K N ENERGY INC, DEF 14A, 1998-03-16

K N ENERGY INC
DEF 14A, 1998-03-16
NATURAL GAS TRANSMISISON & DISTRIBUTION

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<PAGE> 1

SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant /X/

Filed by a Party other than the Registrant / /

Check the appropriate box:

/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement

/ / Definitive Additional Materials

/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

KN Energy, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.

/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

(1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

- --------------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------

(5) Total fee paid:

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/ / Fee paid previously with preliminary materials.

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/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.

(1) Amount previously paid:

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(2) Form, schedule or registration statement no.:

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(3) Filing party:

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(4) Date filed:

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<PAGE> 2

<TABLE>
<S> <C>
[K N ENERGY, INC. LOGO] K N Energy, Inc.
370 Van Gordon Street
P.O. Box 281304
Lakewood, CO 80228-8304
(303) 989-1740
</TABLE>

March 16, 1998

Fellow Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders to
be held at The Westin Central Park South located at 112 Central Park South, New
York, New York, on Thursday, April 16, 1998, at 10:00 A.M., Eastern Daylight
Time.

Please read carefully the accompanying Notice of Annual Meeting and Proxy
Statement which contain details concerning the business to come before the
meeting. You will note that the Board of Directors of the Company recommends a
vote: "FOR" an amendment to the Restated Articles of Incorporation of the
Company increasing the authorized Common Stock, par value $5.00 per share, of
the Company from 50,000,000 shares to 150,000,000 shares; "FOR" the
authorization of an additional 1,600,000 shares of Common Stock for issuance
under the Company's 1994 Long-Term Incentive Plan; "FOR" the authorization of an
additional 1,000,000 shares of Common Stock for issuance under the Company's
1990 Employee Stock Purchase Plan; and "FOR" the reelection of five directors,
four directors for terms of three years each and one director for a term of one
year.

As in the past, in the election of directors, you may vote either for or
against all persons nominated by the Board by checking the appropriate box. If
you wish to vote for some but not all of the persons nominated, mark the
"Exceptions" box and write the name of the nominees for whom you do not wish to
vote in the space provided.

To be sure that your shares will be voted, whether or not you plan to
attend the meeting in person, please complete, sign, date and mail the
accompanying Proxy in the enclosed return envelope promptly. If you then do
attend the meeting, your Proxy will be returned to you if you wish to vote in
person.

Very truly yours,

/s/ LARRY D. HALL

LARRY D. HALL
Chairman of the Board
<PAGE> 3

K N ENERGY, INC.
370 VAN GORDON STREET
P.O. BOX 281304
LAKEWOOD, CO 80228-8304
(303) 989-1740

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

The Annual Meeting of Shareholders of K N Energy, Inc. will be held at The
Westin Central Park South located at 112 Central Park South, New York, New York,
on Thursday, April 16, 1998, at 10:00 A.M., Eastern Daylight Time, for the
following purposes:

1. To elect five Class II Directors, with four directors to serve
terms of three years each and one director to serve a one-year term.

2. To consider and vote upon a proposal to amend the Restated Articles
of Incorporation of the Company to increase the authorized Common Stock,
par value $5.00 per share, of the Company from 50,000,000 shares to
150,000,000 shares.

3. To consider and vote upon a proposal to increase the number of
shares authorized for issuance under the 1994 K N Energy, Inc. Long-Term
Incentive Plan.

4. To consider and vote upon a proposal to increase the number of
shares authorized for issuance under the 1990 Employee Stock Purchase Plan.

5. To transact such other business as may properly come before the
meeting or any adjournment thereof.

Accompanying this Notice of Annual Meeting of Shareholders is a form of
Proxy, a Proxy Statement, and a copy of the Company's 1997 Annual Report to
Shareholders. The 1997 Annual Report to Shareholders is not to be considered
part of the proxy soliciting material.

Only shareholders of record at the close of business on February 20, 1998,
are entitled to vote at the meeting.

A complete list of the shareholders entitled to vote at the annual meeting
will be available for examination by any shareholder, for purposes germane to
the meeting, during ordinary business hours for a period of at least 10 days
prior to the meeting at the Company's offices at 370 Van Gordon Street,
Lakewood, Colorado 80228.

Shareholders who do not intend to be present at the meeting in person are
requested to date and sign the enclosed Proxy and mail it in the enclosed
envelope which does not require postage if mailed within the United States.

IMPORTANT:

PLEASE MARK AND DATE THE PROXY AND SIGN EXACTLY AS YOUR NAME OR NAMES
APPEAR THEREON. IF STOCK IS HELD JOINTLY, SIGNATURE SHOULD INCLUDE BOTH NAMES.
EXECUTORS, ADMINISTRATORS, TRUSTEES, GUARDIANS, CUSTODIANS, CORPORATE OFFICERS
AND OTHERS SIGNING IN A REPRESENTATIVE CAPACITY SHOULD GIVE THEIR FULL TITLES.

MARTHA B. WYRSCH
Vice President, General Counsel
and Secretary

Lakewood, Colorado
March 16, 1998
<PAGE> 4

K N ENERGY, INC.
370 VAN GORDON STREET,
P.O. BOX 281304,
LAKEWOOD, CO 80228-8304
(303) 989-1740

March 16, 1998

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS

This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of K N Energy, Inc. (the "Company" or "K N") of proxies
for use at the Annual Meeting of Shareholders of the Company to be held at 10:00
A.M. Eastern Daylight Time on April 16, 1998, at The Westin Central Park South,
112 Central Park South, New York, New York, and at any adjournment of such
meeting.

Proxies may be revoked at any time before they are voted. Revocation may be
effected in any of the following ways: (i) by instruction to the Secretary
reasonably indicating the shareholder's desire to revoke an existing proxy; (ii)
by appropriately signing and returning to the Company a proxy with a more recent
date than that of the proxy first given; or (iii) by signing and returning a
floor ballot at the meeting of shareholders.

The Proxy Statement and form of Proxy will be first mailed to the
shareholders on or about March 16, 1998.

SHARES OUTSTANDING

Only shareholders of record at the close of business on February 20, 1998,
are entitled to vote at the meeting. On that date the Company had outstanding
the following shares of capital stock: 70,000 shares of Class A $5.00 Cumulative
Preferred Stock, and 32,140,425 shares of Common Stock. Each share of Preferred
and Common Stock has one vote and all shares vote as one class for all matters
to come before the meeting.

The holders of a majority of the issued and outstanding shares of the
Company who are entitled to vote at the meeting must be present at the meeting,
in person or represented by proxy, so that a quorum may be present for the
transaction of business. If a quorum is present at the meeting, the five
nominees for election as directors who receive the greatest number of votes cast
for the election of directors at the meeting by the shares present in person or
by proxy and entitled to vote shall be elected directors. The affirmative vote
of a majority of the outstanding shares entitled to vote at the meeting is
required to adopt the proposed amendment to the Restated Articles of
Incorporation of the Company. Any other matters submitted to a vote of the
shareholders must be approved by the affirmative vote of the holders of a
majority of shares present in person or by proxy and entitled to vote on the
matter. In the election of directors, abstentions will have no effect on the
vote. However, an abstention will have the practical effect of voting against
any other matters since it is one less vote for approval. Broker nonvotes will
have the effect of voting against the proposed amendment to the Restated
Articles of Incorporation and will have no impact on the other matters to come
before the meeting since such Broker nonvotes are not considered "shares
present" for voting purposes. The By-laws of the Company require that directors
be elected by written ballot.

As a matter of policy, proxies, ballots, and voting tabulations that
identify individual shareholders are kept private by the Company. Such documents
are available for examination only by the inspectors of election and certain
personnel associated with processing proxy cards and tabulating the vote. The
vote of any shareholder is not disclosed except as may be necessary to meet
legal requirements.

All properly executed proxies delivered pursuant to this solicitation and
not revoked will be voted at the meeting in accordance with the directions
given. If no specific instructions are given with respect to the matters to be
voted upon, the Proxyholders, who are Larry D. Hall and Martha B. Wyrsch, will
vote the shares covered by proxies received by them for the election of all five
nominees to the Board of Directors, for the
<PAGE> 5

proposal to amend the Restated Articles of Incorporation of the Company to
increase the authorized Common Stock of the Company from 50,000,000 shares to
150,000,000 shares, for the proposals to increase the authorized shares under
the 1994 Long-Term Incentive Plan (the "Incentive Plan") and the 1990 Employee
Stock Purchase Plan (the "Employee Stock Purchase Plan"), and in accordance with
the directors' recommendations on any other matters that may come before the
meeting.

ELECTION OF DIRECTORS (ITEM 1)

The Restated Articles of Incorporation of the Company provide for a Board
of Directors of no fewer than nine nor more than fifteen members (exclusive of
any advisory director), divided into three classes of as nearly an equal number
as possible, the directors in each class being elected for three years. In 1996,
the Company's By-laws were amended to provide that any non-employee director of
the Company must retire from his position as a director at the annual meeting of
shareholders of the Company which next occurs after the director reaches 72
years of age. In 1998, the Company's By-laws were amended to provide a board
position for Charles W. Battey for a period of one year, subject to his
reelection at this meeting. There are currently fifteen members of the Board of
Directors.

Messrs. Charles W. Battey, Larry D. Hall, Richard D. Kinder, John F.
Riordan and H.A. True, III have been nominated for reelection as Class II
directors. Proxies will be voted, unless authority to vote is withheld by the
shareholder, for the election of Messrs. Hall, Kinder, Riordan and True to serve
until the 2001 Annual Meeting of Shareholders and until the election and
qualification of their respective successors, and for the election of Mr. Battey
to serve until the 1999 Annual Meeting of Shareholders. If any such nominee
shall be unable or shall fail to accept nomination or election by virtue of an
unexpected occurrence, proxies may be voted for such other person or persons as
shall be determined by the Proxyholders in their discretion. Proxies cannot be
voted by the Proxyholders for more than the number of nominees named, which is
five persons.

Under the terms of the Company's By-laws, Cabot Corporation ("Cabot"), the
Company's largest shareholder, has the right to nominate a director for election
to the Board of Directors as long as Cabot beneficially owns over 5% of the
voting stock of K N. Cabot has indicated to the Company that it does not intend
to designate a nominee for a board position at this meeting.

Mr. Kinder was elected by the Board of Directors as a Class II Director in
January 1998 to fill one of the two vacancies on the Board of Directors, and
John F. Riordan, the former President and Chief Executive Officer of MidCon
Corp. ("MidCon"), was elected by the Board of Directors in February 1998 as a
Class II Director to fill the other vacancy. K N purchased all of the shares of
MidCon from Occidental Petroleum Corporation on January 30, 1998.

2
<PAGE> 6

The name of each nominee for election as a director at this meeting and of
each director whose term of office will continue after the meeting, and each
individual's business experience, year first elected as director, beneficial
ownership of Company Common Stock, age and relationship to the Company are as
follows:

Charles W. Battey(4) 1971 98,919 66 Director; Chairman(5)
(1989-1996); and Chief
Executive Officer
(1989-1994)
NOMINEES FOR ELECTION FOR TERM OF THREE YEARS EXPIRING IN 2001 (CLASS II)(6)
- ------------------------------------------------------------------------------------------------------------

Larry D. Hall 1984 385,738(7) 55 Chairman(8) (April
1996-Present);
President and Chief
Executive Officer
(1994-Present);
President and Chief
Operating Officer
(1988-1994); Director

Richard D. Kinder(9) 1998 3,200 53 Director (January Chairman and Chief
1998-Present); Executive Officer of
Kinder Morgan Energy
Partners, L.P. (1997
to Present); President
and Chief Operating
Officer of Enron Corp.
(1990 to 1996);
Director of Baker
Hughes, Inc.,
Transocean Offshore
Inc., USA Waste, Inc.
and Kinder Morgan
Energy Partners, L.P.

John F. Riordan(10) 1998 9,866(10) 62 Vice Chairman Chief Executive
(February Officer and President
1998-Present) of MidCon Corp. (1990-
January 1998);
Director and Executive
Vice President of
Occidental Petroleum
Corporation
(1991-January 1998).

H.A. True, III 1991 17,600(11) 55 Director Partner, True
Companies (energy,
agriculture and
financing), Casper,
Wyoming.
</TABLE>

3
<PAGE> 7

Edward H. Austin, Jr. 1994 269,684(12) 56 Director Principal of Austin,
Calvert & Flavin,
Inc., an investment
advisory firm, San
Antonio, Texas.

David W. Burkholder 1984 22,161 55 Director President of Will
Feed, Inc. (cattle
feeding), Willow
Island, Nebraska;
President of Island
Dehy Company, Inc.
(alfalfa dehydration),
Cozad, Nebraska; and
President of
Consolidated Blenders,
Inc. (alfalfa
dehydration),
Hastings, Nebraska.

