountains and western Canada, as well as the major consumer
markets in the Midwest and along the Gulf Coast.
TRANSPORTATION
Facilities. K N's natural gas transmission business is comprised of both
interstate and intrastate pipelines. These operations are conducted principally
through three major subsidiary pipeline companies: Natural Gas Pipeline Company
of America ("NGPL"), MidCon Texas Pipeline Operator, Inc. ("MidCon Texas") and K
N Interstate Gas Transmission Co. ("K N Interstate"). K N also operates
intrastate systems in West Texas, Colorado and Wyoming.
Through NGPL, K N owns and operates approximately 11,600 miles of
interstate pipelines, field system lines and related facilities, consisting
primarily of two major interconnected transmission pipelines terminating in the
Chicago metropolitan area. The system is powered by 61 compressor stations in
mainline and storage service having an aggregate of approximately 1.0 million
horsepower. NGPL's system has over 1,700 points of interconnection with 31
interstate pipelines, 24 intrastate pipelines and 54 local distribution
companies ("LDCs") and end users, thereby providing significant flexibility in
the receipt and delivery of gas. One of NGPL's primary pipelines, the "Amarillo
Line", originates in the West Texas and New Mexico producing areas and is
comprised of approximately 6,600 miles of mainline and various small-diameter
pipelines. The other major pipeline, the "Gulf Coast Line", originates in the
Gulf Coast areas of Texas and Louisiana and consists of approximately 4,300
miles of mainline and various small-diameter pipelines. These two main pipelines
are connected at points in Texas and Oklahoma by NGPL's 230-mile Amarillo/Gulf
Coast pipeline. In addition, subsidiaries of NGPL own interests in several
regulated natural gas pipeline systems which are accounted for as equity
investments. These pipelines include High Island Offshore System, U-T Offshore
System and Stingray offshore pipeline in the Gulf of Mexico, and the Trailblazer
pipeline which moves gas from production basins in southwestern Wyoming and
northwestern Colorado to Mid-Continent pipelines.
Through MidCon Texas, the Company operates an intrastate pipeline system
principally located in the Texas Gulf Coast area. This pipeline is leased from
Occidental under a 30-year lease which commenced on December 31, 1996. The
system includes approximately 2,600 miles of pipelines, supply lines, sales
laterals and related facilities. The MidCon Texas pipeline system transports
natural gas from producing fields in South Texas, the Gulf Coast and the Gulf of
Mexico to markets in southeastern Texas and, through interconnections with NGPL
and 22 other intrastate and interstate pipelines, to markets throughout the
United States. A subsidiary of MidCon Gas Services Corp. ("MidCon Gas") owns a
separate Texas intrastate pipeline system (the "Palo Duro System") that includes
approximately 400 miles of pipeline and related facilities. The Palo Duro System
is leased to a nonaffiliate.
Through K N Interstate, the Company owns and operates over 6,600 miles of
transmission lines in Wyoming, Colorado, Kansas and Nebraska. The system is
powered by 120 compressor stations in mainline and storage service having an
aggregate of approximately 127,000 horsepower.
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Through the Company's West Texas system, located primarily in western Texas
and the Texas panhandle, the Company provides transportation and storage
services to the Company's affiliated marketing organization and to LDCs,
industrial and irrigation markets. This 4,900 mile pipeline and storage system
is strategically interconnected with eight interstate pipelines in the West
Texas region. Through American Gas Storage, L.P. ("American Gas Storage"), the
Company provides the region's only storage facility with 10 Bcf (3 Bcf salt
dome) of high deliverability storage capability.
Through Rocky Mountain Natural Gas Company and Northern Gas Company, the
Company provides transportation services to the Company's affiliated LDCs as
well as to irrigators, grain dryers, gas producers and industrial customers in
Colorado and Wyoming, respectively. These two systems include approximately
1,400 miles of transmission lines.
In addition, K N is a fifty-fifty joint venture partner with Questar in
TransColorado. The TransColorado pipeline is currently only partially
constructed and operational; however, when completed, the pipeline is expected
to provide the Company with increased flexibility in accessing multiple natural
gas basins in the Rocky Mountain region. The completed pipeline will extend 290
miles from the Piceance Basin in Colorado to Blanco, New Mexico, and will have
an initial capacity of 300 MMcf per day. The Company expects TransColorado to be
fully operational in 1999.
Contracts and Customers. The Company's interstate pipeline system provides
transportation and storage services to affiliates, third-party natural gas
distribution utilities and other shippers. Pursuant to transportation agreements
and FERC tariff provisions, K N offers its customers firm and interruptible
transportation and no-notice services. Under K N's tariffs, firm transportation
customers pay reservation charges each month plus a commodity charge based on
actual volumes transported. Interruptible transportation customers pay a
commodity charge based upon actual volumes transported. Reservation and
commodity charges are both based upon geographical location, time of year and
distance of the transportation service provided. Under no-notice service,
customers pay a fee for the right to have up to a specified volume of natural
gas transported but, unlike with firm transportation service, are able to meet
their peak day requirements without making specific nominations. NGPL's revenues
have historically been higher in the first and fourth quarters of the year,
reflecting higher system utilization during the colder months. During the winter
months, NGPL collects higher transportation commodity revenue, higher
interruptible transportation revenue, winter only capacity revenue and higher
peak rates on certain contracts. In the Midstream segment approximately 79% of
the Company's contracts are scheduled to expire within three years.
