<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-6446
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K N ENERGY, INC.
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Kansas 48-0290000
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(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Van Gordon Street
P.O. Box 281304, Lakewood, Colorado 80228-8304
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(Address of principal executive offices) (Zip Code)
(303) 989-1740
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, $5 par value; authorized 150,000,000 shares;
- -----------------------------------------------------------------
outstanding 70,840,522 shares as of April 30, 1999.
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<PAGE> 2 Form 10-Q
K N ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
Contents
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited) Page Number
-----------
Consolidated Balance Sheets..................... 3 & 4
Consolidated Statements of Income............... 5
Consolidated Statements of Cash Flows........... 6
Notes to Consolidated Financial Statements...... 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 14 - 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................... 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................. 23
Item 6. Exhibits and Reports on Form 8-K.................. 23
SIGNATURE.................................................. 24
</TABLE>
<PAGE> 3 Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (Unaudited)
K N Energy, Inc. and Subsidiaries
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
------------- -------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 21,404 $ 21,955
Restricted Deposits 7,431 9,096
U.S. Government Securities - 1,092,415
Accounts Receivable 598,400 693,044
Inventories 105,905 144,831
Gas Imbalances 90,403 85,349
Other 46,444 46,812
---------- ----------
869,987 2,093,502
---------- ----------
Investments 268,634 252,543
---------- ----------
Property, Plant and Equipment 7,781,145 7,767,332
Less Accumulated Depreciation and
Amortization 786,610 744,156
---------- ----------
6,994,535 7,023,176
---------- ----------
Deferred Charges and Other Assets 239,169 242,991
---------- ----------
Total Assets $8,372,325 $9,612,212
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4 Form 10-Q
CONSOLIDATED BALANCE SHEETS (Unaudited)
K N Energy, Inc. and Subsidiaries
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current Maturities of Long-Term Debt $ 7,167 $ 10,167
Notes Payable 622,236 297,000
Substitute Note - 1,394,846
Accounts Payable 407,108 489,414
Accrued Taxes 23,762 18,914
Gas Imbalances 68,760 74,857
Payable for Purchase of Thermo Companies 54,556 86,799
Other 212,263 247,465
---------- ----------
1,395,852 2,619,462
---------- ----------
Other Liabilities and Deferred Credits:
Deferred Income Taxes 1,701,734 1,699,072
Other 394,361 431,565
---------- ----------
2,096,095 2,130,637
---------- ----------
Long-Term Debt 3,300,017 3,300,025
---------- ----------
K N-Obligated Mandatorily Redeemable
Preferred Capital Trust Securities of
Subsidiary Trusts Holding Solely
Debentures of K N 275,000 275,000
---------- ----------
Minority Interests in Equity of Subsidiaries 63,056 63,267
---------- ----------
Stockholders' Equity:
Preferred Stock-
Authorized - Class A, 200,000 Shares:
Class B, 2,000,000 Shares,
Without Par Value
Redeemable Solely at Option of Company at
$105 Per Share - Class A,
$5.00 Cumulative Series; 70,000 Shares
Outstanding 7,000 7,000
---------- ----------
Common Stock-
Authorized - 150,000,000 Shares, Par Value
$5 Per Share
Outstanding - 69,660,801 and 67,037,735 Shares,
Respectively, After Deducting
55,485 and 27,008 Shares Held in Treasury 348,304 343,230
Additional Paid-in Capital 712,620 694,223
Retained Earnings 187,040 193,925
Other (12,659) (14,557)
---------- ----------
Total Common Stockholders' Equity 1,235,305 1,216,821
---------- ----------
Total Stockholders' Equity 1,242,305 1,223,821
---------- ----------
Total Liabilities and Stockholders' Equity $8,372,325 $9,612,212
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5 Form 10-Q
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
K N Energy, Inc. and Subsidiaries
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating Revenues:
Upstream Gathering and Processing $ 131,595 $ 139,099
Midstream Sales, Transportation and Storage 357,426 285,898
Downstream Retail and Marketing 695,838 828,539
Intersegment Eliminations (130,890) (87,014)
---------- ----------
Total Operating Revenues 1,053,969 1,166,522
---------- ----------
Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales 797,833 934,635
Operations and Maintenance 100,681 95,780
Depreciation and Amortization 53,520 41,820
Taxes, Other Than Income Taxes 14,183 12,148
Merger-related Costs 2,916 4,353
---------- ----------
Total Operating Costs and Expenses 969,133 1,088,736
---------- ----------
Operating Income 84,836 77,786
---------- ----------
Other Income and (Deductions):
Interest Expense, Net (70,450) (50,342)
Minority Interests (5,267) (2,381)
Other, Net 2,556 10,694
---------- ----------
Total Other Income and (Deductions) (73,161) (42,029)
---------- ----------
Income Before Income Taxes 11,675 35,757
Income Taxes 4,553 13,249
---------- ----------
Net Income 7,122 22,508
Less - Preferred Stock Dividends 88 88
---------- ----------
Earnings Available For Common Stock $ 7,034 $ 22,420
========== ==========
Number of Shares Used in Computing
Basic Earnings Per Common Share 69,486 52,635
========== ==========
Basic Earnings Per Common Share $ 0.10 $ 0.43
========== ==========
Number of Shares Used in Computing
Diluted Earnings Per Common Share 69,578 53,429
========== ==========
Diluted Earnings Per Common Share $ 0.10 $ 0.42
========== ==========
Dividends Per Common Share $ 0.20 $ 0.19
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6 Form 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
K N Energy, Inc. and Subsidiaries
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,122 $ 22,508
Adjustments to Reconcile Net Income to Net Cash Flows from
Operating Activities:
Depreciation and Amortization, Excluding Amortization
of Gas Plant Acquisition Adjustment 25,887 21,645
Deferred Income Taxes 1,790 7,213
Deferred Purchased Gas Costs 3,296 17,414
Gain on Sale of Facilities (258) (8,252)
Proceeds from Buyout of Contractual Gas Obligations - 27,500
Change in Gas in Underground Storage 47,532 2,214
Changes in Other Working Capital Items (Note 4) (22,752) 7,951
Changes in Deferred Revenues (4,394) (1,466)
Other, Net (19,990) (5,704)
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 38,233 91,023
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (30,455) (81,163)
Cash Paid for Acquisition of MidCon, Net of Cash Acquired - (2,139,752)
Other Acquisitions (18,514) (9,137)
Investments (2,056) (2,526)
Sale of U.S. Government Securities 1,092,415 -
Purchase of U.S. Government Securities - (884,223)
Proceeds from Sales of Assets 853 25,152
---------- ----------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,042,243 (3,091,649)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-Term Debt, Net (1,069,610) 55,800
Long-Term Debt - Issued - 2,362,000
Long-Term Debt - Retired (3,317) (20,662)
Common Stock Issued in Public Offering - 650,000
Other Common Stock Issued 5,925 4,070
Treasury Stock, Issued 25 409
Treasury Stock , Acquired (43) -
Cash Dividends, Common (13,919) (12,496)
Cash Dividends, Preferred (88) (88)
Minority Interests, Contributions - 13,311
Securities Issuance Costs - (45,891)
---------- ----------
NET CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,081,027) 3,006,453
========== ==========
Net Increase (Decrease) in Cash and Cash Equivalents (551) 5,827
Cash and Cash Equivalents at Beginning of Period 21,955 22,471
---------- ----------
Cash and Cash Equivalents at End of Period $ 21,404 $ 28,298
========== ==========
</TABLE>
For supplemental cash flow information, see Note 4.
The accompanying notes are an integral part of these statements.
<PAGE> 7 Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
As used herein, "K N" or "the Company" refers to K N Energy, Inc.
and its consolidated subsidiaries unless the context otherwise
requires. In the opinion of Management, all adjustments
necessary for a fair presentation of the results for the
unaudited interim periods have been made. Except as explicitly
noted, these adjustments consist solely of normal recurring
accruals. Certain prior period amounts have been reclassified to
conform with the current presentation.
2. Sempra Merger
On February 22, 1999, Sempra Energy ("Sempra") and the Company
announced that their respective boards of directors had
unanimously approved a definitive agreement (the "Agreement")
under which Sempra and the Company would combine in a stock-and-
cash transaction valued in the aggregate at $6.0 billion. Sempra
is an energy services holding company based in San Diego,
California, serving 21 million customers through natural gas and
electric distribution, as well as a broad range of energy-related
products and services throughout the United States, Canada,
Mexico and other countries in Latin America. This merger is
conditioned, among other things, upon the approvals of
shareholders of both companies, the Federal Energy Regulatory
Commission and the state commissions of Colorado and Wyoming and
clearance under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (the "HSR Act"). Effective March 30, 1999, the Federal
Trade Commission granted the Company's request for early
termination of the waiting period under the HSR Act with respect
to the merger.
3. Acquisitions, Investments and Sale
(A) MidCon Corp.
On January 30, 1998, pursuant to a definitive stock purchase
agreement (the "MidCon Agreement"), the Company acquired all of
the outstanding shares of capital stock of MidCon Corp.
("MidCon") from Occidental Petroleum Corporation ("Occidental")
for $2.1 billion in cash and the assumption of a $1.4 billion
note (the "Substitute Note"), at which time MidCon became a
wholly owned subsidiary of K N Energy, Inc. (the "Acquisition").
The Substitute Note bore interest at 5.798% and was required to
be collateralized by U.S. government securities, letters of
credit or a combination thereof. The Substitute Note was paid in
full on January 4, 1999. In conjunction with the Acquisition,
K N also assumed MidCon's obligation to lease the MidCon Texas
intrastate pipeline system under a 30-year operating lease,
requiring average annual lease payments of approximately $30
million. The Acquisition was initially financed through a
combination of credit agreements (see Note 6).
The Acquisition was accounted for as a purchase for accounting
purposes and, accordingly, the MidCon assets acquired and
liabilities assumed have been recorded at their respective
estimated fair market values as of the acquisition date. The
allocation of purchase price has resulted in the recognition of a
gas plant acquisition adjustment of approximately $3.9 billion,
principally representing the excess of the assigned fair market
value of the assets of Natural Gas Pipeline Company of America
("NGPL"), a wholly owned subsidiary of MidCon, over the
historical cost for ratemaking purposes. This gas plant
acquisition adjustment, none of which is currently being
recognized for rate-making purposes, is being amortized over 36
years, approximately the estimated remaining useful life of
NGPL's interstate pipeline system. For the quarters ended March
31, 1999 and 1998, approximately $27.2 million and $19.8 million
of such amortization, respectively, was charged to expense. The
assets, liabilities and results of operations of MidCon are
included with those of the Company beginning with
<PAGE> 8 Form 10-Q
the January 30, 1998 acquisition date. Historical information
for periods prior to January 30, 1998 does not reflect any impact
associated with the MidCon acquisition.
(B) Sale of Kansas Distribution Properties
In March 1998, K N completed the sale of its Kansas retail
natural gas distribution properties, located in 58 Kansas
communities and serving approximately 30,000 residential,
commercial and industrial customers, to Midwest Energy, Inc., a
customer-owned cooperative based in Hays, Kansas. K N received
approximately $24 million in cash in conjunction with the sale
and recorded a pre-tax gain of approximately $8.5 million
(approximately $5.2 million after tax or $0.08 per diluted
share). Concurrently with the sale, K N received $27.5 million
in cash in exchange for the release of the purchaser from certain
contractual gas purchase obligations, which amount will be
amortized as an offset to expense over a period of years as the
associated volumes are sold.
(C) Thermo Companies
During the third quarter of 1998, K N completed its acquisition
of interests in four independent power plants in Colorado from
the Denver-based Thermo Companies ("Thermo"), representing
approximately 380 megawatts of electric generation capacity and
access to approximately 130 Bcf of natural gas reserves. These
generating facilities are located in Ft. Lupton, Colorado (272
megawatts) and Greeley, Colorado (108 megawatts) and sell their
power output to Public Service Company of Colorado under long-
term agreements. Payments for these interests are being made over
a two-year period, with the initial payment of 689,810 shares
(1,034,715 shares adjusted for the December 1998 three-for-two
stock split) of K N common stock having been made on October 21,
1998. Additional payments were made on January 4, 1999,
consisting of 833,623 shares of K N common stock and $15 million
in cash, and on April 20, 1999, consisting of 1,232,286 shares of
K N common stock and $20 million in cash. The remaining payment
in 2000 is expected to be made in a combination of cash and
common stock as agreed to by K N and Thermo, with the default mix
being 50% stock and 50% cash. This transaction has been
accounted for as a purchase.
(D) TransColorado Pipeline
On March 31, 1999, the TransColorado Gas Transmission Company
("TransColorado"), an enterprise jointly owned by K N and Questar
Corp., placed in service a 280-mile-long natural gas pipeline,
which includes two compressor stations and extends from near
Rangely, Colorado, to its southern terminus at the Blanco Hub
near Aztec, New Mexico. The pipeline has a design transmission
capacity of approximately 300 million cubic feet of natural gas
per day. On October 14, 1998, TransColorado entered into a $200
million revolving credit agreement with a group of commercial
banks. K N provides a corporate guarantee for one-half of all
amounts borrowed under the agreement.
(E) Thunder Creek Gathering System
In March 1999, Thunder Creek Gas Services, LLC, a joint venture
of K N and Devon Energy Corporation, began construction of a 126-
mile-long-trunkline natural gas gathering system which will
include carbon dioxide removal facilities and will extend from
Glenrock, Wyoming to approximately 12 miles north of Gillette,
Wyoming. The trunkline will have an initial capacity of 450
million cubic feet of natural gas per day. The gathering system
is located in the Powder River Basin of northeast Wyoming and is
expected to be operational by fall 1999. The expected total cost
of the system is approximately $100 million.
(F) Horizon Pipeline
In May 1999, the Company announced plans to build the Horizon
Pipeline, a 129-mile-long natural gas pipeline from Joliet,
Illinois, to Hales Corners, Wisconsin. Construction is expected
to start in spring 2001 and be completed by the fall of 2001. The
estimated cost of the project is $150 million to $250 million,
depending on shipper response and design capacity, expected to be
from 630 million cubic feet up to 1.2 billion cubic feet per
<PAGE> 9 Form 10-Q
day. The Company plans to jointly own the pipeline with one or
more other partners. An open season will begin in May 1999,
which will allow potential shippers to express their interest in
obtaining capacity on the pipeline.
4. Supplemental Cash Flow Information
Changes in Other Working Capital Items Summary and Supplemental
Disclosures of Cash Flow Information are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
1999 1998
---- ----
<S> <C> <C>
CHANGES IN OTHER WORKING CAPITAL ITEMS:
(Net of Effects of Acquisitions and Sales)
Accounts Receivable $ 93,913 $ 72,952
Materials and Supplies Inventory 1,297 (7,514)
Other Current Assets (3,022) (11,796)
Accounts Payable (82,306) (60,688)
Other Current Liabilities (32,634) 14,997
---------- ----------
$ (22,752) $ 7,951
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid for:
Interest (Net of Amount Capitalized) $ 120,097 $ 31,120
========== ==========
Income Taxes $ 349 $ (228)
========== ==========
</TABLE>
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. "Other, Net", presented as a component of "Net Cash
Flows from Operating Activities" in the accompanying interim
Consolidated Statements of Cash Flows includes, among other
things, the amortization of the gas plant acquisition adjustment
recorded in conjunction with the acquisition of MidCon,
undistributed equity in earnings of unconsolidated subsidiaries
and joint ventures and other non-cash charges and credits to
income.
In the third quarter of 1998, K N purchased interests in four
independent power plants in Colorado from the Thermo Companies.
Payments for this purchase were made in October 1998 with K N
common stock and in January and April 1999 with a combination of
cash and K N common stock. The remaining payment is expected to
be made with a combination of cash and K N common stock. A
portion of K N's January 1998 acquisition of MidCon was made
through the assumption of a note. For additional information on
these transactions, see Notes 3(A) and 3(C).
5. Business Segments
K N Energy, Inc. has adopted a strategy of extracting profit from
the energy value stream, which extends from the purchase or
production of the fuel through the sale of the energy to the end-
user. Consistent with this strategy, K N manages its business
and has segregated its activities into three business segments,
"Upstream", "Midstream" and "Downstream", based on where in the
value stream such activities are conducted. In general, these
segments are also differentiated by the nature of their
processes, their principal suppliers, and their target markets
and customers. The Company's Upstream operations consist of (i)
natural gas gathering, (ii) natural gas processing and (iii)
natural gas liquids ("NGLs") extraction and marketing; Midstream
operations consist of transportation, storage and bundled sales
transactions for K N's interstate and intrastate pipelines;
Downstream operations principally consist of energy marketing,
regulated natural gas distribution and electric power generation
and sales.
<PAGE> 10 Form 10-Q
The accounting policies applied in the generation of segment
information are generally the same as those described in the
summary of significant accounting policies in the Company's 1998
Report on Form 10-K. In general, items below the
"Operating Income" line are either not allocated to business
segments or are not considered by Management in its evaluation of
business unit performance. In addition, certain items included
in operating income (such as the merger-related costs incurred)
are not allocated to individual business segments. With
adjustment for these items, the Company currently evaluates
business segment performance primarily based on operating income
in relation to the level of capital employed. In general,
intersegment sales are accounted for at market prices, while
asset transfers are made at either market value or, in some
instances, book value.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
--------------------------------------------------------------
Upstream Midstream Downstream Other Consolidated
-------- --------- --------- ----- -----------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Revenues from External Customers $ 101.6 $ 298.7 $ 653.7 $1,054.0
Intersegment Revenues $ 30.0 $ 58.7 $ 42.2 $ 130.9
Operating Income (Loss) $ (3.4) $ 87.7 $ 3.4 $ (2.9) (1) $ 84.8
Other Income and (Deductions) (73.1)
--------
Income Before Income Taxes $ 11.7
========
Total Assets at March 31, 1999 $ 702.0 $6,535.3 $1,106.2 $ 28.8 (3) $8,372.3
Three Months Ended March 31, 1998
--------------------------------------------------------------
Upstream Midstream Downstream Other Consolidated
-------- --------- ---------- ----- -----------
(dollars in millions)
Revenues from External Customers $ 120.7 $ 212.6 $ 833.2 $1,166.5
Intersegment Revenues $ 18.4 $ 73.3 $ (4.7) $ 87.0
Operating Income (Loss) $ (4.1) $ 77.8 $ 8.5 $ (4.4) (2) $ 77.8
Other Income and (Deductions) (42.0)
--------
Income Before Income Taxes $ 35.8
========
(1) Represents costs related to the pending merger with Sempra (see Note 2).
(2) Represents costs related to the MidCon Acquisition (see Note 3(A)).
(3) Corporate assets represent cash and restricted deposits.
</TABLE>
6. Financing
The total amount of funds required by the Company to complete the
acquisition of MidCon, pay related fees and expenses and to repay
borrowings under the Company's existing credit facility was
approximately $2.5 billion, financed through borrowings under
credit agreements dated January 30, 1998 (the "Bank Facility")
among K N, Morgan Guaranty Trust Company of New York and a
syndicate of other lenders. A working capital facility replaced
the revolving credit agreement previously in place (the "Pre-
Acquisition Facility"). An acquisition facility was also part of
the overall Bank Facility structure. See Note 7(A) of Notes to
Consolidated Financial Statements on pages 42-43 of the Company's
1998 Annual Report on Form 10-K for additional information
regarding the Bank Facility and the Pre-Acquisition Facility. In
addition to the working capital and acquisition components of the
Bank Facility described preceding, the Company assumed a short-
term note for $1.4 billion due January 1999 (the "Substitute
Note") which, pursuant to the MidCon Agreement, was initially
collateralized by letters of credit issued under a commitment for
that purpose within the Bank Facility. The acquisition facility
was repaid in its entirety and cancelled on March 10, 1998. The
Substitute Note was repaid on January 4, 1999. On January 5,
1999, K N cancelled the remaining letters of credit used to
collateralize the Substitute Note.
<PAGE> 11 Form 10-Q
In March 1998, the Company received net proceeds of approximately
$624.6 million from a public offering of 12.5 million shares
(18.75 million shares after adjustment for the December 1998
three-for-two stock split) of K N common stock and approximately
$2.34 billion from the concurrent public offerings of senior debt
securities of varying maturities with principal totaling $2.35
billion. The net proceeds from these offerings were used to
refinance borrowings under the Bank Facility and to purchase U.S.
government securities to replace a portion of the letters of
credit that collateralized the Substitute Note.
In April 1998, the Company sold $175 million of 7.63% Capital
Trust Securities (the "Capital Securities") maturing on April 15,
2028, in an underwritten public offering. The sale was effected
through a wholly owned business trust, K N Capital Trust III.
The Company used the net proceeds from the offering to
purchase U.S. government securities to replace a portion of the
letters of credit that collateralized the Substitute Note.
In November 1998, the Company completed an underwritten public
offering of $400 million of three-year senior notes (the "Senior
Notes") bearing an interest rate of 6.45 percent. The net
proceeds of approximately $397.4 million were used to retire a
portion of K N's then-outstanding short-term borrowings.
Concurrently with the Senior Notes offering, the Company sold
$460 million principal amount of premium equity participating
security units ("PEPS") in an underwritten public offering. The
PEPS essentially are contracts (i) requiring the holders to
purchase K N common stock at the end of a three-year period
coinciding with the maturity of the Senior Notes and (ii)
providing for payment of a contract fee of 2.375 percent to the
PEPS holders by the Company during the three-year period. The
net cash proceeds from the sale of the PEPS, together with
additional funds provided by the Company, were used to purchase
U.S. treasury securities on behalf of the PEPS owners.
7. Preferred Stock
On April 13, 1999, the Company sent notice to holders of its
Class A $5.00 Cumulative Preferred Stock, of its intent to
redeem these shares on May 14, 1999. Holders of 70,000 preferred
shares were advised that on April 13, 1999, funds were deposited
with the First National Bank of Chicago to pay the redemption
price of $105 per share plus accrued but unpaid dividends. Under
the terms of the Company's Articles of Incorporation, upon
deposit of funds to pay the redemption price, all rights of the
preferred stockholders cease and terminate except the right to
receive the redemption price upon surrender of their stock
certificates.
8. Common Stock Split and Dividend Action
On November 9, 1998, the Board of Directors of K N Energy, Inc.
approved a 7.1 percent increase in the quarterly dividend and a
three-for-two split of the Company's common stock. The quarterly
dividend was declared at $0.30 per common share, an increase from
$0.28 per common share. Giving effect to the stock split, the
quarterly dividend is $0.20 per common share. The stock split
was distributed and the increase in dividend was paid
concurrently on December 31, 1998, to shareholders of record at
the close of business on December 15, 1998. The par value of the
stock did not change. Weighted-average shares outstanding and all
per share amounts (except as otherwise noted) in the accompanying
interim consolidated financial statements and these notes have
been restated to reflect the stock split.
<PAGE> 12 Form 10-Q
9. Regulatory Matters
On January 23, 1998, K N Interstate Gas Transmission Co. ("KNI"),
a wholly owned subsidiary of K N Energy, Inc., filed a general
rate case with the Federal Energy Regulatory Commission ("FERC")
requesting a $30.2 million increase in annual revenues.
As a result of the FERC action, KNI was allowed to place its rates
into effect on August 1, 1998, subject to refund, and provisions
for refund have been recorded based on its expectation of ultimate
resolution. By a subsequent order, the FERC required KNI to remove
costs associated with the Pony Express project and to refund the
associated dollars. The refund of approximately $11 million will
be made during the third quarter of 1999. KNI has filed for rehearing
of the FERC's order. A hearing on its proposed rates is currently
anticipated to commence in December, 1999.
On December 29, 1998, Rocky Mountain Natural Gas Company
("RMNG"), a wholly owned subsidiary of K N Energy, Inc., received
a "show cause" order from the Colorado Public Utilities
Commission (the "Commission"). The Commission has concluded that
there is reason to believe that RMNG's rates may be excessive and
may require further investigation. RMNG has entered into a
Stipulation and Agreement with the Staff of the Commission and
the Office of Consumer Counsel providing for an annual revenue
reduction of approximately $0.9 million. The Stipulation and
Agreement is awaiting Commission approval.
10. Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting of
Comprehensive Income, effective for fiscal years beginning after
December 15, 1997, requires that enterprises report a total for
comprehensive income. Currently, the only difference between
"net income" and "comprehensive income" for K N is the unrealized
gain or loss on its investment in available-for-sale securities
which is recorded directly to stockholders' equity. For the
quarters ended March 31, 1999 and 1998, the respective unrealized
after-tax investment gain was $1.1 million and $1.8 million,
resulting in comprehensive income of $8.2 million and $24.3
million, respectively.
11. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (the
"Statement"). The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes
in the derivatives' fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. If
the derivatives meet these criteria, the Statement allows a
derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company
formally designate a derivative as a hedge and document and
assess the effectiveness of derivatives associated with
transactions that receive hedge accounting.
The Statement is effective for fiscal years beginning after June
15, 1999. A company may also implement the Statement as of the
beginning of any fiscal quarter after issuance (that is, fiscal
quarters beginning June 16, 1998 and thereafter). The Statement
cannot be applied retroactively. The Statement must be applied
to (i) derivative instruments and (ii) certain derivative
instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997,
(and, at the company's election, before January 1, 1998). K N
has not yet quantified the impacts of adopting the Statement on
its financial position or results of operations and has not
determined the timing of or method of adoption of the Statement.
<PAGE> 13 Form 10-Q
12. Interest Expense, Net
"Interest Expense, Net" as presented in the accompanying interim
Consolidated Statements of Income is net of (i) the debt
component of the allowance for funds used during construction
("AFUDC - Interest") and (ii) interest income related to
government securities ("Interest Income"), as shown in the
following table.
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
(Dollars in Millions)
<S> <C> <C>
1999 1998
---- ----
AFUDC - Interest $ 0.3 $ 0.4
Interest Income $ 0.5 $ 2.6
</TABLE>
As discussed in Note 3(A), in conjunction with the January 30,
1998, acquisition of MidCon Corp., the Company was required by
the MidCon Agreement to assume the Substitute Note for $1.4
billion and to collateralize the Substitute Note with bank
letters of credit, a portfolio of U.S. government securities or a
combination of the two. As a result, the Company has interest
income associated with the issuance of the Substitute Note,
which has been reported together with the related interest
expense as described preceding.
13. Equity in Earnings of Equity Method Investments
Equity in earnings of investments accounted for under the equity
method totaling $5.3 million and $3.3 million for the three
months ended March 31, 1999 and 1998, respectively, are included
in operating revenues (within the appropriate business segment)
in the accompanying interim Consolidated Statements of Income.
14. Accounts Receivable
The caption "Accounts Receivable" in the accompanying Consolidated
Balance Sheets is presented net of allowances for doubtful accounts of
$11.3 million at March 31, 1999, and $10.8 million at December 31,
1998.
<PAGE> 14 Form 10-Q
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The following discussion should be read in conjunction with the
accompanying consolidated financial statements and related notes.
As discussed in Note 3 to the accompanying consolidated financial
statements, the Company has engaged in acquisition and
divestiture transactions which may affect the comparison of
results of operations between periods. All per share amounts
following reflect the impact of the December 31, 1998, three-for-
two common stock split as discussed in Note 8 to the accompanying
consolidated financial statements.
On February 22, 1999, Sempra Energy ("Sempra"), an energy services
holding company based in San Diego, California, and the Company
announced that their respective boards of directors had approved
a definitive agreement under which Sempra and the Company would
combine in a stock and cash transaction. This merger is
conditioned, among other things, upon the approvals of
shareholders of both companies as well as certain regulatory
approvals, including approvals of the Federal Energy Regulatory
Commission. For additional information, see Note 2 to the
accompanying consolidated financial statements.
Consolidated Financial Results
<TABLE>
<CAPTION>
For the Three Months Ended March 31
-----------------------------------
(Dollars in Millions Except Per Share Amounts)
1999 1998
---- ----
<S> <C> <C>
Operating Revenues $ 1,054.0 $ 1,166.5
Gross Margin 256.1 231.9
Operating Income 84.8 77.8
Net Income 7.1 22.5
Diluted Earnings Per Share $ 0.10 $ 0.42
</TABLE>
In comparison to the corresponding period of 1998, the Company's
results for the three months ended March 31, 1999 reflect (i) a
decrease of 9.6 percent in operating revenues and (ii) increases
of 10.4 percent in gross margin and 9.0 percent in operating
income. Operating revenues, gross margin and operating income
were positively impacted in 1999, relative to 1998, by (i) the
fact that 1999 results include the operations of MidCon Corp.
("MidCon") for three months, while 1998 results include only two
months, beginning with the January 30, 1998, MidCon acquisition
date (see Note 3(A) to the accompanying consolidated financial
statements), (ii) cost savings realized subsequent to the MidCon
acquisition and (iii) the inclusion of $4.4 million of expense
related to the acquisition of MidCon in 1998 results, compared to
$2.9 million of expense in 1999 related to the pending merger
with Sempra. The operating revenues, gross margin and operating
income associated with each of the Company's business segments
were negatively affected in 1999, relative to 1998, by (i) low
natural gas liquids ("NGLs") prices and associated reduced
processing margins and (ii) reduced pipeline basis differentials
reflecting, in part, weather-related reduction in demand as
further described within the individual segment discussions which
follow.
There was a significant increase in interest expense in 1999
largely resulting from the additional month's financing of
MidCon, a decrease in other income and an increase in the
effective tax rate - see "Other Income and (Deductions)" and
"Income Taxes" elsewhere herein. Earnings per diluted share for
1999 declined by 76.2 percent from 1998 reflecting, in addition
to the decline in 1999 net income, an increase of 30.2 percent in
the number of diluted shares used to calculate earnings per
share. This increase in shares was largely due to the
<PAGE> 15 Form 10-Q
March 1998 common stock issuance associated with the acquisition
of MidCon (see Note 6 to the accompanying consolidated financial
statements).
Results of Operations
Reflecting the Company's strategy of extracting margins from the
various segments of the energy value stream, the Company has
segregated its results of operations into "Upstream," "Midstream"
and "Downstream" components. The Company's Upstream operations
consist of (i) natural gas gathering, (ii) natural gas processing
and (iii) NGLs extraction and marketing activities. Midstream
operations consist of transportation, storage and bundled sales
transactions for K N's interstate and intrastate pipelines.
Downstream activities principally consist of energy marketing,
regulated natural gas distribution and electric power generation
and sales. The following segment data are before intersegment
eliminations, and exclude expenses of the Sempra merger and
MidCon acquisition.
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------------------------
(Dollars in Millions Except Per Gallon Amounts)
Increase
Upstream Gathering and Processing 1999 1998 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Operating Revenues
Gas Sales $ 52.5 $ 50.3 $ 2.2
Natural Gas Liquids Sales 44.9 55.8 (10.9)
Gathering, Transportation and Other 34.2 33.0 1.2
------- ------- -------
131.6 139.1 (7.5)
------- ------- -------
Operating Costs and Expenses
Gas Purchases and Other Costs of Sales 98.9 103.3 (4.4)
Operations and Maintenance 26.7 30.3 (3.6)
Depreciation and Amortization 6.8 6.3 0.5
Taxes, Other Than Income Taxes 2.6 3.3 (0.7)
------- ------- -------
135.0 143.2 (8.2)
------- ------- -------
Operating Loss $ (3.4) $ (4.1) $ 0.7
======= ======= =======
System Throughput (Trillion Btus):
Gas Sales 32.6 24.8 7.8
Gathering and Transportation 84.4 85.9 (1.5)
------- ------- -------
117.0 110.7 6.3
------- ------- -------
Natural Gas Liquids:
Sales (Million Gallons) 194.0 180.1 13.9
======= ======= =======
Average Sales Price/Gallon $ 0.23 $ 0.31 $ (0.08)
======= ======= =======
</TABLE>
Upstream's operating loss declined by $0.7 million from $4.1
million in the first quarter of 1998 to $3.4 million in the
corresponding period of 1999. The Upstream segment was
negatively impacted in 1999, relative to 1998, by approximately
$10 million due to lower NGLs prices. The negative impact of
NGLs prices was more than offset by a combination of positive
factors, including (i) approximately $4.6 million of positive
impact from lower natural gas prices, (ii) approximately $3.3 of
positive impact from higher gathering rates, (iii) positive
results from the 1998 expansion of the Red Cedar gathering
assets, (iv) the fact that 1998 results included operating losses
associated with certain gas processing facilities that were sold
in the fourth quarter of 1998 and (v) reduced 1999 operating
expenses.
<PAGE> 16 Form 10-Q
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------------
(Dollars in Millions)
Increase
Midstream Sales, Transportation and Storage 1999 1998 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Operating Revenues
Transportation and Storage $ 179.7 $ 136.5 $ 43.2
Gas Sales 178.5 145.2 33.3
Other (0.8) 4.2 (5.0)
------- ------- -------
357.4 285.9 71.5
------- ------- -------
Operating Costs and Expenses
Gas Purchases and Other Costs of Sales 159.6 126.4 33.2
Operations and Maintenance 57.0 43.1 13.9
Depreciation and Amortization 43.2 31.9 11.3
Taxes, Other Than Income Taxes 9.9 6.7 3.2
------- ------- -------
269.7 208.1 61.6
------- ------- -------
Operating Income $ 87.7 $ 77.8 $ 9.9
======= ======= =======
Systems Throughput (Trillion Btus) 669.6 468.3 201.3
======= ======= =======
</TABLE>
Midstream operating income increased from $77.8 million in the
first quarter of 1998 to $87.7 million in the corresponding
period of 1999, an increase of $9.9 million (12.7%). This
increase in operating income, as well as the increases in
operating revenues, operating expenses and throughput shown in
the preceding table, was largely attributable to the inclusion of
three months of operations of MidCon in 1999, while 1998 results
include only two months. The Midstream segment was, however,
negatively impacted in 1999, relative to 1998, by a 13.3 percent
reduction in margin per unit of throughput, principally
attributable to weather-related demand factors. These negative
margin impacts were partially offset by expense savings realized
subsequent to the acquisition of MidCon.
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------------
(Dollars in Millions)
Increase
Downstream Retail and Marketing 1999 1998 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Operating Revenues
Gas Sales $ 672.3 $ 819.9 $ (147.6)
Transportation and Other 23.5 8.6 14.9
------- ------- --------
695.8 828.5 (132.7)
------- ------- --------
Operating Costs and Expenses
Gas Purchases and Other Costs of Sales 667.7 791.2 (123.5)
Operations and Maintenance 19.5 23.1 (3.6)
Depreciation and Amortization 3.5 3.6 (0.1)
Taxes, Other Than Income Taxes 1.7 2.1 (0.4)
------- ------- --------
692.4 820.0 (127.6)
------- ------- --------
Operating Income $ 3.4 $ 8.5 $ (5.1)
======= ======= ========
Gas Sales (Trillion Btus) 361.4 337.5 23.9
======= ======= ========
</TABLE>
Downstream operating income decreased from $8.5 million in the
first quarter of 1998 to $3.4 million in the corresponding period
of 1999, a decline of $5.1 million (60.0%). Downstream results
were negatively impacted by (i) 1998 earnings contributions that
included (a) approximately $3.4 million in margins from sales of
storage gas, (b) approximately $2.1 million related to the
favorable resolution of certain "above market" gas purchase
contracts and (c) approximately $1.2 million of operating income
from the Company's
<PAGE> 17 Form 10-Q
Kansas gas distribution properties, which were sold on March 31,
1998, (ii) a reduction of approximately $2.2 million in 1999
commodity marketing gas sales margins, largely due to weather-
related reductions in per-unit margins and (iii) weather-related
reductions in 1999 sales volumes for retail natural gas
distribution. These negative factors were partially offset by
(i) approximately $2.4 million of 1999 operating income from
Thermo, which was acquired in the third quarter of 1998 (see Note
3(C) to the accompanying consolidated financial statements) and
(ii) reduced 1999 operating expenses.
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------------------
(In Millions)
Earnings
Increase
Other Income and (Deductions) 1999 1998 (Decrease)
---- ---- -----------
<S> <C> <C> <C>
Interest Expense, Net $ (70.5) $ (50.3) $ (20.2)
Minority Interests (5.3) (2.4) (2.9)
Other, Net 2.6 10.7 (8.1)
------- ------- -------
$ (73.2) $ (42.0) $ (31.2)
======= ======= =======
</TABLE>
The increase of $20.2 million in "Interest Expense, Net" from
1998 to 1999 was principally due to incremental debt associated
with the MidCon acquisition (see Note 6 to the accompanying
consolidated financial statements). The increase in net expense
associated with "Minority Interests" in 1999, relative to 1998,
was principally due to the dividend requirements associated with
the $175 million of Capital Trust Securities issued in April 1998
(see Note 6 to the accompanying consolidated financial
statements). The decrease in "Other, Net" from 1998 to 1999 was
principally due to the fact that 1998 results included an $8.5
million gain from the sale of the Company's Kansas natural gas
distribution properties (see Note 3(B) to the accompanying
consolidated financial statements).
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------------------
(Dollars In Millions)
Increase
Income Taxes 1999 1998 (Decrease)
----- ----- ----------
<S> <C> <C> <C>
Provision $ 4.6 $ 13.2 $ (8.6)
====== ====== ======
Effective Tax Rate 39.0% 37.1% 1.9%
====== ====== ======
</TABLE>
The $8.6 million net decrease in income tax expense from 1998 to
1999 reflected a decrease of approximately $8.9 million
attributable to a decrease in 1999 pre-tax income and an increase
of approximately $0.3 million attributable to an increase in the
1999 effective tax rate. This increased 1999 effective tax rate
was principally due to an increase in 1999 effective state tax
provisions attributable to the addition of the results of
operations of MidCon.
<PAGE> 18 Form 10-Q
Liquidity and Capital Resources
The following table illustrates the sources of the Company's
invested capital. The balances at December 31, 1998, reflect the
incremental capital associated with the acquisition of MidCon,
including the post-acquisition refinancings completed in 1998
(see Notes 3(A) and 6 to the accompanying consolidated financial
statements).
<TABLE>
<CAPTION>
March 31 December 31
-------------------------- ---------------------------------------
(Dollars in Thousands)
1999 1998 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Long-Term Debt $3,300,017 $ 2,894,864 $ 3,300,025 $ 553,816 $ 423,676
Common Equity 1,235,305 1,249,018 1,216,821 606,132 519,794
Preferred Stock 7,000 7,000 7,000 7,000 7,000
Capital Trust Securities 275,000 100,000 275,000 100,000 -
---------- ----------- ----------- ----------- -----------
Capitalization 4,817,322 4,250,882 4,798,846 1,266,948 950,470
Short-Term Debt 629,403 1,798,901 (1) 1,702,013 (1) 359,951 156,271
---------- ----------- ----------- ----------- -----------
Invested Capital $5,446,725 $ 6,049,783 $ 6,500,859 $ 1,626,899 $ 1,106,741
========== =========== =========== =========== ===========
Capitalization:
Long-Term Debt 68.5% 68.1% 68.8% 43.7% 44.6%
Common Equity 25.6% 29.4% 25.4% 47.8% 54.7%
Preferred Stock 0.2% 0.2% 0.1% 0.6% 0.7%
Capital Trust Securities 5.7% 2.3% 5.7% 7.9% -
Invested Capital:
Total Debt 72.1% 77.6% 76.9% 56.2% 52.4%
Equity, Including Capital
Trust Securities 27.9% 22.4% 23.1% 43.8% 47.6%
(1) Includes the $1,394,846 Substitute Note assumed in
conjunction with the acquisition of MidCon, which was repaid in
January 1999.
</TABLE>
The following discussion of cash flows should be read in
conjunction with the accompanying Consolidated Statements of Cash
Flows and related supplemental disclosures.
Net Cash Flows From Operating Activities
"Net Cash Flows From Operating Activities" decreased from $91.0
million in the first quarter of 1998 to $38.2 million in the
corresponding period of 1999, a decrease of $52.8 million or 58.0
percent. This decrease was principally attributable to the net
impact of (i) a decrease in 1999 earnings before non-cash
charges and credits, (ii) the fact that 1998 results included
$27.5 million of proceeds from the buyout of certain contractual
gas purchase obligations, (iii) an increase in cash used in 1999
to make interest payments, reflecting the increased average debt
balance outstanding and (iv) increased 1999 cash from changes in
gas in underground storage.
Net Cash Flows From Investing Activities
The net cash inflow from investing activities in the first
quarter of 1999 consisted principally of (i) $1.1 billion of
proceeds from the sale of U.S. government securities, which
proceeds were used, together with additional short-term
borrowings, to repay the Substitute Note (see "Net Cash Flows
From Financing Activities" following) and (ii) $49.0 million of
capital expenditures and acquisitions. The net cash outflow from
investing activities in the first quarter of 1998 consisted
principally of (i) $2.1 billion in cash paid to Occidental for
the purchase of MidCon, (ii) the purchase of $0.9 billion of U.S.
government securities as collateral for the Substitute Note, also
in conjunction with the acquisition of MidCon and (iii) capital
expenditures and other acquisitions of $90.3 million.
<PAGE> 19 Form 10-Q
Net Cash Flows From Financing Activities
"Net Cash Flows From Financing Activities" was a net inflow of
$3.0 billion in the first quarter of 1998 and a net outflow of
$1.1 billion in the first quarter of 1999. The net cash outflow
in 1999 was principally attributable to the January 4, 1999
repayment of the Substitute Note (see Notes 3(A) and 6 to the
accompanying consolidated financial statements). The note was
repaid using the proceeds of approximately $1.1 billion from the
sale of U.S. government securities which had been held as
collateral, with the balance of the funds provided by an increase
in short-term borrowings. In addition, first quarter 1999 cash
flows include the payment of $14.0 million of common and
preferred dividends.
The net cash inflow of $3.0 billion in the first quarter of 1998
was principally the result of financing activities in conjunction
with the purchase of MidCon (see Notes 3(A) and 6 to the
accompanying consolidated financial statements). In March 1998,
K N issued 12.5 million shares (18.75 million shares after
adjustment for the December 1998 three-for-two stock split) of
common stock in an underwritten public offering, receiving net
proceeds of approximately $624.6 million. Also in March 1998,
K N issued $2.35 billion principal amount of debt securities of
varying maturities and interest rates in an underwritten public
offering, receiving net proceeds of approximately $2.34 billion.
The net proceeds from these two offerings were used to refinance
borrowings under the MidCon acquisition financing arrangements
and to purchase U.S. government securities to collateralize a
portion of the Substitute Note. In addition, 1998 results
include the payment of $12.6 million of common and preferred
dividends and $13.3 million of minority interest contributions.
The Company's principal sources of short-term liquidity are its
$1 billion revolving bank facilities. At March 31, 1999, the
Company had $622.2 million of commercial paper issued and
outstanding (which is backed by the bank facilities). As
described in the Company's 1998 report on Form 10-K, the
Company's bank facilities and certain of its operating lease
arrangements contain covenants related to the Company's ratio of
debt to total capitalization, consolidated net worth and debt
ratings.
Regulation
On January 23, 1998, K N Interstate Gas Transmission Co. ("KNI"),
a wholly owned subsidiary of K N Energy, Inc., filed a general
rate case with the Federal Energy Regulatory Commission
("FERC") requesting a $30.2 million increase in annual
revenues. As a result of the FERC action, KNI was allowed to
place its rates into effect on August 1, 1998, subject to refund,
and provisions for refund have been recorded based on its
expectation of ultimate resolution. By a subsequent order, the
FERC required KNI to remove costs associated with the Pony
Express project and to refund the associated dollars. The refund
of approximately $11 million will be made during the third
quarter of 1999. KNI has filed for rehearing of the FERC's
order. A hearing on its proposed rates is currently anticipated
to commence in December, 1999.
On December 29, 1998, Rocky Mountain Natural Gas Company
("RMNG"), a wholly owned subsidiary of K N Energy, Inc., received
a "show cause" order from the Colorado Public Utilities
Commission (the "Commission"). The Commission has concluded that
there is reason to believe that RMNG's rates may be excessive and
may require further investigation. RMNG has entered into a
Stipulation and Agreement with the Staff of the Commission and
the Office of Consumer Counsel providing for an annual revenue
reduction of approximately $0.9 million. The Stipulation and
Agreement is awaiting Commission approval.
<PAGE> 20 Form 10-Q
Readiness for Year 2000
The following is a discussion of the Year 2000 problem and its
potential impact on the Company. The Securities and Exchange
Commission ("SEC") has issued specific guidelines for public
companies regarding their disclosure of the Year 2000 problem.
The guidelines require more detailed disclosure of each company's
analysis of and approach to the Year 2000 problem. As a result,
the Company is providing the following disclosure; however, the
length and detail contained in this disclosure, relative to the
other disclosures contained herein, is not an indication of the
Company's view of the relative risk of the Year 2000 problem to
the Company.
Some computers and programs, and some devices containing computer
chips ("embedded chips") store or process dates containing the
Year 2000 as "00." This can result in inaccurate date-related
calculations. It is expected that once the Year 2000 arrives,
computers, computer programs and devices with embedded chips that
have not been modified to correct this problem will not function
normally. The Company relies on a number of automated systems to
conduct its operations and to transact its business, as is common
among large diversified energy companies. In addition, certain
of the Company's pipelines and processing equipment and related
systems contain electric controls or other devices containing
embedded chips. These controls may also be adversely affected by
this problem.
In 1997, the Audit Committee of the Company's Board of Directors
(the "Audit Committee") established a Year 2000 project to
address the Year 2000 problem. In that year, the Company
established a Year 2000 Executive Steering Committee (the "Year
2000 Committee") and a Year 2000 Project Management Office (the
"Year 2000 Project Management Office"). The Year 2000 project is
an ongoing effort monitored by the Audit Committee.
The Audit Committee has adopted a Year 2000 Plan (the "Plan") and
will oversee its implementation by receiving periodic reports
from the Year 2000 Committee and directly from management. The
Audit Committee is prepared to require management to make
additional efforts, including amending the Plan as necessary, to
fulfill the Audit Committee's goal of taking reasonable steps to
minimize injury to people, damage to property, disruption to the
Company's delivery of products and services, supporting systems
and business operations, and other risks associated with the Year
2000 problem.
The Year 2000 Committee is charged with directing the
implementation of the Plan in accordance with resolutions of the
Audit Committee and under the direction of the Company's
designated senior executives. The Year 2000 Committee oversees
the Year 2000 Project Management Office, headed by the Year 2000
Project Coordinator. The Year 2000 Committee keeps the Audit
Committee informed of the Company's progress in implementing the
Plan and of significant updates that are made to the Plan. The
Year 2000 Committee communicates the Audit Committee's directives
concerning the Plan to management and executives, and oversees
the implementation of those directives.
The Year 2000 Project Management Office works closely with the
Company's Readiness Teams comprised of members of the Company's
operating units. The teams have been organized to further
implement the Plan throughout the Company. The Project
Management Office, among other things, promotes exchange of
information about Year 2000 problems and solutions, assists in
disseminating information about the Company's policies governing
communications concerning Year 2000 issues and serves as a
conduit between the various Readiness Teams and the Year 2000
Committee.
<PAGE> 21 Form 10-Q
The aim of the Plan is to take reasonable steps to prevent the
Company's mission critical functions from being impaired due to
the Year 2000 problem. "Mission critical" describes those
systems, devices, functions and external entities that are of
material importance to maintaining the Company's capacity to
deliver and account for products and services without
interruption, and to maintain the Company's supporting business
operations with no material disruption or diminution in quality.
Each of the Company's operating units is in various stages of
implementing the Plan to address the Year 2000 problem. These
efforts include:
an assessment of potential problems;
an inventory of systems and areas which may need to be
corrected;
remediation and implementation, with priority given to mission
critical items;
the testing of such systems and devices; and
developing contingency plans in case the Company cannot correct
the problem in time, or in the event certain facets of the Year
2000 problem go undetected or do not manifest themselves until
after January 1, 2000.
Specifically, the Company is in the process of correcting
programmable code, replacing non-Year 2000-ready embedded chips,
installing Year 2000-ready releases of certain vendor-supplied
computer systems and, in some cases, replacing existing systems
with new internally or externally developed software in advance
of December 31, 1999.
The Company has completed an inventory of affected items in the
non-information technology area and is assessing the results.
The Company has begun testing and currently has found very few
items that are likely to suffer adverse effects from the Year
2000 problem. The Company expects testing and remediation of
mission critical items to be substantially completed by mid-1999.
For the Company's Plan to be successful, the Company must rely
for some purposes on outside contractors. There is a risk that
those contractors will not complete their work prior to the Year
2000. The Company is developing alternative ways to conduct its
business if such deadlines are not met. However, any alternative
may involve additional expense and may not be implemented in time
to avoid the Year 2000 problem. Ultimately, these alternatives
may not be successful.
The Company also relies on suppliers, business partners and other
external entities which may or may not be addressing their own
problems associated with the Year 2000 problem. The Company has
sent out questionnaires to external entities to determine what
steps they have taken to correct any Year 2000 problems they may
have. The Company has no control over such external entities'
efforts, so the Company has developed contingency plans in case
such external entities do not complete their efforts before the
Year 2000.
The Company estimates that the direct costs the Company has
incurred or will incur in 1998, 1999 and 2000 associated with
assessing, inventorying, remediating and testing internally
developed computer applications, hardware and equipment,
including embedded chip systems and third-party developed
software, to be between $5 million and $7 million. In addition,
as part of the integration of the Company's systems with the
systems of MidCon, the Company has begun modifying certain of its
computer systems for the combined company or purchasing computer
systems from third parties. These computer systems will address
the Year 2000 problem and are expected to be operational prior to
December 31, 1999. The costs for these computer systems are
expected to be between $23 million and $25 million, the majority
of which will be capitalized.
<PAGE> 22 Form 10-Q
The SEC's guidelines also require the Company to address the most
reasonably likely worst case scenarios resulting from the Year
2000 problem. As a result of the Year 2000 problem, the Company
may be faced with: failure of electrical, gas and similar
services and supplies from utilities, disruption of
telecommunications facilities, interruptions in the nation's
transportation systems and failure of a substantial number of the
Company's mission critical hardware and software systems. In
addition, the Company's key suppliers or customers may experience
their own Year 2000 problems in a way that materially adversely
affects the Company's ability to do business without interruption
or disruption. As a result of the cumulative impact of these
events, the Company's business may be materially adversely
affected. The adverse impact of these events occurring can not
be quantified at this time.
The Company is in the process of developing contingency plans to
address issues associated with the reasonably likely worst case
scenarios. The Company expects to have such contingency plans
substantially completed by the end of June 1999. The Company
will then refine and update its contingency plans for the
remainder of 1999.
The Company does not believe that the direct costs associated
with the Year 2000 problem will be material to its business,
financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
There have been no material changes in market risk exposures that
would affect the quantitative and qualitative disclosures
presented as of December 31, 1998, in the "Risk Management"
section of Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 25 of the Company's
1998 Annual Report on Form 10-K.
<PAGE> 23 Form 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 26, 1996, the Company and RMNG, along with over 70 other
natural gas companies, were served by Jack J. Grynberg, acting on
behalf of the Government of the United States, with a Civil False
Claims Act lawsuit alleging mismeasurement of the heating content
and volume of natural gas resulting in underpayment of royalties
to the federal government. The Company and the other named
companies filed a motion to dismiss the lawsuit on grounds of
improper joinder and lack of jurisdiction. The motion was
granted in 1997, but the court gave Mr. Grynberg leave to refile
this action in a court with proper jurisdiction. Mr. Grynberg
appealed the dismissal of the action based on improper joinder,
and the D.C. Court of Appeals affirmed the joinder decision in
October 1998. Mr. Grynberg has filed a new case, modified
somewhat from his original action, in Federal District Court,
District of Colorado. The Department of Justice decided to not
intervene in these cases in support of Grynberg's complaint. The
Company has not yet been served in this action. The Company
believes it has a meritorious position in this matter, and does
not expect this lawsuit to have a material adverse effect on the
Company's business, financial position or results of operations.
On April 16, 1999, Consumer Services Association, Inc. and
Midwest United Energy, L.L.C. filed suit in the U.S. District
Court for the District of Colorado, claiming that the Company has
violated Section 1 and Section 2 of the Sherman Act federal
antitrust laws. These allegations assert various claims
regarding the operation of the Company's "Choice" programs in
Nebraska. Service of process has only recently occurred and no
further activity has taken place in the lawsuit. The Company's
potential liability and the amount of such damages, if any, are
subject to dispute; however, the Company believes it has a
meritorious position in this matter and does not expect this
lawsuit to have a material adverse effect on the Company's
business, financial position or results of operations.
The Company believes it has meritorious defenses to all lawsuits
and legal proceedings in which it is a defendant and will
vigorously defend against them. Based on its evaluation of the
above matters, and after consideration of reserves established,
the Company believes that the resolution of such matters will not
have a material adverse effect on the Company's business,
financial position or results of operations.
Item 6. Exhibits
(A) Exhibits
3 - By-Laws of the Company, as amended on March 9, 1999
27- Financial Data Schedule
(B) Reports on Form 8-K
Current Report on Form 8-K dated February 23, 1999, to report the
entering into an Agreement and Plan of Merger with Sempra Energy,
whereby K N will be merged with and into Cardinal Acquisition
Corp., a wholly owned subsidiary of Sempra Energy.
<PAGE> 24 Form 10-Q
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
K N ENERGY, INC.
(Registrant)
May 17, 1999 /s/ Clyde E. McKenzie
-------------------------
Clyde E. McKenzie
Vice President and Chief Financial Officer
(On Behalf of the Registrant and as
Principal Financial and Accounting Officer)
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
<RECEIVABLES> 609,689
<ALLOWANCES> 11,289
<INVENTORY> 105,905
<CURRENT-ASSETS> 869,987
<PP&E> 7,781,145
<DEPRECIATION> 786,610
<TOTAL-ASSETS> 8,372,325
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<BONDS> 3,300,017
0
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<CGS> 797,833
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<PAGE> 1
K N ENERGY, INC.
(Formerly Kansas-Nebraska Natural Gas Company, Inc.)
---ooOoo---
B Y - L A W S
As Amended to March 9, 1999
Effective March 9, 1999
---ooOoo---
ARTICLE I
OFFICES
Section 1. Offices. The registered office shall be at 205
-------
F Street in the City of Phillipsburg, County of Phillips, State
of Kansas. The Company's principal executive office shall be at
370 Van Gordon Street, Lakewood, Colorado 80228-8304 (mailing
address: Post Office Box 281304, Lakewood, Colorado 80228-8304).
Section 2. Additional Offices. The corporation may also
------------------
have offices at such other places both within and without the
State of Kansas as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
Section 1. Time and Place. The annual meeting of the
--------------
shareholders for the election of directors and all special
<PAGE> 2
meetings of shareholders for that or for any other purpose may be
held at such time and place within or without the State of Kansas
as shall be stated in the notice of the meeting, or in a duly
executed waiver of notice thereof.
Section 2. Annual Meeting. The annual meeting of the
--------------
shareholders shall be held each year at a time to be determined
by the Board of Directors, at which meeting the shareholders
shall elect a Board of Directors, and transact such other
business as may be properly brought before the meeting.
Section 3. Special Meetings. Special meetings of the
----------------
shareholders, for any purpose or purposes, unless otherwise
prescribed by statute may be called by the Chairman of the Board,
if any, the President or the Board of Directors, and shall be
called by the President or the Secretary at the request in
writing of a majority of the directors, or at the request in
writing of shareholders owning at least fifty-one percent (51%)
in amount of the shares of the Corporation issued and outstanding
and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
Section 4. Notice. Written notice of the place, date and
------
hour of any annual or special meeting of shareholders shall be
given personally or by mail to each shareholder entitled to vote
thereat, not less than ten (10) nor more than fifty (50) days
prior to the meeting.
<PAGE> 3
The notice shall state in addition, the purpose or purposes
for which the meeting is called, and by, or at whose direction it
is being issued.
Section 5. Quorum. Except as otherwise provided by the
------
Articles of Incorporation, the holders of a majority of the
shares of the Corporation issued and outstanding and entitled to
vote thereat, present in person or represented by proxy, shall be
necessary to and shall constitute a quorum for the transaction of
business at all meetings of the shareholders.
If, however, such quorum shall not be present or represented
at any meeting of the shareholders, the shareholders entitled to
vote thereat present in person or represented by proxy shall have
power to adjourn the meeting from time to time, but not for more
than thirty (30) days, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall
be present or represented, any business may be transacted which
might have been transacted at the meeting as originally noticed.
Section 6. Voting. At any meeting of the shareholders
------
every shareholder having the right to vote shall be entitled to
vote in person, or by proxy. Except as otherwise provided by law
or the Articles of Incorporation, each shareholder of record
shall be entitled, as to each proposal, to one vote for each
share of stock standing in his name on the books of the
Corporation on the date fixed as the record date for the
<PAGE> 4
determination of its shareholders entitled to vote. All
elections of directors shall be by written ballot and shall be
determined by a plurality vote, and, except as otherwise provided
by law or the Articles of Incorporation, all other matters shall
be determined by vote of a majority of the shares present or
represented at such meeting and voting on such questions.
Section 7. Proxies. Every proxy must be executed in
-------
writing by the shareholder or by his attorney-in-fact. No proxy
shall be valid after the expiration of eleven (11) months from
the date thereof, unless otherwise provided in the proxy. Every
proxy shall be revocable at the pleasure of the shareholder
executing it, except in those cases where an irrevocable proxy is
permitted by law.
Section 8. Consents. Whenever by any provision of law or
--------
of the Articles of Incorporation, the vote of shareholders at a
meeting thereof is required or permitted to be taken in
connection with any corporate action, the meeting and vote of
shareholders may be dispensed with, if all the shareholders who
would have been entitled to vote upon the action if such meeting
were held, shall consent in writing to such corporate action
being taken.
Section 9. Presiding Officer. Meetings of the shareholders
-----------------
shall be presided over by the Chairman of the Board, if any, or
if he is not present, by the President, or, if he is not present,
<PAGE> 5
by a Vice President or, if neither the Chairman of the Board, the
President nor a Vice President is present, by a chairman to be
chosen at the meeting. The Secretary of the Company or, if he is
not present, an Assistant Secretary of the Company or, if neither
the Secretary nor an Assistant Secretary is present, a secretary
to be chosen at the meeting, shall act as secretary of the
meeting.
Section 10. Notice of Shareholder Business. At an annual
------------------------------
meeting of shareholders, only such business shall be conducted as
shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by a shareholder
who is a shareholder of record at the time of giving such notice,
who shall be entitled to vote at such meeting and who complies
with the notice procedures set forth in this Section. For
business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary. To be timely, a
shareholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation, not less
than 40 days prior to the meeting. A shareholder's notice to the
Secretary shall set forth as to each matter the shareholder
proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at
<PAGE> 6
the annual meeting, (b) the name and address, as they appear on
the Corporation's books, of the shareholder proposing such
business, (c) the class and number of shares of the Corporation
which are beneficially owned by the shareholder, and (d) any
material interest of the shareholder in such business.
Nothwithstanding anything in these By-Laws to the contrary, no
business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section. The
Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the
provisions of this Section, and if he should so determine, he
shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section, a
shareholder shall also comply with all applicable requirements of
the Securities Exchange Act of 1934, as amended and the rules and
regulations thereunder with respect to the matters set forth in
this Section.
ARTICLE III
DIRECTORS
Section 1. Number and Tenure. The whole Board of Directors
-----------------
of the Corporation shall consist of fifteen members. The
<PAGE> 7
directors shall be classified with respect to the time for which
they shall severally hold office by dividing them into three
classes, which were first approved at the annual meeting of
shareholders in 1975; Class I shall consist of three directors
whose initial term of office shall expire in 1994, Class II shall
consist of four directors whose initial term of office shall
expire in 1995, and Class III shall consist of three directors
whose initial term of office shall expire in 1996. Each director
shall hold office until his successor is duly elected and
qualified or until his resignation in writing has been filed with
the corporation. At each annual election, the successors of the
class of directors whose terms shall expire that year shall be
elected to hold office for a term of three years, so that the
term of office of one class of directors shall expire in each
year, except where the Board of Directors determines that a newly
elected director shall be elected by the shareholders to fill a
vacancy of a directorship created subsequent to the previous
annual meeting, such director shall be elected to hold office for
the balance of the term of the class of directors of which he is
to be a member, as determined by the Board of Directors, and
until his successor is elected and qualified.
Section 2. Vacancies. A vacancy on the Board of Directors
---------
or a newly created directorship may be filled by a majority of
the remaining directors, though less than a quorum, or by the
<PAGE> 8
sole director, by election of a new director, who at the time of
his election shall be designated as a member of one of the
classes of directors and shall hold office until the next
election of the class of which he has become a member, unless his
term of office is terminated by death, resignation, or otherwise.
Section 3. Resignation, Retirement; Removal. Any director
--------------------------------
may resign at any time. Any director who experiences a change in
his personal or business circumstances or principal employment
shall immediately tender his resignation as a director of the
Corporation to the Executive Committee of the Board of Directors.
From and after the annual meeting of shareholders held in the
year 2000, any director who is not an employee of the Corporation
shall retire his position as a director at the annual meeting of
the shareholders of the Corporation next occurring after such
director attains the age of 72 years. The Board of Directors may
by unanimous vote of other directors then in office, remove a
director with or without cause. The shareholders entitled to
vote for the election of directors may remove a director, with
cause as provided in the Articles of Incorporation.
Section 4. Advisory Directors and Directors Emeritus. The
-----------------------------------------
Board of Directors by a vote of a majority of the directors
present and entitled to vote, at any regular or special meeting
at which a quorum is present, may designate such number of
persons as it may from time to time determine, as an "Advisory
<PAGE> 9
Director" or may designate a former member of the Board as a
"Director Emeritus," if such former member is willing to so
serve. Each Advisory Director and each Director Emeritus shall
serve, subject to the pleasure of the regular Board of Directors,
until the next succeeding annual meeting of the regular Board of
Directors, following the annual meeting of the stockholders, at
which such regular directors are elected, unless he shall have
resigned. Each Advisory Director and each Director Emeritus
shall be notified of all regular or special meetings of the
regular Board of Directors, shall be entitled to attend and
participate therein, but shall not be entitled to vote. Each
Advisory Director and each Director Emeritus shall be reimbursed
for any necessary expenses of attending directors' meetings.
Section 5. Nomination of Director Candidates.
---------------------------------
(a) Eligibility to Make Nominations. Nominations of
-------------------------------
candidates for election as directors of the Corporation at any
meeting of shareholders called for election of directors, in
whole or in part (an "Election Meeting"), may be made by the
Board of Directors or by any shareholder who is a shareholder of
record at the time of giving notice, who shall be entitled to
vote at such Election Meeting and who complies with the notice
procedures set forth in this Section.
(b) Procedure for Nominations by Shareholders.
-----------------------------------------
Nominations, other than those made by the Board of Directors,
<PAGE> 10
shall be made pursuant to timely notice in writing to the
Secretary. To be timely, shareholder's notice shall be delivered
to or mailed and received at the principal executive offices of
the Corporation not less than 40 days prior to the date of the
Election Meeting. Such shareholder's notice shall set forth (i)
the name, age, business address and residence address of each
nominee proposed in such notice, (ii) the principal occupation or
employment of each such nominee, (iii) the number of shares of
capital stock of the Corporation which are beneficially owned by
each such nominee and (iv) such other information concerning each
such nominee as would be required, under the rules of the SEC, in
a proxy statement soliciting proxies for the election of such
nominees. Such notice shall include a signed consent to serve as
a director of the Corporation, if elected, of each such nominee.
Such notice shall also set forth as to the shareholder giving the
notice (i) the name and address, as they appear on the Corpora-
tion's books, of such shareholder and (ii) the class and number
of shares of the Corporation which are beneficially owned by such
shareholder.
(c) Meeting Procedures. No person shall be eligible for
------------------
election as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section. The
Chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in
<PAGE> 11
accordance with the procedures prescribed by this Section 5, and
if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
(d) Substitution of Nominees. In the event that a person
------------------------
is validly designated as a nominee to the Board and shall
thereafter become unable or unwilling to stand for election to
the Board of Directors, the Board of Directors or the shareholder
who proposed such nominee, as the case may be, may designate a
substitute nominee.
(e) Securities Exchange Act of 1934. Notwithstanding the
-------------------------------
foregoing provisions of this Section, a shareholder shall also
comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended and the rules and regulations
thereunder with respect to the matters set forth in this Section.
ARTICLE IV
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. Place. The Board of Directors of the
-----
Corporation may hold meetings, both regular and special, either
within or without the State of Kansas.
Section 2. Regular Meetings. Regular meetings of the Board
----------------
of Directors may be held without notice at such time and at such
place as shall from time to time be determined by the Board.
<PAGE> 12
Section 3. Special Meetings. Special meetings of the Board
----------------
of Directors may be called by the Chairman of the Board, if any,
or by the President on two days' notice to each director, either
personally or by mail or by telegram; special meetings shall be
called by the Chairman, President or Secretary in like manner and
on like notice on the written request of two directors.
Section 4. Quorum. At all meetings of the Board of
------
Directors a majority of the entire Board shall be necessary to
and constitute a quorum for the transaction of business and the
act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by
statute or by the Articles of Incorporation. If a quorum shall
not be present at any meeting of the Board of Directors the
directors present thereat may adjourn the meeting from time to
time until a quorum shall be present. Notice of such adjournment
shall be given to any directors who were not present and, unless
announced at the meeting, to the other directors.
Section 5. Consents. Unless otherwise restricted by the
--------
Articles of Incorporation or these By-Laws, any action required
or permitted to be taken at any meeting of the Board of Directors
or of any committee thereof may be taken without a meeting, if
all members of the Board or of such committee as the case may be,
consent thereto in writing and such written consent is filed with
<PAGE> 13
the minutes of the Board or committee. Such consents may be in
counterpart so that each member will have signed a consent, but
all members need not sign the same document.
Section 6. Compensation. Directors, as such, shall not
------------
receive any stated salary for their services, but, by resolution
of the Board of Directors an annual fee, plus a fee and expenses
for attendance at meetings may be allowed, provided that nothing
herein contained shall be construed to preclude any director from
serving the Corporation in any other capacity and receiving
compensation therefor.
Section 7. Presiding Officer. Meetings of the Board of
-----------------
Directors shall be presided over by the Chairman of the Board, if
any, or, if he is not present, by the President or, if he is not
present, by a chairman to be chosen at the meeting. The
Secretary of the Company, or, if he is not present, an Assistant
Secretary of the Company, or, if neither the Secretary nor an
Assistant Secretary is present, a secretary to be chosen at the
meeting, shall act as secretary of the meeting.
ARTICLE V
COMMITTEES OF DIRECTORS
Section 1. Designation. The Board of Directors, by
-----------
resolution adopted by a majority of the whole Board, may
designate from among its members one or more committees, each
<PAGE> 14
consisting of two or more directors, each of which, to the extent
provided in such resolution, shall have and may exercise the
powers of the Board of Directors in the business and affairs of
the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it.
The Board may designate one or more directors as alternate
members of any committee who may replace any absent or
disqualified member at any meeting of the committee.
Section 2. Tenure; Reports. Each such committee shall
---------------
serve at the pleasure of the Board. It shall keep minutes of its
meetings and report the same to the Board.
ARTICLE VI
EXECUTIVE COMMITTEE
Section 1. Appointment and Authority. The Board of
-------------------------
Directors may by resolution or resolutions passed by a majority
of the whole Board create and designate an Executive Committee
consisting of the officer who is designated as Chief Executive
Officer and two or more other directors of the Company who shall
hold office subject to the pleasure of the Board of Directors,
and the Board shall have the power at any time to remove any of
the members of the Executive Committee and to appoint to the
Committee other directors in lieu of the directors so removed.
The Chief Executive Officer shall serve as Chairman of the
<PAGE> 15
Executive Committee. During the intervals between the meetings
of the Board of Directors the Executive Committee shall possess
and may exercise the powers delegated by the Board of Directors,
including the power to authorize the seal of the Company to be
affixed to all papers which may require it, to authorize the
payment of dividends, to authorize the issuance of stock, to
serve as a nominating committee for the Board of Directors and to
approve resolutions necessary for the day-to-day operations of
the Company; provided, however, that the Executive Committee
shall not have power to amend these By-Laws or to fill vacancies
on the Board of Directors or to fill vacancies in, or to change
the membership of, said Committee. The Executive Committee shall
also have and may exercise all the powers of the Board of
Directors except as aforesaid whenever a quorum of the Board
shall fail to be present at any meeting of the Board.
Section 2. Report of Action Taken. All action of the
----------------------
Executive Committee shall be reported to the Board of Directors
at its meeting next succeeding such action, and shall be subject
to revision and alteration by the Board, provided that no rights
of third parties shall be affected by any such revision or
alteration. Regular minutes of the proceedings of the Executive
Committee shall be kept in a book provided for that purpose.
Section 3. Quorum and Procedure. A majority of the members
--------------------
of the Executive Committee shall be necessary to constitute a
<PAGE> 16
quorum, and, in every case, an affirmative vote of a majority of
the members shall be necessary for the passage of any
resolution. It shall fix its own rules of procedure and shall
meet as provided by such rules or by resolution of the Board, and
it shall also meet at the call of the Chairman or of any two
members of the Committee. Should the Executive Committee fail to
fix its own rules therefor, the provisions of these By-Laws,
pertaining to the calling of meetings and conduct of business by
the Board of Directors, shall apply as nearly as may be.
Section 4. Consent. Unless otherwise restricted by
-------
statute, the Articles of Incorporation or these By-Laws, any
action required or permitted to be taken at any meeting of the
Executive Committee thereof may be taken without a meeting, if a
written consent thereto is signed by each member of the Executive
Committee, and such written consent is filed with the minutes of
proceedings of the Executive Committee. Such consents may be in
counterpart so that each member will have signed a consent but
all members need not sign the same document.
ARTICLE VII
NOTICES
Section 1. Form; Delivery. Notices to directors and
--------------
shareholders shall be in writing and delivered personally or
mailed to the directors or shareholders at their addresses
<PAGE> 17
appearing on the books of the Corporation. Notice by mail shall
be deemed to be given at the time when the same shall be mailed.
Notice to directors may also be given by telegram.
Section 2. Waiver. Whenever any notice is required to be
------
given under the provisions of the statutes or of the Articles of
Incorporation or of these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed
equivalent thereto. In addition, any shareholder attending a
meeting of shareholders in person or by proxy without protesting
at the beginning of the meeting the lack of notice thereof to
him, and any director attending a meeting of the Board of
Directors without protesting prior to the meeting or at its
commencement such lack of notice shall be conclusively deemed to
have waived notice of such meeting.
ARTICLE VIII
OFFICERS
Section 1. Executive Officers. The executive officers of
------------------
the Corporation shall be a President and one or more Vice
Presidents, a Secretary, a Treasurer and may include a Chairman
of the Board.
Section 2. Designation; Term of Office; Removal. All
------------------------------------
officers shall be elected by the Board of Directors and shall
<PAGE> 18
hold office for such term as may be prescribed by the Board or
until their successors are chosen and qualified or until their
resignation is filed in the office of the Secretary, whichever
first occurs. Any officer elected by the Board may be removed
with or without cause at any time by the Board.
Section 3. Authority and Duties. All officers, as between
--------------------
themselves and the Corporation, shall have such authority and
perform such duties in the management of the Corporation as may
be provided in these By-Laws, or, to the extent not so provided,
by the Board of Directors.
Section 4. Compensation. The compensation of all officers
------------
of the Corporation shall be fixed by the Board of Directors and
the compensation of agents shall either be so fixed or shall be
fixed by officers thereunto duly authorized.
Section 5. Vacancies. If an office becomes vacant for any
---------
reason, the Board of Directors shall fill such vacancy. Any
officer so elected by the Board shall serve only until such time
as the unexpired term of his predecessor shall have expired
unless re-elected or reappointed by the Board.
Section 6. The Chairman of the Board. The Chairman of the
-------------------------
Board of Directors, if there be a Chairman, shall preside at all
meetings of the shareholders and directors and shall have such
other powers and duties as may from time to time be assigned by
<PAGE> 19
the Board including designation as Chief Executive Officer if the
President is not so designated.
Section 7. The President. The President shall be the Chief
-------------
Executive Officer of the Corporation unless the Chairman of the
Board is so designated, in which event the President shall be
Chief Operating Officer of the Corporation. In the absence of
the Chairman of the Board, or if there be no Chairman, he shall
preside at all meetings of the shareholders and directors. The
Chief Executive Officer, whether the Chairman of the Board or the
President, shall be ex officio a member of all standing
committees, shall have general and active management and control
of the business and affairs of the Corporation subject to the
control of the Board of Directors, and shall see that all orders
and resolutions of the Board are carried into effect.
Section 8. Vice Presidents. The Vice Presidents in the
---------------
order of their seniority or in any other order determined by the
Board, shall in the absence or disability of the President,
perform the duties and exercise the powers of the President, and
shall generally assist the President and perform such other
duties as the Board of Directors or the President shall
prescribe.
Section 9. The Secretary. The Secretary shall attend all
-------------
meetings of the Board and all meetings of the shareholders and
record all votes and the minutes of all proceedings in a book to
<PAGE> 20
be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be
given, notice of all meetings of the shareholders and special
meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall act. He shall keep
in safe custody the seal of the Corporation and, when authorized
by the Board, affix the same to any instrument requiring it and,
when so affixed, it shall be attested by his signature or by the
signature of the Treasurer or an Assistant Secretary or Assistant
Treasurer. He shall keep in safe custody the certificate books
and shareholder records and such other books and records as the
Board may direct and shall perform all other duties incident to
the office of the Secretary.
Section 10. Assistant Secretaries. The Assistant
---------------------
Secretaries, if any, in order of their seniority or in any other
order determined by the Board shall, in the absence or disability
of the Secretary, perform the duties and exercise the powers of
the Secretary and shall perform such other duties as the Board of
Directors or the Secretary shall prescribe.
Section 11. The Treasurer. The Treasurer shall have the
-------------
custody of the corporate funds and securities and shall keep full
and accurate accounts of receipts and disbursements in books
belonging to the corporation and shall deposit all moneys and
<PAGE> 21
other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the
Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the
President and the Board of Directors at its regular meetings, or
when the Board of Directors so requires, an account of all his
transactions as Treasurer and of the financial condition of the
Corporation. He shall establish and execute programs for the
provision of the capital required by the Company, including
negotiating the procurement of capital and maintaining the
required financial arrangements. He shall establish and maintain
an adequate market for the Company's securities and, in
connection therewith, maintain adequate liaison with investment
bankers, financial analysts and shareholders. He shall maintain
adequate sources for the Company's current borrowings from
commercial banks and other lending institutions.
He shall maintain banking arrangements to receive, have
custody of and disburse the Company's moneys and securities. He
shall invest the Company's funds as required and establish and
coordinate policies for investment in pension and other similar
trusts.
Section 12. Assistant Treasurers. The Assistant
--------------------
Treasurers, if any, in the order of their seniority or in any
<PAGE> 22
other order determined by the Board, shall in the absence or
disability of the Treasurer, perform the duties and exercise the
power of the Treasurer and shall perform such other duties as the
Board of Directors or the Treasurer shall prescribe.
ARTICLE IX
CERTIFICATE OF SHARES
Section 1. Form; Signature. The certificates for shares of
---------------
the Corporation shall be in such form as shall be determined by
the Board of Directors and shall be numbered consecutively and
entered in the books of the Corporation as they are issued. Each
certificate shall exhibit the registered holder's name and the
number and class of shares, and shall be signed by the President
or a Vice President and the Treasurer or an Assistant Treasurer
or the Secretary or an Assistant Secretary, and shall bear the
seal of the Corporation or a facsimile thereof. Where any such
certificate is countersigned by a transfer agent or by a
registrar other than the Corporation, the signature of any such
officer may be a facsimile signature. In case any officer who
signed, or whose facsimile signature or signatures were placed on
any such certificate shall have ceased to be such officer before
such certificate is issued, it may nevertheless be issued by the
Corporation with the same effect as if he were such officer at
the date of issue.
<PAGE> 23
Section 2. Lost Certificates. The Board of Directors may
-----------------
direct a new share certificate or certificates to be issued in
place of any certificate or certificates theretofore issued by
the Corporation alleged to have been lost or destroyed, upon the
making of an affidavit of that fact by the person claiming the
certificate to be lost or destroyed. When authorizing such issue
of a new certificate or certificates, the Board of Directors may,
in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost or destroyed certificate
or certificates, or his legal representative, to give the
Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost or
destroyed.
Section 3. Registration of Transfer. Upon surrender to the
------------------------
Corporation or any transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it
shall be the duty of the Corporation, or such transfer agent to
issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 4. Registered Shareholders. Except as otherwise
-----------------------
provided by law, the Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the
<PAGE> 24
owner of shares to receive dividends or other distributions, and
to vote as such owner, and to hold liable for calls a person
registered on its books as the owner of shares, and shall not be
bound to recognize any equitable or legal claim to or interest in
such share or shares on the part of any other person.
Section 5. Record Date. For the purpose of determining the
-----------
shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or to express consent to
or dissent from any proposal without a meeting, or for the
purpose of determining shareholders entitled to receive payment
of any dividend or the allotment of any rights, or for the
purpose of any other action affecting the interests of
shareholders, the Board of Directors may fix, in advance, a
record date. Such date shall not be more than sixty (60) nor
less than ten (10) days before the date of any such meeting, nor
more than sixty (60) days prior to any other action.
In each such case, except as otherwise provided by law, only
such persons as shall be shareholders of record on the date so
fixed shall be entitled to notice of, and to vote at, such
meeting and any adjournment thereof, or to express such consent
or dissent, or to receive payment of such dividend, or such
allotment of rights, or otherwise to be recognized as
shareholders for the related purpose, notwithstanding any
<PAGE> 25
registration of transfer of shares on the books of the
Corporation after any such record date so fixed.
ARTICLE X
GENERAL PROVISIONS
Section 1. Dividends. Subject to the provisions of the
---------
Articles of Incorporation, if any, dividends upon the outstanding
shares of the Corporation may be declared by the Board of
Directors at any regular or special meeting, pursuant to law and
may be paid in cash, in property, or in shares of the
Corporation.
Section 2. Reserves. Before payment of any dividends,
--------
there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the directors from
time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the directors shall
think conducive to the interest of the Corporation, and the
directors may modify or abolish any such reserve in the manner in
which it was created.
Section 3. Annual Statement. The Board of Directors shall
----------------
present at each annual meeting, and at any special meeting of the
stockholders when called for by vote of the stockholders, a full
<PAGE> 26
and clear statement of the business and condition of the
corporation.
Section 4. Instruments Under Seal. All deeds, bonds,
----------------------
mortgages, contracts, and other instruments requiring a seal may
be signed in the name of the Corporation by the President or by
any other officer authorized to sign such instrument by the
President or the Board of Directors.
Section 5. Checks. All checks or demands for money and
------
notes or other instrument evidencing indebtedness or obligation
of the Corporation shall be signed by such officer or officers or
such other person or persons as the Board of Directors may from
time to time designate.
Section 6. Fiscal Year. The fiscal year of the Corporation
-----------
shall begin on the first day of January of each year and shall
end on the thirty-first day of December following.
Section 7. Seal. The corporate seal shall have inscribed
----
thereon the name of the corporation and the words "Corporate
Seal, Kansas 1927." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE XI
AMENDMENTS
Section 1. These By-Laws may be altered or repealed at any
regular meeting of the Board of Directors, or at any special
<PAGE> 27
meeting of the Board of Directors if notice of such alteration or
repeal be contained in the notice of such special meeting.
ARTICLE XII
SPECIAL MANAGEMENT PROVISIONS
Section 1. General. The provisions of this Article XII of
-------
the By-Laws have been adopted by the Board of Directors of the
Corporation pursuant to that certain Agreement of Merger by and
between the Corporation, KNE Acquisition Corporation, a Delaware
corporation, and American Oil and Gas Corporation, a Delaware
corporation dated March 24, 1994 (the "Merger Agreement").
Capitalized terms used in this Article XII not otherwise defined
herein shall have the meaning ascribed to them in the Merger
Agreement. The provisions of this Article XII shall be effective
from and after the Effective Time notwithstanding any other
provisions of these By-Laws to the contrary. In the event of a
conflict between the provisions of this Article XII and other
provisions of the By-Laws, the provisions of this Article XII
shall control.
Section 2. Cabot Director. For so long as Cabot
--------------
Corporation shall continue to own beneficially (within the
meaning of Rule 13d-3 promulgated by the Securities and Exchange
Commission) 10% or more of the issued and outstanding voting
stock of the Corporation, Cabot Corporation shall have the right
<PAGE> 28
to designate one person to serve as an advisory director of the
Corporation. In the event beneficial ownership of Cabot
Corporation of the issued and outstanding voting stock of the
Corporation falls below 10% but constitutes more than 5%, the
Board of Directors shall appoint the Cabot Corporation advisory
director as a full director, to serve the then remaining term of
a Class II director. For so long as Cabot Corporation continues
to own beneficially less than 10% but more than 5% of the issued
and outstanding voting stock of the Corporation, the Board of
Directors shall nominate a Cabot Corporation designee (provided
that such nominee is otherwise qualified as required by these By-
Laws) for election by the Corporation's stockholders as a
director. The Corporation shall at all times during which Cabot
Corporation shall beneficially own in excess 10% of the issued
and outstanding voting stock of the Corporation, maintain a
vacancy on its Board of Directors for such Cabot designee.
Section 3. Vacancies in Certain Offices. Any vacancy
----------------------------
arising following the Effective Time and prior to the
Corporation's Annual Meeting of Stockholders in 1996, in the
offices of the Chairman of the Board, Vice-Chairman of the Board,
President, Chief Executive Officer or Chief Operating Officer, or
on the Management Committee or the Chairman of the Management
Committee, shall be filled by the Board of Directors upon
recommendation by a Special Nominating Committee of the Board of
<PAGE> 29
Directors. The Board of Directors shall by majority vote
establish a Special Nominating Committee in the event of a
vacancy in any of the foregoing positions. The Special
Nominating Committee shall consist of four directors, two of whom
shall be designated by the Board of Directors from the directors
of the Corporation who served as a director prior to the
Effective Time, and two of whom shall be designated by the
directors designated by American Oil and Gas Corporation in the
Merger Agreement.
Section 4. Continuation of Retirement Policy. The
---------------------------------
Corporation shall continue its present retirement policy that
officers of the Corporation (including the Chairman of the Board,
Vice-Chairman of the Board, President and Chief Executive Officer
or Chief Operating Officer) shall be ineligible and cease to
serve as an officer of the Corporation as of the first of the
month coincident with or next following his or her 65th birthday.
Section 5. Super-Majority Vote. For purposes of this
-------------------
Article XII, the term "Super-Majority Vote" shall mean the
affirmative vote of at least 12 of a 14-member Board of
Directors; at least 11 of a 13-member Board of Directors; at
least 10 of a 12-member Board of Directors; at least 9 of an 11-
member Board of Directors; or in all other cases, the affirmative
vote of a number of directors equal to at least 85% of the total
number of directors. A Super-Majority Vote shall be required for
<PAGE> 30
the following actions to be taken by the Board of Directors; (i)
amendment, modification or revocation of any provision of this
Article XII; (ii) amendment, modification or revocation of the
current retirement policy of the Corporation; and (iii) any
increase in the number of members to serve on the Board of
Directors; provided that, no Super-Majority Vote shall be
required for any such action taken by the Board of Directors from
and after the date of the annual stockholders meeting for 1997.
I hereby certify that the foregoing are the By-Laws of K N
Energy, Inc. as the same were adopted at the meeting of the
Board of Directors on May 20, 1975, and subsequently amended at
meetings of the Board of Directors on November 20, 1975,
November 8, 1978, August 5, 1983, November 11, 1983, November 16,
1984, January 9, 1988, March 24, 1989, August 10, 1989,
January 20, 1991, November 10, 1993, June 24, 1994, July 13,
1994, April 11, 1996, February 10, 1998, March 9, 1999, and are
still in force and effect on this 9th day of March, 1999.
/s/ Martha B. Wyrsch
---------------------
Martha B. Wyrsch
Secretary
