-----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, HzrPTI9fNaJntxw5wnZMQiN4Q4Li2q1QBxaJYGFUO9QIyY6OxHqgLnWEeJ9/uVLE U0+U8V7N/CdMS42sf1mOdg== 0000950129-00-001414.txt : 20000328 0000950129-00-001414.hdr.sgml : 20000328 ACCESSION NUMBER: 0000950129-00-001414 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINDER MORGAN INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 480290000 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06446 FILM NUMBER: 579985 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-K 1 KINDER MORGAN, INC. - DATED DECEMBER 31, 1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1999 ----------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______to______ 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 incorporation or organization) (I.R.S. Employer Identification No.) 1301 McKinney, Suite 3400, Houston, Texas 77010 - --------------------------------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 844-9500 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------------------------ ----------------------- Common stock, par value $5 per share New York Stock Exchange Preferred share purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Preferred stock, Class A $5 cumulative series - --------------------------------------------- (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant was $2,168,755,111 as of March 10, 2000. The number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date was: Common stock, $5 par value; authorized 150,000,000 shares; outstanding 113,035,166 shares as of March 10, 2000. Documents Incorporated by Reference ----------------------------------- Part III of this report incorporates by reference specific portions of the Registrant's Proxy Statement relating to the 2000 Annual Meeting of Stockholders. 2 KINDER MORGAN, INC. AND SUBSIDIARIES CONTENTS
Page Number PART I ITEMS 1&2: BUSINESS AND PROPERTIES .............................................. 3-13 ITEM 3: LEGAL PROCEEDINGS .................................................... 13-15 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS .............. 15 EXECUTIVE OFFICERS OF THE REGISTRANT ................................. 16-18 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ............................................... 19 ITEM 6: SELECTED FINANCIAL DATA .............................................. 20 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................... 21-37 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS .......... 37 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .......................... 38-80 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON CONDITION AND RESULTS OF OPERATIONS ............................... 81 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................... 81 ITEM 11: EXECUTIVE COMPENSATION ............................................... 81 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ....... 82 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ....................... 82 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K ........................................................... 83-88 SIGNATURES ............................................................................... 89
Note: Individual financial statements of the parent Company are omitted pursuant to the provisions of Accounting Series Release No. 302. 2 3 PART I ITEMS 1 and 2: BUSINESS and PROPERTIES As used in this report "Kinder Morgan" refers to Kinder Morgan, Inc., a Kansas corporation, together with its consolidated subsidiaries, unless the context otherwise requires. All volumes of natural gas referred to herein are stated at a pressure base of 14.73 pounds per square inch absolute and at 60 degrees Fahrenheit and, in most instances, are rounded to the nearest major multiple. As used in this report, the term "Mcf" means thousand cubic feet, the term "MMcf" means million cubic feet, the term "Bcf" means billion cubic feet, the term "Tcf" means trillion cubic feet, the term "MMBtus" means million British thermal units ("Btus") and the term "Bbls" means barrels. Natural gas liquids consist of ethane, propane, butane, iso-butane and natural gasoline. (A) General Description Kinder Morgan is traded on the New York Stock Exchange under the symbol "KMI" and is one of the largest midstream energy companies in America, operating more than 30,000 miles of natural gas and products pipelines in 26 states. It also has significant retail natural gas distribution, electric generation and bulk terminal operations. Kinder Morgan, through a general partner interest, operates Kinder Morgan Energy Partners, L.P., America's largest pipeline master limited partnership, traded on the New York Stock Exchange under the symbol "KMP." Kinder Morgan also holds a significant limited partner interest in Kinder Morgan Energy Partners. Combined, these two entities have an enterprise value of approximately $10 billion. Kinder Morgan's executive offices are located at 1301 McKinney, Suite 3400, Houston Texas 77010 and its telephone number is (713) 844-9500. Kinder Morgan, (formerly named K N Energy, Inc.) was incorporated in the State of Kansas on May 18, 1927. Kinder Morgan employed 3,195 people at December 31, 1999. On July 8, 1999, K N Energy announced the signing of an agreement and plan of merger to acquire Kinder Morgan, Inc., a Delaware corporation later renamed Kinder Morgan (Delaware), Inc., the sole stockholder of the general partner of Kinder Morgan Energy Partners. As used in this report, Kinder Morgan Delaware will refer to Kinder Morgan (Delaware), Inc. This merger was completed on October 7, 1999. Pursuant to the terms of the merger agreement, K N Energy issued approximately 41.5 million shares of its common stock in exchange for all of the outstanding shares of Kinder Morgan Delaware. Upon closing of the transaction, Richard D. Kinder, Chairman and Chief Executive Officer of Kinder Morgan Delaware, was named Chairman and Chief Executive Officer of Kinder Morgan. In addition, K N Energy, Inc. was renamed Kinder Morgan, Inc. As a result of the October 1999 business combination with Kinder Morgan Delaware, Kinder Morgan owns the entity (Kinder Morgan G. P., Inc.) which owns the general partner interest in Kinder Morgan Energy Partners and is the operator of Kinder Morgan Energy Partners. In addition, as of December 31, 1999, and after inclusion of incremental units resulting from the sale of certain assets by Kinder Morgan to Kinder Morgan Energy Partners as discussed following, Kinder Morgan owned approximately 10.7 million limited partner units of Kinder Morgan Energy Partners, representing approximately 18% of the total units outstanding. As a result of Kinder Morgan's general and limited partner interests in Kinder Morgan Energy Partners (including incentive distributions to the general partner), Kinder Morgan currently is entitled to receive approximately 44% of all distributions from Kinder Morgan Energy Partners and approximately 59% of incremental distributions. The actual level of distributions received by Kinder Morgan in the future will vary with the level of distributable cash determined by Kinder Morgan Energy Partners' partnership agreement. Kinder Morgan reflects its investment in Kinder Morgan Energy Partners under the equity method of accounting and, accordingly, reports its share of Kinder Morgan Energy Partners' earnings as "Equity in Earnings" and "Amortization of Excess 3 4 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) Investment" in its consolidated income statement in the period in which such earnings are reported by Kinder Morgan Energy Partners. Kinder Morgan Energy Partners manages a diverse group of assets used in the transportation, storage and processing of energy products, including six refined products/liquids pipeline systems containing over 5,000 miles of pipeline and over 20 truck loading terminals. Kinder Morgan Energy Partners also operates 25 bulk terminal facilities that transfer over 40 million tons of coal, petroleum coke and other products annually. In addition, Kinder Morgan Energy Partners owns 51% of Plantation Pipeline Company and 20% of Shell CO2 Company. On March 9, 2000, Kinder Morgan Energy Partners announced it had reached a definitive agreement to increase its interest in Shell CO2 Company to 100% by acquiring a 78% limited partner interest and a 2% general partner interest from affiliates of Shell Exploration & Production Company. Kinder Morgan G.P.'s cash incentive distributions provide it with a strong incentive to increase unitholder distributions through the successful management and business growth of Kinder Morgan Energy Partners. Kinder Morgan Energy Partners is the largest publicly traded limited partnership in the pipeline industry and the second largest products pipeline system in the United States in terms of volumes delivered. In most instances, Kinder Morgan Energy Partners transports and/or handles products for a fee and is not engaged in the purchase and resale of commodity products. As a result, Kinder Morgan Energy Partners does not face significant risks relating to shifts in commodity prices. Effective December 31, 1999, Kinder Morgan sold over $700 million of assets to Kinder Morgan Energy Partners consisting of (i) Kinder Morgan Interstate Gas Transmission LLC (formerly KN Interstate Gas Transmission Co.), (ii) a 49 percent interest in Red Cedar Gathering Company and (iii) a subsidiary that owns a one-third interest in Trailblazer Pipeline Company. As consideration for the transfer, Kinder Morgan received 9.81 million Kinder Morgan Energy Partners common units representing limited partner interests and approximately $330 million ($200 million of which was received in cash on January 21, 2000, with the balance of $130 million represented by a short-term obligation of Kinder Morgan Energy Partners to Kinder Morgan.) In conjunction with the sale, Kinder Morgan recorded a pre-tax gain of approximately $158.8 million. Additional information on this transaction (including certain pro forma financial information) is contained in Kinder Morgan's Report on Form 8-K dated February 4, 2000. The reader is directed to Kinder Morgan Energy Partners' 1999 Annual Report on Form 10-K for the year ended December 31, 1999 for additional information concerning the business of Kinder Morgan Energy Partners. During the third quarter of 1999, Kinder Morgan adopted a plan to discontinue the direct marketing of non-energy products and services (principally made under the "Simple Choice" brand), which activities had been carried on largely through Kinder Morgan's en*able joint venture with PacifiCorp. During the fourth quarter of 1999 (following the business combination with Kinder Morgan Delaware and associated management changes as described preceding), Kinder Morgan elected to narrow the focus of its business operations and adopted a plan to dispose of assets and businesses which did not fit its new corporate strategy and risk profile. The businesses identified for discontinuation included (i) the gathering and processing of natural gas, and the provision of field services to natural gas producers, (ii) the commodity marketing of natural gas and natural gas liquids, (iii) international operations and (iv) non-end-user based intrastate pipeline operations. The disposition of all these businesses have been or are expected to be by sale. During 1999, Kinder Morgan completed the sale of its field services businesses. During early 2000, Kinder Morgan completed the sale of (i) certain of its gathering and processing assets and (ii) Orcom Solutions, which has constituted Kinder Morgan's remaining investment in the direct marketing of non-energy services business. On February 8, 2000, Kinder Morgan announced the signing of a definitive agreement with ONEOK, Inc. for the sale of all of Kinder Morgan's natural gas gathering and processing businesses in Oklahoma, Kansas and West Texas. In addition, ONEOK agreed to purchase Kinder Morgan's marketing and trading businesses, as well as certain storage and transmission pipelines in the mid-continent region. As consideration for the sale, 4 5 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) ONEOK will pay Kinder Morgan $114 million in cash plus an amount equal to working capital at closing and will assume (i) the operating lease on the Bushton, Kansas processing plant and (ii) long-term capacity commitments on Natural Gas Pipeline Company of America and Kinder Morgan Interstate Gas Transmission LLC. Upon completion of this pending sale, Kinder Morgan's divestiture plan will be more than 80% complete. Additional information on discontinued operations is contained in the accompanying Consolidated Financial Statements and related Notes, and in Management's Discussion and Analysis of Financial Condition and Results of Operations. On February 22, 1999, Sempra Energy and Kinder Morgan announced that their respective boards of directors had unanimously approved a definitive agreement under which Sempra and Kinder Morgan would combine in a stock-and-cash transaction valued at $6.0 billion. On June 21, 1999, Sempra and Kinder Morgan announced that they had mutually agreed to terminate the merger agreement. Sempra reimbursed Kinder Morgan $5.95 million for expenses incurred in connection with the proposed merger. (B) Narrative Description of Business OVERVIEW Kinder Morgan is an integrated energy services provider whose operations include (i) transportation and storage of natural gas, (ii) retail distribution of natural gas and (iii) electric power generation and sales. In addition, Kinder Morgan has a major investment in liquids and refined products pipelines and bulk terminals through its general and limited partner interests in Kinder Morgan Energy Partners. Reflecting the manner in which Kinder Morgan manages and evaluates the performance of its various business units, Kinder Morgan has segregated the results of operations of its consolidated businesses into (i) Natural Gas Pipeline Company of America and certain associated entities, referred to as "NGPL," a major interstate natural gas pipeline system, (ii) MidCon Texas Pipeline Operator, Inc. and certain associated entities, referred to as "MTP," a major intrastate natural gas pipeline located in Texas, (iii) retail natural gas distribution, referred to as "Retail," providing natural gas utility and certain non-utility services to residential, commercial and industrial customers, (iv) electric power generation and sales, referred to as "Power" and (v) "Other," various other activities not constituting business segments. See Note 19 of Notes to Consolidated Financial Statements for financial information for each of Kinder Morgan's business segments. Kinder Morgan previously engaged in other businesses which have been discontinued or sold to Kinder Morgan Energy Partners, in each case as described preceding. As discussed following, certain of Kinder Morgan's operations are regulated by various federal and state entities. NATURAL GAS PIPELINE COMPANY OF AMERICA Through NGPL, Kinder Morgan owns and operates approximately 11,000 miles of interstate natural gas pipelines, field system lines and related facilities, consisting primarily of two major interconnected transmission pipelines terminating in the Chicago metropolitan area. The system is powered by 61 compressor stations in mainline and storage service having an aggregate of approximately 1.0 million horsepower. NGPL's system has over 1,700 points of interconnection with 31 interstate pipelines, 24 intrastate pipelines and 54 local distribution companies and end users, thereby providing significant flexibility in the receipt and delivery of gas. One of NGPL's primary pipelines, the "Amarillo Line," originates in the West Texas and New Mexico producing areas and is comprised of approximately 3,900 miles of mainline and various small-diameter pipelines. The other major pipeline, the "Gulf Coast Line," originates in the Gulf Coast areas of Texas and Louisiana and consists of approximately 4,400 miles of mainline and various small-diameter pipelines. These two main pipelines are connected at points in Texas and Oklahoma by NGPL's 700-mile Amarillo/Gulf Coast pipeline. 5 6 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) NGPL provides transportation and storage services to third-party natural gas distribution utilities, marketers and producers, industrial end users, affiliates and other shippers. Pursuant to transportation agreements and Federal Energy Regulatory Commission tariff provisions, NGPL offers its customers firm and interruptible transportation, storage and no-notice services. Under NGPL's tariffs, firm transportation customers pay reservation charges each month plus a commodity charge based on actual volumes transported. Interruptible transportation customers pay a commodity charge based upon actual volumes transported. Reservation and commodity charges are both based upon geographical location, time of year and distance of the transportation service provided. Under no-notice service, customers pay a reservation charge for the right to have up to a specified volume of natural gas delivered but, unlike with firm transportation service, are able to meet their peaking requirements without making specific nominations. NGPL's revenues have historically been higher in the first and fourth quarters of the year, reflecting higher system utilization during the colder months. During the winter months, NGPL collects higher transportation commodity revenue, higher interruptible transportation revenue, winter only capacity revenue and higher peak rates on certain contracts. NGPL's principal delivery market area encompasses the states of Illinois, Indiana and Iowa and portions of Wisconsin, Nebraska, Kansas, Missouri and Arkansas. NGPL is the largest transporter of gas to the Chicago market and Kinder Morgan believes that its cost of service is one of the most competitive in the region. In 1999, NGPL delivered an average of 4.1 Bcf per day of natural gas to this market. Given its strategic location at the center of the North American pipeline grid, Kinder Morgan believes that Chicago is likely to continue to be a major natural gas trading hub for the rapidly growing markets in the Midwest and Northeast. Substantially all of NGPL's pipeline capacity to Chicago is committed under firm transportation contracts ranging from one to five years. As of December 31, 1999, approximately 81% of the total transportation volume committed under NGPL's firm transportation contracts had remaining terms of less than three years. NGPL continues to actively pursue the renegotiation, extension and/or replacement of expiring contracts. In September 1999, Kinder Morgan announced (i) a three year contract with Nicor Gas for approximately 1 Bcf per day of transportation and significant storage services and (ii) a two year contract with Aquila Energy for 500 MMBtu per day of transportation services. In January 2000, Kinder Morgan announced the signing of contracts with Peoples Energy for approximately 300 MMcf per day of firm transportation (generally through 2005) and 20 Bcf of storage services (generally through 2003). Nicor Gas and Peoples Energy are NGPL's two largest customers. As of March 8, 2000, contracts representing 21% of NGPL's total contracted firm transport capacity are scheduled to expire during the remainder of 2000. Through NGPL, Kinder Morgan is one of the nation's largest natural gas storage operators with approximately 600 Bcf of total natural gas storage capacity, 210 Bcf of working gas capacity and up to 4.0 Bcf per day of peak deliverability from its storage facilities, which are located near the markets NGPL serves. NGPL owns and operates eight underground storage fields in four states. These storage assets complement NGPL's pipeline facilities and allow it to optimize pipeline deliveries and meet peak delivery requirements in its principal markets. NGPL provides firm and interruptible gas storage service pursuant to storage agreements and tariffs. Firm storage customers pay a monthly demand charge irrespective of actual volumes stored. Interruptible storage customers pay a monthly charge based upon actual volumes of gas stored. On February 9, 2000, Kinder Morgan jointly announced with Nicor, Inc. (an energy and transportation holding company whose subsidiary, Nicor Gas, is a major customer of NGPL as discussed preceding) the signing of an agreement to become equal partners in the Horizon Pipeline. The Horizon Pipeline is a $75 million natural gas pipeline that will originate in Joliet, Illinois and extend 74 miles into northern Illinois, connecting the emerging supply hub at Joliet with Nicor Gas' distribution system and an existing NGPL pipeline. The initial capacity of the pipeline, expected to be completed in spring of 2002, is 380 MMcf/day, of which 300 MMcf/day has been committed to by Nicor Gas. 6 7 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) MIDCON TEXAS PIPELINE OPERATOR, INC. Through MTP, Kinder Morgan operates an intrastate natural gas pipeline system principally located in the Texas Gulf Coast area. This pipeline, acquired in conjunction with Kinder Morgan's January 30, 1998 purchase of MidCon Corp. from Occidental Petroleum Corporation, is leased from Occidental under a 30-year lease which commenced on December 31, 1996. The system includes approximately 2,700 miles of pipelines, supply lines, sales laterals and related facilities. The MTP pipeline system transports natural gas from producing fields in South Texas, the Gulf Coast and the Gulf of Mexico to markets in southeastern Texas and, through interconnections with NGPL and 22 other intrastate and interstate pipelines, to markets throughout the United States. Unlike NGPL, MTP acts as a seller of natural gas as well as a transporter. Principal customers of MTP include the electric and natural gas utilities that serve the Houston area and industrial customers located along the Houston Ship Channel and in the Beaumont/Port Arthur area. During 1999, approximately 37 percent of MTP's revenues were attributable to sales and transportation services provided to Reliant Energy. On March 17, 2000, Kinder Morgan announced that MidCon Texas Pipeline Operator, Inc. has renewed its natural gas sales and transportation contract with Reliant Energy HL&P through March 1, 2004. Additionally, MidCon Texas Pipeline has entered into a new transportation services agreement with Reliant Energy HL&P beginning in 2002 and extending through 2012. Reliant HL&P provides electric service to approximately 1.6 million customers in the Houston area. The Houston Ship Channel/Beaumont/Port Arthur market is one of the largest and most competitive natural gas markets in the United States. Large industrial end users of gas in this market have, on average, three pipelines connected to their plants. Large local distribution companies and electric utilities have multiple pipeline connections. Multiple pipeline connections provide the consumer of gas the opportunity to purchase gas directly from a number of pipelines and/or from third parties that may hold capacity on the various pipelines. Contract terms for the major utilities will expire between 2002 and 2004. Other contracts vary in length from month-to-month to five or more years. During 1999, MTP delivered an average of 1.599 Bcf per day of natural gas to this area, of which 60 percent of the deliveries were for sales contracts and 40 percent were for transportation contracts. In MTP's markets, the greatest demand for natural gas deliveries for space heating needs occurs in the winter months, while electric generation peak demand occurs in the summer. Through MTP, Kinder Morgan developed a salt dome storage facility located near Markham, Texas with a subsidiary of NIPSCO Industries, Inc. The facility has two salt dome caverns and approximately 8.3 Bcf of total storage capacity, over 5.7 Bcf of working gas capacity and up to 500 MMcf per day of peak deliverability. The storage facility is leased by a partnership in which MTP and a subsidiary of NIPSCO are partners. MTP has executed a 20-year sublease with the partnership under which it has rights to 50% of the facility's working gas capacity, 85% of its withdrawal capacity and approximately 70% of its injection capacity. MTP also leases a salt dome cavern from Dow Hydrocarbon & Resources, Inc. in Brazoria County, Texas, referred to as the "Stratton Ridge Facility." The Stratton Ridge Facility has a total capacity of 6.8 Bcf, working gas capacity of 2.9 Bcf and a peak day deliverability of 150 MMcf per day. KINDER MORGAN RETAIL As of December 31, 1999, Kinder Morgan's retail natural gas business served over 223,000 customers in Colorado, Nebraska and Wyoming through approximately 7,400 miles of distribution pipelines. Kinder Morgan's intrastate pipelines, distribution facilities and retail sales in Colorado and Wyoming are subject to the regulatory authority of each state's utility commission. In Nebraska, retail gas sales rates for residential and small commercial customers are regulated by each municipality served. Retail's operations in Nebraska, Wyoming and northeastern Colorado serve areas that are primarily rural and agriculturally based where gas is used primarily for space heating, crop irrigation, grain drying and processing of 7 8 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) agricultural products. In much of Nebraska, the winter heating load is balanced by irrigation requirements in the summer and grain drying in the fall. Retail operations in western Colorado serve fast-growing resort and associated service areas, and rural communities. These areas are characterized primarily by natural gas use for space heating, with annual growth rates of 6-8%. To support Retail's business, underground storage facilities are used to provide gas for load balancing and peak system demand. Storage services for Kinder Morgan's retail natural gas services are provided by three facilities in Wyoming owned by Northern Gas Company (a wholly owned subsidiary of Kinder Morgan), one facility in Colorado owned by Wildhorse Energy Partners (a joint venture in which Kinder Morgan owns a 55% interest), and one facility located in Nebraska and owned by Kinder Morgan Energy Partners. The peak natural gas withdrawal capacity available for Retail's business is approximately 99 MMcf per day. Retail's natural gas business relies on both the intrastate pipelines it operates and third-party pipelines for transportation and storage services required to serve its markets. The gas supply requirements for Retail's natural gas business have historically been met through a combination of purchases from marketing affiliates and third-party suppliers. With Kinder Morgan's sale of its natural gas marketing business as discussed preceding, Retail's future gas requirements are expected to be met by third-party suppliers. Through Rocky Mountain Natural Gas Company in Colorado and Northern Gas Company in Wyoming, Retail provides transportation services to affiliated local distribution companies as well as to irrigators, grain dryers, gas producers, shippers and industrial customers. These two intrastate pipeline systems include approximately 1,400 miles of transmission lines, field system lines and related facilities. Through Northern Gas Company, Retail provides storage services in Wyoming to its customers from its three storage fields, Oil Springs, Bunker Hill and Kirk Ranch, which combined have 29.7 Bcf of total storage capacity, 11.7 Bcf of working gas capacity, and up to 36 MMcf per day of peak withdrawal capacity. KINDER MORGAN POWER Kinder Morgan's power service businesses position Kinder Morgan to take advantage of its significant natural gas pipeline assets as the trend toward distributed electric power generation accelerates. Instead of creating large, new centrally-located electric power generation facilities, utilities are increasingly looking toward smaller, strategically located non-utility-owned generation facilities to meet the incremental need for electric power due, in addition to increased demand, to the closing and anticipated closing of nuclear power plants and environmental concerns with large coal-fired generation plants. Kinder Morgan plans to acquire and develop gas-fired non-utility electric generation assets, generally sited along its existing natural gas pipeline systems. In addition, as part of its distributive electric generation strategy, Kinder Morgan plans to optimize operations in its current generation facilities, as well as monitoring and participating in continued electric industry restructuring. Kinder Morgan's 1998 acquisition of interests in the Thermo Companies provided Kinder Morgan with its first electric generation assets as well as the knowledge and expertise of Thermo's management which Kinder Morgan expects will prove beneficial in the development of merchant power plants along its pipeline assets. Thermo has interests in four independent natural gas fired power plants in Colorado representing approximately 380 megawatts of electric generation capacity with access to approximately 130 BCF of natural gas reserves. In general, the output from these facilities is sold to the local electric utility under long-term contracts. 8 9 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) REGULATION FEDERAL AND STATE REGULATION Both the performance of interstate transportation and storage services by natural gas companies, including interstate pipeline companies, and the rates charged for such services, are regulated by the Federal Energy Regulatory Commission under the Natural Gas Act and, to a lesser extent, the Natural Gas Policy Act. As used in this report, FERC refers to the Federal Energy Regulatory Commission. With the adoption of FERC Order No. 636, the FERC required interstate pipelines that perform open access transportation under blanket certificates to "unbundle" or separate their traditional merchant sales services from their transportation and storage services and to provide comparable transportation and storage services with respect to all gas supplies, whether purchased from the pipeline or from other merchants such as marketers or producers. The pipelines must now separately state the applicable rates for each unbundled service. Order 636 has been affirmed in all material respects upon judicial review and Natural Gas Pipeline Company of America's own FERC orders approving its unbundling plans are final and not subject to any pending judicial review. Natural Gas Pipeline Company of America, referred to in this report as Natural, (as distinct from "NGPL" which includes certain affiliates of Natural), had a number of gas purchase contracts that required Natural to purchase natural gas at prices in excess of the prevailing market price. As a result of Order 636 prohibiting interstate pipelines from using their gas transportation and storage facilities to market gas to sales customers, Natural no longer had a sales market for the gas it is required to purchase under these contracts. Order 636 went into effect on Natural's system on December 1, 1993. Natural agreed to pay substantial transition costs to reform these contracts with the gas suppliers. Under settlement agreements between Natural and its former sales customers, Natural recovered from these customers a significant amount of the gas supply realignment costs over a four-year period beginning December 1, 1993. These settlement agreements were approved by the FERC. The FERC also permitted Natural to implement a tariff mechanism to recover additional portions of its gas supply realignment costs in rates charged to transportation customers that were not party to the settlements. On December 1, 1997, the FERC allowed recovery of gas supply realignment costs initially allocated to interruptible transportation but not recovered. Effective December 1, 1998, the FERC allowed Natural to recover its remaining gas supply realignment costs over the period from December 1, 1998 through November 30, 2001. INTRASTATE TRANSPORTATION AND SALES The operations of Kinder Morgan's intrastate pipeline located primarily in Texas are affected by FERC rules and regulations issued pursuant to the Natural Gas Act and the Natural Gas Policy Act. Of particular importance are regulations that allow increased access to interstate transportation services, without the necessity of obtaining prior FERC authorization for each transaction. A key element of the program is nondiscriminatory access, under which a regulated pipeline must agree, under certain conditions, to transport gas for any party requesting such service. Kinder Morgan's intrastate pipeline in Texas, MidCon Texas Pipeline Operator, Inc., falls under the jurisdiction of Texas in regards to sales and transportation within the state. The rates for city gate gas sales within Texas are subject to regulation by the Railroad Commission of Texas. The rates for other sales and transportation of natural gas within Texas are determined by market conditions and are largely unregulated. The Railroad Commission has authority to regulate various activities of persons selling or transporting natural gas for public use within Texas, including the authority to fix rates. Under Texas law, rates charged by a gas utility to industrial and other large volume users through contract negotiation are considered to be just and reasonable and must be approved by the Railroad Commission if they meet the objective standard set forth in Texas law. MidCon Texas also performs certain transportation services in interstate commerce pursuant to Section 311 of the Natural Gas Policy Act of 1978. 9 10 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) Kinder Morgan's intrastate pipeline in Colorado, Rocky Mountain Natural Gas Company, is regulated by the Colorado Public Utilities Commission as a public utility in regard to its transportation and sales services within the state. Rocky Mountain also performs certain transportation services in interstate commerce pursuant to Section 311 of the Natural Gas Policy Act of 1978. The Colorado Public Utilities Commission regulates the rates, terms, and conditions of natural gas sales and transportation services performed by public utilities in the state of Colorado. Kinder Morgan's intrastate pipeline in Wyoming, Northern Gas Company, is regulated by the Wyoming Public Service Commission as a public utility in regard to its transportation and sales services within the state. Northern Gas also performs certain transportation services in interstate commerce pursuant to Section 311 of the Natural Gas Policy Act of 1978. The Wyoming Public Service Commission regulates the rates, terms, and conditions of natural gas sales and transportation services performed by public utilities in the state of Wyoming. INTERSTATE TRANSPORTATION AND STORAGE SERVICES Facilities for the transportation of natural gas in interstate commerce and for storage services in interstate commerce are subject to regulation by the FERC under the Natural Gas Act and the Natural Gas Policy Act. Kinder Morgan is also subject to the requirements of FERC Order Nos. 497, et seq., and 566, et. seq., the Marketing Affiliate Rules, which prohibit preferential treatment by an interstate pipeline of its marketing affiliates and govern, in particular, the provision of information by an interstate pipeline to its marketing affiliates. In January 1997, Amoco Production Company and Amoco Energy Trading Corporation filed a complaint against Natural before the FERC contending that Natural had improperly provided its affiliate, MidCon Gas Services Corp., transportation service on preferential terms, and seeking termination of currently effective contracts and the imposition of civil penalties. A subsequent FERC staff audit made proposed findings that Natural had favored MidCon Gas, which Natural challenged. In July 1997, Amoco and Natural agreed to a settlement of this proceeding. Amoco filed to withdraw its complaint subject to the FERC's procedures. Several intervenors opposed the withdrawal of the complaint and Natural filed an answer to that opposition. By orders issued January 16, 1998, the FERC ruled that Natural had violated certain of the FERC's regulations regarding its business relationships with its affiliate, MidCon Gas. Relying upon its authority under the Natural Gas Policy Act, the FERC provided notice to Natural that, in addition to other remedial action, it proposed to assess civil penalties of $8,840,000. Such orders also required Natural to take certain other actions, including making a new tariff filing, and imposed certain restrictions on the sharing of employees by Natural and MidCon Gas. The FERC proposed to suspend one-half of the penalty provided that for two years following the date of the order Natural does not violate specified sections of the FERC's regulations. Natural and other parties sought rehearing in February 1998. Natural also made several filings in compliance with that order, including payment of a $4.42 million civil penalty. On March 26, 1998, the FERC issued an order denying all rehearing requests, including those of several parties which had argued for more onerous penalties or restrictions. Natural filed a petition for review of the orders with the U.S. Court of Appeals for the District of Columbia. On May 11, 1999, Natural and an intervenor filed a joint motion to withdraw their petitions for review. The Court of Appeals granted such withdrawal. There remains only one appeal by another intervenor regarding Natural's tariff settlement of this proceeding. Kinder Morgan does not believe the ultimate resolution of these issues will have a material adverse affect on Kinder Morgan's business, cash flows, financial position or results of operations. RETAIL NATURAL GAS SERVICES Certain of Kinder Morgan's intrastate pipelines, storage, distribution and/or retail sales in Colorado, Texas and 10 11 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) Wyoming are under the regulatory authority of those state's utility commission. In Nebraska, certain retail gas sales rates for residential and small commercial customers are regulated by the municipality served. In certain of the incorporated communities in which Kinder Morgan provides retail natural gas services, Kinder Morgan operates under franchises granted by the applicable municipal authorities. The duration of these franchises varies. In unincorporated areas, Kinder Morgan's natural gas utility services are not subject to municipal franchise. Kinder Morgan has been issued various certificates of public convenience and necessity by the regulatory commissions in Colorado and Wyoming authorizing it to provide natural gas utility services within certain incorporated and unincorporated areas of those states. Continuing regulatory change will provide energy consumers with increasing choices among their suppliers. Kinder Morgan emerged as a leader in providing for customer choice by filing an application with the Wyoming Public Service Commission in 1995 to allow 10,500 residential and commercial customers to choose to purchase the gas from a qualified list of suppliers. The proposal provided that Kinder Morgan would continue to provide all other utility services. In early 1996, the Wyoming Public Service Commission issued an order allowing Kinder Morgan to bring competition to these 10,500 residential and commercial customers beginning in mid 1996. Choosing from a menu of three competing suppliers, approximately 80% of Kinder Morgan's customers chose to remain with Kinder Morgan. The experience gave Kinder Morgan early and valuable experience in competing in an unbundled environment and led to the development of new products and services. The innovative program was one of the first in the nation that allowed essentially all customers the opportunity to exercise energy choice for natural gas. In November 1997, Kinder Morgan announced a similar plan to give residential and small commercial customers in Nebraska a choice of natural gas suppliers. This program, the Nebraska Choice Gas program, became effective June 1, 1998. As of December 31, 1999, the plan had been approved by 177 communities, representing approximately 92,000 customers served by Kinder Morgan in Nebraska. ENVIRONMENTAL REGULATION Kinder Morgan's operations and properties are subject to extensive and evolving Federal, state and local laws and regulations governing the release or discharge of regulated materials into the environment or otherwise relating to environmental protection or human health and safety. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. These laws and regulations can also impose liability for remedial costs on the owner or operator of properties or the generators of waste materials, regardless of fault. Moreover, the recent trends toward stricter standards in environmental legislation and regulation are likely to continue. On December 20, 1999, the U.S. Department of Justice filed a Complaint on behalf of the U.S. Environmental Protection Agency against Natural alleging that Natural failed to obtain all of the necessary air quality permits in 1979 when it constructed the Akron Compressor Station which consisted of three compressor engines in Weld County, Colorado. Natural constructed and then operated the facility until August 1996 when it was sold to High Plains Gathering System. High Plains sold one of the compressor engines to Colorado Interstate Gas Company in October 1997. The complaint makes the standard request for penalties up to the statutory maximums of $25,000 for each day of violation prior to January 30, 1997 and $27,500 for each day of violation after January 31, 1997. Natural has identified a number of defenses to the complaint and plans to defend the action vigorously. Although Kinder Morgan cannot express an opinion as to the probable outcome of this case, Kinder Morgan believes that this litigation will not have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. 11 12 ITEMS 1 and 2: BUSINESS and PROPERTIES (continued) On December 17, 1999, the State of Colorado notified Kinder Morgan of air quality permit compliance issues for several Kinder Morgan facilities. The notice included civil penalties of $164,000. Kinder Morgan is currently in the process of negotiating a consent order with the State of Colorado to resolve the outstanding issues. The Environmental Protection Agency recently published a final rule addressing transport of ground level ozone. The rule affects 22 Eastern and Midwestern states, including Illinois and Missouri in which Kinder Morgan operates gas compression facilities. The rule requires reductions in emissions of nitrogen oxide, a precursor to ozone formation, from various emission sources, including utility and non-utility sources. The rule requires that the affected states prepare and submit State Implementation Plans to the Environmental Protection Agency by September 1999, reflecting how the required emissions reductions will be achieved. Emission controls are required to be installed by May 1, 2003. This rule will likely require Kinder Morgan, as well as its competitors, to install some form of new emissions control technology on certain equipment it operates. The rule may also result in broadly increased use of natural gas, as other sources of nitrogen oxide air emissions, including utilities, seek to achieve the reductions required under the rule. The State Implementation Plans which will effectuate this rule have yet to be proposed or promulgated, and will require detailed analysis before their final economic impact can be ascertained. On March 3, 2000, the Washington D.C. Circuit Court issued a decision regarding the rule. The Circuit Court remanded certain issues back to the Environmental Protection Agency. The rule is stayed pending resolution of the remanded issues. While additional capital costs are likely to result from this rule, based on currently available information, Kinder Morgan does not believe that these costs will have a material adverse effect on its business, cash flows, financial position or results of operations. On June 17, 1999, the Environmental Protection Agency published a final rule creating a standard to limit emissions of hazardous air pollutants from oil and natural gas production as well as from natural gas transmission and storage facilities. The standard requires that the affected facilities reduce emissions of hazardous air pollutants by 95 percent. This standard will require Kinder Morgan to achieve this reduction either by process modifications or by installing new emissions control technology. The standard will affect Kinder Morgan and its competitors in a like manner. The rule allows most affected sources three years from the publication date to come into compliance. Kinder Morgan is conducting a detailed analysis of the final rule to determine its overall effect. While additional capital costs are likely to result from this rule, Kinder Morgan believes that the rule will not have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. Based on current information and taking into account reserves established for environmental matters, Kinder Morgan does not believe that compliance with Federal, state and local environmental laws and regulations 12 13 will have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. In addition, the clean-up programs in which Kinder Morgan is engaged are not expected to interrupt or diminish Kinder Morgan's operational ability to gather or transport natural gas. However, there can be no assurances that future events, such as changes in existing laws, the promulgation of new laws, or the development of new facts or conditions will not cause Kinder Morgan to incur significant costs. Other Amounts spent by Kinder Morgan during 1999, 1998 and 1997 on research and development activities were not material. (C) Financial Information About Foreign and Domestic Operations and Export Sales Substantially all of Kinder Morgan's operations are in the contiguous 48 states. ITEM 3: LEGAL PROCEEDINGS Jack J. Grynberg v. K N Energy, Inc., Rocky Mountain Natural Gas Company, and GASCO, Inc., Civil Action No. 92-N-2000. On October 9, 1992, Jack J. Grynberg filed suit in the United States District Court for the District of Colorado against Kinder Morgan, Rocky Mountain Natural Gas Company and GASCO, Inc. alleging that these entities, referred to here as the "K N Entities," as well as K N Production Company and K N Gas Gathering, Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts that the companies have engaged in an illegal exercise of monopoly power, have illegally denied him economically feasible access to essential facilities to store, transport and distribute gas, and illegally have attempted to monopolize or to enhance or maintain an existing monopoly. Grynberg also asserts certain state causes of action relating to a gas purchase contract. In February 1999, the Federal District Court granted summary judgment as to some of Grynberg's antitrust and state law claims, while allowing other claims to proceed to trial. In addition to monetary damages, Grynberg has requested that the K N Entities be ordered to divest all interests in natural gas exploration, development and production properties, all interests in distribution and marketing operations, and all interests in natural gas storage facilities, separating these interests from Kinder Morgan's natural gas gathering and transportation system in northwest Colorado. No trial date has been set. However, a settlement conference is currently scheduled for April 25, 2000. Jack J. Grynberg, individually and as general partner for the Greater Green River Basin Drilling Program: 72-73 v. Rocky Mountain Natural Gas Company and K N Energy, Inc., Case No. 90-CV-3686. On June 5, 1990, Jack J. Grynberg filed suit, which is presently pending in Jefferson County District Court for Colorado, against Rocky Mountain Natural Gas Company and Kinder Morgan alleging breach of contract and fraud. In essence, Grynberg asserts claims that the named companies failed to pay Grynberg the proper price, impeded the flow of gas, mismeasured gas, delayed his development of gas reserves, and other claims arising out of a contract to purchase gas from a field in northwest Colorado. On February 13, 1997, the trial judge entered partial summary judgment for Mr. Grynberg on his contract claim that he failed to receive the proper price for his gas. This ruling followed an appellate decision which was adverse to Kinder Morgan on the contract interpretation of the price issue, but which did not address the question of whether Grynberg could legally receive the price he claimed or whether he had illegally diverted gas from a prior purchase. On August 29, 1997, the trial judge stayed the summary judgment pending resolution of a proceeding at the FERC to determine if Grynberg was entitled to administrative relief from an earlier dedication of the same gas to interstate commerce. The background of that proceeding is described below. On March 15, 1999, an Administrative Law Judge for the FERC ruled, after an evidentiary hearing, that Mr. Grynberg had illegally diverted the gas when he entered the contract with the named companies and was not entitled to relief. Grynberg filed exceptions to this ruling, and a ruling from the FERC is expected soon. The action in Colorado remains stayed pending final resolution of the FERC proceeding. Jack J. Grynberg v. Rocky Mountain Natural Gas Company, Docket No. GP91-8-008. On May 8, 1991, Grynberg filed a petition for declaratory order with the FERC seeking a determination whether he was entitled to the price he seeks in the Jefferson County District Court proceeding referred to above. While Grynberg initially received a favorable decision from the FERC, that decision was reversed by the Court of Appeals for the District of Columbia Circuit on June 6, 1997. This matter has been remanded to the FERC for subsequent proceedings. The matter was set for an expedited evidentiary hearing, and an Initial Decision favorable to Rocky Mountain was issued on March 15, 1999. That decision determined that Grynberg had intentionally diverted gas from an earlier dedication to interstate commerce in violation of the Natural Gas Act and denied him equitable administrative relief. Grynberg filed exceptions to this Initial Decision. In late March 2000, the FERC issued an order affirming in part and denying in part its Initial Decision. Kinder Morgan is currently studying the order. 13 14 ITEM 3: LEGAL PROCEEDINGS (continued) 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. 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 Company entities. The plaintiffs in the case purport to represent a class of natural gas producers and fee royalty owners who allege that they have been subject to systematic gas mismeasurement by the defendants for more than 25 years. Subsequently, one of the defendants removed the action to Kansas Federal District Court. Thereafter, Kinder Morgan filed a motion with the Judicial Panel for Multidistrict Litigation to consolidate this action for pretrial purposes with the False Claim Act cases referred to above, because of common factual questions. The motion is briefed and a hearing has been set for March 30, 2000. 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). This appeal has been fully briefed and a decision is pending. 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 pending resolution of a third case styled Natural Gas Pipelines Company of America, et al. v. Dirt Hogs, Inc. (Case No. 99-360-R). Following a default judgment against Dirt Hogs, Dirt Hogs dismissed their appeal. KN Energy, Inc., et al. v. James P. Rode and Patrick R. McDonald, Case No. 99CV1239, filed in the District Court, Jefferson County, Division 8, Colorado. Defendants counterclaimed and filed third party claims against several former KN Energy officers and/or directors. Messrs. Rode and McDonald are former principal shareholders of Interenergy Corporation. Interenergy was merged into K N Energy on December 19, 1997 pursuant to a Merger Agreement dated August 25, 1997. Rode and McDonald allege that K N Energy committed securities fraud, common law fraud and negligent misrepresentation as well as breach in contract. They are seeking an unspecified amount of compensatory damages that we estimate could be greater than $2 million, plus unspecified exemplary or punitive damages, attorney's fees and their costs. Kinder Morgan has filed a Motion to Dismiss which is briefed and awaiting oral argument. 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. KN Energy, Inc., et al., Civil Action No. 00-N-190. This case also raises the identical state law claims contained in the counterclaim and third party complaint in state court. In addition to the federal claims, defendants have moved to stay the state case pending resolution of the federal action. 14 15 ITEM 3: LEGAL PROCEEDINGS (continued) Kinder Morgan believes it has meritorious defenses to all lawsuits and legal proceedings in which it is a defendant and will vigorously defend against them. Based on its evaluation of the above matters, and after consideration of reserves established, Kinder Morgan believes that the resolution of such matters will not have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 15 16 EXECUTIVE OFFICERS OF THE REGISTRANT (A) Identification and Business Experience of Executive Officers
Name Age Position and Business Experience ---- --- -------------------------------- William V. Allison............................ 52 President, Natural Gas Pipeline Operations since September 1999. President, Pipeline Operations of Kinder Morgan Energy Partners from February 1999 to September 1999. Vice President and General Counsel of Kinder Morgan Energy Partners from April 1998 to February 1999. From 1997 to April 1998, Mr. Allison was employed at Enron Corp. where he held various executive positions, including President of Enron Liquid Services Corporation, Florida Gas Transmission Company and Houston Pipeline Company and Vice President and Associate General Counsel of Enron Corp. Prior to joining Enron Corp. he was an attorney at the FERC. David G. Dehaemers, Jr........................ 39 Vice President of Corporate Development since January 2000. Vice President and Chief Financial Officer from October 1999 to January 2000. Also Vice President, Corporate Development of Kinder Morgan G.P., Inc. since January 2000. Treasurer of Kinder Morgan G.P., Inc. from February 1997 to January 2000. Vice President and Chief Financial Officer of Kinder Morgan G.P., Inc. from July 1997 to January 2000. Secretary of Kinder Morgan G.P., Inc. from February 1997 to August 1997. Chief Financial Officer of Morgan Associates, Inc., an energy investment and pipeline management company, from October 1992 to January 1997. Jack W. Ellis II.............................. 46 Vice President and Controller since December 1997. Assistant Treasurer and Assistant Secretary. Vice President and Controller of NorAm Energy Corp. from December 1989 to August 1997. Richard D. Kinder............................. 55 Director, Chairman and Chief Executive Officer since October 1999. Director, Chairman and Chief Executive Officer of Kinder Morgan G.P., Inc. since February 1997. From 1992 to 1994, Chairman of Kinder Morgan G.P., Inc. From October 1990 until December, 1996, President of Enron Corp. Mr. Kinder was employed by Enron and its affiliates and predecessors for over 16 years. P. Anthony Lannie............................. 46 President of Power Operations since January of 2000. Previously, President of Coral Energy Canada from August 1999 to December 1999 and Senior Vice President and General Counsel of Coral Energy and its predecessor Tejas Energy Corporation from January 1994. Tejas Energy Corporation was acquired by Shell Oil Company in January 1998.
