<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1999
REGISTRATION NO. 333-78165
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
KINDER MORGAN, INC.
(Exact Name of Registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 4613 43-1761550
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1301 MCKINNEY, SUITE 3400
HOUSTON, TEXAS 77010
(713) 844-9500
(Address, including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
JOSEPH LISTENGART
KINDER MORGAN, INC.
1301 MCKINNEY, SUITE 3400
HOUSTON, TEXAS 77010
(713) 844-9500
(Name and Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
---------------------------
Please send copies of communications to:
<TABLE>
<S> <C>
DAVID L. RONN MICHAEL ROSENWASSER
BRACEWELL & PATTERSON, L.L.P. ANDREWS & KURTH L.L.P.
SOUTH TOWER PENNZOIL PLACE 805 THIRD AVENUE
711 LOUISIANA STREET, SUITE 2900 NEW YORK, NEW YORK 10022
HOUSTON, TEXAS 77002-2781 (212) 850-2800
(713) 221-1352
</TABLE>
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject To Completion. Dated June 18, 1999.
[Kinder Morgan LOGO] 7,250,000 Shares
KINDER MORGAN, INC.
Common Stock
---------------------------
This is an initial public offering by Kinder Morgan, Inc. of 7,250,000
shares of common stock. Kinder Morgan, Inc. is the sole stockholder of Kinder
Morgan G.P., Inc., the general partner of Kinder Morgan Energy Partners, L.P., a
publicly-traded limited partnership that manages a diverse group of assets used
in the transportation, storage and processing of energy products.
Before the offering, there has been no public market for our common stock.
We currently estimate that the initial public offering price per share of common
stock will be between $18.00 and $20.00. We intend to list our common stock on
the New York Stock Exchange under the symbol "KMI".
SEE "RISK FACTORS" ON PAGE 9 TO READ ABOUT IMPORTANT FACTORS THAT YOU
SHOULD CONSIDER BEFORE BUYING OUR COMMON STOCK.
---------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
The underwriters may, under various circumstances, purchase up to an
additional 1,087,500 shares of common stock from us at the initial public
offering price less the underwriting discount.
---------------------------
THE UNDERWRITERS EXPECT TO DELIVER THE SHARES IN NEW YORK, NEW YORK ON
, 1999.
GOLDMAN, SACHS & CO. PAINEWEBBER INCORPORATED
---------------------------
Prospectus dated , 1999.
<PAGE> 3
INSIDE FRONT COVER
[SCHEMATIC DIAGRAM OF ROLE OF KINDER MORGAN ENERGY PARTNERS IN TRANSPORTATION
AND STORAGE OF ENERGY PRODUCTS.]
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including the "Risk Factors" section and the financial statements and the notes
to those statements.
We are the sole stockholder of Kinder Morgan G.P., Inc., the general
partner of Kinder Morgan Energy Partners, L.P., a publicly-traded limited
partnership that manages a diverse group of assets used in the transportation,
storage and processing of energy products. We plan to implement an aggressive
growth strategy to pursue strategic acquisitions of those same types of assets
and businesses, both on our own and in cooperation with Kinder Morgan Energy
Partners. We have had discussions with several potential acquisition candidates
and intend to move quickly toward the advancement of our acquisition strategy.
Our current earnings and cash flow are generated solely from cash
distributions received from Kinder Morgan G.P., Inc., which are in turn
generated by the operations of Kinder Morgan Energy Partners, its operating
limited partnerships and its subsidiaries. We expect those revenues to grow due
to Kinder Morgan Energy Partners' growth-oriented strategy and Kinder Morgan
G.P., Inc.'s right to an incentive cash distribution under Kinder Morgan Energy
Partners' partnership agreement.
The incentive cash distribution provides Kinder Morgan G.P., Inc. a
percentage of the cash distributions made by Kinder Morgan Energy Partners,
which percentage increases up to 50%, as distributions to the common unitholders
of Kinder Morgan Energy Partners increase. At Kinder Morgan Energy Partners'
current per unit distribution, Kinder Morgan G.P., Inc.:
- receives approximately 29% of the cash distributed by Kinder Morgan
Energy Partners to its partners, which percentage consists of 27% from
the incentive cash distribution and 2% from the 2% general partner
interest in Kinder Morgan Energy Partners and its operating limited
partnerships; and
- pursuant to the incentive cash distribution, shares equally, at the
maximum 50% level, with the common units in any increase in Kinder Morgan
Energy Partners' per unit cash distribution; each $0.01 increase in the
per common quarterly unit distribution of Kinder Morgan Energy Partners
results in Kinder Morgan G.P., Inc.'s receipt of an additional $488,157
based on the 48,815,690 common units currently outstanding.
For a detailed description of the incentive cash distribution, see
"Material Provisions of Kinder Morgan Energy Partners' Partnership
Agreement -- Cash Distribution Policy," on page 78.
Our management, in its capacity as the management of Kinder Morgan G.P.,
Inc., has an established track record of making acquisitions for and efficiently
managing the operations of Kinder Morgan Energy Partners. Since our acquisition
of Kinder Morgan G.P., Inc. in February 1997, Kinder Morgan Energy Partners has
increased the per unit quarterly cash distribution to its common unitholders by
over 120%, from $0.315 to $0.70. We intend to implement the same strategy of
strategic acquisitions, cost cuts and enhanced utilization of assets.
Since we are a corporation rather than a partnership, we believe we will
have the flexibility to pursue acquisitions which may not be suitable for or
available to Kinder Morgan Energy Partners. For example, we may pursue
acquisitions of companies that Kinder Morgan Energy Partners could not pursue
due to:
- the nature of the target companies' income jeopardizing Kinder Morgan
Energy Partners' partnership tax status; or
- the target companies' stockholders unwillingness to accept Kinder Morgan
1
<PAGE> 5
Energy Partners' limited partnership units as purchase consideration.
We may divide purchased assets between Kinder Morgan Energy Partners and us
as appropriate after we consider each entity's different characteristics and
strategies. This enhanced flexibility should permit Kinder Morgan Energy
Partners:
- to make acquisitions it could not otherwise make; and
- to increase its asset base to generate additional cash for distributions
to its partners including us.
Kinder Morgan Energy Partners is the largest publicly-traded pipeline
limited partnership in the United States and has the second largest products
pipeline system based on volumes delivered. As an operator of assets used in the
transportation, storage and processing of energy products, Kinder Morgan Energy
Partners does not trade or market energy commodities and therefore is not
subject to risks relating to fluctuations in prices of these commodities. Kinder
Morgan Energy Partners is divided into three reportable business segments:
- Pacific operations that consist of approximately 3,300 miles of pipelines
which transport over one million barrels per day of refined petroleum
products to some of the fastest growing population centers in the United
States, including Los Angeles, San Diego and Orange County California;
the San Francisco Bay area; Las Vegas, Nevada and Tucson and Phoenix,
Arizona;
- Mid-continent operations that consist of:
- interests in refined petroleum products and natural gas liquids
pipelines;
- interests in carbon dioxide production, transportation and marketing;
and
- natural gas processing facilities; and
- bulk terminals that consist of 24 bulk terminals which handle over 40
million tons of dry and liquid bulk products annually.
Kinder Morgan Energy Partners' objective is to increase unitholder
distributions through:
- the reduction of operating expenses;
- better utilization and expansion of its asset base; and
- selective, strategic acquisitions that help increase distributions to its
partners.
2
<PAGE> 6
SUMMARY OF RISK FACTORS
RISKS RELATED TO OUR BUSINESS
- We rely on Kinder Morgan Energy Partners for all of our revenues.
- The restrictions in our credit facility may prevent us from taking
advantage of potentially beneficial transactions or restrict our ability
to pay dividends.
- You will experience immediate and substantial dilution of your shares.
- Thirty-two million seven hundred fifty thousand shares, or 81.88%, of our
total outstanding shares are restricted from immediate resale but may be
sold in the future. These sales could cause the market price of our
common stock to drop significantly, even if our business is doing well.
- Our governing documents, other agreements and the presence of controlling
stockholders may frustrate beneficial transactions.
RISKS RELATED TO CONFLICTS OF INTEREST
- The fiduciary duties of our officers and directors may conflict with
those of Kinder Morgan G.P., Inc.
- The similarity of our acquisition strategy to the strategy of Kinder
Morgan Energy Partners creates conflicts of interest.
- We may not be fully compensated for the risks of or work done on
acquisitions shared with Kinder Morgan Energy Partners.
- We may not be fully reimbursed for the use of our officers and employees
by Kinder Morgan G.P., Inc.
- Kinder Morgan G.P., Inc. has significant influence over our business.
RISKS RELATED TO KINDER MORGAN
ENERGY PARTNERS' BUSINESS
- Pending Federal Energy Regulatory Commission and California Public
Utilities Commission proceedings seek substantial refunds and reductions
in the tariff rates of Kinder Morgan Energy Partners.
- Kinder Morgan Energy Partners does not own the land on which its
pipelines are constructed and is subject to the possibility of increased
costs for its loss of land use.
- Distributions from Shell CO(2) Company, Ltd. may be limited.
- Restrictions in Kinder Morgan Energy Partners' debt agreements may
prevent it from engaging in some beneficial transactions or paying
distributions if it is in default.
