-----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, Rzx3mRSdUdmLhIIga14iWBEQ9zClHglfflBQpUK7JbPVKahJZKWtJzBlh4SwzlN1 DeIvKAptdoLsZrIrF4Lv+A== /in/edgar/work/0000054502-00-000027/0000054502-00-000027.txt : 20001114 0000054502-00-000027.hdr.sgml : 20001114 ACCESSION NUMBER: 0000054502-00-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINDER MORGAN INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: [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: 759589 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 0001.txt Form 10-Q ================================================================= 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 September 30, 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 incorporation or organization) Identification No.) 500 Dallas, Suite 1000, Houston, Texas 77002 -------------------------------------- ----------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (713) 369-9000 -------------- - ----------------------------------------------------------- (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 114,409,373 shares as of October 31, 2000. 2 KINDER MORGAN, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2000 Contents PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Number Consolidated Balance Sheets....................... 3-4 Consolidated Statements of Income................. 5 Consolidated Statements of Cash Flows............. 6 Notes to Consolidated Financial Statements........ 7-18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 18-30 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................... 30 PART II OTHER INFORMATION Item 1. Legal Proceedings.................................... 30 Item 6. Exhibits and Reports on Form 8-K..................... 30 SIGNATURE.................................................... 31 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (Unaudited) Kinder Morgan, Inc. and Subsidiaries (In Thousands)
September 30, December 31, 2000 1999 ------------- ------------- ASSETS: Current Assets: Cash and Cash Equivalents $ 19,198 $ 26,378 Restricted Deposits 272 51 Accounts Receivable 423,876 306,451 Receivable from Kinder Morgan Energy Partners - 330,000 Inventories 49,300 50,328 Gas Imbalances 54,263 51,024 Other 16,232 19,154 Net Current Assets of Discontinued Operations 10,434 58,991 ----------- ----------- 573,575 842,377 ----------- ----------- Investments: Kinder Morgan Energy Partners 1,707,470 1,791,768 Other 149,271 126,103 ----------- ----------- 1,856,741 1,917,871 ----------- ----------- Property, Plant and Equipment 6,188,089 6,167,251 Less Accumulated Depreciation and Amortization 408,150 377,687 ----------- ----------- 5,779,939 5,789,564 ----------- ----------- Deferred Charges and Other Assets 239,741 209,758 Net Non-current Assets of Discontinued Operations 74,560 659,236 ----------- ----------- Total Assets $ 8,524,556 $ 9,418,806 =========== =========== The accompanying notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS (Unaudited) Kinder Morgan, Inc. and Subsidiaries (In Thousands)
September 30, December 31, 2000 1999 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current Maturities of Long-term Debt $ - $ 7,167 Notes Payable - 574,400 Accounts Payable 330,663 224,625 Accrued Taxes 13,847 36,075 Gas Imbalances 42,487 74,992 Payable for Purchase of Thermo Companies 15,000 44,320 Reserve for Loss on Disposal of Discontinued Operations 17,181 535,630 Other 127,670 206,620 ----------- ----------- 546,848 1,703,829 ----------- ----------- Other Liabilities and Deferred Credits: Deferred Income Taxes 2,161,382 2,228,553 Other 231,196 242,926 ----------- ----------- 2,392,578 2,471,479 ----------- ----------- Long-term Debt 3,560,547 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 7,396 9,331 ----------- ----------- Stockholders' Equity: Common Stock- Authorized - 150,000,000 Shares, Par Value $5 Per Share Outstanding - 114,352,762 and 112,665,977 Shares, Respectively, After Deducting 131,594 and 172,402 Shares Held in Treasury 572,422 564,192 Additional Paid-in Capital 1,188,072 1,203,008 Retained Deficit (15,143) (95,615) Other (3,164) (5,744) ----------- ----------- Total Stockholders' Equity 1,742,187 1,665,841 ----------- ----------- Total Liabilities and Stockholders' Equity $ 8,524,556 $ 9,418,806 =========== =========== The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Kinder Morgan, Inc. and Subsidiaries (In Thousands except Per Share Amounts)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Operating Revenues: Natural Gas Sales $ 578,898 $ 299,191 $1,250,686 $ 736,854 Natural Gas Transportation and Storage 138,306 173,530 443,546 552,934 Other 31,859 23,961 85,187 65,888 ---------- ---------- ---------- ---------- Total Operating Revenues 749,063 496,682 1,779,419 1,355,676 ---------- ---------- ---------- ---------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 576,370 318,291 1,233,715 772,517 Operations and Maintenance 38,391 38,559 117,927 125,744 General and Administrative 14,553 26,825 42,701 72,060 Depreciation and Amortization 27,012 31,674 80,784 119,664 Taxes, Other Than Income Taxes 7,241 8,938 20,926 25,753 Merger-related Costs - 10,962 - 10,962 ---------- ---------- ---------- ---------- Total Operating Costs and Expenses 663,567 435,249 1,496,053 1,126,700 ---------- ---------- ---------- ---------- Operating Income 85,496 61,433 283,366 228,976 ---------- ---------- ---------- ---------- Other Income and (Deductions): Kinder Morgan Energy Partners: Equity in Earnings 34,562 - 99,287 - Amortization of Excess Investment (6,927) - (21,366) - Equity in Earnings (Losses) of Other Equity Investments (1,783) 1,783 (7,399) 12,312 Interest Expense, Net (61,594) (61,410) (184,463) (187,223) Minority Interests (5,975) (6,062) (18,012) (18,626) Other, Net 588 13,906 11,152 33,699 ---------- ---------- ---------- ---------- Total Other Income and (Deductions) (41,129) (51,783) (120,801) (159,838) ---------- ---------- ---------- ---------- Income from Continuing Operations Before Income Taxes 44,367 9,650 162,565 69,138 Income Taxes 17,739 3,764 65,026 26,964 ---------- ---------- ---------- ---------- Income from Continuing Operations 26,628 5,886 97,539 42,174 ---------- ---------- ---------- ---------- Discontinued Operations, Net of Tax: Loss from Discontinued Operations - (8,925) - (40,499) Loss on Disposal of Discontinued Operations - (11,479) - (11,479) ---------- ---------- ---------- ---------- Total Loss From Discontinued Operations - (20,404) - (51,978) ---------- ---------- ---------- ---------- Net Income (Loss) 26,628 (14,518) 97,539 (9,804) Less - Preferred Dividends - - - 129 Less - Premium Paid on Preferred Stock Redemption - - - 350 ---------- ---------- ---------- ---------- Earnings (Loss) Available For Common Stock $ 26,628 $ (14,518) $ 97,539 $ (10,283) ========== ========== ========== ========== Number of Shares Used in Computing Basic Earnings Per Common Share (Thousands) 114,461 70,914 113,906 70,363 ========== ========== ========== ========== Basic Earnings (Loss) Per Common Share: Continuing Operations $ 0.23 $ 0.08 $ 0.86 $ 0.59 Discontinued Operations - (0.12) - (0.58) Loss on Disposal of Discontinued Operations - (0.16) - (0.16) ---------- ---------- ---------- ---------- Total Basic Earnings (Loss) Per Common Share $ 0.23 $ (0.20) $ 0.86 $ (0.15) ========== ========== ========== ========== Number of Shares Used in Computing Diluted Earnings Per Common Share (Thousands) 116,177 70,986 114,686 70,441 ========== ========== ========== ========== Diluted Earnings (Loss) Per Common Share: Continuing Operations $ 0.23 $ 0.08 $ 0.85 $ 0.59 Discontinued Operations - (0.12) - (0.58) Loss on Disposal of Discontinued Operations - (0.16) - (0.16) ---------- ---------- ---------- ---------- Total Diluted Earnings (Loss) Per Common Share $ 0.23 $ (0.20) $ 0.85 $ (0.15) ========== ========== ========== ========== Dividends Per Common Share $ 0.05 $ 0.20 $ 0.15 $ 0.60 ========== ========== ========== ========== 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)
Nine Months Ended September 30, ------------------------ 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from Continuing Operations $ 97,539 $ 42,174 Adjustments to Reconcile Income from Continuing Operations to Net Cash Flows from Operating Activities: Depreciation and Amortization 80,784 119,664 Deferred Income Taxes 58,417 (1,994) Equity in Earnings of Kinder Morgan Energy Partners (77,921) - Distributions from Kinder Morgan Energy Partners 84,315 - Deferred Purchased Gas Costs 2,329 5,800 Net Gains on Sales of Facilities (2,130) (30,908) Changes in Other Working Capital Items (3,225) (108,007) Changes in Deferred Revenues (3,573) (11,665) Other Non-cash Charges and Credits to Income (16,486) (11,078) Other, Net (21,181) (18,727) ---------- ---------- Net Cash Flows Provided by (Used in) Continuing Operations 198,868 (14,741) Net Cash Flows Provided by (Used in) Discontinued Operations (102,374) 138,288 ---------- ---------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 96,494 123,547 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (74,114) (60,631) Proceeds from Sales to Kinder Morgan Energy Partners 330,000 - Acquisitions (19,412) (35,000) Investments (41,712) (25,393) Sale of Tom Brown, Inc. Stock 14,864 28,650 Sale of U.S. Government Securities - 1,092,415 Proceeds from Sales of Other Assets 11,415 89,701 ---------- ---------- Net Cash Flows Provided by Continuing Investing Activities 221,041 1,089,742 Net Cash Flows Provided by (Used in) Discontinued Investing Activities 126,440 (51,686) ---------- ---------- NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 347,481 1,038,056 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term Debt, Net (313,200) (1,113,146) Long-term Debt Retired (1,622) (5,167) Premium Equity Participating Securities Contract Fee (654) (1,097) Common Stock Issued 15,022 5,590 Other Financing (133,409) - Preferred Stock Redeemed - (7,350) Treasury Stock Issued 997 236 Treasury Stock Acquired (18) (545) Cash Dividends, Common and Preferred (17,068) (42,458) Minority Interests, Net (1,203) 934 ---------- ---------- NET CASH FLOWS USED IN FINANCING ACTIVITIES (451,155) (1,163,003) ---------- ---------- Net Decrease in Cash and Cash Equivalents (7,180) (1,400) Cash and Cash Equivalents at Beginning of Period 26,378 16,247 ---------- ---------- Cash and Cash Equivalents at End of Period $ 19,198 $ 14,847 ========== ========== For supplemental cash flow information, see Note 8. The accompanying notes are an integral part of these statements.