16 17 EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Joseph Listengart............................. 31 Vice President, General Counsel and Secretary since October 1999. Also Vice President and General Counsel of Kinder Morgan G.P., Inc. since October 1999. Mr. Listengart became an employee of Kinder Morgan G.P., Inc. in March 1998 and was elected its Secretary in November 1998. From March 1995 through February 1998, Mr. Listengart worked as an attorney for Hutchins, Wheeler & Dittmar, a Professional Corporation. Deborah Macdonald........................... 48 Vice President and President of Natural Gas Pipeline Company of America since October 1999. Senior Vice President - Legal Affairs of Aquila Energy, a subsidiary of Utilicorp United, from March 1999 to October 1999. Independent energy consultant from June 1996 to March 1999. President of Transwestern Pipeline Company, a subsidiary of Enron Corp., from April 1993 through May 1996. Michael C. Morgan............................ 31 Vice President, Strategy and Investor Relations since January 2000. Also Vice President, Strategy and Investor Relations of Kinder Morgan G.P., Inc. since January 2000. Vice President of Corporate Development of Kinder Morgan G.P., Inc. from February 1997 to January 2000. From August 1995 until February 1997, an associate with McKinsey & Company, an international management consulting firm. Son of William V. Morgan. William V. Morgan............................ 56 Director, Vice Chairman and President since October 1999. Director of Kinder Morgan G.P., Inc. since June 1994. Vice Chairman of Kinder Morgan G.P., Inc. since February 1997. President of Kinder Morgan G.P., Inc. since November 1998. President of Morgan Associates, Inc., an investment and pipeline management company, since February 1987, and Cortez Holdings Corporation, a related pipeline investment company, since October 1992. Legal and management positions in the energy industry since 1975, including the presidencies of three major interstate natural gas companies which are now part of Enron Corp.: Florida Gas Transmission Company, Transwestern Pipeline Company and Northern Natural Gas Company. Prior to joining Florida Gas in 1975, Mr. Morgan was engaged in the private practice of law in Washington, D.C. Rose M. Robeson.............................. 39 Vice President and Treasurer since April 1998. Assistant Treasurer from 1996 to 1998. Assistant Treasurer of Total Petroleum, Inc. from 1992 to 1996. C. Park Shaper................................ 31 Vice President and Chief Financial Officer since January 2000. Also Vice President, Treasurer and Chief Financial Officer of Kinder Morgan G.P., Inc. since January 2000. Previously, President and Director of Altair Corporation, an enterprise focused on the distribution of web-based investment research for the financial services industry. Vice President and Chief Financial Officer of First Data Analytics, a subsidiary of First Data Corporation, from 1997 to June 1999. From 1995 to 1997, a consultant with The Boston Consulting Group. Previous experience with TeleCheck
17 18 EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Services, Inc. and as a management consultant with the Strategic Services Division of Andersen Consulting. James E. Street............................... 43 Vice President of Human Resources and Administration since August 1999. Also Vice President, Human Resources and Administration of Kinder Morgan G.P., Inc., since August 1999. Senior Vice President, Human Resources and Administration for Coral Energy, a subsidiary of Shell Oil Company, from October 1996 to August 1999. Vice President, Human Resources of Enron Corp. from July 1989 to August 1992. Laurel L. Tiffin.............................. 41 Vice President and Chief Information Officer since October 1999. Director of Information Systems of Kinder Morgan G.P., Inc. from April 1998 to October 1999. Employee of Kinder Morgan G.P., Inc., providing systems administration support, from February 1997 to April 1998. Employee of Electronic Data Systems, supporting Enron Oil & Gas Company in various capacities including: Information Technology support of engineering systems, domestic and international systems administration and client/server applications development, from 1992 to February 1997.
These officers generally serve until April of each year. (B) Involvement in Certain Legal Proceedings None. 18 19 ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Kinder Morgan's common stock is listed for trading on the New York Stock Exchange under the symbol KMI. Dividends paid and the price range of Kinder Morgan's common stock by quarter for the last two years are provided below. All amounts have been restated to reflect the three-for-two split of Kinder Morgan's common stock effective December 31,1998.
MARKET PRICE DATA ----------------- 1999 1998 ----------------------------------------- ----------------------------------------- Quarter Ended: LOW HIGH CLOSE LOW HIGH CLOSE --- ---- ----- --- ---- ----- March 31 $18.813 $24.188 $19.938 $33.328 $39.375 $39.375 June 30 $12.188 $22.438 $13.375 $32.797 $40.328 $36.125 September 30 $12.188 $24.688 $22.438 $25.000 $36.125 $34.172 December 31 $17.125 $24.500 $20.188 $22.328 $34.922 $24.250 Dividends Quarter Ended: March 31 $0.2000 $0.1867 June 30 $0.2000 $0.1867 September 30 $0.2000 $0.1867 December 31 $0.0500 $0.2000 Common Stockholders at Year-end 10,397 9,659
19 20 ITEM 6: SELECTED FINANCIAL DATA FIVE-YEAR REVIEW KINDER MORGAN, INC. AND SUBSIDIARIES
1999(2) 1998(3) 1997 ----------- ----------- ----------- (In Thousands, Except Per Share Amounts) OPERATING REVENUES Natural Gas Sales $ 1,003,535 $ 955,134 $ 214,775 Natural Gas Transportation and Storage 651,647 640,906 87,579 Other 90,299 64,854 38,084 ----------- ----------- ----------- Total Operating Revenues $ 1,745,481 $ 1,660,894 $ 340,438 =========== =========== =========== OPERATING INCOME $ 305,057 $ 401,207 $ 78,280 Other Income and (Deductions) (59,878) (181,547) (21,089) ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 245,179 219,660 57,191 Income Taxes 90,527 81,492 12,810 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS 154,652 138,168 44,381 ----------- ----------- ----------- DISCONTINUED OPERATIONS, NET OF TAX Income (Loss) From Discontinued Operations (51,718) (78,179) 33,116 Loss on Disposal of Discontinued Operations (344,378) -- -- ----------- ----------- ----------- TOTAL INCOME (LOSS) FROM DISCONTINUED OPERATIONS (396,096) (78,179) 33,116 ----------- ----------- ----------- NET INCOME (LOSS) (241,444) 59,989 77,497 Less -Preferred Stock Dividends 129 350 350 Less-Premium Paid on Preferred Stock Redemption 350 -- -- ----------- ----------- ----------- EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ (241,923) $ 59,639 $ 77,147 =========== =========== =========== DILUTED EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 1.92 $ 2.13 $ 0.93 Discontinued Operations (4.93) (1.21) 0.70 ----------- ----------- ----------- TOTAL DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (3.01) $ 0.92 $ 1.63 =========== =========== =========== DIVIDENDS PER COMMON SHARE $ 0.65 $ 0.76 $ 0.73 =========== =========== =========== NUMBER OF SHARES USED IN COMPUTING DILUTED EARNINGS PER COMMON SHARE 80,358 64,636 47,307 =========== =========== =========== TOTAL ASSETS $ 9,540,283 $ 9,716,129 $ 2,305,805 =========== =========== =========== CAPITAL EXPENDITURES(1) $ 94,348 $ 118,452 $ 228,735 =========== =========== =========== CAPITALIZATION: Common Stockholders' Equity $ 1,665,841 32% $ 1,216,821 25% $ 606,132 48% Preferred Stock -- -- 7,000 -- 7,000 -- Preferred Stock Subject to Mandatory Redemption -- -- -- -- -- -- Preferred Capital Trust Securities 275,000 5% 275,000 6% 100,000 8% Long-term Debt 3,293,326 63% 3,300,025 69% 553,816 44% ----------- ----- ----------- ----- ----------- ----- Total Capitalization $ 5,234,167 100% $ 4,798,846 100% $ 1,266,948 100% =========== ===== =========== ===== =========== ===== BOOK VALUE PER COMMON SHARE $ 14.79 $ 17.74 $ 12.63 =========== =========== =========== 1996 1995 ----------- ----------- (In Thousands, Except Per Share Amounts) OPERATING REVENUES Natural Gas Sales $ 191,506 $ 204,429 Natural Gas Transportation and Storage 73,825 60,172 Other 34,277 33,424 ----------- ----------- Total Operating Revenues $ 299,608 $ 298,025 =========== =========== OPERATING INCOME $ 67,988 $ 57,332 Other Income and (Deductions) (14,798) (15,653) ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 53,190 41,679 Income Taxes 17,304 14,837 ----------- ----------- INCOME FROM CONTINUING OPERATIONS 35,886 26,842 ----------- ----------- DISCONTINUED OPERATIONS, NET OF TAX Income (Loss) From Discontinued Operations 27,933 25,680 Loss on Disposal of Discontinued Operations -- -- ----------- ----------- TOTAL INCOME (LOSS) FROM DISCONTINUED OPERATIONS 27,933 25,680 ----------- ----------- NET INCOME (LOSS) 63,819 52,522 Less -Preferred Stock Dividends 398 492 Less-Premium Paid on Preferred Stock Redemption -- -- ----------- ----------- EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ 63,421 $ 52,030 =========== =========== DILUTED EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 0.80 $ 0.62 Discontinued Operations 0.63 0.60 ----------- ----------- TOTAL DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 1.43 $ 1.22 =========== =========== DIVIDENDS PER COMMON SHARE $ 0.70 $ 0.67 =========== =========== NUMBER OF SHARES USED IN COMPUTING DILUTED EARNINGS PER COMMON SHARE 44,436 42,540 =========== =========== TOTAL ASSETS $ 1,629,720 $ 1,257,457 =========== =========== CAPITAL EXPENDITURES(1) $ 88,755 $ 48,263 =========== =========== CAPITALIZATION: Common Stockholders' Equity $ 519,794 55% $ 426,760 57% Preferred Stock 7,000 1% 7,000 1% Preferred Stock Subject to Mandatory Redemption -- -- 572 -- Preferred Capital Trust Securities -- -- -- -- Long-term Debt 423,676 44% 315,564 42% ----------- ----- ----------- ----- Total Capitalization $ 950,470 100% $ 749,896 100% =========== ===== =========== ===== BOOK VALUE PER COMMON SHARE $ 11.44 $ 10.13 =========== ===========
(1) Capital Expenditures shown are for continuing operations only. (2) Reflects the acquisition of Kinder Morgan Delaware on October 7, 1999. See Note 2 of the accompanying Notes to Consolidated Financial Statements. (3) Reflects the acquisition of MidCon Corp. on January 30, 1998. See Note 2 of the accompanying Notes to Consolidated Financial Statements. 20 21 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As used in this report, "Kinder Morgan" refers to Kinder Morgan, Inc. (a Kansas corporation, formerly K N Energy, Inc.) and its consolidated subsidiaries. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes. Specifically, as discussed in Notes 2, 5 and 6 of the accompanying Notes to Consolidated Financial Statements, Kinder Morgan has engaged in acquisitions (including the October 1999 acquisition of Kinder Morgan (Delaware), Inc., a Delaware corporation and the indirect owner of the general partner interest in Kinder Morgan Energy Partners, L.P., a publicly-traded master limited partnership), and divestitures (including the discontinuance of certain businesses) which may affect comparisons of results between periods. CONSOLIDATED FINANCIAL RESULTS
1999 1998 1997 ------------ ------------ ------------ (Dollars In Thousands Except Per Share Amounts) Operating Revenues $ 1,745,481 $ 1,660,894 $ 340,438 Gross Margin(1) $ 789,300 $ 827,619 $ 206,102 Operating Income: Before Merger-related and Severance Costs $ 342,500 $ 406,970 $ 78,280 Merger-related and Severance Costs (37,443) (5,763) -- ------------ ------------ ------------ Consolidated Operating Income $ 305,057 $ 401,207 $ 78,280 ============ ============ ============ Income from Continuing Operations: Before Merger-related and Severance Costs and Gain from Sale to KMEP(2) $ 77,121 $ 141,686 $ 44,381 Merger-related and Severance Costs, Net of Tax (23,327) (3,518) -- Gain from Sale to KMEP(2), Net of Tax 100,858 -- -- ------------ ------------ ------------ Income from Continuing Operations 154,652 138,168 44,381 Income (Loss) from Discontinued Operations (51,718) (78,179) 33,116 Loss on Disposal of Discontinued Operations (344,378) -- -- ------------ ------------ ------------ Net Income (Loss) $ (241,444) $ 59,989 $ 77,497 ============ ============ ============ Diluted Earnings (Loss) Per Share: From Continuing Operations Before Merger-related and Severance Costs and Gain from Sale to KMEP(2) $ 0.96 $ 2.18 $ 0.93 Merger Related and Severance Costs (0.29) (0.05) -- Gain from Sale to KMEP(2) 1.25 -- -- Income (Loss) from Discontinued Operations (0.64) (1.21) 0.70 Loss on Disposal of Discontinued Operations (4.29) -- -- ------------ ------------ ------------ Diluted Earnings (Loss) Per Share $ (3.01) $ 0.92 $ 1.63 ============ ============ ============
(1) Gross margin equals total operating revenues less gas purchases and other costs of sales. (2) KMEP refers to Kinder Morgan Energy Partners. Kinder Morgan's results for 1999 reflect an increase of $84.6 million in operating revenues, a decrease of $38.3 million in gross margin and a decrease of $64.5 million in operating income before merger-related and severance costs. The increase in operating revenues is principally due to (i) the fact that 1999 results include 12 months of the operations of assets acquired in the January 30, 1998, acquisition of MidCon Corp. (see Note 2 of the accompanying Notes to Consolidated Financial Statements), while 1998 results include only 11 months, (ii) increased 1999 sales by Kinder Morgan's MidCon Texas Pipeline Operator, Inc. subsidiary and (iii) increased 21 22 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 1999 sales by Kinder Morgan's power operations, partially offset by (i) reduced per unit revenues realized by Kinder Morgan's Natural Gas Pipeline Company of America subsidiary and (ii) decreased 1999 sales by Kinder Morgan's retail natural gas distribution operations. The decrease in gross margin that occurred from 1998 to 1999, despite the increased operating revenues, was principally due to lower 1999 margins realized by Natural Gas Pipeline Company of America and retail natural gas distribution, partially offset by increased 1999 margins in Kinder Morgan's other businesses. Individual business unit results are discussed in detail under "Results of Operations" following. Results for 1999 and 1998 included pre-tax merger-related and severance-related costs of $37.4 million and $5.8 million, respectively, as further discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements. In addition, results for both 1999 and 1998 included significant gains from the sale of assets. In 1999, earnings included a $158.8 million pre-tax gain from the sale of assets to Kinder Morgan Energy Partners (see Note 5 of the accompanying Notes to Consolidated Financial Statements), as well as equity in earnings (and associated amortization of excess investment) associated with Kinder Morgan's investment in Kinder Morgan Energy Partners. Interest expense increased significantly in 1999 due, in large part, to the January 1998 acquisition of MidCon Corp., as discussed in Note 2 of the accompanying Notes to Consolidated Financial Statements. Additional information on these items is included under "Other Income and (Deductions)" following. Diluted earnings per common share from continuing operations before merger-related and severance costs and the gain from the sale of assets to Kinder Morgan Energy Partners decreased from $2.18 per share in 1998 to $0.96 per share in 1999. In addition to the operating and financing factors described preceding, this decrease reflects an increase of 15.7 million (24.3%) in average diluted shares outstanding, largely due to shares issued in conjunction with the acquisition of Kinder Morgan Delaware as further discussed in Note 2 of the accompanying Notes to Consolidated Financial Statements. Diluted earnings per common share declined from $0.92 per common share in 1998 to a loss of $3.01 in 1999 reflecting, in addition to the factors discussed preceding, the impact of discontinued operations in each period and, in 1999, the loss from disposal of discontinued operations. See "Discontinued Operations" following and Note 6 of the accompanying Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS Following Kinder Morgan's October 1999 business combination with Kinder Morgan Delaware (see Note 2 of the accompanying Notes to Consolidated Financial Statements), Richard D. Kinder (formerly the Chairman of the Board of Kinder Morgan Delaware) became chairman of Kinder Morgan's board of directors, certain directors of Kinder Morgan Delaware became members of Kinder Morgan's board of directors and certain members of senior management of Kinder Morgan Delaware assumed similar positions with Kinder Morgan. In addition, during the fourth quarter of 1999, Kinder Morgan made the decision to dispose of a number of businesses (see Note 6 of the accompanying Notes to Consolidated Financial Statements) and to alter its business unit structure. In accordance with the manner in which Kinder Morgan currently manages its businesses, including the allocation of capital and evaluation of business unit performance, Kinder Morgan reports its operations in the following segments: (1) Natural Gas Pipeline Company of America and certain associated entities, referred to as "NGPL," a major interstate natural gas pipeline system; (2) MidCon Texas Pipeline Operator, Inc. and certain associated entities, referred to as "MTP", a major intrastate natural gas pipeline system; (3) "Retail," the (largely regulated) distribution of natural gas to retail customers; (4) "Power," the generation and sale of electric power and (5) "Other," various other activities not constituting business segments. Prior to its December 31, 1999 sale to Kinder Morgan Energy Partners (see Note 5 of the accompanying Notes to Consolidated Financial Statements), Kinder Morgan also owned and operated Kinder Morgan Interstate Gas Transmission LLC 22 23 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (formerly K N Interstate Gas Transmission Co.), which is referred to in this report as "KMIGT." For comparative purposes, Kinder Morgan's previously reported segment results have been restated to conform to the current presentation. Following are operating results by individual segment (before intersegment eliminations), including explanations of significant variances between the periods presented.
NGPL 1999 1998 - ---- ----------- ----------- (In Thousands Except Systems Throughput) Operating Revenues Transportation and Storage $ 471,895 $ 484,145 Other 61,461 72,816 ----------- ----------- 533,356 556,961 ----------- ----------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 21,949 24,273 Operations and Maintenance 71,008 59,055 Depreciation and Amortization 109,346 121,008 Taxes, Other Than Income Taxes 22,575 15,800 ----------- ----------- 224,878 220,136 ----------- ----------- Operating Income Before Corporate Costs $ 308,478 $ 336,825 =========== =========== Systems Throughput (Trillion Btus) 1,509.2 1,298.0 =========== ===========
Operating results for NGPL are included in Kinder Morgan's consolidated results beginning with the January 30, 1998 acquisition of MidCon Corp. See Note 2 of the accompanying Notes to Consolidated Financial Statements for more information regarding Kinder Morgan's acquisition of MidCon Corp. NGPL's operating income before corporate costs decreased by $28.3 million (8.4%) from 1998 to 1999. This segment was negatively impacted in 1999, relative to 1998, by (i) a decrease in the margin per MMBtu of throughput from $0.41 in 1998 to $0.34 in 1999 resulting from (1) two recent mild winters, including the impact of the resultant high levels of gas in underground storage and (2) increased competitive pressures in Midwest markets due to actual or projected supply increases and (ii) increased operations and maintenance expenses and property taxes. These negative impacts were partially offset by (i) an increase in average monthly throughput volumes from 118 trillion Btus in 1998 to 126 trillion Btus in 1999 (although, in general, interstate pipelines receive the majority of their transportation revenues from demand charges which are not affected by the level of throughput), (ii) reduced amortization expense in 1999 resulting from a change in the estimated useful life of NGPL's assets (see Note 4 of the accompanying Notes to Consolidated Financial Statements) and (iii) the fact that 1999 results for Kinder Morgan included 12 months of the operations of NGPL, while 1998 results included only 11 months. 23 24 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
KMIGT 1999 1998 1997 - ----- ----------- ----------- ----------- (In Thousands Except Systems Throughput) Operating Revenues Transportation and Storage $ 112,732 $ 105,160 $ 73,777 Other 475 417 6,267 ----------- ----------- ----------- 113,207 105,577 80,044 ----------- ----------- ----------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 13,954 3,763 4,236 Operations and Maintenance 23,379 20,026 14,957 Depreciation and Amortization 16,985 19,474 12,432 Taxes, Other Than Income Taxes 4,607 4,308 2,966 ----------- ----------- ----------- 58,925 47,571 34,591 ----------- ----------- ----------- Operating Income Before Corporate Costs $ 54,282 $ 58,006 $ 45,453 =========== =========== =========== Systems Throughput (Trillion Btus) 203.1 216.6 177.4 =========== =========== ===========
Effective December 31, 1999, Kinder Morgan contributed KMIGT and Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.), as well as its interest in Red Cedar Gathering Company to Kinder Morgan Energy Partners in exchange for $330 million in cash plus approximately 9.8 million Kinder Morgan Energy Partners common units. See Note 5 of the accompanying Notes to Consolidated Financial Statements for more information regarding this transaction. KMIGT's operating income before corporate costs decreased by $3.7 million (6.4%) from 1998 to 1999. This segment was negatively impacted in 1999, relative to 1998, by (i) the 1999 write-off of approximately $5.8 million of deferred fuel tracker costs that had accumulated since the initial implementation of FERC Order No. 636 and were deemed unrecoverable due to the settlement of the general rate case, (see Note 8 of the accompanying Notes to Consolidated Financial Statements for more information regarding KMIGT's general rate case), (ii) a decrease in shipper supplied fuel requirements under the terms of KMIGT's general rate case which, in conjunction with normal system fuel and loss requirements, caused KMIGT to purchase additional system fuel supplies and (iii) increased operations and maintenance expenses, primarily related to the Pony Express Pipeline. These negative impacts were partially offset by (i) increased revenues in 1999 due to higher transportation rates under the terms of the general rate case and (ii) reduced depreciation expense in 1999 resulting from the assets of KMIGT being classified as assets held for sale effective November 1, 1999, at which time further depreciation of these assets was suspended in accordance with the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. KMIGT's operating income before corporate costs increased by $12.6 million (27.6%) from 1997 to 1998. This segment was positively impacted in 1998, relative to 1997, by (i) incremental revenue from the Pony Express Pipeline, which became fully operational in late 1997 and (ii) incremental revenues due to higher transportation rates from KMIGT's rate case subsequent to August 1, 1998, at which date the FERC allowed KMIGT to place its new rates into effect, subject to refund. These positive impacts were partially offset by (i) a decrease in other operating revenues in 1998 due to the transfer of the Casper processing plant to KN Gas Gathering in August 1997 and (ii) increased 1998 operating expenses associated with the Pony Express Pipeline. 24 25 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RETAIL 1999 1998 1997 - ------ ----------- ----------- ----------- (In Thousands Except Systems Throughput) Operating Revenues Gas Sales $ 134,208 $ 186,527 $ 212,710 Transportation 34,919 27,309 19,865 Other 13,785 20,470 16,967 ----------- ----------- ----------- 182,912 234,306 249,542 ----------- ----------- ----------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 107,264 123,099 140,699 Operations and Maintenance 40,463 41,093 39,817 Depreciation and Amortization 11,382 11,014 10,582 Taxes, Other Than Income Taxes 3,355 2,886 3,651 ----------- ----------- ----------- 162,464 178,092 194,749 ----------- ----------- ----------- Operating Income Before Corporate Costs $ 20,448 $ 56,214 $ 54,793 =========== =========== =========== Systems Throughput (Trillion Btus) 56.6 61.7 72.9 =========== =========== ===========
Retail's operating income before corporate costs decreased by $35.8 million (63.6%) from 1998 to 1999. This segment was negatively impacted in 1999, relative to 1998, by (i) the fact that 1998 results include three months of the operations of distribution assets in Kansas that were sold in March 1998 (see Note 5 of the accompanying Notes to Consolidated Financial Statements) and (ii) reduced margins from sales and transportation due primarily to (1) weather-related reductions in 1999 irrigation demand and (2) reduced margins related to the Nebraska Choice Gas program. Retail's operating income before corporate costs increased by $1.4 million (2.6%) from 1997 to 1998. This increase was due primarily to weather-related increases in space-heating and irrigation loads, which were largely offset by the fact that 1997 results include twelve months of the operations of distribution assets in Kansas, while 1998 results include only three months.
MTP 1999 1998 - --- ----------- ----------- (In Thousands Except Systems Throughput) Operating Revenues Gas Sales $ 815,557 $ 704,190 Transportation and Storage 23,971 19,192 Other 32,633 15,819 ----------- ----------- 872,161 739,201 ----------- ----------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 804,674 680,766 Operations and Maintenance 45,714 51,067 Depreciation and Amortization 2,466 1,615 Taxes, Other Than Income Taxes 2,689 3,624 ----------- ----------- 855,543 737,072 ----------- ----------- Operating Income Before Corporate Costs $ 16,618 $ 2,129 =========== =========== Systems Throughput (Trillion Btus) 575.3 581.6 =========== ===========
Operating results for MTP are included in Kinder Morgan's consolidated results beginning with the January 30, 1998 acquisition of MidCon Corp. See Note 2 of the accompanying Notes to Consolidated Financial Statements for more information regarding Kinder Morgan's acquisition of MidCon Corp. MTP's operating income before corporate costs increased by $14.5 million from 1998 to 1999. This segment 25 26 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) was positively impacted in 1999, relative to 1998, by (i) the fact that 1999 results include 12 months of the operations of MTP, while 1998 results include only 11 months, (ii) increased per unit margins from sales and transportation in 1999, (iii) increased 1999 margins from natural gas liquids sales due to an improved pricing environment, (iv) reduced 1999 operations and maintenance expenses and (v) reduced 1999 ad valorem taxes. These positive impacts were partially offset by (i) reduced 1999 overall systems throughput volumes and (ii) increased 1999 depreciation expense resulting from capital expenditures made in 1998 and 1999.
POWER 1999 1998 - ----- ----------- ----------- (In Thousands) Operating Revenues $ 21,609 $ 8,485 ----------- ----------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 4,525 1,547 Operations and Maintenance 3,023 750 Depreciation and Amortization 1,991 618 Taxes, Other Than Income Taxes 132 - ----------- ----------- 9,671 2,915 ----------- ----------- Operating Income Before Corporate Costs $ 11,938 $ 5,570 =========== ===========
Results of operations for the Power segment are included beginning with the acquisition of interests in power plants from the Denver-based Thermo Companies, which acquisition was completed in the third quarter of 1998 (see Note 2 of the accompanying Notes to Consolidated Financial Statements). Differences in operating results between 1999 and 1998 are principally attributable to the fact that 1998 includes only a partial year of operations.
OTHER 1999 1998 1997 - ----- ----------- ----------- ----------- (In Thousands) Operating Revenues $ 48,978 $ 39,530 $ 38,471 ----------- ----------- ----------- Operating Costs and Expenses Gas Purchases and Other Costs of Sales 19,687 14,555 16,065 Operations and Maintenance 6,852 5,180 5,705 Depreciation and Amortization 2,098 1,633 854 Taxes, Other Than Income Taxes 1,202 1,672 1,278 General and Administrative 88,403 68,264 36,535 Merger-related and Severance 37,443 5,763 - ----------- ----------- ----------- 155,685 97,067 60,437 ----------- ----------- ----------- Operating Loss $ (106,707) $ (57,537) $ (21,966) =========== =========== ===========
Results included in "Other" include earnings from Kinder Morgan's agreement with HS Resources, Inc. as discussed following, earnings from certain telecommunications assets used primarily by internal business segments and certain general and administrative, and merger-related and severance costs. As announced by Kinder Morgan on November 30, 1999, Kinder Morgan has entered into agreements with HS Resources, Inc. to sell certain assets in the Wattenberg field area of the Denver-Julesberg Basin. Under the terms of the agreements, HS Resources, Inc. commenced operating these assets. Kinder Morgan will receive cash payments from HS Resources, Inc. during 2000 and 2001, with the legal transfer of ownership expected to occur on or before December 15, 2001. Operating losses increased by $49.2 million (85.5%) from 1998 to 1999. This increase was largely the result of (i) $20.1 million of increased general and administrative expenses due primarily to (1) the fact that 1999 results 26 27 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) included 12 months of the operations of NGPL and MTP, while 1998 results included only 11 months (see Note 2 of the accompanying Notes to Consolidated Financial Statements) and (2) reduced capitalization of overhead costs in 1999 resulting from a significantly reduced capital spending program, (ii) additional severance costs related to corporate reorganization and (iii) merger-related costs resulting from the merger with Kinder Morgan Delaware. Operating losses increased by $35.6 million from 1997 to 1998. This increase was largely the result of (i) the inclusion in 1998 results of 11 months of the operations of NGPL and MTP, which were acquired in the January 1998 acquisition of MidCon Corp. and (ii) merger-related and severance costs associated with the MidCon acquisition.
OTHER INCOME AND (DEDUCTIONS) 1999 1998 1997 - ----------------------------- ---------- ---------- ---------- (In Thousands) Interest Expense, Net $ (251,986) $ (205,899) $ (29,057) Equity in Earnings of KMEP(1): Equity in Earnings 15,733 -- -- Amortization of Excess Investment (7,335) -- -- Other Equity in Earnings 14,140 22,465 4,906 Minority Interests (24,740) (19,396) (5,849) Gain on Sale of Assets to KMEP1 158,832 -- -- Other Gains on Asset Sales 30,946 19,552 1,547 Other, Net 4,532 1,731 7,364 ---------- ---------- ---------- $ (59,878) $ (181,547) $ (21,089) ========== ========== ==========
(1) KMEP refers to Kinder Morgan Energy Partners. The decrease of $121.7 million in net expense reported under "Other Income and (Deductions)" from 1998 to 1999 is principally due to the gain from the sale of assets to Kinder Morgan Energy Partners (see Note 2 of the accompanying Notes to Consolidated Financial Statements) and to other factors as discussed following. The increase of $46.1 million (22.4%) in "Interest Expense, Net" from 1998 to 1999 is principally due the incremental debt outstanding as a result of the January 1998 acquisition of MidCon (see Note 2 of the accompanying Notes to Consolidated Financial Statements) and decreased capitalized interest in 1999 due to the reduced level of capital spending (see "Net Cash Flows from Investing Activities"). The equity in earnings of Kinder Morgan Energy Partners (and associated amortization) resulted from the October 1999 business combination with Kinder Morgan Delaware (see Note 2 of the accompanying Notes to Consolidated Financial Statements). The decrease of $8.3 million in "Other Equity in Earnings" from 1998 to 1999 is principally due to the sale of certain equity method investments as described following. The increase of $11.4 million (58.3%) in "Other Gains on Asset Sales" from 1998 to 1999 is principally due to the inclusion in 1999 results of (i) a gain of $17.5 million from the June 1999 sale of Kinder Morgan's interests in the HIOS and UTOS offshore pipeline systems and (ii) a gain of $11.4 million from the September 1999 sale of Kinder Morgan's interest in Stingray Pipeline Company, L.L.C. and West Cameron Dehydration Company, L.L.C., while 1998 results included (i) a gain of $8.5 million from the March 1998 sale of Kinder Morgan's Kansas natural gas distribution properties and (ii) a gain of $10.9 million from Kinder Morgan's September 1998 sale of certain microwave facilities. For additional information on these transactions, see Note 5 of the accompanying Notes to Consolidated Financial Statements. The increase of $176.8 million in "Interest Expense, Net" from 1997 to 1998 was principally due to the acquisition of MidCon (see Note 2 of the accompanying Notes to Consolidated Financial Statements) and to construction costs associated with the Pony Express Pipeline. The increase of $13.5 million in net expense associated with "Minority Interests" from 1997 to 1998 was principally due to the dividend requirements associated with the $175 million of Capital Trust Securities issued in April 1998. The $18.0 million increase in "Other Gains on Asset Sales" from 1997 to 1998 reflects the fact that 1998 results included the gains from asset 27 28 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) sales as described preceding, while 1997 included only minor gains. The decrease of $5.6 million in "Other, Net" from 1997 to 1998 is primarily the result of the inclusion, in 1998 results, of $5.0 million of expense representing an increased provision for regulatory refund obligations.
INCOME TAXES FROM CONTINUING OPERATIONS 1999 1998 1997 - --------------------------------------- ----------- ----------- ----------- (Dollars In Thousands) Income Tax Provision $ 90,527 $ 81,492 $ 12,810 =========== =========== =========== Effective Tax Rate 36.9% 37.1% 22.4% =========== =========== ===========
The increase of $9.0 million in income tax expense from 1998 to 1999 reflected an increase of $9.5 million due to an increase in 1999 pre-tax income, partially offset by a decrease of $0.5 million due to a decrease in the 1999 effective tax rate. The decrease in the 1999 effective tax rate was principally due to the impact of asset sales and dispositions of certain lines of business. The $68.7 million net increase in income tax expense from 1997 to 1998 reflected an increase of $36.4 million due to an increase in 1998 pre-tax income and an increase of $32.3 million due to an increase in the effective tax rate. The increase in the 1998 effective tax rate was principally due to (i) increased state income taxes due to the addition of MidCon's results of operations beginning January 30, 1998 and (ii) the inclusion in 1997 results of adjustments to income tax expense resulting from the successful resolution of certain issues from prior years' federal income tax filings.
DISCONTINUED OPERATIONS 1999 1998 1997 - ----------------------- ----------- ----------- ----------- (In Thousands) Income (Loss) from Discontinued Operations, Net of Tax $ (51,718) $ (78,179) $ 33,116 =========== =========== ===========
During the third quarter of 1999, Kinder Morgan adopted a plan to discontinue the direct marketing of non-energy products and services (principally under the "Simple Choice" brand), which activities had been carried on largely through Kinder Morgan's enoable joint venture with PacifiCorp. During the fourth quarter of 1999, Kinder Morgan adopted plans to discontinue the following lines of business: (i) gathering and processing natural gas, and providing field services to natural gas producers, (ii) commodity marketing of natural gas and natural gas liquids, (iii) international operations, and (iv) West Texas intrastate pipelines. For more information on these discontinued operations, see Note 6 of the accompanying Notes to Consolidated Financial Statements. Losses from discontinued operations, net of tax benefits of $32.1 million and $41.5 million in 1999 and 1998, respectively, decreased by $26.5 million from 1998 to 1999. Operating results were positively impacted in 1999, relative to 1998, by (i) improvement in the natural gas liquids pricing environment in 1999 and (ii) the fact that 1998 operating results included (1) $6.4 million of adjustments to write down certain natural gas due from third parties and in underground storage to their current market values, (2) $3.7 million of increased provision for uncollectible accounts receivable, (3) natural gas liquids storage inventory write-downs and (4) operating losses associated with gas processing facilities that were sold in the fourth quarter of 1998. These positive impacts were partially offset by the fact that 1998 results included $6.0 million in margin from sales of storage gas. The operating results of discontinued operations, net of a tax benefit of $41.5 million in 1998 and income tax expense of $23.2 million in 1997, decreased from income of $33.1 million in 1997 to a loss of $74.1 million in 1998. Operating results were negatively impacted in 1998, relative to 1997, by (i) lower natural gas liquids prices in 1998, (ii) a decrease in earnings from commodity marketing in 1998, which reflected (1) certain unfavorable adjustments as described preceding and (2) reduced 1998 sales of gas in storage, (iii) increased 1998 downtime resulting from plant turnaround and installation of additional measurement facilities, (iv) operational problems in 1998 associated with deficient vendor performance, (v) 1998 natural gas liquids storage 28 29 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) inventory write-downs, (vi) reduced 1998 revenues from the sale of natural gas liquids marketing rights and processing agreements and (vii) increased equity in losses of ENOable. These negative impacts were partially offset by the fact that 1997 results included $4.0 million of losses from power marketing activities. Liquidity and Capital Resources The following table illustrates the sources of Kinder Morgan's invested capital. The balances at December 31, 1999 and 1998, reflect the incremental capital associated with the acquisition of MidCon Corp., including the post-acquisition refinancings completed in 1998. The balances at December 31, 1999 also reflect the impacts associated with the acquisition of Kinder Morgan Delaware and the sale of certain assets to Kinder Morgan Energy Partners (see Notes 2 and 12 of the accompanying Notes to Consolidated Financial Statements).