OUR STRUCTURE AND MANAGEMENT
We own 100% of Kinder Morgan G.P., Inc. Kinder Morgan G.P., Inc. owns:
- a 1% general partner interest in Kinder Morgan Energy Partners;
- 862,000 publicly-traded common units of Kinder Morgan Energy Partners;
and
- a 1.0101% general partner interest in each of four subsidiary operating
limited partnerships of Kinder Morgan Energy Partners.
Our two largest stockholders, Richard D. Kinder, Director, Chairman and
Chief Executive Officer, and William V. Morgan, Director, Vice Chairman and
President, have agreed with the underwriters not to dispose of any of our common
stock for two years without first obtaining the written consent of the
representatives of the underwriters. First Union Corporation, one of our
principal stockholders, and some employees of First Union Corporation have
agreed with the underwriters not to dispose of any common stock or securities
convertible into or exchangeable for shares of our common stock for one year
without first obtaining the
3
<PAGE> 7
written consent of the representatives of the underwriters.
Kinder Morgan G.P., Inc. has approximately 1,100 employees. Upon completion
of the offering and prior to an acquisition, we will have 4 employees, our
executives. We may add employees as appropriate, when we acquire operating
assets.
Our principal executive offices are located at 1301 McKinney, Suite 3400,
Houston, Texas 77010, and our phone number is (713) 844-9500.
The following chart depicts the organization and our ownership of our
subsidiaries. Kinder Morgan G.P., Inc. holds a 1.0101% general partner interest,
and Kinder Morgan Energy Partners holds a 98.9899% limited partnership interest
in each entity marked with an asterisk. Santa Fe Pacific Pipelines, Inc. owns a
0.5% special limited partnership interest in SFPP, L.P.
[GRAPH]
<TABLE>
<S> <C> <C> <C>
O Plantation Pipe Line O Cora coal terminal O 4 coal terminals O Pacific operations
Company O Painter plant O 8 petroleum coke terminals
O North system O 11 other bulk terminals
O Cypress pipeline
O Shell CO(2) Company, Ltd.
O Heartland Pipeline Company
O Mont Belvieu fractionator
</TABLE>
4
<PAGE> 8
THE OFFERING
Securities offered.................. 7,250,000 shares of common stock.
8,337,500 shares of common stock if the
underwriters' over-allotment option is
exercised in full.
Shares of common stock outstanding
after the offering.................. 40,000,000 shares which includes
36,523,329 shares of common stock and
3,476,671 shares of non-voting
convertible common stock.
If the underwriters' over-allotment
option is exercised in full:
- 1,087,500 additional shares of
common stock will be issued; and
- 41,087,500 shares of common stock,
including shares of non-voting
convertible common stock, will be
outstanding.
Use of proceeds..................... We estimate that we will receive
approximately $134 million from the sale
of the shares, after the deduction of
underwriting discounts and commissions
and offering expenses. We intend to use
the net proceeds:
- to repay all but approximately $5
million of the term debt outstanding
under our credit facility; and
- for working capital and general
corporate purposes, including to
finance acquisitions of strategic
assets and, when we believe market
conditions to be favorable, to
purchase of limited partnership
units of Kinder Morgan Energy
Partners.
For a more detailed description, see
"Use of Proceeds," on page 15.
New York Stock Exchange listing..... We have applied and intend to list the
common stock on the New York Stock
Exchange under the symbol "KMI".
5
<PAGE> 9
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF
KINDER MORGAN, INC.
Our summary historical consolidated income statement and balance sheet data
shown below are derived from our financial statements and their notes. The
selected historical income statement and balance sheet data shown below for the
year ended December 31, 1996, and the period from January 1, to February 14,
1997, relate to Enron Liquids Pipeline Company as our predecessor.
Our summary historical consolidated income statement and balance sheet data
shown below as of and for the three months ended March 31, 1998 and March 31,
1999, are derived from our unaudited financial statements that, in our opinion,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation. The interim results shown below for the three
months ended March 31, 1999 may not be indicative of results for the full year.
Our summary historical consolidated financial data should be read:
- with the understanding that we acquired Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc., in February 1997 and we were
unable to influence its activities prior to that date;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations;"
- with the understanding that we borrowed and distributed to our existing
stockholders $65 million in May 1999 under our existing credit facility;
and
- together with our financial statements and their notes.
<TABLE>
<CAPTION>
PREDECESSOR KINDER MORGAN, INC.
--------------------------- ------------------------------------------------
PERIOD FROM
JANUARY 1, PERIOD FROM THREE MONTHS
YEAR ENDED 1997 -- FEBRUARY 14, ENDED
DECEMBER 31, FEBRUARY 14, 1997 -- YEAR ENDED MARCH 31,
1996 1997 DECEMBER 31, DECEMBER 31, ------------------
PREDECESSOR PREDECESSOR 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: --
Equity in earnings of
subsidiaries................. $ 1,886 $ 234 $ 4,577 $ 37,575 $ 5,021 $ 14,220
Operating expenses:
Depreciation and amortization
expense.................... 182 21 67 603 -- 256
General and administrative
expenses................... 2,658 332 1,025 877 146 124
-------- ------- ------- --------- ------- --------
Total operating
expenses............. 2,840 353 1,092 1,480 146 380
-------- ------- ------- --------- ------- --------
Operating income (loss)........ (954) (119) 3,485 36,095 4,875 13,840
Other income (expense):
Interest expense............. -- -- (831) (4,507) (99) (1,965)
Interest income.............. 4,471 740 49 740 10 48
-------- ------- ------- --------- ------- --------
Income before tax.............. 3,517 621 2,703 32,328 4,786 11,923
Income tax expense............. 869 5,002 1,065 11,661 1,760 4,412
-------- ------- ------- --------- ------- --------
Net income (loss).............. $ 2,648 $(4,381) $ 1,638 $ 20,667 $ 3,026 $ 7,511
======== ======= ======= ========= ======= ========
Earnings (loss) per common
share -- basic and diluted... $ 2.65 $ (4.38) $154.70 $1,951.93 $285.80 $ 709.39
BALANCE SHEET DATA
(AT PERIOD END):
Total assets................... $109,574 $25,035 $24,347 $ 74,282 $41,822 $ 62,567
Total liabilities.............. 28,726 -- 4,565 116,577 19,030 96,935
Stockholders' equity
(deficit).................... 80,848 25,035 19,782 (42,295) 22,792 (34,368)
</TABLE>
6
<PAGE> 10
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF
KINDER MORGAN ENERGY PARTNERS
Kinder Morgan Energy Partners' summary historical consolidated income
statement and balance sheet data shown below are derived from its financial
statements and their notes.
Kinder Morgan Energy Partners' summary historical consolidated income
statement and balance sheet data shown below as of and for the three months
ended March 31, 1998 and March 31, 1999, are derived from its unaudited
financial statements that, in our opinion, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation. The
interim results shown below for the three months ended March 31, 1999 may not be
indicative of results for the full year.
Kinder Morgan Energy Partners' summary historical consolidated financial
data should be read:
- with the understanding that we acquired Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc., in February 1997 and we were
unable to influence its activities prior to that date;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations;" and
- together with Kinder Morgan Energy Partners' financial statements and
their notes.
Additions to property, plant and equipment for 1997 exclude the $11,688,000
of assets that Kinder Morgan Energy Partners acquired in its acquisition of
Grand Rivers terminal in September 1997. The Pacific operations volumes reflect
Kinder Morgan Energy Partners' acquisition of its Pacific operations on March 6,
1998. The Mid-continent operations volumes include only the volumes for the
North system and the Cypress pipeline. The bulk terminals transport volumes
represent the volumes:
- of the Cora terminal, excluding ship or pay volumes of 252 thousand tons
for 1996;
- of the Grand Rivers terminal from September 1997;
- of Kinder Morgan Bulk Terminals, Inc. from July 1, 1998; and
- of the Pier IX and Shipyard River terminals from December 18, 1998.
The financial data for both the three months ended March 31, 1998, and the
year ended December 31, 1998, include the results of operations for the Pacific
operations from March 6, 1998, for Kinder Morgan Bulk Terminals, Inc. from July
1, 1998, and for Plantation Pipe Line Company from September 15, 1998.