NGPL's principal delivery market area encompasses the states of Illinois,
Indiana and Iowa and portions of Wisconsin, Nebraska, Kansas, Missouri and
Arkansas. NGPL is one of the largest transporters of gas to the Chicago market
and the Company believes that its cost of service is one of the most competitive
in the region. In 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 market
during the same period. Given its strategic location at the center of the North
American pipeline grid, the Company believes that Chicago is likely to continue
to be a major natural gas trading hub for the rapidly growing markets in the
Midwest and Northeast.
The top ten customers of NGPL are Northern Illinois Gas (d/b/a Nicor Gas),
The Peoples Gas Light & Coke Company and its utility affiliate Northern Shore
Gas Company, Northern Indiana Public Service Company, Illinois Power Company,
MidAmerican Energy Company, Minnegasco (a division of a subsidiary of Houston
Industries Incorporated), Wisconsin Electric Power Company, Dynegy Inc., Archer
Daniels Midland Company and Amoco Corporation, which together accounted for
approximately 55% of NGPL's transportation and storage revenues during 1997.
Substantially all of NGPL's pipeline capacity to Chicago is committed under firm
transportation contracts ranging from one to five years. As of September 1,
1998, approximately 85% of the total transportation volume committed under the
NGPL's firm transportation contracts had remaining terms of less than three
years. K N continues to actively pursue the renegotiation, extension and/or
replacement of expiring contracts. During 1998, contracts representing 42% of
NGPL's total system capacity are scheduled to expire. As of August 31, 1998, K N
had successfully negotiated contracts for approximately 74% of that capacity at
favorable rates and terms.
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Unlike NGPL, MidCon Texas acts as a merchant provider of natural gas as
well as a transporter. Principal customers of MidCon Texas include the electric
and natural gas utilities that serve the Houston area and industrial customers
located along the Houston Ship Channel and in the Beaumont/Port Arthur area.
Contract terms for the major utilities will expire between 2002 and 2004. Other
contracts vary in length from month-to-month to five or more years. During 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.
The transport and storage customers of K N's West Texas intrastate system
include electric utilities, irrigators, industrials, LDCs and gas marketers.
Approximately 67% of the transport is performed by the Company's marketing
affiliate. Contract terms range from month-to-month to five or more years.
Bundled transport and sales revenue from this system are recorded by the
Company's marketing affiliate.
K N Interstate's primary transport and storage customers include the
Company's affiliates, Missouri Gas Energy, Northwestern Public Service Company,
Utilicorp United Inc. and Chevron Corporation. Approximately 27% of the
contracts expire within one year, 15% expire within one to five years and 58%
expire in more than five years. Over 90% of the system's firm transport capacity
is currently subscribed, with firm transport demand revenues accounting for more
than 90% of the revenues on the system.
STORAGE
Through NGPL, the Company is one of the nation's largest natural gas
storage operators with approximately 600 Bcf of total natural gas storage
capacity, over 200 Bcf of working gas capacity and up to 3.9 Bcf per day of peak
deliverability from its facilities, which are strategically located near the
markets NGPL serves. NGPL owns and operates nine underground storage fields in
four states. These storage assets complement the Company's pipeline facilities
and allow K N to optimize deliveries on its pipelines and meet peak delivery
requirements in its principal markets. NGPL provides firm and interruptible gas
storage service pursuant to storage agreements and FERC-approved tariffs. Firm
storage customers pay a monthly demand charge irrespective of actual volumes
stored. Interruptible storage customers pay a monthly commodity charge based
upon actual volumes of gas stored.
Through MidCon Texas, the Company also developed a salt dome storage
facility located near Markham, Texas with a subsidiary of NIPSCO Industries,
Inc. ("NIPSCO"). The facility has two salt dome caverns and approximately 8.3
Bcf of total storage capacity, over 5.7 Bcf of working gas capacity and up to
500 MMcf per day of peak deliverability. The storage facility is leased by a
partnership in which subsidiaries of MidCon Texas and NIPSCO are equal partners.
MidCon Texas has executed a 20-year sublease with the partnership under which it
has rights to 50% of the facility's working gas capacity, 85% of its withdrawal
capacity and approximately 70% of its injection capacity.
Through K N Interstate, the Company provides storage services to its
customers from its Huntsman Storage Field in Cheyenne County, Nebraska. The
facility has 39.4 Bcf of total storage capacity, 7.9 Bcf of working gas
capacity, and up to 101 MMcf of peak withdrawal capacity.
Through Northern Gas Company, the Company provides storage services in
Wyoming to its customers from its three storage fields, Oil Springs, Bunker Hill
and Kirk Ranch, with a combined 29.7 Bcf of total storage capacity, 11.7 Bcf of
working gas capacity, and up to 36 MMcf of peak withdrawal capacity.
Through Wildhorse, the Company has 10.1 Bcf of total storage capacity in
Pitkin and Mesa Counties in Colorado, 2.7 Bcf of working gas capacity, and up to
15 MMcf of peak withdrawal capacity.
Through American Gas Storage, the Company provides storage services from
two gas reservoirs and three salt caverns located in Gaines County, Texas,
through which the Company has a combined 25.2 Bcf of total storage capacity,
16.4 Bcf of working gas capacity, and up to 500 MMcf of peak withdrawal
capacity.