DECEMBER 31, ------------ 1999 1998 1997 ------------ ------------ ------------ (Dollars In Thousands) Long-term Debt $ 3,293,326 $ 3,300,025 $ 553,816 Common Equity 1,665,841 1,216,821 606,132 Preferred Stock -- 7,000 7,000 Capital Trust Securities 275,000 275,000 100,000 ------------ ------------ ------------ Capitalization 5,234,167 4,798,846 1,266,948 Short-term Debt 581,567 1,702,013 (1) 359,951 ------------ ------------ ------------ Invested Capital $ 5,815,734 $ 6,500,859 $ 1,626,899 ============ ============ ============ Capitalization: Long-term Debt 62.9% 68.8% 43.7% Common Equity 31.8% 25.4% 47.8% Preferred Stock -- 0.1% 0.6% Capital Trust Securities 5.3% 5.7% 7.9% Invested Capital: Total Debt (2) 66.6% 76.9% 56.2% Equity, Including Capital Trust Securities 33.4% 23.1% 43.8%
(1) Includes the $1,394,846 Substitute Note assumed in conjunction with the acquisition of MidCon Corp. This note was repaid on January 4, 1999. (2) If the government securities then held as collateral were offset against the related debt, the ratio of total debt to invested capital at December 31, 1998, would have been 72.3 percent. The following discussion of cash flows should be read in conjunction with the accompanying Consolidated Statements of Cash Flows and related supplemental disclosures. Net Cash Flows From Operating Activities "Net Cash Flows From Operating Activities" increased from $95.3 million in 1998 to $312.0 million in 1999, an increase of $216.7 million or 227 percent. This increase was principally attributable to (i) cash provided by reductions in working capital for continuing operations in 1999 and (ii) increased 1999 operating cash flows associated with discontinued operations reflecting, among other things, improved operating results and the sale of accounts receivable, partially offset by (i) reduced 1999 earnings from continuing operations before asset sales and (ii) the inclusion in 1998 results of $27.5 million of proceeds from the buyout of certain contractual gas obligations. "Net Cash Flows From Operating Activities" decreased from $97.5 million in 1997 to $95.3 million in 1998, a decrease of $2.2 million or 2.3 percent. This decrease was principally attributable to (i) an increase in 1998 earnings from continuing operations, due principally to the acquisition of MidCon Corp. and (ii) the 1998 receipt of $27.5 million of proceeds from the buyout of certain contractual gas obligations, largely offset by (i) 29 30 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) cash used to increase working capital during 1998 and (ii) reduced 1998 operating cash flows associated with discontinued operations. In September 1999, Kinder Morgan established a receivables sales facility that provides up to $150 million of additional liquidity. In accordance with this agreement, proceeds of $150 million were received on September 30, 1999. These proceeds were subsequently used to retire debt obligations of Kinder Morgan Delaware outstanding at the time of its acquisition by Kinder Morgan (see Note 7 of the accompanying Notes to Consolidated Financial Statements). In accordance with authoritative accounting guidelines, cash flows (both continuing and discontinuing) associated with this facility are included with "Cash flows from Operating Activities" in the accompanying Consolidated Statements of Cash Flows. In February 2000, approximately $120 million of this facility was repaid, largely as a result of Kinder Morgan's agreement to dispose of certain businesses. Net Cash Flows From Investing Activities "Net Cash Flows From Investing Activities" increased from a net outflow of $3.5 billion in 1998 to a net inflow of $1.0 billion in 1999. This increase was principally attributable to the net impact of (i) a net cash outflow of $2.2 billion in 1998 for the purchase of MidCon Corp., (ii) net purchases of U.S. Government securities of $1.1 billion in 1998, principally to act as collateral for the Substitute Note assumed in the acquisition of MidCon Corp., (iii) net sales of U.S. government securities of $1.1 billion in 1999, which proceeds were used, together with proceeds of additional short-term borrowings, to repay the Substitute Note, (iv) additional cash used in 1999 for other acquisitions, principally the cash portion of consideration paid for the Thermo acquisition, (v) the 1999 receipt of $28.7 million of proceeds from the sale of Tom Brown, Inc. preferred stock, (vi) increased proceeds from sales of assets in 1999 and (vi) decreased net cash outflows for investing activities of discontinued operations in 1999. See Note 2 of the accompanying Notes to Consolidated Financial Statements for additional information regarding the MidCon Corp. acquisition, related assumption of the Substitute Note and the Thermo acquisition. Major asset sales during 1999 included (i) the transfer of KMIGT, Kinder Morgan Trailblazer LLC and Kinder Morgan's interest in Red Cedar Gathering Company to Kinder Morgan Energy Partners, (ii) all of Kinder Morgan's major offshore assets in the Gulf of Mexico area, including Kinder Morgan's interests in Stingray Pipeline Company L.L.C. and West Cameron Dehydration Company L.L.C., and the HIOS and UTOS offshore pipeline systems and (iii) MidCon Gas Products of New Mexico Corp. Total proceeds received in 1999 from asset sales (both continuing and discontinued) were $111.1 million. In addition, on January 21, 2000, Kinder Morgan received $200 million in cash from Kinder Morgan Energy Partners as partial consideration for the aforementioned transfer of assets. Kinder Morgan Energy Partners is also obligated to pay Kinder Morgan an additional $130 million in cash in early 2000. See Notes 5 and 6 of the accompanying Notes to Consolidated Financial Statements for more information concerning these investments and sales. "Net Cash Flows From Investing Activities" increased from $496.6 million in 1997 to $3.5 billion in 1998, an increase of approximately $3.0 billion, principally due to (i) the $2.2 billion of net cash paid in 1998 and (ii) the net use of cash for the purchases of approximately $1.1 billion of U.S. government securities as collateral for the Substitute Note, in each case in conjunction with the acquisition of MidCon Corp. In addition, (i) cash outflows for investments were approximately $71 million less in 1998 than in 1997, reflecting the inclusion in 1997 of the investment in Red Cedar Gathering Company, (ii) proceeds from sales of assets increased by approximately $36 million in 1998, reflecting the sales of Kinder Morgan's Kansas natural gas distribution assets and certain microwave towers and (iii) net cash outflows for investing activities of discontinued operations decreased in 1998. 30 31 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net Cash Flows From Financing Activities "Net Cash Flows From Financing Activities" decreased from a net inflow of $3.4 billion in 1998 to a net outflow of $1.3 billion in 1999. This decrease was principally the result of the 1998 financings associated with the acquisition of MidCon Corp. and the repayment of the Substitute Note in 1999, in each case as described following. In addition, Kinder Morgan retired $158.9 million of long-term debt in 1999, compared to $35.8 million in 1998. The long-term debt retired in 1999 included $148.6 million of debt assumed in conjunction with the acquisition of Kinder Morgan Delaware. "Net Cash Flows From Financing Activities" increased from $411.2 million in 1997 to approximately $3.4 billion in 1998, an increase of approximately $3.0 billion. This increase reflected reduced 1998 cash from short-term borrowings and the 1998 receipt of (i) $2.75 billion from the public sale of debt securities, (ii) $650 million from the public sale of common stock and (iii) $175 million from the public sale of Capital Trust Securities (in each case representing the refinancing of acquisition debt associated with the purchase of MidCon), net of associated issuance costs of approximately $78.2 million (see Notes 2 and 12 of the accompanying Notes to Consolidated Financial Statements). In addition, 1998 cash used for dividends and long-term debt retirement increased by $17.3 million and $8.0 million, respectively. In March 1998, Kinder Morgan issued 12.5 million shares (18.75 million shares after adjustment for the December 1998 three-for-two stock split) of common stock in an underwritten public offering, receiving net proceeds of approximately $624.6 million. Also in March 1998, Kinder Morgan issued $2.35 billion principal amount of debt securities of varying maturities and interest rates in an underwritten public offering, receiving net proceeds of approximately $2.34 billion. The net proceeds from these two offerings were used to refinance borrowings under the MidCon Corp. acquisition financing arrangements and to purchase U.S. government securities to collateralize a portion of the Substitute Note. In April 1998, Kinder Morgan sold $175 million of 7.63% Capital Securities due April 15, 2028, in an underwritten offering, with the net proceeds of $173.1 million used to purchase U.S. government securities to further collateralize the Substitute Note. In November 1998, Kinder Morgan completed the concurrent underwritten public offerings of $400 million of 3-year senior notes and $460 million principal amount of premium equity participating security units. The $397.4 million of net proceeds from the senior notes offering were used to retire a portion of Kinder Morgan's then-outstanding short-term borrowings. The proceeds from the security units offering was used to purchase U.S. Treasury Notes on behalf of the security unit holders, which notes are the property of the security unit holders and will be held as collateral to fund the obligation of the security unit holders to purchase Kinder Morgan common stock at the end of a three-year period. For additional information on each of these financings, including terms of the specific securities and the associated accounting treatment, see Note 12 of the accompanying Notes to Consolidated Financial Statements. On January 4, 1999, Kinder Morgan repaid the $1.4 billion Substitute Note payable to Occidental Petroleum as part of the MidCon Corp. acquisition. The note was repaid using the proceeds of approximately $1.1 billion from the sale of U.S. government securities which had been held as collateral, with the balance of the funds provided by an increase in short-term borrowings. Kinder Morgan's principal sources of short-term liquidity are its revolving bank facilities and, to a lesser extent, its receivable sales facility (see "Net Cash Flows from Operating Activities"). As of December 31, 1999, Kinder Morgan had available a $550 million 364-day facility dated November 18, 1999, and a $400 million amended and restated five-year revolving credit agreement dated January 30, 1998. The bank facilities can be used for general corporate purposes, including backup for Kinder Morgan's commercial paper program. At December 31, 1999, Kinder Morgan had $574.4 million of bank borrowings and commercial paper (which is backed by the bank facilities) issued and outstanding. The corresponding amount outstanding was $402.3 million at February 15, 2000. After inclusion of applicable letters of credit, the remaining available borrowing 31 32 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) capacity under the bank facilities was $354.5 million and $526.6 million at December 31, 1999 and February 15, 2000, respectively. The bank facilities include covenants that are common in such arrangements. For example, the $350 million facility requires consolidated debt to be less than 71% of consolidated total capitalization. The $400 million facility requires that upon issuance of common stock to the holders of the premium equity participating security units at the maturity of the security units, consolidated debt must be less than 67% of consolidated total capitalization. Both of the bank facilities require the debt of consolidated subsidiaries to be less than 10% of consolidated debt of Kinder Morgan, require the consolidated debt of each material subsidiary to be less than 65% of its consolidated total capitalization and require Kinder Morgan's consolidated net worth (inclusive of trust preferred securities) be at least $1.236 billion plus 50 percent of consolidated net income earned for each fiscal quarter beginning with the last quarter of 1998. Capital Expenditures and Commitments Capital expenditures in 1999 were $94.3 million and $31.7 million for continuing operations and discontinued operations, respectively. The 2000 capital expenditure budget totals approximately $120 million, and the funds are expected to be provided from internal sources and, if necessary, incremental borrowings. Approximately $8.5 million of this amount had been committed for the purchase of plant and equipment at December 31, 1999. Additional information on commitments is contained in Note 17 of the accompanying Notes to Consolidated Financial Statements. REGULATION On January 23, 1998, KMIGT filed a general rate case with the Federal Energy Regulatory Commission ("FERC") requesting a $30.2 million increase in annual revenues. As a result of the FERC's action, KMIGT was allowed to place its rates into effect on August 1, 1998, subject to refund, and provisions for refund were recorded based on expected ultimate resolution. On November 3, 1999, KMIGT filed a comprehensive Stipulation and Agreement to resolve all issues in this proceeding. The FERC approved the Stipulation and Agreement on December 22, 1999. The settlement rates have been placed in effect, and it is anticipated that refunds for past periods (totaling $36.6 million at December 31, 1999) will be made in early 2000. On December 29, 1998, Rocky Mountain Natural Gas Company, a wholly owned subsidiary of Kinder Morgan, received a "show cause" order from the Colorado Public Utilities Commission. Rocky Mountain has reached settlement on the issue, and a Stipulation and Agreement memorializing the settlement with the Staff of the Commission and the Office of Consumer Counsel has been filed and approved. As part of this settlement, Rocky Mountain agreed to reduce its sales and transportation rates effective June 1, 1999. The settled rate reduction is anticipated to reduce Rocky Mountain's annual revenues by approximately $0.9 million per year. RISK MANAGEMENT To minimize the risk of price changes in the natural gas and natural gas liquids markets, Kinder Morgan uses certain financial instruments for hedging purposes. These instruments include energy products traded on the New York Mercantile Exchange, the Kansas City Board of Trade and over-the-counter markets including, but not limited to, futures and options contracts and fixed-price swaps. Kinder Morgan is exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments but, given their existing credit ratings, does not expect any counterparties to fail to meet their obligations. 32 33 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Pursuant to a policy approved by its Board of Directors, Kinder Morgan is to engage in these activities only as a hedging mechanism against price volatility associated with (i) pre-existing or anticipated physical gas and condensate sales, (ii) gas purchases and (iii) system use and storage in order to protect profit margins, and is not to engage in speculative trading. Commodity-related activities of the risk management group are monitored by Kinder Morgan's Risk Management Committee, which is charged with the review and enforcement of the Board of Directors' risk management policy. The Risk Management Committee reviews the types of hedging instruments used, contract limits and approval levels and may review the pricing and hedging of any or all commodity transactions. All energy futures, swaps and options are recorded at fair value. The fair value of these risk management instruments reflects the estimated amounts that Kinder Morgan would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses on open contracts. Market quotes are available for substantially all financial instruments used by Kinder Morgan. Gains and losses on hedging positions are deferred and recognized as gas purchases expense in the periods in which the underlying physical transactions occur. Kinder Morgan measures the risk of price changes in the natural gas and natural gas liquids markets utilizing a Value-at-Risk model. Value-at-Risk is a statistical measure of how much the marked-to-market value of a portfolio could change during a period of time, within a certain level of statistical confidence. Kinder Morgan utilizes a closed form model to evaluate risk on a daily basis. The Value-at-Risk computations utilize a confidence level of 97.7 percent for the resultant price movement and a holding period of one day chosen for the calculation. The confidence level used means that there is a 97.7 percent probability that the mark-to-market losses for a single day will not exceed the Value-at-Risk number presented. Instruments evaluated by the model include forward physical gas, storage and transportation contracts and financial products including commodity futures and options contracts, fixed price swaps, basis swaps and over-the-counter options. Value-at-Risk at December 30, 1999, was $3.1 million and averaged $3.7 million for 1999. Kinder Morgan's calculated Value-at-Risk exposure represents an estimate of the reasonably possible net losses that would be recognized on Kinder Morgan's portfolio of derivatives assuming hypothetical movements in future market rates, and is not necessarily indicative of actual results that may occur. It does not represent the maximum possible loss or any expected loss that may occur, since actual future gains and losses will differ from those estimated. Actual gains and losses may differ from estimates due to actual fluctuations in market rates, operating exposures and the timing thereof, as well as changes in Kinder Morgan's portfolio of derivatives during the year. As a result of Kinder Morgan's planned divestiture of certain of its businesses, primarily its commodity marketing business, it is expected that Kinder Morgan's portfolio of financial instruments held for the purposes of hedging, and corresponding exposure to loss from such instruments, will be smaller in the future. Kinder Morgan's treasury department manages interest rate exposure utilizing interest rate swaps, caps or similar derivatives within Board-established policy. None of these interest rate derivatives is leveraged. Kinder Morgan currently is not hedging its interest rate exposure resulting from its short-term borrowings. The market risk related to short-term borrowings from a one percent change in interest rates would result in an approximate $6.2 million annual impact on pre-tax income, based on short-term borrowing levels as of March 15, 2000. There are recently issued accounting pronouncements that change the accounting and reporting requirements for certain risk management activities (see Note 14 of the accompanying Notes to Consolidated Financial Statements). 33 34 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OUTLOOK/FORWARD-LOOKING INFORMATION Certain information contained in this report may include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of Kinder Morgan's management, based on information currently available to Kinder Morgan's management. When words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should" or similar expressions are used, Kinder Morgan is making forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of Kinder Morgan may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond Kinder Morgan's ability to control or predict. These statements are necessarily based upon various assumptions involving judgments with respect to the future including, among others, the ability to achieve synergies and revenue growth, national, international, regional and local economic, competitive and regulatory conditions and developments, technological developments, capital market conditions, inflation rates, interest rates, the political and economic stability of oil producing nations, energy markets, weather conditions, business and regulatory or legal decisions, the pace of deregulation of retail natural gas and electricity, the timing and extent of changes in commodity prices for oil, natural gas, natural gas liquids, electricity and certain agricultural products, the timing and success of business development efforts, and other uncertainties, all of which are difficult to predict and many of which are beyond Kinder Morgan's control. Readers are cautioned not to put undue reliance on any forward-looking statements. For those statements, Kinder Morgan claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Business Strategy On October 7, 1999, the merger between Kinder Morgan and Kinder Morgan Delaware was completed. Pursuant to the terms of the merger agreement, Kinder Morgan issued approximately 41.5 million shares of common stock in exchange for all of the outstanding shares of Kinder Morgan Delaware. Upon closing of the transaction, Richard D. Kinder was named Chairman of the combined company, which was renamed Kinder Morgan, Inc. In accordance with previously announced plans, Kinder Morgan implemented and has continued to pursue its "Back to Basics" strategy. This strategy includes the following key aspects: (i) focus on Kinder Morgan's core assets, (ii) divest non-core assets and use the proceeds to reduce debt, (iii) sell certain core assets for fair market value to Kinder Morgan Energy Partners, (iv) reduce corporate overhead costs, (v) align employee and shareholder incentives, (vi) reduce the shareholder dividend and (vii) seek accretive acquisitions and business expansions. Currently, Kinder Morgan's primary source of operating income is NGPL, a major interstate natural gas pipeline system which runs from natural gas producing areas in West Texas and the Gulf of Mexico to its principal market area of Chicago, Illinois. In accordance with its strategy to focus on core assets, Kinder Morgan has worked toward agreements to fully utilize the transportation and storage capacity of NGPL on a long-term basis. Kinder Morgan has experienced some successes in these endeavors as discussed under "NGPL" elsewhere in this Form 10-K. During the third quarter of 1999, Kinder Morgan chose to discontinue certain of its business activities related to the sale of non-energy products and services - - principally consisting of Kinder Morgan's en*able joint venture with PacifiCorp. During the fourth quarter of 1999, Kinder Morgan chose to discontinue several other lines of business, including natural gas gathering and processing, natural gas marketing, West Texas intrastate natural gas pipeline and storage businesses and international operations. Kinder Morgan has announced sales, or 34 35 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) agreements to sell a number of these assets as more fully described under "General Description" elsewhere in this Form 10-K and in Note 6 of the accompanying Notes to Consolidated Financial Statements. In addition, during 1999, Kinder Morgan sold its major offshore natural gas gathering and pipeline interests. In addition to sales of assets to third parties, Kinder Morgan's strategy also includes plans to transfer qualifying assets to Kinder Morgan Energy Partners. Kinder Morgan Energy Partners is a publicly traded master limited partnership which manages a variety of midstream energy assets. Kinder Morgan Energy Partners, G.P., Inc., a wholly owned subsidiary of Kinder Morgan, is the general partner of Kinder Morgan Energy Partners. According to the terms of Kinder Morgan Energy Partners' partnership agreement, the general partner may qualify to receive cash incentive distributions from Kinder Morgan Energy Partners. By contributing assets to Kinder Morgan Energy Partners that are accretive to the earnings and cash flow of Kinder Morgan Energy Partners, Kinder Morgan can receive fair value for its assets, while still maintaining an indirect interest in the earnings and cash flows of the assets through its interests in Kinder Morgan Energy Partners. Effective December 31, 1999, Kinder Morgan contributed (i) KMIGT, (ii) a subsidiary holding the interest in Trailblazer Pipeline Company and (iii) its interest in Red Cedar Gathering Company to Kinder Morgan Energy Partners in return for $330 million in cash and approximately 9.81 million common units of Kinder Morgan Energy Partners. By significantly increasing its stake in Kinder Morgan Energy Partners, Kinder Morgan expects to receive additional future cash distributions from Kinder Morgan Energy Partners through incremental general partner incentive distributions as well as increased limited partner distributions due to its ownership of additional common units (see Note 5 of the accompanying Notes to Consolidated Financial Statements). Kinder Morgan believes that opportunities exist both with respect to existing assets and future acquisitions for increasing shareholder value through cost reductions and other efficiency improvements. Through the merger with Kinder Morgan Delaware and other cost reduction actions, Kinder Morgan expects to realize between $60 million and $70 million of annual cost savings. Another measure intended to increase shareholder value is the All Employee Stock Option Plan (see Note 16 of the accompanying Notes to Consolidated Financial Statements), implemented in October 1999. Through this plan, virtually all employees, with the exception of Richard D. Kinder and William V. Morgan, have received options to purchase shares of Kinder Morgan's common stock. By aligning employee incentives with shareholder value, Kinder Morgan expects to increase employee productivity, retention and satisfaction, and correspondingly increase earnings and overall shareholder value. Kinder Morgan expects to grow and increase profitability through acquisitions and system expansions, as well as through increased earnings from Kinder Morgan Energy Partners. To reduce debt and provide funds for future growth, Kinder Morgan reduced the regular quarterly common dividend from $0.20 per share to $0.05 per share in the fourth quarter of 1999. In February 2000, NGPL signed an agreement with Nicor Inc. to become equal partners in the planned Horizon Pipeline. The Horizon Pipeline is a $75 million natural gas pipeline with an initial capacity of 380 million cfd. The pipeline will originate in Joliet, Illinois and extend 74 miles into northern Illinois where it will connect with Nicor's gas distribution system. Future expansion of the Horizon system could potentially serve markets in southern Wisconsin. In addition to natural gas pipeline expansions, Kinder Morgan expects to participate in the expansion of gas-fired electric power generation by providing natural gas transportation and storage services, as in its agreement with Ameren, or through direct ownership of power generating assets. Readiness for Year 2000 In prior Reports on Form 10-K and 10-Q, Kinder Morgan discussed the nature and progress of its plans to become Year 2000-ready. In late 1999, Kinder Morgan completed its remediation and testing of systems. As a result of these planning and implementation efforts, Kinder Morgan experienced no significant disruption in mission-critical information technology and non-information technology systems and believes these systems 35 36 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) successfully responded to the Year 2000 date change. Kinder Morgan incurred less than $5 million in direct costs since 1997 in connection with replacing its non-compliant systems. In addition, approximately $25 million in costs were incurred (most of which were capitalized) modifying or replacing computer systems as part of the integration of its systems with the systems of MidCon. These computer systems addressed the Year 2000 problem. Kinder Morgan is not aware of any material problems resulting from Year 2000 issues with its internal systems or the products and services of third parties. Kinder Morgan will continue to monitor its mission-critical computer applications and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. Litigation and Environmental Kinder Morgan's anticipated environmental capital costs and expenses for 2000, including expected costs for voluntary remediation efforts, are approximately $2.3 million. A substantial portion of Kinder Morgan's environmental costs are either recoverable through insurance and indemnification provisions or have previously recorded liabilities associated with them. Refer to Notes 9(A) and 9(B) to the accompanying Consolidated Financial Statements for additional information on Kinder Morgan's pending litigation and environmental matters. Kinder Morgan believes it has established adequate reserves such that the resolution of pending litigation and environmental matters will not have a material adverse impact on Kinder Morgan's business, cash flows, financial position or results of operations. Significant Operating Variables Kinder Morgan's principal exposure to market variability is related to the variation in natural gas prices and basis differentials, which can affect gross margins in its NGPL, MTP and Retail Distribution segments. "Basis differential" is a term that refers to the difference in natural gas prices between two locations or two points in time. These price differences can be affected by, among other things, natural gas supply and demand, available transportation capacity, storage inventories and deliverability, prices of alternative fuels and weather conditions. Kinder Morgan has attempted to reduce its exposure to this form of market variability by pursuing long-term, fixed-rate type contract agreements for capacity on NGPL as described preceding. Additional competitive pressures have been generated in Midwest natural gas markets due to the introduction and planned introduction of additional supplies into the Chicago market area. In December 1998, the Northern Border Pipeline began operations on its 645 million cubic feet per day expansion project from Canadian supply areas into the Chicago market area, which is the terminus of NGPL's main pipeline system. In addition, the Alliance Pipeline, a joint venture of several energy companies, is currently constructing a 1.3 billion cubic feet per day pipeline to transport natural gas from Canada into the Chicago market area. The in-service date for the Alliance pipeline is currently projected for late 2000. In addition, various pipelines have proposed projects to take gas out of the Chicago area to market areas in the Northeast United States. It is currently unknown what impact, if any, this 36 37 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) additional pipeline capacity will have on gas prices and basis differentials for delivery points in the upper Midwest. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this item is in Item 7 under the heading "Risk Management." 37 38 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page - ----- ---- Report of Independent Accountants...................................................................................39-40 Consolidated Statements of Income...................................................................................41-42 Consolidated Balance Sheets............................................................................................43 Consolidated Statements of Common Stockholders' Equity.................................................................44 Consolidated Statements of Cash Flows..................................................................................45 Notes to Consolidated Financial Statements..........................................................................46-78 Selected Quarterly Financial Data (unaudited).......................................................................79-80
38 39 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Kinder Morgan, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1), present fairly, in all material respects, the financial position of Kinder Morgan, Inc. (formerly K N Energy, Inc.) and its subsidiaries at December 31, 1999 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Houston, Texas March 16, 2000 39 40 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kinder Morgan, Inc.: We have audited the accompanying consolidated balance sheet of Kinder Morgan, Inc. (formerly K N Energy, Inc. and a Kansas corporation) and subsidiaries as of December 31, 1998, and the related consolidated statements of income, comprehensive income, common stockholders' equity and cash flows for each of the two years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kinder Morgan, Inc. and subsidiaries as of December 31, 1998 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule for the year ended December 31, 1998 listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Denver, Colorado February 2, 1999 (except with respect to the matter discussed in Note 6, as to which the date is March 16, 2000). 40 41 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) CONSOLIDATED STATEMENTS OF INCOME KINDER MORGAN, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ------------ ------------ ------------ (In Thousands Except Per Share Amounts) OPERATING REVENUES: Natural Gas Sales $ 1,003,535 $ 955,134 $ 214,775 Natural Gas Transportation and Storage 651,647 640,906 87,579 Other 90,299 64,854 38,084 ------------ ------------ ------------ Total Operating Revenues 1,745,481 1,660,894 340,438 ------------ ------------ ------------ OPERATING COSTS AND EXPENSES: Gas Purchases and Other Costs of Sales 956,181 833,275 134,336 Operations and Maintenance 179,569 168,733 59,524 General and Administrative 88,403 68,264 36,535 Depreciation and Amortization 144,268 155,362 23,868 Taxes, Other Than Income Taxes 34,560 28,290 7,895 Merger-related and Severance Costs 37,443 5,763 -- ------------ ------------ ------------ Total Operating Costs and Expenses 1,440,424 1,259,687 262,158 ------------ ------------ ------------ OPERATING INCOME 305,057 401,207 78,280 ------------ ------------ ------------ OTHER INCOME AND (DEDUCTIONS): Kinder Morgan Energy Partners: Equity in Earnings 15,733 -- -- Amortization of Excess Investment (7,335) -- -- Equity in Earnings of Other Equity Investments 14,140 22,465 4,906 Interest Expense, Net (251,986) (205,899) (29,057) Minority Interests (24,740) (19,396) (5,849) Gains from Sales of Assets 189,778 19,552 1,547 Other, Net 4,532 1,731 7,364 ------------ ------------ ------------ Total Other Income and (Deductions) (59,878) (181,547) (21,089) ------------ ------------ ------------ Income from Continuing Operations Before Income Taxes 245,179 219,660 57,191 Income Taxes 90,527 81,492 12,810 ------------ ------------ ------------ Income from Continuing Operations 154,652 138,168 44,381 ------------ ------------ ------------ DISCONTINUED OPERATIONS, NET OF TAX: Income (Loss) From Discontinued Operations (51,718) (78,179) 33,116 Loss on Disposal of Discontinued Operations (344,378) -- -- ------------ ------------ ------------ Total Income (Loss) From Discontinued Operations (396,096) (78,179) 33,116 ------------ ------------ ------------ NET INCOME (LOSS) (241,444) 59,989 77,497 Less-Preferred Dividends 129 350 350 Less-Premium Paid on Preferred Stock Redemption 350 -- -- ------------ ------------ ------------ Earnings (Loss) Available for Common Stock $ (241,923) $ 59,639 $ 77,147 ============ ============ ============ Number of Shares Used in Computing Basic Earnings Per Common Share 80,284 64,021 46,589 ============ ============ ============ BASIC EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 1.92 $ 2.15 $ 0.95 Discontinued Operations (4.93) (1.22) 0.71 ------------ ------------ ------------ Basic Earnings (Loss) Per Common Share $ (3.01) $ 0.93 $ 1.66 ============ ============ ============ Number of Shares Used in Computing Diluted Earnings Per Common Share 80,358 64,636 47,307 ============ ============ ============ DILUTED EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 1.92 $ 2.13 $ 0.93 Discontinued Operations (4.93) (1.21) 0.70 ------------ ------------ ------------ Diluted Earnings (Loss) Per Common Share $ (3.01) $ 0.92 $ 1.63 ============ ============ ============ Dividends Per Common Share $ 0.65 $ 0.76 $ 0.73 ============ ============ ============
The accompanying notes are an integral part of these statements. 41 42 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME KINDER MORGAN, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ---------- ---------- ---------- (In Thousands) NET INCOME (LOSS) $ (241,444) $ 59,989 $ 77,497 Unrealized (Loss) Gain on Equity Securities, Net of Tax 852 (6,697) (1,492) ---------- ---------- ---------- COMPREHENSIVE INCOME (LOSS) $ (240,592) $ 53,292 $ 76,005 ========== ========== ==========
The accompanying notes are an integral part of these statements. 42 43 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) CONSOLIDATED BALANCE SHEETS KINDER MORGAN, INC. AND SUBSIDIARIES
DECEMBER 31, ------------ 1999 1998 ------------ ------------ ASSETS (In Thousands) CURRENT ASSETS: Cash and Cash Equivalents $ 26,378 $ 21,955 Restricted Deposits 51 9,096 U.S. Government Securities -- 1,092,415 Accounts Receivable 306,451 693,044 Receivable From Kinder Morgan Energy Partners 330,000 -- Inventories 50,328 144,831 Gas Imbalances 172,501 189,266 Other 19,154 46,812 Net Current Assets of Discontinued Operations 58,991 -- ------------ ------------ 963,854 2,197,419 ------------ ------------ INVESTMENTS: Kinder Morgan Energy Partners 1,791,768 -- Other 126,103 252,543 ------------ ------------ 1,917,871 252,543 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT, NET 5,789,564 7,023,176 ------------ ------------ DEFERRED CHARGES AND OTHER ASSETS 209,758 242,991 ------------ ------------ NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS 659,236 -- ------------ ------------ TOTAL ASSETS $ 9,540,283 $ 9,716,129 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current Maturities of Long-term Debt $ 7,167 $ 10,167 Notes Payable 574,400 297,000 Substitute Note -- 1,394,846 Accounts Payable 224,625 489,414 Accrued Taxes 36,075 18,914 Gas Imbalances 196,469 178,774 Payable for Purchase of Thermo Companies 44,320 86,799 Reserve for Loss on Disposal of Discontinued Operations 535,630 -- Other 206,620 247,465 ------------ ------------ 1,825,306 2,723,379 ------------ ------------ OTHER LIABILITIES AND DEFERRED CREDITS: Deferred Income Taxes 2,228,553 1,699,072 Other 242,926 431,565 ------------ ------------ 2,471,479 2,130,637 ------------ ------------ LONG-TERM DEBT 3,293,326 3,300,025 ------------ ------------ KINDER MORGAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL TRUST SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF KINDER MORGAN 275,000 275,000 ------------ ------------ MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 9,331 63,267 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 2, 5, 9 AND 17) STOCKHOLDERS' EQUITY: Preferred Stock -- 7,000 ------------ ------------ Common Stock- Authorized - 150,000,000 Shares, Par Value $5 Per Share Outstanding - 112,665,977 and 68,597,308 Shares, After Deducting 172,402 and 48,598 Shares Held in Treasury 564,192 343,230 Additional Paid-in Capital 1,203,008 694,223 Retained Earnings (Deficit) (95,615) 193,925 Other (5,744) (14,557) ------------ ------------ Total Common Stockholders' Equity 1,665,841 1,216,821 ------------ ------------ Total Stockholders' Equity 1,665,841 1,223,821 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,540,283 $ 9,716,129 ============ ============
The accompanying notes are an integral part of these statements. 43 44 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY KINDER MORGAN, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 ------------ ------------ SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ (Dollars In Thousands) COMMON STOCK: Beginning Balance 68,645,906 $ 343,230 32,024,557 $ 160,123 Sale of Common Stock, Net -- -- 12,500,000 62,500 Exercise of Common Stock Warrants -- -- -- -- Acquisition of Kinder Morgan Delaware 41,683,323 208,417 -- -- Acquisition of Other Businesses 2,065,909 10,330 689,810 3,449 Employee and Executive Benefit Plans 443,241 2,215 549,570 2,758 Common Stock Split -- -- 22,881,969 114,400 ------------ ------------ ------------ ------------ Ending Balance 112,838,379 564,192 68,645,906 343,230 ------------ ------------ ------------ ------------ ADDITIONAL PAID-IN CAPITAL: Beginning Balance 694,223 266,435 Sale of Common Stock, Net -- 558,053 Costs Related to PEPS Offering -- (62,150) Exercise of Common Stock Warrants -- -- Acquisition of Kinder Morgan Delaware 470,831 -- Acquisition of Other Businesses 34,670 30,985 Employee and Executive Benefit Plans 3,284 15,371 Common Stock Split -- (114,471) ------------ ------------ Ending Balance 1,203,008 694,223 ------------ ------------ RETAINED EARNINGS (DEFICIT) Beginning Balance 193,925 185,658 Net Income (Loss) (241,444) 59,989 Cash Dividends: Common (47,967) (51,372) Preferred (129) (350) ------------ ------------ Ending Balance (95,615) 193,925 ------------ ------------ OTHER: DEFERRED COMPENSATION: Beginning Balance (10,686) (9,203) Executive Benefit Plans 10,686 (1,483) ------------ ------------ Ending Balance -- (10,686) ------------ ------------ TREASURY STOCK, AT COST: Beginning Balance (48,598) (1,417) (28,482) (1,124) Treasury Stock Acquired (135,510) (2,956) (60,994) (2,834) Acquisition of Businesses -- -- 39,970 1,801 Dividend Reinvestment Plan 11,706 231 17,135 740 Common Stock Split -- -- (16,227) -- ------------ ------------ ------------ ------------ Ending Balance (172,402) (4,142) (48,598) (1,417) ------------ ------------ ------------ ------------ ACCUMULATED OTHER COMPREHENSIVE INCOME (NET OF TAX): Beginning Balance (2,454) 4,243 Unrealized Gain (Loss) on Equity Securities 852 (6,697) ------------ ------------ Ending Balance (1,602) (2,454) ------------ ------------ TOTAL OTHER (172,402) (5,744) (48,598) (14,557) ------------ ------------ ------------ ------------ TOTAL COMMON STOCKHOLDERS' EQUITY 112,665,977 $ 1,665,841 68,597,308 $ 1,216,821 ============ ============ ============ ============ YEAR ENDED DECEMBER 31, ----------------------- 1997 ------------ SHARES AMOUNT ------------ ------------ COMMON STOCK: Beginning Balance 30,295,792 $ 151,479 Sale of Common Stock, Net -- -- Exercise of Common Stock Warrants 642,232 3,211 Acquisition of Kinder Morgan Delaware -- -- Acquisition of Other Businesses 544,604 2,723 Employee and Executive Benefit Plans 541,929 2,710 Common Stock Split -- -- ------------ ------------ Ending Balance 32,024,557 160,123 ------------ ------------ ADDITIONAL PAID-IN CAPITAL: Beginning Balance 223,167 Sale of Common Stock, Net -- Costs Related to PEPS Offering -- Exercise of Common Stock Warrants 8,060 Acquisition of Kinder Morgan Delaware -- Acquisition of Other Businesses 21,411 Employee and Executive Benefit Plans 13,797 Common Stock Split -- ------------ Ending Balance 266,435 ------------ RETAINED EARNINGS (DEFICIT) Beginning Balance 142,578 Net Income (Loss) 77,497 Cash Dividends: Common (34,067) Preferred (350) ------------ Ending Balance 185,658 ------------ OTHER: DEFERRED COMPENSATION: Beginning Balance (2,908) Executive Benefit Plans (6,295) ------------ Ending Balance (9,203) ------------ TREASURY STOCK, AT COST: Beginning Balance (7,216) (257) Treasury Stock Acquired (53,190) (2,096) Acquisition of Businesses -- -- Dividend Reinvestment Plan 31,924 1,229 Common Stock Split -- -- ------------ ------------ Ending Balance (28,482) (1,124) ------------ ------------ ACCUMULATED OTHER COMPREHENSIVE INCOME (NET OF TAX): Beginning Balance 5,735 Unrealized Gain (Loss) on Equity Securities (1,492) ------------ Ending Balance 4,243 ------------ TOTAL OTHER (28,482) (6,084) ------------ ------------ TOTAL COMMON STOCKHOLDERS' EQUITY 31,996,075 $ 606,132 ============ ============
The accompanying notes are an integral part of these statements. 44 45 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS KINDER MORGAN, INC. AND SUBSIDIARIES
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ------------ ------------ ------------ (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Income from Continuing Operations $ 154,652 $ 138,168 $ 44,381 Adjustments to Reconcile Income from Continuing Operations to Net Cash Flows from Operating Activities: Depreciation and Amortization 144,268 155,362 23,868 Deferred Income Taxes 57,473 24,148 3,401 Deferred Purchased Gas Costs 6,646 468 (16,575) Gains from Sales of Assets (126,348) (19,552) (1,547) Proceeds from Buyout of Contractual Gas Obligations -- 27,500 -- Change in Gas in Underground Storage (18,608) (6,987) (5,801) Changes in Other Working Capital Items [Note 1(L)] 50,539 (44,592) (12,613) Changes in Deferred Revenues (15,641) 6,300 (5,166) Other, Net (22,913) 11,837 12,183 ------------ ------------ ------------ Net Cash Flows Provided by Continuing Operations 230,068 292,652 42,131 Net Cash Flows Provided by (Used In) Discontinued Operations 81,925 (197,383) 55,372 ------------ ------------ ------------ NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 311,993 95,269 97,503 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (94,348) (118,452) (228,735) Cash Paid for Acquisition of MidCon, Net of Cash Acquired -- (2,191,555) -- Other Acquisitions (34,565) 1,086 (1,393) Investments (10,044) (9,179) (80,400) Sale of U.S. Government Securities 1,092,415 1,062,453 -- Purchase of U.S. Government Securities -- (2,154,868) -- Proceeds from Sales of Tom Brown, Inc. Preferred Stock 28,650 -- -- Proceeds from Sales of Assets 87,949 38,634 2,732 ------------ ------------ ------------ Net Cash Flows Provided by (Used In) Continuing Investing Activities 1,070,057 (3,371,881) (307,796) Net Cash Flows Used In Discontinued Investing Activities (49,864) (121,529) (188,761) ------------ ------------ ------------ NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,020,193 (3,493,410) (496,557) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Short-term Debt, Net (1,117,446) (32,687) 199,900 Long-term Debt, Issued -- 2,750,000 150,000 Long-term Debt, Retired (158,934) (35,787) (27,832) Common Stock Issued in Public Offering -- 650,000 -- Other Common Stock Issued 8,323 13,437 19,091 Mandatorily Redeemable Trust Securities Issued -- 175,000 100,000 Preferred Stock, Redeemed (7,350) -- -- Treasury Stock, Issued 231 740 1,229 Treasury Stock, Acquired (2,956) (2,834) (2,096) Cash Dividends, Common (47,967) (51,372) (34,067) Cash Dividends, Preferred (129) (350) (350) Minority Interests, Net - Continuing Operations (1,100) (854) -- Minority Interests, Net - Discontinued Operations 1,479 10,551 7,611 Security Unit Contract Fees (1,914) -- -- Securities Issuance Costs -- (78,219) (2,300) ------------ ------------ ------------ NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,327,763) 3,397,625 411,186 ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents 4,423 (516) 12,132 Cash and Cash Equivalents at Beginning of Period 21,955 22,471 10,339 ------------ ------------ ------------ Cash and Cash Equivalents at End of Period $ 26,378 $ 21,955 $ 22,471 ============ ============ ============
The accompanying notes are an integral part of these statements. 45 46 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Nature of Operations Effective with K N Energy, Inc.'s acquisition of Kinder Morgan (Delaware), Inc., formerly Kinder Morgan, Inc., a Delaware corporation, K N Energy, Inc. changed its name to Kinder Morgan, Inc. As used in these Notes, "Kinder Morgan" refers to Kinder Morgan, Inc. (a Kansas corporation, formerly K N Energy, Inc.) and its consolidated subsidiaries unless the context otherwise requires (see Note 2), while "Kinder Morgan Delaware" refers to Kinder Morgan (Delaware), Inc. Kinder Morgan is an energy services provider and has operations in 16 states in the Rocky Mountain and mid-continent regions, with principal operations in Arkansas, Colorado, Illinois, Iowa, Kansas, Nebraska, Oklahoma, Texas and Wyoming. During 1999, Kinder Morgan made significant acquisitions, including Kinder Morgan Delaware (see Note 2). As a result, Kinder Morgan, through its general partner interest, operates Kinder Morgan Energy Partners L.P., a publicly traded pipeline master limited partnership. Energy services offered by Kinder Morgan include: storing, transporting and selling natural gas, providing retail natural gas distribution services, and generating and selling electricity. Kinder Morgan has both regulated and nonregulated operations. During the third and fourth quarters of 1999, Kinder Morgan adopted and implemented plans to discontinue its businesses involved in (i) gathering, processing and wholesale marketing of natural gas, (ii) providing field services to natural gas producers, (iii) direct marketing of non-energy products and services, (iv) international operations, as well as (v) its West Texas intrastate pipelines (see Note 6). As used in these Notes, "Kinder Morgan Energy Partners" refers to Kinder Morgan Energy Partners L.P. (B) Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from these estimates. The consolidated financial statements include the accounts of Kinder Morgan, Inc. and its majority-owned subsidiaries. Investments in jointly owned operations in which Kinder Morgan has 20 to 50 percent ownership are accounted for under the equity method, as is Kinder Morgan's investment in Kinder Morgan Energy Partners. All material intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current presentation. (C) Accounting for Regulatory Activities Kinder Morgan's regulated public utilities are accounted for in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71, Accounting for the Effects of Certain Types of Regulation, which prescribes the circumstances in which the application of generally accepted accounting principles is affected by the economic effects of regulation. As of December 31, 1999, there were $56.3 million of regulatory assets and $63.1 million of regulatory liabilities reflected in the accompanying Consolidated Balance Sheets. 46 47 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) (D) Revenue Recognition Policies Kinder Morgan recognizes revenues as services are rendered or goods are delivered. Kinder Morgan's rate-regulated retail natural gas distribution business bills customers on a monthly cycle billing basis. Revenues are recorded on an accrual basis, including an estimate at the end of each accounting period for gas delivered but for which bills have not yet been rendered. (E) Earnings Per Share Basic earnings per share is computed based on the monthly weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed based on the monthly weighted-average number of common shares outstanding during the periods, increased by the assumed exercise or conversion of securities (stock options and warrants) convertible into common stock for which the effect of conversion or exercise using the treasury stock method would be dilutive. Dilutive securities assumed to have been converted or exercised totaled 73,800 for 1999, 614,500 for 1998 and 718,500 for 1997. Remaining stock options outstanding and all premium equity participating security units were not included in the earnings per share calculation because to do so would have been antidilutive. See Note 12(B) for more information regarding premium equity participating security units and Note 16 for more information regarding stock options. (F) Restricted Deposits Restricted Deposits consist of monies on deposit with brokers that are restricted to meet exchange trading requirements (see Note 14). (G) Inventories
DECEMBER 31, ------------ 1999 1998 --------- --------- (In Thousands) Gas in Underground Storage (Current) $ 38,499 $ 106,971 Natural Gas Liquids - 11,226 Materials and Supplies 11,829 26,634 --------- --------- $ 50,328 $ 144,831 ========= =========
Inventories are accounted for using the following methods, with the percent of the total dollars at December 31, 1999 shown in parentheses: average cost (89.97%), last-in, first-out (8.31%) and first-in, first-out (1.72%). All non-utility inventories held for resale are valued at the lower of cost or market. Kinder Morgan also maintains gas in its underground storage facilities on behalf of certain third parties. Kinder Morgan receives a fee for its storage services but does not reflect the value of gas stored for third parties in the accompanying consolidated financial statements. 47 48 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) (G) Other Investments
DECEMBER 31, ------------ 1999 1998 ----------- ----------- (In Thousands) Thermo Companies $ 63,441 $ 65,683 TransColorado Pipeline Company 31,160 34,675 Tom Brown, Inc. Common and Preferred Stock(1) 12,283 35,690 Other 19,219 116,495 ----------- ----------- $ 126,103 $ 252,543 =========== ===========
(1) Tom Brown Preferred Stock was sold during 1999, see Note 5. Investments consist primarily of equity method investments in unconsolidated subsidiaries and joint ventures, and include ownership interests in net profits and net cash flows. In addition, Kinder Morgan has an investment in Tom Brown, Inc. common stock, considered to be an available-for-sale security and, as a result, unrealized holding gains and losses, net of tax, are recognized as comprehensive income and included as a component of stockholders' equity. (I) Property, Plant and Equipment Property, plant and equipment is stated at historical cost which, for constructed plant, includes indirect costs such as payroll taxes, fringe benefits, administrative and general costs. Expenditures that increase capacities, improve efficiencies or extend useful lives are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred. The cost of normal retirements of depreciable utility property, plant and equipment, plus the cost of removal less salvage, is deducted from accumulated depreciation with no effect on current period earnings. Gains or losses are recognized upon retirement of non-utility property, plant and equipment, and utility property, plant and equipment constituting an operating unit or system, when sold or abandoned. In accordance with the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, Kinder Morgan reviews the carrying values of its long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. As yet, no asset or group of assets has been identified for which the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset(s) and, accordingly, no impairment losses have been recorded. However, currently unforeseen events and changes in circumstances could require the recognition of impairment losses at some future date. (J) Depreciation and Amortization Depreciation is computed based on the straight-line method over the estimated useful lives of assets. The range of estimated useful lives of assets used in depreciating assets for each business segment are as follows:
BUSINESS SEGMENT(1) RANGE OF ESTIMATED USEFUL LIVES OF ASSETS (IN YEARS) ---------- ------------------------------------------------------------ NGPL 5 to 56 (Transmission assets: 56) KMIGT 7 to 40 (Transmission assets: 40) Retail 7 to 40 (Distribution assets: 33) MTP 13 to 40 (Transmission leasehold improvements, primarily 28) Power and Other 2 to 30
(1) See Note 19 for definitions of the business segments. 48 49 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) (K) Interest Expense, Net "Interest Expense, Net" as presented in the accompanying Consolidated Statements of Income is net of (i) capitalized interest, (ii) the debt component of the allowance for funds used during construction ("AFUDC") and (iii) interest income related to government securities (collectively, "Interest Income"), as shown in the following table:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ---- ---- ---- (In Millions) Capitalized Interest and AFUDC $ 1.9 $ 2.3 $ 7.0 Interest Income $ 0.5 $46.4 $ --
As discussed in Note 2, in conjunction with the January 30, 1998, acquisition of MidCon Corp., Kinder Morgan was required by the definitive stock purchase agreement to assume the Substitute Note for $1.4 billion and to collateralize the Substitute Note with bank letters of credit, a portfolio of government securities or a combination of the two. As a result, Kinder Morgan had a significant amount of interest income during 1998 associated with the issuance of the Substitute Note, which has been reported together with the related interest expense as described preceding. (L) Cash Flow Information Kinder Morgan considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. "Other, Net," presented as a component of "Net Cash Flows From Operating Activities" in the accompanying Consolidated Statements of Cash Flows includes, among other things, undistributed equity in earnings of unconsolidated subsidiaries and joint ventures and other non-cash charges and credits to income. ADDITIONAL CASH FLOW INFORMATION: CHANGES IN OTHER WORKING CAPITAL ITEMS (NET OF EFFECTS OF ACQUISITIONS AND SALES) INCREASE (DECREASE) IN CASH AND CASH AND CASH EQUIVALENTS
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 -------- -------- -------- (In Thousands) Accounts Receivable $(15,782) $(16,985) $(22,299) Material and Supplies Inventory 2,894 (962) 229 Other Current Assets (25,212) (12,548) 11,039 Accounts Payable 37,492 (68,810) 11,751 Other Current Liabilities 51,147 54,713 (13,333) -------- -------- -------- $ 50,539 $(44,592) $(12,613) ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ---------- ---------- ---------- (In Thousands) CASH PAID FOR: Interest (Net of Amount Capitalized) $ 284,762 $ 189,929 $ 41,986 ========== ========== ========== Income Taxes Paid (Received) $ (10,883) $ 39,756 $ 15,823 ========== ========== ========== Distributions on Preferred Capital Trust Securities $ 21,913 $ 14,754 $ 4,066 ========== ========== ==========
In October 1999, Kinder Morgan acquired Kinder Morgan Delaware in a non-cash transaction. During 1998, Kinder Morgan acquired MidCon Corp. and interests in assets from the Thermo Companies in transactions that 49 50 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) included both cash and non-cash components. For additional information on these transactions, see Note 2. (M) Accounts Receivable The caption "Accounts Receivable" in the accompanying Consolidated Balance Sheets is presented net of allowances for doubtful accounts of $1.7 million and $10.8 million at December 31, 1999 and 1998, respectively. (N) Stock-Based Compensation SFAS 123, Accounting for Stock-Based Compensation, encourages, but does not require, entities to adopt the fair value method of accounting for stock-based compensation plans. As allowed under SFAS 123, Kinder Morgan continues to apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation expense is not recognized for stock options unless the options were granted at an exercise price lower than the market price on the grant date. 2. BUSINESS COMBINATIONS On October 7, 1999, K N Energy, Inc. completed the acquisition of Kinder Morgan Delaware, the sole stockholder of the general partner of Kinder Morgan Energy Partners. Kinder Morgan Energy Partners is the nation's largest pipeline master limited partnership. It owns and operates one of the largest product pipeline systems in the United States, serving customers in sixteen states with more than 5,000 miles of pipeline and over twenty associated terminals. Kinder Morgan Energy Partners also operates 24 bulk terminal facilities which transload over 40 million tons of coal, petroleum coke and other products annually. In addition, Kinder Morgan Energy Partners owns 51 percent of Plantation Pipe Line Company and 20 percent of Shell CO2 Company, Ltd. (and has executed a definitive agreement to acquire the remaining 80%). To effect the business combination, K N Energy, Inc. issued approximately 41.5 million shares of its common stock in exchange for all of the outstanding shares of Kinder Morgan Delaware. Upon closing of the transaction, Richard D. Kinder, Chairman and Chief Executive Officer of Kinder Morgan Delaware, was named Chairman and Chief Executive Officer of Kinder Morgan, which was renamed Kinder Morgan, Inc. In addition, Kinder Morgan issued 200,000 shares of its common stock to Petrie Parkman & Co., Inc. in consideration for Petrie Parkman's advisory services rendered in connection with the acquisition of Kinder Morgan Delaware. The issuance of these shares was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. This acquisition was accounted for as a purchase for accounting purposes and, accordingly, the assets acquired and liabilities assumed were recorded at their respective estimated fair market values as of the acquisition date. The allocation of the purchase price resulted in an excess of the purchase price over Kinder Morgan Delaware's share of the underlying equity in the net assets of Kinder Morgan Energy Partners totaling $1.3 billion. This excess has been fully allocated to the Kinder Morgan Delaware investment in Kinder Morgan Energy Partners and reflects the estimated fair market value of this investment. This excess investment is being amortized over 44 years, approximately the estimated remaining useful life of Kinder Morgan Energy Partners' assets, and is shown in the accompanying Consolidated Income Statements as "Amortization of Excess Investment" under the sub-heading "Kinder Morgan Energy Partners" within "Other Income and (Deductions)." The assets, liabilities and results of operations of Kinder Morgan Delaware are included with those of Kinder Morgan beginning with the October 7, 1999 acquisition date. The following pro forma information gives effect to the acquisition of Kinder Morgan Delaware as if the business combination had occurred at the beginning of each period presented. The pro forma adjustments that 50 51 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) have been made are based on a preliminary allocation of the purchase price to assets acquired and liabilities assumed. This unaudited pro forma information should be read in conjunction with the accompanying consolidated financial statements. This pro forma information is not necessarily indicative of the financial results that would have occurred had this acquisition taken place on the dates indicated, nor is it necessarily indicative of future financial results.