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General ------- In October 1999, K N Energy, Inc., a Kansas corporation, acquired Kinder Morgan, Inc., a Delaware corporation, referred to in these Notes as Kinder Morgan Delaware. K N Energy, Inc. then changed its name to Kinder Morgan, Inc. Unless the context requires otherwise, references to "we," "us," "our," or the "Company" are intended to mean Kinder Morgan, Inc. (a Kansas corporation and formerly known as K N Energy, Inc.) and its consolidated subsidiaries. We have prepared the accompanying unaudited consolidated financial statements under the rules and regulations of the Securities and Exchange Commission. Under such rules and regulations, we have condensed or omitted certain information and notes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States. We believe, however, that our disclosures are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial results for the interim periods. You should read these consolidated financial statements in conjunction with our consolidated financial statements and related notes included in our 1999 Form 10-K. Certain prior period amounts have been reclassified to conform to the current presentation. 2. Business Combination -------------------- On October 7, 1999, we completed our acquisition of Kinder Morgan Delaware, the sole stockholder of the general partner of Kinder Morgan Energy Partners, L.P. Kinder Morgan Energy Partners, the nation's largest pipeline master limited partnership, owns and operates product pipelines, bulk terminals, natural gas pipelines and certain other businesses. Kinder Morgan Energy Partners' 1999 Form 10-K contains additional information on its businesses and assets. We issued approximately 41.5 million shares of our common stock in exchange for all of the outstanding shares of Kinder Morgan Delaware. This transaction was a purchase for accounting purposes, with the assets acquired and liabilities assumed recorded at their respective estimated fair market values as of the acquisition date. We began including the assets, liabilities and results of operations of Kinder Morgan Delaware with ours beginning with the October 1999 acquisition. Our 1999 Form 10-K contains additional information on this acquisition. The following pro forma information gives effect to our acquisition of Kinder Morgan Delaware as if the business combination had occurred January 1, 1999. 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 our 1999 Form 10-K. This pro forma information does not necessarily indicate the financial results that would have occurred if this acquisition had taken place on the date indicated, nor should it necessarily be viewed as an indicator of future financial results. Nine Months Ended Unaudited Pro Forma Financial Information September 30, 1999 - ----------------------------------------- ------------------------- (Dollars In Millions Except Per Share Amounts) Operating Revenues $ 3,748.4 Net Loss $ (2.3) Diluted Loss Per Common Share $ (0.02) Number of Shares Used in Computing Diluted Loss Per Common Share (In Thousands) 112,124 8 3. Accounting for Certain Equity Transactions by Affiliates -------------------------------------------------------- We account for our investment in Kinder Morgan Energy Partners (among other entities) under the equity method of accounting. In each accounting period, we record our share of these investees' earnings, and amortize any "excess" investment. We adjust the amount of our excess investment when an equity method investee or a consolidated subsidiary issues additional equity (or reacquires equity shares) in any manner which alters our ownership percentage. Differences between the per unit sales proceeds from these equity issuances (or reacquisitions) and our underlying book basis, as well as the pro rata portion of the excess investment (including associated deferred taxes) which must be written off, are recorded directly to paid-in capital rather than being recognized as gains or losses. 4. Change in Accounting Estimate ----------------------------- Based on a study of the useful lives of the underlying assets by an independent third party, in July 1999, we changed our depreciation rates associated with a portion of our property, plant, and equipment acquired from MidCon Corp. in early 1998. This change decreased "Depreciation and Amortization" by approximately $9.7 million and $29.0 million for the quarter and nine months ended September 30, 2000, respectively, and increased "Income from Continuing Operations" and "Net Income" by approximately $5.8 million ($0.05 per diluted share) and $17.4 million ($0.15 per diluted share) for the quarter and nine months ended September 30, 2000, respectively, in comparison to the amounts we would have recorded using the previous depreciation rates. 5. Investments and Sales --------------------- On October 4, 2000, we announced that we intended to contribute approximately $300 million of assets to Kinder Morgan Energy Partners. The largest asset we intend to contribute is Kinder Morgan Texas Pipeline, Inc. We will also contribute the Casper and Douglas Natural Gas Gathering and Processing Systems, our 50 percent interest in Coyote Gas Treating, LLC and our 25 percent interest in Thunder Creek Gas Services, L.L.C. As consideration for the sale, we will receive approximately $300 million, 50 percent in cash and 50 percent in Kinder Morgan Energy Partners limited partnership units. We expect this transaction to close during the fourth quarter. In August 2000, Kinder Morgan Power Company, one of our wholly owned subsidiaries, announced plans to build a 550-megawatt electric power plant in Jackson, Michigan. All necessary regulatory permits and approvals have been obtained, and construction on the $250 million natural gas-fired plant has begun. The plant is expected to begin producing power in June 2002. In May 2000, Kinder Morgan Power announced another 550- megawatt facility which is currently being constructed near Little Rock, Arkansas. In April 2000, Kinder Morgan Energy Partners issued 4.5 million limited partnership units in a public offering at a price of $39.75 per unit, receiving total net proceeds (after underwriting discount) of $171.3 million. We did not acquire any of these units. This transaction reduced our percentage ownership of Kinder Morgan Energy Partners from approximately 19.9% to approximately 18.6% and had the associated effects of increasing our investment in the net assets of Kinder Morgan Energy Partners by $6.1 million and reducing (i) our excess investment in Kinder Morgan Energy Partners by $81.1 million, (ii) associated accumulated deferred income taxes by $30.0 million, (iii) paid-in capital by $45.0 million and (iv) the monthly amortization of the excess investment by approximately $176 thousand (see Note 3). 9 On December 30, 1999, we entered into a contribution agreement with several of our wholly owned subsidiaries and Kinder Morgan Energy Partners. As a result, effective as of December 31, 1999, we contributed all of our interests in the following to Kinder Morgan Energy Partners: (i) our wholly owned subsidiary, Kinder Morgan Interstate Gas Transmission LLC (formerly K N Interstate Gas Transmission Co.), (ii) our wholly owned subsidiary, Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.), which owns a one-third interest in Trailblazer Pipeline Company and (iii) our 49% interest in Red Cedar Gathering Company. On September 30, 1999, we sold (to an unaffiliated party) our 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. On June 30, 1999, we sold our interests in the HIOS and UTOS offshore pipeline systems and related laterals to Leviathan Gas Pipeline Partners, L. P. These two sales yielded total cash proceeds of approximately $75 million, resulted in a total pretax gain of approximately $28.9 million, and substantially eliminated our investment in offshore assets. On September 3, 1999, we sold 1,000,000 shares of preferred stock of Tom Brown, Inc. for approximately $29 million in cash, realizing a gain of $2.2 million (approximately $1.3 million after tax, or $0.02 per diluted share). Additional information on these and other investment/sale transactions is included in our 1999 Form 10-K. Note 6 contains information regarding sales of assets and businesses included in discontinued operations. 6. Discontinued Operations ----------------------- During the third quarter of 1999, we adopted and implemented a plan to discontinue our direct marketing of non-energy products and services (principally under the "Simple Choice" brand), which activities had been carried on largely through our en*able joint venture with PacifiCorp. During the fourth quarter of 1999, we adopted and implemented plans to discontinue the following lines of business: gathering and processing of natural gas, providing field services to natural gas producers, commodity marketing of natural gas and natural gas liquids, international operations and West Texas pipelines. The accounting for the discontinuance of these businesses is further described in Note 6 of Notes to Consolidated Financial Statements included in our 1999 Form 10-K. The estimated loss associated with discontinuing these businesses remains subject to uncertainty with respect to the ultimate proceeds to be received from the sale and the 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 probable and estimable, and will be classified in the same manner as the original estimated loss. 10 Summarized financial data of discontinued operations are as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (In Thousands) Income Statement Data - --------------------- Operating Revenues: Commodity Marketing $ - $1,110,755 $ 580,159 $2,608,987 Gathering and Processing 86,847 166,855 400,572 430,268 West Texas Pipelines - 16,679 8,336 47,221 International Operations 1,498 425 4,381 1,096 Loss From Discontinued Operations, Net of Tax Benefit: Commodity Marketing, net of $2,750 and $8,875 of tax - $ (4,301) - $ (13,881) Gathering and Processing, net of $515 and $8,315 of tax - (805) - (13,005) West Texas Pipelines, net of $1,162 and $3,964 of tax - (1,817) - (6,200) International Operations, net of $417 and $590 of tax - (652) - (922) en*able/Orcom, net of $863 and $4,150 of tax - (1,350) - (6,491) ---------- ---------- $ (8,925) $ (40,499) ========== ==========