David M. Carmichael 1994 245,540 59 Director; Vice Director of Tom Brown,
Chairman (July Inc. (1996-Present);
1994-1996)(13) Chairman of the Board
and Chief Executive
Officer of American
Oil and Gas
Corporation
(1983-1994);
President, Chairman of
the Board and Chief
Executive Officer of
American Oil and Gas
Corporation
(1986-1993).

Jordan L. Haines 1983 25,077 70 Director Director of Forest Oil
Corporation; Director
of Qwest
Communications
International Inc.
</TABLE>

4
<PAGE> 8

<TABLE>
<CAPTION>
COMPANY
YEAR SHARES OTHER
FIRST BENEFICIALLY POSITIONS BUSINESS
ELECTED OWNED AS OF HELD EXPERIENCE
AS FEBRUARY 20, WITH THE DURING PAST
NAME DIRECTOR 1998(1)(2) AGE COMPANY(3) 5 YEARS(3)
---- -------- ------------ --- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
William J. Hybl 1988 17,712(14) 55 Director Chairman and Chief
Executive Officer and
Trustee of El Pomar
Foundation (charitable
foundation), Colorado
Springs, Colorado;
Vice Chairman and
Director of Broadmoor
Hotel, Inc., Colorado
Springs, Colorado;
Director and President
of the Garden City
Company; Director of
USAA, San Antonio,
Texas (insurance
company); President,
United States Olympic
Committee (1996-2000);
Director of FirstBank
Holding Co. of
Colorado.
DIRECTORS WHOSE TERMS EXPIRE IN 1999 (CLASS III)
- ------------------------------------------------------------------------------------------------------------

Stewart A. Bliss 1993 12,450 64 Director Financial Consultant
and Senior Business
Advisor, Denver,
Colorado (1993-
Present); Board Member
of Colorado State
Board of Agriculture
(1993-Present); Chief
of Staff to Governor
of Colorado, Denver,
Colorado (1987-1993);
Director of MACTEC.

Robert H. Chitwood 1990 25,200 67 Director President, R.H.
Chitwood Company (oil
and gas production,
investments and
petroleum consulting),
Tulsa, Oklahoma.

Howard P. Coghlan 1981 26,116 70 Director Senior Partner,
Coghlan, Crowson,
Fitzpatrick &
Westbrook, Attorneys
at Law, Longview,
Texas.
</TABLE>

5
<PAGE> 9

James C. Taylor 1994 103,932(16) 60 Director Owner and Operator,
Wytana Livestock
Company, Bozeman,
Montana; Private
investor.
</TABLE>

- ---------------

(1) No Director owns any Preferred Stock of the Company. No director owns
beneficially more than one percent of the outstanding shares of Common
Stock of the Company other than Mr. Hall who beneficially owns 1.2% of the
outstanding Common Stock. In making the computations required in connection
with the preceding statement, with respect to any director who held options
to purchase shares of Common Stock exercisable within 60 days of February
20, 1998, it was assumed that such options had been exercised. The
following number of shares representing such unexercised options were added
to the holdings of each of the following directors: Mr. Austin, 12,000
shares; Mr. Battey, 34,000 shares; Mr. Bliss, 12,000 shares; Mr.
Burkholder, 9,000 shares; Mr. Carmichael, 81,000 shares; Mr. Chitwood,
15,750 shares; Mr. Coghlan, 9,000 shares; Mr. Haines, 16,500 shares; Mr.
Hall, 241,250 shares; Mr. Hybl, 14,250 shares; Mr. Kinder, 3,000 shares;
Mr. Randall, 11,000 shares; Mr. Riordan, 6,666 shares; Mr. Taylor, 11,000
shares; and Mr. True, 12,000 shares.

(2) Unless otherwise indicated, the directors have sole voting and investment
power over the shares listed above, other than shared rights created under
joint tenancy or marital property laws as between the directors and their
respective spouses, if any, and unexercised options.

(3) All of these persons have held such positions for at least five years
unless otherwise indicated.

(4) Mr. Battey is being nominated for a one-year term expiring in 1999.

(5) Mr. Battey retired as Chairman after the 1996 Annual Meeting, but remains
as a K N Director.

(6) R. Gordon Shearer, formerly a Class II Director, resigned as a K N Director
effective December 12, 1997.

(7) Includes 139 shares of Common Stock owned by Mr. Hall's wife, as to which
Mr. Hall disclaims beneficial ownership and over which he has neither
investment nor voting power. Also includes 88,000 restricted shares that
Mr. Hall has the right to vote. Does not include any of the shares
attributable to the K N Energy, Inc. Non-Qualified Benefit Plan Trust of
which Mr. Hall is a beneficiary. The cumulative number of shares
attributable thereto and held by the Trustee thereof as of December 31,
1997 is 4,392 shares.

(8) Mr. Hall assumed the position of Chairman of the Board after the 1996
Annual Meeting.

(9) Mr. Kinder filled a vacancy when he was elected by the Board of Directors
on January 13, 1998.

(10) Mr. Riordan filled a vacancy when he was elected by the Board of Directors
on February 10, 1998. As of February 10, 1998, Mr. Riordan was granted
stock options to purchase 20,000 shares of Common Stock, vesting in
one-third increments, with the first third immediately vested, and 3,000
shares of restricted stock vesting in one-third increments beginning in
1999. Mr. Riordan has the right to vote all such 3,000 restricted shares.
The stock options were granted at 100% of the fair market value of the
Common Stock as of the date of grant.

6
<PAGE> 10

(11) Mr. True has sole voting and investment power over 5,450 shares.

(12) Includes shares of Common Stock owned by various family members or their
estates, over which Mr. Austin either has power of attorney or with respect
to which Mr. Austin is executor; family trusts; a family partnership and a
hedge fund partnership, for both of which Mr. Austin is general partner.
Mr. Austin has sole voting power over 61,635 shares; shared voting power
over 77,249 shares; and shared investment power over 118,800 shares.

(13) Mr. Carmichael retired as Vice Chairman after the 1996 Annual Meeting, but
remains as a K N Director.

(14) Includes 400 shares of Common Stock owned by Mr. Hybl's wife, as to which
Mr. Hybl disclaims beneficial ownership and over which he has neither
investment nor voting power.

(15) Includes 181,748 shares of Common Stock owned by various family trusts as
to which Mr. Randall disclaims beneficial ownership. Mr. Randall has shared
voting and investment power over 64,936 shares and sole voting and
investment power over 186,268 shares.

(16) Mr. Taylor has sole voting and investment power over 74,882 shares and
shared voting and investment power over 18,050 shares.

Mr. Edward H. Austin, Jr. is married to the niece of Mr. James C. Taylor.
No other family relationships exist between any director, executive officer, or
person nominated or chosen by the Company to become a director or executive
officer.

RELATIONSHIP BETWEEN CERTAIN DIRECTORS AND THE COMPANY

Mr. Stewart A. Bliss, a Director of the Company, shared office space with
and provided business development consulting services to the law firm of Parcel,
Mauro & Spaanstra in 1997, which firm was retained by the Company in 1997, and
provided in excess of $60,000 in services to the Company. Mr. Bliss is neither a
member of, nor counsel to, the above named law firm and did not provide legal
services to the Company.

On December 30, 1997, Mr. Hall, the Chairman of the Board, Chief Executive
Officer and President of the Company, executed a promissory note in favor of the
Company in the amount of $120,479 to cover certain tax withholding obligations
for employee stock option exercises and the release of restrictions on
restricted stock. The promissory note is due to be paid in full on June 15,
1998, and bears interest at a rate of 8.5% per annum.

Mr. Howard P. Coghlan, a Director of the Company, is a senior partner at
the law firm of Coghlan, Crowson, Fitzpatrick & Westbrook, which provided $3,137
in services to the Company in 1997.

7
<PAGE> 11

DIRECTOR AND COMMITTEE MEETINGS

The Board of Directors met twelve times during 1997, seven of the meetings
being regularly-scheduled and five being special meetings. During 1997, all
directors attended at least 96% percent of the aggregate meetings of the Board
of Directors and committees thereof on which they served.

During 1997, the Audit Committee was composed of Messrs. Burkholder
(Chairman, January to April), Battey, Chitwood, Taylor, and Shearer (Chairman,
May to December), and it met four times in 1997. The duties of the Audit
Committee include recommendation of the independent auditor for selection by the
Board of Directors, review of the arrangements and scope of the independent
auditor's audit, review of the findings and recommendations of the independent
auditor and internal auditors concerning internal accounting procedures and
controls, review of professional services rendered by the independent auditor,
review of the independence of the auditor in regard to the Company and its
management and review of the Company's risk management policies and procedures.

The Compensation Committee during 1997 was composed of Messrs. Randall
(Chairman, January to April), Austin, Bliss (Chairman, May to December), and
Coghlan. It met five times in 1997. The duties of the Compensation Committee are
set forth in the "Report of the Compensation Committee on Executive
Compensation" which follows.

The Executive Committee, composed of Messrs. Hall (Chairman), Haines, Hybl,
True, and Carmichael met seven times in 1997. The duties of the Executive
Committee consist of oversight and direction of management decisions with
respect to the day-to-day operations of K N and its subsidiaries, and
nominations for Directors of the Board of the Company. The Executive Committee
replaced the Management Committee on April 11, 1996 pursuant to an amendment to
the Company's By-laws.

The Board of Directors does not presently have a separate Nominating
Committee; rather, the Executive Committee serves as the Nominating Committee
for the Board. Pursuant to the Company's By-laws, shareholders may nominate
candidates for the Board of Directors by notifying the Company at its principal
executive offices of the name of such candidate and by furnishing other required
information at least forty days before the shareholders' meeting at which such
election will be held. See also "Date for Receipt of Shareholder Proposals" on
page 33.

DIRECTOR COMPENSATION

A director (except a current employee) receives a retainer of $20,000 per
year, which may be taken in the form of Common Stock or cash, plus a fee of
$1,500 per day for each meeting attended. In addition, beginning in 1998 each
non-employee director receives 200 shares of Common Stock on the first business
day of the calendar year, with the 1998 issuance occurring on February 10, 1998.
Members of the Audit, Compensation and Executive Committees also receive a fee
of $1,500 per day for each committee meeting attended on a day other than that
of a Board meeting. Directors who are full-time employees of the Company receive
no additional compensation in their capacity as director. All directors are
reimbursed for reasonable travel and other expenses incurred in attending all
meetings. Directors who are not also employees or officers may elect to defer
until age 65, and/or until retirement from the Board, all or any portion of
their compensation pursuant to the Deferred Compensation Plan for Outside
Directors or the 1987 Directors' Deferred Fee Plan, which were adopted by the
Company effective May 1, 1984, and May 1, 1987, respectively. The Deferred
Compensation Plan for Outside Directors was amended in November 1995 and
December 1997 to allow Directors to defer their retainer and/or meeting fees in
the form of K N Common Stock or cash equivalency.

Directors who are not also employees participate in the 1992 Stock Option
Plan for Non-Employee Directors ("Directors' Option Plan"), which was amended in
1996. Under the Directors' Option Plan, on the first business day of each
calendar year, each Director who is not a salaried employee of the Company is
granted an option to purchase up to 3,000 shares of the Company's Common Stock.
Options, which vest on the date of grant, may be granted at not less than 100
percent of the fair market value of the Common Stock on the date of grant, but
must be at least the par value of the shares subject to the option, and expire
10 years from the date of grant. Options granted pursuant to the Directors'
Option Plan are not intended to qualify as
8
<PAGE> 12

incentive stock options, but rather are intended to constitute "nonqualified
stock options" as defined by Section 422(b) of the Internal Revenue Code of
1986, as amended (the "Code"). The options become exercisable commencing on the
date of the grant.

On January 2, 1998, options to purchase 3,000 shares each were granted to
Messrs. Austin, Battey, Bliss, Burkholder, Carmichael, Chitwood, Coghlan,
Haines, Hybl, Randall, Taylor and True at an exercise price of $53.9375 per
share, the average sales price of the Common Stock on that date. On January 13,
1998, Mr. Kinder was appointed to the Board of Directors and was granted an
option to purchase 3,000 shares at an exercise price of $54.7188, the average
sales price of the Common Stock on that date.

Non-employee Directors who were elected prior to 1992 received grants under
the 1982 Stock Option Plan for Non-Employee Directors (the "1982 Plan"). Grants
are no longer being made from the 1982 Plan. Under the terms of the 1982 Plan,
each participant was granted options to purchase the number of shares equal to
500 times the number of years or partial years in the term to which he was
elected, which were exercisable in one-third increments annually over the
succeeding three-year period.

At the request of the Company, Mr. David M. Carmichael is a Director of Tom
Brown, Inc. The Company pays Mr. Carmichael the annual Tom Brown, Inc. Board of
Directors fees. In 1997, those fees totaled $48,000.