DECEMBER 31, ------------ UNAUDITED PRO FORMA FINANCIAL INFORMATION 1999 1998 - ----------------------------------------- ------------ ------------ (Dollars In Millions Except Per Share Amounts) Operating Revenues $ 1,745.5 $ 1,660.9 Net Income (Loss) $ (233.9) $ 62.5 Diluted Earnings (Loss) Per Common Share $ (2.09) $ 0.58 Number of Shares Used in Computing Diluted Earnings Per Common Share (In Thousands) 112,334 106,319
During the third quarter of 1998, Kinder Morgan completed its acquisition of interests in four independent power plants in Colorado from the Denver-based Thermo Companies ("Thermo"), representing approximately 380 megawatts of electric generation capacity and access to approximately 130 Bcf of natural gas reserves. These generating facilities are located in Ft. Lupton, Colorado (272 megawatts) and Greeley, Colorado (108 megawatts) and sell their power output to Public Service Company of Colorado under long-term agreements. Payments for the Thermo interests are being made over a two-year period, with the initial payment of 1,034,715 shares of Kinder Morgan's common stock having been made on October 21, 1998. Additional payments were made on January 4, 1999, consisting of 833,623 shares of Kinder Morgan's common stock and $15 million in cash, and on April 20, 1999, consisting of 1,232,286 shares of Kinder Morgan's common stock and $20 million in cash. The remaining payment, due in 2000, is expected to be made in a combination of cash and common stock as agreed to by Kinder Morgan and Thermo, with the default mix being 50 percent stock and 50 percent cash. This transaction was accounted for as a purchase. On January 30, 1998, pursuant to a definitive stock purchase agreement, Kinder Morgan acquired all of the outstanding shares of capital stock of MidCon Corp. from Occidental Petroleum Corporation for $2.1 billion in cash and the assumption of a $1.4 billion short-term note referred to as the "Substitute Note", at which time MidCon Corp. became a wholly owned subsidiary of Kinder Morgan. The Substitute Note bore interest at 5.798% and was required to be collateralized by U.S. government securities, letters of credit or a combination thereof. The Substitute Note was paid in full on January 4, 1999. In conjunction with the acquisition, Kinder Morgan also assumed the obligation of a wholly owned subsidiary of MidCon Corp. to lease the MidCon Texas intrastate pipeline system under a 30-year operating lease, requiring average annual lease payments of approximately $30 million. The acquisition was initially financed through a combination of credit agreements (see Note 12). MidCon Corp. and its subsidiaries (which will be referred to as "MidCon" in these Notes) is engaged in the purchase, gathering, processing, transmission, storage and sale of natural gas to utilities, municipalities, and industrial and commercial users. MidCon's pipeline system includes over 13,000 miles of natural gas pipelines located in the center of the North American pipeline grid, with access to major supply and market areas. MidCon is also one of the nation's largest natural gas storage operators and owns and operates several natural gas gathering and natural gas processing facilities. The acquisition was accounted for as a purchase for accounting purposes and, accordingly, the MidCon assets acquired and liabilities assumed were recorded at their respective estimated fair market values as of the acquisition date. The allocation of purchase price resulted in the recognition of a gas plant acquisition adjustment of approximately $4.0 billion, principally representing the excess of the assigned fair market value of the assets of Natural Gas Pipeline Company of America, a wholly owned subsidiary of MidCon Corp., over 51 52 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) the historical cost for ratemaking purposes. This gas plant acquisition adjustment, none of which is currently being recognized for rate-making purposes, is being amortized over 55 years (see Note 4), approximately the estimated remaining useful life of Natural Gas Pipeline Company of America's interstate pipeline system. For the years ended December 31, 1999 and 1998, $96.0 million and $97.9 million of such amortization, respectively, was charged to expense. The assets, liabilities and results of operations of MidCon are included with those of Kinder Morgan beginning with the January 30, 1998 acquisition date. The following previously reported pro forma information is provided in accordance with authoritative accounting guidelines and gives effect to the acquisition of MidCon Corp. as if the business combination had occurred at the beginning of each period presented. This unaudited pro forma information should be read in conjunction with the accompanying consolidated financial statements. This pro forma information is not necessarily indicative of the financial results that would have occurred had the acquisition taken place on the dates indicated, nor is it necessarily comparable to subsequent financial results or indicative of future financial results. This pro forma information has not been restated to reflect the discontinued operations described in Note 6.
YEAR ENDED DECEMBER 31, ----------------------- UNAUDITED PRO FORMA FINANCIAL INFORMATION 1998 1997 - ----------------------------------------- ---------- ---------- (Dollars In Millions Except Per Share Amounts) Operating Revenues $ 4,655.9 $ 5,194.1 Net Income $ 65.6 $ 78.8 Diluted Earnings Per Common Share $ 1.01 $ 1.67 Number of Shares Used in Computing Diluted Earnings Per Common Share (In Thousands) 64,636 47,307
On February 22, 1999, Sempra Energy and Kinder Morgan announced that their respective boards of directors had unanimously approved a definitive agreement under which Sempra and Kinder Morgan would combine in a stock-and-cash transaction valued in the aggregate at $6.0 billion. On June 21, 1999, Sempra and Kinder Morgan announced that they had mutually agreed to terminate the merger agreement. Sempra reimbursed Kinder Morgan $5.95 million for expenses incurred in connection with the proposed merger. 3. MERGER-RELATED AND SEVERANCE COSTS In anticipation of the completion of the transaction with Kinder Morgan Delaware, during the third quarter of 1999, a number of Kinder Morgan's officers terminated their employment with Kinder Morgan, as did certain other employees. In addition, Kinder Morgan terminated the employment of a number of additional employees during the fourth quarter of 1999 and in early 2000 as a result of cost saving initiatives implemented following the closing of the Kinder Morgan Delaware transaction. In total, approximately 150 employees were severed. In conjunction with these terminations, Kinder Morgan agreed to provide severance benefits and incurred certain legal and other associated costs. Also in conjunction with the Kinder Morgan Delaware transaction, Kinder Morgan elected to discontinue certain projects, consolidate certain facilities and relocate certain employees. The $37.4 million pre-tax expense ($23.6 million after tax or $0.29 per diluted share) associated with these matters (included in the accompanying Consolidated Income Statement for 1999 under the caption "Merger-related and Severance Costs") was composed of the following: (i) severance and relocation, including restricted stock -- $22.7 million, (ii) facilities costs, including moving expenses -- $5.3 million, (iii) write-down/write-off of project costs -- $8.0 million and (iv) other -- $1.4 million. Of this total, approximately $9.4 million remained as an accrual at December 31, 1999, all of which is expected to be expended during the first half of 2000. The $5.8 million pre-tax expense ($3.6 million after tax or $0.06 per diluted share) included under the same caption for the year ended December 31, 1998 represents costs associated with Kinder Morgan's January 30, 1998 acquisition of MidCon Corp. For additional information on these business combinations, see Note 2. 52 53 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 4. CHANGE IN ACCOUNTING ESTIMATE Pursuant to a revised study of the useful lives of the underlying assets by an independent third party, in July 1999, Kinder Morgan changed the depreciation rates associated with the gas plant acquisition adjustment recorded in conjunction with the acquisition of MidCon Corp. This change had the effect of decreasing "Depreciation and Amortization" by approximately $19.3 million and increasing "Income from Continuing Operations" and "Net Income" for the year ended December 31, 1999 by approximately $12.1 million or $0.15 per diluted share in comparison to the amounts which would have been recorded utilizing the previous depreciation rates. 5. INVESTMENTS AND SALES See Note 6 for information regarding sales of assets and businesses included in discontinued operations. On December 30, 1999, Kinder Morgan entered into a Contribution Agreement among Kinder Morgan, several of its wholly owned subsidiaries and Kinder Morgan Energy Partners. As a result, effective as of December 31, 1999, Kinder Morgan contributed all of its interest in the following to Kinder Morgan Energy Partners: (i) Kinder Morgan Interstate Gas Transmission LLC, formerly K N Interstate Gas Transmission Co., a wholly owned subsidiary which will be referred to as "KMIGT" in these Notes, (ii) Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.), a wholly owned subsidiary and owner of a one-third interest in Trailblazer Pipeline Company and (iii) Red Cedar Gathering Company (a 49% interest). In exchange, Kinder Morgan Energy Partners issued to Kinder Morgan 9,810,000 common units representing limited partnership interest in Kinder Morgan Energy Partners. In addition, Kinder Morgan Energy Partners paid Kinder Morgan $200 million in cash on January 20, 2000 and is obligated to pay Kinder Morgan an additional $130 million in cash in early 2000. Kinder Morgan recorded a pre-tax gain of $158.8 million (approximately $100.9 million after tax or $1.25 per diluted share) in conjunction with the transfer of interests. On September 30, 1999, Kinder Morgan sold (to an unaffiliated party) its interests in Stingray Pipeline Company, L.L.C., an offshore pipeline that gathers natural gas, and West Cameron Dehydration Company, L.L.C., which dehydrates natural gas for shippers on the Stingray Pipeline. Kinder Morgan received approximately $24 million in cash from the sale and recorded a pre-tax gain of $11.4 million (approximately $6.9 million after tax or $0.10 per diluted share). With this sale, Kinder Morgan completed its divestiture of its major offshore interests. On September 3, 1999, Kinder Morgan sold 1,000,000 shares of Tom Brown, Inc. preferred stock for approximately $29 million in cash, realizing a pre-tax gain of $2.2 million (approximately $1.3 million after tax or $0.02 per diluted share). The preferred stock was originally issued to Kinder Morgan in 1996 as part of Tom Brown, Inc.'s acquisition of K N Production Company. The preferred stock was convertible into 1,666,000 shares of Tom Brown, Inc. common stock, and paid dividends quarterly at an annual rate of $1.75 per share. Kinder Morgan retained ownership of approximately 918,000 shares of Tom Brown, Inc. common stock. In September 1999, Thunder Creek Gas Services, LLC, a joint venture owned 25 percent by Kinder Morgan and 75 percent by Devon Energy Corporation, placed into service a 126-mile-long-trunkline natural gas gathering system extending from Glenrock, Wyoming to approximately 12 miles north of Gillette, Wyoming. The trunkline has an initial capacity of 450 million cubic feet of natural gas per day. The gathering system is located in the Powder River Basin of northeast Wyoming. The total committed cost of the system was approximately $76.7 million at December 31, 1999. 53 54 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) On June 30, 1999, Kinder Morgan sold its interests in the HIOS and UTOS offshore pipeline systems and related laterals to Leviathan Gas Pipeline Partners, L. P. Kinder Morgan received approximately $51 million in cash in conjunction with the sale and recorded a pre-tax gain of $17.5 million (approximately $10.7 million after tax or $0.15 per diluted share). In May 1999, Kinder Morgan announced plans to build the Horizon Pipeline which, through its wholly owned subsidiary NGPL, it planned to own jointly with one or more other partners. An open season closed in June 1999 with service requests from shippers of more than 800 MMcf of natural gas per day, including 300 MMcf per day from Nicor Gas. In February 2000, Nicor, Inc. announced that it had signed an agreement to become an equal partner in the planned Horizon Pipeline with NGPL. The Horizon Pipeline is a $75 million natural gas pipeline that will originate in Joliet, Illinois and extend 74 miles into northern Illinois, connecting the emerging supply hub at Joliet with Nicor Gas' distribution system and an existing NGPL pipeline. Construction is expected to be completed by the spring of 2002. The initial capacity of the pipeline is proposed to be 380 MMcf of natural gas per day. The project is expected to be funded through a combination of non-recourse debt securities and equity contributions. On March 31, 1999, the TransColorado Gas Transmission Company ("TransColorado"), an enterprise jointly owned by Kinder Morgan and Questar Corp., placed in service a 280-mile-long natural gas pipeline. This pipeline includes two compressor stations and extends from near Rangely, Colorado, to its southern terminus at the Blanco Hub near Aztec, New Mexico. The pipeline has a design transmission capacity of approximately 300 million cubic feet of natural gas per day. On October 14, 1998, TransColorado entered into a $200 million revolving credit agreement with a group of commercial banks. Kinder Morgan provides a corporate guarantee for one-half of all amounts borrowed under the agreement. Beginning 24 months after the in-service date, Questar has the right, for a 12-month period, to require that Kinder Morgan purchase Questar's ownership interest in TransColorado for $121 million. It is not currently known whether Questar will exercise its right. In September 1998, Kinder Morgan sold certain of its microwave towers and associated land and equipment to American Tower Corp. for $14.6 million. The sale resulted in a pre-tax gain of $10.9 million ($6.7 million after tax or $0.10 per diluted share), included in the accompanying Consolidated Statements of Income under the caption "Other, Net." In March 1998, Kinder Morgan sold its Kansas retail natural gas distribution properties, located in 58 Kansas communities and serving approximately 30,000 residential, commercial and industrial customers, to Midwest Energy, Inc., a customer-owned cooperative based in Hays, Kansas. Kinder Morgan received approximately $24 million in cash in conjunction with the sale and recorded a pre-tax gain of approximately $8.5 million (approximately $5.2 million after tax or $0.08 per diluted share). Concurrently with the sale, Kinder Morgan received $27.5 million in cash in exchange for the release of the purchaser from certain contractual gas purchase obligations, which amount is being amortized as an offset to gas purchases over a period of years as the associated volumes are sold. 6. DISCONTINUED OPERATIONS During the third quarter of 1999, Kinder Morgan adopted a plan to discontinue the direct marketing of non-energy products and services (principally under the "Simple Choice" brand), which activities had been carried on largely through Kinder Morgan's en*able joint venture with PacifiCorp. During the fourth quarter of 1999, Kinder Morgan adopted and implemented plans to discontinue the following lines of business: gathering and processing natural gas and providing field services to natural gas producers, commodity marketing of natural gas and natural gas liquids, international operations and West Texas intrastate pipelines. 54 55 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) In accordance with the provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, ("APB 30"), the consolidated financial statements of Kinder Morgan have been restated to present these businesses as discontinued operations. Accordingly, the revenues, costs and expenses, assets and liabilities and cash flows of these discontinued operations have been excluded from the respective captions in the accompanying Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported in the various statements under the captions "Discontinued Operations, Net of Tax"; "Loss on Disposal of Discontinued Operations, Net of Tax"; "Net Current Assets of Discontinued Operations"; "Net Non-current Assets of Discontinued Operations"; "Net Cash Flows from Discontinued Operations" and "Net Cash Flows Provided By (Used In) Discontinued Investing Activities" for all relevant periods. In addition, certain of these Notes have been restated for all relevant periods to reflect the discontinuance of these operations. Summarized financial data of discontinued operations are as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ------------ ------------ ------------ (In Thousands) Income Statement Data Operating Revenues: Commodity Marketing $ 3,550,568 $ 2,580,459 $ 1,519,674 Gathering and Processing $ 570,688 $ 550,111 $ 513,316 West Texas Intrastate Pipelines $ 59,317 $ 90,512 $ 84,900 International Operations $ 1,129 $ 4,249 $ 247 Income (Loss) From Discontinued Operations, Net of Tax: Commodity Marketing, net of $(9,300), ($7,869) and $11,327 of tax $ (15,046) $ (14,837) $ 16,182 Gathering and Processing, net of ($11,405), ($21,373) and $15,554 of tax $ (18,452) $ (40,300) $ 22,220 West Texas Intrastate Pipelines, net of ($6,330), ($9,120) and ($5,745) of tax $ (10,241) $ (17,196) $ (8,208) International Operations, net of ($919), ($344) and ($69) of tax $ (1,488) $ (648) $ (98) en*able/Orcom, net of ($4,150), ($2,757) and $2,114 of tax $ (6,491) $ (5,198) $ 3,020 Loss on Disposal of Discontinued Operations, Net of Tax: Commodity Marketing, net of ($34,588) of tax $ (55,780) $ -- $ -- Gathering and Processing, net of ($136,539) of tax $ (220,187) $ -- $ -- West Texas Intrastate Pipelines, net of ($32,874) of tax $ (53,015) $ -- $ -- International Operations, net of ($2,430) of tax $ (3,917) $ -- $ -- en*able/Orcom, net of ($7,340) of tax $ (11,479) $ -- $ --
55 56 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
DECEMBER 31, 1999 -------------------------------------------------------------------------- WEST TEXAS COMMODITY GATHERING INTRASTATE INTERNATIONAL en*ABLE/ MARKETING PROCESSING PIPELINES OPERATIONS ORCOM TOTAL --------- ---------- ---------- ------------- --------- --------- Balance Sheet Data (In Thousands) Net Current Assets of Discontinued Operations: Cash and Cash Equivalents $ 83 $ 6,323 $ 254 $ 3,362 $ -- $ 10,022 Restricted Deposits 17,169 -- -- -- -- 17,169 Accounts Receivable 189,376 56,202 7,107 3,963 -- 256,648 Inventories 72,986 15,700 6,136 -- -- 94,822 Gas Imbalances Receivable 12,496 5,583 2,313 -- -- 20,392 Other Current Assets 3,264 13,305 10,296 35 -- 26,900 Accounts Payable (329,130) (25,183) (2,544) (25) -- (356,882) Accrued Taxes 13,157 14,243 (11,095) 341 -- 16,646 Gas Imbalances Payable -- (4,631) 314 -- -- (4,317) Other Current Liabilities (9,786) (9,783) (2,651) (189) -- (22,409) --------- --------- --------- --------- --------- --------- $ (30,385) $ 71,759 $ 10,130 $ 7,487 $ -- $ 58,991 ========= ========= ========= ========= ========= ========= Net Non-current Assets of Discontinued Operations: Investments $ -- $ 18,984 $ -- $ 6,433 $ 6,807 $ 32,224 Property, Plant and Equipment, Net 27,015 473,497 199,031 8,032 -- 707,575 Deferred Charges 750 18,370 3,114 3,661 -- 25,895 Other Deferred Credits (39,265) (9,429) (3,925) -- -- (52,619) Minority Interests in Equity of Subsidiaries -- (51,192) (1,880) (767) -- (53,839) --------- --------- --------- --------- --------- --------- $ (11,500) $ 450,230 $ 196,340 $ 17,359 $ 6,807 $ 659,236 ========= ========= ========= ========= ========= =========
Kinder Morgan has essentially completed the disposition of its investment in en*able. Kinder Morgan sold its businesses involved in providing field services to natural gas producers (K N Field Services, Inc. and Compressor Pump and Engine, Inc.) and MidCon Gas Products of New Mexico Corp., a wholly owned subsidiary providing natural gas gathering and processing services, prior to the end of 1999. Kinder Morgan received $23.3 million in cash as consideration for these sales. The net impact of these sales on earnings is included in the caption "Loss on Disposal of Discontinued Operations, Net of Tax" in the preceding table and the accompanying Consolidated Statements of Income. On February 8, 2000, Kinder Morgan and ONEOK, Inc. announced the signing of a definitive agreement for ONEOK to purchase all of Kinder Morgan's natural gas gathering and processing businesses in Oklahoma, Kansas and West Texas. In addition, ONEOK agreed to purchase Kinder Morgan's natural gas commodity marketing and trading business, as well as its West Texas intrastate natural gas pipelines. As consideration, ONEOK has agreed to (i) pay Kinder Morgan approximately $114 million plus an amount equal to net working capital at closing, (ii) assume the operating lease associated with the Bushton, Kansas gas processing plant and (iii) assume long-term capacity commitments on Natural Gas Pipeline Company of America and on KMIGT. The expected loss from disposal of the businesses not yet sold, including both the expected losses from the sale of assets and the estimated operating losses until the disposal is completed (the substantial majority of which dispositions are currently expected to occur by early 2000), is subject to uncertainty with respect to the proceeds to be received from the sale and operation of these assets (among other factors) and, accordingly, the actual loss may differ materially from the estimate. In accordance with the provisions of APB 30, any such difference will be recognized in the period in which it is identified, and classified in the same manner as the original estimated loss. 56 57 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 7. ACCOUNTS RECEIVABLE SALES FACILITY In September 1999, certain wholly owned subsidiaries of Kinder Morgan entered into a five-year agreement to sell all of their accounts receivable, on a revolving basis, to K N Receivables Corporation, a wholly owned subsidiary of Kinder Morgan. K N Receivables was formed prior to the execution of that receivables agreement for the purpose of buying and selling accounts receivable and has been determined to be bankruptcy remote. Also in September 1999, K N Receivables entered into a five-year agreement with a financial institution whereby K N Receivables can sell, on a revolving basis, an undivided percentage ownership interest in certain eligible accounts receivable, as defined, up to a maximum of $150 million. This transaction is accounted for as a sale of receivables in accordance with Statement of Financial Accounting Standards No. 125, Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities. Accordingly, Kinder Morgan's accompanying Consolidated Balance Sheet reflects the portion of receivables transferred to the financial institution as a reduction of Accounts Receivable. Losses from the sale of these receivables are included in "Other, Net" in the accompanying Consolidated Statements of Income. Kinder Morgan receives compensation for servicing that is approximately equal to the amount an independent servicer would receive. Accordingly, no servicing assets or liabilities have been recorded. The full amount of the allowance for possible losses has been retained by K N Receivables. The fair value of this recourse liability approximated the allocated allowance for doubtful accounts given the short-term nature of the transferred receivables. Kinder Morgan received $150 million in proceeds from the sale of receivables on September 30, 1999. The proceeds were subsequently used to retire notes payable of Kinder Morgan Delaware outstanding at the time of its acquisition by Kinder Morgan. Cash flows associated with this program are included with "Accounts Receivable" under "Cash Flows from Operating Activities" in the accompanying Statements of Consolidated Cash Flows. In February 2000, Kinder Morgan reduced its participation in this receivables sale program by approximately $120 million, principally as a result of its pending disposition of its wholesale gas marketing business (see Note 6). 8. REGULATORY MATTERS (A) Rate Matters On January 23, 1998, KMIGT filed a general rate case with the Federal Energy Regulatory Commission, referred to in these Notes as "FERC", requesting a $30.2 million increase in annual revenues. As a result of the FERC's action, KMIGT was allowed to place its rates into effect on August 1, 1998, subject to refund, and provisions for refund were recorded based on expected ultimate resolution. On November 3, 1999, KMIGT filed a comprehensive Stipulation and Agreement to resolve all issues in this proceeding. The FERC approved the Stipulation and Agreement on December 22, 1999. The settlement rates have been placed in effect, and it is anticipated that refunds for past periods (totaling $36.6 million at December 31, 1999) will be made in early 2000. On December 29, 1998, Rocky Mountain Natural Gas Company, a wholly owned subsidiary of Kinder Morgan, received a "show cause" order from the Colorado Public Utilities Commission. Rocky Mountain has reached settlement on the issue, and a Stipulation and Agreement memorializing the settlement with the Staff of the Commission and the Office of Consumer Counsel has been filed and approved. As part of this settlement, Rocky Mountain agreed to reduce its sales and transportation rates effective June 1, 1999. The settled rate reduction is anticipated to reduce Rocky Mountain's annual revenues by approximately $0.9 million per year. 57 58 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) (B) Retail Unbundling In November 1997, Kinder Morgan announced a plan to give residential and small commercial customers in Nebraska a choice of natural gas suppliers. This program, the Nebraska Choice Gas program, became effective June 1, 1998. This program separates, or "unbundles," the consumer's natural gas purchases from other utility services. As of December 31, 1999, the plan had been approved by 177 communities, representing approximately 92,000 customers served by Kinder Morgan in Nebraska. 9. ENVIRONMENTAL AND LEGAL MATTERS (A) Environmental Matters On December 20, 1999, the U.S. Department of Justice filed a Complaint on behalf of the U.S. Environmental Protection Agency against Natural Gas Pipeline Company of America alleging that Natural failed to obtain all of the necessary air quality permits in 1979 when it constructed the Akron Compressor Station, which consisted of three compressor engines in Weld County, Colorado. Natural constructed and then operated the facility until August 1996 when it was sold to High Plains Gathering System. High Plains sold one of the compressor engines to Colorado Interstate Gas Company in October 1997. The complaint makes the standard request for penalties up to the statutory maximums of $25,000 for each day of violation prior to January 30, 1997 and $27,500 for each day of violation after January 31, 1997. Natural has identified a number of defenses to the complaint and plans to defend the action vigorously. Although Kinder Morgan cannot express an opinion as to the probable outcome of this case, Kinder Morgan believes that this litigation will not have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. On December 17, 1999, the State of Colorado notified Kinder Morgan of air quality permit compliance issues for several Kinder Morgan facilities. The notice included civil penalties of $164,000. Kinder Morgan is currently in the process of negotiating a consent order with the State of Colorado to resolve the outstanding issues. The U.S. Environmental Protection Agency recently published a final rule addressing transport of ground level ozone. The rule affects 22 Eastern and Midwestern states, including Illinois and Missouri, in which Kinder Morgan operates gas compression facilities. The rule requires reductions in emissions of nitrogen oxide, a precursor to ozone formation, from various emission sources, including utility and non-utility sources. The rule requires that the affected states prepare and submit State Implementation Plans to the Environmental Protection Agency by September 1999, reflecting how the required emissions reductions will be achieved. Emission controls are required to be installed by May 1, 2003. This rule will likely require Kinder Morgan, as well as its competitors, to install some form of new emissions control technology on certain equipment it operates. The rule may also result in broadly increased use of natural gas, as other sources of nitrogen oxide air emissions, including utilities, seek to achieve the reductions required under the rule. The State Implementation Plans which will effectuate this rule have yet to be proposed or promulgated, and will require detailed analysis before their final economic impact can be ascertained. On March 3, 2000, the Washington D.C. Circuit Court issued a decision regarding the rule. The Circuit Court remanded certain issues back to the Environmental Protection Agency. The rule is stayed pending resolution of the remanded issues. While additional capital costs are likely to result from this rule, based on currently available information, Kinder Morgan does not believe that these costs will have a material adverse effect on its business, cash flows, financial position or results of operations. On June 17, 1999, the Environmental Protection Agency published a final rule creating a standard to limit emissions of hazardous air pollutants from oil and natural gas production as well as from natural gas 58 59 transmission and storage facilities. The standard requires that the affected facilities reduce emissions of hazardous air pollutants by 95 percent. This standard will require Kinder Morgan to achieve this reduction either by process modifications or by installing new emissions control technology. The standard will affect Kinder Morgan and its competitors in a like manner. The rule allows most affected sources three years from the publication date to come into compliance. Kinder Morgan is conducting a detailed analysis of the final rule to determine its overall effect. While additional capital costs are likely to result from this rule, Kinder Morgan believes that the rule will not have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. In connection with Kinder Morgan's acquisition of MidCon Corp. in January 1998, Occidental Petroleum Corporation indemnified Kinder Morgan against certain liabilities, including litigation and the failure of MidCon to be in compliance with applicable laws, which, in each case, would have a material adverse effect on MidCon, for one year following the closing date. To the extent that an environmental liability of MidCon is not covered by Occidental's indemnity obligation or, to the extent that matters arise following the termination of Occidental's indemnification obligation, Kinder Morgan will be responsible for MidCon's environmental liabilities. Kinder Morgan does not expect that such costs will have a material adverse effect on its business, cash flows, financial position or results of operations. Pursuant to certain acquisition agreements involving Cabot Corporation, Cabot indemnified Kinder Morgan for certain environmental liabilities associated with assets in Texas, Oklahoma and New Mexico acquired from American Oil and Gas Corporation. Issues arose concerning Cabot's indemnification obligations, and Kinder Morgan and Cabot entered into binding arbitration to resolve all issues in dispute. The binding decision of the arbitrators resulted in the requirement that Cabot pay Kinder Morgan for a substantial portion of past and future environmental related costs associated with the properties. In December 1998, Kinder Morgan recorded a charge of approximately $7.2 million representing both previously incurred costs which were not awarded in the arbitration and the recognition of a liability for Kinder Morgan's share of estimated future costs. As a result of this settlement, Kinder Morgan will have no future expense associated with this matter. Kinder Morgan does not expect its potential exposure for the remaining liabilities to have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. Based on current information and taking into account reserves established for environmental matters, Kinder Morgan does not believe that compliance with federal, state and local environmental laws and regulations will have a material adverse effect on Kinder Morgan's business, cash flows, financial position or results of operations. In addition, the clean-up programs in which Kinder Morgan is engaged are not expected to interrupt or diminish Kinder Morgan's operational ability to gather or transport natural gas. However, there can be no assurances that future events, such as changes in existing laws, the promulgation of new laws, or the development of new facts or conditions will not cause Kinder Morgan to incur significant costs. (B) Litigation Matters Jack J. Grynberg v. K N Energy, Inc., Rocky Mountain Natural Gas Company, and GASCO, Inc., Civil Action No. 92-N-2000. On October 9, 1992, Jack J. Grynberg filed suit in the United States District Court for the District of Colorado against Kinder Morgan, Rocky Mountain Natural Gas Company and GASCO, Inc. alleging that these entities, referred to here as the "K N Entities," as well as K N Production Company and K N Gas Gathering, Inc., have violated federal and state antitrust laws. In essence, Grynberg asserts that the companies have engaged in an illegal exercise of monopoly power, have illegally denied him economically feasible access to essential facilities to store, transport and distribute gas, and illegally have attempted to monopolize or to enhance or maintain an existing monopoly. Grynberg also asserts certain state causes of action relating to a gas purchase contract. In February 1999, the Federal District Court granted summary judgment as to some of Grynberg's antitrust and state law claims, while allowing other claims to proceed to trial. In addition to 59 60 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 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 distribution and marketing operations, and all interests in natural gas storage facilities, separating these interests from Kinder Morgan's natural gas gathering and transportation system in northwest Colorado. No trial date has been set. However, a settlement conference is currently scheduled for April 25, 2000. Jack J. Grynberg, individually and as general partner for the Greater Green River Basin Drilling Program: 72-73 v. Rocky Mountain Natural Gas Company and K N Energy, Inc., Case No. 90-CV-3686. On June 5, 1990, Jack J. Grynberg filed suit, which is presently pending in Jefferson County District Court for Colorado, against Rocky Mountain Natural Gas Company and Kinder Morgan alleging breach of contract and fraud. In essence, Grynberg asserts claims that the named companies failed to pay Grynberg the proper price, impeded the flow of gas, mismeasured gas, delayed his development of gas reserves, and other claims arising out of a contract to purchase gas from a field in northwest Colorado. On February 13, 1997, the trial judge entered partial summary judgment for Mr. Grynberg on his contract claim that he failed to receive the proper price for his gas. This ruling followed an appellate decision which was adverse to Kinder Morgan on the contract interpretation of the price issue, but which did not address the question of whether Grynberg could legally receive the price he claimed or whether he had illegally diverted gas from a prior purchase. On August 29, 1997, the trial judge stayed the summary judgment pending resolution of a proceeding at the FERC to determine if Grynberg was entitled to administrative relief from an earlier dedication of the same gas to interstate commerce. The background of that proceeding is described below. On March 15, 1999, an Administrative Law Judge for the FERC ruled, after an evidentiary hearing, that Mr. Grynberg had illegally diverted the gas when he entered the contract with the named companies and was not entitled to relief. Grynberg filed exceptions to this ruling, and a ruling from the FERC is expected soon. 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 Federal Energy Regulatory Commission ("Commission") seeking a determination whether he was entitled to the price he seeks in the Jefferson County District Court proceeding referred to above. While Grynberg initially received a favorable decision from the FERC, that decision was reversed by the Court of Appeals for the District of Columbia Circuit on June 6, 1997. This matter has been remanded to the FERC for subsequent proceedings. The matter was set for an expedited evidentiary hearing, and an Initial Decision favorable to Rocky Mountain was issued on March 15, 1999. That decision determined that Grynberg had intentionally diverted gas from an earlier dedication to interstate commerce in violation of the Natural Gas Act and denied him equitable administrative relief. Grynberg filed exceptions to this Initial Decision. In late March, 2000, the FERC issued an order affirming in part and denying in part its Initial Decision. Kinder Morgan is currently studying the order. 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. 60 61 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 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 Company entities. The plaintiffs in the case purport to represent a class of natural gas producers and fee royalty owners who allege that they have been subject to systematic gas mismeasurement by the defendants for more than 25 years. Subsequently, one of the defendants removed the action to Kansas Federal District Court. Thereafter, Kinder Morgan filed a motion with the Judicial Panel for Multidistrict Litigation to consolidate this action for pretrial purposes with the False Claim Act cases referred to above, because of common factual questions. The motion is briefed and a hearing has been set for March 30, 2000. 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). This appeal has been fully briefed and a decision is pending. 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 pending resolution of a third case styled Natural Gas Pipelines Company of America, et al. v. Dirt Hogs, Inc. (Case No. 99-360-R). Following a default judgment against Dirt Hogs, Dirt Hogs dismissed their appeal. KN Energy, Inc., et al. v. James P. Rode and Patrick R. McDonald, Case No. 99CV1239, filed in the District Court, Jefferson County, Division 8, Colorado. Defendants counterclaimed and filed third party claims against several former K N Energy officers and/or directors. Messrs. Rode and McDonald are former principal shareholders of Interenergy Corporation. Interenergy was merged into K N Energy on December 19, 1997 pursuant to a Merger Agreement dated August 25, 1997. Rode and McDonald allege that K N Energy committed securities fraud, common law fraud and negligent misrepresentation as well as breach in contract. They are seeking an unspecified amount of compensatory damages that we estimate could be greater than $2 million, plus unspecified exemplary or punitive damages, attorney's fees and their costs. Kinder Morgan has filed a Motion to Dismiss which is briefed and awaiting oral argument. 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. KN Energy, Inc., et al., Civil Action No. 00-N-190. This case also raises the identical state law claims contained in the counterclaim and third party complaint in state court. In addition to the federal claims, defendants have moved to stay the state case pending resolution of the federal action. Kinder Morgan believes it has meritorious defenses to all lawsuits and legal proceedings in which it is a defendant and will vigorously defend against them. Based on its evaluation of the above matters, and after consideration of reserves established, Kinder Morgan believes that the resolution of such matters will not have a material adverse effect on Kinder Morgan's business, financial position or results of operations. 61 62 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 10. PROPERTY, PLANT AND EQUIPMENT Investments in property, plant and equipment, at cost, and accumulated depreciation and amortization ("Accumulated D&A"), detailed by business segment, are as follows:
DECEMBER 31, 1999 ---------------------------------------------------- PROPERTY, PLANT ACCUMULATED AND EQUIPMENT D&A NET --------------- ----------- ---------- (In Thousands) NGPL $5,579,249 $ 170,593 $5,408,656 Retail 395,474 152,979 242,495 MTP 70,726 9,827 60,899 Power and Other 121,802 44,288 77,514 ---------- ---------- ---------- PP&E Related to Continuing Operations $6,167,251 $ 377,687 $5,789,564 ========== ========== ==========