Through AOG Gas Transmission Co., L.P., the Company provides storage
services from the Stratton Ridge salt dome located in Brazoria County, Texas.
The Company has 10.3 Bcf of total storage capacity, 5.9 Bcf of working gas
capacity, and up to 150 MMcf of peak withdrawal capacity.
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DOWNSTREAM BUSINESS SEGMENT
K N's Downstream operations principally consist of energy marketing,
regulated natural gas distribution, merchant power and distributed generation.
In addition, this segment also includes unregulated retail service and the
supplying of an array of products and services for the deregulated energy market
through EN-able, a fifty-fifty joint venture between K N and PacifiCorp Holdings
Corp. ("PacifiCorp").
ENERGY MARKETING
In the energy marketing area, the Company performs a merchant function
whereby the Company purchases most of its gas supplies at the wellhead, combines
such gas with other supplies of gas, and markets the aggregated gas to
consumers. In addition, the Company provides gas marketing and supply services,
including certain storage services, to producers, various LDCs and end-users.
The Company also arranges the purchase and transportation of producers' excess
or uncommitted gas to end users, acts as shipper or agent for the end users,
administers nominations and provides balancing assistance when needed. A
positive gross margin is received in providing these services.
The Company's natural gas marketing customers include LDCs, industrial,
commercial and agricultural end users, electric utilities, Company affiliates,
and other marketers located both on and off K N's pipeline systems. The
Company's Downstream segment sells an average of approximately 3.3 Bcf of gas
per day to third parties.
Natural gas is purchased by K N's Downstream business segment from various
sources, including gas producers, gas processing plants and pipeline
interconnections. As is customary in the industry, most of the Company's gas
purchase agreements are for periods of one year or less, and many are for
periods of 60 days or less. Various agreements permit the purchaser or the
supplier to renegotiate the purchase price or discontinue the purchase under
certain circumstances. Purchase volume obligations under many of the agreements
utilized by this business segment are generally "best efforts" and do not have
traditional take-or-pay provisions. However, certain agreements require the
Company to prepay for, or to receive, minimum quantities of natural gas. Natural
gas is sold to marketing customers pursuant to short-term agreements with both
fixed and index-based pricing.
In conjunction with its merchant function, the Company engages in price
risk management activities in the energy financial instruments market to hedge
certain of its price and basis risk exposure. The Company buys and sells gas and
crude oil futures 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 trading policy, the
Company manages its commodity exposure through constant monitoring of its
exposure and maintenance of proper controls in order to ensure compliance with
the volumetric, market-to-market and value-at-risk restrictions contained in the
policy.
REGULATED RETAIL SERVICES
The Company's domestic retail natural gas business operates approximately
1,500 miles of intrastate natural gas transmission, gathering and storage
facilities. This segment's intrastate pipeline systems serve industrial
customers and much of the Company's retail natural gas business in Colorado,
Nebraska and Wyoming. As of September 30, 1998, the Company's retail natural gas
business also served over 210,000 customers in Colorado, Nebraska and Wyoming
through approximately 7,200 miles of distribution pipelines. The Company's
intrastate pipelines, distribution facilities and retail sales in Colorado 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 are regulated by each municipality served.
The Company's retail operations in Nebraska, Wyoming and northeastern
Colorado serve areas that are primarily rural and agriculturally based where gas
is used primarily for space heating, crop irrigation, grain drying and
processing of agricultural products. In much of Nebraska, the winter heating
load is balanced by irrigation requirements in the summer and grain drying in
the fall.
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To support its regulated domestic retail business, the Company utilizes its
underground storage facilities to provide gas for load balancing and peak system
demand. Storage services for the Company's retail natural gas services are
provided by three facilities owned in Wyoming, one facility in Colorado owned
and operated by Wildhorse, and a storage facility located in Nebraska and owned
by K N Interstate's interstate pipeline system. The peak natural gas withdrawal
capacity available for the Company's retail business is approximately 103 MMcf
per day.
The Company's regulated domestic retail natural gas business relies on the
Company's interstate pipeline systems, the intrastate pipelines it operates and
third-party pipelines for transportation and storage services required to serve
its markets. The gas supply requirements for K N's regulated domestic retail
natural gas business are met through a combination of purchases from marketing
affiliates and third-party suppliers. In general, the cost of natural gas is
recoverable from the regulated retail customers under existing regulatory rules.
In May 1997, the Mexico Energy Regulatory Commission awarded a franchise to
Gas Natural De Noroeste ("GNN"), a joint venture in which K N has a 75%
interest, to construct and operate an LDC in the cities of Hermosillo, Guaymas
and Empalme in western Mexico. The franchise grants GNN exclusive rights in the
region for 12 years and distribution rights for 30 years. Pursuant to this
franchise, GNN will construct a distribution system to connect at least 26,250
residential, commercial and industrial customers by June 2002. Construction
began in April 1998, with a projected capital investment of $21.3 million. On
September 30, 1998, GNN opened its distribution system and began supplying 2.5
MMcf of natural gas per day to industrial customers. GNN's approved rates of
return are 16.9%, with exchange rate protection for dollar/peso conversion.