BOARD RECOMMENDATION

The Board of Directors recommends a vote FOR each of the director nominees.

REPORT OF THE COMPENSATION
COMMITTEE ON EXECUTIVE COMPENSATION

The Company's employees are the most important and valued asset it has. Its
senior executives are responsible for developing and driving a business strategy
for sustained growth and enhanced rates of return that results in maximum value
to the shareholders of the Company. Fiscal year 1997 was a unique year for the
Company. The Board of Directors and the Company's senior executives targeted as
a primary objective the identification and acquisition of a significant business
opportunity, and achieved it. The Company's acquisition of MidCon in January
1998 resulted in a combined company with $8.2 billion in assets and $5.2 billion
in operating revenues. It is the goal and obligation of the Compensation
Committee and the Board of Directors to attract and retain highly qualified
people with the skills to manage opportunities and create shareholder value, and
the compensation philosophy discussed in this Report is aimed at creating
shareholder value by tying the compensation of the senior executives of the
Company to increases in that value.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors is presently composed
entirely of four independent non-employee directors: Mr. Austin, Mr. Bliss
(Chairman), Mr. Coghlan and Mr. Randall. Mr. Coghlan is a senior partner at the
law firm of Coghlan, Crowson, Fitzpatrick & Westbrook, which provided $3,137 in
services to the Company in 1997. There are no other interlocking relationships
among these directors and K N.

The Compensation Committee is responsible for setting and administering the
policies which govern both annual compensation and long-term compensation of
executive officers. Following review and approval by the Compensation Committee,
all issues pertaining to executive compensation are submitted to the full Board
of Directors for approval.

COMPENSATION COMPONENTS AND PHILOSOPHY

Annual executive compensation is principally comprised of salary and
incentive cash and stock awards. It is the philosophy of the Company that annual
compensation of its executive officers and other key employees should be
directly and materially tied to corporate operating and financial performance.
To achieve this
9
<PAGE> 13

objective, annual executive compensation decisions are weighted towards cash
incentives payable on the basis of such performance. The Company also believes
that long-term executive compensation should be tied to corporate operating and
financial performance. Grants of stock options, and, more recently, restricted
stock awards, have been the principal component of long-term executive
compensation.

The Company's executive compensation components are reviewed periodically
and are under review in 1998 by outside compensation consultants to ensure that
the Company's compensation package operates effectively, remains both reasonable
and competitive with the industry, and is comparable to the compensation offered
by companies of the size and scope of the new combined company.

The Incentive Plan gives the Compensation Committee the flexibility to
recommend that the Board grant both non-qualified and incentive stock options,
restricted stock awards, stock appreciation rights and other stock-based awards.
The Incentive Plan permits the Company to keep pace with changing developments
in compensation and benefit programs, making the Company competitive with those
companies that offer creative incentives to attract and keep employees. The
ability to grant both incentive and non-qualified stock awards enhances the
Compensation Committee's ability to meet the Company's objectives of attracting
and retaining well-qualified individuals to serve as executive officers and key
employees.

Section 162(m) of the Code limits the deductibility of certain compensation
for the Chief Executive Officer and the additional four highest paid executive
officers of the Company to $1 million per year. If certain conditions are met,
including the removal of discretion in determining individual rewards,
compensation may be excluded from consideration of the $1 million limit. Annual
compensation of the Company's individual executive officers has historically
been below $1 million. However, principally due to the acquisition of MidCon, it
is expected that compensation may exceed this limit. The policy of the
Compensation Committee to date is to establish and maintain a compensation
program which maximizes the creation of long-term shareholder value by
recognizing and rewarding performance which increases the value of the Company.
Therefore, the Compensation Committee will continue to base the overall
compensation of its senior executives on Company performance that favorably
impacts shareholder value rather than limit such compensation due to the impact
of Section 162(m). However, the Compensation Committee expects to address this
issue again later in 1998 due to the rapid growth of the Company.

BASE SALARY

Salary decisions are based on achievement of both personal and company-wide
performance objectives as well as recommendations for salary ranges developed
from data obtained through surveys of comparable companies. The types of
performance objectives considered when making salary decisions are the same as
those described in the discussion on page 13 under the heading entitled
"Executive Incentive Plan". Salary comparisons are prepared periodically by
outside compensation consultants, and are done to ensure that Company salaries
remain competitive and reasonable in the industry. Such salary comparisons are
currently being developed to ensure competitiveness with companies of comparable
size and scope.

STOCK OPTIONS

In 1997, stock options granted under the Incentive Plan comprised part of
the Company's major long-term executive benefit.

Stock options are granted to meet certain corporate objectives, including
to encourage contributions by executive officers to key corporate, operating and
financial goals, to show confidence and high expectations that the judgment,
initiative and efforts of executive officers will result in the Company's
success and to align the interests of executive officers with shareholder
interests. Decisions concerning the granting of stock options are directly
related to performance-based objectives. In 1997, the Company awarded options to
purchase 482,652 shares of Common Stock to a total of 116 employees.

10
<PAGE> 14

The following table shows the stock option grants made on August 8, 1997,
to the five most highly compensated executive officers of the Company and the
portion of those grants which vest in 1998.

1997 STOCK OPTIONS

<TABLE>
<CAPTION>
SHARES
UNDERLYING
OPTIONS GRANTED SHARES UNDERLYING
ON AUGUST 8, PURCHASE OPTIONS WHICH
NAME 1997 PRICE WILL VEST IN 1998
---- --------------- -------------- -----------------
<S> <C> <C> <C>
Larry D. Hall..................................... 80,000 $41.8438 16,000
Morton C. Aaronson................................ 20,000 $41.8438 4,000
John N. DiNardo................................... 20,000 $41.8438 4,000
Clyde E. McKenzie................................. 20,000 $41.8438 4,000
H. Rickey Wells................................... 20,000 $41.8438 4,000
</TABLE>

The following table shows the stock option grants made during fiscal year
1997 to all employees other than the five most highly compensated executive
officers of the Company.

1997 STOCK OPTIONS

<TABLE>
<CAPTION>
SHARES
UNDERLYING
OPTIONS GRANTED PURCHASE
IN 1997 PRICE VESTING SCHEDULE
--------------- -------- --------------------
<S> <C> <C> <C>
All employees as a group excluding the five most
highly compensated executive officers (111 one-third increments
persons)....................................... 322,652 varies over three years
</TABLE>

Additionally, as part of a special award approved by the Board of Directors
on February 10, 1998, in recognition of the extraordinary contributions of the
five most highly compensated executive officers in 1997 related to their work on
the acquisition of MidCon, the Board granted stock options with an exercise
price equal to the public offering price of the Company's Common Stock in the
Company's equity offering which was expected to be completed in early March
1998. The stock option grants to each of the five most highly compensated
officers were as follows: Mr. Hall 90,000 shares; Mr. Aaronson 60,000 shares;
Mr. DiNardo 60,000 shares; Mr. McKenzie 60,000 shares; and Mr. Wells 60,000
shares. The exercise price of each of these options was set at $52.00 per share
on March 4, 1998 when the Company's public offering was priced. These awards are
not included in the columns reflecting stock ownership because the grants are
subject to forfeiture as described in "Proposal to Amend the Incentive Plan"
below.

RESTRICTED STOCK AWARDS

In 1997, restricted stock awards were granted to the five most highly
compensated executives under the Incentive Plan as a component of long-term
executive compensation. These grants are intended to reward executive officers
for their contributions to key corporate operating and financial results, and to
align the interests of these officers with the interests of the Company's
shareholders.

11
<PAGE> 15

The following table shows the restricted stock grants which were made on
February 10, 1997 and August 8, 1997, and the portion of those grants with
respect to which restrictions will be lifted in 1998. Holders of the restricted
stock identified below are entitled to receive dividends on this stock and to
exercise all voting rights with respect thereto.

1997 RESTRICTED STOCK

<TABLE>
<CAPTION>
RESTRICTED STOCK RESTRICTED STOCK GRANTED
GRANTED ON IN 1997 FOR WHICH
----------------- RESTRICTIONS WILL BE LIFTED
NAME 2/10/97 8/8/97 IN 1998
---- ------- ------ ---------------------------
<S> <C> <C> <C>
Larry D. Hall....................................... 55,000 15,000 3,000
Morton C. Aaronson.................................. 36,250 3,500 700
John N. DiNardo..................................... 36,250 3,500 700
Clyde E. McKenzie................................... 36,250 3,500 700
H. Rickey Wells..................................... 36,250 3,500 700
</TABLE>

In recognition of the special performance of the Company's senior
executives in completing the acquisition of MidCon in early 1998 as well as the
overall performance of the Company in 1997, and consistent with the Incentive
Plan to provide competitive compensation to attract and retain the Company's
executive officers, on February 10, 1998, the Board of Directors approved a
restricted stock award totaling 24,000 shares of stock for the five most highly
compensated officers. The allocation of this award to these officers is as
follows: Mr. Hall 10,000 shares, Mr. Aaronson 3,500 shares, Mr. DiNardo 3,500
shares, Mr. McKenzie 3,500 shares, and Mr. Wells 3,500 shares. Similar to the
stock option awards approved on February 10, 1998, these restricted stock awards
are not included in the columns reflecting stock ownership because the grants
were not effective until the Company priced its equity offering, which was
completed on March 4, 1998, and they are subject to forfeiture unless the
shareholders approve the proposal to amend the Incentive Plan. See "Proposal to
Amend the Incentive Plan." The only requirement for lapse of restrictions on the
stock awards made in 1997 and 1998 is the continued employment with the Company
of the executive on the date the restrictions are set to lapse. The restrictions
for the restricted stock granted on February 10, 1998, lapse 20% immediately,
and 20% each year on the anniversary date in 1999, 2000, 2001 and 2002.

DIRECTORS AND EXECUTIVES DEFERRED COMPENSATION PLAN

The Board of Directors adopted the Directors and Executive Officers
Deferred Compensation Plan (the "Deferred Compensation Plan") effective January
1, 1998. Under the terms of the Deferred Compensation Plan, directors and
executive officers, along with all other key employees who meet certain
requirements as highly compensated employees of the Company, are eligible to
participate in the plan. The Deferred Compensation Plan permits plan
participants the option of deferring for each plan year base annual salary,
incentive payments, director's fees, qualifying gains on stock options and
restricted stock awards. One benefit of participating in the plan includes the
opportunity for executive officers to earn a matching contribution of up to 15%
of their annual base salary, based on the Company's annual attainment of
performance objectives announced prior to the plan year during which the match
will be earned.

PROFIT SHARING PLAN

Executive officers, along with all other employees who meet certain
requirements regarding length of employment and full-time status, are eligible
to participate in the Company's Employee Retirement Fund Trust Profit Sharing
Plan ("Profit Sharing Plan"). Effective with the 1996 plan year, the profit
sharing contribution was revised to relate directly to the attainment by the
Company of specific earnings targets which were approved by the Board of
Directors. The Profit Sharing Plan distribution opportunities range from 0
percent to 10 percent depending on successful achievement of these specific
earnings targets. The Profit Sharing Plan payout for 1997 was 7 percent,
reflecting the Company's accomplishments in 1997.

12
<PAGE> 16

EXECUTIVE INCENTIVE PLAN

The Compensation Committee annually approves an Executive Incentive Plan,
which provides the means for determining and paying annual executive cash
awards.

The Executive Incentive Plan contains detailed criteria for the evaluation
of performance by executive officers. Particular emphasis is placed on
performance-oriented objectives, financial measures, cost control measures and
other measures linked to strategic objectives designed to improve existing
performance, development of business growth opportunities, management
effectiveness, productivity, safety, cost control, service levels and
efficiencies to clearly benefit customers and, thereby, shareholders. Target
objectives are set for corporate performance and for division and personal
objectives in January of each year. Examples of operating objectives in the 1997
Executive Incentive Plan included: identification and acquisition of a
significant business opportunity such as the acquisition of MidCon; acquisition
and integration of the Bushton Plant; completion of the Pony Express Pipeline
including achievement of full operational capability; and achievement of
satisfactory safety goals. Examples of financial goals in the 1996 Executive
Incentive Plan included achievement of objectives for net operating income,
annual operating income, and for consolidated return on beginning common equity.

Fiscal year 1997 was a unique year for the Company, and the 1997 Executive
Incentive Plan rewards for the five most highly compensated executives reflect
special awards made in recognition of the identification and acquisition of
MidCon.

Prior to April 15 of each year, the Compensation Committee designates
executive participants in the Executive Incentive Plan for that year.
Participation in one year does not guarantee participation in following years.
Participants are assigned to levels of eligibility, based on their degree of
responsibility for corporate-wide results. In 1997, the five most highly
compensated executives had bonus opportunities with a target range of 75%. The
Compensation Committee has the discretionary authority to exceed this range.