September 30, 2000 ------------------------------------------- Gathering and International Processing Operations Total ------------- ------------- ------------- Balance Sheet Data (In Thousands) - ------------------ Net Current Assets of Discontinued Operations: Cash and Cash Equivalents $ 5,093 $ 2,617 $ 7,710 Restricted Deposits 12,198 - 12,198 Accounts Receivable 58,631 2,356 60,987 Inventories 196 1,164 1,360 Gas Imbalances Receivable 12,899 - 12,899 Other Current Assets 3,450 534 3,984 Accounts Payable (71,628) (2,592) (74,220) Accrued Taxes (4,071) (4) (4,075) Gas Imbalances Payable (3,114) - (3,114) Other Current Liabilities (3,688) (3,607) (7,295) ---------- ---------- ---------- $ 9,966 $ 468 $ 10,434 ========== ========== ========== Net Non-current Assets of Discontinued Operations: Investments $ 37,677 $ 10,040 $ 47,717 Property, Plant and Equipment, Net 120,398 10,950 131,348 Deferred Charges (9,297) 7,960 (1,337) Deferred Income Taxes (49,535) 780 (48,755) Minority Interests in Equity of Subsidiaries (53,646) (767) (54,413) ---------- ---------- ---------- $ 45,597 $ 28,963 $ 74,560 ========== ========== ==========
In our 1999 Form 10-K and our Form 10-Qs filed for the first and second quarters of 2000, we provided information on the progress made in disposing of our discontinued businesses. On October 30, 2000, we announced that we had entered into a definitive agree- ment with Tom Brown, Inc. to distribute all the assets of the Wildhorse Energy Partners, LLC joint venture to the members in anticipation of dissolution of the joint venture. Formed in 1996, Wildhorse is owned 55 percent by us and 45 percent by Tom Brown. Wildhorse will distribute all of the gathering and pro- cessing assets to Tom Brown and we will receive the Wolf Creek storage facility and cash in a transaction expected to close on or before November 30, 2000. The remaining assets associated with discontinued operations, representing a relatively small percent- age of the total operations discontinued as of December 31, 1999, are in various stages of the disposition process. Our divest- iture process is expected to be substantially completed during 2000. 11 7. Accounts Receivable Sales Facility ---------------------------------- In September 1999, certain of our wholly owned subsidiaries entered into a five-year agreement to sell their accounts receivable in a transaction accounted for as a sale. This transaction and the associated accounting is discussed in our 1999 Form 10-K. We received $150 million in proceeds from the sale of receivables on September 30, 1999. In the first quarter of 2000, we reduced our participation in this receivable sale program by $124.9 million, principally as a result of the then- pending disposition of our wholesale gas marketing business. On April 25, 2000, we repaid the residual balance and terminated this agreement. 8. Supplemental Cash Flow Information ---------------------------------- We consider 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 Operating Activities" in the accompanying Consolidated Statements of Cash Flows includes, among other things, equity in undistributed earnings or losses of unconsolidated subsidiaries (other than Kinder Morgan Energy Partners) and joint ventures. Nine Months Ended September 30, -------------------------- 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 $ (2,518) $ 24,769 Materials and Supplies Inventory (1,688) 912 Gas in Underground Storage - Current (5,463) (4,788) Other Current Assets (30,169) (17,638) Accounts Payable 89,406 (90,338) Other Current Liabilities (52,793) (20,924) ---------- ---------- $ (3,225) $ (108,007) ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION Cash Paid During the Period for: Interest, Net of Amount Capitalized $ 224,261 $ 250,598 ========== ========== Distributions on Preferred Capital Trust Securities $ 10,956 $ 10,956 ========== ========== Income Taxes $ 7,141 $ 5,449 ========== ========== 9. Business Segments ----------------- In accordance with the manner in which we currently manage our businesses, including the allocation of capital and evaluation of business unit performance, we report our operations in the following segments: (1) Natural Gas Pipeline Company of America and certain associated entities, referred to as Natural, a major interstate natural gas pipeline system; (2) Kinder Morgan Texas Pipeline and certain associated entities, referred to as Kinder Morgan Texas, 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, together with various other activities not constituting business segments. Prior to our December 31, 1999 sale to Kinder Morgan Energy Partners (see Note 5), we also owned and operated Kinder Morgan Interstate. In October 2000, we announced that we would contribute several assets to Kinder Morgan Energy Partners, 12 including Kinder Morgan Texas Pipeline. Additional information on this pending transaction is contained in Note 5 of the accompanying Notes to Consolidated Financial Statements. The accounting policies we apply in the generation of segment information are generally the same as those described in Note 1 of Notes to Consolidated Financial Statements included in our 1999 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, we currently evaluate 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. BUSINESS SEGMENT INFORMATION (In Thousands)
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999 ------------------------------------------ ------------------------------------------ Operating Revenues Operating Revenues Income Before From Income Before From Corporate External Intersegment Corporate External Intersegment Costs Customers Revenues Costs Customers Revenues ------------ ------------ ------------ ------------ ------------ ------------ Natural (NGPL) $ 82,305 $ 172,160 $ - $ 78,805 $ 154,341 $ 190 Kinder Morgan Interstate (KMIGT) - - - 14,543 21,382 7,273 Retail 4,875 41,585 - (1,399) 31,104 59 Kinder Morgan Texas (KMTP) 3,957 515,694 - 1,726 275,975 - Power and Other 8,912 19,624 49 5,545 13,880 49 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated 100,049 $ 749,063 $ 49 99,220 $ 496,682 $ 7,571 ========== ========== ========== ========== General and Administrative Expenses (14,553) (26,825) Merger-related Costs - (10,962) ---------- ---------- Operating Income 85,496 61,433 Other Income and (Deductions) (41,129) (51,783) ---------- ---------- Income from Continuing Operations Before Income Taxes $ 44,367 $ 9,650 ========== ==========
Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999 ----------------------------------------- ------------------------------------------- Operating Revenues Operating Revenues Income Before From Income Before From Corporate External Intersegment Corporate External Intersegment Costs Customers Revenues Costs Customers Revenues ------------- ------------- ------------- ------------- ------------- ------------- Natural (NGPL) $ 253,501 $ 441,031 $ (18) $ 224,528 $ 459,256 $ 1,132 Kinder Morgan Interstate (KMIGT) - - - 41,285 70,025 10,032 Retail 30,993 146,171 - 14,714 137,164 64 Kinder Morgan Texas (KMTP) 18,384 1,139,124 - 12,826 644,418 - Power and Other 23,189 53,093 97 18,645 44,813 146 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated 326,067 $1,779,419 $ 79 311,998 $1,355,676 $ 11,374 ========== ========== ========== ========== General and Administrative Expenses (42,701) (72,060) Merger-related Costs - (10,962) ---------- ---------- Operating Income 283,366 228,976 Other Income and (Deductions) (120,801) (159,838) ---------- ---------- Income from Continuing Operations Before Income Taxes $ 162,565 $ 69,138 ========== ==========
13
Assets at September 30, 2000 -------------------------------------------------------------------------------- Kinder Morgan Kinder Power Natural Interstate Retail Morgan Texas and Other Consolidated ------------ ------------ ------------ ------------ -------------- ------------ (In Thousands) Continuing Operations $5,505,690 $ - $ 405,476 $ 327,491 $2,200,905 (1) $8,439,562 Discontinued Operations 84,994 ---------- Consolidated $8,524,556 ========== (1)Principally the investment in Kinder Morgan Energy Partners