UNREGULATED RETAIL SERVICES
EN-able is the energy deregulation "superstore," offering a wide array of
turnkey and individual solutions to the energy industry and others that desire
to compete in a deregulated energy market. EN-able sells a full range of
services through Simple Choice, which in partnership with local utilities
provides consumers an opportunity to purchase more than 30 home, entertainment,
energy and communication products and services with "one call, one bill, and one
check." Through licensing agreements, Simple Choice offers utilities across the
country a means of reinforcing their brand and developing greater customer
loyalty. EN-able is a limited liability company owned equally by K N Energy and
PacifiCorp. EN-able was founded in January 1997 to develop and deliver effective
means of creating more substantial customer relationships to energy providers
across the nation through the Simple Choice brand, and other back office and
marketing support efforts. EN-able's wholly owned subsidiary, Orcom Solutions,
is a leading developer of customer care solutions. EN-able is also considering
the sale of equity ownership interests in Orcom.
POWER SERVICES
K N's new power services businesses position the Company to take advantage
of the rapidly changing energy industry and leverage markets with cross
commodity opportunities in convergent energy markets. The Company plans to
acquire and develop gas-fired, merchant power generation assets, develop and
implement distributive generation strategy, optimize electric activities in K
N's facilities, monitor and participate in industry restructuring and leverage
value stream assets to create new revenue streams. This may include the
combination of the Company's gas marketing subsidiary with power marketing
affiliates of potential joint venture partners.
K N's Thermo acquisition provided K N with its first electric generation
assets as well as the knowledge and expertise of Thermo's management necessary
to undertake the development of merchant power plants along its pipeline assets.
The Company expects to bring the first merchant power plants to market in 1999.
The Company is currently in the process of site selection and permitting for a
510 megawatt power plant in Lake County, Illinois.
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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 affiliate of
the pipeline could sell gas at points of entry into the pipeline system; (ii)
permitting holders of firm capacity to release all or a part of their capacity
for resale by the pipeline either to the highest bidder or, under short-term or
maximum rate releases, to shippers in a prepackaged release, with revenues in
both instances credited to the releasing shipper; (iii) allowing shippers to use
as secondary points other receipt points and delivery points on the system,
subject to the rights of other shippers to use those points as their primary
receipt and delivery points; (iv) the issuance of blanket sales certificates to
interstate pipelines for unbundled services; (v) the continuation of pregranted
abandonment of previously committed pipeline sales and transportation services,
subject to certain rights of first refusal, which should make unused pipeline
capacity available to other shippers and clear the way for excess transportation
services to be reallocated to the marketplace; (vi) requiring that firm and
interruptible transportation services be provided by the pipelines to all
parties on a comparable basis; and (vii) generally requiring that pipelines
derive transportation rates using a straight-fixed-variable rate method which
places all fixed costs in a fixed reservation fee that is payable without regard
to usage, as opposed to the previously used modified fixed-variable method that
allocated a part of the pipelines' fixed costs to the usage fee. The FERC's
stated position is that the straight-fixed-variable method promotes the goal of
a competitive national gas market by increasing the cost of unnecessarily
holding firm capacity rather than releasing it, and is consistent with its
directive to unbundle the pipelines' traditional merchant sales services. Order
636 has been affirmed in all material respects upon judicial review and the
Company's own FERC orders approving its unbundling plans are final and not
subject to any pending judicial review.
NGPL has been a party to a number of contracts that required NGPL to
purchase natural gas at prices in excess of the prevailing market price. As a
result of Order 636 prohibiting interstate pipelines from using their gas
transportation and storage facilities to market gas to sales customers, NGPL no
longer had a sales market
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for the gas it is required to purchase under these contracts. Order 636 went
into effect on NGPL's system on December 1, 1993. NGPL has agreed to pay
substantial transition costs to reform these contracts with gas suppliers. Under
settlement agreements reached by NGPL and its former sales customers, NGPL
recovered from those customers over a four year period beginning December 1,
1993, a significant amount of the gas supply realignment (GSR) costs. The FERC
has also permitted NGPL to implement a tariff mechanism to recover additional
portions of its GSR costs in rates charged to transportation customers that were
not party to the settlements. In July 1996, a Federal appellate court remanded
Order 636 to the FERC for further explanation of aspects of its decision
regarding recovery of GSR costs by interstate pipelines. Because of the
settlements and FERC orders authorizing NGPL's GSR cost recovery mechanism, the
remand is not expected to have any significant impact on NGPL. The FERC has
allowed GSR rates to go into effect on December 1, 1997, subject to refund, to
recover any shortfall in recoveries of GSR costs allocated to interruptible
transportation. However, the FERC rejected NGPL's filing for rehearing that NGPL
be allowed to recoup a portion of any shortfall on title transfers and
interruptible transportation to pooling points.
GATHERING, 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
non-interstate 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 "Prospectus Supplement
Summary -- 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 intrastate pipeline services and assets (including
MidCon Texas') are subject to regulation by the Texas Railroad Commission, the
Wyoming Public Service Commission and the Colorado Public Utilities 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.