The Executive Incentive Plan is designed to keep individuals focused on
their specific tasks while working as a team. In all cases, at least 50% of each
participant's incentive compensation opportunity is based upon the Company's
overall results. Depending upon the individual's position, the mix of corporate
and division/ personal performance objectives can range from 50% corporate and
50% division/personal to 90% corporate and 10% division/personal.

The mix of corporate and division/personal goals for each of the five most
highly compensated executives, and the 1997 payout, is as follows:

INCENTIVE COMPENSATION PERFORMANCE CRITERIA

<TABLE>
<CAPTION>
EXECUTIVE CORPORATE GOAL DIVISION/PERSONAL GOAL 1997 PAYOUT
--------- -------------- ---------------------- -----------
<S> <C> <C> <C>
Larry D. Hall......................... 90% 0%/10% $450,000
Morton C. Aaronson.................... 80% 10%/10% $180,000
John N. DiNardo....................... 80% 10%/10% $210,000
Clyde E. McKenzie..................... 80% 10%/10% $200,000
H. Rickey Wells....................... 80% 10%/10% $210,000
</TABLE>

The amount of incentive compensation paid under the Executive Incentive
Plan is based upon actual achievements in the combination of corporate-wide,
division and personal goals. Each of the five most highly compensated executives
exceeded 100% of his corporate-wide, division and personal goals as well as
completing the MidCon acquisition, for which special awards were made.
Participants in the Executive Incentive Plan may defer a portion of the awards
made under this plan.

The Company's 1996 financial and operating results also exceeded its 1996
financial and operating objectives and this success is reflected in the
individual incentive pay-outs reported in the 1996 portions of the bonus column
of the Summary Compensation Table on page 15.

13
<PAGE> 17

CHIEF EXECUTIVE OFFICER COMPENSATION

As indicated above, the Company's executive compensation program, both
annual and long-term, is based in large part upon the Company's business
performance. Annual incentive compensation for the Chief Executive Officer under
the Executive Incentive Plan depend primarily upon the overall performance of
the Company. His long-term compensation from both performance-based and
nonperformance-based stock options and restricted stock awards, and his salary
level, also depend primarily upon Company performance.

The Compensation Committee closely monitors the performance of the Chief
Executive Officer, meeting without his presence to evaluate his success in
achieving the corporate objectives in each year. As reported above, in 1997, Mr.
Hall was awarded stock options to acquire 80,000 shares of the Company's stock
and restricted stock of 70,000 shares, pursuant to the performance criteria
described above.

On February 10, 1998, the Compensation Committee determined that based on
the Company's extraordinary achievement of 14.5% growth in corporate diluted
earnings per share in 1997, coupled with the successful acquisition of MidCon
and the strong 1997 financial and operating results for the Company, Mr. Hall
had exceeded all performance objectives for 1997 under the incentive stock
option agreement, his restricted stock agreement, and the Executive Incentive
Plan and was granted the following awards as a part of his 1997 compensation:
options to acquire 90,000 shares, 10,000 shares of restricted stock, the lifting
of restrictions on 6,000 shares of formerly restricted stock, and a cash
incentive compensation award of $450,000 under the Executive Incentive Plan. The
options and restricted stock awarded to Mr. Hall are subject to forfeiture as
described in "Proposal to Amend the Incentive Plan" below.

The 1996 financial and operating results also exceeded the Company's
expectations, and the Chief Executive Officer's cash incentive compensation
under the Executive Incentive Plan in 1996 also reflects this achievement.

Compensation Committee of
the Board of Directors

Mr. Edward H. Austin, Jr.
Mr. Stewart A. Bliss (Chairman)
Mr. Howard P. Coghlan
Mr. Edward Randall, III

14
<PAGE> 18

EXECUTIVE COMPENSATION

The following table sets forth information regarding compensation during
the last three fiscal years of the Chief Executive Officer and each of the four
other most highly compensated executive officers of the Company (collectively,
the "named executive officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
----------------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING ALL OTHER
NAME AND ------------------------------ STOCK OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) AWARDS($)(2) (#)(3) ($)(4)
------------------ ---- --------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Larry D. Hall 1997 499,999 450,000 2,662,656(5) 80,000(6) 11,220(7)
Chairman/ 1996 434,006 375,000 1,081,875(5) 300,000(6) 16,299(7)
President/CEO 1995 362,500 125,000 0 50,000(6) 13,583(7)
Morton C. Aaronson 1997 210,000 180,000 1,487,703(9) 20,000(6) 10,280(10)
Vice President & 1996 204,000 162,500(8) 761,719(9) 71,000(6) 87,269(10)
Chief Marketing 1995(11) N/A N/A N/A N/A N/A
Officer
John N. DiNardo 1997 188,333 210,000 1,487,703(12) 20,000(6) 10,248(13)
Vice President & 1996 159,155 101,250 119,006(12) 33,000(6) 15,457(13)
General Manager 1995 125,000 23,000 0 10,000(6) 15,426(13)
Clyde E. McKenzie 1997 214,000 200,000 1,487,703(15) 20,000(6) 10,293(16)
Vice President & 1996 164,615(14) 112,500 769,688(15) 71,000(6) 50,462(16)
Chief Financial 1995(17) N/A N/A N/A N/A N/A
Officer
H. Rickey Wells 1997 199,999 210,000 1,487,703(18) 20,000(6) 10,248(19)
Vice President -- 1996 180,252 112,500 540,938(18) 51,000(6) 15,473(19)
Business Operations 1995 122,500 0 0 15,000(6) 23,002(19)
</TABLE>

- ---------------

(1) The Company has no permanent long-term cash incentive plans. Instead, the
Compensation Committee of the Board of Directors reviews the advisability
of an executive cash incentive plan on an annual basis as discussed in the
"Report of the Compensation Committee on Executive Compensation" contained
herein. Amounts earned under such annual cash incentive plans are actually
paid in the year following the year in which they were earned; however such
amounts are reflected in the table in the year in which such amounts were
earned.

(2) The amounts disclosed in this column represent the dollar values of the
restricted shares of Common Stock granted to the named executive officers
in 1997 and 1996. The amounts listed in this column do not reflect the
February 10, 1998 restricted stock awards of 24,000 shares to the named
executive officers that are described in the last paragraph of the section
entitled "Restricted Stock Awards" in the "Report of the Compensation
Committee on Executive Compensation."

(3) The amounts listed in this column do not reflect the February 10, 1998
stock option awards of 330,000 shares to the named executive officers which
are described in the last paragraph of the section entitled "Stock Options"
in the "Report of the Compensation Committee on Executive Compensation."

(4) 1997 earnings under the All Other Compensation column include an amount
earned under the Profit Sharing Plan earned in 1997 but credited under the
plan in 1998. Under the provisions of the Company's Profit Sharing Plan (a
defined contribution plan) established in 1945, during 1997, the Company
contributed 7 percent and for 1996 an amount equal to a maximum of 10
percent of eligible employee compensation (determined by comparing 1997 and
1996 actual results to a predetermined graduated scale of annual operating
income goals) to the Profit Sharing Plan; and for 1995 the Company
contributed an amount equal to the lesser of 10 percent of the annual
eligible compensation of eligible employees, excluding bonuses, or 10
percent of net income as defined by the Profit Sharing Plan. All employees
who have completed 1,000 hours of service in a plan year are participants.
Amounts allocated

15
<PAGE> 19

to an employee's Profit Sharing Plan account vest immediately. Benefits are
generally only payable on termination or retirement. Amounts earned under
the Profit Sharing Plan are actually credited under the plan in the year
following the year in which they were earned.

(5) Mr. Hall was awarded 30,000 shares of performance-based restricted stock on
August 19, 1996, 55,000 shares of restricted stock on February 10, 1997 and
15,000 shares of restricted stock on August 8, 1997, having a per share
market value (based on the grant date average of the high and low prices of
the Common Stock) of $36.0625, $37.00 and $41.8438, respectively. As of
December 31, 1997, Mr. Hall owned 94,000 shares of restricted stock, having
a market value of $5,037,817, which were still subject to restriction, and
with respect to which Mr. Hall receives dividends and may exercise all
voting rights. Restrictions on the 1996 restricted stock award of 30,000
shares and the August 8, 1997 restricted stock award of 15,000 shares are
eligible for lapsing over a five-year period in equal annual portions. The
restrictions on the February 10, 1997 restricted stock award of 55,000
shares are eligible for lapsing over a five-year period, with 40% of such
shares eligible for lapsing in 1999 and 20% of such shares eligible for
lapsing in 2000, 2001 and 2002, respectively.

(6) These options were granted under the Incentive Plan at an exercise price of
100% of the fair market value of the Common Stock as of the date of grant,
are exercisable within 10 years from the respective dates of grant, and
vest over a three, four or five-year period. See "Stock Options" on page 18
below.

(7) Mr. Hall's 1997 earnings under the All Other Compensation column include
$9,600 earned for 1997 under the Company's Profit Sharing Plan (see
discussion in footnote (4) above). The Company also paid $1,620 in term
life and accidental death and dismemberment insurance premiums in 1997 on
behalf of Mr. Hall. Mr. Hall's earnings for 1996 under the Profit Sharing
Plan were $15,000 and insurance premiums paid on behalf of Mr. Hall for
1996 were $1,299, which amounts are reflected in the 1996 All Other
Compensation column. Mr. Hall's 1995 Profit Sharing Plan distribution was
$13,471 and insurance premiums paid on behalf of Mr. Hall for 1995 totaled
$112.

(8) Mr. Aaronson was awarded a signing bonus of $50,000 on January 4, 1996, and
received an Executive Incentive Plan payout of $112,500 for the 1996 year.

(9) Mr. Aaronson was awarded 7,500 shares of performance-based restricted stock
on January 4, 1996, 15,000 shares of performance-based restricted stock on
August 19, 1996, 36,250 shares of restricted stock on February 10, 1997 and
3,500 shares of restricted stock on August 8, 1997, having a per share
market value (based on the grant date average of the high and low prices of
the Common Stock) of $29.4375, $36.0625, $37.00 and $41.8438, respectively.
As of December 31, 1997, Mr. Aaronson owned 52,250 shares of restricted
stock, having a market value of $2,800,276, which were still subject to
restriction, and with respect to which Mr. Aaronson receives dividends and
may exercise all voting rights. Restrictions on the 1996 restricted stock
awards of 7,500 and 15,000, and the August 8, 1997 restricted stock award
of 3,500 shares, are eligible for lapsing in equal annual portions over a
three-year and five-year periods, respectively. The restrictions on the
February 10, 1997 restricted stock award of 36,250 shares are eligible for
lapsing over a five-year period, with 40% of such shares eligible for
lapsing in 1999 and 20% of such shares eligible for lapsing in 2000, 2001
and 2002, respectively.

(10) Mr. Aaronson's 1997 earnings under the All Other Compensation column
include $9,600 earned for 1997 under the Company's Profit Sharing Plan (see
discussion in footnote (4) above), and $680 in term life and accidental
death and dismemberment insurance premiums paid in 1997 on behalf of Mr.
Aaronson. Mr. Aaronson's 1996 Profit Sharing Plan distribution was $15,000
and insurance premiums paid on behalf of Mr. Aaronson for 1996 totaled
$655. The All Other Compensation column for 1996 also reflects $71,614 in
relocation and moving allowances.

(11) Mr. Aaronson was not employed by the Company in 1995.

(12) Mr. DiNardo was awarded 3,300 shares of performance-based restricted stock
on August 19, 1996, 36,250 shares of restricted stock on February 10, 1997
and 3,500 shares of restricted stock on August 8, 1997, having a per share
market value (based on the grant date average of the high and low prices of
the Common Stock) of $36.0625, $37.00 and $41.8438, respectively. As of
December 31, 1997, Mr. DiNardo owned 41,950 shares of restricted stock,
having a market value of $2,248,260, which were still subject to
restriction, and with respect to which Mr. DiNardo receives dividends and
may exercise all voting rights. Restrictions on the 1996 restricted stock
award of 3,300 shares and the August 8, 1997 restricted stock award of
3,500 shares are eligible for lapsing in equal annual portions over a
three-year

16
<PAGE> 20

and five-year period, respectively. The restrictions on the February 10,
1997 restricted stock award of 36,250 shares are eligible for lapsing over
a five-year period, with 40% of such shares eligible for lapsing in 1999
and 20% of such shares eligible for lapsing in 2000, 2001 and 2002,
respectively.

(13) Mr. DiNardo's 1997 earnings under the All Other Compensation column include
$9,600 earned for 1997 under the Company's Profit Sharing Plan (see
discussion in footnote (4) above), and $648 in term life and accidental
death and dismemberment insurance premiums paid in 1997 on behalf of Mr.
DiNardo. Mr. DiNardo's 1996 Profit Sharing Plan distribution was $15,000
and insurance premiums paid on behalf of Mr. DiNardo for 1996 totaled $457.
Mr. DiNardo's 1995 Profit Sharing Plan distribution and insurance premiums
paid on behalf of Mr. DiNardo totaled $11,226, and Mr. DiNardo received an
automobile allowance of $4,200.