GEOGRAPHIC INFORMATION All but an insignificant amount of our assets and operations are located in the continental United States. 10. Financing --------- We have available a $500 million 364-day credit facility dated October 25, 2000 (which contains terms and covenants similar to our prior facility) 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 our commercial paper program, and include covenants which are common in such arrangements. Our 1999 Form 10-K contains additional information concerning these covenants. Under these bank facilities, we are required to pay a facility fee based on the total commitment, whether used or unused, at a rate which varies based on our senior debt rating. We had no borrowings under our bank facilities at September 30, 2000 or at October 25, 2000. Because we have both the intent and the ability (through our five-year revolving credit facility) to re- finance our commercial paper borrowings and the current maturi- ties of our long-term debt on a long-term basis, these liabili- ties, totaling $269.4 million at September 30, 2000, have been included with "Long-term Debt" in the accompanying Consolidated Balance Sheet. The commercial paper we issue, which is supported by the bank facilities, is comprised of unsecured short-term notes with maturities not to exceed 270 days from the date of issue. Commercial paper outstanding at September 30, 2000 and October 25, 2000 was $261.2 million and $256.5 million, respectively. Our weighted-average interest rate on short-term borrowings outstanding at September 30, 2000 was 6.98 percent. Average short-term borrowings outstanding during the third quarter of 2000 were $240.3 million and our weighted-average interest rate was 6.78 percent. Average short-term borrowings outstanding during the first nine months of 2000 were $343.8 million and our weighted-average interest rate was 6.42 percent. On October 19, 2000, our Board of Directors declared a common stock dividend of $0.05 per share payable on November 14, 2000 to shareholders of record as of October 31, 2000. 11. Regulatory Matters ------------------ On July 17, 2000, Natural filed its Compliance Plan, including pro forma tariff sheets, pursuant to FERC's Order Nos. 637 and 637-A. The FERC directed all interstate pipelines to file pro forma tariff sheets to comply with new regulatory requirements in the Orders regarding scheduling procedures, capacity segmentation, imbalance management services and penalty credits, or in the alternative, to explain why no changes to existing tariff provisions are necessary. Natural's filing is currently pending FERC action and any changes to its tariff provisions are not expected to take effect until after the entire Order 637 process is finished for all interstate pipelines. 14 On May 10, 2000, Chesapeake Panhandle Limited Partnership filed a complaint with the FERC against Natural, MidCon Gas Products Corp., MidCon Gas Services Corp., K N Energy, Inc. and us. The complaint alleges that Natural collected an unlawful gathering rate from Chesapeake for the period March 1998 through December 1999. Chesapeake is seeking a refund totaling $5.2 million. We have responded and denied the allegations. On July 27, 2000, the FERC issued an order commencing a preliminary non-public investigation into the complaint. We believe that we have meritorious defenses to the claim. 12. Comprehensive Income -------------------- Statement of Financial Accounting Standards No. 130, Reporting of Comprehensive Income, requires that enterprises report a total for comprehensive income. The only difference between "net income" and "comprehensive income" for us has been the unrealized gain or loss on our investment in available-for-sale securities which was recorded directly to stockholders' equity. During the quarter ended March 31, 2000, we sold our only remaining available-for-sale securities.
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Millions of Dollars) Net Income $ 26.6 $ (14.5) $ 97.5 $ (9.8) Gain (Loss) From Available-for- Sale Securities - (0.5) 1.6 2.5 ---------- ---------- ---------- ---------- Comprehensive Income (Loss) $ 26.6 $ (15.0) $ 99.1 $ (7.3) ========== ========== ========== ==========
13. 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 trans- actions 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 our election, before January 1, 1998). We enter into derivatives contracts solely for the purpose of hedging exposures which accompany our normal business activities. Because (i) we currently report our derivatives at fair value in our consolidated balance sheets, (ii) the majority of our derivatives activities would be considered cash flow hedges under the Statement, (iii) the Statement provides for hedging accounting treatment for this use of derivatives and (iv) because we do not expect any material amount of hedge ineffectiveness, no material impact on our earnings or financial position is expected to result from adoption of the Statement. 15 14. 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 Corp. (see Note 1(K) of Notes to Consolidated Financial Statements included in our 1999 Form 10-K) and (iii) in the first quarter of 2000, interest income attributable to our note receivable from Kinder Morgan Energy Partners associated with the sale of certain interests (see Note 5). Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ (In Thousands) 2000 1999 2000 1999 ----------- ----------- ----------- ----------- AFUDC - Interest $ 713 $ 388 $ 1,710 $ 699 Interest Income $ - $ - $ 2,647 $ 480 15. Other, Net ---------- "Other, Net" as presented in the accompanying Consolidated Statement of Income for the three months ended September 30, 1999 principally consists of (i) an $11.4 million gain from the sale of certain offshore assets, and (ii) a $2.2 million gain from the sale of Tom Brown, Inc. Preferred Stock. For the nine months ended September 30, 1999, "Other, Net" principally consists of (i) the $28.9 million gain from the sale of certain offshore assets and (ii) the $2.2 million gain from the sale of Tom Brown, Inc. Preferred Stock. "Other, Net" for the nine months ended September 30, 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 and (iii) $1.3 million attributable to a gain from the sale of Tom Brown, Inc. Common Stock. Note 5 contains additional information on certain of these matters. 16. Environmental and Legal Matters ------------------------------- (A) Environmental Matters On December 20, 1999, the U.S. Department of Justice (DOJ) filed a Complaint against Natural on behalf of the U.S. Environmental Protection Agency (EPA) in the Federal District Court of Colorado, Civil Action 99-S-2419. The Complaint alleged 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 and the EPA, through the DOJ, have reached a tentative settlement of this issue. The EPA has agreed to dismiss all allegations and claims upon completion of the terms of the settlement. Based on current information, we do not believe that compliance with federal, state and local environmental laws and regulations will have a material adverse effect on our business, cash flows, financial position or results of operations. In addition, the clean-up programs in which we are engaged are not expected to interrupt or diminish our ability to operate our businesses. 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 us to incur significant costs. 16 See Note 9(A) of Notes to Consolidated Financial Statements in our 1999 Form 10-K for additional information regarding environmental matters. (B) Litigation Matters "K N TransColorado, Inc. v. TransColorado Gas Transmission Company, et. al," Case No. 00-CV-129, District Court, County of Garfield, State of Colorado. On June 15, 2000, K N TransColorado filed suit against Questar TransColorado and several of its affiliated Questar entities, asserting claims for breach of fiduciary duties, breach of contract, constructive trust, rescission of the partnership agreement, breach of good faith and fair dealing, tortious concealment, misrepresentation, aiding and abetting a breach of fiduciary duty, dissolution of the TransColorado partnership, and seeking a declaratory judgment, among other claims. The TransColorado partnership has been made a defendant for purposes of an accounting. The lawsuit stems from Questar's failure to support the TransColorado partnership, together with its decision to seek regulatory approval for a project that competes with the Partnership, in breach of its fiduciary duties as a partner. K N TransColorado seeks to recover damages in excess of $152 million due to Questar's breaches and, in addition, seeks punitive damages. In response to the complaint, on July 28, 2000, the Questar entities filed a counterclaim and third party claims against us and certain of our entities for claims arising out of the construction and operation of the TransColorado pipeline project. The claims allege, among other things, that the Kinder Morgan entities interfered with and delayed construction of the pipeline and made misrepresentations about marketing of capacity. The Questar entities seek to recover damages in excess of $185 million for an alleged breach of fiduciary duty and other claims. "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 us, Rocky Mountain Natural Gas Company and GASCO, Inc. alleging that these entities, 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 exist- ing 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 for the K N Entities 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 interests in natural gas exploration, development and production properties, all interests in distribu- tion and marketing operations, and all interests in natural gas storage facilities, in order to separate these interests from our 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 us 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 us 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 17 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 com- merce. The background of that proceeding is described in the immediately following paragraph. 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 the motions for rehearing of 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 in the immediately preceding paragraph. 