-----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, R2tZy+MGatVO836HQlmrNtyey6vv5FAZPUEA8wE8mfgzXzVuFJeDQ5YQH4cEJs4w OOpEJLWyJIvX+aA7JeXoVA== 0000950129-01-500161.txt : 20010430 0000950129-01-500161.hdr.sgml : 20010430 ACCESSION NUMBER: 0000950129-01-500161 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000120 ITEM INFORMATION: FILED AS OF DATE: 20010427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINDER MORGAN ENERGY PARTNERS L P CENTRAL INDEX KEY: 0000888228 STANDARD INDUSTRIAL CLASSIFICATION: PIPE LINES (NO NATURAL GAS) [4610] IRS NUMBER: 760380342 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-11234 FILM NUMBER: 1612368 BUSINESS ADDRESS: STREET 1: 500 DALLAS ST SUITE 1000 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7138449500 MAIL ADDRESS: STREET 1: 370 VAN GORDON STREET STREET 2: 2600 GRAND AVENUE CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 FORMER COMPANY: FORMER CONFORMED NAME: ENRON LIQUIDS PIPELINE L P DATE OF NAME CHANGE: 19970304 8-K/A 1 h86412e8-ka.txt KINDER MORGAN ENERGY PARTNERS LP 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Amendment No. 3 to CURRENT REPORT dated January 20, 2000 Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: April 27, 2001 KINDER MORGAN ENERGY PARTNERS, L.P. (Exact name of registrant as specified in its charter) Delaware 1-11234 76-0380342 (State or other (Commission (I.R.S. Employer jurisdiction File Number) Identification No.) of incorporation) 500 Dallas Street, Suite 1000 Houston, Texas 77002 (Address of principal executive offices, including zip code) 713-369-9000 (Registrant's telephone number, including area code) 2 The undersigned registrant hereby amends the following items of its Current Report on Form 8-K dated January 20, 2000, as set forth herein. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of the Businesses Acquired. Filed herewith as Exhibit 99.1 are audited financial statements as required by this Item 7 for the following entities, interests in which were acquired by registrant as reported in a Current Report on Form 8-K dated February 4, 2000: (1) Kinder Morgan Interstate Gas Transmission LLC, a Colorado single-member limited liability company; (2) Trailblazer Pipeline Company, an Illinois general partnership; and (3) Red Cedar Gathering Company, a general partnership. (b) Pro Forma Financial Information. Filed herewith as Exhibit 99.2 is the Unaudited Pro Forma Condensed Combined Statement of Income for the registrant, giving effect to the acquisition of the above listed entities by the registrant as described in a Current Report on Form 8-K dated February 4, 2000. In addition, the Pro Forma Condensed Combined Statement of Income gives effect to our acquisition from Columbia Gulf Transmission Company on November 30, 1999 of an additional 33 1/3% interest in Trailblazer Pipeline Company. (c) Exhibits. The Exhibits listed in the Index to Exhibits are filed as part of this Current Report on Form 8-K/A. 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. KINDER MORGAN ENERGY PARTNERS, L.P. By: KINDER MORGAN G.P., INC., its general partner By: /s/ Joseph Listengart --------------------------- Joseph Listengart Vice President, General Counsel and Secretary Date: April 27, 2001 4 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 23.1 Consent of Independent Accountants 23.2 Consent of Independent Public Accountants 99.1 Financial Statements of Kinder Morgan Interstate Gas Transmission LLC, Trailblazer Pipeline Company and Red Cedar Gathering Company for the year ended December 31, 1999. 99.2 Unaudited Pro Forma Condensed Combined Statement of Income of Kinder Morgan Energy Partners, L.P. for the fiscal year ended December 31, 1999.
EX-23.1 2 h86412ex23-1.txt 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-3 (Nos. 333-25995, 333-62155, 333-33726, 333-54616 and 333-55866), (ii) Form S-4 (No. 333-50898) and (iii) Form S-8 (No. 333-56343) of Kinder Morgan Energy Partners, L.P. of our reports dated March 27, 2000 relating to the financial statements of Kinder Morgan Interstate Gas Transmission LLC and Trailblazer Pipeline Company, which appear in this Current Report on Form 8-K/A (Amendment No. 3) of Kinder Morgan Energy Partners, L.P. dated April 27, 2001. /s/ PricewaterhouseCoopers LLP Denver, Colorado April 27, 2001 EX-23.2 3 h86412ex23-2.txt 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 the Registration Statements on Form S-3 Nos. 333-25995, 333-62155, 333-33726, 333-54616 and 333-55866, Form S-4 No. 333-50898 and Form S-8 No. 333-56343 of Kinder Morgan Energy Partners, L.P. of our report dated March 24, 2000 on the financial statements of Red Cedar Gathering Company, included in this Current Report on Amendment No. 3 Form 8-K/A of Kinder Morgan Energy Partners, L.P. dated March 28, 2000. /s/ ARTHUR ANDERSEN LLP Denver, Colorado, April 27, 2001. EX-99.1 4 h86412ex99-1.txt FINANCIAL STATEMENTS-KINDER MORGAN INTERSTATE GAS 1 EXHIBIT 99.1 Report of Independent Accountants To the Members of Kinder Morgan Interstate Gas Transmission LLC: In our opinion, the accompanying statements of income, of cash flows and of changes in member's equity present fairly, in all material respects, the results of operations and the cash flows of Kinder Morgan Interstate Gas Transmission LLC (formerly K N Interstate Gas Transmission Co.) for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 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. PricewaterhouseCoopers LLP Denver, Colorado March 27, 2000 2 STATEMENT OF INCOME Kinder Morgan Interstate Gas Transmission LLC (Formerly K N Interstate Gas Transmission Co.)
Year Ended December 31, 1999 -------------- (In Thousands) Operating Revenues: Natural Gas Transportation and Storage $ 112,732 Other 475 ----------- Total Operating Revenues 113,207 ----------- Operating Costs and Expenses: Gas Purchases and Other Costs of Sales 13,954 Operations and Maintenance 23,379 General and Administrative 9,566 Depreciation and Amortization 16,985 Taxes, Other Than Income Taxes 4,608 Severance Costs 3,054 ----------- Total Operating Costs and Expenses 71,546 ----------- Operating Income 41,661 ----------- Other Expenses: Interest Expense (27,119) Other, Net (248) ----------- Total Other Expenses (27,367) ------------ Income Before Income Taxes 14,294 Income Taxes 5,948 ----------- Net Income $ 8,346 ===========
The accompanying notes are an integral part of these statements. 3 STATEMENT OF CHANGES IN MEMBER'S EQUITY Kinder Morgan Interstate Gas Transmission LLC (Formerly K N Interstate Gas Transmission Co.)
Net Income Balance at Year Ended Transfer Push Down Balance at December 31, December 31, To Member's Accounting December 31, 1998 1999 Equity(1) Adjustment(2) 1999 (Dollars in Thousands) Common Stock $ 10 $ - $ (10) $ - $ - Additional Paid-in Capital 89,019 - (89,019) - - Retained Earnings 71,749 8,346 (80,095) - - Member's Capital - - 169,124 101,378 270,502 ---------- ------------- ----------- ----------- ----------- Total Member's Equity $ 160,778 $ 8,346 $ - $ 101,378 $ 270,502 ========== ============= =========== =========== ===========
(1) Change Form of Organization From a C Corporation to a Limited Liability Company (2) Push Down Accounting Adjustment Resulting From the Sale of KMIGT to Kinder Morgan Energy Partners The accompanying notes are an integral part of these statements. 4 STATEMENT OF CASH FLOWS Kinder Morgan Interstate Gas Transmission LLC (Formerly K N Interstate Gas Transmission Co.)