(14) Mr. McKenzie's employment by the Company began on March 25, 1996.

(15) Mr. McKenzie was awarded 7,500 shares of performance-based restricted stock
on March 25, 1996, 15,000 shares of performance-based restricted stock on
August 19, 1996, 36,250 shares of restricted stock on February 10, 1997 and
3,500 shares of restricted stock on August 8, 1997, having a per share
market value (based on the grant date average of the high and low prices of
the Common Stock) of $30.50, $36.0625, $37.00 and $41.8438, respectively.
As of December 31, 1997, Mr. McKenzie owned 54,750 shares of restricted
stock, having a market value of $2,934,261, which were still subject to
restriction, and with respect to which Mr. McKenzie receives dividends, and
may exercise all voting rights. Restrictions on the 1996 restricted stock
awards of 7,500 and 15,000 shares and the August 8, 1997 restricted stock
award of 3,500 shares are eligible for lapsing in equal annual portions
over a three-year and five-year periods, respectively. The restrictions on
the February 10, 1997 restricted stock award of 36,250 shares are eligible
for lapsing over a five-year period, with 40% of such shares eligible for
lapsing in 1999 and 20% of such shares eligible for lapsing in 2000, 2001
and 2002, respectively.

(16) Mr. McKenzie's 1997 earnings under the All Other Compensation column
include $9,600 earned for 1997 under the Company's Profit Sharing Plan (see
discussion in footnote (4) above), and $693 in term life and accidental
death and dismemberment insurance premiums paid in 1997 on behalf of Mr.
McKenzie. Mr. McKenzie's 1996 Profit Sharing Plan distribution was $15,000
and insurance premiums paid on behalf of Mr. McKenzie for 1996 totaled
$462. The All Other Compensation column for 1996 also reflects $35,000 in
relocation allowance granted to Mr. McKenzie.

(17) Mr. McKenzie was not employed by the Company in 1995.

(18) Mr. Wells was awarded 15,000 shares of performance-based restricted stock
on August 19, 1996, 36,250 shares of restricted stock of February 10, 1997
and 3,500 shares of restricted stock on August 8, 1997, having a per share
market value (based on the grant date average of the high and low prices of
the Common Stock) of $36.0625, $37.00 and $41.8438, respectively. As of
December 31, 1997, Mr. Wells owned 49,750 shares of restricted stock,
having a market value of $2,666,292, which were still subject to
restriction, and with respect to which Mr. Wells receives dividends and may
exercise all voting rights. Restrictions on the 1996 restricted stock award
of 15,000 shares and the August 8, 1997 restricted stock award of 3,500
shares are eligible for lapsing in equal annual portions over a three-year
and five-year period, respectively. The restrictions on the February 10,
1997 restricted stock award of 36,250 shares are eligible for lapsing over
a five-year period, with 40% of such shares eligible for lapsing in 1999
and 20% of such shares eligible for lapsing in 2000, 2001 and 2002,
respectively.

(19) Mr. Wells' 1997 earnings under the All Other Compensation column include
$9,600 earned for 1997 under the Company's Profit Sharing Plan (see
discussion in footnote (4) above). The Company also paid $648 in term life
and accidental death and dismemberment insurance premiums in 1997 on behalf
of Mr. Wells. Mr. Wells' 1996 Profit Sharing Plan distribution was $15,000
and insurance premiums paid on behalf of Mr. Wells for 1996 totaled $473.
Mr. Wells' earnings for 1995 included Profit Sharing Plan contributions and
insurance premiums paid on behalf of Mr. Wells totaling $11,002 and an
automobile allowance of $12,000.

17
<PAGE> 21

STOCK OPTIONS

Information concerning 1997 grants of options to purchase the Common Stock
to the named executive officers follows:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------
PERCENT POTENTIAL REALIZABLE
NUMBER OF OF TOTAL VALUE AT ASSUMED
SHARES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OR OPTION TERM(3)
GRANTED FISCAL BASE PRICE EXPIRATION -----------------------
NAME (#)(1) YEAR(2) ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Larry D. Hall.................. 80,000(4) 16.6% 41.8438 8/8/07 2,105,221 5,335,049
Morton C. Aaronson............. 20,000(4) 4.1% 41.8438 8/8/07 526,305 1,333,762
John N. DiNardo................ 20,000(4) 4.1% 41.8438 8/8/07 526,305 1,333,762
Clyde E. McKenzie.............. 20,000(4) 4.1% 41.8438 8/8/07 526,305 1,333,762
H. Rickey Wells................ 20,000(4) 4.1% 41.8438 8/8/07 526,305 1,333,762
</TABLE>

- ---------------

(1) Each option granted in 1997 has an exercise price equal to the fair market
value of K N's Common Stock on the date of grant and expires ten years from
the date of grant, subject to earlier termination in certain events related
to termination of employment of the optionee. The exercise price and tax
withholding obligations related to exercise may be paid by delivery of
already owned shares or by offset of the underlying shares, subject to
certain conditions. Under the terms of the Incentive Plan, the Compensation
Committee retains discretion, subject to plan limits, to accelerate exercise
dates and otherwise waive or amend any conditions of options granted
thereunder.

(2) The total number of options granted to Company employees in 1997 was
482,652.

(3) The values set forth in this column assume annual rates of stock
appreciation of 5% and 10%. The Company has no ability to predict whether
such appreciation rates will be achieved, and, therefore, cannot predict
whether the potential realizable values set forth in this column
realistically indicate the value of the options granted to the named
executive officers in 1997.

(4) These options vest over five years, subject to automatic acceleration of
full exercisability upon a Change of Control of the Company (as defined in
the Change of Control Severance Agreement).

The following table sets forth information about option exercises in 1997
by the named executive officers and the value of the remaining options held by
each such officer at year-end.

AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT YEAR-END(#) YEAR-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
---- --------------- ----------- --------------------- -------------------
<S> <C> <C> <C> <C>
Larry D. Hall................. 26,000 611,541 181,250/349,000 4,336,959/6,264,046
Morton C. Aaronson............ 9,290 188,853 22,210/ 64,500 374,261/1,207,924
John N. DiNardo............... 425 10,749 30,950/ 45,000 714,363/ 775,158
Clyde E. McKenzie............. 2,500 99,375 29,000/ 67,000 529,783/1,329,159
H. Rickey Wells............... 1,250 39,792 42,000/ 57,500 1,050,783/ 997,111
</TABLE>

18
<PAGE> 22

- ---------------

(1) Based on the average of the high and low price of the Company's Common
Stock on the NYSE Composite Tape on December 31, 1997, which was $53.5938.

EXECUTIVE STOCK OWNERSHIP

The following table sets forth information about beneficial stock ownership
of the named executive officers, as well as all executive officers and directors
as a group.

EXECUTIVE OFFICER BENEFICIAL STOCK OWNERSHIP

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
COMMON STOCK BENEFICIALLY
OWNED AS OF FEBRUARY 20,
NAME 1998(1)(2)(3)
---- -------------------------
<S> <C>
Larry D. Hall............................................... 385,738(4)
Morton C. Aaronson.......................................... 106,889
John N. DiNardo............................................. 88,778
Clyde E. McKenzie........................................... 111,886
H. Rickey Wells............................................. 115,450
All executive officers and directors as a group............. 2,094,530
</TABLE>

- ---------------

(1) No named executive officer beneficially owns any preferred stock of the
Company. No named executive officer beneficially owned more than 1 percent
of the Company's outstanding Common Stock other than Mr. Hall, who
beneficially owns 1.2% of the outstanding Common Stock. All executive
officers and directors as a group owned approximately 6.5% percent of the
outstanding Common Stock. Respecting share ownership by directors, see
"Election of Directors" on page 2. In making the computations required in
connection with the preceding statement, with respect to any executive
officer who held options to purchase shares of the Common Stock exercisable
within 60 days of February 20, 1998, it was assumed that such options had
been exercised. The following number of shares representing such unexercised
options were added to the holdings of each of the following executive
officers: Mr. Hall, 241,250 shares; Mr. Aaronson, 43,210 shares; Mr.
DiNardo, 41,950 shares; Mr. McKenzie, 52,500 shares; and Mr. Wells, 59,000
shares. A total of 778,467 shares representing such unexercised options were
added to the holdings of all executive officers and directors as a group.

(2) Does not include shares earned in 1997 under the Company's Profit Sharing
Plan. Fifty percent of the profit sharing award is required to be invested
in the Company's Common Stock.

(3) Unless otherwise indicated, the executive officers have sole voting and
investment power over the shares listed above, other than shared rights
created under joint tenancy or marital property laws as between the
Company's executive officers and their respective spouses, if any.

(4) Includes 139 shares of Common Stock owned by Mr. Hall's wife, as to which
Mr. Hall disclaims beneficial ownership and over which he has neither
investment nor voting power. Also includes 88,000 restricted shares that Mr.
Hall has the right to vote. Does not include any of the shares attributable
to the K N Energy, Inc. Non-Qualified Benefit Plan Trust of which Mr. Hall
is a beneficiary. The cumulative number of shares attributable thereto and
held by the Trustee thereof as of December 31, 1997 was 4,392 shares.

19
<PAGE> 23

PERFORMANCE GRAPH

The following Performance Graph compares the performance of the Company's
Common Stock to the Standard & Poor's 500 Stock Index and to the Standard &
Poor's Natural Gas Index for the Company's last five fiscal years. The graph
assumes that the value of the investment in the Company's Common Stock and each
index was $100 at December 31, 1992, and that all dividends were reinvested.
Total net return to the Company's shareholders in 1997 exceeded 40.9%, as
compared to an average return of 32.8% for the Standard & Poor's 500 Stock Index
and of 18.3% for the Standard & Poor's Natural Gas Index for the same period.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG K N ENERGY, INC., THE S&P 500 INDEX AND THE S&P NATURAL GAS INDEX

<TABLE>
<CAPTION>
MEASUREMENT PERIOD S & P
(FISCAL YEAR COVERED) K N E S & P 500 NATURAL GAS
- --------------------- ----- --------- -----------
<S> <C> <C> <C>
1992 100 100 100
1993 142 110 119
1994 137 111 113
1995 174 153 160
1996 242 189 213
1997 341 251 252
</TABLE>

PENSION AND SUPPLEMENTAL BENEFITS

The Company's employees and officers participate in its Retirement Plan and
Trust Agreement for Non-Bargaining Employees (the "Pension Plan"). This is a
defined benefit plan which is not based upon a participant's final years'
compensation. Annual pension benefits at the normal retirement age of 65 are
equal to the total of the yearly accrued annuity credits. Prior to January 1,
1989, the yearly annuity credit equaled 1.1 percent of the first $8,400 of
compensation and 2.1 percent of compensation in excess of $8,400. Effective
January 1, 1989, the yearly annuity credit equals 1.75 percent of the first
$19,200 of compensation and 2.1 percent of compensation in excess of $19,200.
For purposes of the Pension Plan, compensation excludes bonuses and commissions,
and includes overtime and special duty compensation. Assuming continued
employment to age 65 at present salaries, the estimated annual pension benefits
of the named executive officers are as follows: Mr. Hall, $97,032, Mr. Aaronson,
$92,016, Mr. DiNardo, $64,236, Mr. McKenzie, $55,766, and Mr. Wells, $104,256.
These benefits are not subject to any deduction for Social Security benefits or
other offset amounts.

The Company's Profit Sharing Plan, described on page 12 above, also
provides retirement benefits to eligible employees including executive officers.
In addition, the Company has supplemental benefit plans which are designed to
assure payment to certain employees of benefits that would be provided under the
Pension Plan and the Profit Sharing Plan except for the dollar limits on accrued
benefits imposed by the Code.

20
<PAGE> 24

SEVERANCE AND OTHER AGREEMENTS

The Company has entered into severance agreements with certain key
employees, including all of its named executive officers, effective on or about
October 18, 1996. The agreements provide severance benefits if the officer is
involuntarily terminated under certain circumstances within two years following
a change in control of the Company. A "change in control" means (i) a change in
the majority of the Board of Directors of the Company as a result of any reason
other than normal retirement, death or disability; (ii) the sale by the Company
of all or substantially all of its assets or the approval by the shareholders of
a plan of complete liquidation; (iii) a person or group becoming the beneficial
owner of 30% or more of the outstanding voting stock of the Company; or (iv) the
approval by the shareholders of a merger or consolidation other than one in
which the Company's outstanding voting securities prior thereto constitute more
than 50% of the combined voting power of the surviving entity and other than a
merger in which no person acquires more than 30% of the Company's then
outstanding securities. Such benefits are provided if, within two years
following a change in control, the officer is involuntarily terminated (other
than for willful misconduct, gross negligence, death, disability or retirement),
or the officer terminates his employment because of a "change of duties." A
"change of duties" means generally a reduction in compensation, downgrading of
position or authority, or the requirement to relocate. Upon such termination,
the officer would be entitled to receive in a lump sum an amount, subject to
withholding tax and employee benefit premiums or similar adjustments, equal to a
multiple of the officer's annual compensation (including base salary and cash
incentive bonus) earned at termination, plus payment of the costs for or
provision of certain welfare benefits for a specified period after involuntary
termination. In addition, all stock options or restricted stock granted to such
person and outstanding at the time of involuntary termination become immediately
exercisable and all restrictions thereon are removed. The persons who are
parties to such agreements are bound by certain noncompetition and
confidentiality provisions.