7
<PAGE> 11
KINDER MORGAN ENERGY PARTNERS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Revenues....................... $ 71,250 $ 73,932 $ 322,617 $ 36,741 $ 100,049
Cost of product sold........... 7,874 7,154 5,860 853 569
Operating and maintenance...... 22,347 17,982 77,162 7,839 25,437
Fuel and power................. 4,916 5,636 22,385 3,145 7,184
Depreciation and
amortization................. 9,908 10,067 37,321 4,719 12,054
General and administrative..... 9,132 8,862 39,984 5,094 7,818
-------- -------- ---------- ---------- ----------
Operating income............... 17,073 24,231 139,905 15,091 46,987
Equity in earnings of
partnerships................. 5,675 5,724 25,732 5,282 7,955
Interest expense............... (12,634) (12,605) (40,856) (5,903) (12,160)
Other income (expense), net.... 3,129 (353) (5,992) (506) (271)
Income tax (provision)
benefit...................... (1,343) 740 (1,572) -- (1,442)
Extraordinary charge on early
extinguishment of debt....... -- -- (13,611) (13,611) --
-------- -------- ---------- ---------- ----------
Net income..................... $ 11,900 $ 17,737 $ 103,606 $ 353 $ 41,069
======== ======== ========== ========== ==========
Additions to property, plant
and equipment................ $ 8,575 $ 6,884 $ 38,407 $ 4,359 $ 18,347
BALANCE SHEET DATA (AT PERIOD
END):
Net property, plant and
equipment.................... $235,994 $244,967 $1,763,386 $1,664,214 $1,770,813
Total assets................... 303,603 312,906 2,152,272 1,911,177 2,169,846
Long-term debt................. 160,211 146,824 611,571 636,652 631,205
Partners' capital.............. 118,344 150,224 1,360,663 1,083,636 1,358,536
OPERATING DATA:
Pacific operations volumes
(thousands of barrels)....... -- -- 325,954 29,928 89,267
Mid-continent operations
volumes (thousands of
barrels)..................... 46,601 46,309 44,783 11,816 11,931
Bulk terminals transport
volumes (thousands of tons).. 6,090 9,087 24,016 2,964 9,569
</TABLE>
8
<PAGE> 12
RISK FACTORS
You should consider the following risk factors together with all of the
other information included in this prospectus in your evaluation of an
investment in our common stock.
Realization of any of the following risks could have a material adverse
effect on our business, financial condition, cash flows and results of
operations. In that case, the trading price of our shares could decline and you
may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE RELY ON KINDER MORGAN ENERGY PARTNERS FOR ALL OF OUR REVENUES.
Although we expect to grow our business by the acquisition of strategic
assets and businesses that transport, store and process energy products,
currently our sole source of earnings and cash flow is cash distributions
received from Kinder Morgan G.P., Inc.
In the event Kinder Morgan Energy Partners decreases its cash distributions
to its unitholders, our revenues may decrease substantially, primarily due to
the resulting decrease to the cash incentive distribution. Based on Kinder
Morgan Energy Partners' current cash distribution, the cash incentive
distribution initially would be reduced by 50% of the decrease in the cash
distributions to all partners. If the per unit distribution to Kinder Morgan
Energy Partners' common unitholders falls below target levels described in its
partnership agreement, that percentage would decrease.
THE RESTRICTIONS IN OUR CREDIT FACILITY MAY PREVENT US FROM TAKING ADVANTAGE OF
POTENTIALLY BENEFICIAL TRANSACTIONS OR RESTRICT OUR ABILITY TO PAY DIVIDENDS.
We intend to enter into a new credit facility after the completion of this
offering. We expect that the credit facility will require us to obtain the
consent of the lenders prior to taking actions outside of the ordinary course of
our business and will restrict our activities upon our default of its terms. The
failure to obtain those consents may prevent us from engaging in various
beneficial transactions and our default under our new credit facility may limit
or prohibit us from paying dividends.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF YOUR SHARES.
The assumed initial offering price of $20.00 exceeds the estimated tangible
net book value of $0.84 per share. You will incur immediate and substantial
dilution of $19.16 per share.
THIRTY-TWO MILLION SEVEN HUNDRED FIFTY THOUSAND SHARES, OR 81.88%, OF OUR TOTAL
OUTSTANDING SHARES ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE
MARKET IN THE NEAR FUTURE. THESE SALES COULD CAUSE THE MARKET PRICE OF OUR
COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have outstanding 40,000,000 shares of our
common stock, including shares of our non-voting convertible common stock. These
shares also include the 7,250,000 shares we are selling in this offering, which
may be resold in the public market immediately. The remaining 81.88%, or
32,750,000 shares, of our total outstanding shares will become available for
resale in the public market as shown in the chart below.
As restrictions on resale end, the market price of our common stock could
drop significantly if the holders of these restricted shares sell them or if the
market perceives they intend to sell them.
9
<PAGE> 13
<TABLE>
<S> <C>
NUMBER OF SHARES/% OF DATE OF AVAILABILITY
TOTAL OUTSTANDING FOR RESALE INTO
PUBLIC MARKET
6,139,851/15.35% One year after the
date of this
prospectus due to an
agreement these
stockholders have
with the
underwriters.
However, the
underwriters can
waive this
restriction and allow
these stockholders to
sell their shares at
any time.
26,610,149/66.53% Two years after the
date of this
prospectus due to an
agreement these
stockholders have
with the
underwriters.
However, the
underwriters can
waive this
restriction and allow
these stockholders to
sell their shares at
any time.
</TABLE>
Our restated certificate of incorporation allows us to issue up to
200,000,000 shares of common stock, 10,000,000 shares of non-voting convertible
common stock and 5,000,000 shares of preferred stock. We may issue additional
shares at times and under circumstances as we deem appropriate, including the
issuance of shares of preferred stock without stockholder approval. Future sales
of substantial amounts of common stock in the open market may adversely affect
the market price of your common stock.
For a more detailed description, see "Shares Eligible for Future Sale," on
page 82.
OUR GOVERNING DOCUMENTS, OTHER AGREEMENTS AND THE PRESENCE OF CONTROLLING
STOCKHOLDERS MAY FRUSTRATE BENEFICIAL TRANSACTIONS.
Our restated certificate of incorporation and restated bylaws contain
anti-takeover provisions, including provisions that provide for:
- a classified board;
- restrictions on the call of a special meeting of stockholders; and
- the requirement of a supermajority vote of our stockholders to amend our
charter or bylaws.
In addition we have entered into a rights agreement that generally provides
for significant dilution and increased expense to any person who acquires a
significant amount of our common stock.
Upon completion of this offering, Richard D. Kinder and William V. Morgan
will beneficially own approximately 67% of our outstanding common stock. Since
they, in their capacity as stockholders, do not owe a fiduciary duty to us, they
may decide not to accept transactions that may otherwise be beneficial to our
other stockholders. Unless other issuances of common stock dilute their interest
as stockholders, they will have the voting power to prevent any takeover
transaction.
These factors could discourage or make more difficult a merger, tender
offer, proxy contest or acquisition of a significant portion of our common stock
even if that event potentially would be favorable to the interests of our
stockholders.
RISKS RELATED TO CONFLICTS OF INTEREST
THE FIDUCIARY DUTIES OF OUR OFFICERS AND DIRECTORS MAY CONFLICT WITH THOSE OF
KINDER MORGAN G.P., INC.
Conflicts of interest may arise because of the relationships between Kinder
Morgan G.P., Inc., Kinder Morgan Energy Partners and us. Our directors and
officers have fiduciary duties to manage our business in a manner beneficial to
us and our stockholders. Simultaneously, some of our directors and officers are
also directors and
10
<PAGE> 14
officers of Kinder Morgan G.P., Inc. and have fiduciary duties to manage the
business of Kinder Morgan G.P., Inc. and Kinder Morgan Energy Partners in a
manner beneficial to Kinder Morgan G.P., Inc., Kinder Morgan Energy Partners and
Kinder Morgan Energy Partners' unitholders. The resolution of these conflicts
may not always be in our best interest or that of our stockholders.
THE SIMILARITY OF OUR ACQUISITION STRATEGY TO THE STRATEGY OF KINDER MORGAN
ENERGY PARTNERS CREATES CONFLICTS OF INTEREST.
Since Kinder Morgan Energy Partners and we plan to grow our businesses
through acquisitions, conflicts may arise because:
- individuals who serve on our board of directors also serve on the board
of directors of Kinder Morgan G.P., Inc., and this requires the
disclosure of information to the board of Kinder Morgan G.P., Inc. of any
transaction that could be of interest to that board on behalf of Kinder
Morgan G.P., Inc., Kinder Morgan Energy Partners or its subsidiaries;
- acquisition opportunities may be presented to the interlocking directors
or those officers common to Kinder Morgan G.P., Inc. and us that could be
in the best interests of both Kinder Morgan Energy Partners and us; and
- Kinder Morgan Energy Partners' acquisition strategy has been, and we
believe it will continue to be, to acquire assets used in the
transportation, storage and processing of energy products that generate
long-term, steady cash flows and that can be acquired at a price that may
increase Kinder Morgan Energy Partners' earnings and cash flow. There is
no legal limitation on Kinder Morgan Energy Partners' business that
requires Kinder Morgan Energy Partners not to enter into or acquire other
businesses, and Kinder Morgan Energy Partners' acquisition interests
could conflict with ours.
Any transaction we effect could have been an opportunity of Kinder Morgan
Energy Partners' and vice-versa. The resolution of these conflicts by our board
of directors and the board of directors of Kinder Morgan G.P., Inc. may not
always be the most beneficial resolution to us.
WE MAY NOT BE FULLY COMPENSATED FOR THE RISKS OF OR WORK DONE ON ACQUISITIONS
SHARED
WITH KINDER MORGAN ENERGY PARTNERS.
There may be transactions in which Kinder Morgan Energy Partners and we
combine resources and divide the acquired assets based on various factors,
including the benefits to Kinder Morgan Energy Partners of the acquisition of
these assets. When making these transactions, it may be necessary for us to act
solely on behalf of Kinder Morgan Energy Partners through the acquisition.
Instead of the transaction being for our entire benefit, we would only
benefit to the extent those assets produce distributions by Kinder Morgan Energy
Partners and increase the incentive cash distribution to be received by Kinder
Morgan G.P., Inc. based on its general partner interest in Kinder Morgan Energy
Partners.