Year Ended December 31, 1999 -------------- (In Thousands) Cash Flows From Operating Activities: Net Income $ 8,346 Adjustments to Reconcile Net Income to Net Cash Flows From Operating Activities: Depreciation and Amortization 16,985 Deferred Income Taxes 5,470 Provisions for Rate Refunds 25,662 Net Change in Regulatory Assets and Liabilities 17,144 Net Change in Exchange Gas Imbalances (7,429) Decrease in Gas in Underground Storage 2,145 Decrease in Receivables 4,560 Decrease in Inventory 673 Decrease in Payables and Accrued Expenses (5,195) Other, Net 640 ---------- Net Cash Flows Provided by Operating Activities 69,001 ---------- Cash Flows Used in Investing Activities: Capital Expenditures (20,743) Proceeds From Sales of Assets 11,004 ---------- Net Cash Flows Used in Investing Activities (9,739) ---------- Cash Flows From Financing Activities: Payments on Note to Associated Company (59,262) ---------- Net Cash Flows Used in Financing Activities (59,262) ---------- Net Change in Cash - Cash and Cash Equivalents at Beginning of Year - ---------- Cash and Cash Equivalents at End of Year $ - ==========
The accompanying notes are an integral part of these statements. 5 KINDER MORGAN INTERSTATE GAS TRANSMISSION LLC NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Kinder Morgan Interstate Gas Transmission LLC ("KMIGT," formerly K N Interstate Gas Transmission Co.) was a wholly owned subsidiary of Kinder Morgan, Inc. (formerly K N Energy, Inc.) until its sale to Kinder Morgan Energy Partners, L.P. ("Kinder Morgan Energy Partners") in December 1999 (see Note 3). In connection with the sale to Kinder Morgan Energy Partners and in conjunction with the name change referred to above, KMIGT was converted from a Colorado "C" corporation to a Colorado single- member limited liability company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Accounting The financial statements were prepared in accordance with generally accepted accounting principles, except that no earnings per share data have been provided because KMIGT is a wholly owned subsidiary of Kinder Morgan Energy Partners. (b) Use of Estimates 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. (c) Accounting for Regulatory Activities KMIGT is regulated by and subject to the regulations and accounting procedures of the Federal Energy Regulatory Commission ("FERC"). In addition, KMIGT meets the criteria for application of and accordingly, follows the accounting and reporting requirements 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. (d) Associated Company Transactions Kinder Morgan, Inc. charges KMIGT for non-labor costs incurred on behalf of KMIGT, and for direct labor and related expenses for personnel who perform services for the benefit of KMIGT. KMIGT recognized $83.1 million in transportation and storage revenues for 1999, or 73% of total operating revenues from natural gas services to associated companies. Components of transportation and storage revenues from natural gas services to associated companies are as follows:
1999 Revenues From Percent of Total Associated Companies Operating Revenues KN Marketing, L.P. $ 57,387,976 51% KN Retail 15,778,264 14% Wildhorse Energy Partners, LLC 7,236,808 6% Other 2,720,272 2% ------------ --- Total $ 83,123,320 73% ============ ---
(e) Depreciation Depreciation is computed based on the straight-line method over the estimated useful lives of assets. The range of estimated useful lives of assets is 7-40 years (transmission assets: 40 years). 6 (f) Gas in Underground Storage KMIGT maintains gas in its underground storage facilities on behalf of certain third parties and receives a fee for its storage services. (g) Cash Flow Information KMIGT considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. KMIGT made no cash payments for interest or income taxes during 1999. (h) Revenue Recognition KMIGT recognizes transportation and storage revenues on an accrual basis in the month these services are provided under the terms of its approved FERC tariffs. 3. SALE OF KMIGT TO KINDER MORGAN ENERGY PARTNERS, L.P. On December 30, 1999, Kinder Morgan, Inc. entered into a Contribution Agreement among Kinder Morgan, Inc., several of its wholly owned subsidiaries and Kinder Morgan Energy Partners. As a result, effective as of December 31, 1999, Kinder Morgan, Inc. contributed, among other things, all of its interest in KMIGT to Kinder Morgan Energy Partners. In accordance with authoritative accounting guidelines, an adjustment to push down the increase in the basis of Kinder Morgan Energy Partners' investment in KMIGT resulting from the application of the purchase method of accounting for its acquisition of KMIGT is reflected in the accompanying Statement of Member's Equity as an increase in Member's Equity of $101.4 million. 4. REGULATORY MATTERS On January 23, 1998, KMIGT filed a general rate case with the 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 refunds for past periods will be made in early 2000. As of December 31, 1999, the Partnership had accrued $36.6 million for these rate refunds. 5. LITIGATION AND ENVIRONMENTAL MATTERS 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, including KMIGT, (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. KMIGT believes it has a meritorious position in this matter, and does not expect this lawsuit to have a material adverse effect on KMIGT's business, cash flows, financial position or results of operations. KMIGT is a party to litigation (other than that specifically noted) which arises in the normal course of business. Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual 7 disposition of these matters. Management believes that the effect on KMIGT's results of operations, financial position or cash flows, if any, from the disposition of these matters will not be material. 6. INCOME TAXES For income tax purposes, KMIGT was treated as a C Corporation for 1999, and as such was subject to federal and state income taxes. See Note 1 regarding the conversion of KMIGT from a C corporation to a single-member limited liability company. Components of the income tax provision applicable to federal and state income taxes for the year ended December 31, 1999, are as follows:
1999 Taxes Currently Payable: Federal $ 1,403,798 State (925,807) ----------- 477,991 ----------- Taxes Deferred: Federal $ 3,260,935 State 2,209,503 ----------- 5,470,438 ----------- Total Income Tax Provision $ 5,948,429 ===========
The difference between the statutory federal income tax rate and KMIGT's effective income tax rate is summarized as follows: Federal Income Tax Rate 35.0% State Income Tax 5.6% Other 1.0% ----- Effective Tax Rate 41.6% =====
7. SEVERANCE COSTS Severance costs of $3.1 million, as shown in the accompanying Statement of Income, represent primarily KMIGT's allocated share of severance costs incurred by Kinder Morgan, Inc. during 1999. 8 Report of Independent Accountants To the Partners of Trailblazer Pipeline Company: In our opinion, the accompanying statements of income, of cash flows and of changes in partners' equity present fairly, in all material respects, the results of operations and the cash flows of Trailblazer Pipeline Company for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 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. PricewaterhouseCoopers LLP Denver, Colorado March 27, 2000 9 TRAILBLAZER PIPELINE COMPANY STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999 OPERATING REVENUES: Transportation Services $ 33,711,148 ------------- OPERATING EXPENSES: Operations and Maintenance 2,827,408 Depreciation 16,972,560 Taxes Other Than Income 878,938 ------------- Total Operating Expenses 20,678,906 ------------- OPERATING INCOME 13,032,242 OTHER INCOME: Interest Income 978,921 ------------- INTEREST EXPENSE: Interest on Long-term Debt 3,295,847 Amortization of Debt Issuance Costs 161,000 Interest Expense on Rate Refund 404,185 ------------- Total Interest Expense 3,861,032 ------------- NET INCOME TO PARTNERS $ 10,150,131 =============