The following table summarizes Change of Control Severance Agreement terms
for the Company's five most highly compensated officers:

CHANGE OF CONTROL SEVERANCE AGREEMENTS

<TABLE>
<CAPTION>
DURATION OF
NAME SEVERANCE PAYMENT WELFARE BENEFITS
---- ----------------- ----------------
<S> <C> <C>
Larry D. Hall........................................ 3x executive compensation 36 months
Morton C. Aaronson................................... 2x executive compensation 24 months
John N. DiNardo...................................... 2x executive compensation 24 months
Clyde E. McKenzie.................................... 2x executive compensation 24 months
H. Rickey Wells...................................... 2x executive compensation 24 months
</TABLE>

The Company entered into an Employment Agreement with Morton C. Aaronson
effective January 1, 1996 for a two-year period, with renewal options for
successive one-year terms. This Employment Agreement was renewed for 1998. The
terms of this agreement include: a guaranteed base salary of at least $202,000;
provision of benefits customarily provided to the Company's executive management
employees; and provision of one year's base salary if the Agreement's term is
not renewed in exchange for Mr. Aaronson's compliance with non-competition and
confidentiality covenants.

The Company entered into an agreement with Mr. Battey obligating him to
provide consulting services to the Company for two years following his
retirement on April 11, 1996, for compensation of $300,000, payable in four
equal semi-annual installments over the term of the agreement which expires in
1998.

21
<PAGE> 25

PROPOSAL TO INCREASE THE AUTHORIZED COMMON STOCK (ITEM 2)

The K N Board of Directors has proposed and recommends to the K N
shareholders that they adopt an amendment to the Company's Restated Articles of
Incorporation that would increase the number of authorized shares of Common
Stock, par value $5.00 per share, from 50,000,000 shares to 150,000,000 shares.
The additional 100,000,000 shares would be a part of the existing class of
Common Stock and, if and when issued, would have the same rights and privileges
as the shares of Common Stock presently issued and outstanding. As a result of
this amendment, the total number of shares of all classes, both Common Stock and
Preferred Stock, which the Company shall have authority to issue shall be
152,200,000.

As of February 20, 1998, 32,140,425 shares of Common Stock were outstanding
and an additional 2,810,393 shares were reserved for issuance under K N's stock
option, dividend reinvestment, employee stock purchase and employee benefit
plans (the "Plans"). Later in this Proxy Statement, the Company is asking the
shareholders to approve an increase in the number of shares available for
issuance under both the Company's Incentive Plan and Employee Stock Purchase
Plan, for a total of 2,600,000 additional shares. Also, the Company recently
borrowed money under a bank facility in order to finance the acquisition of
MidCon. In order to refinance some of the money borrowed under the bank
facility, the Company completed a public offering in March 1998 selling
11,000,000 shares of Common Stock. After taking into consideration the shares
reserved for issuance under the Company's Plans, the proposed increase of the
authorized shares under the Company's Incentive Plan and Employee Stock Purchase
Plan, and the recent public offering, the Company will have only 1,449,182
shares of Common Stock available for issuance.

The K N Board of Directors believes that the proposed increase in the
number of authorized shares of Common Stock from 50,000,000 shares to
150,000,000 shares is desirable and prudent so that additional authorized shares
of Common Stock are readily available for issuance in connection with possible
future financings, corporate mergers and acquisitions, strategic relationships
with corporate partners, employee benefit plans and for other general corporate
purposes. Increasing the authorized shares of Common Stock will also provide a
reserve of shares available for issuance in connection with possible stock
splits or stock dividends if the Board of Directors determines it is desirable
to facilitate a broader base of shareholders. Currently, K N has no plans,
agreements or arrangements in place requiring the issuance of additional shares
of Common Stock for these or other purposes, other than possible future
issuances pursuant to existing share reservations. However, having shares
available for issuance would enable K N to take timely advantage of market
conditions and other favorable opportunities for raising new capital without the
delay and expense associated with holding special meetings of shareholders as
would otherwise be required by law or stock exchange regulations.

The ability of the K N Board of Directors to issue additional Common Stock
could be considered to have an anti-takeover effect to the extent that the Board
could use such shares to dilute the percentage ownership or voting power of a
person seeking to obtain control of K N. The K N Board of Directors will be
authorized to determine whether, when and on what terms the issuance of shares
of Common Stock may be warranted in connection with any of the foregoing
purposes.

The Restated Articles of Incorporation and By-laws of the Company contain
certain provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the K N Board of Directors and in the policies
formulated by the Board and to discourage an unsolicited takeover of K N if the
Board determines that such a takeover is not in the best interests of K N and
its shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire K N or to remove incumbent management
even if some (or even a majority) of the shareholders of K N deem such an
attempt to be in their best interests.

BOARD RECOMMENDATION

The K N Board of Directors recommends a vote FOR the proposal to amend the
Restated Articles of Incorporation to increase the number of authorized shares
of Common Stock of the Company from 50,000,000 shares to 150,000,000 shares.

22
<PAGE> 26

PROPOSAL TO AMEND THE INCENTIVE PLAN (ITEM 3)

The Incentive Plan became effective when it received shareholder approval
at the 1994 Annual Meeting. On April 11, 1996, the shareholders approved an
amendment to the Incentive Plan increasing the shares subject to the Incentive
Plan from 700,000 shares to 2,200,000 shares. As of December 31, 1997, there
were only 106,715 shares left in the Incentive Plan. On February 10, 1998, the
Board of Directors voted to amend the Incentive Plan to increase the authorized
number of shares of Common Stock issuable thereunder from 2,200,000 shares to
3,800,000 shares. Such amendment will become effective upon the affirmative vote
of a majority of shares present in person or by proxy and entitled to vote at
the 1998 Annual Meeting. Should the amendment not be approved, the Incentive
Plan will remain in full force and effect, although the stock options and
restricted stock awarded thereunder in February 1998 will be forfeited as
explained below.

The purposes of the Incentive Plan are (i) to further the growth and
financial success of K N and its subsidiaries by aligning the interest of the
Company's shareholders and recipients of awards under the Incentive Plan thereby
increasing the proprietary interest of such recipients in the Company's growth
and success, and (ii) to increase the flexibility of K N to compensate key
employees and to motivate, attract and retain such employees. The Board of
Directors believes that the Incentive Plan has fulfilled these purposes to date.
As indicated in the "Report to the Compensation Committee on Executive
Compensation" herein, during the last four years awards of stock options under
the Incentive Plan have comprised the Company's major long-term executive
benefit. With the recent acquisition of MidCon, the number of employees of the
Company has more than doubled, making the need for an increase in the number of
shares available for issuance under the Incentive Plan more critical.

In structuring the Incentive Plan, the Board of Directors sought to provide
for a variety of awards that could be flexibly administered in order to carry
out the purposes of the Incentive Plan, to permit the Company to keep pace with
changing developments in compensation programs and to make the Company more
competitive with those companies that offer creative incentives to attract and
keep employees. The flexibility of the Incentive Plan allows the Company to
respond to changing circumstances such as changes in tax laws, accounting rules,
securities regulations and other rules regarding benefit plans. The Incentive
Plan grants the administrators flexibility in creating the terms and
restrictions deemed appropriate for particular awards as facts and circumstances
warrant.

23
<PAGE> 27

The following table presents certain information with respect to options
already granted under the Incentive Plan during the Company's fiscal year ending
December 31, 1998 to (i) the named executive officers, (ii) all executive
officers as a group, (iii) all non-executive officer directors as a group, and
(iv) all non-executive officer employees as a group. In each case, the options
have an exercise price of $52.00, the options will expire ten years from the
date of grant, and the options vest over three or five year periods.

1998 STOCK OPTION GRANTS

<TABLE>
<CAPTION>
1994 LONG-TERM INCENTIVE PLAN
---------------------------------------------
NUMBER OF SHARES UNDERLYING
NAME AND POSITION DOLLAR VALUE(1) OPTIONS GRANTED
----------------- --------------- ---------------------------
<S> <C> <C>
Larry D. Hall.......................................... $ 67,500 90,000
Chairman/President and CEO(2)
Morton C. Aaronson..................................... $ 45,000 60,000
Vice President and Chief Marketing Officer(2)
John N. DiNardo........................................ $ 45,000 60,000
Vice President and General Manager(2)
Clyde E. McKenzie...................................... $ 45,000 60,000
Vice President and Chief Financial Officer(2)
H. Rickey Wells........................................ $ 45,000 60,000
Vice President -- Business Operations(2)
All Executive Officers as a Group(2)................... $247,500 330,000
All Non-Executive Officer Directors as a Group......... 0 0
All Non-Executive Officer Employees as a Group(2)...... $ 37,875 50,500
</TABLE>

- ---------------

(1) The current dollar value of these options is unknown and may vary
substantially from the amounts shown here. The dollar value listed here is
based on the difference between the exercise price ($52.00) and the closing
price of the Company's Common Stock on the NYSE Composite Tape on March 10,
1998 ($52.75) multiplied by the number of shares underlying the option(s).
This value assumes that all the options are immediately exercisable.
However, these options vest and become exercisable in equal annual
increments over either a three or five year period.

(2) Option grants to this person or group of persons for the remainder of 1998
will be made at the discretion of the Board and are not determinable at this
time. Accordingly, this table sets forth information regarding option grants
actually made to such person or group of persons on March 4, 1998.

24
<PAGE> 28

The following table presents certain information with respect to restricted
stock already granted under the Incentive Plan during the Company's fiscal year
ending December 31, 1998 to (i) the named executive officers, (ii) all executive
officers as a group, (iii) all non-executive officer directors as a group, and
(iv) all non-executive officer employees as a group. In each case, the
restricted stock awards vest in equal one-third or one-fifth increments over
three or five years, respectively.

1998 RESTRICTED STOCK GRANTS

<TABLE>
<CAPTION>
1994 LONG-TERM INCENTIVE PLAN
--------------------------------------------
NUMBER OF
NAME AND POSITION DOLLAR VALUE(1) RESTRICTED SHARES GRANTED
----------------- --------------- -------------------------
<S> <C> <C>
Larry D. Hall........................................... $ 520,000 10,000
Chairman/President and CEO(2)
Morton C. Aaronson...................................... $ 182,000 3,500
Vice President and Chief Marketing Officer(2)
John N. DiNardo......................................... $ 182,000 3,500
Vice President and General Manager(2)
Clyde E. McKenzie....................................... $ 182,000 3,500
Vice President and Chief Financial Officer(2)
H. Rickey Wells......................................... $ 182,000 3,500
Vice President -- Business Operations(2)
All Executive Officers as a Group(2).................... $1,248,000 24,000
All Non-Executive Officer Directors as a Group.......... 0 0
All Non-Executive Officer Employees as a Group(2)....... $1,565,200 30,100
</TABLE>

- ---------------

(1) Closing market price on the date of grant, March 4, 1998, multiplied by the
number of restricted shares.

(2) Restricted stock grants to this person or group of persons for the remainder
of 1998 will be made at the discretion of the Board and are not determinable
at this time. Accordingly, this table sets forth information regarding
restricted stock grants actually made to such person or group of persons on
March 4, 1998.

If the shareholders do not approve the proposed increase in the number of
authorized shares under the Incentive Plan, the stock options and restricted
stock awards reflected in the above tables will be forfeited and returned to the
Company for cancellation.

INCENTIVE PLAN SUMMARY

ADMINISTRATION

The Incentive Plan provides for administration by the Compensation
Committee of the Board of Directors (the "Compensation Committee"). No member of
the Compensation Committee can participate in the Incentive Plan. Among the
powers granted to the Compensation Committee are the authority to interpret the
Incentive Plan, establish rules and regulations for its operation, select
employees of the Company and its subsidiaries to receive awards, and determine
the form, amount and other terms and conditions of awards. The Compensation
Committee also has the power to modify or waive restrictions on awards, to amend
awards and to grant extensions and accelerate awards.