WE MAY NOT BE FULLY REIMBURSED FOR THE USE OF OUR OFFICERS AND EMPLOYEES BY
KINDER MORGAN G.P., INC.
In the future, we may share administrative personnel with Kinder Morgan
G.P., Inc. to operate both our business and the business of Kinder Morgan Energy
Partners. In that case, our officers, who in some cases are also the officers of
Kinder Morgan G.P., Inc., will allocate, in their reasonable and sole
discretion, the time our employees spend on our behalf and on behalf of Kinder
Morgan Energy Partners. These allocations may not necessarily be the result of
arms-length negotiations between Kinder Morgan G.P., Inc. and us. Although we
intend to be reimbursed for our employees' activities, due to the nature of the
allocations, this reimbursement may not exactly match the actual time and
overhead spent.
11
<PAGE> 15
KINDER MORGAN G.P., INC. HAS SIGNIFICANT
INFLUENCE OVER OUR BUSINESS.
Although we own all of the common stock of Kinder Morgan G.P., Inc., our
control over Kinder Morgan G.P., Inc.'s actions is limited. The fiduciary duties
owed by Kinder Morgan G.P., Inc. to Kinder Morgan Energy Partners and its
unitholders prevent us from influencing Kinder Morgan G.P., Inc. to take any
action that would benefit us to the detriment of Kinder Morgan Energy Partners
or its unitholders. Therefore, our control over Kinder Morgan G.P., Inc. is
limited to our ability to elect its board of directors.
- KINDER MORGAN G.P., INC.'S DECISIONS ON BEHALF OF KINDER MORGAN ENERGY
PARTNERS MAY LIMIT CASH DISTRIBUTIONS TO US. Kinder Morgan G.P., Inc.
determines for Kinder Morgan Energy Partners the amount and timing of
asset purchases and sales, capital expenditures, borrowings and reserves.
All of these decisions can impact the amount of cash distributed by
Kinder Morgan Energy Partners to its unitholders and to Kinder Morgan
G.P., Inc. as the general partner of Kinder Morgan Energy Partners, which
in turn, affects the amount of dividends Kinder Morgan G.P., Inc. can pay
to us.
Kinder Morgan G.P., Inc. also determines the amount of distributions to
the unitholders of Kinder Morgan Energy Partners. This determination
affects the amount of the cash incentive distribution to Kinder Morgan
G.P., Inc., which in turn affects the amount of dividends Kinder Morgan
G.P., Inc. can make to us.
- OUR CORPORATE PURPOSE WILL ALLOW KINDER MORGAN G.P., INC. TO POTENTIALLY
RESTRICT OUR BUSINESS ACTIVITIES. Our corporate purpose excludes any
purchase, sale, investment, divestment or any other transaction if the
completion of that transaction by Kinder Morgan G.P., Inc., Kinder Morgan
Energy Partners or its subsidiaries is determined by the board of
directors of Kinder Morgan G.P., Inc. to be fair and reasonable to those
entities. That determination may be made for transactions first offered
to us or in which we will participate to some degree. Kinder Morgan G.P.,
Inc. may consider factors outside of our best interests when it makes
that determination. If Kinder Morgan G.P., Inc.'s directors make that
determination, those transactions will not be within our corporate power
and our officers and directors who are also officers and directors of
Kinder Morgan G.P., Inc. may not act on our behalf for those
transactions.
By your purchase of common stock, you effectively consent to this
limitation on our corporate purpose and agree that we do not have the
power to enter into transactions to be completed by Kinder Morgan G.P.,
Inc., Kinder Morgan Energy Partners or its subsidiaries.
RISKS RELATED TO KINDER MORGAN ENERGY
PARTNERS' BUSINESS
PENDING FEDERAL ENERGY REGULATORY COMMISSION AND CALIFORNIA PUBLIC UTILITIES
COMMISSION PROCEEDINGS SEEK SUBSTANTIAL REFUNDS AND REDUCTIONS IN THE TARIFF
RATES OF KINDER MORGAN ENERGY PARTNERS.
Some shippers on Kinder Morgan Energy Partners' pipelines have filed
complaints with the Federal Energy Regulatory Commission and the California
Public Utilities Commission that seek substantial refunds and reductions in the
tariff rates on Kinder Morgan Energy Partners' Pacific operations. The Federal
Energy Regulatory Commission has issued an opinion that may require payments for
past actions and future tariff reductions on the Pacific operations' East line.
For the five year period from 1994 to 1998, Kinder Morgan Energy Partners has
reserved approximately $29 million on its balance sheet for the potential impact
of the opinion relating to past activities relating to the East Line. The
opinion with respect to the East line also had the following impacts on Kinder
Morgan Energy Partners. On April 1, 1999, Kinder Morgan Energy Partners filed
with the Federal Energy Regulatory Commission new East line tariff
12
<PAGE> 16
rates consistent with the opinion. We believe that these tariff reductions will
reduce Kinder Morgan Energy Partners' revenues on the East Line by approximately
$5.5 million annually. In addition, Kinder Morgan Energy Partners ceased the $8
million annual accrual of an expense as an addition to reserves for the
potential impact of these claims. The California Public Utilities Commission
affirmed the dismissal of the complaint before it. Nonetheless, an adverse
ruling on appeal of these decisions could negatively impact revenues, results of
operations, financial condition, liquidity, and funds available for distribution
to unitholders and to Kinder Morgan G.P., Inc. As a result, Kinder Morgan Energy
Partners would have fewer funds available for distribution to Kinder Morgan
G.P., Inc. and Kinder Morgan G.P., Inc. would have fewer funds to dividend to
us. For a more detailed discussion of these matters, see "Business of Kinder
Morgan Energy Partners -- Regulation" on page 52 and "Litigation and Other
Contingencies -- Kinder Morgan Energy Partners -- Federal Energy Regulatory
Commission" on page 54
KINDER MORGAN ENERGY PARTNERS DOES NOT OWN THE LAND ON WHICH ITS PIPELINES ARE
CONSTRUCTED AND IS SUBJECT TO THE POSSIBILITY OF INCREASED COSTS FOR ITS LOSS OF
LAND USE.
Kinder Morgan Energy Partners generally does not own the land on which its
pipelines are constructed. Instead, Kinder Morgan Energy Partners obtains by
contract the right to construct and operate the pipelines on other people's land
for a period of time. If a court were to hold that Kinder Morgan Energy Partners
was not entitled to use a substantial part of these lands, its results of
operations and its ability to pay distributions to Kinder Morgan G.P., Inc. and
Kinder Morgan G.P., Inc.'s ability to pay dividends to us would be affected
negatively. For a more detailed discussion of easements, see "Business of Kinder
Morgan Energy Partners -- Litigation and Other Contingencies -- Kinder Morgan
Energy Partners -- Easements" on page 55.
DISTRIBUTIONS FROM SHELL CO(2) COMPANY, LTD. MAY BE LIMITED.
It is possible that Kinder Morgan Energy Partners would not receive any
distributions from Shell CO(2) Company, Ltd. during 2002 and 2003. During
1999-2001, Kinder Morgan Energy Partners will receive a fixed, quarterly
priority distribution from Shell CO(2) Company, Ltd. of approximately $3.6
million, or $14.5 million per year. These distributions are accounted for as
equity earnings. If the distributions through 2001 result in an overpayment to
Kinder Morgan Energy Partners, Shell Oil Company will receive a priority
distribution during 2002 and 2003 equal to the amount of the overpayment. This
priority distribution could limit Kinder Morgan Energy Partners' earnings from
Shell CO(2) Company, Ltd. during that period.
If the priority distribution through 2003 does not make up any prior
overpayment, Kinder Morgan Energy Partners will be required to make a capital
contribution to Shell CO(2) Company, Ltd. for that difference. After 2003,
Kinder Morgan Energy Partners will participate in distributions according to its
ownership percentage.
RESTRICTIONS IN KINDER MORGAN ENERGY PARTNERS' DEBT AGREEMENTS MAY PREVENT IT
FROM ENGAGING IN SOME BENEFICIAL TRANSACTIONS OR PAYING DISTRIBUTIONS IF IT IS
IN DEFAULT.
DEBT INSTRUMENTS MAY LIMIT FINANCIAL FLEXIBILITY. Kinder Morgan Energy
Partners' debt agreements contain restrictions that may prevent it from engaging
in various beneficial transactions. The debt agreements prohibit Kinder Morgan
Energy Partners from:
- distributing cash to unitholders more often than quarterly;
- distributing amounts in excess of 100% of available cash for the
immediately preceding calendar quarter; and
- making any distribution to unitholders if Kinder Morgan Energy Partners
is in default or would be in default because of the distribution.
13
<PAGE> 17
The restrictions relate to:
- specific financial ratios;
- the incurrence of additional debt;
- the entrance into mergers, consolidations and sales of assets;
- investment activity; and
- the grant of liens.