The accompanying notes are an integral part of these statements. 10 TRAILBLAZER PIPELINE COMPANY STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net Income to Partners $ 10,150,131 ------------- Adjustment to Reconcile Net Income to Partners to Net Cash Flows Provided By Operating Activities: Depreciation 16,972,560 Amortization of Debt Expense 141,312 Decrease in Depreciation Rate Adjustment (6,831,397) Increase in Capacity Rate Refund 11,806,930 Other Noncash Charges (Credits) to Income (274,509) Changes in Certain Operating Assets and Liabilities: Decrease in Accounts Receivable (1,188,273) Increase in Other Assets 1,851 Decrease in Prepayments and Other (39,756) Decrease in Gas Imbalance Cashout Assets (16,668) Decrease in Interest Payables (350,348) Decrease in Accounts Payable and Other (739,302) Decrease in Taxes Other Than Income (168,555) Decrease in Refund to Shippers (939,476) ------------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 28,524,500 ------------- CASH FLOWS USED IN INVESTING ACTIVITIES: Capital Expenditures, Net of Contributions (154,229) ------------- CASH FLOWS USED IN FINANCING ACTIVITIES: Repayment of Long-Term Debt (10,100,000) Distributions to Partners: (8,400,079) ------------- NET CASH FLOWS USED IN FINANCING ACTIVITIES (18,500,079) ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 9,870,192 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,846,445 ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,716,637 =============
The accompanying notes are an integral part of these statements. 11 TRAILBLAZER PIPELINE COMPANY STATEMENT OF CHANGES IN PARTNERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 Enron NGPL- Trailblazer Total Trailblazer LLC KMOLP Pipeline Co. -------------- -------------- --------------- -------------- PARTNERS' EQUITY-Beginning Balance $ 80,402,256 $ 26,800,752 $ 26,800,752 $ 26,800,752 Net Income to Partners 10,150,131 3,383,377 3,383,377 3,383,377 Distributions to Partners: Earnings (8,400,079) (2,800,026) (2,800,026) (2,800,026) Refund to Shippers (939,476) (313,159) (313,159) (313,159) ------------- ------------- ------------- ------------- PARTNERS' EQUITY-Ending Balance $ 81,212,832 $ 27,070,944 $ 27,070,944 $ 27,070,944 ============= ============= ============= =============
The accompanying notes are an integral part of these statements. 12 TRAILBLAZER PIPELINE COMPANY NOTES TO FINANCIAL STATEMENTS (1) DESCRIPTION AND STATUS OF PARTNERSHIP Trailblazer Pipeline Company ("Trailblazer") is an Illinois partnership which owns and operates a 436-mile pipeline system and is engaged in the transmission of natural gas for others in interstate commerce from Colorado through southeastern Wyoming to Beatrice, Nebraska. The partners in Trailblazer are NGPL-Trailblazer, LLC, Kinder Morgan Operating L.P. "A" ("KMOLP") and Enron Trailblazer Pipeline Company, each with a 33 1/3% interest. Trailblazer is managed by a committee consisting of management representatives from each of the partners. Trailblazer has no employees. Natural Gas Pipeline Company of America (Natural), a subsidiary of Kinder Morgan, Inc., provides the personnel to operate the pipeline for which it is reimbursed at cost. On November 30, 1999, KMOLP purchased the one-third interest of Trailblazer formerly owned by Columbia Gulf Transmission Company. On December 31, 1999, the entity NGPL-Trailblazer, Inc. (which owned one-third interest in Trailblazer) was purchased by KMOLP. NGPL Trailblazer, Inc.'s name was subsequently changed to NGPL-Trailblazer, LLC. By the Federal Energy Regulatory Commission's order issued March 14, 1997 in Docket No. CP96-506-000, Trailblazer was authorized to construct and operate a new 5,200 horsepower compressor unit in Lincoln County, Nebraska (Compressor Station No. 602). Compressor Station No. 602 was placed in service on July 16, 1997 and increased Trailblazer's firm design day capacity by approximately 104,528 Mcf/day to 402,000 Mcf/day. (2) SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Trailblazer is regulated by and subject to the regulations and accounting procedures of the Federal Energy Regulatory Commission (FERC). In addition, Trailblazer meets the criteria for application of and, accordingly, follows the accounting and reporting requirements of Statement of Financial Accounting Standard No. 71 ,"Accounting for the Effects of Certain Types of Regulation" for regulated enterprises. Use of Estimates The process of preparing financial statement in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from the estimated amounts. Management believes that these estimates and assumptions provide a reasonable basis for the fair presentation of Trailblazer's financial position and results of operations. Cash Flow Information Cash equivalents are recorded at cost, which approximates market. For purposes of reporting cash flows, all liquid investments with maturities at date of purchase of three months or less are considered cash equivalents. Cash paid for interest during 1999 was $3.6 million. Depreciation Depreciation is computed on a straight-line method at a composite annualized rate of 3.6% for the year ended December 31, 1999. Revenue Recognition Trailblazer recognizes transportation revenues on an accrual basis as these services are provided under the terms of its approved FERC tariffs. (3) LONG-TERM AND SHORT-TERM BORROWINGS On September 23, 1992, under the terms of a Note Purchase Agreement ("Agreement"), Trailblazer issued and sold an aggregate principal amount of $101 million of Senior Secured Notes ("Notes") to a syndicate of fifteen insurance companies. Security for the Notes is provided principally by an assignment of certain Trailblazer transportation contracts. Effective April 29, 1997, an amendment to the Agreement was added. This amendment allows Trailblazer to include several additional transportation contracts as security for the Notes, adds a limitation on the amount of additional money that Trailblazer can borrow, and relieves Trailblazer from the security deposit obligation. The Notes have a fixed annual interest rate of 8.03% and will be repaid in semi-annual principal installments of $5.05 million plus interest from March 1, 1993 through September 1, 2002, the final maturity date. On December 29, 1999, Trailblazer entered into a revolving credit agreement with Toronto Dominion, Inc. providing for loans up to $10 million. This agreement provides for an interest rate of LIBOR plus 0.525% on the current loan and is due on December 27, 2000. 13 (4) RESTRICTIONS ON PARTNERSHIP DISTRIBUTIONS Under the terms of the Agreement, as amended, and the revolving credit agreement with Toronto Dominion, Inc., partnership distributions are restricted by certain financial covenants. (5) REFUNDS DUE SHIPPERS Amounts billed to shippers are calculated on the basis of Federal Energy Regulation Commission (FERC) approved rates that include a component for both current and deferred income taxes. Trailblazer has traditionally advanced these amounts billed to shippers to its partners as a component of the distribution of earnings. As a result of the reduction in the federal corporate tax rate from 46% to 35% on July 1, 1987, Trailblazer's reserve for deferred federal income taxes was greater than the amounts of federal income tax that would be paid in future years. The FERC issued a rate settlement order dated October 23, 1990 requiring the deferred taxes collected in excess of the 35% tax rate to be refunded to the shippers. The amount of deferred taxes collected in excess of the 35% tax rate, which has been advanced to the partners, has been quantified at $16,692,069 and identified as the refunds due shippers. The amount to be refunded to shippers will be repaid over a 20 year period beginning in 1992 pursuant to the FERC order. Trailblazer intends to reduce prospective cash distributions to the partners to offset the annual refund to its shippers and, accordingly, has reflected a comparable amount as amounts recoverable or receivable from partners. An amount will be deducted from partners' equity annually representing the cash distribution which has been foregone in order to make this annual refund. (6) CAPACITY RATE REFUND The $11,806,930 capacity rate refund was accrued as a liability and charged against revenue during 1999. This amount was accrued monthly based on the difference between the actual rates billed to shippers and the anticipated rate to be settled through rate case hearings. The rate case was settled and this amount was paid as a refund to shippers in April of 2000. (7) INCOME TAXES Income taxes are the responsibility of the partners and are not reflected in these financial statements. However, the Trailblazer tariff includes an allowance for income taxes calculated as if it were a corporation. As discussed in Note 5, amounts collected by Trailblazer as an allowance for deferred income taxes have historically been paid currently to partners and recorded in the financial statements as a distribution of earnings. Trailblazer's current tariff includes a deduction or negative allowance for deferred income taxes associated with current differences between book depreciation and tax depreciation at the statutory rate. Trailblazer reflects the resulting refunds to shippers in the accompanying financial statements as a reduction in the distribution of earnings to partners. Deferred taxes in excess of the statutory rate are discussed in Note 5. (8) MAJOR CUSTOMERS Revenues recognized by Trailblazer from major customers for the year ended December 31, 1999 were:
Amount % ------------ ---- KN Marketing LP (affiliated company) $ 5,939,467 15.6 Barrett Resources Corp. 5,623,903 14.8 Western Gas Resources, Inc. 5,081,056 13.4 Union Pacific Fuels, Inc. 4,932,441 13.0 Natural (affiliated company) 555,858 1.5 ------------ ---- $ 22,132,725 58.3 ============ ====
(9) RELATED PARTY TRANSACTIONS Natural billed Trailblazer $2.8 million for costs incurred as operator of the pipeline for the year ended December 31, 1999. (10) TRAILBLAZER RATE CASE FILING On July 1, 1997, Trailblazer filed a rate case with the FERC (Docket No. RP97-408) to request approval of an increase in shipping rates. The timing of the rate case filing was in accordance with the requirements of Trailblazer's previous rate case settlement in Docket No. RP93-55. The FERC issued an order on July 31, 1997 which allowed the proposed increased rates to be billed to customers, subject to refund, beginning January 1, 1998. From January 1, 1998 through the final settlement date, March 2000, Trailblazer recorded revenue and a related contra revenue amount to reflect the increased rates and potential refunds to customers. Major issues in the rate case include throughput levels used in the design of the rates, level of depreciation rates, return on investment and the cost of service treatment of the Columbia settlement revenues. Trailblazer filed a proposed settlement agreement with the Administrative Law Judge ("ALJ") on May 8, 1998. The presiding ALJ certified the settlement to the FERC in an order dated June 25, 1998. The FERC issued an order on October 19, 1998 remanding the settlement, which was contested by two parties, to the presiding ALJ for further action. A revised settlement was filed on November 20, 1998. The presiding ALJ certified the revised settlement to the FERC on January 25, 1999. On March 16, 2000, the only contesting party withdrew its rehearing request, reflecting a commercial agreement reached with Trailblazer. A motion to terminate the proceeding is pending before the presiding ALJ. The settlement of Docket No. RP97-408 is expected to result in a $1.0 million increase in revenues over the previous settlement. 14 (11) LITIGATION On March 25, 1998, CIG Trailblazer Gas Company ("CIG Trailblazer") filed a lawsuit, subsequently amended on February 3, 1999, against the three partners of Trailblazer. CIG Trailblazer purchased Tennessee Trailblazer Gas Company's ("Tennessee Trailblazer") agreement ("Tennessee agreement") dated November 1, 1982 with the Trailblazer partners. The Tennessee agreement gave Tennessee Trailblazer the right to participate as an equity owner and partner in Trailblazer expansions beyond Trailblazer's original certificated capacity of 525,000 Mcf/D. The agreement also gave Tennessee Trailblazer the right to attend management committee meetings of Trailblazer. CIG Trailblazer claims in the lawsuit, that as owners of the Tennessee agreement it has a right to attend management committee meetings but has been excluded from them by the management committee of Trailblazer. CIG Trailblazer also claims that it had the right to participate in the 1997 expansion of Trailblazer. CIG Trailblazer also filed a separate lawsuit on February 2, 1999 requesting a declaratory order that once they become a partner in Trailblazer under the 1982 agreement, CIG Trailblazer will not be required to contribute or sell the Wyoming Interstate Company to Trailblazer. On March 1, 2000, all parties reached an agreement and documents formally disposing of both suits were executed, signed by the presiding Judge and filed in the Wyoming Court. The settlement of the litigation does not result in any current change in the ownership of Trailblazer. The settlement does clarify the rights of CIG Trailblazer under the Tennessee agreement, allowing CIG Trailblazer to acquire an ownership interest in the next expansion of Trailblazer. 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Red Cedar Gathering Company: We have audited the accompanying balance sheets of RED CEDAR GATHERING COMPANY (a Colorado joint venture) as of December 31, 1999 and 1998, and the related statements of operations, changes in partners' equity and cash flows for the years then ended. 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 auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the financial position of Red Cedar Gathering Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Denver, Colorado, March 24, 2000. 16 RED CEDAR GATHERING COMPANY BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998 CURRENT ASSETS: Cash and cash equivalents $ 11,708,864 $ 7,285,669 Accounts receivable - trade 11,155,446 11,033,193 Inventories - 43,583 Prepaids and other 284,874 302,693 ------------- ------------- Total current assets 23,149,184 18,665,138 ------------- ------------- PROPERTY AND EQUIPMENT Pipeline 53,863,004 51,838,812 Machinery and equipment 67,093,541 60,008,396 Building and site improvements 2,228,714 2,169,423 Land 422,054 422,054 Right of way 1,192,576 943,409 ------------- ------------- 124,799,889 115,382,094 Less-Accumulated depreciation and Amortization (24,106,181) (18,245,287) ------------- ------------- 100,693,708 97,136,807 Construction work-in-progress 2,489,885 4,618,267 ------------- ------------- Total property and equipment 103,183,593 101,755,074 ------------- ------------- PREPAID INTEREST (Note 4) 4,602,826 5,030,996 DEBT ISSUANCE COSTS AND OTHER, Net of accumulated amortization of $165,093 and $67,053, respectively 1,136,269 1,183,188 ------------- ------------- TOTAL ASSETS $ 132,071,872 $ 126,634,396 ============= =============
The accompanying notes are an integral part of these statements. 17 RED CEDAR GATHERING COMPANY BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998
LIABILITIES AND PARTNERS' EQUITY 1999 1998 CURRENT LIABILITIES: Accounts payable - trade $ 8,278,449 $ 4,969,839 Interest payable 564,665 564,665 Property taxes payable 449,998 550,000 Accrued payroll and bonus 287,753 179,512 Deferred credits 167,715 186,204 Advance payments from related party 10,369 104,287 ------------- ------------- Total current liabilities 9,758,949 6,554,507 ------------- ------------- LONG-TERM DEBT 55,000,000 55,000,000 CAPITAL LEASE 614,571 701,814 COMMITMENTS (Note 7) PARTNERS' EQUITY: Contributions 24,000,000 24,000,000 Retained earnings 42,698,352 40,378,075 ------------- ------------- Total partners' equity 66,698,352 64,378,075 ------------- ------------- TOTAL ASSETS $ 132,071,872 $ 126,634,396 ============= =============
The accompanying notes are an integral part of these statements. 18 RED CEDAR GATHERING COMPANY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 REVENUES: Gas gathering and compression $ 64,363,062 $ 49,165,113 Purchase gas revenue 54,332,597 15,701,585 ------------- ------------- Total revenues 118,695,659 64,866,698 OPERATING COSTS AND EXPENSES: Operating 30,776,526 21,384,771 Purchased gas 50,563,346 10,188,285 Depreciation and amortization 6,177,039 4,889,516 General and administrative 1,559,614 1,343,657 Property taxes 175,134 554,124 ------------- ------------- Total operating costs and 89,251,659 38,360,353 expenses ------------- ------------- Operating income 29,444,000 26,506,345 ------------- ------------- OTHER INCOME (EXPENSE): Interest expense, net of capitalized interest of approximately $78,000 in 1999 and $59,000 in 1998 (3,797,334) (4,228,955) Interest income 518,004 735,023 Other 155,607 291,475 ------------- ------------- Total other expense, net (3,123,723) (3,202,457) ------------- ------------- NET INCOME BEFORE EXTRAORDINARY ITEM 26,320,277 23,303,888 EXTRAORDINARY LOSS ON RETIREMENT OF DEBT - (1,994,262) ------------- ------------- NET INCOME $ 26,320,277 $ 21,309,626 ============= =============