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<PAGE> 38
The acquisition of MidCon's interstate natural gas pipeline system has resulted
in a significant increase in the percentage of the Company's assets subject to
regulation by the FERC. See "Prospectus Supplement Summary -- 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 had favored MidCon Gas, which NGPL has
challenged. In July 1997, Amoco and NGPL agreed to a settlement of this
proceeding. Amoco filed to withdraw its complaint subject to the FERC's
procedures. Several intervenors opposed the withdrawal of the complaint and NGPL
filed an answer to that opposition. By orders issued January 16, 1998 (the
"January Order"), the FERC ruled that NGPL had violated certain of the FERC's
regulations regarding its business relationships with its affiliate, MidCon Gas.
Relying upon its authority under the Natural Gas Policy Act, the FERC provided
notice to NGPL that, in addition to other remedial action, it proposed to assess
civil penalties of $8,840,000. Such orders also required NGPL to take certain
other actions, including making a new tariff filing, and imposed certain
restrictions on the sharing of employees by NGPL and MidCon Gas. The FERC
proposed to suspend one-half of the penalty provided that for two years
following the date of the order NGPL does not violate specified sections of the
FERC's regulations. The Company and other parties sought rehearing in February
1998. The Company also made several filings in compliance with the January
Order, including payment of the $4.42 million civil penalty. On March 26, 1998,
the FERC issued an order denying all rehearing requests, including those of
several parties which had argued for more onerous penalties or restrictions. The
Company and the Interstate Natural Gas Association of America sought further
rehearing and clarification in April 1998. On May 27, 1998, the FERC issued an
order denying rehearing, but granting, in part, the petitioners' request for
clarification. The Company has sought judicial review of the FERC's orders in
the U.S. Court of Appeals for the District of Columbia. The Company does not
believe the ultimate resolution of these issues will have a material adverse
affect on its operations and results.
In January 1998, K N Interstate 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. Additional proceedings are
ongoing before the FERC to resolve differences. The Company will pursue a
negotiated resolution of any differences but the Company cannot predict with
certainty whether the
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<PAGE> 39
regulatory proceedings will be resolved through a negotiated settlement or
through administrative litigation. The Company's interstate pipeline business
could be adversely affected by an unsatisfactory outcome.
RETAIL NATURAL GAS SERVICES
Certain of the Company's intrastate pipelines, storage, distribution and/or
retail sales in Colorado, Texas and Wyoming are under the regulatory authority
of each state's utility commission. In Nebraska, certain retail gas sales rates
for residential and small commercial customers are regulated by the municipality
served.
In certain of the incorporated communities in which the Company provides
retail natural gas services, the Company operates under franchises granted by
the applicable municipal authorities. The duration of franchises varies. In
unincorporated areas, the Company's natural gas utility services are not subject
to municipal franchise. The Company has been issued various certificates of
public convenience and necessity by the regulatory commissions in Colorado and
Wyoming authorizing it to provide natural gas utility services within certain
incorporated and unincorporated areas of those states.
Continuing regulatory change will provide energy consumers with increasing
choices among their suppliers. The Company emerged as a leader in providing for
customer choice by filing an application with the Wyoming Public Service
Commission in 1995 to allow 10,500 residential and commercial customers to
choose to purchase the gas from a qualified list of suppliers. The proposal
provided that the Company would continue to provide all other utility services.
In early 1996, the Wyoming Public Service Commission issued an order allowing
the Company to bring competition to these 10,500 residential and commercial
customers beginning in mid 1996. Choosing from a menu of three competing
suppliers, approximately 80% of the Company's customers chose to remain with the
Company. The experience gave the Company early and valuable experience in
competing in an unbundled environment and led to the development of new products
and services 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. KN began to implement this program earlier 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.
The U.S. Environmental Protection Agency (the "EPA") recently published a
final rule addressing regional transport of ground level ozone. The rule affects
22 Eastern and Midwestern states, including Illinois and Missouri in which the
Company operates gas compression facilities. The rule requires reductions in
emissions of nitrogen oxide, a precursor to ozone formation, from various
emission sources, including utility and non-utility sources. The rule requires
that the affected states prepare and submit State Implementation Plans to the
EPA by September 1999, reflecting how the required emissions reductions will be
achieved. Emission controls are required to be installed by May 1, 2003. This
rule will likely result in the Company, as well as its competitors, being
required to install some form of new emissions control technology on certain
equipment it operates. Another generally beneficial impact from the rule is that
it may result in broad increased use of natural gas, as other sources of
nitrogen oxide air emissions, including utilities, seek to achieve the
reductions required under the rule. The rule is new and very detailed, and
requires significant analysis to begin to determine its overall effect on the
Company. In addition, the State Implementation Plans which will effectuate this
rule and have yet to be proposed or promulgated, will also need detailed
analysis before their final impact can be completely ascertained. While
additional capital costs are likely to result from this rule, based on currently
available information, the Company does not believe that these costs will be
material.
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<PAGE> 40
In connection with the Acquisition of MidCon, Occidental indemnified the
Company against certain liabilities, including litigation and the failure of
MidCon to be in compliance with applicable laws, in each case which would have a
material adverse effect on MidCon, for one year following the closing date. To
the extent that an environmental liability of MidCon is not covered by
Occidental's indemnity obligation or, to the extent that matters arise following
the termination of Occidental's indemnification obligation, the Company will be
responsible for MidCon's environmental liabilities. The Company does not expect
that such costs will have a material adverse impact on its business, financial
position or results of operations.