ELIGIBILITY FOR PARTICIPATION

Officers and other key employees of the Company and subsidiary companies
(in which the Company owns directly or indirectly more than a 50 percent voting
equity interest) are eligible to be selected to

25
<PAGE> 29

participate in the Incentive Plan. The selection of participants from eligible
persons is within the sole discretion of the Compensation Committee. Directors
who are not employees are not eligible to participate in the Incentive Plan. The
Company estimates that approximately fifty persons are currently eligible to
receive awards under the Incentive Plan.

TYPES OF AWARDS

The Incentive Plan provides for the grant of any or all of the following
types of awards: (1) stock options, including incentive stock options and
non-qualified stock options; (2) stock appreciation rights, in tandem with stock
options or freestanding; (3) stock awards, including restricted stock; and (4)
any other stock-based award established by the Committee with terms consistent
with the Incentive Plan's purposes. Any stock option granted in the form of an
incentive stock option must satisfy the applicable requirements of Section 422
of the Code. Awards may be granted individually, in combination, or in tandem as
determined by the Committee.

OPTIONS

Options granted under the Incentive Plan may be Incentive Stock Options
("ISOs"), as defined in Section 422 of the Code, or options not qualifying for
treatment as ISOs ("Nonstatutory Stock Options" and together with ISOs, referred
to as "Options"). The Compensation Committee determines the recipients of
Options and the terms of the Options, including the number of shares for which
an Option is granted, the term of the Option and the time(s) when the Option can
be exercised. Conditions respecting the exercise of an Option may, in the
discretion of the Compensation Committee, be contained in the agreement with the
participant or in the Compensation Committee's procedures. Each ISO must comply
with all the requirements of Section 422 of the Code. The Compensation Committee
may in its discretion waive any condition respecting the exercise of any Option
and may accelerate the time at which any Option is exercisable.

The price per share of Common Stock subject to an Option (the "Option
Price") is set by the Compensation Committee. In the case of ISOs, the Option
Price shall not be less than the fair market value of Common Stock (generally
determined to be the average of the high and low sales price reported in The
Wall Street Journal for the New York Stock Exchange -- Composite Transactions)
on the date of the grant of the ISOs. The Compensation Committee also determines
the manner in which the Option Price of an Option may be paid, which may include
the tender of cash or securities or the withholding of Common Stock or cash to
be received through grants or any other arrangements satisfactory to the
Compensation Committee. The Incentive Plan provides that no ISO shall be
exercisable later than 10 years after the date of grant. The Incentive Plan,
however, does not restrict the term of a Nonstatutory Stock Option. Options are
not transferable except by will or the laws of descent and distribution.

STOCK APPRECIATION RIGHTS

In the discretion of the Compensation Committee, Stock Appreciation Rights
("SARs") may be granted separately or in tandem with the grant of an Option. An
SAR is a grant entitling the participant to receive an amount in cash or shares
of Common Stock or a combination thereof, as the Compensation Committee may
determine, having a value equal to (or if the Compensation Committee shall
determine at the time of grant, less than) the excess of (i) the fair market
value on the date of exercise of the shares of Common Stock with respect to
which the SAR is exercised over (ii) the fair market value of such shares on the
date of the grant (or over the Option Price, if the SAR is granted in tandem
with an Option).

An SAR granted in tandem with a Nonstatutory Stock Option may be granted
either at or after the time of the grant of the Nonstatutory Stock Option. An
SAR granted in tandem with an ISO may be granted only at the time of the grant
of the ISO. An SAR granted in tandem with an Option terminates and is no longer
exercisable upon the termination or exercise of the related Option. Subject to
the limitations set forth in the Incentive Plan, SARs shall be subject to such
terms and conditions as shall be determined from time to time by the
Compensation Committee. The Compensation Committee at any time may accelerate
the ex-

26
<PAGE> 30

ercisability of any SAR and otherwise waive or amend any conditions with respect
to the grant of an SAR. SARs are not transferable except by will or the laws of
descent and distribution.

RESTRICTED STOCK

The Incentive Plan provides that the Compensation Committee will have
discretion to make grants of restricted stock. A restricted stock grant entitles
the recipient to acquire, at no cost or for a purchase price determined by the
Compensation Committee on the date of the grant, shares of Common Stock subject
to such restrictions and conditions as the Committee may determine at the time
of the grant. Upon (i) the grant of restricted stock (or upon payment of the
purchase price for restricted stock if a purchase price is required) and (ii)
recording of the issuance of the restricted stock in the stock ledger of the
Company, the recipient may have all the rights of a stockholder with respect to
the restricted stock, including voting and dividend rights. A grant of
restricted stock will be subject to non-transferability restrictions, Company
repurchase and forfeiture provisions and such other conditions (including
conditions on voting and dividends) as the Compensation Committee shall impose
at the time of grant. Shares of restricted stock may not be transferred or
otherwise disposed of by a participant except as specifically provided for in
the Incentive Plan.

Upon the grant of a restricted stock award, the Compensation Committee
shall specify the conditions and time periods, if any, under which the
restrictions on the shares subject to the grant will lapse. Restrictions may
include vesting restrictions based upon matters such as timing, but also could
relate to other matters. Subsequent to the lapse of all restrictions on shares
of restricted stock, such shares shall cease to be restricted stock and shall be
deemed "vested". The Compensation Committee may in its discretion waive any
condition or restriction related to a grant of restricted stock or accelerate
the date(s) on which a grant of restricted stock vests.

In the event of employment termination for a participant, for any reason,
prior to shares of restricted stock becoming vested, the Company has the right,
in the discretion of the Compensation Committee, to repurchase such shares at
their purchase price, or to require forfeiture of such shares if acquired at no
cost.

OTHER AWARDS

In addition to Options, SARs and restricted stock, the Incentive Plan
permits the Compensation Committee to grant awards consisting of any other form
of stock-based consideration that the Compensation Committee determines is
consistent with the purposes of the Incentive Plan. The grant of additional
types of awards is subject to the overall limitation on the number of shares of
Common Stock (or stock equivalents) that may be granted under the Incentive
Plan. Pursuant to such authority, the Compensation Committee could grant awards
such as restricted units, phantom stock, performance awards, performance units,
limited stock appreciation rights, stock acquisition rights, valuation
protection rights, or any other type of stock-based award or combination or
derivative of various types of awards. The form and terms of any such additional
types of awards, as well as the terms and conditions of the grant of any such
awards, will be determined by the Compensation Committee and set forth in the
agreements entered into with participants and in the Compensation Committee's
procedures. Such grants (including grants of Options, SARs and restricted stock)
may be settled at the discretion of the Compensation Committee in cash, shares
of Common Stock or any combination thereof.

Although the Compensation Committee has not previously granted awards under
other Company plans other than stock options and restricted stock, and has no
present plans to change from past practice, future circumstances could result in
other forms of awards being granted by the Compensation Committee under the
Incentive Plan.

FEDERAL TAX CONSEQUENCES

Under the Code, a participant receiving a Nonstatutory Stock Option
ordinarily does not realize taxable income upon the grant of the Option. A
participant does, however, realize ordinary income upon the exercise of a
Nonstatutory Stock Option to the extent that the fair market value of the Common
Stock on the date of exercise exceeds the Option Price. The Company is entitled
to a Federal income tax deduction for
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<PAGE> 31

compensation in an amount equal to the ordinary income so realized by the
participant, provided that the Company withholds Federal income tax with respect
to the amount of such compensation. Upon the subsequent sale of the shares
acquired pursuant to a Nonstatutory Stock Option, any gain or loss will be
capital gain or loss, assuming the shares represent a capital asset in the hands
of the participant, although there will be no tax consequences for the Company.

The grant of an ISO does not result in taxable income to a participant. The
exercise of an ISO also does not result in taxable income, provided that the
employment requirements specified in the Code are satisfied, although such
exercise may give rise to alternative minimum tax liability for the participant.
In addition, if the participant does not dispose of the Common Stock acquired
upon exercise of an ISO during the statutory holding period, then any gain or
loss upon subsequent sale of the Common Stock will be a long-term capital gain
or loss, assuming the shares represent a capital asset in the participant's
hands.

The statutory holding period is the later of two years from the date the
Option is granted or one year from the date the Common Stock is transferred to
the participant pursuant to the exercise of the Option. If the employment and
statutory holding period requirements are satisfied, the Company may not claim
any Federal income tax deduction upon either the exercise of the ISO or the
subsequent sale of the Common Stock received upon exercise. If these
requirements are not satisfied, the amount of ordinary income taxable to the
participant is the lesser of (i) the fair market value of the Common Stock on
the date of exercise minus the Option Price, and (ii) the amount realized on
disposition minus the Option Price. The Company is entitled to a Federal income
tax deduction in an amount equal to the ordinary income so realized by the
participant.

Generally, a recipient does not realize taxable income upon the grant of a
SAR but realizes ordinary income upon its exercise in an amount equal to the
cash received and/or the fair market value of any Common Stock received. The
Company is entitled to a Federal income tax deduction in an amount equal to the
ordinary income realized by the participant, provided that the Company withholds
Federal income tax with respect to the amount of such compensation. Upon the
subsequent sale of shares acquired pursuant to a SAR, any gain or loss will be
capital gain or loss, assuming the shares represent a capital asset in the hands
of the participant.

In general, a participant receiving restricted stock does not realize
taxable income upon the grant of restricted stock. A participant will, however,
realize ordinary income when the restricted stock becomes vested to the extent
that the fair market value of the Common Stock on that date exceeds the price,
if any, paid for the restricted stock or, if no price was paid, to the extent of
the fair market value of the Common Stock on that date. However, the participant
may elect (within 30 days after the grant of restricted stock) to realize
ordinary income on the date of the grant to the extent of the fair market value
of the restricted stock (determined without regard to restrictions on
transferability and any substantial risk of forfeiture). If such election is
made, the participant will not realize ordinary income when the restricted stock
becomes vested. In addition, if such an election is made and the restricted
stock is subsequently forfeited, the participant is not entitled to a deduction
but will be allowed a capital loss equal to the excess of the amount paid, if
any, for such shares over the amount realized if any, on such forfeiture. Upon a
subsequent sale of vested restricted stock, any gain or loss will be capital
gain or loss, assuming the shares represent a capital asset in the hands of the
participant. The Company is entitled to a Federal income tax deduction in an
amount equal to the ordinary income realized by the recipient of the restricted
stock, provided that the Company withholds Federal income tax with respect to
the amount of such compensation. Dividends paid to the participant on restricted
stock during the restricted period are ordinary compensation income to the
participant and deductible as such by the Company.

If the exercisability of an Option or a SAR, or the elimination of
restrictions on restricted stock is accelerated, or special cash settlement
rights are triggered and exercised, as a result of a Change in Control of the
Company, all or a portion of the value of the relevant award at that time may be
a "parachute payment" for purposes of determining whether a 20% excise tax (in
addition to income tax otherwise owed) is payable by the participant as a result
of the receipt of an "excess parachute payment" pursuant to Section 4999 of the
Code. The Company will not be entitled to a deduction for that portion of any
parachute payment which is subject to the excise tax.

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<PAGE> 32

The Code limits the Company's tax deduction for all compensation paid to an
employee in any one year to $1,000,000. The Company's deductions related to
grants under the Incentive Plan would be subject to this limitation.

BOARD RECOMMENDATION

The Board of Directors recommends a vote FOR the proposal to increase by
1,600,000 shares the number of shares authorized for issuance under the
Incentive Plan.

PROPOSAL TO AMEND THE EMPLOYEE STOCK PURCHASE PLAN (ITEM 4)

The Employee Stock Purchase Plan became effective when it received
shareholder approval at the 1990 Annual Meeting. As of December 31, 1997, there
were only 27,266 shares left in the Employee Stock Purchase Plan. On February
10, 1998, the Board of Directors voted to amend the Employee Stock Purchase Plan
to increase the authorized number of shares of Common Stock issuable thereunder
from 600,000 shares to 1,600,000 shares. Such amendment will become effective
upon the affirmative vote of a majority of shares present or represented by
proxy and entitled to vote at the 1998 Annual Meeting. Should the amendment not
be approved, the Employee Stock Purchase Plan will remain in full force and
effect.

The Employee Stock Purchase Plan is intended to qualify under Section 423
of the Code. The purpose of the plan is to encourage and enable eligible
employees of the Company and its participating subsidiaries to acquire
proprietary interests in the Company through the ownership of Common Stock in
order to establish a closer identification of their interests with those of the
Company. The plan provides the employees with a direct means of participating in
the Company's growth and earnings, which, in turn, will provide motivation for
participating employees to remain in the employ of, and to give greater effort
on behalf of, the Company. With the recent acquisition of MidCon, the number of
employees of the Company has more than doubled, making the need for an increase
in the number of shares available for issuance under the plan more critical.