The accompanying notes are an integral part of these statements. 19 RED CEDAR GATHERING COMPANY STATEMENTS OF CHANGES IN PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Total Retained Partners' Contributions Earnings Equity BALANCES, December 31, 1997 $ 24,000,000 $ 32,868,449 $ 56,868,449 Net income - 21,309,626 21,309,626 Distributions - (13,800,000) (13,800,000) ------------- ------------- ------------- BALANCES, December 31, 1998 24,000,000 40,378,075 64,378,075 Net income - 26,320,277 26,320,277 Distributions - (24,000,000) (24,000,000) ------------- ------------- ------------- BALANCES, December 31, 1999 $ 24,000,000 $ 42,698,352 $ 66,698,352 ============= ============= =============
The accompanying notes are an integral part of these statements. 20 RED CEDAR GATHERING COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,320,277 $ 21,309,626 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 6,177,039 4,889,516 Amortization of prepaid interest 428,170 107,030 Non-cash portion of extraordinary item - 746,027 (Gain) loss on sale of assets (2,360) 2,756 Non-cash gathering fees (87,243) (238,186) Operating assets and liabilities Decrease (increase) in- Receivables (122,253) (4,812,879) Inventories 43,583 28,082 Prepaids and other 17,819 67,874 Other assets (64,026) - Decrease (increase) in- Interest payable - 151,125 Property taxes payable (100,002) 195,413 Trade payables 3,308,610 2,367,436 Deferred credits (18,489) 53,542 Accrued payroll and bonuses 108,241 (285,198) Advance payments from related party (93,918) 104,287 ------------- ------------- Net cash provided by operating activities 35,915,448 24,686,451 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital additions (7,496,053) (9,023,731) Proceeds from sale of vehicle 3,800 2,340 ------------- ------------- Net cash used in investing activities (7,492,253) (9,021,391) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of long-term debt - 55,000,000 Repayment of long-term debt - (53,800,000) Financing costs, including prepaid interest - (6,175,302) Distributions to partners (24,000,000) (13,800,000) ------------- ------------- Net cash used in financing activities (24,000,000) (18,775,302) ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,423,195 (3,110,242) CASH AND CASH EQUIVALENTS, beginning of period 7,285,669 10,395,911 ------------- ------------- CASH AND CASH EQUIVALENTS, end of period $ 11,708,864 $ 7,285,669 ============= =============
The accompanying notes are an integral part of these statements. 21 RED CEDAR GATHERING COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Business Red Cedar Gathering Company ("Red Cedar" or the "Company") was organized in August 1994. For the period from December 30, 1997 to March 30, 1998, the Company was owed 60% by K N Gas Gathering, Inc. ("KNGG") and 40% by the Southern Ute Tribe (the "Tribe"). On March 30, 1998, KNGG and the Tribe entered into a revised Joint Venture Agreement that restructured the original Red Cedar Joint Venture Agreement wherein the Tribe increased its ownership in Red Cedar to 51% through the exercise of the option to acquire an additional 11% interest. Under this same agreement, KNGG will receive 60% of all cash distributions made from Red Cedar earnings generated between January 1, 1998 and August 31, 2002, and the Tribe will receive the remaining 40% of all such cash distributions. The Tribe's ownership will automatically increase 4% on September 1, 2004 and 4% on September 1, 2009 pursuant to the terms of the revised Joint Venture Agreement and the option exercise. Effective December 31, 1999, KNGG's 49% interest in the Company was transferred to Kinder Morgan Energy Partners, L.P. ("KMEP"). The Company is primarily engaged in natural gas gathering, treating and marketing in the San Juan Basin area of Colorado. Management Red Cedar is managed by a management committee (the "Management Committee"), which at year end consists of three members appointed by KMEP and four members appointed by the Tribe. The Management Committee is authorized to make substantially all decisions and take all actions necessary to effectively manage the assets, liabilities and opportunities of the Company. Red Cedar's onsite President and Chief Operating Officer makes day-to-day operating decisions. Use of Estimates 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 amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 22 Property and Equipment Property and equipment consists primarily of natural gas gathering systems including pipelines, compressor stations and treatment facilities. Expenditures that increase capacities or extend useful lives are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred. Interest expense allocable to the cost of constructing new facilities is capitalized as part of the cost of the asset up to the point when operations commence. Capitalized interest in 1999 and 1998 was approximately $78,000 and $59,000, respectively. The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount of the assets may not be recoverable. Generally, the basis for making such assessments is future cash flow projections. No impairments have been recorded to date. Fair Value of Financial Instruments The Company's financial instruments consist of cash, short-term trade receivables and payables and long-term debt. The carrying values of cash and cash equivalents, short-term trade receivables and payables approximate fair value due to their short-term nature. The fair value for long-term debt is estimated based on current rates available for similar debt with similar maturities and securities. Depreciation and Amortization Depreciation and amortization is provided for in amounts sufficient to relate the cost of assets to operations, principally on the straight-line method, over the estimated service lives of the assets. Estimated service lives for natural gas gathering equipment and facilities are as follows:
Asset Number of Years Right-of-way 42 Pipeline 25 Machinery and equipment 3 to 25 Building and site improvements 25
The Company incurred fees, legal costs and other expenses in obtaining its bank debt. Such costs were capitalized and are being amortized over the life of the debt, using the effective interest method. Purchased Gas and Sales The Company enters into commitments to purchase and sell third- party natural gas. Volumes of purchases are generally matched for each month's delivery commitments. The price differential for each combination of purchase and sales contract results in a net fixed gross margin to Red Cedar. These contracts are generally short-term in nature. Red Cedar recognizes the gross purchase and sale amounts in the statement of operations in the month of settlement. Although the Company is not subject to price risk on these contracts, Red Cedar is exposed to credit risk of the counterparties non-performance. Red Cedar has not experienced any events of non-performance. Statements of Cash Flows For purposes of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Cash used in operating activities during the years ended December 31, 1999 and 1998, includes cash payments for interest of approximately $3,447,000 and $5,275,000, respectively (including approximately $1,077,000 paid to related parties in 1998). 23 Income Taxes The owners of Red Cedar have organized the Company as a joint venture and accordingly, the Company does not pay federal or state income taxes. The taxable income or loss of the Company, which may vary substantially from income or loss reported for financial reporting purposes, is included in the state and federal tax returns of the joint venture partners, where and as applicable. New Accounting Principles In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. It also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The Company has not yet quantified the impacts of adopting SFAS 133 on its financial statements and has not determined the timing of, or method of, adoption of SFAS 133. However SFAS 133 could increase volatility in earnings and other comprehensive income. Reclassifications Certain amounts in prior year have been reclassified to conform to the 1999 presentation. 