Based on current information and taking into account reserves established
for environmental matters, the Company does not believe that compliance with
Federal, state and local environmental laws and regulations will have a material
adverse effect on the Company's business, financial position or results of
operations. In addition, the clean-up programs in which the Company is engaged
are not expected to interrupt or diminish the Company's operational ability to
gather or transport natural gas. However, there can be no assurances that future
events, such as changes in existing laws, the promulgation of new laws, or the
development of new facts or conditions will not cause the Company to incur
significant costs. A discussion of the environmental matters involving K N
Energy can be found in its Annual Report on Form 10-K for the year ended
December 31, 1997 and its Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998. See "Incorporation of Certain Documents by Reference" in the
accompanying prospectus.
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<PAGE> 41
DESCRIPTION OF THE SENIOR NOTES
The following description of the particular terms of the Senior Notes
offered hereby supplements and, to the extent inconsistent therewith, replaces
the description of the general terms and provisions of the Senior Notes set
forth in the accompanying prospectus under the caption "Description of the Debt
Securities," to which description reference is hereby made. The following
summary is qualified in its entirety by reference to the Senior Debt Indenture
referred to in the accompanying prospectus. Capitalized terms defined in the
prospectus have the same meanings when used herein.
GENERAL
The Senior Notes are offered hereby in an aggregate principal amount of
$400 million. Upon issuance, the Senior Notes will be represented by one or more
registered global certificates ("Global Notes") that will be deposited with, or
on behalf of, the Depositary and will be registered in the name of the
Depositary or its nominee. For so long as the Senior Notes are registered in the
name of the Depositary, or its nominee, the principal and interest due on the
Senior Notes will be payable by the Company or its agent to the Depositary for
payment to its participants for subsequent disbursement to the beneficial
owners. See "-- Book-Entry System" below and "Description of the Debt
Securities -- Provisions Applicable to Both Senior and Subordinated Debt
Securities -- Global Debt Securities" in the accompanying Prospectus.
The defeasance and covenant defeasance provisions of the Senior Debt
Indenture described under the caption "Description of the Debt
Securities -- Provisions Applicable to Both Senior and Subordinated Debt
Securities -- Defeasance and Discharge" and "-- Covenant Defeasance" in the
accompanying prospectus will apply to the Senior Notes.
MATURITY AND INTEREST
The Senior Notes will mature on November 30, 2001 and interest will accrue
from November 25, 1998 at the rate of 6.45% per annum, payable semi-annually on
May 31 and November 30 of each year, beginning May 31, 1999 to holders of record
at the close of business on the fifteenth calendar day (whether or not a
business day) immediately preceding the relevant interest payment date.
REDEMPTION
The Senior Notes will not be redeemable prior to maturity.
BOOK-ENTRY SYSTEM
The Senior Notes will be represented by one or more Global Notes registered
in the name of Cede & Co., the nominee of the Depositary. The Depositary 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. The Depositary
holds securities that its participants (the "Direct Participants") deposit with
the Depositary. The Depositary also facilitates the settlement among Direct
Participants of transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in Direct
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. The Depositary 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 Depositary's
system is also available to others such as securities brokers and dealers, banks
and trust companies that clear through or maintain a custodial relationship with
a Direct Participant, either directly or indirectly (the "Indirect
Participants," and together with the Direct Participants, the "Participants").
The rules applicable to the Depositary and its Participants are on file with the
Securities and Exchange Commission.
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<PAGE> 42
Purchases of the Senior Notes within the Depositary's system must be made
by or through Direct Participants, which will receive a credit for the Senior
Notes on the Depositary's records. The ownership interest of each actual
purchaser of each Senior Note (a "Beneficial Owner") is in turn to be recorded
on the Direct and Indirect Participants' respective records. Beneficial Owners
will not receive written confirmation from the Depositary of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the Direct or Indirect Participant through which the Beneficial Owner
entered into the transaction. Transfers of ownership interests in the Senior
Notes 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 Senior Notes except in the event that
use of the book-entry system for the Senior Notes is discontinued.
To facilitate subsequent transfers, all Senior Notes deposited by Direct
Participants with the Depositary will be registered in the name of Cede & Co.
The deposit of the Senior Notes with the Depositary and their registration in
the name of Cede & Co. effect no change in beneficial ownership. The Depositary
has no knowledge of the actual Beneficial Owners of the Senior Notes; the
Depositary's records reflect only the identity of the Direct Participants to
whose accounts such Senior Notes 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.
Conveyance of notices and other communications by the Depositary 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.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Senior Notes. Under its usual procedures, the Depositary mails an omnibus
proxy (an "Omnibus Proxy") to the Participants 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 the Senior Notes are credited on
the record date (identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Senior Notes will be made to the
Depositary. The Depositary's practice is to credit Direct Participants' accounts
on the relevant payment date in accordance with their respective holdings shown
on the Depositary's records unless the Depositary has reason to believe that it
will not receive payment on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with the securities for the accounts of customers in
bearer form or registered in "street-name," and will be the responsibility of
such Participant and not of the Depositary, the Underwriters, or the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of principal and interest to the Depositary is the
responsibility of the Company or the Paying Agent. Disbursement of such payments
to Direct Participants is the responsibility of the Depositary, and disbursement
of such payments to the Beneficial Owners is the responsibility of Direct and
Indirect Participants. Global Notes will settle in immediately available funds
in the secondary trading market.