DECEMBER 31, 1998 ---------------------------------------------------- PROPERTY, PLANT ACCUMULATED AND EQUIPMENT D&A NET --------------- ----------- ---------- (In Thousands) NGPL $5,373,939 $ 113,858 $5,260,081 KMIGT 720,808 183,038 537,770 Retail 389,785 144,490 245,295 MTP 57,459 7,453 50,006 Power and Other 113,907 42,254 71,653 ---------- ---------- ---------- PP&E Related to Continuing Operations 6,655,898 491,093 6,164,805 PP&E Related to Discontinued Operations 1,111,434 253,063 858,371 ---------- ---------- ---------- Total Property, Plant and Equipment $7,767,332 $ 744,156 $7,023,176 ========== ========== ==========
11. INCOME TAXES Deferred income tax assets and liabilities are recognized for temporary differences between the basis of assets and liabilities for financial reporting and tax purposes. Changes in tax legislation are included in the relevant computations in the period in which such changes are effective. Deferred tax assets are reduced by a valuation allowance for the amount of any tax benefit not expected to be realized. Components of the income tax provision applicable to continuing operations for federal and state income taxes are as follows:
1999 1998 1997 -------- -------- -------- (Dollars In Thousands) TAXES CURRENTLY PAYABLE: Federal $ 19,299 $ 48,906 $ 7,811 State 13,755 8,438 1,598 -------- -------- -------- Total 33,054 57,344 9,409 -------- -------- -------- TAXES DEFERRED: Federal 63,950 24,700 6,594 State (6,477) (552) (3,193) -------- -------- -------- Total 57,473 24,148 3,401 -------- -------- -------- TOTAL TAX PROVISION $ 90,527 $ 81,492 $ 12,810 ======== ======== ======== EFFECTIVE TAX RATE 36.9% 37.1% 22.4% ======== ======== ========
62 63 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) The difference between the statutory federal income tax rate and Kinder Morgan's effective income tax rate is summarized as follows:
1999 1998 1997 -------- -------- -------- FEDERAL INCOME TAX RATE 35.0% 35.0% 35.0% INCREASE (DECREASE) AS A RESULT OF: State Income Tax, Net of Federal Benefit 1.9% 2.1% (1.8)% Adjustments to Prior Year Accruals* -- -- (10.2)% Other -- -- (0.6)% -------- -------- -------- EFFECTIVE TAX RATE 36.9% 37.1% 22.4% ======== ======== ========
*Adjustments relate to the resolution of certain issues from prior years' income tax filings. Deferred tax assets and liabilities result from the following:
DECEMBER 31, ------------------------- 1999 1998 ---------- ---------- (Dollars In Thousands) DEFERRED TAX ASSETS: Post-retirement Benefits $ 28,299 $ 44,506 Gas Supply Realignment Deferred Receipts 15,847 36,478 Vacation Accrual 4,948 4,930 State Taxes 112,049 68,332 Contract Impairments 4,682 11,075 Operating and Misc. Reserves 24,238 7,583 Alternative Minimum Tax Credits 8,222 16,620 Net Operating Loss Carryforwards 112,080 -- Discontinued Operations 208,317 -- Other 2,083 26,501 ---------- ---------- TOTAL DEFERRED TAX ASSETS 520,765 216,025 ---------- ---------- DEFERRED TAX LIABILITIES: Property, Plant and Equipment 2,084,438 1,904,706 Rate Matters 4,460 550 Prepaid Pension Costs 1,952 3,560 Stock Investments 656,781 1,809 Other 1,687 4,472 ---------- ---------- TOTAL DEFERRED TAX LIABILITIES 2,749,318 1,915,097 ---------- ---------- NET DEFERRED TAX LIABILITIES $2,228,553 $1,699,072 ========== ==========
For tax purposes Kinder Morgan had available, at December 31, 1999, net operating loss carryforwards for regular federal income tax purposes of approximately $ 277 million which will expire as follows: $66 million in the year 2018 and $211 million in the year 2019. Kinder Morgan believes that it is more likely than not that all of the net operating loss carryforwards will be utilized prior to their expiration. 12. FINANCING (A) Notes Payable As of December 31, 1999, Kinder Morgan had available a $550 million 364-day facility dated November 18, 1999, and a $400 million amended and restated five-year revolving credit agreement dated January 30, 1998. These bank facilities can be used for general corporate purposes, including backup for Kinder Morgan's commercial paper program and include covenants which are common in such arrangements. For example, the $550 million facility requires consolidated debt to be less than 71% of consolidated captialization. The $400 million facility requires that upon issuance of common stock to the holders of the premium equity participating security units at the maturity of the security units, consolidated debt must be less than 67% of consolidated total 63 64 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) capitalization. Both of the bank facilities require the debt of consolidated subsidiaries to be less than 10% of consolidated debt of Kinder Morgan, require the consolidated debt of each material subsidiary to be less than 65% of its consolidated total capitalization and require Kinder Morgan's consolidated net worth (inclusive of trust preferred securities) be at least $1.236 billion plus 50 percent of consolidated net income earned for each fiscal quarter beginning with the last quarter of 1998. Under the bank facilities, Kinder Morgan is required to pay a facility fee based on the total commitment, at a rate which varies based on Kinder Morgan's senior debt rating. Facility fees paid in 1999 and 1998 were $1.9 million and $1.7 million, respectively. At December 31, 1999, $300 million was outstanding under the bank facilities and there were no amounts outstanding at December 31, 1998. Commercial paper issued by Kinder Morgan and supported by the bank facilities are unsecured short-term notes with maturities not to exceed 270 days from the date of issue. During 1999, all commercial paper was redeemed within 182 days, with interest rates ranging from 4.25 percent to 7.25 percent. Commercial paper outstanding at December 31, 1999 and 1998, respectively, was $274.4 million and $297.0 million. The weighted-average interest rates on short-term borrowings outstanding at December 31, 1999 and 1998, respectively, were 7.00 percent and 5.70 percent. Average short-term borrowings outstanding during 1999 and 1998 were $620.9 million and $732.9 million, respectively. During 1999 and 1998, the weighted-average interest rates on short-term borrowings outstanding were 5.56 percent and 5.91 percent (excluding the Substitute Note as described below), respectively. Effective with the acquisition of MidCon Corp. on January 30, 1998, Kinder Morgan entered into a $4.5 billion credit facility consisting of (i) a $1.4 billion 364-day credit facility to support the note issued to Occidental Petroleum Corporation in conjunction with the purchase of MidCon Corp., (ii) a $2.1 billion 364-day revolving facility, (iii) the $400 million facility, providing for loans and letters of credit, of which the letter of credit usage may not exceed $100 million and (iv) a 364-day $600 million revolving credit facility. The $1.4 billion and $2.1 billion facilities could be used only in conjunction with the acquisition of MidCon Corp. In addition to the working capital and acquisition components of the $4.5 billion facility, Kinder Morgan assumed a short-term note for $1.4 billion payable to Occidental referred to as the "Substitute Note", which was initially collateralized by letters of credit issued under the $1.4 billion facility. The $2.1 billion facility was repaid in its entirety and cancelled on March 10, 1998. The Substitute Note was repaid on January 4, 1999. On January 5, 1999, Kinder Morgan cancelled the remaining letters of credit used to collateralize the Substitute Note. On January 8, 1999, the $600 million facility was replaced with a new $600 million 364-day facility which was essentially the same as the previous agreement. On November 18, 1999, Kinder Morgan replaced its then-existing $600 million 364-day facility with a new $550 million 364-day facility. 64 65 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) (B) Long-term Debt and Premium Equity Participating Security Units
DECEMBER 31, ------------------------------- 1999 1998 ----------- ----------- (In Thousands) DEBENTURES: 6.50% Series, Due 2013 $ 50,000 $ 50,000 7.85% Series, Due 2022 25,731 26,631 8.75% Series, Due 2024 75,000 75,000 7.35% Series, Due 2026 125,000 125,000 6.67% Series, Due 2027 150,000 150,000 7.25% Series, Due 2028 500,000 500,000 7.45% Series, Due 2098 150,000 150,000 SINKING FUND DEBENTURES: 9.95% Series, Due 2020 20,000 20,000 9.625% Series, Due 2021 45,000 45,000 8.35% Series, Due 2022 35,000 35,000 SENIOR NOTES: 7.27%, Due 2000-2002 15,000 20,000 6.45%, Due 2001 400,000 400,000 6.45%, Due 2003 500,000 500,000 6.65%, Due 2005 500,000 500,000 6.80%, Due 2008 300,000 300,000 Reset Put Securities, 6.30%, Due 2021 400,000 400,000 Medium-term Notes, 9.98% -- 3,000 Other 14,883 16,318 Unamortized Debt Discount (5,121) (5,757) Current Maturities of Long-term Debt (7,167) (10,167) ----------- ----------- TOTAL LONG-TERM DEBT $ 3,293,326 $ 3,300,025 =========== ===========
Maturities of long-term debt (in thousands) for the five years ending December 31, 2004 are $7,167, $408,167, $10,417, $507,167 and $12,167, respectively. In November 1998, Kinder Morgan completed an underwritten public offering of $400 million of three-year senior notes bearing an interest rate of 6.45 percent. The net proceeds of approximately $397.4 million were used to retire a portion of Kinder Morgan's then-outstanding short-term borrowings. Concurrently with the senior notes offering, Kinder Morgan sold $460 million principal amount of premium equity participating security units in an underwritten public offering. The net cash proceeds from the sale of the security units, together with additional funds provided by Kinder Morgan, were used to purchase U.S. Treasury Notes on behalf of the security unit holders. The Treasury Notes are the property of the security unit holders and are pledged to the collateral agent, for the benefit of Kinder Morgan, to secure the obligation of the security unit holders to purchase Kinder Morgan's common stock. These security units obligate the holders to purchase a certain amount of Kinder Morgan common stock, depending on the market price at that time, at the end of a three-year period coinciding with the maturity of the senior notes (unless earlier terminated or settled at the option of the holders of the security units), and provide for receipt by the holders of 8.25 percent per year during the three-year period. The 8.25 percent is paid by the agent which receives part from the collateral agent, which holds 5.875% U.S. Treasury Notes purchased with the proceeds of the initial investment by the security unit holders, and the remaining 2.375 percent is paid by Kinder Morgan. Payment by Kinder Morgan of all or any part of its portion of contract fees may be deferred until no later than the end of the three-year period and any portion so deferred will accrue interest at the annual rate of 8.25 percent until paid. The face value of the security units is not recorded in the accompanying Consolidated Balance Sheets. The $29.4 million present value of the contract fee payable to the security unit holders has been recorded as a liability and as a reduction to paid-in capital. During the period in which the 2.375 percent contract fees are payable, accretion of the $3.4 million of discount initially recorded will increase the liability and further decrease paid-in capital. In addition, paid-in capital has been reduced for the issuance costs associated with the 65 66 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) security units and the premium paid upon purchase of the Treasury Notes pledged to the collateral agent, which amounts total approximately $32.8 million. In March 1998, Kinder Morgan received net proceeds of approximately $2.34 billion from the public offerings of senior debt securities of varying maturities with principal totaling $2.35 billion. The net proceeds from these offerings were used to refinance borrowings under the $4.5 billion facility and to purchase U.S. government securities to replace a portion of the letters of credit that collateralized the Substitute Note. The 2003 Senior Notes and the 2005 Senior Notes are not redeemable prior to maturity. The 2008 Senior Notes, 2028 Senior Debentures and 2098 Senior Debentures are redeemable in whole or in part, at the option of Kinder Morgan at any time, at redemption prices defined in the associated prospectus supplement. The Reset Put Securities due March 1, 2021 are subject to mandatory redemption from the then-existing holders on March 1, 2001, either (i) through the exercise of a call option by Morgan Stanley & Co. International Limited or (ii) in the event Morgan Stanley does not exercise the call option, the automatic exercise of a mandatory put by First Trust National Association on behalf of the holders. The $12 million of proceeds received by Kinder Morgan from Morgan Stanley as consideration for the call option are being amortized as an adjustment to the effective interest rate on the Reset Put Securities. If Morgan Stanley elects to exercise the call option, the interest rate will be reset at that time. At December 31, 1999 and 1998, the carrying amount of Kinder Morgan's long-term debt was $3.3 billion. The estimated fair values of Kinder Morgan's long-term debt December 31, 1999 and 1998 are shown in Note 8. (C) Capital Securities In April 1998, Kinder Morgan sold $175 million of 7.63% Capital Trust Securities maturing on April 15, 2028, in an underwritten public offering. The sale was effected through a wholly owned business trust, K N Capital Trust III. Kinder Morgan used the net proceeds from the offering to purchase U.S. government securities to replace a portion of the letters of credit that collateralized the Substitute Note. The transactions and balances of K N Capital Trust III are included in Kinder Morgan's consolidated financial statements, with the Capital Securities treated as a minority interest, shown in Kinder Morgan's Consolidated Balance Sheets under the caption "Kinder Morgan-Obligated Mandatorily Redeemable Preferred Capital Trust Securities of Subsidiary Trust Holding Solely Debentures of Kinder Morgan." See Note 18 for the fair value of these securities. (D) Common Stock On November 17, 1999, the Board of Directors of Kinder Morgan, Inc. approved a reduction in the quarterly dividend from $0.20 per share to $0.05 per share. On November 9, 1998, the Board of Directors of Kinder Morgan, Inc. approved a three-for-two split of Kinder Morgan's common stock. The stock split was distributed on December 31, 1998, to shareholders of record at the close of business on December 15, 1998. The par value of the stock did not change. Weighted-average shares outstanding and all per share amounts in the accompanying consolidated financial statements and these Notes have been restated to reflect the stock split. In March 1998, Kinder Morgan received net proceeds of approximately $624.6 million from a public offering of 12.5 million shares (18.75 million shares after adjustment for the December 1998 three-for-two stock split) of its common stock. The net proceeds from this offering were used to refinance borrowings under the $4.5 billion 66 67 Facility and to purchase U.S. government securities to replace a portion of the letters of credit that collateralized the Substitute Note. 13. PREFERRED STOCK Kinder Morgan has authorized 200,000 shares of Class A and 2,000,000 shares of Class B preferred stock, all without par value. (A) Class A $5.00 Preferred Stock On April 13, 1999, Kinder Morgan sent notices to holders of its Class A $5.00 Cumulative Preferred Stock, of its intent to redeem these shares on May 14, 1999. Holders of 70,000 preferred shares were advised that on April 13, 1999, funds were deposited with the First National Bank of Chicago to pay the redemption price of $105 per share plus accrued but unpaid dividends. Under the terms of Kinder Morgan's Articles of Incorporation, upon deposit of funds to pay the redemption price, all rights of the preferred stockholders ceased and terminated except the right to receive the redemption price upon surrender of their stock certificates. At December 31, 1999, Kinder Morgan did not have any outstanding shares of Class A $5.00 Cumulative Series preferred stock. At December 31, 1998 and 1997, Kinder Morgan had 70,000 shares of Class A $5.00 Cumulative Series preferred stock outstanding. (B) Class B Preferred Stock Kinder Morgan did not have any outstanding shares of Class B Preferred Stock at December 31, 1999, 1998 or 1997. 14. RISK MANAGEMENT Kinder Morgan uses energy financial instruments to reduce its risk of price changes in the spot and fixed price natural gas and natural gas liquids markets as discussed following. Kinder Morgan is exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments but, given their existing credit ratings, does not expect any counterparties to fail to meet their obligations. The fair value of these risk management instruments reflects the estimated amounts that Kinder Morgan would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses on open contracts. Market quotes are available for substantially all financial instruments used by Kinder Morgan. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (the "Statement"). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. If the derivatives meet these criteria, the Statement allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally designate a derivative as a hedge and document and assess the effectiveness of derivatives associated with transactions that receive hedge accounting. The Statement is effective for fiscal years beginning after June 15, 2000. The Statement cannot be applied retroactively. The Statement must be applied to (i) derivative instruments and (ii) certain derivative instruments 67 68 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at Kinder Morgan's election, before January 1, 1998). Kinder Morgan has not yet quantified the impacts of adopting the Statement on its financial position or results of operations and has not determined the timing of or method of adoption of the Statement. In December 1998, the Emerging Issues Task Force ("EITF") issued EITF 98-10, Accounting for Energy Trading and Risk Management Activities. This consensus establishes accounting for energy trading activities prior to the adoption of the Statement. EITF 98-10 requires that energy contracts associated with trading activities be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. The effects of initial application of EITF 98-10 are required to be reported as a cumulative effect of a change in accounting principle. Financial statements for periods prior to initial adoption of EITF 98-10 may not be restated. EITF 98-10 is effective for fiscal years beginning after December 15, 1998. Given Kinder Morgan's restrictive policy with respect to the use of energy derivatives as discussed following, Kinder Morgan had no material impact from the application of EITF 98-10 to its operations. Energy risk management products used by Kinder Morgan include commodity futures and options contracts, fixed-price swaps and basis swaps. Pursuant to its Board of Directors' approved policy, Kinder Morgan is to engage in these activities only as a hedging mechanism against price volatility associated with pre-existing or anticipated physical gas and condensate sales, gas purchases, system use and storage in order to protect profit margins, and is prohibited from engaging in speculative trading. Commodity-related activities of the risk management group are monitored by Kinder Morgan's Risk Management Committee, which is charged with the review and enforcement of the Board of Directors' risk management policy. Changes in fair value for trading activities are recognized currently in earnings within the caption "Other, Net" under the heading "Other Income and (Deductions)" in the Consolidated Statements of Income. All energy futures, swaps and options are recorded at fair value. Gains and losses on hedging positions are deferred and recognized as gas purchases expense in the periods which the underlying physical transactions occur. Purchases of commodity contracts and over-the-counter swaps and options require 75 percent of the contract amount to be placed in margin accounts. At December 31, 1999, Kinder Morgan had $51,000 in such margin accounts, which amounts are shown as "Restricted Deposits" in the accompanying Consolidated Balance Sheets. The differences between the current market value and the original physical contracts' value, associated with hedging activities, are reflected, depending on maturity, as deferred charges or credits and other current assets or liabilities in the accompanying Consolidated Balance Sheets. These deferrals are offset by the corresponding value of the underlying physical transactions. In the event energy financial instruments do not meet the criteria for hedge accounting, the deferred gains or losses associated with the corresponding financial instruments would be included in the results of operations in the current period. In the event energy financial instruments are terminated prior to the period of physical delivery of the items being hedged, the gains or losses on the energy financial instruments at the time of termination remain deferred until the period of physical delivery unless both the energy financial instruments and the items being hedged result in a loss. If this occurs, the loss is recorded immediately. 68 69 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Following is selected information concerning Kinder Morgan's risk management activities:
DECEMBER 31, 1999 --------------------------------------------------------------- COMMODITY OVER-THE-COUNTER CONTRACTS SWAPS AND OPTIONS TOTAL ---------- ----------------- ---------- (In Thousands) Deferred Net (Loss) Gain $ (9,503) $ (6,589) $ (16,092) Contract Amounts $ (355,982) $ (99,034) $ (455,016) Credit Exposure of Loss $ -- $ 1,518 $ 1,518 (Billions of Cubic Feet) Notional Volumetric Positions: Long 75.6 1,268.3 1,343.9 Notional Volumetric Positions: Short 72.7 1,237.5 1,310.2 Net Notional Totals to Occur in 2000 2.7 33.7 36.4 Net Notional Totals to Occur in 2001 & Beyond 0.2 (2.9) (2.7)
Deferred net losses are reflected in "Deferred Charges and Other Assets" in the accompanying Consolidated Balance Sheets and will be matched with the corresponding underlying physical transactions. 15. EMPLOYEE BENEFITS (A) Retirement Plans Kinder Morgan has defined benefit pension plans covering substantially all full-time employees. These plans provide pension benefits that are based on the employees' compensation during the period of employment, age and years of service. These plans are tax-qualified subject to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Kinder Morgan's funding policy is to contribute annually the recommended contribution using the actuarial cost method and assumptions used for determining annual funding requirements. Plan assets consist primarily of pooled fixed income, equity, bond and money market funds. Plan assets included securities of Kinder Morgan valued at $ 5.1 million and $5.0 million as of December 31, 1999 and 1998, respectively. Net periodic pension cost includes the following components:
YEAR ENDED DECEMBER 31, 1999 1998 1997 -------- -------- -------- (In Thousands) Service Cost $ 9,977 $ 4,859 $ 3,462 Interest Cost 8,170 7,537 7,155 Expected Return on Assets (13,381) (11,812) (10,276) Net Amortization and Deferral (210) (864) (311) Recognition of Curtailment Gain (9) -- -- -------- -------- -------- Net Periodic Pension (Benefit) Cost $ 4,547 $ (280) $ 30 ======== ======== ========
69 70 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) The following table sets forth the reconciliation of the beginning and ending balances of the pension benefit obligation:
1999 1998 ---------- ---------- (In Thousands) Benefit Obligation at Beginning of Year $ (121,076) $ (106,383) Service Cost (9,977) (4,859) Interest Cost (8,170) (7,537) Actuarial Gain (Loss) 14,602 (8,477) Benefits Paid 6,421 6,180 Curtailment Gain 162 -- ---------- ---------- Benefit Obligation at End of Year $ (118,038) $ (121,076) ========== ==========
The following table sets forth the reconciliation of the beginning and ending balances of the fair value of the plans' assets, the plans' funded status and prepaid pension cost amounts recognized under the caption "Other Current Assets" in Kinder Morgan's Consolidated Balance Sheets:
DECEMBER 31, ------------ 1999 1998 ---------- ---------- (In Thousands) Fair Value of Plan Assets at Beginning of Year $ 143,983 $ 141,423 Actual Return on Plan Assets During the Year 13,338 8,740 Benefits Paid During the Year (6,421) (6,180) ---------- ---------- Fair Value of Plan Assets at End of Year 150,900 143,983 Benefit Obligation at End of Year (118,038) (121,076) ---------- ---------- Plan Assets in Excess of Projected Benefit Obligation 32,862 22,907 Unrecognized Net Gain (27,080) (12,619) Prior Service Cost Not Yet Recognized in Net Periodic Pension Costs 105 218 Unrecognized Net Asset at Transition (842) (989) ---------- ---------- Prepaid Pension Cost $ 5,045 $ 9,517 ========== ==========
The rate of increase in future compensation was 3.5 percent for 1999, 1998 and 1997. The expected long-term rate of return on plan assets was 9.5 percent for 1999 and 8.5 percent for both 1998 and 1997. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.75 percent, 6.75 percent and 7.25 percent for 1999, 1998 and 1997, respectively. Kinder Morgan makes discretionary annual contributions to the Kinder Morgan, Inc. Profit Sharing and Savings Plan, a defined contribution plan. Contributions are made in the year following the year for which the contribution amount is calculated. Kinder Morgan's contribution amount is determined by comparing actual results for that year to a predetermined graduated scale of annual operating goals. No contribution was made to the profit sharing plan for 1999 or 1998. For 1997, Kinder Morgan contributed an amount equal to seven percent of eligible employee compensation. The 1997 contribution was $5.3 million, 50 percent of which was in the form of Company stock. In January 1998, Kinder Morgan acquired the MidCon Retirement Plan as part of its acquisition of MidCon Corp. (see Note 2). The MidCon plan was a defined contribution plan. Contributions to the plan were based on age and earnings. Effective January 1, 1999, the MidCon plan was merged into the Profit Sharing Plan, at which time eligible MidCon employees joined Kinder Morgan's defined benefit pension plans. In 1999 and 1998, Kinder Morgan contributed $0.7 million and $4.6 million, respectively, to the MidCon plan. (B) Other Postretirement Employee Benefits Kinder Morgan has a defined benefit postretirement plan providing medical and life insurance benefits upon retirement for eligible employees and their eligible dependents, including former MidCon employees who met the eligibility requirements on the date of acquisition of MidCon Corp. (see Note 2). Kinder Morgan acquired the 70 71 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) postretirement medical and life insurance plans of already retired employees of MidCon as a result of the acquisition of MidCon Corp. The MidCon plans were "grandfathered" in by Kinder Morgan as of the acquisition date and no new employees have or will be added to the MidCon plans subsequent to the acquisition date. Kinder Morgan funds the future expected postretirement benefit cost under the plan by making payments to Voluntary Employee Benefit Association trusts. Plan assets consist primarily of pooled fixed income funds. Net periodic postretirement benefit cost includes the following components:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ---------- ---------- ---------- (In Thousands) Service Cost $ 450 $ 592 $ 205 Interest Cost 6,655 6,425 1,394 Expected Return on Assets (3,720) (2,854) (159) Net Amortization and Deferral 908 919 811 Curtailment Gain -- (1,569) -- ---------- ---------- ---------- Net Periodic Postretirement Benefit Cost $ 4,293 $ 3,513 $ 2,251 ========== ========== ==========
The following table sets forth the reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation:
1999 1998 ---------- ---------- (In Thousands) Benefit Obligation at Beginning of Year $ (101,988) $ (19,768) Service Cost (450) (592) Interest Cost (6,655) (6,425) Actuarial Gain (Loss) 3,278 (7,663) Benefits Paid 15,330 11,812 Retiree Contributions (2,595) (2,060) Transfer from MidCon Plan -- (78,861) Curtailment -- 1,569 ---------- ---------- Benefit Obligation at End of Year $ (93,080) $ (101,988) ========== ==========
The following table sets forth the reconciliation of the beginning and ending balances of the fair value of plan assets, the plan's funded status and the amounts included under the caption "Other" in the category "Other Liabilities and Deferred Credits" in Kinder Morgan's Consolidated Balance Sheets:
DECEMBER 31, -------------------------- 1999 1998 ---------- ---------- (In Thousands) Fair Value of Plan Assets at Beginning of Year $ 45,364 $ 3,569 Actual Return on Plan Assets 4,320 4,850 Contributions by Employer 2,771 2,368 Retiree Contributions 2,246 1,207 Benefits Paid (2,129) (883) Transfer from MidCon Plan -- 34,253 ---------- ---------- Fair Value of Plan Assets at End of Year 52,572 45,364 Benefit Obligation at End of Year (93,080) (101,988) ---------- ---------- Excess of Projected Benefit Obligation Over Plan Assets (40,508) (56,624) Unrecognized Net (Gain) Loss (2,313) 3,790 Unrecognized Net Obligations at Transition 12,078 13,007 ---------- ---------- Accrued Expense $ (30,743) $ (39,827) ========== ==========
The weighted-average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.75 percent, 6.75 percent and 7.25 percent for 1999, 1998 and 1997, respectively. The expected long-term rate of return on plan assets was 9.5 percent for 1999 and 8.5 percent for 71 72 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) both 1998 and 1997. The assumed health care cost trend rate was 7 percent per year for 1999 and beyond (3 percent per year for 1999 and beyond for the MidCon plans). A one-percentage-point increase (decrease) in the assumed health care cost trend rate for each future year would have increased (decreased) the aggregate of the service and interest cost components of the 1999 net periodic postretirement benefit cost by approximately $23,000 ($21,000) and would have increased (decreased) the accumulated postretirement benefit obligation as of December 31, 1999, by approximately $220,000 ($211,000). 16. COMMON STOCK OPTION AND PURCHASE PLANS Kinder Morgan has the following stock option plans: The 1982 Incentive Stock Option Plan, the 1982 Stock Option Plan for Non-Employee Directors, the 1986 Incentive Stock Option Plan, the 1988 Incentive Stock Option Plan, the 1992 Stock Option Plan for Non-Employee Directors, the 1994 Kinder Morgan, Inc. Long-term Incentive Plan (which also provides for the issuance of restricted stock), the American Oil and Gas Corporation Stock Incentive Plan and the Kinder Morgan, Inc. Amended and Restated 1999 Stock Option Plan. Kinder Morgan also has an employee stock purchase plan. All per share amounts and shares outstanding or exercisable presented in this note have been restated to reflect the impact of the December 31, 1998, three-for-two common stock split as discussed in Note 12(D). On October 8, 1999, Kinder Morgan's Board of Directors approved the creation of the 1999 stock option plan, a broadly based non-qualified stock option plan. Under the plan, options may be granted to individuals who are regular full-time employees (including officers and directors who are employees) of Kinder Morgan or an entity in which Kinder Morgan has an ownership interest. The aggregate number of shares of stock which may be issued under the plan is 5.5 million. Options under the plan vest in 25 percent increments on the anniversary of the grant over a four-year period from the date of grant. All options granted under the plan have a 10-year life, and must be granted at not less than the fair market value of Kinder Morgan's common stock at the close of trading on the date of grant. On October 8, 1999, grants totaling 4.6 million stock options, all priced at $23.8125 per share, the closing price of Kinder Morgan's common stock on October 8, 1999, were awarded. However, no options were allocated to Richard D. Kinder and William V. Morgan. On October 8, 1999, Kinder Morgan's Board of Directors approved the granting of 12,500 options to each non-employee director of Kinder Morgan under the 1992 Stock Option Plan for Non-Employee Directors. All of the options vest in six months and have an exercise price of $23.8125 per share, the closing price of Kinder Morgan's common stock on October 8, 1999. Kinder Morgan accounts for its plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Had compensation cost for these plans been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), Kinder Morgan's net income and diluted earnings per share would have been reduced to the following pro forma amounts:
YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ------------ ------------ ------------ (In Thousands Except Per Share Amounts) NET INCOME (LOSS): As Reported $ (241,444) $ 59,989 $ 77,497 ============ ============ ============ Pro Forma, Unaudited $ (246,296) $ 55,887 $ 73,028 ============ ============ ============ EARNINGS (LOSS) PER DILUTED SHARE: As Reported $ (3.01) $ 0.92 $ 1.63 ============ ============ ============ Pro Forma, Unaudited $ (3.07) $ 0.86 $ 1.53 ============ ============ ============
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 72 73 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Additionally, the pro forma amounts include $0.6 million, $0.6 million and $0.4 million related to the purchase discount offered under the ESP Plan for 1999, 1998 and 1997, respectively. Kinder Morgan may sell up to 2,400,000 shares of common stock to eligible employees under the employee stock purchase plan. Employees purchase shares through voluntary payroll deductions. Prior to the 2000 plan year, shares were purchased annually at a 15 percent discount from the market value of the common stock, as defined in the plan, and issued in the month following the end of the plan year. Beginning with the 2000 plan year, shares will be purchased quarterly at a 15 percent discount from the closing price of the common stock on the last trading day of each calendar quarter. Also beginning with the 2000 plan year, in addition to Kinder Morgan employees, employees of certain affiliated equity method investees will be eligible to participate in the employee stock purchase plan. Employees purchased 187,567 shares, 163,799 shares and 132,202 shares for plan years 1999, 1998 and 1997, respectively. The weighted-average fair value per share of purchase rights granted in 1999, 1998 and 1997 was $6.41, $5.94 and $6.48, respectively.
OPTION SHARES GRANTED SHARES SUBJECT THROUGH VESTING EXPIRATION PLAN NAME TO THE PLAN 12/31/99 PERIOD PERIOD --------- -------------- ------------- ------- ---------- 1982 Plan 1,332,788 1,332,788 Immediate 10 years 1982 Directors' Plan 186,590 186,590 3 years 10 years 1986 Plan 618,750 618,750 Immediate 10 years 1988 Plan 618,750 618,750 Immediate 10 years 1992 Directors' Plan 525,000 400,375 0 - 6 months 10 years L-T Incentive Plan 5,700,000 3,826,932 0 - 5 years 5 - 10 years AOG Plan 775,500 775,500 3 years 10 years 1999 Plan 5,500,000 4,648,500 4 years 10 years
Under all plans, except the Long-term Incentive Plan and the AOG Plan, options are granted at not less than 100 percent of the market value of the stock at the date of grant. Under the Long-term Incentive Plan options may be granted at less than 100 percent of the market value of the stock at the date of grant. Certain restricted stock awards include provisions accelerating the lapsing of restrictions in the event certain operating goals are met. Kinder Morgan recorded compensation expense totaling $8.6 million, $3.1 million, and $2.4 million for 1999, 1998 and 1997, respectively, relating to restricted stock grants awarded under the plans. 73 74 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) A summary of the status of Kinder Morgan's stock option plans at December 31, 1999, 1998 and 1997, and changes during the years then ended is presented in the table and narrative below:
1999 1998 1997 -------------------------- -------------------------- -------------------------- WTD AVG WTD AVG WTD AVG EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ---------- ---------- ---------- ---------- ---------- OUTSTANDING AT BEGINNING OF YEAR 4,218,191 $ 24.38 3,220,065 $ 19.19 2,589,730 $ 18.52 Granted 4,837,656 $ 23.81 1,781,761 $ 31.40 1,128,603 $ 19.01 Exercised (602,928) $ 8.00 (662,274) $ 16.46 (379,575) $ 14.11 Forfeited (910,021) $ 27.79 (121,361) $ 27.35 (118,693) $ 18.97 ---------- ---------- ---------- ---------- ---------- ---------- OUTSTANDING AT END OF YEAR 7,542,898 $ 24.92 4,218,191 $ 24.38 3,220,065 $ 19.19 ========== ========== ========== ========== ========== ========== EXERCISABLE AT END OF YEAR 1,918,868 $ 26.54 1,794,112 $ 25.11 1,343,123 $ 19.75 ========== ========== ========== ========== ========== ========== WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED $ 5.83 $ 12.08 $ 10.47 ========== ========== ==========
The weighted-average fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.5 percent, expected weighted-average lives of 4 years and expected volatility of 0.31 for grants in 1999, 0.25 for grants in 1998, and 0.20 for grants in 1997; and expected dividend yields of 3.2 percent for grants in 1999, 3.5 percent for grants in 1998, and 2.5 percent for grants in 1997. The following table sets forth Kinder Morgan's December 31, 1999, common stock options outstanding, weighted-average exercise prices, weighted-average remaining contractual lives, common stock options exercisable and the exercisable weighted-average exercise price:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------------------- ----------------------------------- WTD AVG WTD AVG REMAINING WTD AVG PRICE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE RANGE OUTSTANDING PRICE LIFE EXERCISABLE PRICE ----- ----------- -------- ----------- ----------- -------- $ 0.00 - $23.79 483,827 $14.11 5.56 years 369,993 $17.55 $23.81 - $23.81 4,748,500 $23.81 9.77 years -- $ 0.00 $24.04 - $39.23 2,310,571 $29.47 7.62 years 1,548,875 $28.68 --------- --------- 7,542,898 $24.92 8.84 years 1,918,868 $26.54 ========= =========
17. COMMITMENTS AND CONTINGENT LIABILITIES (A) Leases Kinder Morgan has entered into a number of operating leases, including those referred to in Note 2. Expenses incurred under operating leases were $57.8 million in 1999, $56.9 million in 1998, and $9.5 million in 1997. 74 75 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Future minimum commitments under major operating leases as of December 31, 1999 are as follows:
YEAR AMOUNT - ---- ------ (In Thousands) 2000 $ 68,509 2001 69,071 2002 83,974 2003 74,100 2004 77,270 Thereafter 885,124 ---------- Total $1,258,048 ==========
Of the total commitments shown in the preceding table, $30.5 million, $32.3 million, $27.8 million, $22.4 million, $27.1 million and $190.8 million for the years 2000, 2001, 2002, 2003, 2004 and the period thereafter, respectively, represent commitments of discontinued operations which will not continue beyond disposal of these businesses (see Note 6). (B) Guarantees of Unconsolidated Subsidiaries' Debt Kinder Morgan has executed various guarantees of unconsolidated subsidiaries' revolving credit agreements as follows:
MAXIMUM BORROWED FINAL SUBSIDIARY AMOUNT AT 12/31/99 MATURITY ---------- -------- ----------- -------- (In Millions) TransColorado $ 100 $ 100.0 10/13/01 Coyote Gas Treating, LLC $ 10 $ 7.1 09/06/00 Coyote Gas Treating, LLC $ 10 $ 10.0 06/30/00 Red Cedar Gas Gathering Company $ 55 $ 55.0 10/31/10
Kinder Morgan's investment in Coyote Gas Treating, LLC is part of the operations discontinued in the fourth quarter of 1999 (see Note 6). Kinder Morgan's investment in Red Cedar Gathering Company was transferred to Kinder Morgan Energy Partners in a transaction effective December 31, 1999 (see Note 5). Kinder Morgan's guarantee of Red Cedar Gathering Company's debt was assigned to Kinder Morgan Energy Partners in February 2000. (C) Capital Expenditures Budget The consolidated capital expenditures budget for 2000 totals $120 million. Approximately $8.5 million had been committed for the purchase of plant and equipment at December 31, 1999. (D) Commitment to Sell or Purchase Assets As announced by Kinder Morgan on November 30, 1999, Kinder Morgan has entered into agreements with HS Resources, Inc. to sell certain assets in the Wattenberg field area of the Denver-Julesberg Basin. Under the terms of the agreements, HS Resources, Inc. commenced operating these assets. Kinder Morgan will receive cash payments from HS Resources, Inc. during 2000 and 2001, with the legal transfer of ownership expected to occur on or before December 15, 2001. Kinder Morgan is committed, during a specified period, to purchase, at the option of the other party, an incremental 50% interest in a joint venture pipeline, see Note 5. 75 76 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 18. FAIR VALUE The following fair values of Investments, Long-term Debt, Capital Securities and Kinder Morgan Preferred Stock were estimated based on an evaluation made by an independent securities analyst. Fair values of "Energy Financial Instruments, Net" reflect the estimated amounts that Kinder Morgan would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses on open contracts. Market quotes are available for substantially all instruments used by Kinder Morgan.