2. RELATED PARTY TRANSACTIONS: Tribe and Affiliates The Company pays monthly right-of-way fees to the Tribe pursuant to the Right-of-Way Agreement and Amendment of Commercial Lease, as amended August 31, 1994. Payments to the Tribe related to such fees amounted to approximately $2,570,000 and $2,178,000 during the years ended December 31, 1999 and 1998, respectively. The Company had a payable to the Tribe related to such fees of approximately $219,000 and $211,000 at December 31, 1999 and 1998, respectively. Also, the Company had revenues earned of approximately $12,020,000 and $8,376,000 during 1999 and 1998, respectively, in gas gathering and compression revenue from Red Willow, an affiliate of the Tribe. Amounts receivable from Red Willow at December 31, 1999 and 1998 were approximately $1,744,000 and $772,000, respectively. During 1999, Red Willow purchased certain working interest in oil and gas properties from Cedar Ridge LLC ("Cedar Ridge"), a former affiliate. In 1997, Red Cedar had financed the construction and acquisition of portions of a pipeline and certain compression facilities through a capital lease with Cedar Ridge and an unrelated third party. Cedar Ridge agreed to fund the construction and acquisition of the facilities and lease them to Red Cedar for a ten-year period, at the conclusion of which, Red Cedar agreed to purchase the facilities for a bargain purchase option. Red Willow (formerly Cedar Ridge) paid approximately $1,376,000 for construction of these facilities. Red Cedar repays this lease by reducing the amount charged to Red Willow (formerly Cedar Ridge) for gathering fees, by $0.06 per MMBtu, for all volumes of gas delivered to Red Cedar greater than 8,500 MMBtu per day through December 31, 2010 and extendible indefinitely thereafter at the option of both parties. The imputed value of this rate reduction was recorded as property and equipment and capital lease at the time of entering into the transaction. The net book value of the facilities and the principal outstanding associated with these facilities at December 31, 1999 and 1998, are approximately $992,000 and $1,038,000, respectively. Repayments of the capital lease are calculated based on the deliveries of gas to the Red Cedar gathering system by Red Willow (formerly Cedar Ridge) over 8,500 MMBtu per day or by the passage of time, such that, the outstanding principal balance of the lease will be zero at the end of the lease term. All amounts outstanding are classified as a long-term capital lease in the December 31, 1999 balance sheet. 24 Other Interest payments to related parties in 1998 totaled approximately $1,077,000 and was paid 50% to KNGG and 50% to the Tribe. This interest related to $12,000,000 of subordinated notes payable to KNGG and the Tribe that was outstanding during 1998 and was repaid in full on October 23, 1998, from proceeds from the $55 million Senior Notes ("Senior Notes"), (Note 4). 3. LINE OF CREDIT: When entering into the Senior Notes agreement discussed below, the Company entered into a $25.0 million revolving credit agreement ("Revolver") with a consortium of investors that is administered by Chase Bank of Texas, N.A. The amount available to the Company under the Revolver at December 31, 1999 was $25.0 million. Borrowings under the Revolver bear interest at rates based upon the Eurodollar base rate plus a margin or a base rate plus a margin, at the borrower's option. The Revolver is due on October 22, 2001. There were no borrowings made under the terms of this Revolver during December 31, 1999 and 1998. A commitment fee of $0.002 per $1 of unused availability under the Revolver is payable to the investors in quarterly installments. The Revolver is guaranteed by KMEP and the Tribe. 4. LONG-TERM DEBT: On October 23, 1998, the Company sold $55 million aggregate principal amount of Senior Notes due October 31, 2010, in a private placement offering. The $55 million was sold in ten different notes in varying amounts with identical terms. The Senior Notes bear interest at an annual rate of 6.16%; interest is payable semiannually on April 30 and October 31. The principal is to be repaid in seven equal installments beginning on October 31, 2004 and ending on October 31, 2009 with any remainder due on October 31, 2010. The Senior Notes and the Revolver require the Company to comply with certain financial and non-financial covenants. The Senior Notes and the Revolver are secured by a first priority lien on the ownership interests of KMEP and the Tribe as described in an intercreditor agreement between the Revolver banks and the Senior Note holders. The Senior Notes are also guaranteed by KMEP and the Tribe. The fair market value of these Senior Notes are estimated at $50,600,000. Prior to the sale of the Senior Notes, the Company entered into a treasury rate lock, for the purpose of securing its debt price during the marketing period, which was treated as an anticipatory hedge. The Company closed out this anticipatory hedge prior to the closing date of the Senior Notes sale for a cash payment made to the counterparty of $5,094,094. This amount has been classified as prepaid interest and is being amortized using the effective interest method over the life of the Senior Notes. The proceeds from the Senior Notes and operating cash flows were used to repay the $12,000,000 of subordinated notes payable to KNGG and the Tribe in 1998. Accordingly, the Company expensed $746,027 of unamortized debt issuance costs related to these notes as an extraordinary item in 1998. Concurrent with the sale of the Senior Notes and the repayment of the subordinated notes to KNGG and the Tribe in 1998, two interest rate swaps were terminated with a combined payment to the counterparty of $1,248,235. This payment was classified as an extraordinary item in the statement of operations for the year ended December 31, 1998. 5. CONCENTRATION OF CREDIT RISK: Substantially all of the Company's accounts receivable at December 31, 1999 and 1998, result from gas gathering, compression fees and marketing revenues from other companies in the oil and gas industry. This concentration of customers may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. Such receivables are generally not collateralized. 25 6. MAJOR CUSTOMERS: Major customers contributing greater than 10% to the Company's gross revenues, consist of the following:
1999 1998 Dynegy 28% 19% Vastar 22% 31% Amoco 12% 12% Red Willow (an affiliate) 10% 13%
The marketing arrangement with Dynegy terminated at the end of 1999. 7. COMMITMENTS: Leases The Company leases certain compressor stations and vehicles, under various operating leases which are scheduled to expire in 2004. The future minimum lease payments required under these leases are as follows: 2000 $ 3,724,000 2001 3,296,000 2002 2,507,000 2003 2,103,000 2004 426,000 ------------ Total $ 12,056,000
Total lease expense for the years ended December 31, 1999 and 1998 was $3,464,000 and $2,289,000, respectively. Commitments to Purchase and Sell Natural Gas Red Cedar has entered into the following contracts to purchase and sell natural gas for the period from January 1, 2000 to December 31, 2000:
Quantity per day Price per Mbtu Purchase 10,000 MMBtu Inside FERC El Paso-San Juan Basin Index less $.0075 Sell 15,000 MMBtu Inside FERC El Paso-San Juan Basin Index plus $.0025
The Company generally purchases the remaining natural gas from various suppliers in which the Company has contracts that are settled monthly at the index price in order to satisfy the remaining 5,000 MMBTU per day sales commitment. Red Cedar generates approximately $.00025 per MMBtu on the remaining 5,000 MMBtu per day sales commitment for marketing services. EX-99.2 5 h86412ex99-2.txt UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT 1 EXHIBIT 99.2 Unaudited Pro Forma Combined Statement of Income The following unaudited pro forma combined statements of income have been prepared from our historical financial statements to give effect to: o Our acquisition from Kinder Morgan Inc. effective as of December 31, 1999, of Kinder Morgan Interstate Gas Transmission LLC, a 33 1/3% interest in Trailblazer Pipeline Company and a 49% interest in Red Cedar Gathering Company in exchange for 9,810,000 common units and $330 million in cash; and o Our acquisition from Columbia Gulf Transmission Company on November 30, 1999, of a 33 1/3% interest in Trailblazer Pipeline Company for $37.6 million in cash. The total purchase price, including assets received and liabilities assumed, of the above acquisitions together with the allocations of those purchase prices are shown below.