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 the motions for rehearing of its Initial Decision. In April 2000, we, 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. On July 20, 2000 the United States of America filed a motion to dismiss those claims by Grynberg that deal with the manner in which defendants valued gas produced from federal leases. "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, we filed a motion with the Judicial Panel for Multidistrict Litigation to consolidate this action for pretrial purposes with the Grynberg 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. 18 "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 of our former officers and/or directors. Messrs. Rode and McDonald are former principal shareholders of Interenergy Corporation. We acquired Interenergy 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. Plaintiffs are seeking an unspecified amount of compensatory damages, greater than $2 million, plus unspecified exemplary or punitive damages, attorney's fees and their costs. We filed a motion to dismiss, and on April 21, 2000, the Jefferson County District Court Judge dismissed the case against us 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 third 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 us on April 10, 2000. As of this date no class has been certi- fied. We have filed a motion to dismiss this case, and the case has been stayed pending the resolution of this motion. We believe that we have meritorious defenses to all lawsuits and legal proceedings in which we are defendants and will vigorously defend against them. Based on our evaluation of the above matters, and after consideration of reserves established, we believe that the resolution of such matters will not have a material adverse effect on our business, financial position or results of operations. See Note 9(B) of Notes to Consolidated Financial Statements of our 1999 Form 10-K for additional information regarding legal matters. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- The following discussion should be read together with (i) the accompanying consolidated financial statements and related notes and (ii) the consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 1999 Form 10-K. For various reasons, including seasonal variations in energy demand and prices, the interim results that follow may not directly suggest what level of earnings to expect for an entire year. In addition, certain previously reported 19 amounts have been placed under different captions in the finan- cial statements in order to report them where comparable items are currently recorded. We have both acquired and disposed of assets and businesses in the recent past. In October 2000, we announced our intention to contribute several assets to Kinder Morgan Energy Partners, including Kinder Morgan Texas Pipeline. These changes in the makeup of our portfolio of businesses may affect the comparison of operating results and financial position between periods. Our 1999 Form 10-K and Notes 2 and 5 of the accompanying Notes to Consolidated Financial Statements contain more information on these transactions. We manage our various businesses by, among other things, allocating capital and monitoring operating performance. This management process includes dividing the overall Company into business segments so that performance can be effectively monitored and reported for a limited number of discrete units. Currently, we report our operations in the following segments:
Business Unit Business Conducted Referred to As: - ------------- ------------------ --------------- Natural Gas Pipeline Company of Major interstate natural Natural America and certain affiliates gas pipeline system Kinder Morgan Texas Pipeline and Major intrastate natural gas Kinder Morgan Texas certain affiliates pipeline system Retail Natural Gas Distribution The regulated sale of natural Retail gas to residential, commercial and industrial customers Power Generation and Other The construction and operation Power and Other of electric generation facilities, together with other activities not constituting business segments
We also owned and operated Kinder Morgan Interstate Gas Trans- mission LLC, an interstate natural gas pipeline system, re- ferred to in this report as Kinder Morgan Interstate, until it was sold to Kinder Morgan Energy Partners in December 1999. That sale transaction, which also included interests in two joint ventures, is discussed in our 1999 Form 10-K. Certain information contained in this report may include "for- ward-looking statements" within the meaning of the Private Secur- ities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, based on information currently available to our management. When words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should" or similar expressions are used, we are making forward- looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results and stockholder values may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond our 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 cost savings and revenue growth, national, international, regional and local economic, competitive and regulatory conditions and 20 developments, technological developments, capital market condi- tions, inflation rates, interest rates, the political and eco- nomic stability of oil producing nations, energy markets, weather conditions, business and regulatory or legal decisions, the pace of deregulation of retail natural gas and electricity, the timing and extent of changes in commodity prices for oil, natural gas, natural gas liquids, electricity and certain agricultural pro- ducts, the timing and success of business development efforts, and other uncertainties, all of which are difficult to predict and many of which are beyond our control. Readers are cautioned not to put undue reliance on any forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securi- ties Litigation Reform Act of 1995.
Consolidated Financial Results - ------------------------------ Three Months Ended September 30, Nine Months Ended September 30, ----------------------------------- ----------------------------------- Increase Increase 2000 1999 (Decrease) 2000 1999 (Decrease) ----------- ----------- ----------- ----------- ----------- ----------- (In Thousands Except Per Share Amounts) Operating Revenues $ 749,063 $ 496,682 $ 252,381 $1,779,419 $1,355,676 $ 423,743 Gross Margin 172,693 178,391 (5,698) 545,704 583,159 (37,455) General and Administrative Expenses 14,553 26,825 (12,272) 42,701 72,060 (29,359) Merger-related Costs N/A 10,962 N/A N/A 10,962 N/A Operating Income 85,496 61,433 24,063 283,366 228,976 54,390 Income From Continuing Operations 26,628 5,886 20,742 97,539 42,174 55,365 Loss From Discontinued Operations, Net of Tax N/A (20,404) N/A N/A (51,978) N/A Diluted Earnings (Loss) Per Share: Continuing Operations 0.23 0.08 0.15 0.85 0.59 0.26 Discontinued Operations N/A (0.28) N/A N/A (0.74) N/A
Our results for the quarter ended September 30, 2000, reflect an increase of $252.4 million (50.8%) in operating revenues, a decrease of $5.7 million (3.2%) in gross margin and an increase of $24.1 million (39.2%) in operating income from the third quarter of 1999. Operating results for 2000 do not include revenues, costs and expenses of Kinder Morgan Interstate, which was sold to Kinder Morgan Energy Partners effective December 31, 1999. The increase in operating revenues is due to increased revenues at all operating segments, principally Kinder Morgan Texas, partially offset by the absence of Kinder Morgan Interstate revenues in the third quarter of 2000. The decline in gross margin principally reflects the sale of Kinder Morgan Interstate. General and administrative expenses decreased from $26.8 million in the third quarter of 1999 to $14.5 million in the third quarter of 2000, a decrease of $12.3 million (45.7%) due to cost reductions implemented following the business combination with Kinder Morgan Delaware as we discussed in our 1999 Form 10-K. These cost reductions principally resulted from reductions in headcount and employee-related expenses, consoli- dation of facilities and other efficiencies associated with implementation of the plan for combining the two entities. The increased operating income, which occurred despite the sale of Kinder Morgan Interstate, reflects improved third-quarter 2000 performance by several operating segments as discussed following. Our results for the nine months ended September 30, 2000, reflect an increase of $423.7 million (31.3%) in operating revenues, a decrease of $37.5 million (6.4%) in gross margin and an increase of $54.4 million (23.8%) in operating income from the corresponding period of 1999. Operating results for 2000 do not include revenues, costs and expenses of Kinder Morgan Interstate, which was sold to Kinder Morgan Energy Partners effective December 31, 1999. The increase in operating revenues is due to increased revenues at all operating segments, principally Kinder Morgan Texas, partially offset by the absence of Kinder Morgan Interstate 21 revenues in 2000 results. The decline in gross margin principal- ly reflects the sale of Kinder Morgan Interstate. General and administrative expenses decreased from $72.1 million in the first nine months of 1999 to $42.7 million in the first nine months of 2000, a decrease of $29.4 million (40.7%) due to cost reduction measures implemented following the business combination with Kinder Morgan Delaware. The increased operating income, which occurred despite the sale of Kinder Morgan Interstate, reflects improved 2000 performance by several operating segments as dis- cussed following. The operating results by individual segment and explanations of significant variances in results which follow are before intersegment eliminations.
Three Months Ended September 30, Nine Months Ended September 30, Natural Gas Pipeline Company --------------------------------- --------------------------------- ---------------------------- Increase Increase of America 2000 1999 (Decrease) 2000 1999 (Decrease) ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In Thousands Except Systems Throughput) Operating Revenues: Transportation and Storage $ 114,529 $ 130,732 $ (16,203) $ 373,821 $ 416,967 $ (43,146) Other 57,632 23,799 33,833 67,193 43,421 23,772 --------- --------- --------- --------- --------- --------- Total Operating Revenues 172,161 154,531 17,630 441,014 460,388 (19,374) --------- --------- --------- --------- --------- --------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 49,772 35,283 14,489 64,794 82,667 (17,873) Operations and Maintenance 13,945 13,545 400 44,348 48,031 (3,683) Depreciation and Amortization 21,021 21,082 (61) 63,336 88,270 (24,934) Taxes, Other Than Income Taxes 5,118 5,816 (698) 15,035 16,892 (1,857) --------- --------- --------- --------- --------- --------- Total Operating Expenses 89,856 75,726 14,130 187,513 235,860 (48,347) --------- --------- --------- --------- --------- --------- Operating Income Before Corporate Costs $ 82,305 $ 78,805 $ 3,500 $ 253,501 $ 224,528 $ 28,973 ========= ========= ========= ========= ========= ========= Systems Throughput (Trillion Btus) 323.5 330.4 (6.9) 1,101.6 1091.2 10.4 ========= ========= ========= ========= ========= =========
Natural's operating income before corporate costs increased by $3.5 million (4.4%) in the third quarter of 2000 from the third quarter of 1999. Operating results for 2000 were positively affected, relative to 1999, by (i) higher operational gas sales revenue due primarily to higher gas prices and increased operational efficiency and (ii) reduced ad valorem taxes. These positive effects were partially offset by (i) reduced 2000 revenues due to sales of certain gathering assets and offshore laterals (see Note 5 of the accompanying Notes to Consolidated Financial Statements) and (ii) decreased 2000 unit revenues largely attributable to both existing and planned competing pipeline capacity (with the attendant reduced value of transportation) in the upper Midwest, Natural's principal market area; although, as discussed in our 1999 Form 10-K and in our Form 10-Qs for the first two quarters of 2000, Natural continues to experience success in retaining existing customers and acquiring new customers. Natural's operating income before corporate costs increased $29.0 million (12.9%) in the nine months ended September 30, 2000 from the corresponding period in 1999. Year-to-date 2000 results were affected positively, relative to 1999, by the same factors affecting the third quarter, as discussed preceding. In addition, results for 2000 were positively affected by (i) a reduction in amortization resulting from the July 1999 change in amortization rates (see Note 4 of the accompanying Notes to Consolidated Financial Statements), (ii) increased 2000 storage activity, (iii) favorable gas imbalance resolutions in 2000 and (iv) reduced 2000 operations and maintenance expenses due to successful cost control measures. Year-to-date 2000 results were negatively affected, relative to 1999, by the absence, in 2000, of revenues from assets that were sold and reduced 2000 unit revenues due to market conditions as discussed in the previous paragraph. 22 In July 2000, Natural entered into agreements with Northern Indiana Public Service ("NIPSCO"), a subsidiary of NiSource, Inc., to extend the terms of its firm natural gas transportation and storage services. The agreements total 295,100 MMBtus per day of capacity beginning December 1, 2000 and December 1, 2001 and continuing through November 30, 2002. Natural and NIPSCO also extended the terms of two storage agreements totaling 10.5 Bcf of capacity beginning December 1, 2000 and April 1, 2001 and continuing through March 31, 2003. In September 2000, Natural announced that the Federal Energy Regulatory Commission would support issuing the certificate of public convenience and necessity to construct and operate the Horizon pipeline. Final certification awaits a pending environmental review. The Horizon Pipeline Company, a joint venture of Natural and Nicor Inc., has proposed to construct 28.5 miles of 36-inch diameter pipe and 8,900 horsepower of compression facilities and lease 380 MDth per day of firm capacity on 42 miles of existing pipeline from Natural. The new facilities and leased capacity would allow Horizon to transport 380 MDth of natural gas per day from near Joliet into McHenry County, connecting the emerging supply hub at Joliet with the northern part of the Nicor Gas distribution system and an existing Natural pipeline. Construction on the $75 million pipeline is expected to begin in the summer of 2001, with completion projected in the spring of 2002. Nicor Gas has committed to transport 300 MDth per day on the pipeline.
Three Months Ended Nine Months Ended Kinder Morgan Interstate Gas Transmission September 30, 1999 September 30, 1999 ----------------------------------------- ------------------ ------------------ (In Thousands Except Systems Throughput) Operating Revenues: Transportation and Storage $ 28,517 $ 79,753 Other 138 304 ----------- ----------- Total Operating Revenues 28,655 80,057 ----------- ----------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 2,992 3,683 Operations and Maintenance 4,844 16,291 Depreciation and Amortization 5,210 15,364 Taxes, Other Than Income Taxes 1,066 3,434 ----------- ----------- Total Operating Expenses 14,112 38,772 ----------- ----------- Operating Income Before Corporate Costs $ 14,543 $ 41,285 =========== =========== Systems Throughput (Trillion Btus) 52.3 155.6 =========== ===========
In December 1999, we contributed Kinder Morgan Interstate and Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.), as well as our interest in Red Cedar Gathering Company to Kinder Morgan Energy Partners (see Note 5 of the accompanying Notes to Consolidated Financial Statements). 23
Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- --------------------------------- Increase Increase Retail 2000 1999 (Decrease) 2000 1999 (Decrease) ------ ---------- ---------- ---------- ---------- ---------- ---------- (In Thousands Except Systems Throughput) Operating Revenues: Gas Sales $ 26,035 $ 17,073 $ 8,962 $ 103,094 $ 94,747 $ 8,347 Transportation 11,356 10,245 1,111 31,177 30,459 718 Other 4,194 3,846 348 11,900 12,023 (123) --------- --------- --------- --------- --------- --------- Total Operating Revenues 41,585 31,164 10,421 146,171 137,229 8,942 --------- --------- --------- --------- --------- --------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 24,007 19,937 4,070 77,301 82,168 (4,867) Operations and Maintenance 9,258 8,916 342 27,342 29,312 (1,970) Depreciation and Amortization 2,928 2,841 87 8,705 8,526 179 Taxes, Other Than Income Taxes 517 869 (352) 1,830 2,509 (679) --------- --------- --------- --------- --------- --------- Total Operating Expenses 36,710 32,563 4,147 115,178 122,515 (7,337) --------- --------- --------- --------- --------- --------- Operating Income Before Corporate Costs $ 4,875 $ (1,399) $ 6,274 $ 30,993 $ 14,714 $ 16,279 ========= ========= ========= ========= ========= ========= Systems Throughput (Trillion Btus) 15.8 12.1 3.7 49.3 38.8 10.5 ========= ========= ========= ========= ========= =========
Retail's operating income before corporate costs increased by $6.3 million in the third quarter of 2000 from the third quarter of 1999. Operating results for 2000 were positively impacted, relative to 1999, by (i) increased irrigation volumes in 2000, (ii) increased service revenues in 2000, (iii) reduced ad valorem and use taxes in 2000 and (iv) reduced costs for certain administrative functions due to renegotiation of a contract with a third-party service provider. Retail's operating income before corporate costs increased $16.3 million (110.6%) in the nine months ended September 30, 2000, from the corresponding period in 1999. Year-to-date 2000 results were positively affected, relative to 1999, by (i) increased system throughput in 2000, although a portion of this increase represents volumes transported for relatively low margins, (ii) reduced cost of gas in 2000 achieved by utilizing lower cost gas from storage (Retail utilizes the average cost inventory method for its gas in underground storage), (iii) certain unfavorable adjustments to gas costs affecting 1999 results and (iv) reduced 2000 operating expenses. These reduced operating expenses re- sulted from (i) a reduction in advertising and marketing expenses for the Choice Gas program, (ii) continued focus on efficient operations and (iii) reduced ad valorem and use taxes.
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------ ------------------------------------ Increase Increase Kinder Morgan Texas Pipeline 2000 1999 (Decrease) 2000 1999 (Decrease) ----------- ----------- ----------- ----------- ----------- ----------- (In Thousands Except Systems Throughput) Operating Revenues Gas Sales $ 495,788 $ 260,337 $ 235,451 $1,084,635 $ 604,124 $ 480,511 Transportation and Storage 5,938 5,238 700 18,361 17,595 766 Other 13,968 10,400 3,568 36,128 22,699 13,429 ---------- ---------- ---------- ---------- ---------- ---------- Total Operating Revenues 515,694 275,975 239,719 1,139,124 644,418 494,706 ---------- ---------- ---------- ---------- ---------- ---------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 497,776 261,005 236,771 1,081,135 594,791 486,344 Operations and Maintenance 11,712 11,820 (108) 34,104 32,887 1,217 Depreciation and Amortization 712 616 96 2,105 1,819 286 Taxes, Other Than Income Taxes 1,537 808 729 3,396 2,095 1,301 ---------- ---------- ---------- ---------- ---------- ---------- Total Operating Expenses 511,737 274,249 237,488 1,120,740 631,592 489,148 ---------- ---------- ---------- ---------- ---------- ---------- Operating Income Before Corporate Costs $ 3,957 $ 1,726 $ 2,231 $ 18,384 $ 12,826 $ 5,558 ========== ========== ========== ========== ========== ========== Systems Throughput (Trillion Btus) 175.6 158.6 17.0 490.5 446.3 44.2 ========== ========== ========== ========== ========== ==========
24 In October 2000, we announced that we would contribute several assets to Kinder Morgan Energy Partners, including Kinder Morgan Texas Pipeline. Additional information on this pending transaction is contained in Note 5 of the accompanying Notes to Consolidated Financial Statements. Kinder Morgan Texas's operating income before corporate costs increased by $2.2 million (129.3%) in the third quarter of 2000 from the third quarter of 1999. Operating results were positively impacted in 2000, relative to 1999, by (i) increased throughput volumes, principally due to additional gas sales and (ii) increased natural gas liquids revenues resulting from an increase in the average price of natural gas liquids from $0.36 per gallon in 1999 to $0.53 per gallon in 2000. These positive effects were partially offset by (i) slightly reduced natural gas liquids sales volumes, (ii) increased depreciation expenses and (iii) increased ad valorem taxes. Kinder Morgan Texas's operating income before corporate costs increased by $5.6 million (43.3%) in the nine months ended September 30, 2000, from the corresponding period in 1999. Year- to-date 2000 results were affected principally by the same factors affecting the third quarter, as discussed preceding, except that on a year-to-date basis, natural gas liquids volumes were higher in 2000 than in 1999. The increased volumes in 2000 were due to the fact that no processing was done in January and February of 1999 at a processing facility at which Kinder Morgan Texas leases capacity. Year-to-date results were also negatively impacted by slightly higher operations and maintenance expenses in 2000. On October 31, 2000, Kinder Morgan Texas announced that it had entered into a long-term natural gas transportation and storage agreement with Calpine Corporation, a fully integrated electric power company, making Kinder Morgan Texas the primary natural gas transporter for Calpine in the Texas Gulf Coast and Houston Ship Channel markets. Under the agreement, which begins January 1, 2001, Calpine will have access to up to 375,000 MMBtus of firm natural gas transportation service per day from Kinder Morgan Texas for a period of 10 years. In July 2000, Kinder Morgan Texas announced that it had entered into a new natural gas sales and transportation agreement with Calpine. Under this agreement, Kinder Morgan Texas will supply Calpine's Pasadena II gas-fired cogeneration facility in Texas with 60,000 MMBtus of natural gas per day - about 75 percent of the amount of natural gas the plant will burn. The contract will continue through the summer of 2002. Kinder Morgan Texas currently supplies 100 percent of the natural gas Calpine burns at its Pasadena I plant.
Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- --------------------------------- Increase Increase Power and Other 2000 1999 (Decrease) 2000 1999 (Decrease) --------------- ---------- ---------- ---------- ---------- ---------- ---------- (In Thousands Except Systems Throughput) Operating Revenues $ 19,674 $ 13,929 $ 5,745 $ 53,191 $ 44,959 $ 8,232 --------- --------- --------- --------- --------- --------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 4,816 3,156 1,660 10,468 9,906 562 Operations and Maintenance 3,526 2,924 602 12,231 9,900 2,331 Depreciation and Amortization 2,351 1,925 426 6,638 5,685 953 Taxes, Other Than Income Taxes 69 379 (310) 665 823 (158) --------- --------- --------- --------- --------- --------- Total Operating Expenses 10,762 8,384 2,378 30,002 26,314 3,688 --------- --------- --------- --------- --------- --------- Operating Income Before Corporate Costs $ 8,912 $ 5,545 $ 3,367 $ 23,189 $ 18,645 $ 4,544 ========= ========= ========= ========= ========= =========
Power and Other operating income before corporate costs increased by $3.4 million (60.7%) in the third quarter of 2000 from the third quarter of 1999. Operating results were positively impacted in 2000, relative to 1999, by 25 (i) profits from development of a 550-megawatt electric generat- ing plant near Little Rock, Arkansas and (ii) increased earnings from other activities, principally our agreement with HS Resources, Inc. as described in our 1999 Form 10-K. These posi- tive effects were partially offset by (i) increased fuel costs in 2000 for power generation and (ii) increased 2000 operations and maintenance and depreciation expenses. Power and Other operating income before corporate costs increased by $4.5 million (24.4%) in the nine months ended September 30, 2000, from the corresponding period in 1999. Year-to-date 2000 results were affected by the same factors affecting the third quarter, as discussed in the preceding paragraph.
Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- --------------------------------- Increase Increase Other Income and (Deductions) 2000 1999 (Decrease) 2000 1999 (Decrease) ----------------------------- ---------- ---------- ---------- ---------- ---------- ---------- (In Thousands) Kinder Morgan Energy Partners: Equity in Earnings $ 34,562 $ - $ 34,562 $ 99,287 $ - $ 99,287 Amortization of Excess Investment (6,927) - (6,927) (21,366) - (21,366) Equity in Earnings of Other Equity Investments (1,783) 1,783 (3,566) (7,399) 12,312 (19,711) Interest Expense (61,594) (61,410) (184) (184,463) (187,223) 2,760 Minority Interests (5,975) (6,062) 87 (18,012) (18,626) 614 Other, Net 588 13,906 (13,318) 11,152 33,699 (22,547) --------- --------- --------- --------- --------- --------- Total $ (41,129) $ (51,783) $ 10,654 $(120,801) $(159,838) $ 39,037 ========= ========= ========= ========= ========= =========
The equity in earnings of Kinder Morgan Energy Partners and associated amortization during 2000 result from our October 1999 acquisition of Kinder Morgan Delaware. Kinder Morgan Energy Partners' Form 10-Q for the third quarter of 2000 contains additional information about its results of operations. The decrease in "Equity in Earnings of Other Equity Investments" from the third quarter of 1999 to the third quarter of 2000 and from the first nine months of 1999 to the first nine months of 2000 is principally due to the sale of various equity method investments. In addition, 2000 results reflect increased losses from the TransColorado pipeline joint venture. "Other, Net" in the third quarter of 2000 principally consists of miscellaneous gains from asset sales. Third-quarter 1999 "Other, Net" included (i) an $11.4 million gain from the sale of Stingray Pipeline Company, L.L.C. and (ii) a $2.2 million gain from the sale of preferred stock of Tom Brown, Inc. Additional information on these matters is contained in Notes 2 and 5 of the accompanying Notes to Consolidated Financial Statements. "Other, Net" for the nine months ended September 30, 2000 includes (i) $4.1 million due to the recovery of note receivable proceeds in excess of its carrying value, (ii) $3.9 million due to the settlement of a regulatory matter for an amount less than that previously reserved, (iii) a $1.3 million gain from the sale of common stock of Tom Brown, Inc. and (iv) miscellaneous gains from the sale of assets. "Other, Net" for the nine months ended September 30, 1999 included (i) a $17.5 million gain from the sale of certain offshore assets, (ii) an $11.4 million gain from the sale of Stingray Pipeline Company, L.L.C., (iii) a $2.2 million gain from the sale of preferred stock of Tom Brown, Inc. and (iv) dividend income from preferred stock of Tom Brown, Inc. prior to its sale.
Three Months Ended Nine Months Ended September 30, September 30, Income Taxes - Continuing --------------------------------- --------------------------------- ------------------------- Increase Increase Operations 2000 1999 (Decrease) 2000 1999 (Decrease) ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In Thousands) Income Tax Provision $ 17,739 $ 3,764 $ 13,975 $ 65,026 $ 26,964 $ 38,062 ========= ========= ========= ========= ========= ========= Effective Tax Rate 40.0% 39.0% 1.0% 40.0% 39.0% 1.0% ========= ========= ========= ========= ========= =========
26 The increase of $14.0 million in the income tax provision from the third quarter of 1999 to the third quarter of 2000 is composed of (i) an increase of $13.5 million due to an increase in pretax income and (ii) an increase of $0.5 million due to an increase in the effective tax rate in 2000. The increase of $38.1 million in the income tax provision from the first nine months of 1999 to the first nine months of 2000 is composed of (i) an increase of $36.4 million due to an increase in pretax income and (ii) an increase of $1.7 million due to an increase in the effective tax rate in 2000. In each case, the increased effective tax rate is principally due to an increased provision for state income taxes. Discontinued Operations - ----------------------- During the third quarter of 1999, we 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 our en*able joint venture with PacifiCorp. During the fourth quarter of 1999, we adopted and implemented plans to discontinue the following lines of business: gathering and processing of natural gas, providing field services to natural gas producers, commodity marketing of natural gas and natural gas liquids, international operations and West Texas pipelines. Our 1999 Form 10-K contains additional information on these matters. Note 6 of the accompanying Notes to Consolidated Financial Statements contains (i) information concerning the status of disposition efforts with respect to these assets, (ii) certain financial information with respect to discontinued operations and (iii) our remaining investment in these businesses. Liquidity and Capital Resources - ------------------------------- The following table illustrates the sources of our invested capital. The balances at December 31, 1998 and thereafter reflect the incremental capital associated with our acquisition of MidCon Corp., including our post-acquisition refinancings completed in 1998. The balances at December 31, 1999 and September 30, 2000 also reflect the impacts associated with our acquisition of Kinder Morgan Delaware and our sale of certain assets to Kinder Morgan Energy Partners. Notes 2 and 5 of the accompanying Notes to Consolidated Financial Statements contain additional information on these transactions. Our capitalization will be affected by, among other things, the maturity of two securities in 2001, see "Net Cash Flows from Financing Activi- ties" following. 27
December 31, September 30, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- (Dollars in Thousands) Long-term Debt $3,560,547 $3,293,326 $3,300,025 $ 553,816 $ 423,676 Common Equity 1,742,187 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 5,577,734 5,234,167 4,798,846 1,266,948 950,470 Short-Term Debt (2) - 581,567 1,702,013 (1) 359,951 156,271 ---------- ---------- ---------- ---------- ---------- Invested Capital $5,577,734 $5,815,734 $6,500,859 $1,626,899 $1,106,741 ========== ========== ========== ========== ========== Capitalization: - --------------- Long-term Debt 63.8% 62.9% 68.8% 43.7% 44.6% Common Equity 31.2% 31.8% 25.4% 47.8% 54.7% Preferred Stock - - 0.1% 0.6% 0.7% Capital Trust Securities 5.0% 5.3% 5.7% 7.9% - Invested Capital: - ----------------- Total Debt 63.8% 66.6% 76.9% 56.2% 52.4% Equity, Including Capital Trust Securities 36.2% 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. (2) At September 30, 2000, $269.4 million of short-term obligations have been reclassified to long-term debt due to our intent and ability to refinance them on a long-term basis (see Note 10 of the accompanying Notes to Consoli- dated Financial Statements).