DECEMBER 31, ------------------------------------------------------------------ 1999 1998 ---- ---- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (In Millions) FINANCIAL ASSETS: Tom Brown, Inc.: Class A Preferred Stock $ - $ - $ 26.5 $ (i) Common Stock $ 12.3 $ 12.3 $ 9.2 $ 9.2 FINANCIAL LIABILITIES: Long-term Debt $ 3,305.6 $ 3,146.1 $ 3,315.9 $ 3,395.9 Capital Securities $ 275.0 $ 265.4 $ 275.0 $ 297.6 Energy Financial Instruments, Net $ 16.1 $ 16.1 $ 3.2 $ 3.2 KMI Class A $5.00 Preferred Stock $ - $ - $ 7.0 $ 5.3
(i) Fair values for Tom Brown, Inc. Class A Preferred Stock are not readily available, See Note 5 regarding the sale of this stock. 19. BUSINESS SEGMENT INFORMATION In accordance with the manner in which Kinder Morgan currently manages its businesses, including the allocation of capital and evaluation of business unit performance, Kinder Morgan reports its operations in the following segments: (1) Natural Gas Pipeline Company of America and certain associated entities, referred to as "NGPL," a major interstate natural gas pipeline system; (2) MidCon Texas Pipeline Operator, Inc. and certain associated entities, referred to as "MTP," a major intrastate natural gas pipeline system; (3) "Retail," the (largely regulated) distribution of natural gas to retail customers; (4) "Power," the generation and sale of electric power and (5) "Other," various other activities not constituting business segments. Prior to its December 31, 1999 sale to Kinder Morgan Energy Partners (see Note 5), Kinder Morgan also owned and operated KMIGT. The accounting policies applied in the generation of segment information are generally the same as those described in Note 1 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 the merger-related and severance costs and general and administrative expenses) are not allocated to individual business segments. With adjustment for these items, Kinder Morgan currently evaluates business segment performance primarily based on operating income in relation to the level of capital employed. Intersegment sales are accounted for at market prices, while asset transfers are made at either market value or, in some instances, book value. For comparative purposes, prior period results and balances have been reclassified to conform to the current presentation. During 1999 and 1998, Kinder Morgan had revenues from a single customer of $346.2 million and $289.3 million, respectively, amounts in excess of 10 percent of consolidated operating revenues for both years. These revenues are reported in the NGPL and MTP segments. 76 77 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) BUSINESS SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1999 ------------------------------------------------------------------------------------------------ NGPL KMIGT RETAIL MTP POWER OTHER CONSOLIDATED ---- ----- ------ --- ----- ----- ------------ (In Thousands) Revenues from External Customers $ 532,174 $ 96,531 $ 182,859 $ 872,161 $ 21,609 $ 40,147 $ 1,745,481 Intersegment Revenues $ 1,182 $ 16,676 $ 53 $ - $ - $ 8,831 $ 26,742 Depreciation and Amortization $ 109,346 $ 16,985 $ 11,382 $ 2,466 $ 1,991 $ 2,098 $ 144,268 Operating Income Before Corporate Costs $ 308,478 $ 54,282 $ 20,448 $ 16,618 $ 11,938 $ 19,139 $ 430,903 General and Administrative Expenses 88,403 Merger-related and Severance Costs 37,443 Operating Income ----------- Other Income and (Deductions) 305,057 (59,878) Income from Continuing ----------- Operations, Before Income Taxes $ 245,179 =========== Assets Continuing Operations $ 5,558,874 $ - $ 332,618 $ 286,853 $ 188,706 $2,455,005(1) $ 8,822,056 Discontinued Operations 718,227 ----------- Consolidated $ 9,540,283 =========== Capital Expenditures Continuing $ 41,716 $ 20,743 $ 11,749 $ 4,567 $ 4,803 $ 10,770 $ 94,348 Discontinued 31,659 ----------- Consolidated $ 126,007 ===========
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------------------------------ NGPL KMIGT RETAIL MTP POWER OTHER CONSOLIDATED ---- ----- ------ --- ----- ----- ------------ (In Thousands) Revenues from External Customers $ 556,662 $ 88,244 $ 234,306 $ 739,201 $ 7,710 $ 34,771 $ 1,660,894 Intersegment Revenues $ 299 $ 17,333 $ - $ - $ 775 $ 4,759 $ 23,166 Depreciation and Amortization $ 121,008 $ 19,474 $ 11,014 $ 1,615 $ 618 $ 1,633 $ 155,362 Operating Income Before Corporate Costs $ 336,825 $ 58,006 $ 56,214 $ 2,129 $ 5,570 $ 16,490 $ 475,234 General and Administrative Expenses 68,264 Merger-related and Severance Costs 5,763 ----------- Operating Income 401,207 Other Income and (Deductions) (181,547) ----------- Income from Continuing Operations, Before Income Taxes $ 219,660 =========== Assets Continuing Operations $ 5,505,119 $ 581,089 $ 362,289 $ 210,398 $ 174,524 $1,341,195(2) $ 8,174,614 Discontinued Operations 1,541,515 ----------- Consolidated $ 9,716,129 =========== Capital Expenditures Continuing $ 40,855 $ 49,044 $ 17,405 $ 8,037 $ 1 $ 3,110 $ 118,452 Discontinued 138,062 ----------- Consolidated $ 256,514 ===========
77 78 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) BUSINESS SEGMENT INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------------------------------------- NGPL KMIGT RETAIL MTP POWER OTHER CONSOLIDATED ---- ----- ------ --- ----- ----- ------------ (In Thousands) Revenues from External Customers $ - $ 52,475 $ 249,523 $ - $ - $ 38,440 $ 340,438 Intersegment Revenues $ - $ 27,569 $ 19 $ - $ - $ 31 $ 27,619 Depreciation and Amortization $ - $ 12,432 $ 10,582 $ - $ - $ 854 $ 23,868 Operating Income Before Corporate Costs $ - $ 45,453 $ 54,793 $ - $ - $ 14,569 $ 114,815 General and Administrative Expenses 36,535 ----------- Operating Income 78,280 Other Income and (Deductions) (21,089) ----------- Income from Continuing Operations, Before Income Taxes $ 57,191 =========== Assets Continuing Operations $ - $ 537,708 $ 383,069 $ - $ - $ 223,635 $ 1,144,412 Discontinued Operations 1,161,393 ----------- Consolidated $ 2,305,805 =========== Capital Expenditures Continuing $ - $ 184,892 $ 28,301 $ - $ - $ 15,542 $ 228,735 Discontinued 82,358 ----------- Consolidated $ 311,093 ===========
(1) Principally the investment in Kinder Morgan Energy Partners (2) Principally government securities held as collateral for the Substitute Note GEOGRAPHIC INFORMATION All but an insignificant amount of Kinder Morgan's assets and operations are located in the continental United States. 78 79 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) KINDER MORGAN, INC. AND SUBSIDIARIES QUARTERLY OPERATING RESULTS FOR 1999 AND 1998
1999 ---- FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- (In Thousands Except Per Share Amounts) Operating Revenues $ 406,742 $ 408,184 $ 471,080 $ 459,475 Operating Expenses 306,582 340,801 409,647 383,394 ---------- ---------- ---------- ---------- Operating Income 100,160 67,383 61,433 76,081 Other Income and (Deductions) (60,966) (47,089) (51,783) 99,960(1) ---------- ---------- ---------- ---------- Income From Continuing Operations Before Income Taxes 39,194 20,294 9,650 176,041 Income Taxes 15,286 7,914 3,764 63,563 ---------- ---------- ---------- ---------- Income From Continuing Operations 23,908 12,380 5,886 112,478 ---------- ---------- ---------- ---------- Discontinued Operations, Net of Tax:(2) Loss From Discontinued Operations (16,786) (14,788) (8,925) (11,219) Loss on Disposal of Discontinued Operations -- -- (11,479) (332,899) ---------- ---------- ---------- ---------- Total Loss From Discontinued Operations (16,786) (14,788) (20,404) (344,118) ---------- ---------- ---------- ---------- Net Income (Loss) 7,122 (2,408) (14,518) (231,640) Less-Preferred Dividends 88 41 -- -- Less-Premium Paid on Preferred Stock Redemption -- 350 -- -- ---------- ---------- ---------- ---------- Earnings (Loss) Available for Common Stock $ 7,034 $ (2,799) $ (14,518) $ (231,640) ========== ========== ========== ========== Number of Shares Used in Computing Basic Earnings Per Share 69,486 70,689 70,914 110,047 Number of Shares Used in Computing Diluted Earnings Per Share 69,578 70,761 70,986 110,105 BASIC EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 0.34 $ 0.17 $ 0.08 $ 1.02 Discontinued Operations (0.24) (0.21) (0.12) (0.10) Loss on Disposal of Discontinued Operations -- -- (0.16) (3.02) ---------- ---------- ---------- ---------- Total Basic Earnings (Loss) Per Common Share $ 0.10 $ (0.04) $ (0.20) $ (2.10) ========== ========== ========== ========== DILUTED EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 0.34 $ 0.17 $ 0.08 $ 1.02 Discontinued Operations (0.24) (0.21) (0.12) (0.10) Loss on Disposal of Discontinued Operations -- -- (0.16) (3.02) ---------- ---------- ---------- ---------- Total Diluted Earnings (Loss) Per Common Share $ 0.10 $ (0.04) $ (0.20) $ (2.10) ========== ========== ========== ==========
(1) Includes the $158 million pre-tax gain from the contribution of certain assets to KMEP, see Note 5 of the accompanying Notes to Consolidated Financial Statements. (2) See Note 6 of the accompanying Notes to Consolidated Financial Statements. 79 80 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
1998(1) ------- FIRST SECOND THIRD FOURTH ---------- ---------- ---------- ---------- (In Thousands Except Per Share Amounts) Operating Revenues $ 343,363 $ 402,162 $ 433,370 $ 481,999 Operating Expenses 247,294 303,669 333,305 375,419 ---------- ---------- ---------- ---------- Operating Income 96,069 98,493 100,065 106,580 Other Income and (Deductions) (28,099) (48,782) (41,401) (63,265) ---------- ---------- ---------- ---------- Income From Continuing Operations Before Income Taxes 67,970 49,711 58,664 43,315 Income Taxes 25,149 18,393 21,706 16,244 ---------- ---------- ---------- ---------- Income From Continuing Operations 42,821 31,318 36,958 27,071 ---------- ---------- ---------- ---------- Loss From Discontinued Operations, Net of Tax:(2) (20,313) (14,628) (12,484) (30,754) ---------- ---------- ---------- ---------- Net Income (Loss) 22,508 16,690 24,474 (3,683) Less-Preferred Dividends 88 87 88 87 ---------- ---------- ---------- ---------- Earnings (Loss) Available for Common Stock $ 22,420 $ 16,603 $ 24,386 $ (3,770) ========== ========== ========== ========== Number of Shares Used in Computing Basic Earnings Per Share 52,635 67,170 67,493 68,442 Number of Shares Used in Computing Diluted Earnings Per Share 53,429 67,986 67,991 68,823 BASIC EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 0.81 $ 0.47 $ 0.54 $ 0.39 Discontinued Operations (0.38) (0.22) (0.18) (0.45) ---------- ---------- ---------- ---------- Total Basic Earnings (Loss) Per Common Share $ 0.43 $ 0.25 $ 0.36 $ (0.06) ========== ========== ========== ========== DILUTED EARNINGS (LOSS) PER COMMON SHARE: Continuing Operations $ 0.80 $ 0.46 $ 0.54 $ 0.39 Discontinued Operations (0.38) (0.22) (0.18) (0.44) ---------- ---------- ---------- ---------- Total Diluted Earnings (Loss) Per Common Share $ 0.42 $ 0.24 $ 0.36 $ (0.05) ========== ========== ========== ==========
(1) Includes the results of operations of MidCon Corp. Beginning with its January 30, 1998 acquisition, See Note 2 of the accompanying Notes to Consolidated Financial Statements. (2) See Note 6 of the accompanying Notes to Consolidated Financial Statements. 80 81 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On November 22, 1999, Kinder Morgan Inc. (the registrant) replaced Arthur Andersen LLP (Arthur Andersen) as the principal accountant for the registrant and its affiliates. For the past two fiscal years, the reports of Arthur Andersen did not contain an adverse opinion nor a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The decision to replace Arthur Andersen was approved by the Board of Directors of the registrant. In connection with the audits of the registrant's financial statements for the two fiscal years ended December 31, 1997 and December 31, 1998 and in the subsequent interim period preceding Arthur Andersen's replacement, there were no disagreements on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Arthur Andersen, would have caused Arthur Andersen to make references to the matter in their report. On November 22, 1999, the registrant engaged as its new principal accountant PricewaterhouseCoopers LLP. During the two most recent fiscal years and through the date of their appointment, the registrant has not consulted with PricewaterhouseCoopers on matters of the type contemplated by Item 304(a)(2) of Regulation S-K. The registrant requested that PricewaterhouseCoopers review this disclosure made in accordance with Item 304(a) of Regulation S-K before it was filed with the Securities and Exchange Commission. PricewaterhouseCoopers determined that no additional disclosure was necessary. The registrant requested that Arthur Andersen furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the statements set forth in the Form 8-K filed with respect to this matter. A copy of that letter, dated November 29, 1999, is filed as Exhibit 16 to this Form 10-K. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information required by this item is contained in Kinder Morgan's Proxy Statement related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by reference. For information regarding Kinder Morgan's current executive officers, see Executive Officers of the Registrant under Part I. ITEM 11: EXECUTIVE COMPENSATION Information required by this item is contained in Kinder Morgan's Proxy Statement related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by reference. 81 82 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is contained in Kinder Morgan's Proxy Statement related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is contained in Kinder Morgan's Proxy Statement related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by reference. 82 83 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page Number ----------- (a) 1. Financial Statements.........................................................................................38 Reference is made to the listings of financial statements and supplementary data under Item 8 in Part II. 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts..........................................................84 Separate Financial Statements of Subsidiaries Not Consolidated and 50% or Less Owned Persons........................................................................84 3. Exhibits List of Executive Compensation Plans and Arrangements.................................................84-86 Exhibit Index.........................................................................................90-93 Exhibit 4(m) - $550,000,000 364-day Credit Agreement Exhibit 10(aa) - Kinder Morgan, Inc. Amended and Restated 1999 Stock Option Plan Exhibit 13 - 1999 Annual Report to Shareholders* Exhibit 21 - Subsidiaries of the Registrant Exhibit 23.1 - Consent of Independent Accountants Exhibit 23.2 - Consent of Independent Public Accountants Exhibit 27 - Financial Data Schedule** (b) Reports on Form 8-K..........................................................................................86-88
* Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as part of this annual report on Form 10-K. ** Included in Securities and Exchange Commission copy only. 83 84 ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) KINDER MORGAN, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1999 --------------------------------------------------------------------------------------- ADDITIONS ----------- DEDUCTIONS BALANCE AT CHARGED TO WRITE-OFF OF DISCONTINUED BEGINNING OF COST AND UNCOLLECTIBLE OPERATIONS BALANCE AT END PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD (In Millions) Allowance for Doubtful Accounts $10.8 $3.6 $(0.6) $(12.1) $1.7
YEAR ENDED DECEMBER 31, 1998 --------------------------------------------------------------------------------------- ADDITIONS ------------------------------ CHARGED TO DEDUCTIONS BALANCE AT CHARGED TO OTHER ACCOUNTS WRITE-OFF OF BEGINNING OF COST AND ACQUISITION OF UNCOLLECTIBLE BALANCE AT END PERIOD EXPENSES MIDCON ACCOUNTS OF PERIOD (In Millions) Allowance for Doubtful Accounts $1.7 $5.0 $5.8 $(1.7) $10.8
Note: Activity and balances prior to 1998 were not material. The financial statements of Kinder Morgan Energy Partners, an equity method investee of the Registrant, are incorporated herein by reference from F-1 to F-30 of Kinder Morgan Energy Partners' Annual Report on Form 10-K for the year ended December 31, 1999 dated March 14, 2000. Any reference made to K N Energy, Inc. in the List of Executive Compensation Plans and Arrangements is a reference to the former name of Kinder Morgan, Inc., a Kansas corporation and the Registrant, and is made because the executive compensation plan or arrangement being listed and incorporated by reference was originally filed before October 7, 1999, the date of the change in the Registrant's name. Executive Compensation Plans and Arrangements Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1982 Stock Option Plan for Nonemployee Directors of K N Energy, Inc. with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1982 Incentive Stock Option Plan for key employees of K N Energy, Inc. (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1986 Incentive Stock Option Plan for key employees of K N Energy, Inc. (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1988 Incentive Stock Option Plan for key employees of K N Energy, Inc. (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 84 85 ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) Directors' Deferred Compensation Plan Agreement (Exhibit 10.8, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* 1987 Directors' Deferred Fee Plan As Amended and Form of Participation Agreement regarding the Plan (Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1995)* 1992 Stock Option Plan for Nonemployee Directors of K N Energy, Inc. with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* 1994 K N Energy, Inc. Long-term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)* K N Energy, Inc. 1996 Executive Incentive Plan (Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1995)* K N Energy, Inc. Nonqualified Deferred Compensation Plan (Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994)* K N Energy, Inc. Nonqualified Retirement Income Restoration Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended December 31, 1994)* K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan (Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (Exhibit 10(p) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Exhibit 10(q) to the Annual Report on Form 10-K for the year ended December 31, 1995)* K N Energy, Inc. Performance Incentive Plan (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Form of Change of Control Severance Agreement (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Form of Incentive Stock Option Agreement (Exhibit 10(v) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Form of Restricted Stock Agreement (Exhibit 10(w) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Employment Agreement dated March 21, 1996 between K N Energy, Inc. and Murray R. Smith (Exhibit 10(x) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Directors and Executives Deferred Compensation Plan effective January 1, 1998 for executive officers and directors of K N Energy, Inc. (Exhibit 10(aa) to the Annual Report on Form 10-K for the year ended December 31, 1998)* 85 86 ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) Management Deferred Compensation Plan effective January 1, 1998 for senior management of K N Energy, Inc. (Exhibit 10(bb) to the Annual Report on Form 10-K for the year ended December 31, 1998)* Kinder Morgan, Inc. Amended and Restated 1999 Stock Option Plan (Attached hereto as Exhibit 10(cc)) * Incorporated herein by reference. (b) Reports on Form 8-K Current Report on Form 8-K dated October 21,1999, was filed on November 15,1999, pursuant to Items 2, 5 and 7 of that form. Pursuant to Item 2 of that form, Kinder Morgan disclosed that on October 7, 1999, Kinder Morgan consummated its acquisition of Kinder Morgan Delaware and changed its name from "K N Energy, Inc." to "Kinder Morgan, Inc." Pursuant to Item 5 of that form, the following was disclosed: 1) On October 7, 1999, Kinder Morgan issued a press release announcing the closing of the agreement that consummated the acquisition of Kinder Morgan Delaware (the "Merger Agreement") and Kinder Morgan's subsequent name change to "Kinder Morgan, Inc." 2) On October 7, 1999, David W. Burkholder, Robert H. Chitwood, Howard P. Coghlan, Jordan L. Haines and James C. Taylor resigned as directors of Kinder Morgan effective as of the closing of the transactions contemplated by the Merger Agreement. On October, 8, 1999, the number of directors constituting the Board of Directors was set at 10 and the remaining directors appointed Richard D. Kinder, William V. Morgan, Ted A. Gardner and Fayez Sarofim to fill the four vacancies on Kinder Morgan's Board of Directors. 3) On October 7, 1999, upon consummation of the Merger Agreement, Kinder Morgan entered into Governance Agreements with each of Richard D. Kinder and Morgan Associates, Inc., a Kansas corporation. Also, upon consummation of the Merger, Kinder Morgan entered into an Employment Agreement with Richard D. Kinder. Pursuant to Item 7 of that form, the financial statements of Kinder Morgan Delaware and Kinder Morgan Energy Partners as of and for the year ended December 31, 1998 and the six-month period ended June 30, 1999 were incorporated by reference to Kinder Morgan's Registration Statement on Form S-4 filed on August 23, 1999 (File No. 333-85747). In addition, the pro forma financial information related to the acquisition was incorporated by reference to Kinder Morgan's Registration Statement on Form S-4 filed on August 23, 1999 (File No. 333-85747). Also, the following were filed as exhibits: Exhibit Number Description 2.1 Agreement and Plan of Merger (incorporated by reference to Annex A-1 of Kinder Morgan's Registration Statement on Form S-4 filed on August 23, 1999 (File No. 333-85747)) 2.2 First Amendment to the Agreement and Plan of Merger (incorporated by reference to Annex A-2 of Kinder Morgan's Registration Statement on Form S-4 filed on August 23, 1999 (File No. 333-85747)) 10.1 Governance Agreement between Kinder Morgan and Richard D. Kinder (incorporated by reference to Exhibit 99.C of the Schedule 13D filed by Mr. Kinder on October 8, 1999). 10.2 Governance Agreement between Kinder Morgan and Morgan Associates, Inc. (incorporated by reference to Exhibit 99.C of the Schedule 13D filed by Morgan Associates, Inc. on October 8, 1999). 10.3 Employment Agreement between Kinder Morgan and Richard D. Kinder (incorporated by reference to Exhibit 99.D of the Schedule 13D filed by Mr. Kinder on October 8, 1999). 23.1 Consent of PricewaterhouseCoopers LLP 99.1 Press Release of Kinder Morgan issued October 7, 1999. 86 87 ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) Current Report on Form 8-K dated November 18, 1999, was filed on November 18, 1999, pursuant to Item 7 of that form. Pursuant to Item 7 of that form, the financial statements of Kinder Morgan Delaware as of and for the nine months ended September 30, 1999 were included. In addition, the pro forma financial statements of Kinder Morgan, giving effect to the acquisition by merger of Kinder Morgan Delaware as of and for the nine months ended September 30, 1999 were included. Also, the following were filed as exhibits: Exhibit Number Description 2.1 Agreement and Plan of Merger (incorporated by reference to Annex A-1 of Kinder Morgan's Registration Statement on Form S-4 filed on August 23, 1999 (File No. 333-85747)). 2.2 First Amendment to the Agreement and Plan of Merger (incorporated by reference to Annex A-2 of Kinder Morgan's Registration Statement on Form S-4 filed on August 23, 1999 (File No. 333-85747)). Current Report on Form 8-K dated November 29, 1999, was filed on November 29, 1999, pursuant to Item 4 and Item 7 of that form. Pursuant to Item 4 of that form, Kinder Morgan disclosed that on November 22, 1999, Kinder Morgan replaced Arthur Andersen LLP as the principal accountant for Kinder Morgan. Also on November 22, 1999, Kinder Morgan engaged as its new principal accountant PricewaterhouseCoopers LLP. Pursuant to Item 7 of that form, a letter dated November 29, 1999, from Arthur Andersen LLP to the Securities and Exchange Commission was filed as Exhibit 16.1. Current Report on Form 8-K dated January 14, 2000, was filed on January 14, 2000, pursuant to Item 5 and Item 7 of that form. Pursuant to Item 5 of that form, Kinder Morgan disclosed that Kinder Morgan had entered into a Contribution Agreement dated as of December 30, 1999 (the "Agreement"), among Kinder Morgan Energy Partners, Kinder Morgan G. P., Inc., a wholly owned subsidiary and the sole general partner of Kinder Morgan Energy Partners ("KMGP"), Kinder Morgan, NGPL, and K N Gas Gathering, Inc., a wholly owned subsidiary ("KNGG"). Pursuant to the Agreement, Kinder Morgan Energy Partners agreed to issue common units representing limited partnership units of Kinder Morgan Energy Partners to Kinder Morgan, NGPL and KNGG and make a special distribution of $330 million to Kinder Morgan in exchange for the contribution to Kinder Morgan Energy Partners of: 1) all of Kinder Morgan's interest in KMIGT; 2) all of NGPL's interest in NGPL-Trailblazer, Inc., which owns a one-third interest in Trailblazer Pipeline Company; and 3) all of KNGG's interest in Red Cedar Gathering Company. Pursuant to Item 7 of that form, the Contribution Agreement was filed as Exhibit 99.1. Current Report on Form 8-K dated February 4, 2000, was filed on February 4, 2000, pursuant to Items 2, 5 and 7 of that form. Pursuant to Item 2 of that form, Kinder Morgan disclosed that on January 20, 2000, but effective as of December 31, 1999, the contribution of assets contemplated by the Contribution Agreement was completed, and that Kinder Morgan Energy Partners had taken the following actions: 1) issued an aggregate of 9,810,000 common units representing limited partnership units of Kinder Morgan Energy Partners to Kinder Morgan, NGPL and KNGG; 2) made a payment in the amount of $ 220 million in cash to Kinder Morgan; and 3) has the obligation to pay Kinder Morgan $ 130 million within 90 days of January 20, 2000. Pursuant to Item 5 of that form, Kinder Morgan disclosed that on January 20, 2000, Kinder Morgan issued a press release announcing, among other things, the completion of the transaction referenced in Item 2. Pursuant to Item 7 of that form, pro forma financial statements of Kinder Morgan, giving effect to the transaction referenced in Item 2 as of and for the nine months ended September 30, 1999 and for the 12 months ended December 31, 1998 were included. Also, the Contribution Agreement (incorporated by reference from Exhibit 87 88 ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) 99.1 to Kinder Morgan's Current Report on Form 8-K filed January 14, 2000) and portions of the press release of Kinder Morgan dated January 20, 2000, were filed as exhibits. Current Report on Form 8-K dated February 23, 2000, was filed on February 23, 2000, pursuant to Item 5 and Item 7 of that form. Pursuant to Item 5 of that form, Kinder Morgan disclosed that Kinder Morgan and certain of its subsidiaries had entered into a definitive agreement dated as of February 8, 2000 with ONEOK, Inc. The agreement provided for the sale to ONEOK, Inc. of (i) all of Kinder Morgan's natural gas gathering and processing business in Oklahoma, Kansas and West Texas, (ii) Kinder Morgan's marketing and trading business, and (iii) certain of Kinder Morgan's storage and transmission pipelines in the mid-continent region. According to the agreement, ONEOK will (i) pay approximately $114 million plus an amount equal to net working capital at closing, (ii) assume the operating lease associated with the Bushton, Kansas gas processing plant and (iii) assume long-term capacity commitments on NGPL and on KMIGT. Also, Kinder Morgan disclosed that on February 8, 2000, Kinder Morgan issued a press release. Pursuant to Item 7 of that form, the definitive agreement with ONEOK and the press release were filed as exhibits. 88 89 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) Date: March 27, 2000 By /s/ C. Park Shaper ------------------------------------------ C. Park Shaper Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Edward H. Austin, Jr. Director - ----------------------------------- Edward H. Austin, Jr. /s/ Charles W. Battey Director - ----------------------------------- Charles W. Battey /s/ Stewart A. Bliss Director - ----------------------------------- Stewart A. Bliss /s/ Ted A. Gardner Director - ----------------------------------- Ted A. Gardner /s/ William J. Hybl Director - ----------------------------------- William J. Hybl /s/ Richard D. Kinder Chairman, Chief Executive Officer - ----------------------------------- and Director (Principal Executive Officer) Richard D. Kinder /s/ William V. Morgan Vice Chairman, President and - ----------------------------------- Director William V. Morgan /s/ Edward Randall, III Director - ----------------------------------- Edward Randall, III /s/ Fayez Sarofim Director - ----------------------------------- Fayez Sarofim /s/ C. Park Shaper Vice President and Chief Financial Officer - ----------------------------------- (Principal Financial and Accounting Officer) C. Park Shaper /s/ H. A. True, III Director - ----------------------------------- H. A. True, III
89 90 Any reference made to K N Energy, Inc. in the exhibit index is a reference to the former name of Kinder Morgan, Inc., a Kansas corporation and the Registrant, and is made because the exhibit being listed and incorporated by reference was originally filed before October 7, 1999, the date of the change in the Registrant's name. EXHIBIT INDEX
Page Number ----------- List of Executive Compensation Plans and Arrangements................................84-86 Exhibit 2(a) - Agreement and Plan of Merger, dated as of July 8, 1999, by and among K N Energy, Inc., a Kansas corporation, Rockies Merger Corp., a Delaware corporation, and Kinder Morgan, Inc., a Delaware corporation (Annex A-1 of Registration Statement on Form S-4 (File No. 333-85747))* Exhibit 2(b) - First Amendment to Agreement and Plan of Merger, dated as of August 20, 1999, by and among K N Energy, Inc., a Kansas corporation, Rockies Merger Corp., a Delaware corporation, and Kinder Morgan, Inc., a Delaware corporation (Annex A-2 of Registration Statement on Form S-4 (File No. 333-85747))* Exhibit 2(c) - Contribution Agreement, dated as of December 30, 1999, by and among Kinder Morgan, Inc., Natural Gas Pipeline Company of America, K N Gas Gathering, Inc., Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners, L.P. (Exhibit 99.1 to Current Report on Form 8-K filed on January 14, 2000)* Exhibit 3(a) - Restated Articles of Incorporation of Kinder Morgan, Inc. (Exhibit 3(a) to the K N Energy, Inc. Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 3(b) - Certificate of Amendment to the Restated Articles of Incorporation of Kinder Morgan, Inc. as filed on October 7, 1999, with the Secretary of State of Kansas (Exhibit 3.1 to Kinder Morgan, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)* Exhibit 3(c) - Bylaws of Kinder Morgan, Inc. as amended to October 7, 1999 (Exhibit 3.2 to Kinder Morgan, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)* Exhibit 4(a) - Indenture dated as of September 1, 1988, between K N Energy, Inc. and Continental Illinois National Bank and Trust Company of Chicago (Exhibit 1.2, Current Report on Form 8-K Dated October 5, 1988)* Exhibit 4(b) - First supplemental indenture dated as of January 15, 1992, between K N Energy, Inc. and Continental Illinois National Bank and Trust Company of Chicago (Exhibit 4.2, File No. 33-45091)* Exhibit 4(c) - Second supplemental indenture dated as of December 15, 1992, between K N Energy, Inc. and Continental Bank, National Association (Exhibit 1.2 Current Report on Form 8-K dated December 15, 1992)*
91 EXHIBIT INDEX (continued)
Page Number ----------- Exhibit 4(d) - Indenture dated as of November 20, 1993, between K N Energy, Inc. and Continental Bank, National Association (Exhibit 4.1, File No. 33-51115)* Note - Copies of instruments relative to long-term debt in authorized amounts that do not exceed 10 percent of the consolidated total assets of Kinder Morgan and its subsidiaries have not been furnished. Kinder Morgan will furnish such instruments to the Commission upon request. Exhibit 4(e) - $600,000,000 364-Day Credit Agreement among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 4(e) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 4(f) - $400,000,000 Five-Year Credit Agreement among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 4(f) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 4(g) - $2,100,000,000 364-Day Credit Agreement among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 4(g) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 4(h) - $1,394,846,122 Reimbursement Agreement among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 4(e) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 4(i) - Purchase Contract Agreement dated as of November 25, 1998, between K N Energy, Inc. and U.S. Bank Trust National Association, as Purchase Contract Agent for the PEPS Units (Exhibit 4.4 to the Current Report on Form 8-K Dated November 24, 1998)* Exhibit 4(j) - Amendment No. 1 to Credit Agreements dated as of November 6, 1998, among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 4(j) to the Annual Report on Form 10-K for the year ended December 31, 1998)* Exhibit 4(k) - $600,000,000 364-Day Credit Agreement dated as of January 8, 1999, among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 4(k) to the Annual Report on Form 10-K for the year ended December 31, 1998)* Exhibit 4(l) - Amendment No. 2 to the $400,000,000 Five-Year Credit Agreement, dated as of January 8, 1999, among K N Energy, Inc., certain banks listed therein and Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 4(l) to the Annual Report on Form 10-K for the year ended December 31, 1998)* Exhibit 4(m) - $550,000,000 364-day Credit Agreement, dated as of November 18, 1999, among Kinder Morgan, Inc., certain banks listed therein and Bank of America, N.A., as Administrative Agent (Attached hereto as Exhibit 4(m))** Exhibit 4(n) - Rights Agreement between K N Energy, Inc. and the Bank of New York, as Rights Agent, dated as of August 21, 1995 (Exhibit 1 on Form 8-A dated August 21, 1995)* Exhibit 4(o) - Amendment No. 1 to Rights Agreement between K N Energy, Inc. and the Bank of New York, as Rights Agent, dated as of September 8, 1998 (Exhibit 10(cc) to the Annual Report on Form 10-K for the year ended December 31, 1998)* Exhibit 4(p) - Amendment No. 2 to Rights Agreement of Kinder Morgan, Inc. dated July 8, 1999, between Kinder Morgan, Inc. and First Chicago Trust Company of New York, as successor-in-interest to the Bank of New York, as Rights Agent (Exhibit 4.1 to Kinder Morgan, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)* Exhibit 10(a) - Form of Key Employee Severance Agreement (Exhibit 10.2, Amendment No. 1 on Form 8 dated September 2, 1998 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(b) - 1982 Stock Option Plan for Non-employee Directors of K N Energy, Inc. with Form of Grant Certificate (Exhibit 10.3, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(c) - 1982 Incentive Stock Option Plan for key employees of K N Energy, Inc. (Exhibit 10.4, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)*
92 EXHIBIT INDEX (continued)
Page Number ----------- Exhibit 10(d) - 1986 Incentive Stock Option Plan for key employees of K N Energy, Inc. (Exhibit 10.5, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(e) - 1988 Incentive Stock Option Plan for key employees of K N Energy, Inc. (Exhibit 10.6, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(f) - Form of Grant Certificate for Employee Stock Option Plans (Exhibit 10.7, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(g) - Directors' Deferred Compensation Plan Agreement (Exhibit 10.8, Amendment No. 1 on Form 8 dated September 2, 1988 to the Annual Report on Form 10-K for the year ended December 31, 1987)* Exhibit 10(h) - 1987 Directors' Deferred Fee Plan As Amended and Form of Participation Agreement regarding the Plan (Exhibit 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(i) - 1992 Stock Option Plan for Nonemployee Directors of K N Energy, Inc. with Form of Grant Certificate (Exhibit 4.1, File No. 33-46999)* Exhibit 10(j) - 1994 K N Energy, Inc. Long-term Incentive Plan (Attachment A to the K N Energy, Inc. 1994 Proxy Statement on Schedule 14-A)* Exhibit 10(k) - K N Energy, Inc. 1996 Executive Incentive Plan (Exhibit 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(l) - K N Energy, Inc. Nonqualified Deferred Compensation Plan (Exhibit 10(m) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(m) - K N Energy, Inc. Nonqualified Retirement Income Restoration Plan (Exhibit 10(n) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(n) - K N Energy, Inc. Nonqualified Profit Sharing Restoration Plan (Exhibit 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1994)* Exhibit 10(o) - Employment Agreement dated December 14, 1995 between K N Energy, Inc. and Morton C. Aaronson (Exhibit 10(p) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(o) - Letter Agreement dated December 4, 1995 between K N Energy, Inc. and Charles W. Battey (Exhibit 10(q) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(p) - Amended and Restated Basket Agreement dated as of June 30, 1990, by and between American Pipeline Company ("APC"), Cabot and Cabot Transmission Corporation (Exhibit 10.5(a) to the Annual Report on Form 10-K for American Oil and Gas Corporation ("AOG") for the year ended December 31, 1993)* Exhibit 10(q) - First Amendment to Amended and Restated Omnibus Acquisition Agreement and Amended and Restated Basket Agreement dated as of March 31, 1992, by and among AOG, APC, Cabot and Cabot Transmission (Exhibit 10.5(d) to the Annual Report on Form 10-K for AOG for the year ended December 31, 1993)*
93 EXHIBIT INDEX (continued)
Page Number ----------- Exhibit 10(r) - K N Energy, Inc. Performance Incentive Plan (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1995)* Exhibit 10(s) - Form of Change of Control Severance Agreement (Exhibit 10(u) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 10(t) - Form of Incentive Stock Option Agreement (Exhibit 10(v) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 10(u) - Form of Restricted Stock Agreement (Exhibit 10(w) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 10(v) - Employment Agreement dated March 21, 1996 between K N Energy, Inc. and Murray R. Smith (Exhibit 10(x) to the Annual Report on Form 10-K for the year ended December 31, 1996)* Exhibit 10(w) - Intrastate Pipeline System Lease, dated December 31, 1996, between MidCon Texas Pipeline, L.P. and MidCon Texas Pipeline Operator, Inc. (Exhibit 10(y) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 10(x) - Amendment Number One To Intrastate Pipeline System Lease, dated January 31, 1998, between MidCon Texas Pipeline, L.P. and MidCon Texas Pipeline Operator, Inc. (Exhibit 10(z) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 10(y) - Directors and Executives Deferred Compensation Plan effective January 1, 1998 for executive officers and directors of K N Energy, Inc. (Exhibit 10(aa) to the Annual Report on Form 10-K for the year ended December 31, 1998)* Exhibit 10(z) - Management Deferred Compensation Plan effective January 1, 1998 for senior management of K N Energy, Inc. (Exhibit 10(bb) to the Annual Report on Form 10-K for the year ended December 31, 1998)* Exhibit 10(aa) - Kinder Morgan, Inc. Amended and Restated 1999 Stock Option Plan (Attached hereto as Exhibit 10(aa))** Exhibit 10(bb) - Stock Purchase Agreement, dated December 18, 1997, between K N Energy, Inc. and Occidental Petroleum Corporation (Exhibit 2.1, File No. 333-44421)* Exhibit 10(cc) - Amendment No. 1 to Stock Purchase Agreement, dated January 30,1998, between K N Energy, Inc. and Occidental Petroleum Corporation (Exhibit 2(b) to the Annual Report on Form 10-K for the year ended December 31, 1997)* Exhibit 10(dd) - Governance Agreement dated October 7, 1999, between the Kinder Morgan, Inc. and Richard D. Kinder (incorporated by reference to Exhibit 99.C of the Schedule 13D filed by Mr. Kinder on October 8, 1999)* Exhibit 10(ee) - Governance Agreement dated October 7, 1999, between the Kinder Morgan, Inc. and Morgan Associates, Inc. (incorporated by reference to Exhibit 99.C of the Schedule 13D filed by Morgan Associates, Inc. and William V. Morgan on October 8, 1999)* Exhibit 10(ff) - Employment Agreement dated October 7, 1999, between the Company and Richard D. Kinder (incorporated by reference to Exhibit 99.D of the Schedule 13D filed by Mr. Kinder on October 8, 1999)* Exhibit 10(gg) - Receivables Purchase Agreement dated September 28, 1999, among KN Receivables Corporation, as Seller, Falcon Asset Securitization Corporation, International Securitization Corporation and The Financial Institutions Party Hereto, as Investors and Bank One, NA, as Agent (Exhibit 10.4 to Kinder Morgan, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)* Exhibit 10(hh) - Receivables Sale Agreement dated September 28, 1999, between K N Energy, Inc., as the Originator, and other Originators specified herein and KN Receivables Corporation, as Buyer (Exhibit 10.5 to Kinder Morgan, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)* Exhibit 13 - 1999 Annual Report to Shareholders***...................................95 Exhibit 21 - Subsidiaries of the Registrant (attached hereto) Exhibit 23.1 - Consent of Independent Accountants (attached hereto) Exhibit 23.2 - Consent of Independent Public Accountants (attached hereto) Exhibit 27 - Financial Data Schedule****
* Incorporated herein by reference. ** Included in SEC and NYSE copies only. *** Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this annual report on Form 10-K. **** Included in SEC copy only. EX-4.M 2 $550,000,000 364-DAY CREDIT AGREEMENT 1 EXHIBIT 4(m) $550,000,000 364-DAY CREDIT AGREEMENT dated as of November 18, 1999 among KINDER MORGAN, INC. The Banks Listed Herein, and BANK OF AMERICA, N.A., as Administrative Agent ------------------ THE CHASE MANHATTAN BANK, Syndication Agent FIRST UNION NATIONAL BANK, Documentation Agent BANK ONE, N.A., Co-Documentation Agent BANC OF AMERICA SECURITIES LLC, Lead Arranger and Sole Book Manager CHASE SECURITIES INC. FIRST UNION SECURITIES, INC. Co-Arrangers 2 TABLE OF CONTENTS
PAGE ARTICLE 1 DEFINITIONS.....................................................................................1 SECTION 1.01. Definitions...............................................................................1 SECTION 1.02. Accounting Terms and Determinations......................................................10 SECTION 1.03. Types of Borrowings......................................................................11 ARTICLE 2 THE CREDITS....................................................................................11 SECTION 2.01. Commitments to Lend; Term Loans..........................................................11 SECTION 2.02. Notice of Committed Borrowing............................................................11 SECTION 2.03. Money Market Borrowings..................................................................12 SECTION 2.04. Notice to Banks; Funding of Loans........................................................15 SECTION 2.05. Notes....................................................................................15 SECTION 2.06. Maturity of Loans........................................................................16 SECTION 2.07. Interest Rates...........................................................................16 SECTION 2.08. Facility Fees............................................................................18 SECTION 2.09. Optional Termination or Reduction of Commitments.........................................19 SECTION 2.10. Method of Electing Interest Rates........................................................19 SECTION 2.11. Optional Prepayments.....................................................................20 SECTION 2.12. General Provisions as to Payments........................................................20 SECTION 2.13. Funding Losses...........................................................................21 SECTION 2.14. Computation of Interest and Fees.........................................................21 SECTION 2.15. Regulation D Compensation................................................................21 ARTICLE 3 CONDITIONS.....................................................................................22 SECTION 3.01. Effectiveness............................................................................22 SECTION 3.02. Borrowings...............................................................................22 ARTICLE 4 REPRESENTATIONS AND WARRANTIES.................................................................23 SECTION 4.01. Corporate Existence and Power............................................................23 SECTION 4.02. Corporate and Governmental Authorization; No Contravention...............................23 SECTION 4.03. Binding Effect...........................................................................23 SECTION 4.04. Financial Information....................................................................23 SECTION 4.05. Litigation...............................................................................24 SECTION 4.06. Compliance with ERISA....................................................................24 SECTION 4.07. Environmental Matters....................................................................24 SECTION 4.08. Taxes....................................................................................25 SECTION 4.09. Subsidiaries.............................................................................25 SECTION 4.10. Not an Investment Company................................................................25 SECTION 4.11. Full Disclosure..........................................................................25 SECTION 4.12. Year 2000 Readiness......................................................................25 ARTICLE 5 COVENANTS......................................................................................25 SECTION 5.01. Information..............................................................................25 SECTION 5.02. Payment of Obligations...................................................................27 SECTION 5.03. Maintenance of Property; Insurance.......................................................27 SECTION 5.04. Conduct of Business and Maintenance of Existence.........................................28 SECTION 5.05. Compliance with Laws.....................................................................28 SECTION 5.06. Inspection of Property, Books and Records................................................28
i 3 SECTION 5.07. Debt.....................................................................................28 SECTION 5.08. Minimum Net Worth........................................................................29 SECTION 5.09. Negative Pledge..........................................................................29 SECTION 5.10. Consolidations, Mergers and Sales of Assets..............................................29 SECTION 5.11. Use of Proceeds..........................................................................30 SECTION 5.12. Transactions with Affiliates.............................................................30 ARTICLE 6 DEFAULTS.......................................................................................30 SECTION 6.01. Events of Default........................................................................30 SECTION 6.02. Notice of Default........................................................................32 ARTICLE 7 THE AGENTS.....................................................................................32 SECTION 7.01. Appointment and Authorization............................................................32 SECTION 7.02. Administrative Agent and Affiliates......................................................32 SECTION 7.03. Action by Administrative Agent...........................................................32 SECTION 7.04. Consultation with Experts................................................................32 SECTION 7.05. Liability of Administrative Agent........................................................33 SECTION 7.06. Indemnification..........................................................................33 SECTION 7.07. Credit Decision..........................................................................33 SECTION 7.08. Successor Administrative Agent...........................................................33 SECTION 7.09. Agents' Fees.............................................................................34 SECTION 7.10. Other Agents.............................................................................34 ARTICLE 8 CHANGE IN CIRCUMSTANCES........................................................................34 SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.................................34 SECTION 8.02. Illegality...............................................................................34 SECTION 8.03. Increased Cost and Reduced Return........................................................35 SECTION 8.04. Taxes....................................................................................36 SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans................................37 SECTION 8.06. Substitution of Bank.....................................................................37 ARTICLE 9 MISCELLANEOUS..................................................................................38 SECTION 9.01. Notices..................................................................................38 SECTION 9.02. No Waivers...............................................................................38 SECTION 9.03. Expenses; Indemnification................................................................38 SECTION 9.04. Sharing of Set-offs......................................................................38 SECTION 9.05. Amendments and Waivers...................................................................39 SECTION 9.06. Successors and Assigns...................................................................39 SECTION 9.07. Designated Lender........................................................................40 SECTION 9.08. Collateral...............................................................................41 SECTION 9.09. Maximum Interest Rate....................................................................41 SECTION 9.10. Governing Law; Submission to Jurisdiction................................................42 SECTION 9.11. Counterparts; Integration................................................................42 SECTION 9.12. WAIVER OF JURY TRIAL.....................................................................42