(In thousands, except per unit amounts) December 31, 1999 Acquisitions: KMIGT Cash $330,000 Units(6,528 at $41.4375 per unit) 270,502 -------- Total Purchase Price 600,502 ======== Allocation of Purchase Price: Net Assets Acquired 270,502 Debt Assumed 330,000 Goodwill -- -------- Total Allocation $600,502 ======== Trailblazer - 33 1/3% interest Cash $ 0 Units (907 at $41.4375 per unit) 37,600 -------- Total Purchase Price 37,600 ======== Allocation of Purchase Price: Net Assets Acquired 37,600 Debt Assumed -- Goodwill -- -------- Total Allocation $ 37,600 ======== Red Cedar Cash $ 0 Units (2,375 at $41.4375 per unit) 98,400 -------- Total Purchase Price 98,400 ======== Allocation of Purchase Price: Net Assets Acquired 98,400 Debt Assumed -- Goodwill -- -------- Total Allocation $ 98,400 ======== November 30, 1999 Acquisition: Trailblazer - 33 1/3% interest Cash $ 37,600 -------- Total Purchase Price 37,600 ======== Allocation of Purchase Price: Net Assets Acquired 37,600 Debt Assumed -- Goodwill -- -------- Total Allocation $ 37,600 ========
The unaudited pro forma combined statements of income reflect adjustments as if the above acquisitions had occurred on January 1, 1999. The pro forma adjustments reflected in the accompanying unaudited pro forma statements of income were prepared using the purchase method of accounting. The pro forma adjustments are based on contractual obligations and certain assumptions that we believe are reasonable under the circumstances. 2 The column entitled "Partnership Historical" includes earnings from equity investments from our 33 1/3% interest in Trailblazer Pipeline Company acquired on November 30, 1999. The column entitled "KMIGT Historical" consists of the historical results of operations of Kinder Morgan Interstate Gas Transmission LLC. The column entitled "Trailblazer Historical" consists of the historical results of operations of Trailblazer Pipeline Company. The column entitled "Red Cedar Historical" consists of the historical results of operations of Red Cedar Gathering Company. The column entitled "Pro Forma Adjustments to Eliminate 33 1/3% of Trailblazer" eliminates the 33 1/3% interest in Trailblazer that we did not acquire by the recognition of minority interest and the original 33 1/3% interest in Trailblazer that we acquired on November 30, 1999 by the elimination of equity earnings included in the "Partnership Historical" column. The column entitled "Pro Forma Adjustments to Eliminate 51% of Red Cedar" eliminates the "Red Cedar Historical" column and replaces the full-year amounts with our 49% interest in Red Cedar, recorded as equity earnings. The column entitled "Other Pro Forma Adjustments" include adjustments to operating expenses and general and administrative expenses to reflect reductions that are contractually guaranteed under the terms of an agreement whereby Kinder Morgan, Inc. will continue to operate, on our behalf, KMIGT. The Operations and Reimbursement Agreement, effective as of December 31, 1999, has an original term of five years, automatically extended for successive five-year terms unless either party notifies the other of its intent not to renew. Under the agreement, Kinder Morgan, Inc. will act as an independent contractor and perform all necessary or appropriate actions to operate and maintain the KMIGT pipeline system. In consideration for its performance under the agreement, Kinder Morgan, Inc. is to fully reimbursed for all of their expenditures, subject to agreed-upon amounts budgeted for operating, maintaining and expanding the KMIGT pipeline system. Kinder Morgan, Inc. will also be reimbursed for all corporate general and administrative costs related to the KMIGT pipeline system, subject to agreed-upon amounts. We believe the amount to be paid to Kinder Morgan, Inc. for the services provided by them fairly reflects the value of the services performed. Furthermore, we believe the agreed-upon amount was, at the time the contracts were entered into, a reasonable estimate of the actual expenses to be incurred. All other pro forma adjustments are labeled and explained on the unaudited pro forma combined statement of income. Our general partner's interest in net income gives effect to the allocation of pro forma net income resulting from the utilization of partnership sharing ratios. Our general partner's interests represent a 1% ownership in Kinder Morgan Energy Partners, L.P. and a direct 1.0101% ownership interest in each of our operating partnerships. Our partnership agreements specify that items of income and loss shall be allocated among the partners in accordance with their percentage interests. Normal allocations according to percentage interests are made, however, only after giving effect to any priority income allocations in an amount equal to the incentive distributions that are allocated 100% to our general partner. Incentive distributions are generally defined as all cash distributions paid to our general partner that are in excess of 2% of the aggregate amount of cash being distributed. Our general partner's interest in net income includes incentive distributions the general partner would have received based on total distributions. These incentive distributions are greater under the pro forma statement due to our $0.05 increase in per unit quarterly distributions, announced on December 15, 1999, and resulting from cash flow attributable to all of the acquired interests and the issuance of the 9,810,000 common units to Kinder Morgan, Inc. as consideration for the acquired interests. The unaudited pro forma combined statement of income does not purport to present the results of operations of Kinder Morgan Energy Partners, L.P. had the assumed acquisitions and assumed events occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved 3 in the future. The unaudited pro forma combined statement of income does not give effect to any operating efficiencies or cost savings that may be realized as a result of the acquisition, primarily related to reduction of duplicative operating, general and administrative expenses, other than those cost savings which are contractually guaranteed. The unaudited pro forma combined statement of income should be read in conjunction with our historical financial statements, including the related notes, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The pro forma adjustment to income tax benefit (expense) reflects the reversal of Kinder Morgan Interstate Gas Transmission LLC's historical income tax expense. The pro forma adjustment to merger-related and severance costs reflects the removal of non-recurring charges unrelated to the acquisition transactions reflected in these pro forma combined statements of income. The unaudited pro forma combined statements of income do not purport to present the results of operations of Kinder Morgan Energy Partners, L.P. had the assumed acquisitions and assumed events occurred on the dates specified, nor are they necessarily indicative of the results of operations that may be achieved in the future. The unaudited pro forma combined statements of income do not give effect to any operating efficiencies or cost savings that may be realized as a result of the acquisition, primarily related to reduction of duplicative operating, general and administrative expenses, other than those cost savings which are contractually guaranteed. The unaudited pro forma combined statements of income should be read in conjunction with the historical financial statements, including the related notes which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 4 PRO FORMA COMBINED STATEMENT OF INCOME TWELVE MONTHS ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Partnership KMIGT Trailblazer Red Cedar Historical Historical Historical Historical ----------- ---------- ----------- ---------- Revenues $ 428,749 $ 113,207 $ 33,711 $ 118,696 Costs and Expenses