RESTRICTIONS ON THE ABILITY TO PREPAY SFPP, L.P.'S DEBT MAY LIMIT KINDER
MORGAN ENERGY PARTNERS' FINANCIAL FLEXIBILITY. SFPP, L.P. is subject to some
restrictions on its debt that may limit Kinder Morgan Energy Partners'
flexibility to structure or refinance existing or future debt. These
restrictions include the following:
- Kinder Morgan Energy Partners may not prepay SFPP, L.P.'s first mortgage
notes before December 15, 1999;
- after December 15, 1999, and before December 15, 2002, Kinder Morgan
Energy Partners may prepay the SFPP, L.P. first mortgage notes with a
penalty; and
- Kinder Morgan Energy Partners agreed as part of the acquisition of the
Pacific operations to not take specific actions related to the $190
million of the SFPP, L.P. first mortgage notes that would cause adverse
tax consequences for the preceding general partner of SFPP, L.P.
14
<PAGE> 18
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock offered
in this prospectus are estimated to be $134 million, after deducting the
underwriting discount and estimated offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that net
proceeds will be $154 million.
We intend to use at least $130 million of the net proceeds of this offering
to pay all but approximately $5 million of the existing term loan debt under our
credit facility. The interest rate as of June 1, 1999 on the term loan debt to
be repaid was 8.18%, and the maturity date is May 31, 2000. Since June 1998, we
used the term loan debt under our credit facility to pay aggregate dividends of
$147 million to our stockholders.
The balance of the net proceeds from this offering will be used for working
capital and general corporate purposes, including to finance acquisitions of
strategic assets and, when we believe market conditions to be favorable,
purchases of limited partnership units of Kinder Morgan Energy Partners.
Although we have begun to internally review potential strategic acquisitions and
have had discussions with several potential acquisition candidates, we currently
have no agreements or understandings concerning specific acquisitions.
15
<PAGE> 19
CAPITALIZATION
The following table shows our capitalization as of March 31, 1999:
- on an actual basis;
- on an "as adjusted" basis to reflect the additional borrowing in May 1999
of $65,000,000 under our credit facility, the dividend of that amount to
our shareholders and the repayment in May 1999 of $7,000,000 of credit
facility debt; and
- on a pro forma basis to reflect the estimated net proceeds from the sale
of the common stock offered by us after deducting the underwriting
discount and estimated offering expenses payable by us and the repayment
of debt with the estimated net proceeds and available working capital
cash.
In each case, the table assumes that the underwriters' over-allotment option is
not exercised. You should read this information together with our historical
financial statements and the notes to those statements appearing elsewhere in
this prospectus. An asterisk in the table indicates the number rounds to zero.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
ACTUAL AS ADJUSTED PRO FORMA
-------- ----------- -----------
(IN THOUSANDS OF DOLLARS,
EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term liabilities............................... $ 81,705 $139,705 $ 5,705
-------- -------- --------
Stockholders' equity:
Series A Common Stock, par value $0.01; 25,000
shares authorized, 8,047 shares issued and
outstanding....................................... * * --
Series B Common Stock, par value $0.01; 25,000
shares authorized, 2,541 shares issued and
outstanding....................................... * * --
Common stock, par value $0.01; 200,000,000 shares
authorized, 29,273,329 issued and outstanding, as
adjusted; 36,523,329 issued and outstanding, pro
forma............................................. -- 293 365
Non-voting convertible common stock, par value
$0.01, 10,000,000 shares authorized, 3,476,671
shares issued and outstanding, as adjusted and pro
forma
Preferred stock, par value $0.01, 5,000,000
shares............................................ 35 35
authorized, 200,000 shares designated as Series A
Junior Participating Preferred Stock and 10,000
shares designated as Series B Junior
Participating Preferred Stock, no shares issued
and outstanding................................ -- -- --
Additional paid-in capital.......................... -- -- 132,631
Retained earnings (deficit)......................... (34,368) (99,368) (99,368)
-------- -------- --------
Total stockholders' equity................ $(34,368) $(99,040) $ 33,663
-------- -------- --------
Total capitalization...................... $ 47,337 $ 40,665 $ 39,368
======== ======== ========
</TABLE>
16
<PAGE> 20
DILUTION
On a pro forma basis as of March 31, 1999 after giving effect to the
offering, the tangible net book value of our assets would have been
approximately $33.7 million or $0.84 per share, assuming an initial public
offering price of $20.00 per share. Purchasers of common stock in the offering
will experience substantial and immediate dilution in tangible net book value
per share of common stock for financial accounting purposes, as illustrated in
the following table. The pro forma tangible net book value per share of common
stock after the offering is determined by dividing the 40,000,000 shares of
common stock to be outstanding after the offering into our pro forma tangible
net book value, after giving effect to the application of the net proceeds of
the offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of common
stock..................................................... $20.00
Net tangible book value (deficit) per common share before
the offering........................................... (3.24)
Increase in net tangible book value per common share
attributable to new investors.......................... 4.08
Less: Pro forma tangible net book value per share of common
stock after the offering.................................. .84
------
Immediate dilution in tangible net book value per share of
common stock to new investors............................. $19.16
======
</TABLE>
The following table summarizes as of March 31, 1999, the number of shares
of common stock, including non-voting convertible common stock, we have issued
and the total consideration provided to us giving effect to the sale of shares
in this offering. The calculation below is based on an initial public offering
price of $20 per share, before deducting the underwriting discount and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL CONSIDERATION
------------------------ -------------------------
NUMBER PERCENTAGE AMOUNT PERCENTAGE
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Existing Stockholders.............. 32,750,000 81.88%
New Investors...................... 7,250,000 18.12% 145,000,000 100
----------- ----- ------------ ---
Total.................... 40,000,000 100% 145,000,000 100%
=========== ===== ============ ===
</TABLE>
------------------------------
This discussion and table assumes no exercise of options that,
simultaneously with the completion of the offering, will be outstanding under
Kinder Morgan, Inc.'s 1999 Stock Awards Plan. At that time, there will be
1,815,000 options outstanding to purchase shares of common stock at a price
equal to the initial public offering price per share.
17
<PAGE> 21
DIVIDEND POLICY
We currently intend to pay to our stockholders quarterly dividends on the
common stock and non-voting convertible common stock. We intend to pay a
dividend for the third quarter of 1999. That dividend is expected to be $
per share. We cannot assure you, however, that this dividend, or any future
dividend, will be declared or paid.
The determination of the amount of cash dividends, including the quarterly
dividend referred to above, if any, to be declared and paid will depend upon our
financial condition, results of operations, cash flow, the level of our capital
expenditures, future business prospects and any other matters that our board of
directors deems relevant. Our credit facility will prohibit us from paying
dividends if we are in default. Kinder Morgan Energy Partners' debt agreements
contain restrictions on the payment of distributions and prohibit the payment of
distributions if Kinder Morgan Energy Partners is in default. If Kinder Morgan
Energy Partners cannot make incentive distributions to Kinder Morgan, G.P.,
Inc., Kinder Morgan, G.P., Inc. cannot pay dividends to us, and we may be unable
to pay dividends on our common stock.
18
<PAGE> 22
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
KINDER MORGAN, INC.
Our selected historical consolidated income statement and balance sheet
data shown below are derived from our financial statements and their notes. Our
selected historical consolidated income statement and balance sheet data shown
below for the years ended December 31, 1994, December 31, 1995, December 31,
1996 and the period from January 1, to February 14, 1997 relate to Enron Liquids
Pipeline Company as our predecessor.
Our selected historical consolidated income statement and balance sheet
data shown below as of and for the three months ended March 31, 1998 and March
31, 1999, are derived from our unaudited financial statements that, in our
opinion, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. The interim results shown below
for the three months ended March 31, 1999 may not be indicative of results for
the full year.
Our selected historical consolidated income statement and balance sheet
data shown below for the years ended December 31, 1994 and December 31, 1995 are
derived from unaudited financial statements of our predecessor company not
included in this prospectus.
Our selected historical consolidated financial data should be read:
- with the understanding that we acquired Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc., in February 1997 and we were
unable to influence its activities prior to that date;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations;"
- with the understanding that we borrowed and distributed to our existing
shareholders $65 million in May 1999 under our existing credit facility;
and
- together with our financial statements and their notes.
<TABLE>
<CAPTION>
PREDECESSOR KINDER MORGAN, INC.