ii 4 PRICING SCHEDULE EXHIBIT A - NOTE EXHIBIT B - MONEY MARKET QUOTE REQUEST EXHIBIT C - INVITATION FOR MONEY MARKET QUOTES EXHIBIT D - MONEY MARKET QUOTE EXHIBIT E- 1 - OPINION OF KANSAS COUNSEL FOR THE BORROWER EXHIBIT E-2 - OPINION OF COUNSEL TO THE BORROWER EXHIBIT F - OPINION OF HAYNES AND BOONE, LLP, SPECIAL COUNSEL FOR THE ADMINISTRATIVE AGENT EXHIBIT G - ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT H - DESIGNATION AGREEMENT iii 5 364-DAY CREDIT AGREEMENT AGREEMENT dated as of November 18, 1999 among KINDER MORGAN, INC., the BANKS listed on the signature pages hereof and BANK OF AMERICA, N.A., as Administrative Agent. The parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "ABSOLUTE RATE AUCTION" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "ADJUSTED CD RATE" has the meaning set forth in Section 2.07(b). "ADMINISTRATIVE AGENT" means Bank of America, N.A. in its capacity as administrative agent for the Banks under this Agreement, and its successors in such capacity. "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "AFFILIATE" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "CONTROLLING PERSON") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "CONTROL" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "AGENT" means each of the Administrative Agent, the Syndication Agent, the Documentation Agent and the Co-Documentation Agent, and "Agents" means any combination of them, as the context may require. "APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "ASSESSMENT RATE" has the meaning set forth in Section 2.07(b). "ASSIGNEE" has the meaning set forth in Section 9.06(c). "BANK" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "BASE RATE" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day or (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. 6 "BASE RATE LOAN" means a Committed Loan to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Committed Borrowing or Notice of Interest Rate Election, or pursuant to Article 8. "BASE RATE MARGIN" has the meaning set forth in Section 2.07(a). "BENEFIT ARRANGEMENT" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "BORROWER" means Kinder Morgan, Inc., a Kansas corporation, and its successors. "BORROWER'S 1998 FORM 10-K" means the Borrower's annual report on Form 10-K for 1998, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "BORROWER'S LATEST FORM 10-Q" means the Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 1999 as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "BORROWING" has the meaning set forth in Section 1.03. "CD BASE RATE" has the meaning set forth in Section 2.07(b). "CD LOAN" means a Committed Loan to be made by a Bank as a CD Loan in accordance with the applicable Notice of Committed Borrowing. "CD MARGIN" has the meaning set forth in Section 2.07(b). "CD REFERENCE BANKS" means Bank of America, N.A., The Chase Manhattan Bank, First Union National Bank and Bank One, N.A.. "CO-DOCUMENTATION AGENT" means Bank One, N.A. in its capacity as a co-documentation agent in respect of this Agreement. "COMMITMENT" means, with respect to each Bank, the amount set forth opposite the name of such Bank on Schedule 1.01, as such amount may be reduced from time to time pursuant to Sections 2.01(b) and 2.09. "COMMITTED LOAN" means a revolving loan or a term loan made by a Bank pursuant to Section 2.01, provided that if any such Loan or Loans are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "CONSOLIDATED ASSETS" means the total amount of assets appearing on the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, prepared in accordance with generally accepted accounting principles as of the date of the most recent regularly prepared consolidated financial statements prior to the taking of any action for the purposes of which the determination is being made. "CONSOLIDATED DEBT" of any Person means at any date the sum (without duplication) of (i) the Debt of such Person and its Consolidated Subsidiaries, determined on a consolidated basis as of such date plus (ii) 2 7 the excess (if any) of the Trust Preferred Securities of such Person over 10% of the Consolidated Total Capitalization of such Person at such date. "CONSOLIDATED EBITDA" means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining Consolidated Net Income for such period, the aggregate amount of (i) Consolidated Interest Expense, (ii) income tax expense and (iii) depreciation and amortization expense. "CONSOLIDATED INTEREST EXPENSE" means, for any period, the interest expense of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "CONSOLIDATED SUBSIDIARY" of any Person means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "CONSOLIDATED NET INCOME" means, for any period, the net income of the Borrower and its Consolidated Subsidiaries before extraordinary items, determined on a consolidated basis for such period. "CONSOLIDATED NET WORTH" of any Person means at any date the sum (without duplication) of (i) the consolidated stockholders' equity of such Person and its Consolidated Subsidiaries, determined as of such date plus (ii) the Mandatorily Convertible Preferred Stock of such Person plus (iii) the Trust Preferred Securities of such Person; provided that the amount of Trust Preferred Securities added pursuant to this clause (iii) shall not exceed 10% of Consolidated Total Capitalization of such Person at such date. "CONSOLIDATED TOTAL CAPITALIZATION" of any Person means at any date the sum of Consolidated Debt of such Person and Consolidated Net Worth of such Person, each determined as of such date. "DEBT" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable or deferred employee and director compensation arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, for purposes of Section 5.09 and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DERIVATIVES OBLIGATIONS" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DESIGNATED LENDER" means with respect to each Designating Bank, each Eligible Designee designated by such Designating Bank pursuant to Section 9.07(a). 3 8 "DESIGNATING BANK" means, with respect to each Designated Lender, the Bank that designated such Designated Lender pursuant to Section 9.07(a). "DOCUMENTATION AGENT" means First Union National Bank, in its capacity as a documentation agent in respect of this Agreement. "DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "DOMESTIC LOANS" means CD Loans or Base Rate Loans or both. "DOMESTIC RESERVE PERCENTAGE" has the meaning set forth in Section 2.07(b). "EFFECTIVE DATE" means the date this Agreement becomes effective in accordance with Section 3.01. "ELIGIBLE DESIGNEE" means a special purpose corporation that (i) is organized under the laws of the United States or any state thereof, (ii) is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and (iii) issues (or the parent of which issues) commercial paper rated at least A-1 or the equivalent thereof by S & P or P-1 or the equivalent thereof by Moody's. "ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA GROUP" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its 4 9 Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "EURO-DOLLAR LOAN" means a Committed Loan to be made by a Bank as a Euro-Dollar Loan in accordance with the applicable Notice of Committed Borrowing. "EURO-DOLLAR MARGIN" has the meaning set forth in Section 2.07(c). "EURO-DOLLAR REFERENCE BANKS" means the principal London offices of Bank of America, N.A., The Chase Manhattan Bank, First Union National Bank and Bank One, N.A.. "EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "EXISTING AGREEMENT" means the Amended and Restated 364-Day Credit Agreement dated as of January 8, 1999, as amended, among the Borrower, the banks party thereto and Morgan Guaranty Trust Company of New York, as administrative agent for such banks. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Bank of America, N.A. on such day on such transactions as determined by the Administrative Agent. "FIXED RATE LOANS" means CD Loans or Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(a)) or any combination of the foregoing. "GROUP OF LOANS" means at any time a group of Loans consisting of (i) all Committed Loans which are Base Rate Loans at such time or (ii) all Committed Loans which are Euro-Dollar Loans or CD Loans having the same Interest Period at such time. "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee 5 10 shall not include endorsements for collection or deposit in the ordinary course of business. The term "GUARANTEE" used as a verb has a corresponding meaning. "HAZARDOUS SUBSTANCES" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "INDEMNITEE" has the meaning set forth in Section 9.03(b). "INTEREST COVERAGE RATIO" means, at any date, the ratio of Consolidated EBITDA to Consolidated Interest Expense for the period of four consecutive fiscal quarters most recently ended on or before such date. "INTEREST PERIOD" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of the Borrowing specified in the applicable Notice of Borrowing or the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter as the Borrower may elect in the applicable notice; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date; (2) with respect to each CD Borrowing, the period commencing on the date of Borrowing specified in the applicable Notice of Borrowing or the date specified in the applicable Notice of Interest Rate Election and ending 30, 60, 90 or 180 days thereafter as the Borrower may elect in the applicable notice; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date; (3) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter (but not more than nine months) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; 6 11 (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date; (4) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than seven days nor more than 360 days) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period beginning prior to the Termination Date which would otherwise end after the Termination Date shall end on the Termination Date, and any Interest Period beginning on or after the Termination Date which would otherwise end after the Maturity Date shall end on the Maturity Date. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "INVESTMENT" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "LIBOR AUCTION" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "LOAN" means a Domestic Loan or a Euro-Dollar Loan or a Money Market Loan and "LOANS" means Domestic Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.07(c). "MANDATORILY CONVERTIBLE PREFERRED STOCK" means, with respect to the Borrower, preferred securities of a Subsidiary which are (i) mandatorily convertible into common equity securities of the Borrower within approximately three years of their date of issuance, (ii) issued in conjunction with, and pledged to secure, an obligation to purchase common equity securities of the Borrower within approximately three years for an equal amount or (iii) otherwise structured in a manner satisfactory to the Administrative Agent so as to ensure the issuance of incremental common equity securities of the Borrower in a substantially equal amount within approximately three years. "MATERIAL DEBT" means Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $75,000,000. 7 12 "MATERIAL FINANCIAL OBLIGATIONS" means a principal or face amount of Debt (other than (i) the Notes and (ii) Debt owing to the Borrower or a Subsidiary) and/or payment obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $125,000,000. "MATERIAL SUBSIDIARY" means any Subsidiary the consolidated assets of which constitute 10% or more of Consolidated Assets. "MATURITY DATE" means the day that is one year after the Termination Date. "MONEY MARKET ABSOLUTE RATE" has the meaning set forth in Section 2.03(d). "MONEY MARKET ABSOLUTE RATE LOAN" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "MONEY MARKET LENDING OFFICE" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may from time to time by notice to the Borrower and the Administrative Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "MONEY MARKET LIBOR LOAN" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01 (a)). "MONEY MARKET LOAN" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "MONEY MARKET MARGIN" has the meaning set forth in Section 2.03(d). "MONEY MARKET QUOTE" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "MOODY'S" means Moody's Investors Service, Inc. "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NOTES" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "NOTICE OF BORROWING" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.10. 8 13 "PARENT" means, with respect to any Bank, any Person controlling such Bank. "PARTICIPANT" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERSON" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PLAN" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "PRICING SCHEDULE" means the Schedule attached hereto identified as such. "PRIME RATE" means the rate of interest publicly announced by Bank of America, N.A. in New York City from time to time as its Prime Rate. The Prime Rate is based upon various factors including Bank of America, N.A.'s costs and desired return, general economic factors and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in the Prime Rate announced by Bank of America, N.A. shall take effect at the opening of business on the day specified in the public announcement of such change. "PURCHASE AGREEMENT" means the Purchase and Sale Agreement dated as of January 28, 1994, among K N Gas Supply Services, Inc., the Borrower, Bank of America National Trust and Savings Association, as the initial Purchaser (as defined therein), and Bank of America National Trust and Savings Association, as agent for the Purchasers. "REFERENCE BANKS" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "REFERENCE BANK" means any one of such Reference Banks. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REQUIRED BANKS" means at any time Banks having at least 66-2/3 % of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66-2/3% of the aggregate unpaid principal amount of the Loans. "REVOLVING CREDIT PERIOD" means the period from and including the Effective Date to but not including the Termination Date. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "SUBSIDIARY" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "SUBSIDIARY" means a Subsidiary of the Borrower. 9 14 "TERM LOAN PHASE" means the period beginning on the Termination Date and ending on the Maturity Date (or, if the maturity of the Loans has been accelerated to an earlier date, then ending on such earlier date). "TERMINATION DATE" means November 16, 2000, or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "TRUST PREFERRED SECURITIES" means, with respect to the Borrower, mandatorily redeemable capital trust securities of trusts which are Subsidiaries and the subordinated debentures of the Borrower in which the proceeds of the issuance of such capital trust securities are invested, including, without limitation, $275,000,000 of such securities outstanding at the Effective Date. "UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "UNITED STATES" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "WHOLLY-OWNED CONSOLIDATED SUBSIDIARY" of any Person means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. SECTION 1.03. Types of Borrowings. The term "BORROWING" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on a single date and, in the case of Fixed Rate Loans, for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "EURO-DOLLAR BORROWING" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "COMMITTED BORROWING" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "MONEY MARKET BORROWING" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). 10 15 ARTICLE 2 THE CREDITS SECTION 2.01. Commitments to Lend; Term Loans. (a) During the Revolving Credit Period each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $5,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(c)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. (b) The Commitments shall terminate at the close of business on the Termination Date, and amounts repaid on or after the Termination Date may not be reborrowed. (c) All Committed Loans which are outstanding on the Termination Date shall automatically become term loans, due and payable on the Maturity Date. SECTION 2.02. Notice of Committed Borrowing. The Borrower shall give the Administrative Agent notice (a "NOTICE OF COMMITTED BORROWING") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received not later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall 11 16 have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $5,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Administrative Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Administrative Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Administrative Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall be irrevocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, 12 17 (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "MONEY MARKET MARGIN") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "MONEY MARKET ABSOLUTE RATE") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) Notice to Borrower. The Administrative Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR 13 18 Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Administrative Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "NOTICE OF MONEY MARKET BORROWING") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $5,000,000 or a larger multiple of $ 1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) Allocation by Administrative Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Administrative Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Administrative Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Administrative Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) If any Bank makes a new Loan hereunder on a day on which the Borrower is to repay all or any part of an outstanding Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Administrative Agent as provided in subsection (b) of this Section, or remitted by the Borrower to the Administrative Agent as provided in Section 2.12, as the case may be. (d) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to 14 19 the Administrative Agent on the date of such Borrowing in accordance with subsections (b) and (c) of this Section 2.04 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Administrative Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "NOTE" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(b), the Administrative Agent shall forward such Note to such Bank. Each Bank may record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.06. Maturity of Loans. Each Loan included in any Borrowing made pursuant to Section 2.01 shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Maturity Date. Each Loan included in any Borrowing made pursuant to Section 2.03 shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the last day of the Interest Period applicable thereto. SECTION 2.07. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the sum of the Base Rate Margin for such day plus the Base Rate for such day. Such interest shall be payable on the last Domestic Business Day of each calendar quarter. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. "BASE RATE MARGIN" means a rate per annum determined in accordance with the Pricing Schedule. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan shall, as a result of clause (2)(b) of the definition of Interest Period, have an Interest Period of less than 30 days, such CD Loan shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such 15 20 period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to the Interest Period for such Loan and (ii) the rate applicable to Base Rate Loans for such day. "CD MARGIN" means a rate per annum determined in accordance with the Pricing Schedule. The "ADJUSTED CD RATE" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [CDBR ]* ACDR = [_____________] + AR [1.00 - DRP] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate --------------- * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD BASE RATE" applicable to any Interest Period is the rate of interest determined by the Administrative Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "DOMESTIC RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $ 100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "ASSESSMENT RATE" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. ss. 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such 16 21 successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "EURO-DOLLAR MARGIN" means a rate per annum determined in accordance with the Pricing Schedule. The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to the Interest Period for such Loan and (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1 %) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (f) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks 17 22 of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.08. Facility Fees. The Borrower shall pay to the Administrative Agent for the account of the Banks ratably a facility fee at the Facility Fee Rate (determined daily in accordance with the Pricing Schedule). Such facility fee shall accrue (i) from and including the Effective Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or such earlier date of termination to but excluding the date the Loans shall be repaid in their entirety, on the daily aggregate outstanding principal amount of the Loans. Accrued fees under this Section shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 and upon the date of termination (other than a termination on the Termination Date pursuant to Section 2.01(b)) of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 2.09. Optional Termination or Reduction of Commitments. During the Revolving Credit Period, the Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $10,000,000 or any larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. Promptly after receiving a notice pursuant to this subsection, the Administrative Agent shall notify each Bank of the contents thereof. SECTION 2.10. Method of Electing Interest Rates. (a) The Loans included in each Group of Loans within a Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Domestic Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are Euro-Dollar Loans or CD Loans, the Borrower may elect to convert such Loans to Domestic Loans or elect to continue such Loans as Euro-Dollar Loans or CD Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Administrative Agent at least three Euro-Dollar Business Days in the case of conversion to or continuation of a Euro-Dollar Loan, and two Domestic Business Days in the case of conversion to or continuation of a CD Rate Loan, before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $5,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: 18 23 (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Euro-Dollar Loans or CD Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans or CD Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Administrative Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by such Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Administrative Agent for any Group of Euro-Dollar Loans or CD Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. (d) If upon the expiration of any Interest Period applicable to Euro-Dollar Loans or CD Loans, the Borrower has failed to select timely a new Interest Period to be applicable to such CD Rate Loans or Euro-Dollar Loans, as the case may be, the Borrower shall be deemed to have submitted a Notice of Interest Rate Election electing to convert such CD Rate Loans or Euro-Dollar Loans into Base Rate Loans effective as of the expiration date of such Interest Period. SECTION 2.11. Optional Prepayments. (a) The Borrower may, upon at least one Domestic Business Day's notice by 11:00 A.M. (New York City time) to the Administrative Agent, prepay any Base Rate Borrowing (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a)) in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Base Rate Loans of the several Banks included in such Borrowing. (b) Subject to Section 2.13, the Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, prepay any CD Borrowing or upon at least three Euro-Dollar Business Days' notice to the Administrative Agent prepay any Euro-Dollar Borrowing, in each case in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (c) Except as provided in Section 2.11(a), the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. 19 24 (d) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.12. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, without any set-off or counterclaim, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.01. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. SECTION 2.13. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(d), or if the Borrower fails to borrow, convert, continue or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a), 2.10(c) or 2.11(d), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow, convert, continue or prepay, provided that such Bank shall have delivered to the Borrower a certificate setting forth in reasonable detail the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. Regulation D Compensation. For so long as any Bank maintains reserves against "EUROCURRENCY LIABILITIES" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets 20 25 which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. ARTICLE 3 CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become effective upon receipt by the Administrative Agent of the following documents, each dated the Effective Date unless otherwise indicated: (a) counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party); (b) a duly executed Note for the account of each Bank dated on or before the Effective Date complying with the provisions of Section 2.05; (c) opinions of Morrison & Hecker, L.L.P, Kansas counsel for the Borrower, and Bracewell & Patterson, L.L.P., counsel for the Borrower, substantially in the respective forms of Exhibits E-1 and E-2 hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (d) an opinion of Haynes and Boone, LLP, special counsel for the Administrative Agent, substantially in the form of Exhibit F hereto; (e) evidence satisfactory to the Administrative Agent of the payment of all principal of and interest on any loans outstanding under, and of all fees accrued under, the Existing Agreement up to but excluding the Effective Date; (f) evidence satisfactory to the Administrative Agent that the Borrower shall have paid or shall concurrently pay all fees then due and payable to the Administrative Agent for the account of any Agent or Bank, as previously agreed; (g) a certificate of the chief financial officer of the Borrower certifying that no material adverse change has occurred since September 30, 1999 in the business, assets, liabilities (actual or contingent), operations or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, or in the facts and information regarding such entities as represented to date, taken as a whole; and 21 26 (h) all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall promptly notify the Borrower and each Bank of the effectiveness of this Agreement, and such notice shall be conclusive and binding on all parties hereto. The Banks which are parties to the Existing Agreement, constituting the "REQUIRED BANKS" under the Existing Agreement, and the Borrower agree that the Commitments under the Existing Agreement shall terminate automatically on the Effective Date without need for further action by any party to the Existing Agreement. SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) the fact that the Effective Date shall have occurred on or prior to November 18, 1999; (b) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02, or 2.03, as the case may be; (c) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (d) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (e) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (c), (d) and (e) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.01. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (other than filings of this Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. 22 27 SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms. SECTION 4.04. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1998 and the related consolidated statements of income, cash flows and common stockholders' equity for the fiscal year then ended, reported on by Arthur Andersen LLP and set forth in the Borrower's 1998 Form 10-K, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1999 and the related unaudited consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's Latest Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine-month period (subject to normal year-end adjustments). (c) Since September 30, 1999 there has been no material adverse change in the business, financial position, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.05. Litigation. Except as disclosed in the most recent Annual Report on Form 10-K delivered by the Borrower to the Banks, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which would materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA, which waiver, failure or liability could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.07. Environmental Matters. In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit 23 28 or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.08. Taxes. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes shown to be due on such returns or pursuant to any assessment received by the Borrower or any Subsidiary to the extent that such taxes have become due and before they have become delinquent, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. SECTION 4.09. Subsidiaries. Each of the Borrower's corporate Material Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.10. Not an Investment Company. The Borrower is not an "INVESTMENT COMPANY" or controlled by an "INVESTMENT COMPANY" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.11. Full Disclosure. All information heretofore furnished by the Borrower to any Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to any Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts peculiar to the business of the Company or any of its Subsidiaries which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower to perform its obligations under this Agreement. SECTION 4.12. Year 2000 Readiness. The Borrower has (i) initiated a review and assessment of all areas within the business and operations of the Borrower and each of its Subsidiaries (including those areas affected by suppliers and vendors) that could be adversely affected by the "YEAR 2000 PROBLEM" (that is, the risk that computer applications used by it or any of its subsidiaries (or their respective suppliers and vendors) may be unable to recognize and perform properly date sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis and (iii) to date, implemented such plan in accordance with such timetable. The Borrower reasonably believes that all mission critical computer applications that are material to the business or operations of the Borrower or any of its Subsidiaries will on a timely basis be able to perform properly date sensitive functions for all dates before and from and after January 1, 2000, except to the extent that a failure to do so could not reasonably be expected to have any material adverse effect on the business, financial position, results of operations or prospects of the Borrower and its Subsidiaries taken as a whole. 24 29 ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 100 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows and common stockholder's equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all audited by Arthur Andersen LLP or other independent public accountants of nationally recognized standing; provided, however, that delivery pursuant to clause (g) below of copies of the Annual Report on Form 10 K (without exhibits) of the Borrower for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (a); (b) as soon as available and in any event within 50 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter (in the case of such statements of income) and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such income and cash flows in comparative form the figures for the corresponding quarter (in the case of such statements of income) and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by an authorized financial or accounting officer of the Borrower; provided, however, that delivery pursuant to clause (g) below of copies of the Quarterly Report on Form 10-Q (without exhibits) of the Borrower for such quarter filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (b); (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the Borrower signed by an authorized financial or accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Section 5.07 and, if applicable, Sections 5.08 and 5.09 on the date of such financial statements, (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto, and (iii) during the Term Loan Phase, certifying that all representations and warranties of the Borrower set forth in Article 4 of this Agreement are true and correct on and as of the date of such certificate as if made on such date; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; provided, however, that such accountants shall not be liable to anyone by reason of their failure to obtain knowledge of any Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards; (e) within five Domestic Business Days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; 25 30 (f) promptly upon the mailing thereof to the public shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents, in each case without exhibits) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "REPORTABLE EVENT" (as defined in Section 4043 of ERISA) (other than such event as to which the 30-day notice requirement is waived or which is triggered by the Acquisition) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request. Information required to be delivered pursuant to clauses 5.01(a), 5.01(b), 5.01(f) or 5.01(g) above shall be deemed to have been delivered on the date on which the Borrower provides notice to the Banks that such information has been posted on the Borrower's website on the Internet at the website address listed on the signature pages hereof, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Banks without charge; provided that (i) such notice may be included in a certificate delivered pursuant to clause 5.01(c) and (ii) the Borrower shall deliver paper copies of the information referred to in clauses 5.01(a), 5.01(b), 5.01(f) or 5.01(g) to any Bank which requests such delivery. SECTION 5.02. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.03. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. 26 31 (b) The Borrower will maintain or cause to be maintained with, in the good faith judgment of the Borrower, financially sound and reputable insurers, or through self-insurance, insurance with respect to its properties and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations. Such insurance may include self-insurance or be subject to co-insurance, deductibility or similar clauses which, in effect, result in self-insurance of certain losses, provided that such self-insurance is in accord with the approved practices of corporations similarly situated and adequate insurance reserves are maintained in connection with such self-insurance, and, notwithstanding the foregoing provisions of this Section 5.03 the Borrower or any Subsidiary may effect workers' compensation or similar insurance in respect of operations in any state or other jurisdiction either through an insurance fund operated by such state or other jurisdiction or by causing to be maintained a system or systems of self-insurance in accord with applicable laws. SECTION 5.04. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) the merger of a Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) the sale or other disposition (whether by merger or otherwise) of the capital stock or assets of any Subsidiary, if such transaction complies with the provisions of Section 5.10 or (iii) the termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. SECTION 5.05. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except (i) where the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) where failure to comply could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 5.06. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries, as required by generally accepted accounting principles, shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records (subject to compliance with confidentiality agreements, copyrights and the like) and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.07. Debt. (a) Consolidated Debt of the Borrower will at no time exceed 71.0% of Consolidated Total Capitalization. 27 32 (b) Total Debt of all Consolidated Subsidiaries (excluding Debt of a Consolidated Subsidiary of the Borrower to the Borrower or to another Consolidated Subsidiary of the Borrower) will at no time exceed 10% of Consolidated Debt of the Borrower. (c) Consolidated Debt of each Material Subsidiary will at no time exceed 65% of the Consolidated Total Capitalization of such Material Subsidiary. SECTION 5.08. Minimum Net Worth. Consolidated Net Worth will at no time be less than an amount equal to the sum of (a) $1,236,000,000 plus (b) 50% of Consolidated Net Income for each fiscal quarter of the Borrower ending after December 30, 1998 and at or prior to such time (but only if such Consolidated Net Income for such fiscal quarter is a positive amount). SECTION 5.09. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) any Liens deemed to exist on the date of this Agreement under the Purchase Agreement; (b) Liens on assets of any Person existing at the time such Person becomes a Subsidiary and not created in contemplation of such event, provided that any such Lien covers only property or assets that were covered at the time such Person becomes a Subsidiary and such Lien secures only Debt that was secured at the time such Person becomes a Subsidiary; (c) Liens arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $150,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (d) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $75,000,000; (e) statutory or common law Liens of or upon deposits of cash in favor of banks or other depository institutions; and (f) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 10% of Consolidated Net Worth of the Borrower. SECTION 5.10. Consolidations, Mergers and Sales of Assets. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of its assets to any other Person, unless: (i) immediately after giving effect to the transaction, no Default shall have occurred and be continuing; and (ii) except in the case of a merger in which the Borrower is the surviving corporation: (x) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a 28 33 transfer, assumes all obligations of the Borrower hereunder and under the Notes; (y) the Person formed by or surviving such transaction, in the case of a consolidation or merger, and the transferee, in the case of a transfer, is organized under the laws of the United States or any state thereof; and (z) the Borrower has delivered to the Administrative Agent an officer's certificate and opinion of counsel, each stating that such consolidation, merger, or transfer and such assumption comply with the provisions hereof. No such sale, lease or other transfer of assets shall have the effect of releasing the Borrower (or any successor that shall have become such in the manner prescribed in this Section) from its liability under this Agreement and the Notes. SECTION 5.11. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general lawful corporate purposes, including but not limited to providing liquidity for commercial paper. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "MARGIN STOCK" within the meaning of Regulation U. SECTION 5.12. Transactions with Affiliates. The Borrower will not participate in any material transaction with an affiliate (other than a Subsidiary) unless such transaction is in the ordinary course of its business and on terms no less advantageous to the Borrower than could be obtained in such a transaction with an unaffiliated party. ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within three Domestic Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.10 to 5.12, inclusive; or shall fail to observe or perform any covenant contained in Sections 5.07 to 5.09, inclusive, and such failure shall continue for 10 days; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); 29 34 (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; provided, however, that if any such failure is cured by the Borrower or such Subsidiary or is waived by the requisite percentage of holders of such Material Financial Obligations entitled to so waive, then the Event of Default under this Agreement by reason of such failure shall be deemed to have been cured; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof, provided, however, that if any such acceleration is rescinded, or any such event or condition is cured by the Borrower or any Subsidiary or is waived by the requisite percentage of holders of such Material Debt entitled to so waive, then the Event of Default under this Agreement by reason of such acceleration, event or condition shall be deemed to have been cured; (g) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation; and in each of the foregoing instances such condition (i) could reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, and (ii) shall continue for 10 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (j) a judgment or judgments for the payment of money (not paid or fully covered by insurance or indemnification) in excess of $60,000,000 in the aggregate shall be rendered against the Borrower or any Material Subsidiary and such judgment or judgments are not, within 30 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 30 days after the expiration of such stay; or 30 35 (k) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 30% or more of the outstanding shares of common stock of the Borrower; or, during any period of twelve consecutive calendar months, individuals who were directors of the Borrower on the first day of such period shall cease to constitute a majority of the board of directors of the Borrower; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.02. Notice of Default. The Administrative Agent shall give notice to the Borrower under Section 6.01(c) or 6.01(i) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 THE AGENTS SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Administrative Agent and Affiliates. Bank of America, N.A. shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Bank of America, N.A. and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. SECTION 7.03. Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. SECTION 7.04. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in 31 36 the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "AGENT" in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify any Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, with the consent of the Borrower, which shall not be unreasonably withheld. If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. SECTION 7.09. Agents' Fees. The Borrower shall pay to the Administrative Agent for the account of the Agents fees in the amounts and at the times previously agreed upon between the Borrower and the Agents. SECTION 7.10. Other Agents. Nothing contained in this Agreement shall be construed to impose any obligation or duty whatsoever on any of the Syndication Agent, Documentation Agent or the Co-Documentation Agent, in its capacity as such an Agent. 32 37 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Administrative Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Committed Borrowing, Banks having 50% or more of the aggregate amount of the Commitments advise the Administrative Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the Borrower notifies the Administrative Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, 33 38 or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.15), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency (including any determination by any such authority, central bank or comparable agency that, for purposes of capital adequacy requirements, the Commitments hereunder do not constitute commitments with an original maturity of one year or less), has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth in reasonable detail the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Notwithstanding the foregoing subsections (a) and (b) of this Section 8.03, the Borrower shall only be obligated to compensate any Bank for any amount arising or accruing during (i) any time or period commencing not more than 90 days prior to the date on which such Bank notifies the Administrative Agent and the Borrower that it proposes to demand such compensation and identifies to the Administrative Agent and the Borrower the statute, regulation or other basis upon which the claimed compensation is or will be based and (ii) any time or period during which, because of the retroactive application of such statute, regulation or other such basis, such Bank did not know that such amount would arise or accrue. 34 39 SECTION 8.04. Taxes. (a) For purposes of this Section 8.04, the following terms have the following meanings: "TAXES" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement. "OTHER TAXES" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. (b) Any and all payments by the Borrower to or for the account of any Bank or the Administrative Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising, therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Bank or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or 35 40 regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(b) or (c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower, at such Bank's expense, shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.04, then such Bank will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Bank, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. SECTION 8.06. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower shall have the right, with the assistance of the Administrative Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to purchase the Note and assume the Commitment of such Bank. ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received or (ii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. 36 41 SECTION 9.02. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent, including fees and disbursements of Haynes and Boone, LLP, special counsel for the Administrative Agent, in connection with the preparation and administration of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by each Agent and Bank, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify each Agent and Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "INDEMNITEE") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of (i) any actual or proposed use of proceeds of Loans hereunder or (ii) any actual or alleged Default under this Agreement or any actual or alleged untruth or inaccuracy of any representation or warranty made by the Borrower in or in connection with this Agreement; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. SECTION 9.04. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. SECTION 9.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of any Agent are affected thereby, by such Agent); provided that no such amendment or waiver shall: (a) unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for termination of 37 42 any Commitment or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement; or (b) unless signed by a Designated Lender or its Designating Bank, subject any Designated Lender to any additional obligation hereunder or otherwise affect its rights hereunder as described in Section 9.07. SECTION 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "PARTICIPANT") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05(a) without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "ASSIGNEE") all, or a proportionate part (equivalent to an initial Commitment of not less than $10,000,000, unless the Administrative Agent otherwise agrees in writing) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, and the Administrative Agent; provided that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent shall be required; and provided further that if at the time an Event of Default shall be continuing, no such consent of the Borrower shall be required; and provided further that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Administrative Agent certification as to 38 43 exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 9.07. Designated Lender. (a) Subject to the terms and conditions set forth in this Section 9.07(a), any Bank may from time to time elect to designate an Eligible Designee to provide all or any part of Loans to be made by such Bank pursuant to this Agreement, provided the designation of an Eligible Designee by any Bank for purposes of this Section 9.07(a) shall be subject to the approval of the Borrower and the Administrative Agent, which consent shall not be unreasonably withheld. Upon the execution by parties to each such designation of an agreement substantially in the form of Exhibit H hereto (a "DESIGNATION AGREEMENT") and the acceptance thereof by the Borrower and the Administrative Agent, the Eligible Designee shall become a Designated Lender for purposes of this Agreement. The Designating Bank shall thereafter have the right to permit such Designated Lender to provide all or a portion of the Loans to be made by such Designating Bank pursuant to Section 2.01 or 2.03, and the making of such Loans or portion thereof shall satisfy the obligation of the Designating Bank to the same extent, and as if, such Loan were made by the Designating Bank. As to any Loan made by it, each Designated Lender shall have all the rights a Bank making such Loan would have had under this Agreement and otherwise provided, (x) that all voting rights under this Agreement shall be exercised solely by the Designating Bank and (y) each Designating Bank shall remain solely responsible to the other parties hereto for its obligations under this Agreement, including all obligations of a Bank in respect of Loans made by its Designated Lender. No additional Note shall be required with regard to Loans provided by a Designated Lender; provided, however, to the extent any Designated Lender shall advance funds, the Designating Bank shall be deemed to hold the Note in its possession as an agent for such Designated Lender to the extent of the Loan funded by such Designated Lender. Such Designating Bank shall act as administrative agent for its Designated Lender and give and receive notices and other communications hereunder. Any payments for the account of any Designated Lender shall be paid to its Designating Bank as administrative agent for such Designated Lender and neither the Borrower nor the Administrative Agent shall be responsible for any Designating Bank's application of any such payments. In addition, any Designated Lender may (i) with notice to, but without the prior written consent of the Borrower and the Administrative Agent, assign all or portions of its interest in any Loans to its Designating Bank or to any financial institutions consented to by the Borrower and the Administrative Agent (it being understood that such consent shall not be unreasonably withheld) providing liquidity and/or credit facilities to or for the account of such Designated Lender to support the funding or maintenance of Loans made by such Designated Lender and (ii) subject to advising any such Person that such information is to be treated as confidential in accordance with such Person's customary practices for dealing with confidential, non-public information, disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any guarantee, surety, credit or liquidity enhancement to such Designated Lender. (b) Each party to this Agreement hereby agrees that it shall not institute against, or join any other person in instituting against, any Designated Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other proceedings under any federal or state bankruptcy or similar law, for one year and a day after the payment in full of all outstanding senior indebtedness of any Designated 39 44 Lender; provided that the Designating Bank for each Designated Lender hereby agrees to indemnify, save, and hold harmless each other party hereto for any loss, cost, damage and expense arising out of their inability to institute any such proceeding against such Designated Lender. This Section 9.07(b) shall survive the termination of this Agreement. SECTION 9.08. Collateral. Each of the Banks represents to each Agent and each of the other Banks that it in good faith is not relying upon any "MARGIN STOCK" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.09. Maximum Interest Rate. Regardless of any provision contained herein or in any Note or other document relating to the Loans (the "LOAN DOCUMENTS"), no Bank shall ever be entitled to receive, collect, take, reserve, charge or apply as interest (whether termed interest herein or deemed to be interest by operation of law or judicial determination) on any Loan any amount in excess of interest calculated at the Maximum Rate, and, in the event that any Bank ever receives, collects, or applies as interest any such excess, then the amount which would be excessive interest shall be deemed to be a partial prepayment of principal and treated hereunder as such; and, if the principal amount of the applicable Loans are paid in full, then any remaining excess shall forthwith be paid to the Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds interest calculated at the Maximum Rate, the Borrower and the Banks shall, to the maximum extent permitted under applicable law: (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest; (b) exclude voluntary prepayments and the effects thereof; and (c) amortize, prorate, allocate, and spread, in equal parts, the total amount of interest throughout the entire contemplated term of the Loans; provided that, if Loans are paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds interest calculated at the Maximum Rate, then the applicable Lender shall refund to the Borrower the amount of such excess or credit the amount of such excess against the principal amount of the applicable Loans and, in such event, no Bank shall be subject to any penalties provided by any laws for contracting for, charging, taking, reserving, or receiving interest in excess of interest calculated at the Maximum Rate. "MAXIMUM RATE" means the highest nonusurious rate of interest (if any) permitted from day to day by applicable law. The parties agree that Chapter 346 of the Texas Finance Code, which regulates certain revolving loan accounts and revolving tri-party accounts, shall not be applicable to this Agreement, any Note or any Loans. SECTION 9.10. Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York and the applicable laws of the United States of America. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City having subject matter jurisdiction for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 9.11. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 9.12. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL 40 45 RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. [SIGNATURES BEGIN ON THE NEXT PAGE] 41 46 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. KINDER MORGAN, INC. By: /s/ David G. Dehaemers, Jr. ------------------------------------------- David G. Dehaemers, Jr. Vice President and Chief Financial Officer 370 Van Gordon Street Lakewood, CO 80228-8304 Attention: Rose Robeson Facsimile Number: 303-763-3155 [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 47 Administrative Agent BANK OF AMERICA, N.A., as Administrative Agent By: /s/ Daryl G. Patterson ------------------------------------ Daryl G. Patterson Managing Director BANK OF AMERICA, N.A., as a Bank By: /s/ Daryl G. Patterson ------------------------------------ Daryl G. Patterson Managing Director Address for Payments: Bank of America, N.A. 901 Main Street Dallas, Texas 75202 Attn: Ms. Renita Cummings Telephone: (214) 209-9254 Facsimile: (214) 290-8373 Payment Office: ABA No. 111000012 Acct. No. 1292000883 Ref.: Kinder Morgan, Inc. Bank of America, N.A. 901 Main Street Dallas, Texas 75202 Attn: Ms. Renita Cummings Telephone: (214) 209-9254 Facsimile: (214) 290-8373 48 Address for Requests for Extensions of Credit: Bank of America, N.A. 901 Main Street Dallas, Texas 75202 Attn: Ms. Vicki Wages Telephone: (214) 209-9254 Facsimile: (214) 290-8373 With a copy to: Bank of America, N.A. Three Allen Center 333 Clay Street, Suite 4550 Houston, Texas 77002 Attn: Pamela K. Rodgers Assistant Vice President Telephone: (713) 651-4880 Facsimile: (713) 651-4808 Address for Notices other than Requests for Extensions of Credit: Bank of America, N.A. Three Allen Center 333 Clay Street, Suite 4550 Houston, Texas 77002 Attn: Daryl G. Patterson Managing Director Telephone: (713) 651-4950 Facsimile: (713) 651-4808 [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 49 Syndication Agent THE CHASE MANHATTAN BANK By: /s/ Peter M. Ling ------------------------------------ Peter M. Ling Title: Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 50 Documentation Agent FIRST UNION NATIONAL BANK By: /s/ Russell Clingman ------------------------------------ Russell Clingman Title: Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 51 Co-Documentation Agent BANK ONE, N.A. By: /s/ Joseph C. Giampetroni ------------------------------------ Joseph C. Giampetroni Title: Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 52 Participants ABN AMRO BANK N.V. By: /s/ Charles W. Randall ------------------------------------ Charles W. Randall Title: Senior Vice President By: /s/ Brandi Lippincott ------------------------------------ Brandi Lippincott Title: Assistant Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 53 THE BANK OF NOVA SCOTIA By: /s/ Chris Osborn ------------------------------------ Chris Osborn Title: Director [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 54 THE BANK OF TOKYO-MITSUBISHI, LTD., HOUSTON AGENCY By: /s/ S. Otani ------------------------------------ S. Otani Title: Deputy General Manager [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 55 CITIBANK, N.A. By: /s/ Steve Baillie ------------------------------------ Steve Baillie Title: Attorney-in-fact [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 56 COMMERZBANK, AG NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Harry P. Yergey ------------------------------------ Harry P. Yergey Title: SVP & Manager By: /s/ W. David Suttles ------------------------------------ W. David Suttles Title: Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 57 CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Philippe Soustra ------------------------------------ Philippe Soustra Title: Senior Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 58 THE NORTHERN TRUST COMPANY By: /s/ Jaron Grimm ------------------------------------ Jaron Grimm Title: Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 59 SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ Richard A. Gould ------------------------------------ Richard A. Gould Title: Director [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 60 TORONTO DOMINION (TEXAS), INC. By: /s/ Alva J. Jones ------------------------------------ Alva J. Jones Title: Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 61 U.S. BANK NATIONAL ASSOCIATION By: /s/ Mark E. Thompson ------------------------------------ Mark E. Thompson Title: Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 62 WELLS FARGO BANK (TEXAS), N.A. By: /s/ J. Alan Alexander ------------------------------------ J. Alan Alexander Title: Vice President [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 63 WESTDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK BRANCH By: /s/ Richard R. Newman ------------------------------------ Richard R. Newman Title: Director By: /s/ Barry S. Wadler ------------------------------------ Barry S. Wadler Title: Associate [THIS IS A SIGNATURE PAGE TO THE CREDIT AGREEMENT.] 64 PRICING SCHEDULE The "EURO-DOLLAR MARGIN", "CD MARGIN", "BASE RATE MARGIN" AND "FACILITY FEE RATE" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day:
- ------------------------------------------------------------------------------------------------------- Level Level Level Level Level Status I II III IV V ======================================================================================================= Euro-Dollar Margin Utilization < 25% 0.40% 0.50% 0.70% 1.125% 1.40% Utilization => 25% 0.525% 0.625% 0.825% 1.25% 1.525% ======================================================================================================= CD Margin Utilization < 25% 0.525% 0.625% 0.825% 1.25% 1.525% Utilization => 25% 0.65% 0.75% 0.95% 1.375% 1.65% ======================================================================================================= Base Rate Margin -0- -0- -0- 0.125% 0.50% Facility Fee Rate 0.10% 0.125% 0.175% 0.25% 0.35% - -------------------------------------------------------------------------------------------------------
For purposes of this Schedule, the following terms have the following meanings: "LEVEL I STATUS" exists at any date if, at such date, the Borrower's senior unsecured long-term debt is rated BBB+ or higher by S&P and Baal or higher by Moody's. "LEVEL II STATUS" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB or higher by S&P and Baa2 or higher by Moody's, and the Borrower's commercial paper is rated A2 or higher by S&P and P2 or higher by Moody's and (ii) Level I Status does not exist. "LEVEL III STATUS" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BBB- or higher by S&P and Baa3 or higher by Moody's and (ii) neither Level I Status nor Level II Status exists. "LEVEL IV STATUS" exists at any date if, at such date, (i) the Borrower's senior unsecured long-term debt is rated BB+ or higher by S&P and Ba1 or higher by Moody's and (ii) none of Level I Status, Level II Status and Level III Status exists. "LEVEL V STATUS" exists at any date if, at such date, no other Status exists. "STATUS" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status exists at any date. "UTILIZATION" means, at any date, the percentage equivalent of a fraction (i) the numerator of which is the aggregate outstanding principal amount of the Loans at such date and (ii) the denominator of which is, (x) during the period from the Effective Date through the Termination Date, the aggregate amount of the Commitments at such date or (y) during the Term Loan Phase, the aggregate amount of the Commitments as of the Termination Date. If for any reason any Loans remain outstanding following termination of the Commitments (except during the Term Loan Phase), Utilization shall be deemed to be in excess of 25%. The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities and/or commercial paper, as the case may be, of the Borrower without third-party credit enhancement, and any rating assigned to any other debt security of the Borrower shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. 65 Schedule 1.01 Commitments