The Depositary may discontinue providing its services as securities
depository with respect to the Senior Notes at any time by giving reasonable
notice to the Company. Under such circumstances and in the event that a
successor securities depository is not obtained, Senior Notes certificates are
required to be printed and delivered. In addition, the Company may decide to
discontinue use of the system of book-entry transfers through the Depositary (or
a successor securities depository). In that event, Senior Notes certificates
will be printed and delivered.
The Company will not have any responsibility or obligation to Participants
or the persons for whom they act as nominees with respect to the accuracy of the
records of the Depositary, its nominee or any Direct or Indirect Participant
with respect to any ownership interest in the Senior Notes, or with respect to
payments to or providing of notice for the Direct Participants, the Indirect
Participants or the Beneficial Owners.
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<PAGE> 43
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 Company has
agreed to sell to them, the respective number of the Senior Notes set forth
opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NAME SENIOR NOTES
---- ------------
<S> <C>
Morgan Stanley & Co. Incorporated........................... $160,000,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 100,000,000
Goldman, Sachs & Co. ....................................... 40,000,000
Salomon Smith Barney Inc. .................................. 40,000,000
Jefferies & Company, Inc. .................................. 20,000,000
NationsBanc Montgomery Securities LLC....................... 20,000,000
Petrie Parkman & Co., Inc. ................................. 20,000,000
------------
Total............................................. $400,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Senior Notes 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 Senior Notes offered
hereby, if any are taken.
The Underwriters initially propose to offer part of the Senior Notes
directly to the public at the public offering price set forth of the cover page
hereof and part to certain dealers at prices that represent a concession not to
exceed .200% of the principal amount of the Senior Notes. Any Underwriter may
allow, and any such dealers may reallow, a concession to certain other dealers
not to exceed .125% of the principal amount of the Senior Notes. After the
initial offering of the Senior Notes, the offering price and other selling terms
may from time to time be varied by the Underwriters.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Company does not intend to apply for listing of any of the Senior Notes
on a national securities exchange, but has been advised by the Underwriters that
they presently intend to make a market in the Senior Notes, as permitted by
applicable laws and regulations. The Underwriters are not obligated, however to
make a market in the Senior Notes 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 Senior
Notes.
The settlement date for the purchase of the Senior Notes will be November
25, 1998, as agreed upon by the Company and the Underwriters pursuant to Rule
15c6-1 of the Exchange Act.
In order to facilitate the offering of the Senior Notes, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Senior Notes. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Senior Notes for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Senior Notes, the Underwriters may bid for, and purchase, the
Senior Notes in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Senior Notes in the offering, if the syndicate repurchases previously
distributed Senior Notes 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 Senior Notes above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
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<PAGE> 44
The Company has 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, it will not offer, sell, contract to
sell or otherwise dispose of any debt securities of the Company or warrants to
purchase or otherwise acquire debt securities of the Company which are
substantially similar to the Senior Notes, except for the Senior Notes,
commercial paper issued in the ordinary course of business or with the prior
written consent of Morgan Stanley & Co. Incorporated.
The Underwriters or their affiliates have performed various investment or
commercial banking services for the Company in the past and may do so from time
to time in the future. Morgan Stanley & Co. Incorporated, Petrie Parkman & Co.,
Inc. and Salomon Brothers Inc (a predecessor-in-interest of Salomon Smith Barney
Inc., one of the Underwriters) 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, the Equity
Offering and the Capital Securities Offering and received customary compensation
therefor. Merrill Lynch, Pierce, Fenner & Smith Incorporated participated as an
underwriter in the Equity Offering and received customary compensation therefor
and served as an underwriter of the Company's public offering of debentures in
October 1997. Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith
Incorporated were initial purchasers of the 8.56% Capital Trust Securities of K
N Capital Trust I in April 1997, and received customary compensation therefor.
Goldman, Sachs & Co. participated as an underwriter in the Equity Offering and
received customary compensation therefor. Petrie Parkman & Co., Inc.
participated as an underwriter in the Equity Offering and the Capital Securities
Offering and received customary compensation therefor. Each of Smith Barney Inc.
(a predecessor-in-interest of Salomon Smith Barney Inc., one of the
Underwriters) and Jefferies & Company, Inc. participated as an underwriter in
the Equity Offering and received customary compensation therefor. NationsBanc
Montgomery Securities LLC participated as an underwriter in the Debt Offerings
and received customary compensation therefor. NationsBanc Montgomery Securities
LLC also serves as a syndication agent under the Bank Facility, under which
NationsBank, N.A., an affiliate of NationsBank Montgomery Securities LLC, is a
lender. The Underwriters are also participating as underwriters in the Company's
concurrent PEPS Units Offering and expect to receive customary compensation
therefor. The proceeds of the sale of the Senior Notes will be used to reduce
indebtedness under the Bank Facility. Because more than 10% of the net proceeds
of the Senior Notes Offering may be paid to affiliates of members of the
National Association of Securities Dealers, Inc. (the "NASD"), the Senior Notes
Offering is being made pursuant to Rule 2710(c)(8) of the Conduct Rules of the
NASD.