--------------------------------------------- ------------------------------------------------
PERIOD FROM PERIOD FROM THREE MONTHS
JANUARY 1, FEBRUARY 14, ENDED
YEAR ENDED DECEMBER 31, 1997 - 1997 - YEAR ENDED MARCH 31,
------------------------------ FEBRUARY 14, DECEMBER 31, DECEMBER 31, ------------------
1994 1995 1996 1997 1997 1998 1998 1999
-------- -------- -------- ------------ ------------ ------------ ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Partnership income............. $ 868 $ 1,921 $ 1,886 $ 234 $ 4,577 $ 37,575 $ 5,021 $ 14,220
Operating expense:
Depreciation and amortization
expense..................... 106 122 182 21 67 603 -- 256
General and administrative
expenses.................... 2,824 4,042 2,658 332 1,025 877 146 124
-------- -------- -------- ------- ------- --------- ------- --------
Total operating
expenses............... 2,930 4,164 2,840 353 1,092 1,480 146 380
-------- -------- -------- ------- ------- --------- ------- --------
Operating income (loss)........ (2,062) (2,243) (954) (119) 3,485 36,095 4,875 13,840
Other income (expense):
Interest expense.............. -- -- -- -- (831) (4,507) (99) (1,965)
Interest income............... 1,696 4,433 4,471 740 49 740 10 48
-------- -------- -------- ------- ------- --------- ------- --------
Income before tax.............. (366) 2,190 3,517 621 2,703 32,328 4,786 11,923
Income tax expense (benefit)... (633) 555 869 5,002 1,065 11,661 1,760 4,412
-------- -------- -------- ------- ------- --------- ------- --------
Net income (loss).............. $ 267 $ 1,635 $ 2,648 $(4,381) $ 1,638 $ 20,667 $ 3,026 $ 7,511
======== ======== ======== ======= ======= ========= ======= ========
Earnings (loss) per common
share -- basic and diluted.... $ 0.27 $ 1.64 $ 2.65 $ (4.38) $154.70 $1,951.93 $285.80 $ 709.39
BALANCE SHEET DATA (AT PERIOD
END):
Current assets................. $ 1,086 $ 1,351 $ 937 $ 93 $ 958 $ 28,644 $ 6,370 $ 13,625
Non-current assets............. 106,857 106,939 108,637 24,942 23,389 45,638 35,452 48,942
Total assets................... 107,943 108,290 109,574 25,035 24,347 74,282 41,822 62,567
Current liabilities............ 92 259 248 -- 1,880 16,577 6,148 15,230
Non-current liabilities........ 31,285 29,831 28,478 -- 2,685 100,000 12,882 81,705
Total liabilities.............. 31,377 30,090 28,726 -- 4,565 116,577 19,030 96,935
Stockholders' equity
(deficit)..................... 76,566 78,200 80,848 25,035 19,782 (42,295) 22,792 (34,368)
</TABLE>
19
<PAGE> 23
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF
KINDER MORGAN ENERGY PARTNERS
Kinder Morgan Energy Partners' selected historical consolidated income
statement and balance sheet data shown below are derived from its financial
statements and their notes.
Kinder Morgan Energy Partners' selected historical consolidated income
statement and balance sheet data shown below as of and for the three months
ended March 31, 1998 and March 31, 1999, are derived from its unaudited
financial statements that, in our opinion, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation. The
interim results shown below for the three months ended March 31, 1999 may not be
indicative of results for the full year.
Our selected historical consolidated income statement and balance sheet
data shown below for the years ended December 31, 1994 and December 31, 1995 are
derived from unaudited financial statements of Kinder Morgan Energy Partners not
included in this prospectus.
Kinder Morgan Energy Partners' selected historical consolidated financial
data should be read:
- with the understanding that we acquired Enron Liquids Pipeline Company,
the predecessor to Kinder Morgan G.P., Inc. in February 1997 and we were
unable to influence its activities prior to that date;
- together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations;" and
- together with Kinder Morgan Energy Partners' financial statements and
their notes.
Additions to property, plant and equipment for 1994 and 1997 exclude the
$12,825,000 and $11,688,000 of assets that Kinder Morgan Energy Partners
acquired in its acquisition of the Painter gas processing plant in June 1994 and
of Grand Rivers terminal in September 1997. The Pacific operations volumes
reflect Kinder Morgan Energy Partners' acquisition of its Pacific operations on
March 6, 1998. The Mid-continent operations volumes include only the volumes for
the North system and the Cypress pipeline systems. The bulk terminals transport
volumes represent the volumes:
- of the Cora terminal, excluding ship or pay volumes of 252 thousand tons
for 1996;
- of the Grand Rivers terminal from September 1997;
- of the Kinder Morgan Bulk Terminals, Inc. from July 1, 1998; and
- of the Pier IX and Shipyard River terminals from December 18, 1998.
The financial data for both the three months ended March 31, 1998, and the
year ended December 31, 1998, includes the results of operations for the Pacific
operations from March 1998, for the bulk terminals from July 1, 1998, and for
Plantation Pipe Line Company from September 15, 1998.
20
<PAGE> 24
KINDER MORGAN ENERGY PARTNERS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ -----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME AND CASH FLOW DATA:
Revenues.............................. $ 54,904 $ 64,304 $ 71,250 $ 73,932 $ 322,617 $ 36,741 $ 100,049
Cost of product sold.................. 940 8,020 7,874 7,154 5,860 853 569
Operating and maintenance............. 13,644 15,928 22,347 17,982 77,162 7,839 25,437
Fuel and power........................ 5,481 3,934 4,916 5,636 22,385 3,145 7,184
Depreciation and
amortization........................ 8,539 9,548 9,908 10,067 37,321 4,719 12,054
General and administrative............ 8,196 8,739 9,132 8,862 39,984 5,094 7,818
-------- -------- -------- -------- ---------- ---------- ----------
Operating income...................... 18,104 18,135 17,073 24,231 139,905 15,091 46,987
Equity in earnings of partnerships.... 5,867 5,755 5,675 5,724 25,732 5,282 7,955
Interest expense...................... (11,989) (12,455) (12,634) (12,605) (40,856) (5,903) (12,160)
Other income (expense),
net................................. 509 1,311 3,129 (353) (5,992) (506) (271)
Income tax (provision)
benefit............................. (1,389) (1,432) (1,343) 740 (1,572) -- (1,442)
Extraordinary charge on early
extinguishment of debt.............. -- -- -- -- (13,611) (13,611) --
-------- -------- -------- -------- ---------- ---------- ----------
Net income.................... $ 11,102 $ 11,314 $ 11,900 $ 17,737 $ 103,606 $ 353 $ 41,069
======== ======== ======== ======== ========== ========== ==========
Additions to property, plant and
equipment........................... $ 5,195 $ 7,826 $ 8,575 $ 6,884 $ 38,407 $ 4,359 $ 18,347
BALANCE SHEET DATA (AT PERIOD END):
Net property, plant and equipment..... $238,850 $236,854 $235,994 $244,967 $1,763,386 $1,664,214 $1,770,813
Total assets.......................... 299,271 303,664 303,603 312,906 2,152,272 1,911,177 2,169,846
Long-term debt........................ 150,219 156,938 160,211 146,824 611,571 636,652 631,205
Partners' capital..................... 128,474 123,116 118,344 150,224 1,360,663 1,083,636 1,358,536
OPERATING DATA
Pacific operations volumes (thousands
of barrels)......................... -- -- -- -- 325,954 29,928 89,267
Mid-continent operations volumes
(thousands of barrels).............. 46,078 41,613 46,601 46,309 44,783 11,816 11,931
Bulk terminals transport volumes
(thousands of tons)................. 4,539 6,486 6,090 9,087 24,016 2,964 9,569
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are the sole stockholder of Kinder Morgan G.P., Inc., the general
partner of Kinder Morgan Energy Partners, a publicly-traded limited partnership
that manages a diverse group of assets used in the transportation, storage and
processing of energy products.
We expect to grow by the efficient operation of acquired assets and by our
share of increased cash distributions from Kinder Morgan Energy Partners. Kinder
Morgan Energy Partners should increase its cash distributions as it increases
its use of existing assets and makes additional acquisitions. We believe Kinder
Morgan Energy Partners can make acquisitions more effectively with the
flexibility provided by a shared acquisition approach with us.
Management's discussion and analysis of financial condition and results of
operations for periods prior to February 14, 1997 relate to Enron Liquids
Pipeline Company as our predecessor. Prior to that date, we were unable to
influence any activities of Kinder Morgan G.P., Inc., Kinder Morgan Energy
Partners and its subsidiaries.
KINDER MORGAN, INC.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Equity in earnings of our subsidiary increased $9.2 million, or 183.2%,
from $14.2 million for the three months ended March 31, 1999, as compared to
$5.0 million for the same period in 1998. This increase was primarily due to
increased incentive cash distributions payable from Kinder Morgan Energy
Partners to Kinder Morgan G.P., Inc. Incentive cash distributions payable from
Kinder Morgan Energy Partners increased due to increases in per unit
distributions to common unitholders and the number of common units outstanding.
Kinder Morgan G.P., Inc. received incentive cash distributions of $13.1 million
for the three months ended March 31, 1999 compared to $2.9 million for the three
months ended March 31, 1998. Kinder Morgan Energy Partners was able to increase
distributions to its partners for the first quarter of 1999 compared to the
first quarter of 1998 primarily due to the cash generated from the acquisitions
of the Pacific operations in March 1998, Kinder Morgan Bulk Terminals, Inc. in
July 1998 and Shipyard and Pier IX terminals in December 1998.
Operating expense increased $234,000, or 160.9%, for the three months ended
March 31, 1999, as compared to the same period in 1998. This increase was
primarily due to increased amortization, partially offset by decreased general
and administrative expenses.
Interest expense, net of interest income, increased $1.8 million, or
2,055.1%, for the three months ended March 31, 1999, as compared to the same
period in 1998. This increase was due to an increase in the average debt
outstanding for the comparable periods to $86.3 million for the three months
ended March 31, 1999 compared to $4.3 million for the three months ended March
31, 1998. The increased debt outstanding resulted from borrowings in 1998 to
fund distributions to stockholders.
1998 Compared to 1997
Equity in earnings of our subsidiary increased $32.8 million, or 681.0%,
from $37.6 million for 1998 as compared to $4.8 million for 1997. This increase
was principally due to increased incentive cash distributions payable from
Kinder Morgan Energy Partners to Kinder Morgan G.P., Inc. Incentive cash
distributions payable from Kinder Morgan Energy Partners increased due to
increases in per unit distributions payable to common unitholders and the number
of common units outstanding. Kinder Morgan G.P., Inc. received incentive cash
distributions of $32.7 million for 1998 compared to $3.9 million for 1997.