EMPLOYEE STOCK PURCHASE PLAN SUMMARY

Under the Employee Stock Purchase Plan, the Compensation Committee of the
Board of Directors administers the plan. As of the effective date of each
offering under the plan, each eligible full-time employee of K N or a
participating subsidiary may elect to purchase shares through payroll deductions
of up to ten percent of pay during the offering, which will not exceed twelve
months. At the end of the offering, the balance in each participant's payroll
deduction account (including interest on the balance at the rate chosen by the
Compensation Committee) will be used to purchase as many whole shares as the
amount will purchase, and the balance remaining will be returned to the
participant. The purchase price per share pursuant to the plan shall be 85
percent of the lesser of the market value of the Common Stock on the first or
last day of the offering, but in no event shall it be less than the par value of
the Common Stock, which is $5.00. The number of shares an employee is allowed to
purchase in any one offering is restricted by provisions of the Code, and may be
further limited by the Compensation Committee before the beginning of an
offering. Any employee who possesses 5 percent or more of the total combined
voting power or value of all classes of stock of the Company (including shares
that could be purchased pursuant to the plan) is not eligible to participate in
the plan. Directors who are not employees of the Company are not eligible to
participate in the plan.

Shares issued under the plan may be either authorized and unissued shares
or treasury shares, or shares purchased on the open market. The plan provides
for appropriate adjustments or other action by the Compensation Committee or the
Board of Directors to reflect mergers, consolidations, recapitalizations,
certain sales of assets, combinations of shares, a change in control of the
Company through share ownership or a contested election of directors, changes in
corporate structure, stock splits, stock dividends, or certain other significant
changes in the Common Stock or in the Company. The Board of Directors may amend
the plan, but not in a manner which would change or impair outstanding rights to
purchase Common Stock without the participant's consent, and may not modify the
requirements as to eligibility for participation, materially

29
<PAGE> 33

increase the benefits accruing to participants under the plan, or increase the
maximum number of shares which may be purchased by all employees under the plan,
without shareholder approval.

FEDERAL INCOME TAX CONSEQUENCES

An employee who participates in the plan will not realize taxable income at
the beginning of an offering or at the purchase of shares pursuant to the plan.
If no disposition of the shares is made by the participant within two years
after the beginning of the offering and one year after the purchase of the
shares (the "required holding period"), then upon disposition of shares after
such required holding period or upon death, the participant will realize
ordinary income in an amount equal to the lesser of (i) the excess of the fair
market value of the shares at the time of disposition or death over the amount
paid for the shares or (ii) the excess of the fair market value of the shares on
the effective date of the offering over 85 percent of that value. Any additional
gain is treated as a capital gain. The Company will not be entitled to any
deduction in connection with the purchase of shares pursuant to the plan if the
holding period requirements are met. Upon disposition of shares before the end
of the required holding period, a participant will have ordinary income in an
amount equal to the difference between the purchase price and the fair market
value of the stock on the purchase date, and the Company will have a
corresponding deduction. The Company has the right to deduct from pay, or
require any payments necessary, to enable it to satisfy its withholding
obligations.

BOARD RECOMMENDATION

The Board of Directors recommends a vote FOR the proposal to increase by
1,000,000 shares the number of shares authorized for issuance under the Employee
Stock Purchase Plan.

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<PAGE> 34

PRINCIPAL SHAREHOLDERS

COMMON STOCK

According to information supplied to the Company by the beneficial owners
listed below and, where applicable, the books and records of the Company, the
following entities each owned beneficially, as indicated on the dates shown,
more than five percent of the outstanding shares of the Common Stock of the
Company on the dates indicated in parentheses below. No other person is known by
the Company to be the beneficial owner of more than five percent of the Common
Stock.

<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNER AND DATE AMOUNT AND NATURE OF PERCENT OF
INFORMATION PROVIDED BENEFICIAL OWNERSHIP(1) CLASS
------------------------- ----------------------- ----------
<S> <C> <C>
Cabot Corporation..................................... 2,990,186(2) 9.30%
75 State Street
Boston, Massachusetts 02109-1806
(February 20, 1998)
Capital Group Companies, Inc.
Capital Research and Management Company............... 2,460,000(3) 7.65%
333 South Hope Street
Los Angeles, CA 90071
(February 10, 1998)

State Farm Mutual Automobile
Insurance Company..................................... 2,099,965(4) 6.53%
One State Farm Plaza
Bloomington, IL 61701
(January 22, 1998)
Jurika & Voyles, Inc.................................. 1,774,764(5) 5.52%
1999 Harrison Street Suite 700
Oakland, CA 94612
(February 6, 1998)
Employees Retirement Fund Trust
Profit Sharing Plan of K N Energy, Inc................ 1,628,922(6) 5.07%
P.O. Box 281304
Lakewood, CO 80228
(February 20, 1998)
</TABLE>

- ---------------

(1) All amounts listed in this column are for the Company's Common Stock.

(2) Cabot acquired 642,232 shares in July 1997 upon the exercise of warrants.
Cabot has sole investment and voting power of all 2,990,186 shares.

(3) As reported on Capital Group Companies, Inc. and Capital Research and
Management Company joint Schedule 13G dated February 10, 1998. Capital
Group Companies, Inc. is a parent holding company of a group of investment
management companies (including Capital Research and Management Company, a
registered investment advisor) and as such has sole voting power over
74,000 shares and sole dispositive power over 2,460,000 shares.

(4) As reported on State Farm's Schedule 13G dated January 22, 1998. State Farm
reports that it has sole investment and voting power over its shares, and
that the shares were acquired solely for investment purposes.

(5) As reported on Jurika & Voyles' Schedule 13G dated February 6, 1998. Jurika
& Voyles is a registered investment advisor, and as such has shared
investment and voting power over all of its shares.

(6) The trustees of the Employees Retirement Fund Trust Profit Sharing Plan
have sole investment power over such shares and have sole voting power as
to shares of Common Stock allocated to participants' accounts as to which
such participants do not exercise their power to vote, but are required to
vote them in the same proportion as those voted by participants.

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<PAGE> 35

Cabot, the Company's largest shareholder, and the Company were subject to a
liability sharing arrangement covering certain contingent liabilities and
potential gas contract liabilities. All matters regarding the liability sharing
arrangement were settled in 1997, and all final payments have been made. The
Company's final liability under the liability sharing arrangement with Cabot was
$5.6 million, which was previously recorded.

Pursuant to acquisition agreements involving Cabot, Cabot indemnified the
Company for certain environmental liabilities. Issues have arisen concerning
Cabot's indemnification obligations. The Company and Cabot have agreed to
binding arbitration to resolve all issues in dispute.

CLASS A PREFERRED STOCK

No person is known to be the owner of five percent or more of the 70,000
outstanding shares of Class A $5.00 Preferred Stock of the Company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers, and any persons holding more than ten percent of
the Company's Common Stock to report their initial ownership of the Company's
Common Stock and any subsequent changes in that ownership to the Securities and
Exchange Commission and the New York Stock Exchange, and to provide copies of
such reports to the Company.

To the Company's knowledge, based solely on the Company's review of the
copies of such reports received by the Company and written representations of
its directors and executive officers, the Company believes that during the year
ended December 31, 1997, all Section 16(a) filing requirements applicable to its
directors and executive officers were satisfied except for the following: (i) a
Form 4 filed on behalf of H. Rickey Wells, Vice President -- Business
Operations, was filed one week late for the sale of 1,225 shares of Common Stock
on June 23, 1997; and (ii) Edward Randall, III a director of the Company, did
not timely disclose the termination of certain trusts for which he acted as the
trustee.

INDEPENDENT PUBLIC ACCOUNTANTS

Arthur Andersen LLP has acted as independent public accountants for the
Company continuously since 1940. A representative of Arthur Andersen LLP will be
present at the annual meeting and will have the opportunity to make a statement
if he desires to do so and will be available to respond to appropriate
questions.

Arthur Andersen LLP was recommended by the Audit Committee to perform the
audit function for 1997, and that recommendation was approved by the Board of
Directors. No independent public accountant has yet been recommended to perform
the audit function for 1998. The Audit Committee normally makes such a
recommendation at the regular Board of Directors' meeting in November.

COST AND METHOD OF PROXY SOLICITATION

The cost of preparing, assembling and mailing this Proxy Statement, the
Notice of Meeting, the enclosed form of Proxy, the Chairman's Letter, and any
additional material relating to the meeting which may be furnished to
shareholders by the Board of Directors subsequent to the furnishing of this
Proxy Statement, has been or is to be borne by the Company.

In addition to the solicitation of Proxies by use of the mails, the Company
may utilize the services of some of its directors and administrative office
personnel (who will receive no compensation therefor in addition to their
regular salaries) to solicit Proxies personally, by telephone or facsimile from
brokerage houses and other shareholders. The Company will reimburse banks and
brokers who hold shares of the Company's stock in their name or custody, or in
the name of nominees for others, for their out-of-pocket expenses incurred in
forwarding copies of the Proxy materials to those persons for whom they hold
such shares. The

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<PAGE> 36

Company has also retained D. F. King & Company, Inc. to aid in the solicitation
at an estimated cost of $7,000 plus reasonable out-of-pocket expenses presently
estimated at $35,000.

DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS

Pursuant to Securities and Exchange Commission regulations, any proposal
which a shareholder intends to present to the 1999 annual meeting must be
received by November 16, 1998, at the Company's principal executive offices in
order to be included in the Proxy Statement and the form of Proxy for that
meeting.

The Company's By-laws establish an advance notice procedure with regard to
certain matters to be brought before the Annual Meeting of Shareholders. In
general, written notice must be received by the Secretary of the Company at its
principal executive offices not less than forty days prior to the meeting and
must contain certain specified information concerning the matters to be brought
before the meeting as well as the shareholder submitting the proposal. A copy of
the applicable provisions of the By-laws may be obtained, without charge, upon
request to the Secretary of the Company at the address set forth on page one of
this Proxy Statement. The annual shareholders meeting is customarily held in
early April.

OTHER MATTERS

The Board of Directors does not intend to present, and does not have any
reason to believe that others will present, any other items of business at the
annual meeting. However, if other matters are properly presented for a vote,
Proxies will be voted upon such matters in accordance with the judgment of the
Proxyholders.

By Order of the Board of Directors

MARTHA B. WYRSCH
Vice President,
General Counsel
and Secretary

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<PAGE> 37
[FORM OF PROXY CARD]

K N ENERGY, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF K N ENERGY, INC.
FOR THE ANNUAL MEETING ON APRIL 16, 1998

The undersigned appoints Larry D. Hall and Martha B. Wyrsch, each of
them, with full power of substitution in each, the proxies of the undersigned,
to represent the undersigned and vote all shares of K N Energy, Inc. Common and
Preferred Stock which the undersigned may be entitled to vote at the Annual
Meeting of Shareholders to be held on April 16, 1998, and at any adjournment or
postponement thereof, as indicated on the reverse side.

This proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder. If no direction is given, this
proxy will be voted FOR proposals 1, 2, 3 and 4.

(Continued and to be dated and signed on the reverse side.)

K N ENERGY, INC.
P.O. BOX 11162
NEW YORK, N.Y. 10203-0162

<PAGE> 38

[FORM OF PROXY CARD]

<TABLE>
<S> <C> <C> <C>
1. Election of Class II Directors FOR all nominees |_| WITHHOLD AUTHORITY to vote |_| *EXCEPTIONS|_|
listed below for all nominees listed below
</TABLE>

Nominees: Charles W. Battey, Larry D. Hall, Richard D. Kinder, John F. Riordan,
H.A. True, III

(INSTRUCTIONS: To withhold authority to vote for any individual
nominee, mark the "Exceptions" box and write that nominee's name in the space
provided below.)

*Exceptions
--------------------------------------------------------------------

2. To approve an amendment to the Restated Articles of Incorporation of the
Company to increase the authorized Common Stock, par value $5.00 per
share, from 50,000,000 shares to 150,000,000 shares.

FOR |_| AGAINST |_| ABSTAIN |_|

3. To approve an increase in the number of shares of K N Energy, Inc. Common
Stock authorized for issuance under the 1994 K N Energy, Inc. Long-Term
Incentive Plan by 1,600,000 shares.

FOR |_| AGAINST |_| ABSTAIN |_|

4. To approve an increase in the number of shares of K N Energy, Inc. Common
Stock authorized for issuance under the 1990 Employee Stock Purchase Plan
by 1,000,000 shares.

FOR |_| AGAINST |_| ABSTAIN |_|

Change of Address and or Comments Mark Here |_|

The signature on this Proxy should correspond exactly with stockholder's name
as printed to the left, in the case of joint tenancies, co-executors, or
co-trustees, both should sign. Persons signing as Attorney, Executor,
Administrator, Trustee or Guardian should give their full title.

Dated: , 1998
-----------------------------------------

-----------------------------------------
Please print name of Stockholder here.

-----------------------------------------
Please sign here.

VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK.

(PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE).