-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WetrteWGBvmBHQ1edLT3DDlV4UYb3mFixJ6NzDCScmYnJsgxh7ynLXuPU/9xNd2K ephFjS3zUsDZxRIVdoKQVA== 0000054502-00-000011.txt : 20000511 0000054502-00-000011.hdr.sgml : 20000511 ACCESSION NUMBER: 0000054502-00-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINDER MORGAN INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 480290000 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06446 FILM NUMBER: 625235 BUSINESS ADDRESS: STREET 1: 370 VAN GORDON STREET CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 BUSINESS PHONE: 7138449500 MAIL ADDRESS: STREET 1: 1301 MCKINNEY STREET 2: SUITE 3400 CITY: HOUSTON STATE: TX ZIP: 77010 FORMER COMPANY: FORMER CONFORMED NAME: K N ENERGY INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: KN ENERGY INC DATE OF NAME CHANGE: 19920430 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS NEBRASKA NATURAL GAS CO INC DATE OF NAME CHANGE: 19830403 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 -------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to______ Commission File Number 1-6446 ------ KINDER MORGAN, INC. ------------------- (Exact name of registrant as specified in its charter) Kansas 48-0290000 - ---------------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1301 McKinney, Suite 3400, Houston, Texas 77010 - ---------------------------------------- ----------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 844-9500 --------------- - ------------------------------------------------------------------------------ (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 --- --- The number of shares outstanding for each of the registrant's classes of common stock, as of the latest practicable date was: Common Stock, $5 par value; outstanding 114,154,007 shares as of April 26, 2000. 2 KINDER MORGAN, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 2000 Contents PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements (Unaudited) ------- Consolidated Balance Sheets.............................. 3 - 4 Consolidated Statements of Income........................ 5 Consolidated Statements of Cash Flows.................... 6 Notes to Consolidated Financial Statements............... 7 - 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 20 - 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 31 Item 6. Exhibits and Reports on Form 8-K............................ 31 SIGNATURE............................................................. 32 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (Unaudited) Kinder Morgan, Inc. and Subsidiaries (Dollars in Thousands)
March 31, December 31, 2000 1999 ------------ ------------ ASSETS: Current Assets: Cash and Cash Equivalents $ 19,714 $ 26,378 Restricted Deposits 51 51 Accounts Receivable 366,232 306,451 Receivable from ONEOK, Inc. 163,856 - Receivable from Kinder Morgan Energy Partners - 330,000 Inventories 31,072 50,328 Gas Imbalances 152,701 172,501 Other 13,061 19,154 Net Current Assets of Discontinued Operations 87,926 58,991 ----------- ----------- 834,613 963,854 ----------- ----------- Investments: Kinder Morgan Energy Partners 1,802,243 1,791,768 Other 132,091 126,103 ----------- ----------- 1,934,334 1,917,871 ----------- ----------- Property, Plant and Equipment 6,151,253 6,167,251 Less Accumulated Depreciation and Amortization 371,672 377,687 ----------- ----------- 5,779,581 5,789,564 ----------- ----------- Deferred Charges and Other Assets 226,278 209,758 Net Non-current Assets of Discontinued Operations 74,127 659,236 ----------- ----------- Total Assets $ 8,848,933 $ 9,540,283 =========== =========== The accompanying notes are an integral part of these statements.
4 CONSOLIDATED BALANCE SHEETS (Unaudited) Kinder Morgan, Inc. and Subsidiaries (Dollars in Thousands)
March 31, December 31, 2000 1999 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current Maturities of Long-term Debt $ 7,167 $ 7,167 Notes Payable 437,100 574,400 Accounts Payable 248,299 224,625 Accrued Taxes 43,425 36,075 Gas Imbalances 148,866 196,469 Payable for Purchase of Thermo Companies 44,882 44,320 Reserve for Loss on Disposal of Discontinued Operations 41,626 535,630 Other 160,109 206,620 ----------- ----------- 1,131,474 1,825,306 ----------- ----------- Other Liabilities and Deferred Credits: Deferred Income Taxes 2,167,142 2,228,553 Other 258,137 242,926 ----------- ----------- 2,425,279 2,471,479 ----------- ----------- Long-term Debt 3,293,168 3,293,326 ----------- ----------- Kinder Morgan-Obligated Mandatorily Redeemable Preferred Capital Trust Securities of Subsidiary Trusts Holding Solely Debentures of Kinder Morgan 275,000 275,000 ----------- ----------- Minority Interests in Equity of Subsidiaries 7,333 9,331 ----------- ----------- Stockholders' Equity: Common Stock- Authorized - 150,000,000 Shares, Par Value $5 Per Share Outstanding - 113,120,002 and 112,665,977 Shares, Respectively, After Deducting 172,402 and 172,402 Shares Held in Treasury 566,462 564,192 Additional Paid-in Capital 1,209,535 1,203,008 Retained Earnings Deficit (55,175) (95,615) Other (4,143) (5,744) ----------- ----------- Total Stockholders' Equity 1,716,679 1,665,841 ----------- ----------- Total Liabilities and Stockholders' Equity $ 8,848,933 $ 9,540,283 =========== =========== The accompanying notes are an integral part of these statements.
5 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Kinder Morgan, Inc. and Subsidiaries (In Thousands except Per Share Amounts)
Three Months Ended March 31, -------------------------- 2000 1999 ---- ---- Operating Revenues: Natural Gas Sales $ 287,441 $ 210,134 Natural Gas Transportation and Storage 165,276 199,776 Other 27,795 17,357 ---------- ---------- Total Operating Revenues 480,512 427,267 ---------- ---------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 276,577 205,905 Operations and Maintenance 41,678 45,286 General and Administrative 14,293 20,349 Depreciation and Amortization 26,761 44,140 Taxes, Other Than Income Taxes 6,807 8,511 Merger-related Costs - 2,916 ---------- ---------- Total Operating Costs and Expenses 366,116 327,107 ---------- ---------- Operating Income 114,396 100,160 ---------- ---------- Other Income and (Deductions): Kinder Morgan Energy Partners: Equity in Earnings 29,583 - Amortization of Excess Investment (7,577) - Equity in Earnings of Other Equity Investments (2,899) 6,573 Interest Expense, Net (60,399) (62,917) Minority Interests (5,965) (5,979) Other, Net 9,672 1,357 ---------- ---------- Total Other Income and (Deductions) (37,585) (60,966) ---------- ---------- Income from Continuing Operations Before Income Taxes 76,811 39,194 Income Taxes 30,727 15,286 ---------- ---------- Income from Continuing Operations 46,084 23,908 Loss from Discontinued Operations, Net of Tax - (16,786) ---------- ---------- Net Income 46,084 7,122 Less - Preferred Dividends - 88 ---------- ---------- Earnings Available For Common Stock $ 46,084 $ 7,034 ========== ========== Number of Shares Used in Computing Basic Earnings Per Common Share (Thousands) 113,058 69,486 ========== ========== Basic Earnings (Loss) Per Common Share: Continuing Operations $ 0.41 $ 0.34 Discontinued Operations - (0.24) ---------- ---------- Total Basic Earnings Per Common Share $ 0.41 $ 0.10 ========== ========== Number of Shares Used in Computing Diluted Earnings Per Common Share (Thousands) 113,456 69,578 ========== ========== Diluted Earnings (Loss) Per Common Share: Continuing Operations $ 0.41 $ 0.34 Discontinued Operations - (0.24) ---------- ---------- Total Diluted Earnings Per Common Share $ 0.41 $ 0.10 ========== ========== Dividends Per Common Share $ 0.05 $ 0.20 ========== ========== The accompanying notes are an integral part of these statements.
6 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Kinder Morgan, Inc. and Subsidiaries Increase (Decrease) in Cash and Cash Equivalents (In Thousands)
Three Months Ended March 31, ------------------------- 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Income from Continuing Operations $ 46,084 $ 23,908 Adjustments to Reconcile Income from Continuing Operations to Net Cash Flows from Operating Activities: Depreciation and Amortization 26,761 44,140 Deferred Income Taxes 27,561 1,735 Equity in Earnings of Kinder Morgan Energy Partners (22,006) - Distributions from Kinder Morgan Energy Partners 15,919 - Deferred Purchased Gas Costs 2,236 3,297 Net Gains on Sales of Facilities (1,343) (179) Changes in Other Working Capital Items (Note 7) (64,958) (93,006) Changes in Deferred Revenues (1,393) (3,455) Other Non-cash Charges and Credits to Income (5,692) (10,924) Other, Net (6,886) (10,045) ---------- ---------- Net Cash Flows Provided by (Used in) Continuing Operations 16,283 (44,529) Net Cash Flows Provided by (Used in) Discontinued Operations (132,042) 82,762 ---------- ---------- NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (115,759) 38,233 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (24,103) (18,998) Proceeds from Sales to Kinder Morgan Energy Partners 330,000 - Acquisitions (19,412) (15,000) Investments (19,367) (2,056) Sale of Tom Brown, Inc. Common Stock 13,350 - Sale of U.S. Government Securities - 1,092,415 Proceeds from Sales of Other Assets 854 1,045 ---------- ---------- Net Cash Flows Provided by Continuing Investing Activities 281,322 1,057,406 Net Cash Flows Used in Discontinued Investing Activities (49,333) (21,824) ---------- ---------- NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 231,989 1,035,582 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term Debt, Net (137,300) 325,236 Repayment of Substitute Note - (1,394,846) Long-term Debt Retired (317) (3,317) Common Stock Issued 8,797 5,925 Other Borrowings 11,818 - Treasury Stock Issued - 25 Treasury Stock Acquired - (43) Cash Dividends, Common and Preferred (5,645) (14,007) Minority Interests, Net (247) - ---------- ---------- NET CASH FLOWS USED IN FINANCING ACTIVITIES (122,894) (1,081,027) ---------- ---------- Net Decrease in Cash and Cash Equivalents (6,664) (7,212) Cash and Cash Equivalents at Beginning of Period 26,378 16,247 ---------- ---------- Cash and Cash Equivalents at End of Period $ 19,714 $ 9,035 ========== ========== For supplemental cash flow information, see Note 7. The accompanying notes are an integral part of these statements.
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General ------- Effective with K N Energy, Inc.'s October 1999 acquisition of Kinder Morgan, Inc., a Delaware corporation ("Kinder Morgan Delaware"), K N Energy, Inc. changed its name to Kinder Morgan, Inc. As used herein, "Kinder Morgan" refers to Kinder Morgan, Inc. (a Kansas corporation and formerly K N Energy, Inc.) and its consolidated subsidiaries unless the context otherwise requires (see Note 2). In the opinion of Management, all adjustments necessary for a fair presentation of the results for the unaudited interim periods have been made. Amounts shown in the Consolidated Balance Sheets for December 31, 1999 were derived from the audited balance sheet included in Kinder Morgan's 1999 Annual Report on Form 10-K. Certain amounts for prior periods have been reclassified to conform to the current presentation. 2. Business Combinations --------------------- On October 7, 1999, K N Energy, Inc. completed the acquisition of Kinder Morgan Delaware, the sole stockholder of the general partner of Kinder Morgan Energy Partners L.P. Kinder Morgan Energy Partners is the nation's largest pipeline master limited partnership. It owns and operates one of the largest product pipeline systems in the United States, serving customers in sixteen states with more than 5,000 miles of pipeline and over twenty associated terminals. Kinder Morgan Energy Partners also operates 25 bulk terminal facilities which transload over 40 million tons of coal, petroleum coke and other products annually. In addition, Kinder Morgan Energy Partners currently owns 51 percent of Plantation Pipe Line Company and 100 percent of Shell CO2 Company, Ltd. For additional information regarding the business and assets of Kinder Morgan Energy Partners, the reader is directed to Kinder Morgan Energy Partners' 1999 Annual Report on Form 10-K. To effect this business combination, K N Energy, Inc. issued approximately 41.5 million shares of its common stock in exchange for all of the outstanding shares of Kinder Morgan Delaware. This acquisition was accounted for as a purchase for accounting purposes and, accordingly, the assets acquired and liabilities assumed were recorded at their respective estimated fair market values as of the acquisition date. The allocation of the purchase price resulted in an excess of the purchase price over Kinder Morgan Delaware's share of the underlying equity in the net assets of Kinder Morgan Energy Partners totaling $1.3 billion. This excess has been fully allocated to Kinder Morgan Delaware's indirect investment in Kinder Morgan Energy Partners (through its 100% ownership of Kinder Morgan G.P., Inc., owner of the general partner interest) and reflects the estimated fair market value of this investment. This excess investment is being amortized over 44 years, approximately the estimated remaining useful life of Kinder Morgan Energy Partners' assets, and is shown in the accompanying Consolidated Statements of Income as "Amortization of Excess Investment" under the sub-heading "Kinder Morgan Energy Partners" within "Other Income and (Deductions)." The assets, liabilities and results of operations of Kinder Morgan Delaware are included with those of Kinder Morgan beginning with the October 1999 acquisition. The following pro forma information gives effect to the acquisition of Kinder Morgan Delaware as if the business combination had occurred at the beginning of each period presented. The pro forma adjustments that have been made are based on a preliminary allocation of the purchase price to assets acquired and liabilities assumed. This unaudited pro forma information should be read in conjunction with the accompanying consolidated financial statements and with the financial statements and other financial information included in Kinder Morgan's 1999 Annual Report on Form 10-K. This pro forma information is 8 not necessarily indicative of the financial results that would have occurred had this acquisition taken place on the dates indicated, nor is it necessarily indicative of future financial results.
Year Ended December 31, ----------------------- Unaudited Pro Forma Financial Information 1999 1998 - ----------------------------------------- ---- ---- (Dollars In Millions Except Per Share Amounts) Operating Revenues $ 1,745.5 $ 1,660.9 Net Income (Loss) $ (233.9) $ 62.5 Diluted Earnings (Loss) Per Common Share $ (2.09) $ 0.58 Number of Shares Used in Computing Diluted Earnings Per Common Share (In Thousands) 112,334 106,319
On February 22, 1999, Sempra Energy and Kinder Morgan announced that their respective boards of directors had unanimously approved a definitive agreement under which Sempra and Kinder Morgan would combine in a stock-and-cash transaction valued in the aggregate at $6.0 billion. During the first quarter of 1999, Kinder Morgan incurred approximately $2.9 million of costs associated with the then-pending merger, reported in the accompanying Consolidated Statements of Income as "Merger-related Costs". On June 21, 1999, Sempra and Kinder Morgan announced that they had mutually agreed to terminate the merger agreement. Sempra reimbursed Kinder Morgan $5.95 million for expenses incurred in connection with the proposed merger. During the third quarter of 1998, Kinder Morgan completed its acquisition (accounted for as a purchase) of interests in four independent power plants in Colorado from the Denver-based Thermo Companies ("Thermo"), representing approximately 380 megawatts of electric generation capacity. The final payment for this acquisition ($30 million) was made April 20, 2000 with 961,153 shares of Kinder Morgan common stock. 3. Change in Accounting Estimate ----------------------------- Pursuant to a study of the useful lives of the underlying assets by an independent third party, in July 1999, Kinder Morgan changed the depreciation rates associated with the gas plant acquisition adjustment recorded in conjunction with the acquisition of MidCon Corp. (see Note 2 of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K). This change had the effect of decreasing "Depreciation and Amortization" by approximately $9.7 million and increasing "Income from Continuing Operations" and "Net Income" for the quarter ended March 31, 2000 by approximately $5.8 million ($0.05 per diluted share) in comparison to the amounts which would have been recorded utilizing the previous depreciation rates. 4. Investments and Sales --------------------- See Note 5 for information regarding sales of assets and businesses included in discontinued operations. In the first quarter of 2000, Kinder Morgan sold the 918,367 shares of Tom Brown, Inc. Common Stock it had held since early 1996 (see the discussion of the sale of Tom Brown Preferred Stock following). Kinder Morgan recorded a pre-tax gain of $1.3 million ($0.8 million after tax or approximately $0.01 per diluted share), included in the accompanying Consolidated Statements of Income under the caption "Other, Net". On December 30, 1999, Kinder Morgan entered into a contribution agreement among Kinder Morgan, several of its wholly owned subsidiaries and Kinder Morgan Energy Partners. As a result, effective as of 9 December 31, 1999, Kinder Morgan contributed all of its interest in the following to Kinder Morgan Energy Partners: (i) Kinder Morgan Interstate Gas Transmission LLC, formerly K N Interstate Gas Transmission Co., a wholly owned subsidiary which is referred to as "KMIGT" in these Notes, (ii) Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.), a wholly owned subsidiary and owner of a one-third interest in Trailblazer Pipeline Company and (iii) Red Cedar Gathering Company (a 49% interest). In exchange, Kinder Morgan Energy Partners (i) issued to Kinder Morgan 9,810,000 common units representing an incremental limited partnership interest in Kinder Morgan Energy Partners and (ii) during the first quarter of 2000, made a distribution to Kinder Morgan of $330 million in cash. Kinder Morgan recorded a pre-tax gain of $158.8 million (approximately $100.9 million after tax or $1.25 per diluted share) in conjunction with the transfer of interests. On September 30, 1999, Kinder Morgan sold (to an unaffiliated party) its interests in Stingray Pipeline Company, L.L.C., an offshore pipeline that gathers natural gas, and West Cameron Dehydration Company, L.L.C., which dehydrates natural gas for shippers on the Stingray Pipeline. Kinder Morgan received approximately $24 million in cash from the sale and recorded a pre-tax gain of $11.4 million (approximately $6.9 million after tax or $0.10 per diluted share). With this sale, Kinder Morgan completed divestiture of its major offshore interests. On September 3, 1999, Kinder Morgan sold 1,000,000 shares of Tom Brown, Inc. Preferred Stock for approximately $29 million in cash, realizing a pre-tax gain of $2.2 million (approximately $1.3 million after tax or $0.02 per diluted share). The preferred stock was originally issued to Kinder Morgan in 1996 as part of Tom Brown, Inc.'s acquisition of K N Production Company. The preferred stock was convertible into 1,666,000 shares of Tom Brown, Inc. Common Stock, and paid dividends quarterly at an annual rate of $1.75 per share. In September 1999, Thunder Creek Gas Services, LLC, a joint venture owned 25 percent by Kinder Morgan and 75 percent by Devon Energy Corporation, placed into service a 126-mile-long-trunkline natural gas gathering system extending from Glenrock, Wyoming to approximately 12 miles north of Gillette, Wyoming. The trunkline has 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. The total forecasted cost of the system is approximately $111 million. On June 30, 1999, Kinder Morgan sold its interests in the HIOS and UTOS offshore pipeline systems and related laterals to Leviathan Gas Pipeline Partners, L. P. Kinder Morgan received approximately $51 million in cash in conjunction with the sale and recorded a pre-tax gain of $17.5 million (approximately $10.7 million after tax or $0.15 per diluted share). In May 1999, Kinder Morgan announced plans to build the Horizon Pipeline which, through its wholly owned subsidiary Natural Gas Pipeline Company of America, referred to as "Natural" in these notes, planned to own jointly with one or more other partners. An open season closed in June 1999 with service requests from shippers of more than 800 MMcf of natural gas per day, including 300 MMcf per day from Nicor Gas. In February 2000, Nicor, Inc. announced that it had signed an agreement to become an equal partner in the planned Horizon Pipeline with Natural. The Horizon Pipeline is a $75 million natural gas pipeline that will originate in Joliet, Illinois and extend 74 miles into northern Illinois, connecting the emerging supply hub at Joliet with Nicor Gas' distribution system and an existing Natural pipeline. Construction is expected to be completed by the spring of 2002. The initial capacity of the pipeline is proposed to be 380 MMcf of natural gas per day. The project is expected to be funded through a combination of non-recourse debt securities and equity contributions. 10 On March 31, 1999, the TransColorado Gas Transmission Company ("TransColorado"), an enterprise jointly owned by Kinder Morgan and Questar Corp., placed in service a 280-mile-long natural gas pipeline. This pipeline 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. Kinder Morgan provides a corporate guarantee for one-half of all amounts borrowed under the agreement. Beginning 24 months after the in-service date, Questar has the right, for a 12-month period, to require that Kinder Morgan purchase Questar's ownership interest in TransColorado for $121 million. It is not currently known whether Questar will exercise its right. 5. Discontinued Operations ----------------------- During the third quarter of 1999, Kinder Morgan adopted and implemented a plan to discontinue the direct marketing of non- energy products and services (principally under the "Simple Choice" brand), which activities had been carried on largely through Kinder Morgan's e*nable joint venture with PacifiCorp. During the fourth quarter of 1999, Kinder Morgan adopted and implemented plans to discontinue the following lines of business: gathering and processing natural gas and providing field services to natural gas producers, commodity marketing of natural gas and natural gas liquids, international operations and West Texas intrastate pipelines. As further described in Note 6 of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K, as of December 31, 1999, in accordance with the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," Kinder Morgan (i) restated its consolidated financial statements to reflect these businesses as discontinued operations and (ii) recorded an estimate of the loss expected to result from the discontinuance and disposal of these businesses, including both the estimated losses to be incurred upon sale and the estimated operating losses to be incurred prior to the projected disposal dates. This total estimated loss is subject to uncertainty with respect to the ultimate proceeds to be received from the sale and pre- disposal operation of these assets (among other factors) and, accordingly, the actual loss may differ materially from the estimate recorded as of December 31, 1999. Any such difference will be recognized in the period in which it is reasonably estimable, and will be classified in the same manner as the original estimated loss. 11 Summarized financial data of discontinued operations are as follows:
Three Months Ended March 31, ----------------------------- 2000 1999 ---- ---- (In Thousands) Income Statement Data - --------------------- Operating Revenues: Commodity Marketing $ 580,148 $ 629,001 Gathering and Processing $ 163,833 $ 117,427 West Texas Intrastate Pipelines $ 8,336 $ 18,098 International Operations $ 1,042 $ 486 Income (Loss) From Discontinued Operations, Net of Tax: Commodity Marketing, net of $(2,001) of tax - $ (3,129) Gathering and Processing, net of $(4,690) of tax - $ (7,336) West Texas Intrastate Pipelines, net of $(2,889) of tax - $ (4,519) International Operations, net of $(45) of tax - $ (71) en*able/Orcom, net of $(1,107) of tax - $ (1,731)
March 31, 2000 ------------------------------------------- Gathering and International Processing Operations Total ---------- ---------- ----- Balance Sheet Data (In Thousands) - ------------------ Net Current Assets of Discontinued Operations: Cash and Cash Equivalents $ 6,671 $ 1,170 $ 7,841 Restricted Deposits 4,218 - 4,218 Accounts Receivable 19,182 3,725 22,907 Inventories 14,128 363 14,491 Gas Imbalances Receivable 16,030 - 16,030 Other Current Assets 13,167 43 13,210 Accounts Payable (8,964) (1,871) (10,835) Accrued Taxes 26,456 338 26,794 Gas Imbalances Payable (5,139) - (5,139) Other Current Liabilities (1,545) (46) (1,591) ---------- --------- ---------- $ 84,204 $ 3,722 $ 87,926 ========== ========= ========== Net Non-current Assets of Discontinued Operations: Investments $ 14,542 $ 10,040 $ 24,582 Property, Plant and Equipment, Net 139,284 8,933 148,217 Deferred Charges (4,059) 4,826 767 Deferred Income Taxes (47,242) 780 (46,462) Minority Interests in Equity of Subsidiaries (52,210) (767) (52,977) ---------- --------- ---------- $ 50,315 $ 23,812 $ 74,127 ========== ========= ==========
Kinder Morgan has essentially completed the disposition of its investment in en*able/Orcom. Kinder Morgan sold its businesses involved in providing field services to natural gas producers (K N Field Services, Inc. and Compressor Pump and Engine, Inc.) and MidCon Gas Products of New Mexico Corp., a wholly owned subsidiary providing natural gas gathering, prior to the end of 1999. Kinder Morgan received $23.3 million in cash as consideration for these sales. Effective with the first quarter of 2000, Kinder Morgan completed its previously announced transaction with ONEOK, Inc. in which ONEOK purchased Kinder Morgan's gathering and processing businesses in Oklahoma, Kansas and West Texas. In addition, ONEOK purchased Kinder Morgan's marketing and trading business, as well as certain storage and transmission pipelines in the Mid-continent region. As consideration, ONEOK paid Kinder Morgan approximately $108 million plus 12 approximately $56 million for estimated net working capital at closing (subject to post-closing adjustment). In addition, ONEOK assumed (i) the operating lease associated with the Bushton, Kansas processing plant and (ii) long-term capacity commitments on Natural and KMIGT. The remaining assets associated with discontinued operations, representing a relatively small percent of the total operations discontinued as of December 31, 1999, are in various stages of the disposition process. The process of divestiture is expected to be completed during 2000. 6. Accounts Receivable Sales Facility ---------------------------------- As more fully discussed in Kinder Morgan's 1999 Annual Report on Form 10-K, in September 1999, certain wholly owned subsidiaries of Kinder Morgan entered into a five-year agreement to sell all of their accounts receivable in a transaction accounted for as a sale of receivables in accordance with Statement of Financial Accounting Standards No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities." Accordingly, the accompanying Consolidated Balance Sheets reflect the portion of receivables transferred to the financial institution as a reduction of Accounts Receivable. Losses from the sale of these receivables are included in "Other, Net" in the accompanying Consolidated Statements of Income. Cash flows associated with this program are included with "Accounts Receivable" under "Cash Flows from Operating Activities" in the accompanying Consolidated Statements of Cash Flows. Kinder Morgan received compensation for servicing that was approximately equal to the amount an independent servicer would receive. Accordingly, no servicing assets or liabilities have been recorded. The full amount of the allowance for possible losses has been retained by Kinder Morgan. The fair value of this recourse liability approximated the allocated allowance for doubtful accounts given the short-term nature of the transferred receivables. Kinder Morgan received $150 million in proceeds from the sale of receivables on September 30, 1999. In the first quarter of 2000, Kinder Morgan reduced its participation in this receivable sale program by $124.9 million, principally as a result of its then-pending disposition of its wholesale gas marketing business, see Note 5. On April 25, 2000, Kinder Morgan repaid the residual balance and terminated the agreement. 7. Supplemental Cash Flow Information ---------------------------------- Kinder Morgan 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 Provided by (Used in) Operating Activities" in the accompanying Consolidated Statements of Cash Flows includes, among other things, equity in undistributed earnings of unconsolidated subsidiaries (other than Kinder Morgan Energy Partners) and joint ventures. 13
Three Months Ended March 31, ------------------------ 2000 1999 ---- ---- (In Thousands) CHANGES IN OTHER WORKING CAPITAL ITEMS (Net of Effects of Acquisitions and Sales) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Accounts Receivable $ (22,453) $ 16,604 Materials and Supplies Inventory (1,022) 400 Gas in Underground Storage - Current 10,099 (13,133) Other Current Assets 25,893 388 Accounts Payable (32,044) (49,164) Other Current Liabilities (45,431) (48,101) --------- --------- $ (64,958) $ (93,006) ========= ========= CASH FLOW INFORMATION Cash Paid During the Period for: Interest, Net of Amount Capitalized $ 99,222 $ 120,097 ========= ========= Distributions on Preferred Capital Trust Securities $ 121 $ 349 ========= ========= Income Taxes $ - $ - ========= =========
8. Business Segments ----------------- In accordance with the manner in which Kinder Morgan currently manages its businesses, including the allocation of capital and evaluation of business unit performance, Kinder Morgan reports its operations in the following segments: (1) Natural and certain associated entities, referred to as "NGPL," a major interstate natural gas pipeline system; (2) Kinder Morgan Texas Pipeline and certain associated entities, referred to as "KMTP," a major intrastate natural gas pipeline system; (3) "Retail," the (largely regulated) distribution of natural gas to retail customers and (4) "Power and Other", the generation and sale of electric power and various other activities not constituting business segments. Prior to its December 31, 1999 sale to Kinder Morgan Energy Partners (see Note 4), Kinder Morgan also owned and operated KMIGT. The accounting policies applied in the generation of segment information are generally the same as those described in Note 1 of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K, except that 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 general and administrative expenses) are not allocated to individual business segments. With adjustment for these items, Kinder Morgan currently evaluates business segment performance primarily based on operating income in relation to the level of capital employed. Intersegment sales are accounted for at market prices, while asset transfers are made at either market value or, in some instances, book value. As necessary for comparative purposes, prior period results and balances have been reclassified to conform to the current presentation. 14 BUSINESS SEGMENT INFORMATION
Quarter Ended March 31, 2000 ------------------------------------------------------------------------- Power NGPL KMIGT (1) Retail KMTP and Other Consolidated ---- ----- ------ ---- --------- ------------ (In Thousands) Revenues from External Customers $ 147,994 $ - $ 68,423 $ 249,919 $ 14,176 $ 480,512 ========= Intersegment Revenues $ 60 $ - $ - $ - $ - $ 60 ========= Operating Income Before Corporate Costs $ 91,950 $ - $ 19,787 $ 11,330 $ 5,622 $ 128,689 General and Administrative Expenses (14,293) --------- Operating Income 114,396 Other Income and (Deductions) (37,585) --------- Income from Continuing Operations, Before Income Taxes $ 76,811 =========
(1) KMIGT was sold to Kinder Morgan Energy Partners effective December 31, 1999.
Quarter Ended March 31, 1999 ------------------------------------------------------------------------- Power NGPL KMIGT Retail KMTP and Other Consolidated ---- ----- ------ ---- --------- ------------ (In Thousands) Revenues from External Customers $ 152,907 $ 25,114 $ 69,842 $ 164,327 $ 15,077 $ 427,267 ========= Intersegment Revenues $ 592 $ 1,283 $ 20 $ - $ 49 $ 1,944 ========= Operating Income Before Corporate Costs $ 78,464 $14,352 $ 15,328 $ 8,987 $ 6,294 $ 123,425 General and Administrative Expenses (20,349) Merger-related costs (2,916) --------- Operating Income 100,160 Other Income and (Deductions) (60,966) --------- Income from Continuing Operations, Before Income Taxes $ 39,194 ===========
There has been no material change in assets by segment for Kinder Morgan's continuing businesses in comparison to the amounts reported in Note 19 of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K. There have been material changes in assets associated with discontinued operations, see Note 5. GEOGRAPHIC INFORMATION All but an insignificant amount of Kinder Morgan's assets and operations are located in the continental United States. 9. Financing --------- Kinder Morgan has available a $550 million 364-day credit facility dated November 18, 1999, and a $400 million amended and restated five-year revolving credit agreement dated January 30, 1998. These bank facilities can be used for general corporate purposes, including backup for Kinder Morgan's commercial paper program and include covenants which are common in such arrangements (see Note 12 of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K for 15 additional information concerning these covenants). Under these bank facilities, Kinder Morgan is required to pay a facility fee based on the total commitment, whether used or unused, at a rate which varies based on Kinder Morgan's senior debt rating. There were no borrowings under the bank facilities at March 31, 2000 or at April 17, 2000. Commercial paper issued by Kinder Morgan and supported by the bank facilities are unsecured short-term notes with maturities not to exceed 270 days from the date of issue. During 1999, all commercial paper was redeemed within 182 days, with interest rates ranging from 4.25 percent to 7.25 percent. Commercial paper outstanding at March 31, 2000 and April 17, 2000, was $437.1 million and $250.3 million, respectively. The weighted- average interest rates on short-term borrowings outstanding at March 31, 2000 was 6.45 percent. Average short-term borrowings outstanding during the first quarter of 2000 were $515.9 million and the weighted-average interest rate was 6.18 percent. On April 20, 2000, the Kinder Morgan board of directors declared a common stock dividend of $0.05 per share payable on May 15, 2000 to shareholders of record as of April 30, 2000. 10. Regulatory Matters ------------------ On March 29, 2000, Kinder Morgan announced that it had reached a settlement with the Federal Energy Regulatory Commission ("FERC") regarding issues surrounding the interpretation of FERC Order No. 497 (which governs the conduct of interstate pipelines and affiliated gas marketers on their systems) relative to KMIGT, NGPL and Westar Transmission Company. KMIGT has been sold to Kinder Morgan Energy Partners, and Westar has been sold to ONEOK, see Notes 4 and 5. Combined, Kinder Morgan agreed to pay a civil penalty and refunds totaling $5.75 million in conjunction with the settlement, which also eliminated the potential for any civil action or prolonged regulatory proceedings. The matters resolved related to periods prior to the October 1999 K N Energy-Kinder Morgan merger and, to some extent, periods prior to K N Energy's January 1998 acquisition of MidCon Corp. The payment had no detrimental effect on Kinder Morgan's earnings due to the existence of previously established reserves. In April 2000, Kinder Morgan filed appeals against 11 Nebraska municipalities that have adopted rate ordinances prohibiting the collection of a surcharge (associated with the P-0802 contract entered into in 1973) to recover costs Retail incurred in purchasing natural gas for its customers. Kinder Morgan alleges that these municipalities failed to determine an appropriate overall amount for Retail's rates and that the municipalities failed to follow the appropriate process, as set up by the Nebraska legislature, to review the P-0802 contract. When Retail opened its distribution system to competitive supplies in 1998, participating municipalities were made aware of the surcharge and passed ordinances allowing it. 11. 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. The only difference between "net income" and "comprehensive income" for Kinder Morgan has been the unrealized gain or loss on its investment in available-for-sale securities, which was recorded directly to stockholders' equity. During the quarter ended March 31, 2000, Kinder Morgan sold its available-for-sale securities, 918,367 shares of Tom Brown, Inc. Common Stock (see Note 4). In conjunction with this sale, Kinder Morgan recorded a reclassification adjustment to Accumulated Comprehensive Income of $1.6 million, resulting in comprehensive income for the period of $47.7 million. For the quarter ended March 31, 16 1999, Kinder Morgan recorded an unrealized after-tax investment gain of $1.1 million, resulting in comprehensive income for the period of $8.2 million. 12. 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 derivative's 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, 2000. 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 Kinder Morgan's election, before January 1, 1998). Kinder Morgan has not yet quantified the impacts of adopting the Statement on its financial position or results of operations. 13. Interest Expense, Net --------------------- "Interest Expense, Net" as presented in the accompanying Consolidated Statements of Income is net of (i) the debt component of the allowance for funds used during construction ("AFUDC - Interest"), (ii) in 1999, interest income related to government securities associated with the acquisition of MidCon (see Note 1(K) of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K) and (iii) in 2000, interest income attributable to Kinder Morgan's note receivable from Kinder Morgan Energy Partners associated with the sale of certain interests, see Note 4. Three Months Ended March 31, ---------------------- (In Thousands) 2000 1999 ------ ------ AFUDC - Interest $ 712 $ 213 Interest Income $ 2,647 $ 480 14 Other, Net ---------- "Other, Net" as presented in the accompanying Consolidated Statements of Income for the three months ended March 31, 2000, principally consists of (i) $4.1 million due to the recovery of note receivable proceeds in excess of its carrying value, (ii) $3.9 million attributable to the settlement of a regulatory matter for an amount less than that previously reserved, see Note 10(A) and (iii) $1.3 million attributable to a gain from the sale of Tom Brown, Inc. Common Stock, see Note 4. 17 15. Accounts Receivable ------------------- The caption "Accounts Receivable" in the accompanying Consolidated Balance Sheets is presented net of allowances for doubtful accounts of $1.7 million at March 31, 2000, and $1.7 million at December 31, 1999. 16. Environmental and Legal Matters ------------------------------- (A) Environmental Matters On December 20, 1999, the U.S. Department of Justice filed a Complaint on behalf of the U.S. Environmental Protection Agency in the Federal District Court of Colorado, Civil Action 99-S- 2419, against Natural alleging that Natural failed to obtain all of the necessary air quality permits in 1979 when it constructed the Akron Compressor Station, which consisted of three compressor engines in Weld County, Colorado. Natural constructed and then operated the facility until August 1996 when it was sold to High Plains Gathering System. High Plains sold one of the compressor engines to Colorado Interstate Gas Company in October 1997. The complaint makes the standard request for penalties up to the statutory maximums for each day of violation. Natural has filed a motion to dismiss this case and is in discussions with the U.S. Department of Justice. A number of defenses to the complaint and plans to defend the action vigorously have been prepared by Natural. Although Kinder Morgan cannot express an opinion as to the probable outcome of this case, Kinder Morgan believes that this proceeding will not have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. Based on current information and taking into account reserves established for environmental matters, Kinder Morgan does not believe that compliance with federal, state and local environmental laws and regulations will have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. In addition, the clean-up programs in which Kinder Morgan is engaged are not expected to interrupt or diminish Kinder Morgan's operational ability to gather or transport natural gas. However, there can be no assurances that future events, such as changes in existing laws, the promulgation of new laws, or the development of new facts or conditions will not cause Kinder Morgan to incur significant costs. See Note 9(A) of Notes to Consolidated Financial Statements of Kinder Morgan's Annual Report on Form 10-K for the year ended December 31, 1999, for additional information regarding environmental matters. (B) Litigation Matters "Jack J. Grynberg v. K N Energy, Inc., Rocky Mountain Natural Gas Company, and GASCO, Inc.," Civil Action No. 92-N-2000. On October 9, 1992, Jack J. Grynberg filed suit in the United States District Court for the District of Colorado against Kinder Morgan, Rocky Mountain Natural Gas Company and GASCO, Inc. alleging that these entities, referred to here as the "K N Entities," as well as K N Production Company and K N Gas Gathering, Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts that the companies have engaged in an illegal exercise of monopoly power, have illegally denied him economically feasible access to essential facilities to store, transport and distribute gas, and illegally have attempted to monopolize or to enhance or maintain an existing monopoly. Grynberg also asserts certain state causes of action relating to a gas purchase contract. In February 1999, the Federal District Court granted summary judgment as to some of Grynberg's antitrust and state law claims, while allowing other claims to proceed to trial. In addition to monetary damages, Grynberg has requested that the K N Entities be ordered to divest all 18 interests in natural gas exploration, development and production properties, all interests in distribution and marketing operations, and all interests in natural gas storage facilities, separating these interests from Kinder Morgan's natural gas gathering and transportation system in northwest Colorado. No trial date has been set. "Jack J. Grynberg, individually and as general partner for the Greater Green River Basin Drilling Program: 72-73 v. Rocky Mountain Natural Gas Company and K N Energy, Inc.," Case No. 90-CV-3686. On June 5, 1990, Jack J. Grynberg filed suit, which is presently pending in Jefferson County District Court for Colorado, against Rocky Mountain Natural Gas Company and Kinder Morgan alleging breach of contract and fraud. In essence, Grynberg asserts claims that the named companies failed to pay Grynberg the proper price, impeded the flow of gas, mismeasured gas, delayed his development of gas reserves, and other claims arising out of a contract to purchase gas from a field in northwest Colorado. On February 13, 1997, the trial judge entered partial summary judgment for Mr. Grynberg on his contract claim that he failed to receive the proper price for his gas. This ruling followed an appellate decision which was adverse to Kinder Morgan on the contract interpretation of the price issue, but which did not address the question of whether Grynberg could legally receive the price he claimed or whether he had illegally diverted gas from a prior purchase. On August 29, 1997, the trial judge stayed the summary judgment pending resolution of a proceeding at the FERC to determine if Grynberg was entitled to administrative relief from an earlier dedication of the same gas to interstate commerce. The background of that proceeding is described below. On March 15, 1999, an Administrative Law Judge for the FERC ruled, after an evidentiary hearing, that Mr. Grynberg had illegally diverted the gas when he entered the contract with the named companies and was not entitled to relief. Grynberg filed exceptions to this ruling. In late March 2000, the FERC issued an order affirming in part and denying in part its Initial Decision. The action in Colorado remains stayed pending final resolution of the FERC proceeding. "Jack J. Grynberg v. Rocky Mountain Natural Gas Company," Docket No. GP91-8-008. On May 8, 1991, Grynberg filed a petition for declaratory order with the FERC) seeking a determination whether he was entitled to the price he seeks in the Jefferson County District Court proceeding referred to above. While Grynberg initially received a favorable decision from the FERC, that decision was reversed by the Court of Appeals for the District of Columbia Circuit on June 6, 1997. This matter has been remanded to the FERC for subsequent proceedings. The matter was set for an expedited evidentiary hearing, and an Initial Decision favorable to Rocky Mountain was issued on March 15, 1999. That decision determined that Grynberg had intentionally diverted gas from an earlier dedication to interstate commerce in violation of the Natural Gas Act and denied him equitable administrative relief. Grynberg filed exceptions to this Initial Decision. In late March 2000, the FERC issued an order affirming in part and denying in part its Initial Decision. In April 2000, Kinder Morgan, together with the other parties, filed for rehearing. "United States of America, ex rel., Jack J. Grynberg v. K N Energy," Civil Action No. 97-D-1233, filed in the U.S. District Court, District of Colorado. This action was filed pursuant to the federal False Claim Act and involves allegations of mismeasurement of natural gas produced from federal and Indian lands. The Department of Justice has decided not to intervene in support of the action. The complaint is part of a larger series of similar complaints filed by Mr. Grynberg against 77 natural gas pipelines (approximately 330 other defendants). An earlier single action making substantially similar allegations against the pipeline industry was dismissed by Judge Hogan of the U.S. District Court for the District of Columbia on grounds of improper joinder and lack of jurisdiction. As a result, Mr. Grynberg filed individual complaints in various courts throughout the country. These cases were recently consolidated by the Judicial Panel for Multidistrict Litigation, and transferred to the District of Wyoming. Motions to Dismiss were filed on November 19, 1999. Plaintiff filed his response on January 14, 2000 and defendants filed their Reply Brief on February 14, 2000. An oral argument on the Motion to Dismiss occurred on March 17, 2000. 19 "Quinque Operating Company, et. al. v. Gas Pipelines, et. al.," Cause No. 99-1390-CM, United States District Court for the District of Kansas. This action was originally filed in Kansas state court in Stevens County, Kansas as a class action against approximately 245 pipeline companies and their affiliates, including certain Kinder Morgan entities. The plaintiffs in the case purport to represent a class of natural gas producers and fee royalty owners who allege that they have been subject to systematic gas mismeasurement by the defendants for more than 25 years. Subsequently, one of the defendants removed the action to Kansas Federal District Court. Thereafter, Kinder Morgan filed a motion with the Judicial Panel for Multidistrict Litigation to consolidate this action for pretrial purposes with the False Claim Act cases referred to above, because of common factual questions. On April 10, 2000, the MDL Panel ordered that this case be consolidated with the Grynberg federal False Claims Act cases. "Dirt Hogs, Inc. v. Natural Gas Pipeline Company of America, et al." There have been several related cases with Dirt Hogs, Inc. with allegations of breach of contract, false representations, improper requests for kickbacks and other improprieties. Essentially, the Plaintiff claims that it should have been awarded extensive pipeline reclamation work without having to qualify or bid as a qualifying contractor. Case No. Civ-98-231-R, is a case which was dismissed in the U.S. District Court for the Western District of Oklahoma because of pleading deficiencies and is now on appeal to the 10th Circuit (Case No. 99-6-026). On April 10, 2000, the 10th Circuit upheld the dismissal of this action. Another case, arising out of the same factual allegations, was filed by Dirt Hogs in the District Court, Caddo County, Oklahoma (Case No. CJ-99-92), on March 29, 1999. By agreement of all parties, this action is currently stayed. A third related case, styled "Natural Gas Pipeline Company of America, et al. v. Dirt Hogs, Inc." (Case No. 99-360-R), resulted in a default judgement against Dirt Hogs. After initially appealing the default judgement, Dirt Hogs dismissed their appeal on September 1, 1999. "K N Energy, Inc., et al. v. James P. Rode and Patrick R. McDonald," Case No. 99CV1239, filed in the District Court, Jefferson County, Division 8, Colorado. Defendants counterclaimed and filed third party claims against several former K N Energy officers and/or directors. Messrs. Rode and McDonald are former principal shareholders of Interenergy Corporation. Interenergy was merged into K N Energy on December 19, 1997 pursuant to a Merger Agreement dated August 25, 1997. Rode and McDonald allege that K N Energy committed securities fraud, common law fraud and negligent misrepresentation as well as breach in contract. They are seeking an unspecified amount of compensatory damages that we estimate could be greater than $2 million, plus unspecified exemplary or punitive damages, attorney's fees and their costs. Kinder Morgan filed a Motion to Dismiss, and on April 21, 2000, the Jefferson County District Court Judge dismissed the case against K N and the individuals with prejudice. Defendants also filed a federal securities fraud action in the United States District Court for the District of Colorado on January 27, 2000 titled: "James P. Rode and Patrick R. McDonald v. K N Energy, Inc., et al.," Civil Action No. 00-N-190. This case initially raised the identical state law claims contained in the counterclaim and third party complaint in state court. Rode and McDonald filed an amended Complaint, which dropped the state-law claims. This Complaint is now the subject of a motion to dismiss filed by defendants. The case has been stayed pending the outcome of these motions. A fourth related class action case styled, "Adams vs. Kinder Morgan, Inc., et. al.," Civil Action No. 00-M-516, in the United States District Court for the District of Colorado was served on Kinder Morgan on April 10, 2000. Kinder Morgan intends to file a motion to dismiss this case, and expects that the case will be stayed pending the resolution of such motion. Kinder Morgan 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 20 consideration of reserves established, Kinder Morgan believes that the resolution of such matters will not have a material adverse effect on Kinder Morgan's business, financial position or results of operations. See Note 9(B) of Notes to Consolidated Financial Statements of Kinder Morgan's Annual Report on Form 10-K for the year ended December 31, 1999, for additional information regarding legal matters. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- As used in this report, "Kinder Morgan" refers to Kinder Morgan, Inc. (a Kansas corporation, formerly K N Energy, Inc.) and its consolidated subsidiaries. The following discussion should be read in conjunction with (i) the accompanying Consolidated Financial Statements and related Notes and (ii) the Consolidated Financial Statements, related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Kinder Morgan's 1999 Annual Report on Form 10-K. Due to the seasonal variation in energy demand, among other factors, the following interim results may not be indicative of the results to be expected for an entire year. As discussed in Notes 2 and 4 of the accompanying Notes to Consolidated Financial Statements, Kinder Morgan has engaged in acquisition and divestiture transactions (and may engage in additional such transactions) which may affect the comparison of results of operations between periods. In accordance with the manner in which Kinder Morgan currently manages its businesses, including the allocation of capital and evaluation of business unit performance, Kinder Morgan reports its operations in the following segments: (1) Natural Gas Pipeline Company of America and certain associated entities, referred to as "NGPL," a major interstate natural gas pipeline system; (2) Kinder Morgan Texas Pipeline and certain associated entities, referred to as "KMTP," a major intrastate natural gas pipeline system; (3) "Retail," the (largely regulated) distribution of natural gas to retail customers and (4) "Power and Other," the generation and sale of electric power and various other activities not constituting business segments. Prior to its December 31, 1999 sale to Kinder Morgan Energy Partners (see Note 4 of the accompanying Notes to Consolidated Financial Statements), Kinder Morgan also owned and operated Kinder Morgan Interstate Gas Transmission LLC (formerly K N Interstate Gas Transmission Co.), which is referred to in this report as "KMIGT." Prior period results and balances have been reclassified to conform to the current presentation. Certain information contained in this report may include "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of Kinder Morgan's management, based on information currently available to Kinder Morgan's management. When words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should" or similar expressions are used, Kinder Morgan is making forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of Kinder Morgan may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond Kinder Morgan's ability to control or predict. These statements are necessarily based upon various assumptions involving judgments with respect to the future including, among others, the ability to achieve synergies and revenue growth, national, international, regional and local economic, competitive and regulatory conditions and developments, technological developments, capital market conditions, inflation rates, interest rates, the political and economic stability of oil producing nations, energy markets, weather conditions, business and regulatory or legal decisions, the pace of deregulation of retail natural gas and 21 electricity, the timing and extent of changes in commodity prices for oil, natural gas, natural gas liquids, electricity and certain agricultural products, the timing and success of business development efforts, and other uncertainties, all of which are difficult to predict and many of which are beyond Kinder Morgan's control. Readers are cautioned not to put undue reliance on any forward-looking statements. For those statements, Kinder Morgan claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Consolidated Financial Results - ------------------------------ Three Months Ended March 31, -------------------------------------- (In Thousands Except Per Share Amounts) Increase 2000 1999 (Decrease) ---- ---- ---------- Operating Revenues $ 480,512 $ 427,267 $ 53,245 Gross Margin 203,935 221,362 (17,427) General and Administrative Expenses 14,293 20,349 (6,056) Merger-related Costs - 2,916 (2,916) Operating Income 114,396 100,160 14,236 Income From Continuing Operations 46,084 23,908 22,176 Loss From Discontinued Operations, Net of Tax N/A (16,786) N/A Diluted Earnings (Loss) Per Share: Continuing Operations $ 0.41 0.34 $ 0.07 Discontinued Operations N/A $ (0.24) N/A Kinder Morgan's results for the quarter ended March 31, 2000 reflect an increase of $53.2 million (12.5%) in operating revenues, a decrease of $17.4 million (7.9%) in gross margin and an increase of $14.2 million (14.2%) in operating income from the first quarter of 1999. Operating results for 2000 do not include revenues, costs and expenses of KMIGT, which was sold to Kinder Morgan Energy Partners effective December 31, 1999. The increase in operating revenues is principally due to increased revenues at KMTP, partially offset by the absence of KMIGT revenues in the first quarter of 2000. The decline in gross margin principally reflects the sale of KMIGT. General and administrative expenses decreased from $20.3 million in the first quarter of 1999 to $14.3 million in the first quarter of 2000, a decrease of $6.0 million (29.6%) due to cost reduction measures implemented following the business combination with Kinder Morgan Delaware. The merger-related costs included in results for the first quarter of 1999 are associated with the proposed merger with Sempra Energy that was not consummated. For additional information on these matters, see Note 2 of the accompanying Notes to Consolidated Financial Statements. The increased operating income, which occurred despite the sale of KMIGT, reflects (i) improved first-quarter 2000 segment performance, principally NGPL, and (ii) merger-related costs included in 1999 results and lower first-quarter 2000 general and administrative expenses, in each case as discussed preceding. Operating income for each of Kinder Morgan's business segments, as well as interest expense, other income and deductions and income taxes were affected by various factors which are described within the corresponding individual discussions which follow. Following are operating results by individual segment (before intersegment eliminations), including explanations of significant variances between the periods presented. 22
Three Months Ended March 31, ---------------------------- Increase NGPL 2000 1999 (Decrease) - ---- ---- ---- ------------ (In Thousands Except Systems Throughput) Operating Revenues: Transportation and Storage $ 144,578 $ 150,619 $ (6,041) Other 3,476 2,880 596 ----------- ----------- ----------- 148,054 153,499 (5,445) ----------- ----------- ----------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 13,800 16,973 (3,173) Operations and Maintenance 16,258 18,934 (2,676) Depreciation and Amortization 21,118 33,664 (12,546) Taxes, Other Than Income Taxes 4,928 5,464 (536) ----------- ----------- ----------- 56,104 75,035 (18,931) ----------- ----------- ----------- Operating Income Before Corporate Costs $ 91,950 $ 78,464 $ 13,486 =========== =========== =========== Systems Throughput (Trillion Btus) 433.5 420.7 12.8 =========== =========== ===========
NGPL's operating income before corporate costs increased from $78.5 million in the first quarter of 1999 to $91.9 million in the first quarter of 2000, an increase of $13.5 million (17.2%). Approximately $9.7 million of this increase is attributable to a July 1999 change in amortization rates, see Note 3 of the accompanying Notes to Consolidated Financial Statements. In addition, results for the first quarter of 2000 reflect (i) decreased unit revenues largely attributable to both existing and planned competing pipeline capacity (with the attendant reduced value of transportation) in the upper Midwest, NGPL's principal market area; although, as discussed following and in Kinder Morgan's 1999 Annual Report on Form 10-K, NGPL continues to experience successes in retaining existing customers and acquiring new customers; (ii) reduced operating expenses reflecting continued cost control measures and (iii) a $3.3 million refund of previously expensed transportation charges from an unaffiliated interstate pipeline. In March 2000, Kinder Morgan announced that it had reached a settlement with the Federal Energy Regulatory Commission (the "FERC") regarding issues surrounding the interpretation of FERC Order No. 497 to several entities currently or formerly owned by Kinder Morgan, including Natural Gas Pipeline Company of America ("Natural"). For additional information on this matter, see Note 10 of the accompanying Notes to Consolidated Financial Statements. Also in March 2000, Kinder Morgan announced that it had filed a "motion to dismiss" in Colorado Federal District Court and will vigorously defend itself against a complaint filed by the Department of Justice alleging that Natural failed to obtain all necessary air quality permits when constructing a compressor station in Colorado more than 20 years ago. For additional information on this matter, see Note 16 of the accompanying Notes to Consolidated Financial Statements. During the first quarter of 2000, Natural announced that it had (i) fully subscribed its 130 Bcf of nominated storage capacity until at least January 1, 2001 as a result of entering into contracts for 25 Bcf of firm nominated storage service under two separate three-year contracts and (ii) entered into contracts with Ameren Corporation for up to 245,000 MMBtu per day of natural gas transportation through a four-year term which began on April 1, 2000. In April 2000, Natural announced that it had initiated HubAmerica, a new program designed to facilitate the movement of natural gas from Chicago and other MidWest regions to markets served directly by Natural or 23 through interconnecting pipelines. In connection with establishment of HubAmerica, Natural signed a letter of intent with Duke Energy's Texas Eastern Transmission Corporation for a long-term reciprocal natural gas pipeline capacity lease. Under the agreement, the two pipelines will lease capacity on each other's systems to offer seamless transportation services of natural gas from the Chicago area to eastern markets. HubAmerica will provide direct access to major markets in Illinois, Indiana, Iowa and Wisconsin, and indirect access to Dallas, Houston, St. Louis, Kansas City and markets on the West Coast, East Coast and Southeastern states through numerous downstream interstate and intrastate pipelines. HubAmerica will offer firm and interruptible transportation services in conjunction with other Natural services, such as parking and loaning transactions and other storage and balancing services. Three Months Ended March 31, 1999 -------------------- KMIGT (In Thousands Except - ----- Systems Throughput) Operating Revenues: Transportation and Storage $ 26,288 Other 109 ----------- 26,397 ----------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales (449) Operations and Maintenance 6,050 Depreciation and Amortization 5,145 Taxes, Other Than Income Taxes 1,299 ----------- 12,045 ----------- Operating Income Before Corporate Costs $ 14,352 =========== Systems Throughput (Trillion Btus) 54.7 =========== Effective December 31, 1999, Kinder Morgan contributed KMIGT and Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.), as well as its interest in Red Cedar Gathering Company to Kinder Morgan Energy Partners in exchange for $330 million in cash plus approximately 9.8 million Kinder Morgan Energy Partners common units. See Note 4 of the accompanying Notes to Consolidated Financial Statements for more information regarding this transaction. In March 2000, Kinder Morgan announced that it had reached a settlement with the FERC regarding issues surrounding the interpretation of FERC Order 497 to several entities currently or formerly owned by Kinder Morgan, including KMIGT. For additional information on this matter, see Note 10 of the accompanying Notes to Consolidated Financial Statements. 24
Three Months Ended March 31, ----------------------------- Increase Retail 2000 1999 (Decrease) - ------ ---- ---- ----------- (In Thousands Except Systems Throughput) Operating Revenues: Gas Sales $ 53,910 $ 54,769 $ (859) Transportation 11,257 11,197 60 Other 3,256 3,896 (640) ----------- ----------- --------- 68,423 69,862 (1,439) ----------- ----------- --------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 35,306 40,553 (5,247) Operations and Maintenance 9,812 10,250 (438) Depreciation and Amortization 2,889 2,845 44 Taxes, Other Than Income Taxes 629 886 (257) ----------- ----------- --------- 48,636 54,534 (5,898) ----------- ----------- --------- Operating Income Before Corporate Costs $ 19,787 $ 15,328 $ 4,459 =========== =========== ========= Systems Throughput (Trillion Btus) 21.8 17.2 4.6 =========== =========== =========
Retail's operating income before corporate costs increased from $15.3 million in the first quarter of 1999 to $19.8 million in the first quarter of 2000, an increase of $4.5 million (29.1%). Gross margin increased from $29.3 million in the first quarter of 1999 to $33.1 million in the first quarter of 2000, an increase of $3.8 million (13.0%), despite a $1.4 million (2.1%) decrease in operating revenues. These favorable results principally reflect (i) increased system throughput in the first quarter of 2000, although a significant portion of this increase represents volumes transported for relatively low margins, (ii) reduced operating expenses reflecting a continued focus on efficient operations and reduced costs for certain administrative functions due to renegotiation of a contract with a third-party service provider and (iii) certain unfavorable adjustments to gas cost affecting first-quarter 1999 results. In March 2000, Kinder Morgan announced the results of Retail's Agricultural Choice Gas Program, which provides agricultural customers in Nebraska (approximately 10,000 customers, a 6.9 Bcf per year market) the option to select their natural gas supplier. During the selection period, which ran from January 20 to March 15, customers in Nebraska had the opportunity to select from six natural gas suppliers. Retail received the largest share of the market with 47%, which represents a small increase in market share over the previous year, with the next largest market share going to Midwest United Energy at 32%. Kinder Morgan recently filed appeals with respect to recovery of certain surcharges in Nebraska, see "Regulatory Matters". 25
Three Months Ended March 31, ---------------------------- Increase KMTP 2000 1999 (Decrease) - ---- ---- ---- ----------- (In Thousands Except Systems Throughput) Operating Revenues: Gas Sales $ 231,963 $ 153,994 $ 77,969 Transportation and Storage 7,217 7,170 47 Other 10,739 3,163 7,576 ----------- ----------- ---------- 249,919 164,327 85,592 ----------- ----------- ---------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 225,789 143,714 82,075 Operations and Maintenance 11,195 10,417 778 Depreciation and Amortization 676 587 89 Taxes, Other Than Income Taxes 929 622 307 ----------- ----------- ---------- 238,589 155,340 83,249 ----------- ----------- ---------- Operating Income Before Corporate Costs $ 11,330 $ 8,987 $ 2,343 =========== =========== ========== Systems Throughput (Trillion Btus) 144.2 145.5 (1.3) =========== =========== ==========
KMTP's operating income before corporate costs increased from $9.0 million in the first quarter of 1999 to $11.3 million in the first quarter of 2000, an increase of $2.3 million (26.1%). Operating revenues increased from $164.3 million in the first quarter of 1999 to $249.9 million in the first quarter of 2000, an increase of $85.6 million (52.1%), while gross margin increased by $3.5 million (17.0%), from $20.6 million to $24.1 million, over the same period. The increase in first-quarter 2000 operating revenues is principally due to (i) an increase in the average cost of gas (a component of the gas sales rate) of approximately $0.75 per MMBtu in 2000, (ii) a $0.30 per gallon increase in the average sales price of natural gas liquids during the first quarter of 2000 and (iii) increased first-quarter 2000 natural gas liquids sales volumes. The increase in "Gas Purchases and Other Costs of Sales" is principally due to the increased first-quarter 2000 cost of gas. The increase in both gross margin and operating income largely reflects the increased natural gas liquids sales volumes and improvement in natural gas liquids prices, each as discussed preceding. In March 2000, Kinder Morgan announced that Kinder Morgan Texas Pipeline had (i) renewed its natural gas and transportation contract with Reliant Energy HL&P (the electric utility which serves the greater Houston, Texas metropolitan area) through March 1, 2004 and (ii) entered into a new transportation services agreement with Reliant Energy HL&P beginning in 2002 and extending through 2012. Reliant Energy, as a consolidated enterprise (which includes, in addition to HL&P, Entex - the gas distribution utility which serves the Houston Texas metropolitan area), constitutes KMTP's (and Kinder Morgan Inc.'s) largest customer. See Note 19 of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K. 26
Three Months Ended March 31, ----------------------------- Increase Power and Other 2000 1999 (Decrease) - --------------- ---- ---- ------------ (In Thousands) Operating Revenues $ 14,176 $ 15,126 $ (950) ----------- ----------- ----------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 1,742 3,675 (1,933) Operations and Maintenance 4,413 3,018 1,395 Depreciation and Amortization 2,078 1,899 179 Taxes, Other Than Income Taxes 321 240 81 ----------- ----------- ----------- 8,554 8,832 (278) ----------- ----------- ----------- Operating Income Before Corporate Costs $ 5,622 $ 6,294 $ (672) =========== =========== ===========
Power and Other operating income before corporate costs declined by approximately $0.7 million (10.7%) from the first quarter of 1999 to the first quarter of 2000, reflecting minor decreases in both operating revenues and operating expenses. These declines were principally due to lower power sales volumes and associated reduced operating expenses resulting from relatively milder 2000 winter weather. In addition to power operations, results reported in "Power and Other" include earnings from Kinder Morgan's agreement with HS Resources, Inc. as described in Kinder Morgan's 1999 Annual Report on Form 10-K and earnings from certain telecommunications assets used primarily by internal business segments.
Three Months Ended March 31, ----------------------------- Increase Other Income and (Deductions) 2000 1999 (Decrease) - ----------------------------- ---- ---- ------------ (In Thousands) Equity in Earnings of Kinder Morgan Energy Partners: Equity in Earnings $ 29,583 $ - $ 29,583 Amortization of Excess Investment (7,577) - (7,577) Other Equity in Earnings(Losses) (2,899) 6,573 (9,472) Interest Expense, Net (60,399) (62,917) 2,518 Minority Interests (5,965) (5,979) 14 Other, Net 9,672 1,357 8,315 ----------- ----------- ----------- $ (37,585) $ (60,966) $ 23,381 =========== =========== ===========
The equity in earnings of Kinder Morgan Energy Partners and associated amortization during 2000 reflect the October 1999 acquisition of Kinder Morgan Delaware, see Note 2 of the accompanying Notes to Consolidated Financial Statements. For additional information regarding the results of operations of Kinder Morgan Energy Partners, the reader is directed to Kinder Morgan Energy Partners' quarterly report on Form 10-Q for the period ended March 31, 2000. The decrease in "Other Equity in Earnings" from the first quarter of 1999 to the first quarter of 2000 is principally due to the sale or discontinuance of various equity method investments, see Notes 4 and 5 of the accompanying Notes to Consolidated Financial Statements. "Other, Net" in the first quarter of 2000 includes (i) $4.1 million due to the recovery of note receivable proceeds in excess of its carrying value, (ii) $3.9 million attributable to the settlement of a regulatory matter for an amount less than that previously reserved, see "Regulation" and (iii) $1.3 million attributable to a gain from the sale of Tom Brown, Inc. Common Stock. First quarter 1999 "Other, Net" included dividend income associated with Tom Brown, Inc. Preferred Stock, which was sold in the third quarter of 1999. For additional information with respect to the sale of the Tom Brown, Inc. Preferred and Common stock, see Note 4 of the accompanying Notes to Consolidated Financial Statements. 27
Three Months Ended March 31, ----------------------------- Income Taxes From Continuing Operations 2000 1999 Increase - --------------------------------------- ---- ---- ------------ (Dollars In Thousands) Income Tax Provision $ 30,727 $ 15,286 $ 15,441 =========== =========== =========== Effective Tax Rate 40.0% 39.0% 1.0% =========== =========== ===========
The increase of $15.4 million in the income tax provision from the first quarter of 1999 to the first quarter of 2000 is composed of (i) an increase of $14.7 million attributable to an increase in pre-tax income and (ii) an increase of $0.7 million attributable to an increase in the effective tax rate in 2000. This increase in the effective tax rate is principally due to an increased provision for state income taxes. Discontinued Operations - ----------------------- During the third quarter of 1999, Kinder Morgan adopted a plan to discontinue the direct marketing of non-energy products and services (principally under the "Simple Choice" brand), which activities had been carried on largely through Kinder Morgan's en*able joint venture with PacifiCorp. During the fourth quarter of 1999, Kinder Morgan adopted and implemented plans to discontinue the following lines of business: gathering and processing natural gas and providing field services to natural gas producers, commodity marketing of natural gas and natural gas liquids, international operations and West Texas intrastate pipelines. As further described in Note 6 of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K, as of December 31, 1999, in accordance with the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," Kinder Morgan (i) restated its consolidated financial statements to reflect these businesses as discontinued operations and (ii) recorded an estimate of the loss expected to result from the discontinuance and disposal of these businesses, including both the estimated losses to be incurred upon sale and the estimated operating losses to be incurred prior to the projected disposal dates. This total estimated loss is subject to uncertainty with respect to the ultimate proceeds to be received from the sale and operation of these assets (among other factors) and, accordingly, the actual loss may differ materially from the estimate recorded as of December 31, 1999. Any such difference will be recognized in the period in which it is reasonably estimable and classified in the same manner as the original estimated loss. The reader is directed to Note 5 of the accompanying Notes to Consolidated Financial Statements for (i) information concerning the status of disposition efforts with respect to these assets, (ii) certain financial information with respect to discontinued operations and (iii) Kinder Morgan's remaining investment in these businesses. Liquidity and Capital Resources - ------------------------------- The following table illustrates the sources of Kinder Morgan's invested capital. The balances at December 31, 1998 and subsequent reflect the incremental capital associated with the acquisition of MidCon Corp., including the post-acquisition refinancings completed in 1998. The balances at December 31, 1999 and March 31, 2000 also reflect the impacts associated with the acquisition of Kinder Morgan Delaware and the sale of certain assets to Kinder Morgan Energy Partners (for additional information on these transactions, see Notes 2 and 4 of the accompanying Notes to Consolidated Financial Statements). 28
March 31, December 31, ------------ -------------------------------------------------------- (Dollars in Thousands) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Long-term Debt $3,293,168 $ 3,293,326 $ 3,300,025 $ 553,816 $ 423,676 Common Equity 1,716,679 1,665,841 1,216,821 606,132 519,794 Preferred Stock - - 7,000 7,000 7,000 Capital Trust Securities 275,000 275,000 275,000 100,000 - ---------- ----------- ----------- ---------- ---------- Capitalization 5,284,847 5,234,167 4,798,846 1,266,948 950,470 Short-Term Debt 444,267 581,567 1,702,013 (1) 359,951 156,271 ---------- ----------- ----------- ---------- ---------- Invested Capital $5,729,114 $ 5,815,734 $ 6,500,859 $1,626,899 $1,106,741 ========== =========== =========== ========== ========== Capitalization: - --------------- Long-term Debt 62.3% 62.9% 68.8% 43.7% 44.6% Common Equity 32.5% 31.8% 25.4% 47.8% 54.7% Preferred Stock - - 0.1% 0.6% 0.7% Capital Trust Securities 5.2% 5.3% 5.7% 7.9% - Invested Capital: - ----------------- Total Debt 65.2% 66.6% 76.9% 56.2% 52.4% Equity, Including Capital Trust Securities 34.8% 33.4% 23.1% 43.8% 47.6%
(1) Includes the $1,394,846 Substitute Note assumed in conjunction with the acquisition of MidCon Corp., which note was repaid in January 1999. CASH FLOWS - ---------- The following discussion of cash flows should be read in conjunction with the Statements of Consolidated Cash Flows and related supplemental information included in Kinder Morgan's 1999 Annual Report on Form 10-K and the accompanying Consolidated Statements of Cash Flows, including the related supplemental disclosures. Net Cash Flows from Operating Activities - ---------------------------------------- "Net Cash Flows Provided by (Used in) Operating Activities" decreased from a source of $38.2 million in the first quarter of 1999 to a use of $115.8 million in the first quarter of 2000, a decline of $154.0 million. This decline is primarily due to an increase in cash flows used for discontinued operations, which increased from a source of $82.8 million in the first quarter of 1999 to a use of $132.0 million in the first quarter of 2000, reflecting (i) $124.9 million of cash outflow attributable to the reduced utilization of Kinder Morgan's receivable sale program, see "Net Cash Flows from Financing Activities" following and (ii) a $21.5 million source of cash in the first quarter of 2000 for discontinued operations working capital items, compared to a $109.2 million source of cash in the first quarter of 1999. This decline in cash provided by working capital items for discontinued operations principally reflected (i) decreased cash from sales of gas in storage during the first quarter of 2000 and (ii) decreased cash provided from the net of accounts receivable and accounts payable during the first quarter of 2000, over and above the effect of the receivable sales program. The decline in "Net Cash Flows Provided by (Used in) Operating Activities" for discontinued operations was partially offset by an increase in cash flows provided by continuing operations, which increased from a use of $44.5 million in the first quarter of 1999 to a source of $16.3 million in the first quarter of 2000. This increase is primarily due to (i) increased cash of $13.8 million in the first quarter of 2000 attributable to increased income before equity in earnings of Kinder Morgan Energy Partners, depreciation and amortization, deferred income taxes and other non-cash charges and credits, (ii) $15.9 million of cash distributions in the first quarter of 2000 attributable to Kinder Morgan's interest in Kinder Morgan Energy Partners, see Note 2 of the accompanying Notes to Consolidated Financial Statements and (iii) a decrease in cash used in the first 29 quarter of 2000 to make interest payments reflecting the decreased average debt balance outstanding. Partially offsetting this increase were January 2000 payments associated with December 1999 gas supply purchases. Net Cash Flows from Investing Activities - ---------------------------------------- "Net Cash Flows Provided by Investing Activities" decreased from $1.0 billion in the first quarter of 1999 to $232.0 million in the first quarter of 2000, a decline of $803.6 million principally due to the sale of approximately $1.1 billion of government securities in the first quarter of 1999, with the proceeds utilized to repay the Substitute Note assumed in conjunction with the January 1998 acquisition of MidCon Corp., see "Cash Flows From Financing Activities" following and Note 2 of Notes to Consolidated Financial Statements included in Kinder Morgan's 1999 Annual Report on Form 10-K. Partially offsetting this decrease was $330 million of cash received during the first quarter of 2000 from the sale of certain interests to Kinder Morgan Energy Partners, see Note 4 of the accompanying Notes to Consolidated Financial Statements. In addition, cash flows used in discontinued investing activities increased from $21.8 million in the first quarter of 1999 to $49.3 million in the first quarter of 2000. Kinder Morgan is in the process of monetizing its remaining investment in Discontinued businesses, see "Discontinued Operations" elsewhere herein. Net Cash Flows from Financing Activities - ---------------------------------------- "Net Cash Flows Used in Financing Activities" decreased from approximately $1.1 billion in the first quarter of 1999 to $122.9 million in the first quarter of 2000, a decline of approximately $1.0 billion. This decrease was principally due to the first- quarter 1999 repayment of the $1.39 billion Substitute Note as discussed preceding, partially offset by increased short-term borrowings. As further discussed in Note 9 of the accompanying Notes to Consolidated Financial Statements, Kinder Morgan's principal sources of short-term liquidity are its revolving bank facilities totaling $950 million. At March 31, 2000, Kinder Morgan had $437.1 million of commercial paper (which is backed by the bank facilities) issued and outstanding. The corresponding amount outstanding was $250.3 million at April 17, 2000. The principal reason for the decline in short-term borrowings from March 31 to April 17 was application of the $164 million of cash proceeds from the transaction with ONEOK, see Note 5 of the accompanying Notes to Consolidated Financial Statements. After inclusion of applicable letters of credit, the remaining available borrowing capacity under the bank facilities was $512.9 million and $699.7 million at March 31, 2000 and April 17, 2000, respectively. As described in Kinder Morgan's 1999 Annual Report on Form 10-K, Kinder Morgan's bank facilities and certain of its operating lease arrangements contain covenants related to Kinder Morgan's ratio of debt to total capitalization, consolidated net worth and debt ratings. For additional information on utilization of these facilities, see Note 9 of the accompanying Notes to Consolidated Financial Statements. As more fully discussed in Kinder Morgan's 1999 Annual Report on Form 10-K, in September 1999, Kinder Morgan established a receivables sales facility that provided up to $150 million of additional liquidity. In accordance with this agreement, proceeds of $150 million were received on September 30, 1999. In accordance with authoritative accounting guidelines, cash flows associated with this facility are included with "Cash flows from Operating Activities" in the accompanying Consolidated Statements of Cash Flows. In February 2000, Kinder Morgan reduced its participation in this receivable sales program by $124.9 million, principally as a result of its then-pending disposition of its wholesale gas marketing business, see Note 6 of the accompanying Notes to Consolidated Financial Statements. On April 25, 2000, Kinder Morgan repaid the residual balance and terminated the agreement. 30 Regulation - ---------- On March 29, 2000, Kinder Morgan announced that it had reached a settlement with the FERC regarding issues surrounding the interpretation of FERC Order 497 (which governs the conduct of interstate pipelines and affiliated gas marketers on their systems) relative to KMIGT, Natural and Westar Transmission Company. KKMIGT has been sold to Kinder Morgan Energy Partners and Westar has been sold to ONEOK, see Notes 4 and 5 of the accompanying Notes to Consolidated Financial Statements. Combined, Kinder Morgan agreed to pay a civil penalty and refunds totaling $5.75 million in conjunction with the settlement, which also eliminated the potential for any civil action or prolonged regulatory proceedings. The matters resolved related to periods prior to the October 1999 K N Energy-Kinder Morgan merger and, to some extent, periods prior to K N Energy's January 1998 acquisition of MidCon Corp. The payment had no detrimental effect on Kinder Morgan's earnings due to the existence of previously established reserves. In April 2000, Kinder Morgan filed appeals against 11 Nebraska municipalities that have adopted rate ordinances prohibiting the collection of a surcharge (associated with the P-0802 contract entered into in 1973) to recover costs Retail incurred in purchasing natural gas for its customers. Kinder Morgan alleges that these municipalities failed to determine an appropriate overall amount for Retail's rates and that the municipalities failed to follow the appropriate process, as set up by the Nebraska legislature, to review the P-0802 contract. When Retail opened its distribution system to competitive supplies in 1998, participating municipalities were made aware of the surcharge and passed ordinances allowing it. Environmental and Legal Matters - ------------------------------- See Note 16 of the accompanying Notes to Consolidated Financial Statements for information regarding environmental and legal matters. The reader is also directed to Notes 9(A) and 9(B) of Notes to Consolidated Financial Statements of Kinder Morgan's Annual Report on Form 10-K for the year ended December 31, 1999, for additional information on Kinder Morgan's pending litigation and environmental matters. Kinder Morgan believes it has established adequate reserves such that the resolution of pending litigation and environmental matters will not have a material adverse impact on Kinder Morgan's business, cash flows, financial position or results of operations. Business Strategy - ----------------- The reader is directed to Kinder Morgan's 1999 Annual Report on Form 10K for a discussion of business strategy. 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, 1999, in the "Risk Management" section of Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Kinder Morgan's Annual Report on Form 10-K for the year ended December 31, 1999. 31 PART II - OTHER INFORMATION Item 1. Legal Proceedings The reader is directed to Note 16 of the accompanying Notes to Consolidated Financial Statements in Part I, Item 1, which is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 10(a) Employment Agreement dated April 20, 2000, by and among Kinder Morgan, Inc., Kinder Morgan G.P., Inc. and David G. Dehaemers, Jr. (Attached hereto as Exhibit 10(a))* 10(b) Employment Agreement dated April 20, 2000, by and among Kinder Morgan, Inc., Kinder Morgan G.P., Inc. and Michael C. Morgan (Attached hereto as Exhibit 10(b))* 27.1 Financial Data Schedule* *Included in SEC copy only. (B) Reports on Form 8-K (1) Current Report on Form 8-K dated January 14, 2000 was filed pursuant to Items 5 and 7 of that form. (2) Current Report on Form 8-K dated February 4, 2000 was filed pursuant to Items 2, 5 and 7 of that form. Pursuant to Item 7 of that form, Kinder Morgan filed certain pro forma financial information. (3) Amendment No. 1 to Current Report on Form 8-K (an amendment to the Current Report on Form 8-K dated February 4, 2000) dated February 7, 2000 was filed pursuant to Items 2, 5 and 7. Pursuant to Item 7 of that form, Kinder Morgan filed certain pro forma financial information. (4) Current Report on Form 8-K dated February 23, 2000 was filed pursuant to Items 5 and 7 of that form. (5) Current Report on Form 8-K dated April 20, 2000 was filed pursuant to Items 2 and 7 of that form. Pursuant to Item 7 of that form, Kinder Morgan disclosed that substantially the same information as that required by Item 7 (pro forma financial information) has been previously reported by Kinder Morgan on its Form 10-K for the year ended December 31, 1999. 32 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. KINDER MORGAN, INC. (Registrant) May 10, 2000 /s/ C. Park Shaper ---------------------------------------------- C. Park Shaper Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 33 EXHIBIT INDEX 10(a) Employment Agreement dated April 20, 2000, by and among Kinder Morgan, Inc., Kinder Morgan G.P., Inc. and David G Dehaemers, Jr. (Attached hereto as Exhibit 10(a))* 10(b) Employment Agreement dated April 20, 2000, by and among Kinder Morgan, Inc., Kinder Morgan G.P., Inc. and Michael C. Morgan (Attached hereto as Exhibit 10(b))* 27.1 Financial Data Schedule* *Included in SEC copy only. EX-10.A 2 Exhibit 10(a) EMPLOYMENT AGREEMENT This Agreement ("Agreement") is entered into this 20th day of April, 2000 (the "Effective Date") by and among Kinder Morgan, Inc., a Kansas corporation ("KMI"), Kinder Morgan G.P., Inc., a Delaware corporation ("KMGP"), and David G. Dehaemers, Jr. ("Employee"). WHEREAS, the parties acknowledge wherever KMI is used in this Agreement it is intended to refer to both KMI and KMGP; WHEREAS, the parties acknowledge Employee is an officer of KMI and KMGP; WHEREAS, the parties wish to provide for certain conditions of employment as negotiated relating to continued employment; WHEREAS, the parties negotiated certain terms to extend past employment, including, without limitation, terms relating to a non-compete obligation; WHEREAS, Employee agrees that ample consideration was provided to ensure enforcement of certain provisions and the waiver of certain rights; NOW THEREFORE, in consideration of the foregoing premises and the following promises, the parties agree as follows: 1. Intent of the Parties. It is the intent of the parties that Employee's rights under the Kinder Morgan Energy Partners, L.P. Executive Compensation Plan shall be waived and forfeited upon execution of this Agreement. 2. Definitions. (a) Termination for Cause. "Termination for Cause" shall mean termination of Employee's employment by KMI because of (i)Employee's conviction of a felony which in the reasonable, good faith opinion of the Compensation Committee of the Board of Directors of Kinder Morgan, Inc. would have an adverse impact on the reputation or business of KMI or any of its affiliates; (ii) subject to the notice provision's set forth below in this Section 2(a), Employee's willful refusal without proper legal cause to perform his duties and responsibilities; (iii) Employee's willfully engaging in conduct which Employee has reason to know is materially injurious to KMI or any of its affiliates; or (iv) subject to the notice and counseling provisions set forth below in this Section 2(a), failure to meet clearly established and reasonable performance objectives or standards established by KMI for Employee's job position. Such termination shall be effected by notice thereof delivered by KMI to Employee and shall be effective as of the date of such notice; provided, however, that if such termination is pursuant to clause (ii) above and within seven (7) days following the date of such notice Employee shall cease such refusal and shall use his or her best efforts to perform such duties and responsibilities, the termination shall not be effective; provided further, that termination pursuant to clause (iv) above shall not become effective unless Employee has been counseled about such unacceptable performance and coached to improve performance for at least forty-five (45) days; and, provided further, that KMI shall consult with Employee and provide an opportunity for Employee to be heard prior to effecting any termination under this section, and KMI's failure to do so shall constitute Involuntary Termination and not Termination for Cause. (b) Change of Duties. A "Change of Duties" means; (i) A significant reduction in the nature, scope of authority or duties of Employee (without the written consent of Employee) from those applicable to him on the Effective Date of this Agreement; (ii) Any reduction in Employee's annual base salary, without the consent of Employee, unless it is part of a program to reduce salaries for all similarly situated employees; (iii) Receipt of employee benefits (including but not limited to medical, dental, life insurance, accidental death and dismemberment; and long term disability plans) that are materially inconsistent with and inferior to the employee benefits provided by KMI to employees with comparable duties; or (iv) A change in the location of Employee's principal place of employment by KMI by more than 50 miles from the location where he was principally employed on the Effective Date of this Agreement, without Employee's consent. (c) Pro-Rata Portion. "Pro-Rata Portion" is the amount determined by the formula: the compensation payment received by Employee pursuant to section 4(b) hereof, multiplied by the Pro- Rata Percentage. The Pro-Rata Percentage is defined as: 1460 minus the number of calendar days from Effective Date of this Agreement up to the date of a Non-Competition Violation, as defined in Section 5(d) below, not to exceed 1460 days, divided by 1460. (d) Confidential Information. "Confidential Information" shall include all information, the use of which by persons or entities other than KMI or its employees, agents or representatives would be detrimental to KMI's business interests, relating to (i) KMI's Customers, providers, suppliers, and other business affiliates; (ii) KMI's policies, practices, operating information, financial information, business plans, and market approaches; and (iii) other information, techniques or approaches used by KMI and not generally known or applied in KMI's industry. KMI believes that some or all of this information constitutes trade secrets; however, the Confidential Information covered in this Agreement need not satisfy the legal definition or requirements of a "trade secret" to be protected from disclosure hereunder. Confidential Information shall exclude any information that is generally known in KMI's industry and information known to any future employer of Employee and any information disclosed by KMI in public filings, including, without limitation, filings with the Securities and Exchange Commission and the Federal Energy Regulatory Commission. (e) Customer. "Customer" shall include any person or entity to whom during the Term of this Agreement, services are being sold by KMI, and any person or entity with whom, during the Term of this Agreement, KMI has established a strategic marketing alliance. (f) He, him, himself, his. "He," "him," "himself" and "his" when used herein shall be synonymous with "she," "her," "herself," and "her," as applicable. (g) Involuntary Termination. "Involuntary Termination" means (i) termination of Employee's employment at the behest of KMI other than a Termination for Cause; (ii) Employee's resignation on or before thirty (30) days following receipt by Employee of a notice of a Change of Duties; or (iii) a termination which under the terms of the last clause of Section 2(a) is not a Termination for Cause. "Involuntary Termination" does not include (i) Termination for Cause; (ii) termination of Employee's employment due to the death of Employee; (iii) termination of Employee's employment due to Employee's disability under circumstances entitling him to benefits under KMI's long term disability plan; (iv) or any change of employer due to transfer of Employee's employment to a successor company that is a wholly owned KMI subsidiary or affiliate and/or any change of employer due to transfer of Employee's employment to a purchaser of or successor to KMI. (h) KMI. "KMI" means collectively Kinder Morgan, Inc., a Kansas corporation, Kinder Morgan G.P., Inc., their successors and assigns, and their divisions and affiliates. For purposes of this Agreement, the term "affiliates" shall have the same definition as the term "affiliated group" in Section 1504(a) of the Internal Revenue Code of 1986, as amended from time to time. (i) Welfare Benefit Coverages. "Welfare Benefit Coverages" shall mean the medical, dental, life insurance, long term disability and accidental death and dismemberment coverages provided by KMI to its active employees. 3. Term of This Agreement. The term of this Agreement shall be four (4) years from the Effective Date of this Agreement. It is expressly understood and agreed that this Agreement shall terminate and be of no further force or effect at the end of the initial four (4) year term. 4. KMI's Promises. In consideration of Employee's promises, KMI hereby agrees as follows: (a) Salary. Employee shall receive a base salary of two hundred thousand dollars ($200,000) annually. Increases may occur at the behest of the senior management of the Company if approved by the Compensation Committee of the Board. Salary shall be continued only if Employee's employment continues. (b) Compensation Payment. In consideration of the obligations of Employee set forth in Section 5(d) hereof and for waiving all rights under the Kinder Morgan Energy Partners, L.P. Executive Compensation Plan, Kinder Morgan, Inc. shall cause Kinder Morgan G.P., Inc., on behalf of Kinder Morgan Energy Partners, L.P., to pay Employee a lump sum payment of seven million, ten thousand dollars ($7,010,000.00) within three (3) days of execution of this Agreement. The parties acknowledge that Employee and Kinder Morgan Energy Partners, L.P. have executed a termination and settlement of the grant agreement evidencing Employee's grant under the Kinder Morgan Energy Partners, L.P. Executive Compensation Plan. (c) Stock Options. Kinder Morgan, Inc. will provide Employee a grant of 150,000 stock options priced at $33.125, the closing price of Kinder Morgan, Inc.'s common stock on the New York Stock Exchange on April 20, 2000. The terms and conditions are specified in the Option Agreement (Exhibit B). (d) Bonus. Employee will be eligible for any applicable incentive compensation plan of KMI or its predecessors, at the same level as other senior officers. (e) Directors and Officers Insurance. As long as Employee is an officer or director of either Kinder Morgan, Inc. or any of its affiliates, KMI will provide director and officer liability coverage to Employee on the same terms as it provides to other officers and directors. (f) Bridging. KMI will provide for bridging of service for eligible employees in accordance with approved plan documents in effect on the Effective Date of Employee's Involuntary Termination. (g) Condition to Receipt of Benefits Listed in This Paragraph 4. As a condition of receipt of any benefit listed in this Paragraph 4, Employee shall execute Exhibit A, Exhibit B and be subject to all promises provided in Section 5(d) of this Agreement. Exhibit A and Exhibit B shall be executed upon execution of this Agreement. 5. Employee's Promises. (a) Confidential Information. Employee shall not, while employed by KMI or at any time thereafter, directly or indirectly, (i) use or apply any Confidential Information for unauthorized purposes, alone or with any other person or entity; or (ii) disclose or provide any Confidential Information to any person or entity not authorized by KMI to receive such Confidential Information. (b) Non-Disparagement Agreement. Employee specifically agrees that he will not in any way disparage KMI, its officers, directors, employees, consultants, agents, or business operations or decisions; provided, however, that Employee shall not be held in breach of this provision should Employee testify pursuant to subpoena under oath and give testimony that KMI considers to be disparaging. (c) Non-Solicitation of KMI Employees. Employee agrees that, for the term of the Agreement from the date of termination of employment hereunder, he will not encourage, entice, or otherwise solicit any employee of KMI or any of its affiliates or subsidiaries, or aid any third party to encourage, entice or solicit any employee of KMI, to leave employment with KMI in order to accept employment elsewhere. For purposes of this paragraph, "employment elsewhere" shall include any relationship of employer/employee and any relationship of principal/independent contractor. (d) Non-Competition. Employee acknowledges that; 1) KMI and its affiliates are engaged in the business (the "Business")of owning and/or operating integrated natural gas assets, products and bulk terminals, refined products, natural gas, natural gas liquids and carbon dioxide pipelines, electricity generating assets and other midstream energy assets; 2) the Business is conducted throughout the United States; 3) his work for KMI gives or gave him access to proprietary information and trade secrets of and confidential information concerning KMI, and 4) the agreements and covenants contained in this provision are essential to protect the Business and the trade secrets, confidential and proprietary information and other legitimate interests of KMI. Accordingly, Employee covenants and agrees as follows: (i) Employee agrees that for a period of four (4) years following the Effective Date of this Agreement regardless of whether Employee remains employed by KMI, Employee, other than on behalf of KMI, will not engage in any conduct, line of business or activity which is the same as or substantially similar to any conduct, activity or line of business conducted by KMI or their affiliates in which Employee was or is engaged in during his employment by KMI (each such line of business or activity being an "Exclusive Activity"), in any geographic area in which Company conducts such Exclusive Activities. (ii) The parties stipulate and agree that the terms and covenants contained in this provision are fair and reasonable in all respects, including the time period and geographical coverage and that these restrictions are designed for the reasonable protection of the business of KMI. If, at the time of enforcement of any of these provisions, a court holds that the restrictions stated herein are unreasonable under the circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances will be substituted for the stated period, scope or area. In such event KMI and Employee hereby specifically request a trial court presented with this Agreement for enforcement to reform it as to time, geographic area or scope of activities prohibited and to enforce this Agreement as reformed. (iii) In the event KMI determines that Employee has violated the provisions of this Section 5(d), KMI agrees to provide Employee written notice of such violation. If Employee does not cease the conduct prohibited by this Section 5(d) and cure the impact of such conduct on KMI within 30 days after receipt of written notice from KMI, a "Non-Competition Violation" shall be deemed to have occurred at the end of such 30 day period, and the provisions of Section 7 shall apply. (iv) KMI hereby waives any rights under, and Employee shall not be deemed to have violated, the provisions of this Section 5(d) with respect to any conduct or activity of Employee if Employee gives KMI 30 days written notice prior to engaging in such conduct or activity, and KMI does not object to such conduct or activity in writing within the 30 day period following notice from Employee. (e) Section 5 shall be enforceable only to the extent either Richard D. Kinder or William V. Morgan serves as Chief Executive Officer of Kinder Morgan, Inc. or its successor. 6. Effects of Termination. During the term of this Agreement, a termination of Employee's employment for any of the following reasons shall have the effects set forth below: (a) Termination is for Cause. If the Employee's employment is terminated by a Termination for Cause: (i) subject to Section 7 below, Employee shall be entitled to retain the all payments and benefits made under Sections 4(b) hereof; (ii) Employee shall retain the stock options granted in accordance with Section 4(c) hereof; (iii) Employee shall not be eligible for severance payments under KMI's severance policy; and (iv) all benefits otherwise payable under Sections 4(a) and 4 (d) hereof shall cease. (b) Termination for Change of Duties or Involuntary Termination. If the Employee's employment is terminated by a Termination for Change of Duties or an Involuntary Termination: (i) subject to Section 7 below, Employee shall be entitled to retain all payments and benefits made under Sections 4(b) hereof; (ii) Employee shall retain the stock options granted in accordance with Section 4(c) hereof; (iii) Employee shall be eligible for severance consistent with KMI's severance policy; and (iv) all benefits otherwise payable under Sections 4(a) and 4(d) hereof shall cease. (c) Termination for Death, Disability ,Retirement or Resignation. If the Employee's employment is terminated due to the death, disability, retirement or resignation of Employee: (i) subject to Section 7 below, Employee shall be entitled to retain all payments and benefits made under Sections 4(b) hereof; (ii) Employee shall retain the stock options granted in accordance with Section 4(c) hereof; and (iii) All other payments and benefits relating to Employee's employment shall cease upon last day of employment other than benefits which generally continue for all KMI employees after termination of employment under the terms of KMI's benefit plans. 7. Violation of Non-Competition; Payment of Pro-Rata Portion. Within three business days following a Non-Competition Violation which occurs during the term of this Agreement,, Employee shall pay to KMI an amount in U.S. dollars equal to the Pro-Rata Portion, calculated in accordance with Section 2(c) hereof. 8. Adequacy of Consideration. By executing this Agreement, KMI and Employee acknowledges the receipt and sufficiency of the consideration provided by the other in conjunction with executing this Agreement. Each acknowledges and confirms to the other that the consideration provided by the other is good and valuable consideration legally supportive of each party's respective rights, duties and obligations hereunder. By executing this Agreement, KMI and Employee shall be estopped from raising and hereby expressly waive any defense regarding the receipt and/or legal sufficiency of the consideration provided by one to the other with respect to this Agreement. 9. Nonassignability. This Agreement shall inure to the benefit of, and be binding upon, Employee and Employee's personal or legal representatives, employees, administrators, successors, heirs, distributees, devisees and legatees, and KMI, its successors and assignees, provided, however, that neither KMI nor Employee may assign any of Employee's or its rights or benefits hereunder without the prior written consent of the other. 10. No Attachment. Except as required by law, the right to receive payments under this Agreement shall not be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void ab initio and of no effect. 11. Arbitration. The parties agree that any dispute regarding the interpretation or breach of any term of this Agreement shall be resolved through arbitration pursuant to the guidelines set forth by the American Arbitration Association and that any attempt by either party to bring a court action concerning this Agreement shall be subject to dismissal for lack of jurisdiction at the request of the other party. The arbitration and all related activities shall occur in Houston, Texas. To the extent that either party should initiate action to enforce this Agreement, the party prevailing in the action for breach shall be entitled to recover its attorney fees and costs incurred in the prosecution or defense of said action. 12. Headings. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 13. Controlling Law. This Agreement shall be governed and construed in accordance with the laws of Texas. 14. Entire Agreement. This document constitutes the entire agreement of the parties on the subject matters addressed herein and may not be expanded or except by express written agreement executed by both. 15. Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary and convenient, and by the different parties on separate counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 16. Effective Date. The Effective Date of this Agreement shall be the date provided at the top of this Agreement. KINDER MORGAN G.P., INC. By /s/ Joseph Listengart ------------------------------------------- Title: Vice President Witness: /s/ Andre Massey _______________________________________ EMPLOYEE /s/ David G. Dehaemers, Jr. __________________________________________ Name: David G. Dehaemers, Jr. Exhibit A In connection with the Employment Agreement (the "Agreement") dated April 20, 2000, by and among David G. Dehaemers, Jr., Kinder Morgan, Inc. and Kinder Morgan G.P., Inc. (collectively ("KMI"), Employee for himself and his representatives, heirs, and assigns, hereby releases and discharges KMI, any parent, sister or subsidiary company, and any present or former shareholders, officers, directors, employees, agents, representatives, legal representatives, accountants, successors, and assigns, , Richard Kinder, and William Morgan, from all claims, demands, and actions of any nature, known or unknown, in any manner arising out of or involving any aspect of his rights under the Kinder Morgan Energy Partners, L.P. Executive Compensation Plan and any agreement executed in connection therewith. This release includes any and all claims concerning attorney fees, costs, and any and all other expenses related to the claims released herein. This release does not include claims for breach of the Agreement, indemnification, coverage or defense under any applicable directors and officers' insurance policy or vested employee benefits. EMPLOYEE: ________________________________________ Employee Signature Exhibit B KINDER MORGAN, INC. NONQUALIFIED STOCK OPTION AGREEMENT For the 1994 KINDER MORGAN LONG TERM INCENTIVE PLAN This Nonqualified Stock Option Agreement ("Option Agreement") is between Kinder Morgan, Inc. (the "Company"), and David G. Dehaemers, Jr. ("Optionee"), who agree as follows: Section 1. Introduction. The Company has heretofore adopted the Kinder Morgan, Inc. (f/k/a KN Energy, Inc.) 1994 Kinder Morgan Long Term Incentive Plan (the "Plan") for the purpose of providing eligible employees of the Company and its Affiliates (as defined in the Plan) with incentive and reward opportunities designed to enhance the profitable growth of the Company. The Company, acting through the Committee (as defined in the Plan), has determined that its interests will be advanced by the issuance to Optionee of a nonqualified stock option under the Plan. Section 2. Option. Subject to the terms and conditions contained herein, the Company hereby irrevocably grants to Optionee the right and option ("Option") to purchase from the Company 150,000 shares of the Company's common stock, $5.00 par value ("Stock"), at a price of $33.125 per share. Section 3. Option Period. The Option, herein granted, may be exercised by Optionee in whole or in part at any time during a ten year period (the "Option Period") beginning on April 20, 2000 (the "Date of Grant").: Section 4. Procedure for Exercise. The Committee or its designee shall establish procedures for Exercise of the Option. Section 5. Termination of Employment. If, for any reason other than Death, Optionee ceases to be employed by the Company or its Affiliates, the Option may be exercised to the extent Optionee would have been entitled to do so, but in no event may the Option be exercised after the expiration of the Option Period. Section 6. Death. In the event that Optionee's employment is terminated because of Optionee's death, this Option may be exercised, at any time and from time to time, within the Option Period after such Death, by (i) the guardian of Optionee's estate, (ii) the executor or administrator of Optionee's estate, or (iii) the person or persons to whom Optionee's rights under this Option Agreement shall pass by will or the laws of descent and distribution, but in no event may the Option be exercised after the expiration of the Option Period. Section 7. Transferability. This Option shall not be trans ferable by Optionee otherwise than by Optionee's will or by the laws of descent and distribution. During the lifetime of Optionee, the Option shall be exercisable only by Optionee or his guardian or authorized legal representative. Any heir or legatee of Optionee shall take rights herein granted subject to the terms and conditions hereof. No such transfer of this Option Agreement to heirs or legatees of Optionee shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of such evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions hereof. Section 8. No Rights as Shareholder. Optionee shall have no rights as a shareholder with respect to any shares of Stock covered by this Option Agreement until the Option is exercised by written notice and accompanied by payment as provided in Section 4 of this Option Agreement. Section 9. Extraordinary Corporate Transactions. The existence of outstanding Options shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganiza tions, exchanges or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issuance of Stock or other securities or subscription rights thereto, or any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceedings, whether of a similar character or otherwise. Section 10. Changes in Capital Structure. If the outstanding shares of Stock or other securities of the Company, or both, for which the Option is then exercisable shall at any time be changed or exchanged by declaration of a stock dividend, stock split or combination of shares, the number and kind of shares of Stock or other securities subject to the Plan or subject to the Option, and the exercise price, shall be appro priately and equitably adjusted so as to maintain the proportionate number of shares or other securities without changing the aggregate exercise price. Section 11. Compliance With Securities Laws. Upon the acquisition of any shares pursuant to the exercise of the Option herein granted, Optionee (or any person acting under Section 7) will enter into such written representations, warranties and agreements as the Company may reasonably request in order to comply with applicable securities laws or with this Option Agreement. Section 12. Compliance With Laws. Notwithstanding any of the other provisions hereof, Optionee agrees that he or she will not exercise the Option granted hereby, and that the Company will not be obligated to issue any shares pursuant to this Option Agreement, if the exercise of the Option or the issuance of such shares of Stock would constitute a violation by Optionee or by the Company of any provision of any law or regulation of any governmental authority. Section 13. Withholding of Tax. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Optionee for federal or state income tax purposes, Optionee shall pay to the Company at the time of such exercise or disposition such amount of money as the Company may require to meet its obligation under applicable tax laws or regulations and, if Optionee fails to do so, the Company is authorized to withhold from any cash remuneration then or thereafter payable to Optionee, any tax required to be withheld by reason of such resulting compensation income or Company may otherwise refuse to issue or transfer any shares otherwise required to be issued or transferred pursuant to the terms hereof. Section 14. No Right to Employment or Directorship. Optionee shall be considered to be in the employment of the Company or its Affiliates or in service on the Board so long as he or she remains an employee or director of the Company or its Affiliates. Any questions as to whether and when there has been a termination of such employment or service on the Board and the cause of such termination shall be determined by the Committee, and its determination shall be final. Nothing contained herein shall be construed as conferring upon Optionee the right to continue in the employ of the Company or its Affiliates or to continue service on the Board, nor shall anything contained herein be construed or interpreted to limit the "employment at will" relationship between Optionee and the Company or its Affiliates. Section 15. Resolution of Disputes. As a condition of the granting of the Option hereby, Optionee and Optionee's heirs, personal representatives and successors agree that any dispute or disagreement which may arise hereunder shall be determined by the Committee in its sole discretion and judgment, and that any such determination and any interpretation by the Committee of the terms of this Option Agreement shall be final and shall be binding and conclusive, for all purposes, upon the Company, Optionee, and Optionee's heirs, personal representatives and successors. Section 16. Legends on Certificate. The certificates representing the shares of Stock purchased by exercise of the Option will be stamped or otherwise imprinted with legends in such form as the Company or its counsel may require with respect to any applicable restrictions on sale or transfer and the stock transfer records of the Company will reflect stop-transfer instructions with respect to such shares. Section 17. Notices. Every notice hereunder shall be in writing and shall be given by registered or certified mail or by any other method accepted by the Company or the Company's designee. All notices of the exercise of any Option hereunder shall be directed to Kinder Morgan, Inc., 1301 McKinney, Suite 3450, Houston, Texas 77010, Attention: Secretary, or to the Company's designee. Any notice given by the Company to Optionee directed to Optionee at the address on file with the Company shall be effective to bind Optionee and any other person who shall acquire rights hereunder. The Company shall be under no obligation whatsoever to advise Optionee of the existence, maturity or termination of any of Optionee's rights hereunder and Optionee shall be deemed to have familiarized himself or herself with all matters contained herein and in the Plan which may affect any of Optionee's rights or privileges hereunder. Section 18. Construction and Interpretation. Whenever the term "Optionee" is used herein under circumstances applicable to any other person or persons to whom this award, in accordance with the provisions of Section 7 hereof, may be transferred, the word "Optionee" shall be deemed to include such person or persons. Section 19. Agreement Subject to Plan. This Option Agreement is subject to the Plan. The terms and provisions of the Plan (including any subsequent amendments thereto) are hereby incorporated herein by reference thereto. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. All definitions of words and terms contained in the Plan shall be applicable to this Option Agreement. Section 20. Entire Agreement; Amendment. This Option Agreement and any other agreements and instruments contemplated by this Option Agreement contain the entire agreement of the parties, and this Option Agreement may be amended only in writing signed by both parties. Section 21. Modification and Severability. If a court of competent jurisdiction declares that any provision of this Option Agreement is illegal, invalid or unenforceable, then such provision shall be modified automatically to the extent necessary to make such provision fully enforceable. If such court does not modify any such provision as contemplated herein, but instead declares it to be wholly illegal, invalid or unenforceable, then such provision shall be severed from this Option Agreement, and such declaration shall in no way affect the legality, validity and enforceability of the other provisions of this Option Agreement to which such declaration does not relate. In this event, this Option Agreement shall be construed as if it did not contain the particular provision held to be illegal, invalid or unenforceable, the rights and obligations of the parties hereto shall be construed and enforced accordingly, and this Option Agreement otherwise shall remain in full force and effect. If any provision of this Option Agreement is capable of two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the construction which renders it valid. Section 22. Binding Effect. This Option Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Optionee as provided herein. Section 23. Governing Law. This Option Agreement shall be interpreted and construed in accordance with the laws of the State of Colorado and applicable federal law. IN WITNESS WHEREOF, this Nonqualified Stock Option Agreement has been executed as of the 20th day of April, 2000. KINDER MORGAN, INC. By: ------------------------------- Joseph Listengart Vice President OPTIONEE _______________________________________ David G. Dehaemers, Jr. EX-10.B 3 Exhibit 10(b) EMPLOYMENT AGREEMENT This Agreement ("Agreement") is entered into this 20th day of April, 2000 (the "Effective Date") by and among Kinder Morgan, Inc., a Kansas corporation ("KMI"), Kinder Morgan G.P., Inc., a Delaware corporation ("KMGP"), and Michael C. Morgan ("Employee"). WHEREAS, the parties acknowledge wherever KMI is used in this Agreement it is intended to refer to both KMI and KMGP; WHEREAS, the parties acknowledge Employee is an officer of KMI and KMGP; WHEREAS, the parties wish to provide for certain conditions of employment as negotiated relating to continued employment; WHEREAS, the parties negotiated certain terms to extend past employment, including, without limitation, terms relating to a non-compete obligation; WHEREAS, Employee agrees that ample consideration was provided to ensure enforcement of certain provisions and the waiver of certain rights; NOW THEREFORE, in consideration of the foregoing premises and the following promises, the parties agree as follows: 1. Intent of the Parties. It is the intent of the parties that Employee's rights under the Kinder Morgan Energy Partners, L.P. Executive Compensation Plan shall be waived and forfeited upon execution of this Agreement. 2. Definitions. (a) Termination for Cause. "Termination for Cause" shall mean termination of Employee's employment by KMI because of (i) Employee's conviction of a felony which in the reasonable, good faith opinion of the Compensation Committee of the Board of Directors of Kinder Morgan, Inc. would have an adverse impact on the reputation or business of KMI or any of its affiliates; (ii) subject to the notice provision's set forth below in this Section 2(a), Employee's willful refusal without proper legal cause to perform his duties and responsibilities; (iii) Employee's willfully engaging in conduct which Employee has reason to know is materially injurious to KMI or any of its affiliates; or (iv) subject to the notice and counseling provisions set forth below in this Section 2(a), failure to meet clearly established and reasonable performance objectives or standards established by KMI for Employee's job position. Such termination shall be effected by notice thereof delivered by KMI to Employee and shall be effective as of the date of such notice; provided, however, that if such termination is pursuant to clause (ii) above and within seven (7) days following the date of such notice Employee shall cease such refusal and shall use his or her best efforts to perform such duties and responsibilities, the termination shall not be effective; provided further, that termination pursuant to clause (iv) above shall not become effective unless Employee has been counseled about such unacceptable performance and coached to improve performance for at least forty-five (45) days; and, provided further, that KMI shall consult with Employee and provide an opportunity for Employee to be heard prior to effecting any termination under this section, and KMI's failure to do so shall constitute Involuntary Termination and not Termination for Cause. (b) Change of Duties. A "Change of Duties" means; (i) A significant reduction in the nature, scope of authority or duties of Employee (without the written consent of Employee) from those applicable to him on the Effective Date of this Agreement; (ii) Any reduction in Employee's annual base salary, without the consent of Employee, unless it is part of a program to reduce salaries for all similarly situated employees; (iii) Receipt of employee benefits (including but not limited to medical, dental, life insurance, accidental death and dismemberment; and long term disability plans) that are materially inconsistent with and inferior to the employee benefits provided by KMI to employees with comparable duties; or (iv) A change in the location of Employee's principal place of employment by KMI by more than 50 miles from the location where he was principally employed on the Effective Date of this Agreement, without Employee's consent. (c) Pro-Rata Portion. "Pro-Rata Portion" is the amount determined by the formula: the compensation payment received by Employee pursuant to section 4(b) hereof, multiplied by the Pro- Rata Percentage. The Pro-Rata Percentage is defined as: 1460 minus the number of calendar days from Effective Date of this Agreement up to the date of a Non-Competition Violation, as defined in Section 5(d) below, not to exceed 1460 days, divided by 1460. (d) Confidential Information. "Confidential Information" shall include all information, the use of which by persons or entities other than KMI or its employees, agents or representatives would be detrimental to KMI's business interests, relating to (i) KMI's Customers, providers, suppliers, and other business affiliates; (ii) KMI's policies, practices, operating information, financial information, business plans, and market approaches; and (iii) other information, techniques or approaches used by KMI and not generally known or applied in KMI's industry. KMI believes that some or all of this information constitutes trade secrets; however, the Confidential Information covered in this Agreement need not satisfy the legal definition or requirements of a "trade secret" to be protected from disclosure hereunder. Confidential Information shall exclude any information that is generally known in KMI's industry and information known to any future employer of Employee and any information disclosed by KMI in public filings, including, without limitation, filings with the Securities and Exchange Commission and the Federal Energy Regulatory Commission. (e) Customer. "Customer" shall include any person or entity to whom during the Term of this Agreement, services are being sold by KMI, and any person or entity with whom, during the Term of this Agreement, KMI has established a strategic marketing alliance. (f) He, him, himself, his. "He," "him," "himself" and "his" when used herein shall be synonymous with "she," "her," "herself," and "her," as applicable. (g) Involuntary Termination. "Involuntary Termination" means (i) termination of Employee's employment at the behest of KMI other than a Termination for Cause; (ii) Employee's resignation on or before thirty (30) days following receipt by Employee of a notice of a Change of Duties; or (iii) a termination which under the terms of the last clause of Section 2(a) is not a Termination for Cause. "Involuntary Termination" does not include (i) Termination for Cause; (ii) termination of Employee's employment due to the death of Employee; (iii) termination of Employee's employment due to Employee's disability under circumstances entitling him to benefits under KMI's long term disability plan; (iv) or any change of employer due to transfer of Employee's employment to a successor company that is a wholly owned KMI subsidiary or affiliate and/or any change of employer due to transfer of Employee's employment to a purchaser of or successor to KMI. (h) KMI. "KMI" means collectively Kinder Morgan, Inc., a Kansas corporation, Kinder Morgan G.P., Inc., their successors and assigns, and their divisions and affiliates. For purposes of this Agreement, the term "affiliates" shall have the same definition as the term "affiliated group" in Section 1504(a) of the Internal Revenue Code of 1986, as amended from time to time. (i) Welfare Benefit Coverages. "Welfare Benefit Coverages" shall mean the medical, dental, life insurance, long term disability and accidental death and dismemberment coverages provided by KMI to its active employees. 3. Term of This Agreement. The term of this Agreement shall be four (4) years from the Effective Date of this Agreement. It is expressly understood and agreed that this Agreement shall terminate and be of no further force or effect at the end of the initial four (4) year term. 4. KMI's Promises. In consideration of Employee's promises, KMI hereby agrees as follows: (a) Salary. Employee shall receive a base salary of two hundred thousand dollars ($200,000) annually. Increases may occur at the behest of the senior management of the Company if approved by the Compensation Committee of the Board. Salary shall be continued only if Employee's employment continues. (b) Compensation Payment. In consideration of the obligations of Employee set forth in Section 5(d) hereof and for waiving all rights under the Kinder Morgan Energy Partners, L.P. Executive Compensation Plan, Kinder Morgan, Inc. shall cause Kinder Morgan G.P., Inc., on behalf of Kinder Morgan Energy Partners, L.P., to pay Employee a lump sum payment of seven million, ten thousand dollars ($7,010,000.00) within three (3) days of execution of this Agreement. The parties acknowledge that Employee and Kinder Morgan Energy Partners, L.P. have executed a termination and settlement of the grant agreement evidencing Employee's grant under the Kinder Morgan Energy Partners, L.P. Executive Compensation Plan. (c) Stock Options. Kinder Morgan, Inc. will provide Employee a grant of 150,000 stock options priced at $33.125, the closing price of Kinder Morgan, Inc.'s common stock on the New York Stock Exchange on April 20, 2000. The terms and conditions are specified in the Option Agreement (Exhibit B). (d) Bonus. Employee will be eligible for any applicable incentive compensation plan of KMI or its predecessors, at the same level as other senior officers. (e) Directors and Officers Insurance. As long as Employee is an officer or director of either Kinder Morgan, Inc. or any of its affiliates, KMI will provide director and officer liability coverage to Employee on the same terms as it provides to other officers and directors. (f) Bridging. KMI will provide for bridging of service for eligible employees in accordance with approved plan documents in effect on the Effective Date of Employee's Involuntary Termination. (g) Condition to Receipt of Benefits Listed in This Paragraph 4. As a condition of receipt of any benefit listed in this Paragraph 4, Employee shall execute Exhibit A, Exhibit B and be subject to all promises provided in Section 5(d) of this Agreement. Exhibit A and Exhibit B shall be executed upon execution of this Agreement. 5. Employee's Promises. (a) Confidential Information. Employee shall not, while employed by KMI or at any time thereafter, directly or indirectly, (i) use or apply any Confidential Information for unauthorized purposes, alone or with any other person or entity; or (ii) disclose or provide any Confidential Information to any person or entity not authorized by KMI to receive such Confidential Information. (b) Non-Disparagement Agreement. Employee specifically agrees that he will not in any way disparage KMI, its officers, directors, employees, consultants, agents, or business operations or decisions; provided, however, that Employee shall not be held in breach of this provision should Employee testify pursuant to subpoena under oath and give testimony that KMI considers to be disparaging. (c) Non-Solicitation of KMI Employees. Employee agrees that, for the term of the Agreement from the date of termination of employment hereunder, he will not encourage, entice, or otherwise solicit any employee of KMI or any of its affiliates or subsidiaries, or aid any third party to encourage, entice or solicit any employee of KMI, to leave employment with KMI in order to accept employment elsewhere. For purposes of this paragraph, "employment elsewhere" shall include any relationship of employer/employee and any relationship of principal/independent contractor. (d) Non-Competition. Employee acknowledges that; 1) KMI and its affiliates are engaged in the business (the "Business")of owning and/or operating integrated natural gas assets, products and bulk terminals, refined products, natural gas, natural gas liquids and carbon dioxide pipelines, electricity generating assets and other midstream energy assets; 2) the Business is conducted throughout the United States; 3) his work for KMI gives or gave him access to proprietary information and trade secrets of and confidential information concerning KMI, and 4) the agreements and covenants contained in this provision are essential to protect the Business and the trade secrets, confidential and proprietary information and other legitimate interests of KMI. Accordingly, Employee covenants and agrees as follows: (i) Employee agrees that for a period of four (4) years following the Effective Date of this Agreement regardless of whether Employee remains employed by KMI, Employee, other than on behalf of KMI, will not engage in any conduct, line of business or activity which is the same as or substantially similar to any conduct, activity or line of business conducted by KMI or their affiliates in which Employee was or is engaged in during his employment by KMI (each such line of business or activity being an "Exclusive Activity"), in any geographic area in which Company conducts such Exclusive Activities. (ii) The parties stipulate and agree that the terms and covenants contained in this provision are fair and reasonable in all respects, including the time period and geographical coverage and that these restrictions are designed for the reasonable protection of the business of KMI. If, at the time of enforcement of any of these provisions, a court holds that the restrictions stated herein are unreasonable under the circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances will be substituted for the stated period, scope or area. In such event KMI and Employee hereby specifically request a trial court presented with this Agreement for enforcement to reform it as to time, geographic area or scope of activities prohibited and to enforce this Agreement as reformed. (iii) In the event KMI determines that Employee has violated the provisions of this Section 5(d), KMI agrees to provide Employee written notice of such violation. If Employee does not cease the conduct prohibited by this Section 5(d) and cure the impact of such conduct on KMI within 30 days after receipt of written notice from KMI, a "Non-Competition Violation" shall be deemed to have occurred at the end of such 30 day period, and the provisions of Section 7 shall apply. (iv) KMI hereby waives any rights under, and Employee shall not be deemed to have violated, the provisions of this Section 5(d) with respect to any conduct or activity of Employee if Employee gives KMI 30 days written notice prior to engaging in such conduct or activity, and KMI does not object to such conduct or activity in writing within the 30 day period following notice from Employee. (e) Section 5 shall be enforceable only to the extent either Richard D. Kinder or William V. Morgan serves as Chief Executive Officer of Kinder Morgan, Inc. or its successor. 6. Effects of Termination. During the term of this Agreement, a termination of Employee's employment for any of the following reasons shall have the effects set forth below: (a) Termination is for Cause. If the Employee's employment is terminated by a Termination for Cause: (i) subject to Section 7 below, Employee shall be entitled to retain the all payments and benefits made under Sections 4(b) hereof; (ii) Employee shall retain the stock options granted in accordance with Section 4(c) hereof; (iii) Employee shall not be eligible for severance payments under KMI's severance policy; and (iv) all benefits otherwise payable under Sections 4(a) and 4(d) hereof shall cease. (b) Termination for Change of Duties or Involuntary Termination. If the Employee's employment is terminated by a Termination for Change of Duties or an Involuntary Termination: (i) subject to Section 7 below, Employee shall be entitled to retain all payments and benefits made under Sections 4(b) hereof; (ii) Employee shall retain the stock options granted in accordance with Section 4(c) hereof; (iii) Employee shall be eligible for severance consistent with KMI's severance policy; and (iv) all benefits otherwise payable under Sections 4(a) and 4(d) hereof shall cease. (c) Termination for Death, Disability ,Retirement or Resignation. If the Employee's employment is terminated due to the death, disability, retirement or resignation of Employee: (i) subject to Section 7 below, Employee shall be entitled to retain all payments and benefits made under Sections 4(b) hereof; (ii) Employee shall retain the stock options granted in accordance with Section 4(c) hereof; and (iii) All other payments and benefits relating to Employee's employment shall cease upon last day of employment other than benefits which generally continue for all KMI employees after termination of employment under the terms of KMI's benefit plans. 7. Violation of Non-Competition; Payment of Pro-Rata Portion. Within three business days following a Non-Competition Violation which occurs during the term of this Agreement,, Employee shall pay to KMI an amount in U.S. dollars equal to the Pro-Rata Portion, calculated in accordance with Section 2(c) hereof. 8. Adequacy of Consideration. By executing this Agreement, KMI and Employee acknowledges the receipt and sufficiency of the consideration provided by the other in conjunction with executing this Agreement. Each acknowledges and confirms to the other that the consideration provided by the other is good and valuable consideration legally supportive of each party's respective rights, duties and obligations hereunder. By executing this Agreement, KMI and Employee shall be estopped from raising and hereby expressly waive any defense regarding the receipt and/or legal sufficiency of the consideration provided by one to the other with respect to this Agreement. 9. Nonassignability. This Agreement shall inure to the benefit of, and be binding upon, Employee and Employee's personal or legal representatives, employees, administrators, successors, heirs, distributees, devisees and legatees, and KMI, its successors and assignees, provided, however, that neither KMI nor Employee may assign any of Employee's or its rights or benefits hereunder without the prior written consent of the other. 10. No Attachment. Except as required by law, the right to receive payments under this Agreement shall not be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void ab initio and of no effect. 11. Arbitration. The parties agree that any dispute regarding the interpretation or breach of any term of this Agreement shall be resolved through arbitration pursuant to the guidelines set forth by the American Arbitration Association and that any attempt by either party to bring a court action concerning this Agreement shall be subject to dismissal for lack of jurisdiction at the request of the other party. The arbitration and all related activities shall occur in Houston, Texas. To the extent that either party should initiate action to enforce this Agreement, the party prevailing in the action for breach shall be entitled to recover its attorney fees and costs incurred in the prosecution or defense of said action. 12. Headings. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 13. Controlling Law. This Agreement shall be governed and construed in accordance with the laws of Texas. 14. Entire Agreement. This document constitutes the entire agreement of the parties on the subject matters addressed herein and may not be expanded or except by express written agreement executed by both. 15. Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary and convenient, and by the different parties on separate counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 16. Effective Date. The Effective Date of this Agreement shall be the date provided at the top of this Agreement. KINDER MORGAN G.P., INC. By /s/ Joseph Listengart ______________________________________ Title: Vice President Witness: /s/ Andre Massey _______________________________________ EMPLOYEE /s/ Michael C. Morgan ___________________________________________ Name: Michael C. Morgan Exhibit A In connection with the Employment Agreement (the "Agreement") dated April 20, 2000, by and among Michael C. Morgan, Kinder Morgan, Inc. and Kinder Morgan G.P., Inc. (collectively ("KMI"), Employee for himself and his representatives, heirs, and assigns, hereby releases and discharges KMI, any parent, sister or subsidiary company, and any present or former shareholders, officers, directors, employees, agents, representatives, legal representatives, accountants, successors, and assigns, , Richard Kinder, and William Morgan, from all claims, demands, and actions of any nature, known or unknown, in any manner arising out of or involving any aspect of his rights under the Kinder Morgan Energy Partners, L.P. Executive Compensation Plan and any agreement executed in connection therewith. This release includes any and all claims concerning attorney fees, costs, and any and all other expenses related to the claims released herein. This release does not include claims for breach of the Agreement, indemnification, coverage or defense under any applicable directors and officers' insurance policy or vested employee benefits. EMPLOYEE: ________________________________________ Employee Signature Exhibit B KINDER MORGAN, INC. NONQUALIFIED STOCK OPTION AGREEMENT For the 1994 KINDER MORGAN LONG TERM INCENTIVE PLAN This Nonqualified Stock Option Agreement ("Option Agreement") is between Kinder Morgan, Inc. (the "Company"), and Michael C. Morgan ("Optionee"), who agree as follows: Section 1. Introduction. The Company has heretofore adopted the Kinder Morgan, Inc. (f/k/a KN Energy, Inc.) 1994 Kinder Morgan Long Term Incentive Plan (the "Plan") for the purpose of providing eligible employees of the Company and its Affiliates (as defined in the Plan) with incentive and reward opportunities designed to enhance the profitable growth of the Company. The Company, acting through the Committee (as defined in the Plan), has determined that its interests will be advanced by the issuance to Optionee of a nonqualified stock option under the Plan. Section 2. Option. Subject to the terms and conditions contained herein, the Company hereby irrevocably grants to Optionee the right and option ("Option") to purchase from the Company 150,000 shares of the Company's common stock, $5.00 par value ("Stock"), at a price of $33.125 per share. Section 3. Option Period. The Option, herein granted, may be exercised by Optionee in whole or in part at any time during a ten year period (the "Option Period") beginning on April 20, 2000 (the "Date of Grant"). Section 4. Procedure for Exercise. The Committee or its designee shall establish procedures for Exercise of the Option. Section 5. Termination of Employment. If, for any reason other than Death, Optionee ceases to be employed by the Company or its Affiliates, the Option may be exercised to the extent Optionee would have been entitled to do so, but in no event may the Option be exercised after the expiration of the Option Period. Section 6. Death. In the event that Optionee's employment is terminated because of Optionee's death, this Option may be exercised, at any time and from time to time, within the Option Period after such Death, by (i) the guardian of Optionee's estate, (ii) the executor or administrator of Optionee's estate, or (iii) the person or persons to whom Optionee's rights under this Option Agreement shall pass by will or the laws of descent and distribution, but in no event may the Option be exercised after the expiration of the Option Period. Section 7. Transferability. This Option shall not be trans ferable by Optionee otherwise than by Optionee's will or by the laws of descent and distribution. During the lifetime of Optionee, the Option shall be exercisable only by Optionee or his guardian or authorized legal representative. Any heir or legatee of Optionee shall take rights herein granted subject to the terms and conditions hereof. No such transfer of this Option Agreement to heirs or legatees of Optionee shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of such evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions hereof. Section 8. No Rights as Shareholder. Optionee shall have no rights as a shareholder with respect to any shares of Stock covered by this Option Agreement until the Option is exercised by written notice and accompanied by payment as provided in Section 4 of this Option Agreement. Section 9. Extraordinary Corporate Transactions. The existence of outstanding Options shall not affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganiza tions, exchanges or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issuance of Stock or other securities or subscription rights thereto, or any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceedings, whether of a similar character or otherwise. Section 10. Changes in Capital Structure. If the outstanding shares of Stock or other securities of the Company, or both, for which the Option is then exercisable shall at any time be changed or exchanged by declaration of a stock dividend, stock split or combination of shares, the number and kind of shares of Stock or other securities subject to the Plan or subject to the Option, and the exercise price, shall be appro priately and equitably adjusted so as to maintain the proportionate number of shares or other securities without changing the aggregate exercise price. Section 11. Compliance With Securities Laws. Upon the acquisition of any shares pursuant to the exercise of the Option herein granted, Optionee (or any person acting under Section 7) will enter into such written representations, warranties and agreements as the Company may reasonably request in order to comply with applicable securities laws or with this Option Agreement. Section 12. Compliance With Laws. Notwithstanding any of the other provisions hereof, Optionee agrees that he or she will not exercise the Option granted hereby, and that the Company will not be obligated to issue any shares pursuant to this Option Agreement, if the exercise of the Option or the issuance of such shares of Stock would constitute a violation by Optionee or by the Company of any provision of any law or regulation of any governmental authority. Section 13. Withholding of Tax. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Optionee for federal or state income tax purposes, Optionee shall pay to the Company at the time of such exercise or disposition such amount of money as the Company may require to meet its obligation under applicable tax laws or regulations and, if Optionee fails to do so, the Company is authorized to withhold from any cash remuneration then or thereafter payable to Optionee, any tax required to be withheld by reason of such resulting compensation income or Company may otherwise refuse to issue or transfer any shares otherwise required to be issued or transferred pursuant to the terms hereof. Section 14. No Right to Employment or Directorship. Optionee shall be considered to be in the employment of the Company or its Affiliates or in service on the Board so long as he or she remains an employee or director of the Company or its Affiliates. Any questions as to whether and when there has been a termination of such employment or service on the Board and the cause of such termination shall be determined by the Committee, and its determination shall be final. Nothing contained herein shall be construed as conferring upon Optionee the right to continue in the employ of the Company or its Affiliates or to continue service on the Board, nor shall anything contained herein be construed or interpreted to limit the "employment at will" relationship between Optionee and the Company or its Affiliates. Section 15. Resolution of Disputes. As a condition of the granting of the Option hereby, Optionee and Optionee's heirs, personal representatives and successors agree that any dispute or disagreement which may arise hereunder shall be determined by the Committee in its sole discretion and judgment, and that any such determination and any interpretation by the Committee of the terms of this Option Agreement shall be final and shall be binding and conclusive, for all purposes, upon the Company, Optionee, and Optionee's heirs, personal representatives and successors. Section 16. Legends on Certificate. The certificates representing the shares of Stock purchased by exercise of the Option will be stamped or otherwise imprinted with legends in such form as the Company or its counsel may require with respect to any applicable restrictions on sale or transfer and the stock transfer records of the Company will reflect stop-transfer instructions with respect to such shares. Section 17. Notices. Every notice hereunder shall be in writing and shall be given by registered or certified mail or by any other method accepted by the Company or the Company's designee. All notices of the exercise of any Option hereunder shall be directed to Kinder Morgan, Inc., 1301 McKinney, Suite 3450, Houston, Texas 77010, Attention: Secretary, or to the Company's designee. Any notice given by the Company to Optionee directed to Optionee at the address on file with the Company shall be effective to bind Optionee and any other person who shall acquire rights hereunder. The Company shall be under no obligation whatsoever to advise Optionee of the existence, maturity or termination of any of Optionee's rights hereunder and Optionee shall be deemed to have familiarized himself or herself with all matters contained herein and in the Plan which may affect any of Optionee's rights or privileges hereunder. Section 18. Construction and Interpretation. Whenever the term "Optionee" is used herein under circumstances applicable to any other person or persons to whom this award, in accordance with the provisions of Section 7 hereof, may be transferred, the word "Optionee" shall be deemed to include such person or persons. Section 19. Agreement Subject to Plan. This Option Agreement is subject to the Plan. The terms and provisions of the Plan (including any subsequent amendments thereto) are hereby incorporated herein by reference thereto. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. All definitions of words and terms contained in the Plan shall be applicable to this Option Agreement. Section 20. Entire Agreement; Amendment. This Option Agreement and any other agreements and instruments contemplated by this Option Agreement contain the entire agreement of the parties, and this Option Agreement may be amended only in writing signed by both parties. Section 21. Modification and Severability. If a court of competent jurisdiction declares that any provision of this Option Agreement is illegal, invalid or unenforceable, then such provision shall be modified automatically to the extent necessary to make such provision fully enforceable. If such court does not modify any such provision as contemplated herein, but instead declares it to be wholly illegal, invalid or unenforceable, then such provision shall be severed from this Option Agreement, and such declaration shall in no way affect the legality, validity and enforceability of the other provisions of this Option Agreement to which such declaration does not relate. In this event, this Option Agreement shall be construed as if it did not contain the particular provision held to be illegal, invalid or unenforceable, the rights and obligations of the parties hereto shall be construed and enforced accordingly, and this Option Agreement otherwise shall remain in full force and effect. If any provision of this Option Agreement is capable of two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the construction which renders it valid. Section 22. Binding Effect. This Option Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Optionee as provided herein. Section 23. Governing Law. This Option Agreement shall be interpreted and construed in accordance with the laws of the State of Colorado and applicable federal law. IN WITNESS WHEREOF, this Nonqualified Stock Option Agreement has been executed as of the 20th day of April, 2000. KINDER MORGAN, INC. By: ---------------------------- Joseph Listengart Vice President OPTIONEE _______________________________________ Michael C. Morgan EX-27.1 4
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