S-42
<PAGE> 45
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
Certain legal matters with respect to the Senior Notes will be passed upon
for the Company by Simpson Thacher & Bartlett, New York, New York, Polsinelli,
White, Vardeman & Shalton, Kansas City, Missouri and Martha B. Wyrsch, General
Counsel of the Company (who as of August 31, 1998 owned 3,253 shares of Common
Stock, 4,200 shares of restricted Common Stock and held options to purchase an
additional 90,549 shares of Common Stock). Certain legal matters will be passed
upon for the Underwriters by Davis Polk & Wardwell, New York, New York. Martha
B. Wyrsch, Simpson Thacher & Bartlett and Davis Polk & Wardwell will rely on
Polsinelli, White, Vardeman & Shalton as to matters of Kansas law.
S-43
<PAGE> 46
PROSPECTUS
$1,419,500,100
K N Energy, Inc.
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
TRUST DEBENTURES
DEBT SECURITIES
COMMON STOCK
K N Capital Trust II
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
Debt Securities (as defined below), 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 II ("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 $1,419,500,100 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.
------------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF THE SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
------------------------
October 19, 1998
<PAGE> 47
(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 (as defined below) 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> 48
(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 two 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> 49
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 Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998 and June 30, 1998;
(c) 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, March 6, 1998, April 24, 1998, June 5, 1998, October 7,
1998 and October 9, 1998; and
(d) 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 (amended
and restated on June 1, 1998) 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
4
<PAGE> 50
in its entirety (as so amended and restated, 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 will 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 (as defined below), K N Energy, as borrower, will pay all
fees and expenses related to the Trust and the offering of the Trust Securities.
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> 51
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>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- --------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1.43 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. The ratio of earnings to fixed
charges for the six months ended June 30, 1998 is not necessarily indicative of
such ratio that would be expected for the full year ended December 31, 1998.
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<PAGE> 52
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> 53
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 will be senior to its
7.63% Junior Subordinated Debentures due April 15, 2028 (the "1998 Subordinated
Trust Debentures"), which were issued in April 1998 in the aggregate principal
amount of $180,500,000, 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, and the obligations of K N Energy under the
Guarantee will be senior to its guarantee (the "1998 Guarantee") in relation to
the 7.63% Capital Securities of K N Capital Trust III (the "1998 Capital
Securities"), which were issued in April 1998 in the aggregate liquidation
amount of $175,000,000.
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 dates on which any such interest shall be payable (the
"Interest Payment Dates"), 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
(the "Redemption Price") 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
8
<PAGE> 54
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 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
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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 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 of acceleration 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)
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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 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
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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)
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.
Wilmington Trust Company is also the trustee under the indenture relating
to the 1997 Subordinated Trust Debentures and the 1998 Subordinated Trust
Debentures. Pursuant to the Trust Indenture Act, should a default occur with
respect to any of the 1997 Subordinated Trust Debentures, the 1998 Subordinated
Trust Debentures or the Trust Debentures, then Wilmington Trust Company would be
required to resign as trustee under one of the indentures within 90 days of such
default, unless such defaults were cured, duly waived or otherwise eliminated.
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.
Wilmington Trust Company is also the trustee under the 1997 Guarantee and
the 1998 Guarantee. Pursuant to the Trust Indenture Act, should a default occur
with respect to any of the 1997 Guarantee, the 1998 Guarantee or the Guarantee,
then Wilmington Trust Company would be required to resign as trustee under one
of the guarantees within 90 days of such default, unless such default were
cured, duly waived or otherwise eliminated.
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.
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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.
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 U.S. Bank 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 U.S. Bank Trust National Association, as
successor 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." U.S. Bank 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
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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 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
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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.
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
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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 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.
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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 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.
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(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 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
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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 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)
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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 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. U.S. Bank 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, U.S. Bank
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.
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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 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
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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)
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
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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 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
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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 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 150,000,000 shares of Common Stock, of
which 44,990,698 were outstanding on July 31, 1998; 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 series of Class A Preferred Stock then outstanding is required for
K N to amend the K N Charter or
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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
two-thirds 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 of which a majority of the outstanding shares of voting
securities is owned by K N and its subsidiaries;
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(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 Common Stock (or Preferred Shares) in mandatory redemption of, and in
exchange for, all or part of the then
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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
First Chicago Trust Company 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 Purchase Contracts. The Stock Purchase Contracts
may be issued separately or as Stock Purchase Units
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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.
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
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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 deemed to
be an underwriter, as that term is defined in the Securities Act, of the
Securities so offered and sold.
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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.
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.
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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, 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 August 31, 1998, Ms. Wyrsch owned 3,253 shares of Common
Stock, 4,200 shares of restricted Common Stock and held options to purchase an
additional 90,549 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, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, 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, 1997, 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, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, incorporated in this Prospectus and elsewhere in the
Registration Statement by reference to the Current Report on Form 8-K/A filed
with the Commission on February 12, 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]