Operating expenses 143,107 37,333 2,827 81,340 Merger and restructuring costs -- -- -- -- Depreciation and amortization 46,469 16,985 16,973 6,177 General and administrative 35,612 9,566 -- 1,560 Taxes, other than income taxes 16,154 4,608 879 175 Merger-related and severance costs -- 3,054 -- -- --------- --------- --------- --------- 241,342 71,546 20,679 89,252 Operating Income 187,407 41,661 13,032 29,444 Other Income (Expense) Earnings from equity investments 42,918 -- -- -- Amortization of excess cost of equity investments (4,254) -- -- -- Interest, net (52,605) (27,119) (2,882) (3,279) Other, net 14,085 (248) -- 155 Gain on sale of equity interest and special charges 10,063 -- -- -- Minority interest (2,891) -- -- -- --------- --------- --------- --------- Income Before Income Taxes and Extraordinary charge 194,723 14,294 10,150 26,320 Income Tax Benefit (Expense) (9,826) (5,948) -- -- --------- --------- --------- --------- Income Before Extraordinary charge 184,897 8,346 10,150 26,320 Extraordinary charge on early extinguishment of debt (2,595) -- -- -- --------- --------- --------- --------- Net Income $ 182,302 $ 8,346 $ 10,150 $ 26,320 ========= ========= ========= ========= Calculation of Limited Partners' Interest in Income Before Extraordinary item: Income Before Extraordinary charge $ 184,897 Less: General Partners' interest in Net Income (56,273) --------- Limited Partner's Net Income Before Extraordinary item 128,624 Less: Extraordinary charge on early extinguishment of debt (2,595) --------- Limited Partners' Net Income $ 126,029 ========= Net Income per Unit Before Extraordinary charge $ 2.63 ========= Extraordinary charge per Unit $ (0.06) ========= ========= Net Income per Unit $ 2.57 ========= Declared distribution per unit $ 2.85 ========= ========= Number of Units used in Computation 48,974 ========= PRO FORMA COMBINED STATEMENT OF INCOME - CONTINUED TWELVE MONTHS ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) Pro Forma Pro Forma Adjustments to Adjustments to Other Eliminate 33 1/3% Eliminate 51% Pro Forma Pro Forma of Trailblazer(a) of Red Cedar(b) Adjustments Combined ----------------- --------------- ------------- --------- Revenues $ -- $(118,696) $ -- $ 575,667 Costs and Expenses Operating expenses -- (81,340) (12,514)(d) 170,753 Merger and restructuring costs -- -- -- -- Depreciation and amortization -- (6,177) (4,710)(e) 75,717 General and administrative -- (1,560) (3,516)(d) 41,662 Taxes, other than income taxes -- (175) -- 21,641 Merger-related and severance costs -- -- (3,054)(f) -- --------- --------- --------- --------- -- (89,252) (23,794) 309,773 Operating Income -- (29,444) 23,794 265,894 Other Income (Expense) Earnings from equity investments (283) 12,897(c) -- 55,532 Amortization of excess cost of equity investments 24 -- (1,110)(g) (5,340) Interest, net -- 3,279 3,244(b) (79,362) Other, net -- (155) -- 13,837 Gain on sale of equity interest and special charges -- -- -- 10,063 Minority interest (3,383) -- (602)(i) (6,876) --------- --------- --------- --------- Income Before Income Taxes and Extraordinary charge (3,642) (13,423) 25,326 253,748 Income Tax Benefit (Expense) -- -- 5,948(j) (9,826) --------- --------- --------- --------- Income Before Extraordinary charge (3,642) (13,423) 31,274 243,922 Extraordinary charge on early extinguishment of debt -- -- -- (2,595) --------- --------- --------- --------- Net Income $ (3,642) $ (13,423) $ 31,274 $ 241,327 ========= ========= ========= ========= Calculation of Limited Partners' Interest in Income Before Extraordinary item: Income Before Extraordinary charge $ 59,025 $ 243,922 Less: General Partners' interest in Net Income (22,779) (79,052) --------- --------- Limited Partner's Net Income Before Extraordinary item 36,246 164,870 Less: Extraordinary charge on early extinguishment of debt -- (2,595) --------- --------- Limited Partners' Net Income 36,246 162,275 ========= ========= Net Income per Unit Before Extraordinary charge $ 0.17 $ 2.80 ========= ========= Extraordinary charge per Unit $ 0.02 $ (0.04) ========= ========= ========= ========= Net Income per Unit $ 0.19 $ 2.76 ========= ========= Declared distribution per unit $ 0.20 $ 3.05 ========= ========= ========= ========= Number of Units used in Computation 9,810 58,784 ========= =========
5 (a) Represents the elimination of the 33 1/3% interest in Trailblazer that was not acquired and the 33 1/3% interest in Trailblazer that was acquired on November 30, 1999. The 33 1/3% interest that was not acquired is eliminated by recording minority interest expense. The 33 1/3% interest acquired on November 30, 1999, which is included in the Partnership Historical column is eliminated by reversing the equity earnings, including the amortization of excess cost of investment. (b) Represents the elimination of the 51% interest in Red Cedar that was not acquired on January 1, 1999. The Red Cedar historical amounts are reversed and our 49% equity interest in Red Cedar earnings is recorded under the equity method. (c) Represents our 49% interest in Red Cedar earnings, recorded under the equity method. Amount is equal to 49% of Red Cedar's 1999 historical income of $26,320. (d) The pro forma adjustments to operating expenses and general and administrative expenses reflect reductions that are contractually guaranteed under the terms of an agreement whereby Kinder Morgan, Inc. will continue to operate, on our behalf, KMIGT. The operating expense adjustments represent savings in operations, maintenance, fuel loss and transportation and compression charges. The general and administrative expense adjustment reflects the reversal of KMIGT's historical expenses and the incremental general and administrative expenses, which are contractually limited to $6,050. (e) The pro forma adjustments to depreciation and amortization expense reflect the reduction in estimated depreciation expense as a result of the reduced cost of property, plant and equipment, and an adjustment to include a full year of depreciation for KMIGT. The total reduction in property, plant and equipment cost is $272,285. The amortization period used to record our adjustment is 40 years for KMIGT and Trailblazer. (f) The pro forma adjustment to merger-related and severance costs reflects the removal of non-recurring charges unrelated to the acquisition transactions reflected in these pro forma combined statements of income. These charges primarily represent KMIGT's allocated share of severance costs incurred by Kinder Morgan, Inc. during 1999, as identified in the financial statements of Kinder Morgan Interstate Gas Transmission, LLC which are included as part of this Form 8-K/A, Amendment No. 2 filing. (g) The pro forma adjustment to amortization of excess cost of equity investments reflect the amortization of the excess cost of our investment in Red Cedar over our share of the book value of the underlying net assets of Red Cedar. The excess costs resulting from the acquisition of a 49% interest in Red Cedar is $55,523, and the assumed amortization period is 50 years. (h) The pro forma adjustment to interest, net reflects the reversal of KMIGT's historical interest expense and the incremental interest expense on the additional $330,000 in debt incurred with respect to the acquisitions. The adjustment for interest expense was made using a rate of 6.59%, which represents the committed rate associated with the debt used to finance the acquisitions. (i) The pro forma adjustment to minority interest reflects the allocation of additional historical net income and pro forma adjustments to net income to our general partner, due to our general partner's direct 1.0101% general partner interest in our operating partnerships. (j) The pro forma adjustment to income tax benefit (expense) reflects the reversal of KMIGT's historical income tax expense. -----END PRIVACY-ENHANCED MESSAGE-----