Kinder Morgan Energy Partners was able to increase distributions to its partners
in 1998 compared to 1997 primarily due to the cash generated
22
<PAGE> 26
from the acquisitions of the Pacific operations in March 1998, Kinder Morgan
Bulk Terminals, Inc. in July 1998 and Shipyard and Pier IX terminals in December
1998.
Operating expenses increased $35,000, or 2.4%, from $1.5 million for 1998
compared to $1.4 million for 1997. This increase was primarily due to increased
amortization expense offset partially by decreased general and administrative
expenses.
Interest expense, net of interest income, increased $3.7 million, or
8,869.0%, from $3.8 million for 1998 as compared to $42,000 for 1997. This
increase was primarily due to an increase in the average debt outstanding to
$54.2 million in 1998 from $10.9 million in 1997. The increased debt outstanding
resulted from borrowings in 1998 to fund distributions to stockholders.
1997 Compared to 1996
Equity in earnings of our subsidiary increased $2.9 million, or 155.1%,
from $4.8 million for 1997 as compared to $1.9 million 1996. This increase was
due to increased incentive cash distributions from Kinder Morgan Energy Partners
to both Kinder Morgan G.P. Inc. Incentive cash distributions payable from Kinder
Morgan Energy Partners increased due to increases in the per unit distribution
payable to common unitholders and the number of common units outstanding. Kinder
Morgan G.P., Inc. received incentive cash distributions of $3.9 million for 1997
compared to $0.1 million for 1996. Kinder Morgan Energy Partners was able to
increase unitholder distributions for 1997 compared to 1996 by decreasing
operating expenses by $1.4 million, and through a $6.3 million increase in
income at Kinder Morgan Energy Partners' bulk terminals segment, due to
increased throughput and higher rates at the Cora terminal and the acquisition
of Grand Rivers terminal, partially offset by a decrease in interest income.
Operating expenses decreased $1.4 million, or 49.1%, from $1.4 million for
1997 as compared to $2.8 million for 1996. This decrease was primarily due to
decreased amortization and general and administrative expenses.
Interest income, net of interest expense decreased $4.5 million from
$42,000 for 1997 as compared to $4.5 million for 1996. This decrease was
attributable to the elimination of interest income received by Enron Liquids
Pipeline Company, as our predecessor company, from its affiliates.
OUR LIQUIDITY AND CAPITAL RESOURCES
Historically, our cash requirements have been for debt service and various
operating expenses. Since we currently do not operate any assets, we currently
do not require cash to fund normal operating expenses or capital expenditures.
In the event Kinder Morgan Energy Partners decreases its cash distributions to
its unitholders, our revenues and liquidity may decrease substantially, since
that decrease would also decrease the dividends paid by Kinder Morgan G.P., Inc.
to us. Initially, the cash incentive distribution would be reduced by an amount
equal to 50% of the decrease in the cash distributions to all partners. If the
per unit distribution to Kinder Morgan Energy Partners' common unitholders falls
below specific target levels described in its partnership agreement, that
percentage would decrease.
We anticipate that operating expenses, capital expenditures and general and
administrative expenses will increase as we pursue and make acquisitions. In
addition, we will require cash for quarterly dividends, if any, to our
stockholders. We expect to fund normal operating expenses, dividends and
interest payments through cash generated from operations. At March 31,1999, we
had cash reserves of $4.0 million and we expect to have approximately that
amount immediately after the offering. We intend to finance acquisitions with
issuances of debt and equity securities and intend to meet cash requirements for
operating acquired entities with cash generated by those entities. In addition
to the use of cash generated from operations, we could meet our cash
requirements with the retained portion of the proceeds of this offering, through
borrowings under a new credit facility or by the issuance
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<PAGE> 27
of additional securities. For these reasons, we anticipate that our current cash
position will not impact our liquidity on either a long-term or short-term
basis.
Our only material cash requirement for the three months ended March 31,
1999 consisted of debt service payments of $2.5 million. Future debt service
requirements for the year ended December 31, 1999 will depend on the amount of
outstanding debt, if any, under our new revolving credit facility. We cannot
estimate at this time if and when we will borrow under that facility.
1998 Compared to 1997
Cash Provided by Operating Activities
Net cash provided by operating activities was $13.2 million for 1998, a
525.1% increase over 1997. This increase was primarily due to increased
distributions from Kinder Morgan G.P., Inc., and an increase in accrued
liabilities partially offset by, among other things, an increase in accounts
receivable.
Net cash provided by operating activities was $8.2 million for the first
three months of 1999, a 1,480.2% increase compared to the same period in 1997.
This increase was primarily due to increased distributions from Kinder Morgan
G.P., Inc., and a decrease in accounts receivable partially offset by an
increase in accrued liabilities.
Cash Used in Investing Activities
Net cash used in investment activities was $12.5 million for 1998, a 44.4%
decrease compared to 1997. The net cash used in 1997 for investing activities
was attributable to our acquisition of Enron Liquids Pipeline Company. The $12.5
million of cash used in investing activities in 1998 enabled Kinder Morgan G.P.,
Inc. to contribute to Kinder Morgan Energy Partners its percentage of the cost
of the acquisition by Kinder Morgan Energy Partners of its Pacific operations.
No cash was provided by investment activities for the first three months of
1999, compared to $9.6 million of net cash used in investment activities for the
comparable period in 1998. The $9.6 million of cash used in investing activities
in the first quarter of 1998 enabled Kinder Morgan G.P., Inc. to contribute its
percentage of the cost of the acquisition by Kinder Morgan Energy Partners of
its Pacific operations.
Cash Provided by or Used In Financing Activities
Net cash provided by financing activities was $13.0 million for 1998,
compared to $20.5 million for 1997. The decrease was primarily due to our
receipt of proceeds from contributed capital and the issuance of common stock in
1997 and to dividends paid in 1998. The decrease in net cash provided by
financing activities was partially offset by the issuance of debt and dividends
paid in 1998.
Net cash used in financing activities was $18.1 million for the first three
months of 1999 compared to $9.2 million provided by financing activities during
the comparable period of 1998. The difference was due to increased payments of
debt in 1999, partially offset by the issuance of debt in 1998.
RECENT DEVELOPMENTS
On June 16, 1999, Kinder Morgan Energy Partners acquired from Chevron Pipe
Line Company an additional 27% of Plantation Pipe Line Company for approximately
$124.2 million. The acquisition increased its indirect stake in Plantation Pipe
Line Company to 51%.
YEAR 2000
We do not have any computer systems which are involved in the operations of
our business. We do, however, use the accounting and managerial software that is
also used by Kinder Morgan G.P., Inc. As a result, for the accounting and
managerial software that we share with Kinder Morgan G.P., Inc., we would also
share the Year 2000 issues related to that software. In addition, since our
current revenues are generated solely by cash distributions from Kinder Morgan
G.P., Inc., which are in turn generated by the operations of Kinder Morgan
Energy Partners, we share the Year 2000 issues relating to the operations of
Kinder Morgan Energy Partners. For a
24
<PAGE> 28
description of those issues, see "-- Kinder Morgan Energy Partners -- Year
2000," on page 37.
CREDIT FACILITIES
We are currently negotiating to amend or replace our existing credit
facility with First Union National Bank. We expect to have $100 million of
revolving credit facilities with a syndicate of financial institutions
consisting of a $50 million 364-day facility and a $50 million five year
facility. First Union National Bank will be the administrative agent under each
credit facility. Borrowings must be repaid on or before the termination of each
facility, which we expect to be in 2000 for the 364-day facility in 2004 for the
five year facility.
Interest on advances would be payable quarterly at a floating rate equal,
at our option, to either:
- First Union National Bank's base rate, but not less than the federal
funds rate plus 0.5% per annum; or
- the London interbank offered rate, plus a margin that will vary from 1%
to 1.5% per year, depending on our debt to earnings ratio.
We expect the credit facility to include restrictions that are customary
for this type of facility. These restrictions include:
- requirements to maintain various financial ratios;
- restrictions on the incurrence of additional indebtedness;
- restrictions on mergers, consolidations and sales of assets;
- restrictions on investments;
- restrictions on the grant of liens;
- restrictions on dividends based on available cash;
- prohibitions on the issuance of stock that is convertible into debt or
that is subject to mandatory repurchase or redemption; and
- restrictions on capital leases.
As of June 1, 1999, we had outstanding borrowings under our existing credit
facility of $151.0 million, comprised of $139.5 million outstanding under our
$150 million term loan and $11.5 million outstanding under our $15 million
revolving facility. The covenants under our existing credit facility are
substantially similar to those described above. We intend to use the proceeds of
the offering to pay all but approximately $5 million of the outstanding balance
of the term loan. Upon the amendment of the credit facility, we expect to repay
the remaining balance of the term loan.
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 24
bulk terminal facilities that transload over 40 million tons of coal, petroleum
coke and other products annually. In addition, Kinder Morgan Energy Partners
owns 51% of Plantation Pipe Line Company, 20% of Shell CO(2) Company, Ltd. and a
25% interest in a natural gas liquids separation facility. Kinder Morgan Energy
Partners' three reportable segments are its:
- Pacific operations;
- Mid-continent operations; and
- bulk terminals.