As discussed in Note 5 to the accompanying consolidated financial statements, in April 2000, Kinder Morgan Energy Partners issued 4.5 million limited partnership units in a public offering. We did not acquire any of these units and, accordingly, our percentage ownership of Kinder Morgan Energy Partners was reduced by approximately 1.3 percent. In accordance with the policy described in Note 3 of the accompanying Notes to Consolidated Financial Statements, various balance sheet accounts, including paid-in-capital, were also affected. Kinder Morgan Energy Part- ners has adopted an aggressive acquisition strategy and it is expected that future acquisitions will be financed, in part, by issuance of additional limited partnership units. Therefore, it is expected that future similar transactions will occur. Never- theless, because (i) it is Kinder Morgan Energy Partners' policy that such acquisitions be accretive to cash flow per common unit, (ii) the general partner interest is not diluted by such trans- actions and (iii) for a given level of cash distribution, the incentive distribution structure results in relatively larger distributions to the general partner as the number of limited partnership units outstanding increases, it is not anticipated that additional transactions will collectively have an adverse effect on cash flows or earnings from this investment. 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 our 1999 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 Operating Activities" decreased from $123.5 million for the nine months ended September 30, 1999 to $96.5 million for the nine months ended September 30, 2000, a decline of $27.0 million (21.9%). This decline is primarily due to an increase in cash flows used for discontinued operations, which increased from a source of $138.3 million in the first nine months of 1999 to a use of $102.4 million in the first 28 nine months of 2000, a $240.7 million increased use of cash re- flecting (i) $124.9 million of cash outflow in 2000 attributable to the termination of our receivable sale program and (ii) 124.9 million of cash inflow in 1999 attributable to the receivable sale program (see "Net Cash Flows from Financing Activities" following). The decline in "Net Cash Flows Provided by Operating Activities" for discontinued operations was partially offset by an increase in cash flows provided by continuing operations, which increased from a use of $14.7 million for the nine months ended September 30, 1999 to a source of $198.9 million for the nine months ended September 30, 2000. This $213.6 million of increased cash flow is primarily due to (i) $84.3 million of cash distributions received in the first nine months of 2000 attributable to our interest in Kinder Morgan Energy Partners (see Note 2 of the accompanying Notes to Consolidated Financial Statements and the discussion following), (ii) a decrease in cash used for working capital of $104.8 million during the first nine months of 2000 and (iii) a decrease in cash used in the first nine months 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. In general, distributions from Kinder Morgan Energy Partners are declared in the month following the end of the quarter to which they apply and are paid in the month following the month of declaration to the general partner and unit holders of record as of the end of the declaration month. Therefore, the accompanying Statement of Consolidated Cash Flows for the nine months ended September 30, 2000 reflects the receipt of a total of $84.3 million of cash distributions from Kinder Morgan Energy Partners for the fourth quarter of 1999 and the first six months of 2000. The cash distributions attributable to our interest for the three months and nine months ended September 30, 2000 total $37.0 million and $105.4 million, respectively. The increase in distributions during 2000 reflects, among other factors, the December 31, 1999 transfer of certain properties from us to Kinder Morgan Energy Partners (see Note 5 of the accompanying Notes to Consolidated Financial Statements). Net Cash Flows from Investing Activities - ---------------------------------------- "Net Cash Flows Provided by Investing Activities" decreased from $1.0 billion for the nine months ended September 30, 1999 to $347.5 million for the nine months ended September 30, 2000, a decline of $690.6 million principally due to the sale of approximately $1.1 billion of government securities during the first nine months 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 our 1999 Form 10-K). Partially offsetting this decrease was (i) $330 million of cash received during 2000 from the sale of certain interests to Kinder Morgan Energy Partners (see Note 5 of the accompanying Notes to Consolidated Financial Statements) and (ii) cash flows of discontinued investing activities increasing from a use of $51.7 million in the first nine months of 1999 to a source of $126.4 million in the first nine months of 2000, which was principally a result of the $163.9 million of proceeds received from ONEOK for the sale of gathering and processing businesses in Oklahoma, Kansas and West Texas (see Note 6 of the accompanying Notes to Consolidated Financial Statements). We are in the process of monetizing our 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 $1.2 billion for the nine months ended September 30, 1999 to $451.2 million for the nine months ended September 30, 2000, a decline of approximately $711.8 million. 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 29 during the same period, as well as reduced cash payments for dividends in 2000. Partially offsetting these effects were in- creased 2000 cash used for miscellaneous financing activities. As further discussed in Note 10 of the accompanying Notes to Consolidated Financial Statements, our principal sources of short- term liquidity are our revolving bank facilities totaling $900 million. At September 30, 2000, we had $261.2 million of commercial paper (which is backed by the bank facilities) issued and outstanding. The corresponding amount outstanding was $256.5 million at October 25, 2000. After inclusion of applicable letters of credit, the remaining available borrowing capacity under the bank facilities was $670.5 million and $625.2 million at September 30, 2000 and October 25, 2000, respectively. As described in our 1999 Form 10-K, our bank facilities and certain of our operating lease arrangements contain covenants related to our ratio of debt to total capitalization, consolidated net worth and debt ratings. For additional information on utilization of these facilities, see Note 10 of the accompanying Notes to Consolidated Financial Statements. On March 1, 2001, our $400 million of Reset Put Securities will either (i) have their interest rate reset and remain outstanding with a maturity date of March 1, 2021 as a result of the exercise of a call option by Morgan Stanley & Co. or (ii) be redeemed by us as a result of the automatic exercise of a mandatory put by First Trust National Association on behalf of the holders in the event that Morgan Stanley fails to exercise its call option. If we redeem the Reset Put Securities, the required funds are expected to be provided principally by incremental short-term borrowing. It is not currently possible to determine which outcome will result because the principal economic decision is dependent upon interest rates in effect at the time the decision must be made. These securities are included in "Long-term Debt" in the accompanying Consolidated Balance Sheets. In November 1998, we sold $460 million principal amount of premium equity participating securities in a public offering. These securities obligated the holders to purchase a certain amount of our Common Stock based on the market price at the end of a three-year period. In November 2001, the maturity of these securities will result in our receipt of $460 million in cash and, based on the current market price of our Common Stock, the issuance of approximately 13.4 million shares of common stock. The cash proceeds are expected to be used to retire the $400 million of 6.45% Senior Notes which mature concurrently with the premium equity participating securities and to repay a portion of short-term borrowings then outstanding. In September 1999, we established an accounts receivable sales facility that provided up to $150 million of additional liquidity. In accordance with this agreement, we received proceeds of $150 million on September 30, 1999. 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, we reduced our participation in this receivables sales program by $124.9 million, principally as a result of our then-pending disposition of our wholesale gas marketing business. On April 25, 2000, we repaid the residual balance and terminated the agreement. Regulatory Matters - ------------------ See Note 11 of the accompanying Notes to Consolidated Financial Statements for information regarding regulatory matters. The reader is also directed to Notes 8(A) and 8(B) of Notes to Consolidated Financial Statements of our 1999 Form 10-K for additional information on regulatory matters. 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 30 Financial Statements of our 1999 Form 10-K for additional infor- mation on our pending litigation and environmental matters. We believe we have established adequate reserves such that the reso- lution of pending litigation and environmental matters will not have a material adverse impact on our business, cash flows, financial position or results of operations. Business Strategy - ----------------- The reader is directed to our 1999 Form 10-K 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 our 1999 Form 10-K. 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 27.1 Financial Data Schedule* *Included in SEC copy only. (B) Reports on Form 8-K (1) Current Report on Form 8-K dated November 6, 2000 was filed pursuant to Items 7 and 9 of that form. Pursuant to Item 9 of that form, in Item 7 we filed an exhibit containing presentation materials for use at a meeting with analysts and others on November 6, 2000. 31 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) November 13, 2000 /s/ C. Park Shaper ---------------------------------- C. Park Shaper Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 32 EXHIBIT INDEX 27.1 Financial Data Schedule* *Included in SEC copy only. EX-27 2 0002.txt
5 1000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 19,198 0 426,993 3,117 49,300 573,575 6,188,089 408,150 8,524,556 546,848 3,560,547 0 0 572,422 1,169,765 8,524,556 1,779,419 1,779,419 1,233,715 1,496,053 0 422 184,463 162,565 65,026 97,539 0 0 0 97,539 0.86 0.85
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