Bank Commitments ---- ----------- First Union National Bank $ 50,500,000 Bank of America, N.A $ 47,750,000 Bank One, N.A $ 47,750,000 The Chase Manhattan Bank $ 45,000,000 Citibank, N.A $ 40,000,000 Toronto Dominion (Texas), Inc. $ 40,000,000 The Bank of Nova Scotia $ 35,000,000 Commerzbank, AG $ 35,000,000 U.S. Bank National Association $ 35,000,000 ABN AMRO Bank N.V $ 30,000,000 Societe Generale $ 30,000,000 Credit Lyonnais New York Branch $ 30,000,000 Wells Fargo Bank (Texas), N.A $ 27,000,000 Westdeutsche Landesbank Girozentrale $ 21,000,000 The Northern Trust Company $ 20,000,000 The Bank of Tokyo-Mitsubishi, Ltd. $ 16,000,000 TOTAL $550,000,000
Schedule 1.01 - Page 1 66 EXHIBIT A NOTE New York, New York November 18, 1999 For value received, Kinder Morgan, Inc., a Kansas corporation (the "BORROWER"), promises to pay to the order of _________________________ (the "BANK"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the Maturity Date set forth in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Bank of America, N.A., 901 Main Street, Dallas, Texas. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof may be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof, provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of November 18, 1999 among the Borrower, the banks listed on the signature pages thereof and Bank of America, N.A., as Administrative Agent (as the same may be amended from time to time, the "CREDIT AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. Without limiting the preceding sentence, reference is made to the provisions of the Credit Agreement concerning the Maximum Lawful Rate. This Note shall be governed by and construed in accordance with the laws of the State of New York and the applicable laws of the United States of America. KINDER MORGAN, INC. By -------------------------------------- Title: Exhibit A - Page 1 67 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL
- -------------------------------------------------------------------------------------------------------------------- Amount of Date Amount of Type of Principal Maturity Notation Loan Loan Repaid Date Made By - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
Exhibit A - Page 2 68 EXHIBIT B Form of Money Market Quote Request [Date] To: Bank of America, N.A. (the "ADMINISTRATIVE AGENT") From: Kinder Morgan, Inc. Re: 364-Day Credit Agreement (the "CREDIT AGREEMENT") dated as of November 18, 1999 among the Borrower, the Banks listed on the signature pages thereof and the Administrative Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: Principal Amount* Interest Period** $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Terms used herein have the meanings assigned to them in the Credit Agreement. KINDER MORGAN, INC. By --------------------------------- Title: - -------------------- * Amount must be $5,000,000 or a larger multiple of $ 1,000,000. ** Not less than one month and not more than nine months (LIBOR Auction) or not less than seven days and not more than 360 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. Exhibit B - Page 1 69 EXHIBIT C Form of Invitation for Money Market Quotes To: [Name of Bank] Re: Invitation for Money Market Quotes to Kinder Morgan, Inc. (the "BORROWER") Pursuant to Section 2.03 of the 364-Day Credit Agreement dated as of November 18, 1999 among the Borrower, the Banks parties thereto and the undersigned, as Administrative Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: ________________________ Principal Amount Interest Period $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. BANK OF AMERICA, N.A. By -------------------------------------- Authorized Officer Exhibit C - Page 1 70 EXHIBIT D Form of Money Market Quote To: Bank of America, N.A., as Administrative Agent Re: Money Market Quote to Kinder Morgan, Inc. (the "BORROWER") In response to your invitation on behalf of the Borrower dated _______________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: 2. Person to contact at Quoting Bank: 3. Date of Borrowing: 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market - --------------- * As specified in the related Invitation. Exhibit D - Page 1 71
Amount** Period*** [Margin****] [Absolute Rate*****] $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $_______________.]**
We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the 364-Day Credit Agreement dated as of November 18, 1999 among the Borrower, the Banks listed on the signature pages thereof and yourselves, as Administrative Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated: By --------------- --------------------------------- Authorized Officer - --------------- ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. *** Not less than one month and not more than nine months or not less than seven days and not more than 360 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000th of 1%) and specify whether "PLUS" OR "MINUS". ***** Specify rate of interest per annum (to the nearest 1/10,000th of 1 %). Exhibit D - Page 2 72 EXHIBIT E-1 OPINION OF KANSAS COUNSEL FOR THE BORROWER November ____, 1999 To the Banks and the Administrative Agent Referred to Below c/o Bank of America, N.A., as Administrative Agent 333 Clay Street, Suite 4550 Houston, TX 77002 Dear Sirs: We have acted as counsel in the State of Kansas for Kinder Morgan, Inc. (the "Borrower") in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of November 18, 1999 among the Borrower, the banks listed on the signature pages thereof and Bank of America, N.A., as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.01(c) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. In rendering the opinions set forth below, we have assumed (i) the genuineness of all signatures, (ii) the authenticity of all documents submitted to us as originals, (iii) the conformity to authentic original documents of all documents submitted to us as draft, certified, conformed or photostatic copies, (iv) the authenticity of the originals of all such draft, certified, conformed or photostatic copies, (v) the accuracy and completeness of all official public records (including their proper indexing and filing), and (vi) the legal capacity of all natural persons. As to questions of fact relevant to this letter, we have, without independent investigation, relied upon and assumed to be true (a) certificates, statements and representations made to us by officers and other representatives of the Borrower, (b) the representations contained in or incorporated into the Credit Agreement, and (c) certain representations of public officials. Upon the basis of the foregoing, we are of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Kansas, and has all corporate powers required to perform its obligations under the Credit Agreement. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Kansas and do not contravene, or constitute a default under, any provision of applicable law or regulation of the State of Kansas. We are members of the Bar of the State of Kansas and the foregoing opinion is limited to the laws of the State of Kansas. Exhibit E-1 - Page 1 73 This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter, and to Haynes and Boone, LLP, counsel to the Administrative Agent and to Bracewell & Patterson L.L.P. We acknowledge that Haynes and Boone LLP and Bracewell & Patterson L.L.P. are each relying on the opinions herein expressed in rendering certain opinions to the Administrative Agent and the Banks. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. This opinion speaks as of the date hereof, and we undertake no, and hereby disclaim any, obligation to advise you of any change in any matter set forth herein in response to subsequent changes in law or future events or circumstances affecting the transactions contemplated by the Credit Agreement whether based on a change in any fact relating to the Borrower or any other person, or any other circumstance. Very truly yours, Exhibit E-1 - Page 2 74 EXHIBIT E-2 OPINION OF COUNSEL TO THE BORROWER To the Banks and the Administrative Agent Referred to Below c/o Bank of America, N.A., as Administrative Agent 333 Clay Street, Suite 4550 Houston, Texas 77002 Dear Sirs: We are counsel to Kinder Morgan, Inc., a Kansas corporation (the "BORROWER"), and have represented the Borrower in connection with the 364-Day Credit Agreement (the "CREDIT AGREEMENT") dated as of November 18, 1999 among the Borrower, the banks listed on the signature pages thereof and Bank of America, N.A., as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our client pursuant to Section 3.01(c) of the Credit Agreement. In connection with this opinion, we have examined the following (the "Documents"): 1. The Credit Agreement, executed by the Borrower; and 2. The __ Notes dated the date hereof, executed by the Borrower. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials, certificates or comparable documents of officers of the Borrower and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. We have assumed (a) the genuineness of all signatures (other than those of the Borrower), (b) the authenticity of all documents and records submitted to us as originals, (c) the conformity to original documents and records of all documents and records submitted to us as copies (including conformed copies), and (d) the truthfulness of all statements of fact contained therein. Upon the basis of the foregoing, and having due regard for such legal considerations as we deem relevant, we are of the opinion that: 1. To our knowledge after due inquiry, the Borrower has all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Documents require no action by or in respect of, or filing with, any governmental body, agency or official of the State of Texas or the United States of America (other than filings of the Credit Agreement and the Notes with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934) and do not contravene, or constitute a default under, any provision Exhibit E-2 - Page 1 75 of applicable law or regulation of the State of Texas or the United States of America or of the articles of incorporation or by-laws of the Borrower or of any material agreement, judgment, injunction, order, decree or other instrument, known to us after due inquiry, binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. 3. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable against the Borrower in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. To our knowledge after due inquiry, there is no action, suit or proceeding pending against, or threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of the Documents. 5. To our knowledge after due inquiry, each of the Borrower's corporate Material Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 6. The choice of New York law (other than conflict of laws rules) to govern the construction and interpretation of the Documents which contain such a choice of law should, if the issue is properly presented to a court of competent jurisdiction sitting in the State of Texas, be found by such court to be a valid choice of law under the laws of the State of Texas. Our opinion is subject to the following: (a) We are members of the Bar of the State of Texas and the foregoing opinion is limited to the laws of the State of Texas and the federal laws of the United States of America. In rendering the opinion in paragraph 3 above, (i) insofar as such opinion involves matters governed by the laws of the State of Kansas, we have relied, without independent investigation, upon the opinion of Morrison & Hecker, L.L.P., delivered to you pursuant to Section 3.01(c) of the Credit Agreement and (ii) insofar as such opinion includes matters governed by the laws of the State of New York, we have assumed such laws are the same as the laws of the State of Texas. (b) Our opinion is subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, preference, liquidation, conservatorship or other similar laws affecting creditor's rights generally. (c) The enforceability of each of the Documents is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and we express no opinion as to the availability of specific performance or any other equitable remedy. Exhibit E-2 - Page 2 76 (d) We express no opinion as to the legality, validity, binding effect or enforceability of any provision in the Documents (i) purporting to restrict access to courts or to legal or equitable remedies; (ii) purporting to establish evidentiary standards; (iii) purporting to grant a right of set-off or similar rights against moneys, securities and other properties of Persons other than the Person granting such right or purporting to permit any Person purchasing a participation to exercise a right of set-off or similar rights with respect to such participation; (iv) purporting to indemnify, defend, or hold harmless any Person; (v) purporting to affect any right to trial by jury, venue or jurisdiction; or (vi) pertaining to subrogation rights, delay or omission of enforcement of rights or remedies, severability or marshaling of assets. (e) We express no opinion as to the legality, validity, binding effect or enforceability of any waiver under the Credit Agreement, or any consent thereunder, relating to the rights of, or duties owing to, any Person which exist as a matter of law except to the extent such Person may legally so waive or consent and has so waived and consented. (f) We have assumed, as to each Person (other than the Borrower) shown as being a party to the Credit Agreement, (i) that such Person is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized; (ii) that the Credit Agreement has been duly authorized, executed and delivered by such Person; (iii) that such Person has the requisite power and authority to perform its obligations under the Credit Agreement and will perform such obligations in compliance with all laws and regulations applicable to it; (iv) that there are neither suits, actions or proceedings pending against such Person nor judicial or administrative orders, judgments or decrees binding on such Person that affect the legality, validity, binding effect or enforceability of the Credit Agreement; (v) that no consent, license, approval or authorization of, or filing or registration with, any governmental authority is required for the valid execution, delivery and performance of the Credit Agreement, and (vi) that the execution, delivery and performance of the Credit Agreement by such Person do not violate (1) any provision of any law or regulation, (2) any order, judgment, writ, injunction, award or decree of any court, arbitrator, or governmental authority, (3) the charter or bylaws of such Person, or (4) any indenture, lease or other agreement to which such Person is a party or by which such Person or any of its assets is bound; and (vii) that the Credit Agreement constitutes the legal, valid and binding obligation of such Person enforceable against such Person in accordance with its terms, subject to the type of qualifications regarding enforceability as are set forth in this opinion. We have also assumed that each Bank will make each Loan under the documents for its own account in the ordinary course of its commercial lending business and not with a view to, or for sale in connection with, any distribution of the Notes and that no Bank is participating in any such distribution. (g) We have assumed that the Administrative Agent and the Banks will comply with each usury savings clause in the Documents and that none of the Administrative Agent or the Banks has taken, reserved, charged or received interest or will take, reserve, charge or receive interest, except as provided in the Documents. We express no opinion as to the effect of the law of any jurisdiction other than the State of Texas wherein any Bank may be located or wherein enforcement of the Documents may be sought which limits the rates of interest legally chargeable or collectible. (h) Our opinion is subject to the qualification that certain remedial provisions of the Documents are or may be unenforceable in whole or in part, but such possible unenforceability of Exhibit E-2 - Page 3 77 such remedial provisions will not render any Document inadequate for enforcing payment of the indebtedness that is evidenced by such Document and for the practical realization of the principal rights and benefits afforded by such Document. (i) We have assumed that a party to the Documents is a resident of the State of New York or that a party to the Documents has its place of business or, if that party has more than one place of business, its chief executive office or an office from which it conducts a substantial part of the negotiations relating to the transaction, in the State of New York. (j) Whenever our opinion is given "to our knowledge after due inquiry" or is based on circumstances "known to us after due inquiry", we have relied exclusively upon certificates of officers (after the discussion of the contents thereof with such officers) of the Borrower as to the existence or non-existence of the circumstances upon which such opinion is predicated. We have no reason to believe, however, that any such certificate is untrue or inaccurate in any material respect. (k) In rendering the opinions herein relating to the absence of any litigation, investigation or administrative proceeding, we express no opinion with respect to the possible effect of any litigation, investigation or proceeding as to which the Borrower is not a named party. You are advised that various members of this firm are stockholders of Kinder Morgan, Inc.; however, no member owns in excess of one percent of Kinder Morgan, Inc.'s outstanding common stock. This opinion is rendered solely to you and any Assignee or Participant in connection with the above matter, and to Haynes and Boone, LLP, counsel to the Administrative Agent. We acknowledge that Haynes and Boone, LLP is relying on the opinions herein expressed in rendering certain opinions to the Administrative Agent and the Banks. This opinion may not be relied upon by you or any Assignee or Participant for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, Exhibit E-2 - Page 4 78 EXHIBIT F OPINION OF HAYNES AND BOONE, LLP, SPECIAL COUNSEL FOR THE ADMINISTRATIVE AGENT November 18, 1999 Bank of America, N.A., as Administrative Agent Three Allen Center 333 Clay Street, Suite 4550 Houston, Texas 77002 And to the Banks party to the Credit Agreement (as defined below) Ladies and Gentlemen: We have acted as counsel to Bank of America, N.A. (the "ADMINISTRATIVE AGENT") in connection with the preparation, execution and delivery of the 364-Day Credit Agreement dated as of November 18, 1999 (the "CREDIT AGREEMENT"), among Kinder Morgan, Inc. ("BORROWER"), the Administrative Agent and the Banks as therein defined. Unless otherwise defined herein, capitalized terms used herein and not otherwise defined have the meanings given in the Credit Agreement. In this connection, we have examined the Credit Agreement and the Notes and such records, certificates, instruments and other documents in our judgment necessary or appropriate to enable us to render this opinion. In our examination of the Credit Agreement and the Notes, we have assumed, without independent investigation: (a) the due execution and delivery, pursuant to due authorization, of the Credit Agreement and the Notes by all parties thereto; (b) the genuineness of all signatures; (c) the authenticity of the originals of the documents submitted to us; and (d) the conformity to originals of any documents submitted to us as copies; (e) the full corporate (or equivalent) power, authority and legal right of each Person to enter into and perform its obligations under the Credit Agreement and the Notes. Based upon the foregoing examination and assumptions and upon such other investigation as we have deemed necessary and subject to the qualifications as set forth below, we are of the opinion that the Credit Agreement and each Note constitutes the legal, valid and binding obligation of the Borrower, in each case enforceable against the Borrower in accordance with its terms. Our opinion above is subject to the following qualifications: (a) Our opinion above is subject to the effect of any applicable bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium, or similar law affecting creditors' rights generally. (b) Our opinion above is also subject to the effect of general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). Exhibit F - Page 1 79 (c) We express no opinion as to the validity or enforceability of any provision contained in the Credit Agreement or the Notes that purports to preclude the amendment, waiver, release or discharge of obligations except by an instrument in writing. (d) Our opinion above is limited to the law of the State of New York and the federal law of the United States of America and we do not express any opinion herein concerning any other law. Without limiting the generality of the foregoing, we express no opinion as to the effect of the law of a jurisdiction other than the State of New York wherein enforcement of the Credit Agreement or any of the Notes may be sought that limits the rates of interest legally chargeable or collectible. This opinion is provided to you by us in our capacity as special counsel to the Administrative Agent. Without our prior written consent, this opinion may not be relied upon by any Person other than you, and as of the date hereof, other Persons who become Banks in accordance with the provisions of the Credit Agreement. This opinion may not be relied upon by any Person for any purpose other than in connection with the transactions contemplated by the Credit Agreement without our prior written consent. This opinion letter speaks only as of the date hereof. We expressly disclaim any responsibility to advise you or any other Bank who is permitted to rely on the opinion expressed herein as specified in the next preceding paragraph of any development of circumstances of any kind including any change of law or fact that may occur after the date of this opinion letter, even though such development, circumstances or change may affect the legal analysis, a legal conclusion or any other matter set forth in or relating to this opinion letter. Very truly yours, HAYNES AND BOONE, LLP Exhibit F - Page 2 80 EXHIBIT G ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _______________, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "ASSIGNEE"), KINDER MORGAN, INC. (the "BORROWER") and BANK OF AMERICA, N.A., as Administrative Agent (the "ADMINISTRATIVE AGENT"). W I T N E S S E T H WHEREAS, this Assignment and Assumption Agreement (the "AGREEMENT") relates to the 364-Day Credit Agreement dated as of November 18, 1999 among the Borrower, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent (the "CREDIT AGREEMENT"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof, and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "ASSIGNED AMOUNT"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee[, the Borrower and the Administrative Agent] and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.* [It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee.] Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such Exhibit G - Page 1 81 other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrower and the Administrative Agent. This Agreement is conditioned upon the consent of the Borrower and the Administrative Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Administrative Agent is evidence of this consent. Pursuant to Section 9.06(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. - --------------- * Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. Exhibit G - Page 2 82 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By -------------------------------------- Title: [ASSIGNEE] By -------------------------------------- Title: KINDER MORGAN, INC. By -------------------------------------- Title: BANK OF AMERICA, N.A., as Administrative Agent By -------------------------------------- Title: Exhibit G - Page 3 83 EXHIBIT H DESIGNATION AGREEMENT Dated ________________, 19__ Reference is made to the $550,000,000 364-Day Credit Agreement dated as of November 18, 1999 ([amended or otherwise modified from time] to time, the "CREDIT AGREEMENT") among Kinder Morgan, Inc., a Kansas corporation (the "BORROWER"), the banks listed on the signature pages thereof (the "BANKS") and Bank of America, N.A., as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. _______________ (the "DESIGNATOR"), _______________ (the "DESIGNEE"), and the Borrower, agree as follows: 1 The Designator hereby designates the Designee, and the Designee hereby accepts such designation, as its Designated Lender under the Credit Agreement. 2. The Designator makes no representations or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Designee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Article 5 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Designation Agreement; (ii) agrees that it will, independently and without reliance upon the Agents, the Designator or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action it may be permitted to take under the Credit Agreement; (iii) confirms that it is an Eligible Designee; (iv) appoints and authorizes the Designator as its administrative agent and attorney-in-fact and grants the Designator an irrevocable power of attorney to receive payments made for the benefit of the Designee under the Credit Agreement and to deliver and receive all communications and notices under the Credit Agreement, if any, that Designee is obligated to deliver or has the right to receive thereunder; (v) acknowledges that it is subject to and bound by the confidentiality provisions of the Credit Agreement (except as permitted under Section 9.07(a) thereof); and (vi) acknowledges that the Designator retains the sole right and responsibility to vote under the Credit Agreement, including, without limitation, the right to approve any amendment, modification or waiver of any provision of the Credit Agreement, and agrees that the Designee shall be bound by all such votes, approvals, amendments, modifications and waivers and all other agreements of the Designator pursuant to or in connection with the Credit Agreement, all subject to Section 9.05(b) of the Credit Agreement. 4. Following the execution of this Designation Agreement by the Designator, the Designee and the Borrower, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Designation Agreement shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on the signature page hereto (the "EFFECTIVE DATE"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date (a) the Designee shall have the right to make Loans as a Bank pursuant to Section 2.01 or 2.03 of the Credit Agreement and the rights of a Bank related thereto and (b) the making of any such Loans by the Designee shall satisfy the obligations of the Designator under the Credit Agreement to the same extent, and as if, such Loans were made by the Designator. Exhibit H - Page 1 84 6. This Designation Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties have caused this Designation Agreement to be executed by their respective officers hereunto duly authorized, as of the date first above written. Effective Date*: _________________, ________ [NAME OF DESIGNATOR] By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- [NAME OF DESIGNEE] By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- KINDER MORGAN, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Accepted and Approved this _____ day of _______________, _______ BANK OF AMERICA, N.A., as Administrative Agent By: ---------------------------------------- Title: ---------------------------- - ----------------- * This date should be no earlier than the date of acceptance by the Administrative Agent. Exhibit H - Page 2 EX-10.AA 3 STOCK OPTION PLAN 1 EXHIBIT 10(aa) KINDER MORGAN, INC. AMENDED AND RESTATED 1999 STOCK OPTION PLAN SECTION I. PURPOSE OF THE PLAN This Plan is an amendment and restatement of the K N Energy, Inc. 1999 Stock Option Plan. The KINDER MORGAN, INC. AMENDED AND RESTATED 1999 STOCK OPTION PLAN (the "Plan) is intended to provide a means whereby certain employees of KINDER MORGAN, INC., a Kansas corporation (the "Company"), and its subsidiaries may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. Accordingly, the Company may grant to certain employees ("Optionees") the option ("Option") to purchase shares of the common stock of the Company, par value $5.00 per share ("Stock"), as hereinafter set forth. Options granted under the Plan shall be options that do not constitute incentive stock options within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). SECTION II. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") of, and appointed by, the Board of Directors of the Company (the "Board"), and the Committee shall be (a) comprised solely of two or more outside directors (within the meaning of Section 162(m) of the Code and applicable interpretive authority thereunder), and (b) constituted so as to permit the Plan to comply with Rule 16b-3, as currently in effect or as hereinafter modified or amended ("Rule 16b-3"), promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Committee shall have sole authority to select the Optionees from among those individuals eligible hereunder and to establish the number of shares of Stock which may be issued under each Option. In selecting the Optionees from among individuals eligible hereunder and in establishing the number of shares of Stock that may be issued under each Option, the Committee may take into account the nature of the services rendered by such individuals, their present and potential contributions to the Company's success and such other factors as the Committee in its discretion shall deem relevant. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, consistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. All decisions made by the Committee in selecting the Optionees, in establishing the number of shares of Stock which may be issued under each Option and in construing the provisions of the Plan shall be final, conclusive and binding on all persons, including the Company, its subsidiaries and other entities in which the Company has an ownership interest, its shareholders, Optionees and their estates and beneficiaries. 2 SECTION III. OPTION AGREEMENTS (a) Each Option shall be evidenced by a written agreement between the Company and the Optionee ("Option Agreement") which shall contain such terms and conditions as may be approved by the Committee, including, but not limited to, the number of shares of Stock that may be purchased under the Option and the price per share of Stock purchasable under the Option ("Option Price"). The terms and conditions of the respective Option Agreements need not be identical. Specifically, an Option Agreement may provide for the surrender of the right to purchase shares of Stock under the Option in return for a payment in cash or shares of Stock or a combination of cash and shares of Stock equal in value to the excess of the fair market value of the shares of Stock with respect to which the right to purchase is surrendered over the Option Price therefor ("Stock Appreciation Rights"), on such terms and conditions as the Committee in its sole discretion may prescribe. Moreover, an Option Agreement may provide for the payment of the Option Price, in whole or in part, by the delivery of a number of shares of Stock (plus cash if necessary) having a fair market value equal to such Option Price. (b) For all purposes under the Plan, the fair market value of a share of Stock on a particular date shall be equal to the closing sales price of the Stock reported on the New York Stock Exchange Composite Tape on that date; or, if no prices are reported on that date, on the last preceding date on which such prices of the Stock are so reported. In the event Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate. (c) Each Option and all rights granted thereunder shall not be transferable other than (i) by will or the laws of descent and distribution, (ii) between an Optionee and his or her former spouse, but only if such transfer is incident to a divorce under Section 1041(a) of the Code, or (iii) with the consent of the Committee. SECTION IV. ELIGIBILITY OF OPTIONEE The Plan is intended to constitute a "broadly-based plan" for purposes of the shareholder approval policy of the New York Stock Exchange relating to stock option plans, and the Plan shall be administered accordingly. Options may be granted only to individuals who are employees (including officers and directors who are also employees) of the Company or an entity in which the Company has an ownership interest, directly or indirectly, at the time the Option is granted or who will be future employees within 90 days of any grant of Options, and, in any event, at least a majority of the full-time employees in the United States of the Company or any parent or subsidiary corporation (as defined in Section 424 of the Code) (who are "exempt employees" under the Fair Labor Standards Act of 1938) shall be eligible to receive grants of Options. Options may be granted to the same individual on more than one occasion. -2- 3 At least a majority of the shares of Stock underlying Options awarded under the Plan, during the three-year period commencing on the date the Plan is adopted by the Company, shall be made to eligible employees who are neither officers nor directors of the Company. SECTION V. SHARES SUBJECT TO THE PLAN The aggregate number of shares of Stock which may be issued under Options granted under the Plan shall not exceed 5,500,000. Such shares may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. Should any Option hereunder expire or terminate prior to its exercise in full, the shares theretofore subject to such Option may again be subject to an Option granted under the Plan to the extent permitted under Rule 16b-3. The aggregate number of shares of Stock which may be issued under the Plan shall be subject to adjustment in the same manner as provided in Paragraph VIII hereof with respect to shares of Stock subject to Options then outstanding. Exercise of an Option in any manner, including an exercise involving a Stock Appreciation Right, shall result in a decrease in the number of shares of Stock which may thereafter be available, both for purposes of the Plan and for sale to any one individual, by the number of shares as to which the Option is exercised. Notwithstanding any provision in the Plan to the contrary, no more than 1,000,000 shares of Stock may be subject to Options granted under the Plan to any one individual during the term of the Plan. The limitation set forth in the preceding sentence shall be applied in a manner which will permit compensation generated under the Plan to constitute "performance-based" compensation for purposes of Section 162(m) of the Code, including, without limitation, counting against such maximum number of shares of Stock, to the extent required under Section 162(m) of the Code and applicable interpretive authority thereunder, any shares of Stock subject to Options that are canceled or repriced. SECTION VI. OPTION PRICE The Option Price of Stock issued under each Option shall be determined by the Committee, but such Option Price shall not be less than the fair market value of Stock subject to the Option on the date the Option is granted. SECTION VII. TERM OF PLAN This Plan was originally effective on October 8, 1999 (the "Effective Date"). This Plan, as amended and restated, shall be effective on January 20, 2000, which is the date on which the Board adopted this amended and restated Plan, subject to the approval of the shareholders. -3- 4 Except with respect to Options then outstanding, if not sooner terminated under the provisions of Paragraph IX, the Plan shall terminate upon and no further Options shall be granted after the expiration of ten years from the Effective Date. SECTION VIII. RECAPITALIZATION OR REORGANIZATION (a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (b) The shares with respect to which Options may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Option theretofore granted, the Company shall effect a subdivision or consolidation of shares of Stock or the payment of a stock dividend on Stock without receipt of consideration by the Company, the number of shares of Stock with respect to which such Option may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the Option Price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the Option Price per share shall be proportionately increased. Any fractional share resulting from such adjustment shall be rounded up to the next whole share. (c) If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "Recapitalization"), the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock and securities to which the Optionee would have been entitled pursuant to the terms of the Recapitalization if, immediately prior to the Recapitalization, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option. If (i) any "person," as such term is used in Sections 13(d) and 14(d) of the 1934 Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities, (ii) during any period of two consecutive years (not including any period prior to the Effective Date of this Plan), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in (i), (iii) or (iv) of this Paragraph VIII(c)) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors -4- 5 at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason other than normal retirement, death or disability to constitute at least a majority thereof, (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other person, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities for the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (2) a merger in which the Company is the surviving entity but no "person" (as defined above) acquires more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities, or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) (each such event described in clauses (i), (ii), (iii) and (iv) is referred to herein as a "Corporate Change"), no later than (A) ten days after the approval by the shareholders of the Company of such merger or consolidation, plan of complete liquidation, or sale or disposition of assets or (B) thirty days after a change of control of the type described in clause (i) or (ii), the Committee, acting in its sole discretion without the consent or approval of any Optionee, shall act to effect one or more of the following alternatives, which may vary among individual Optionees and which may vary among Options held by any individual Optionee: (I) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options and all rights of Optionees thereunder shall terminate, (II) require the mandatory surrender to the Company by selected Optionees of some or all of the outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay to each Optionee an amount of cash per share equal to the excess, if any, of the amount calculated in Subparagraph (d) below (the "Change of Control Value") of the shares subject to such Option over the Option Price(s) under such Options for such shares, (III) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Options then outstanding) or (IV) provide that the number and class of shares of Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of Stock or other securities or property (including, without limitation, cash) to which the Optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the Optionee had been the holder of record of the number of shares of Stock then covered by such Option. Notwithstanding anything herein to the contrary, if a Corporate Change occurs and, in connection with or as a result of such Corporate Change, neither William V. Morgan nor Richard D. Kinder holds or continues to hold the office of Chairman or Vice Chairman of the Company, all Options granted hereunder shall immediately become fully exercisable. -5- 6 (d) For the purposes of clause (II) in Subparagraph (c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to shareholders of the Company in any such merger, consolidation, reorganization, sale of assets or dissolution transaction, (ii) the price per share offered to shareholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the fair market value per share of the shares into which such Options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Options. In the event that the consideration offered to shareholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph (c) above consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consolidation offered which is other than cash. (e) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Options theretofore granted or the Option Price per share. SECTION IX. AMENDMENT OR TERMINATION The Board in its discretion may terminate the Plan at any time with respect to any shares for which Options have not theretofore been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided, that (a) no change in any Option theretofore granted may be made which would impair the rights of the Optionee without the consent of such Optionee; (b) the Board may not make any alteration or amendment which would decrease any authority granted to the Committee hereunder in contravention of Rule 16b-3; and (c) no such action of the Board shall be taken without approval of the Company's shareholders if such approval is required to comply with Rule 16b-3, any rule promulgated by the New York Stock Exchange, or Section 162(m) of the Code or any successor provisions. SECTION X. SECURITIES LAWS (a) The Company shall not be obligated to issue any Stock pursuant to any Option granted under the Plan at any time when the offering of the shares covered by such Option have not been registered under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the offering and sale of such shares. -6- 7 (b) It is intended that the Plan and any grant of an Option made to a person subject to Section 16 of the 1934 Act meet all of the requirements of Rule 16b-3. If any provision of the Plan or any such Option would disqualify the Plan or such Option under, or would otherwise not comply with, Rule 16b-3, such provision or Option shall be construed or deemed amended to conform to Rule 16b-3. SECTION XI. MISCELLANEOUS (a) Neither the adoption of the Plan by the Company nor any action of the Board or the Committee shall be deemed to give an employee any right to be granted an Option or any other rights hereunder except as may be evidenced by an Option Agreement duly executed on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. (b) Nothing contained in the Plan shall (i) confer upon any employee any right with respect to continuation of employment with the Company or any subsidiary or (ii) interfere in any way with the right of the Company or any subsidiary to terminate his or her employment at any time. (c) Nothing contained in the Plan shall be construed to prevent the Company or any subsidiary from taking any corporate action which is deemed by the Company or such subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Option made under the Plan. No employee, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action. (d) Any Option Agreement or related document may be executed by facsimile signature. If any officer who shall have signed or whose facsimile signature shall have been placed upon any such Option Agreement or related document shall have ceased to be such officer before the related Option is granted by the Company, such Option may nevertheless be issued by the Company with the same effect as if such person were such officer at the date of grant. (e) This Plan shall be construed in accordance with the laws of the State of Texas. -7- 8 IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing by the Board of Directors, Kinder Morgan, Inc. has caused these presents to be duly executed in its name and behalf by its proper officers thereunto duly authorized as of this ____ day of _______________, 2000. KINDER MORGAN, INC. By: Name: Title: EX-13 4 1999 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 KINDER MORGAN, INC. 1999 ANNUAL REPORT TO SHAREHOLDERS Interested persons may receive a copy of Kinder Morgan's 1999 Annual Report to Shareholders without charge by forwarding a written request to: Kinder Morgan, Inc., Investor Relations Department, 1301 McKinney, Suite 3400 Houston, Texas, 77010. EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 KINDER MORGAN, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT
NAME OF COMPANY STATE OF INCORPORATION - --------------- ---------------------- AOG Gas Transmission Company, L.P. ....................................................................... Texas AOG Holdings, Inc. ....................................................................................... Delaware American Gas Storage, L.P. ............................................................................... Texas American Gathering, L.P. ................................................................................. Texas American Oil & Gas Corporation ........................................................................... Delaware American Pipeline Company ................................................................................ Delaware American Processing, L.P. ................................................................................ Texas Blue Moon Holdings, LLC* ................................................................................. Delaware Caprock Pipeline Company ................................................................................. Delaware Compressor Pump & Engine Machine, Inc. ................................................................... Wyoming Coyote Gas Treating Limited Liability Company* ........................................................... Colorado Enoable, LLC* ............................................................................................ Delaware Energy Mountain Services ................................................................................. Colorado Evolve Solutions, L.L.C .................................................................................. Delaware FR Holdings, L.L.C. ...................................................................................... Colorado Gas Natural del Noroeste, S.A. de C.V. ................................................................... Mexico Interenergy Corporation .................................................................................. Colorado Interenergy Distribution Corporation ..................................................................... Colorado Interenergy Resources Corporation ........................................................................ Colorado Interenergy Resources, L.P. .............................................................................. Texas Interenergy Resources Corporation of New Mexico .......................................................... New Mexico Kinder Morgan (Delaware), Inc ............................................................................ Delaware Kinder Morgan G.P., Inc .................................................................................. Delaware Kinder Morgan Power Company .............................................................................. Colorado KNFS Investments ......................................................................................... Colorado K N Cogeneration ......................................................................................... Colorado K N Energy Foundation .................................................................................... Colorado
2 EXHIBIT 21 (continued) K N Energy Igasamex, Inc. ................................................................................ Delaware K N Energy International, Inc. ........................................................................... Delaware K N Energy de Mexico, S.A. de C.V. ....................................................................... Mexico K N Field Services, Inc. ................................................................................. Colorado K N Finance Company ...................................................................................... Colorado K N Gas Gathering, Inc. .................................................................................. Colorado K N Gas Supply Services, Inc. ............................................................................ Colorado K N Management Corp. ..................................................................................... Delaware K N Marketing, L.P. ...................................................................................... Texas K N Natural Gas, Inc. .................................................................................... Colorado K N Processing, Inc. ..................................................................................... Delaware K N Services, Inc. ....................................................................................... Colorado K N Telecommunications, Inc. ............................................................................. Colorado K N Thermo Acquisition, Inc. ............................................................................. Colorado K N Thermo, LLC .......................................................................................... Colorado K N Trading, Inc. ........................................................................................ Delaware K N TransColorado, Inc. .................................................................................. Colorado K N Wattenberg Transmission Limited Liability Company .................................................... Colorado K N Weatherwise LLC ...................................................................................... Delaware K N WesTex Gas Service Company ........................................................................... Texas Lake Power, L.L.C ........................................................................................ Delaware mc2 Inc. ................................................................................................. Delaware MCN Gulf Processing Corp. ................................................................................ Delaware MCN Properties Corp. ..................................................................................... Delaware MidCon Corp. ............................................................................................. Delaware MidCon Dehydration Corp. ................................................................................. Delaware MidCon Development Corp. ................................................................................. Delaware MidCon Exploration Company ............................................................................... Illinois MidCon Gas Natural de Mexico, S.A. de C.V. ............................................................... Mexico MidCon Gas Products Corp. ................................................................................ Delaware MidCon Gas Services Corp. ................................................................................ Delaware MidCon Marketing Corp. ................................................................................... Delaware
3 EXHIBIT 21 (continued) MidCon Mexico Pipeline Corp. ............................................................................. Delaware MidCon NGL Corp. ......................................................................................... Delaware MidCon Power Services Corp. .............................................................................. Delaware MidCon Texas Gas Services Corp. .......................................................................... Delaware MidCon Texas Pipeline Operator, Inc. ..................................................................... Delaware NALOCO, Inc. ............................................................................................. Delaware NATOCO, Inc. ............................................................................................. Delaware Natural Gas Pipeline Company of America .................................................................. Delaware NGPL-Canyon Compression Co. .............................................................................. Delaware NGPL Offshore Company .................................................................................... Delaware NGPL-Overthrust Inc. ..................................................................................... Delaware Northern Gas Company ..................................................................................... Wyoming Occidental Energy Development Corp. ...................................................................... Delaware Palo Duro Pipeline Company, Inc. ......................................................................... Delaware Panola/Rusk Gatherers .................................................................................... Texas Red River Pipeline, L.P. ................................................................................. Texas Red Rock Energy, LLC ..................................................................................... Delaware Rocky Mountain Natural Gas Company ....................................................................... Colorado Slurco Corporation ....................................................................................... Colorado TCP Gathering Co. ........................................................................................ Colorado Temple & Petty Construction Co., L.L.C. .................................................................. Colorado Thermo Greeley L.L.C. .................................................................................... Colorado Thermo Salt Company, LLC ................................................................................. Colorado Thunder Creek Gas Services, L.L.C. ....................................................................... Wyoming Valley Operating, Inc. ................................................................................... Colorado Westar Transmission Company .............................................................................. Delaware Wildhorse Energy Partners, LLC ........................................................................... Delaware
EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on (i) Form S-16, (Nos. 2-51894, 2-55664, 2-63470 and 2-75654); (ii) Form S-8, (Nos. 2-77752, 33-10747, 33-24934, 33-33018, 33-54403, 33-54443, 33-54555, 333-08059, 333-08087 and 333-60839); and (iii) Form S-3, (Nos. 2-84910, 33-26314, 33-23880, 33-42698, 33-44871, 33-45091, 33-46999, 33-54317, 33-69432, 333-04385, 333-40869, 333-44421, 333-55921, and 333-68257) of Kinder Morgan, Inc. and subsidiaries of our report dated March 16, 2000 relating to the financial statements and schedule, which appear in this Form 10-K, and of our report dated March 10, 2000 relating to the financial statements of Kinder Morgan Energy Partners, L.P., which are incorporated by reference in this Form 10-K. /s/ PricewaterhouseCoopers LLP Houston, Texas March 27, 2000 EX-23.2 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in (i) Registration Statements on Form S-16, File Nos. 2-51894, 2-55664, 2-63470 and 2-75654; (ii) Registration Statements on Form S-8, File Nos. 2-77752, 33-10747, 33-24934, 33-33018, 33-54403, 33-54443, 33-54555, 333-08059, 333-08087 and 333-60839; and (iii) Registration Statements on Form S-3, File Nos. 2-84910, 33-26314, 33-23880, 33-42698, 33-44871, 33-45091, 33-46999, 33-54317, 33-69432, 333-04385, 333-40869, 333-44421, 333-55921 and 333-68257 of our report dated February 2, 1999 (except with respect to the matter discussed in Note 6 to the December 31, 1999 consolidated financial statements, as to which the date is March 16, 2000), on the consolidated financial statements and schedule of Kinder Morgan, Inc. (formerly K N Energy, Inc.) and subsidiaries for the year ended December 31, 1998 included in this Form 10-K. /s/ Arthur Andersen LLP Denver, Colorado March 27, 2000 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 26,378 0 638,120 1,669 50,328 963,854 6,167,251 377,687 9,540,283 1,825,306 3,293,326 0 0 564,192 1,101,649 9,540,283 1,745,481 1,745,481 956,181 1,440,424 0 2,460 251,986 245,179 90,527 154,652 (396,096) 0 0 (241,444) (3.01) (3.01)
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