RESULTS OF OPERATIONS OF KINDER MORGAN ENERGY PARTNERS
Three Months Ended March 31, 1999
compared to Three Months Ended
March 31, 1998
Kinder Morgan Energy Partners' first quarter results reflect record
quarterly earnings before extraordinary items and strong revenue growth across
all business segments. Total net earnings before extraordinary charges for the
first quarter of 1999 were $41.1 million, $0.57 per unit, compared to $14.0
million, $0.52 per unit, for the first quarter of 1998. Included in 1998 net
25
<PAGE> 29
earnings was an extraordinary charge of $13.6 million associated with debt
refinancing transactions that included both a prepayment premium and the
write-off of unamortized debt issue costs. After the extraordinary charge, net
income for the first quarter of 1998 was $0.4 million. There was revenue growth
across all Kinder Morgan Energy Partners' business segments, primarily due to
the acquisitions of its Pacific operations, formerly Santa Fe Pacific Pipeline
Partners, L.P., in March 1998 and Kinder Morgan Bulk Terminals, Inc., formerly
Hall-Buck Marine, Inc., in July 1998. Total Kinder Morgan Energy Partners
revenue increased to $100.0 million in the first quarter of 1999 compared to
$36.7 million in the first quarter of 1998. Approximately, 75% of the revenue
increase for the first quarter of 1999 compared to the first quarter of 1998 was
attributable to acquisitions with the remainder attributable to enhanced use of
operations. Operating income for the three months ended March 31, 1999 was $47.0
million compared to $15.1 million for the same period of 1998.
Earnings from equity investments totaled $7.6 million in the first quarter
of 1999 compared to $5.2 million in the first quarter of 1998. The 46% increase
is mainly due to the inclusion of $2.9 million in earnings from Kinder Morgan
Energy Partners' equity investment in Plantation Pipe Line Company and an
increase in earnings from its investment in Heartland Pipeline Company to
$414,000 in the first quarter of 1999 from $192,000 in the first quarter of
1998. Higher overall equity earnings were partially offset by lower returns on
Kinder Morgan Energy Partners' investment in the Mont Belvieu fractionator,
primarily due to a decrease in volumes of product delivered for processing.
Income tax expense for the segment increased $1.1 million in 1999 over the
previous year. The 1999 income tax expense increase represents Kinder Morgan
Energy Partners' share of tax expense related to its investment in Plantation
Pipe Line Company.
Total general and administrative expenses of Kinder Morgan Energy Partners
were $7.8 million in the first quarter of 1999 compared to $5.1 million in the
same period of 1998. The increase was attributable to higher administrative
expenses associated with the acquisition of the Pacific operations and Kinder
Morgan Bulk Terminals, Inc. by Kinder Morgan Energy Partners in 1998. Kinder
Morgan Energy Partners continues to focus on productivity and expense controls.
Total interest expense of Kinder Morgan Energy Partners, net of interest
income, was $11.8 million in the first quarter of 1999 compared to $5.7 million
in the same period of 1998. The increase was mainly due to debt assumed by
Kinder Morgan Energy Partners as part of the acquisition of the Pacific
operations as well as expenses related to the financing of Kinder Morgan Energy
Partners' 1998 investments.
Operating statistics for the first quarter are as follows:
<TABLE>
<CAPTION>
FIRST QUARTER
-------------
1998 1999
----- -----
<S> <C> <C>
Pacific operations
Delivery volumes (millions of barrels).................... 29.9 89.3
Average revenue (dollars per barrel)...................... $0.69 $0.68
Mid-continent operations (North system and Cypress only)
Delivery volumes (millions of barrels).................... 11.8 11.9
Average tariff (dollars per barrel)....................... $0.78 $0.80
Bulk terminals
Transport volumes (millions of tons)...................... 3.0 9.6
</TABLE>
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<PAGE> 30
Earnings contribution by Kinder Morgan Energy Partners' business segment
for the first quarter is as follows:
EARNINGS CONTRIBUTION BY KINDER MORGAN ENERGY PARTNERS' BUSINESS SEGMENT
(EXCLUDES GENERAL AND ADMINISTRATIVE EXPENSES, DEBT COSTS, AND MINORITY
INTEREST;
INCLUDES THE RESULTS OF ACQUIRED OPERATIONS FROM THE DATE OF ACQUISITION)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST QUARTER
-----------------
1998 1999
------- -------
<S> <C> <C>
Pacific operations.......................................... $12,865 $42,400
Mid-continent operations.................................... $ 9,409 $10,071
Bulk terminals.............................................. $ 2,450 $ 8,839
</TABLE>
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Key acquisitions and strong performance across all business segments during
1998 allowed Kinder Morgan Energy Partners to realize a 105% increase in net
income per unit before extraordinary items. Kinder Morgan Energy Partners
reported net earnings before extraordinary charge of $117.2 million, or $2.09
per unit, for 1998 and $17.7 million, or $1.02 per unit, for 1997. Included in
the 1998 results was an extraordinary charge of $13.6 million associated with
debt refinancing transactions, including both a prepayment premium and the
write-off of unamortized debt issue costs. After the extraordinary charge, net
income for the full year 1998 was $103.6 million, or $1.75 per unit. The
acquisition of the Pacific operations, which were formerly Santa Fe Pacific
Pipeline Partners, L.P., in March 1998 was the primary contributing factor for
the increase in total revenue of Kinder Morgan Energy Partners to $322.6 million
in 1998 from $73.9 million in 1997. Operating income for 1998 was $139.9 million
versus $24.2 million in 1997. Approximately 95% of the increase in revenues from
$73.9 million in 1997 to $322.6 million in 1998 was attributable to
acquisitions, with the remainder attributable to enhanced utilization of
operations.
Operating and maintenance expenses, combined with fuel and power expenses,
were $14.1 million in 1998. This amount compares to $17.1 million for 1997. The
decrease was attributable to the assignment of the Mobil gas processing
agreement at the Bushton plant in April 1997, the transfer of the Central Basin
pipeline and a slight decrease of 3% in barrels transported. The transfer of the
Central Basin pipeline also accounted for a decrease in depreciation expense and
other tax expenses in 1998. Depreciation and amortization expenses, combined
with taxes, other than income taxes, were $10.3 million in 1998 and $11.7
million in 1997.
Earnings from equity investments grew to $24.9 million in 1998 compared to
$5.7 million in 1997. The increase was chiefly the result of Kinder Morgan
Energy Partners' interests in Plantation Pipe Line Company and Shell CO(2)
Company, Ltd., both of which are accounted for under the equity method. Other
income items increased $0.6 million in 1998 compared to 1997. This increase was
attributable to a $0.6 million contested product loss at the Mont Belvieu
fractionator in 1997. Income tax expense for the segment increased $1.7 million
in 1998 over the previous year. The 1998 income tax provision includes Kinder
Morgan Energy Partners' share of tax expense relating to its investment in
Plantation Pipe Line Company.
Total general and administrative expenses of Kinder Morgan Energy Partners
totaled $40.0 million in 1998 compared to $8.9 million in 1997. The increase was
attributable to higher administrative expenses associated with new acquisitions,
primarily
27
<PAGE> 31
the Pacific operations, made by Kinder Morgan Energy Partners in March 1998.
Kinder Morgan Energy Partners continues to focus on productivity and expense
controls.
Total interest expense of Kinder Morgan Energy Partners, net of interest
income, was $38.6 million in 1998 compared to $12.1 million in 1997. The
increase was primarily due to debt assumed by Kinder Morgan Energy Partners as
part of the acquisition of the Pacific operations as well as expenses related to
the financing of Kinder Morgan Energy Partners' 1998 investments.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Net income of Kinder Morgan Energy Partners increased 49% to $17.7 million
in 1997 from $11.9 million in 1996. The results for 1996 included a
non-recurring gain of $2.5 million, attributable to the cash buyout received
from Chevron, USA for early termination of a gas processing contract at the
Painter plant. For a more detailed description, see note 7 of the notes to the
consolidated financial statements of Kinder Morgan Energy Partners on page F-28.
Revenues of Kinder Morgan Energy Partners increased 4% to $73.9 million in 1997
compared to $71.3 million in 1996 primarily attributable to enhanced use of
assets.
Total general and administrative expenses of Kinder Morgan Energy Partners
totaled $8.9 million in 1997 compared to $9.1 million in 1996. The 2% decrease
in administrative expenses was the result of cost savings realized by our new
management.
Total interest expense of Kinder Morgan Energy Partners, net of interest
income, for 1997 of $12.1 million was relatively unchanged from the amount
reported in 1996, which was $11.9 million.
RESULTS OF OPERATIONS OF KINDER MORGAN ENERGY PARTNERS' PACIFIC OPERATIONS
Three Months Ended March 31, 1999
Compared to Three Months Ended
March 31, 1998
The Pacific operations reported segment earnings of $42.4 million and
operating revenues of $60.7 million for the first three months of 1999. Segment
earnings and operating revenues for the first three months of 1998 were $12.9
million and $20.8 million, respectively. The 1999 first quarter results reflect
the inclusion of a full quarter of operations and continued strong demand for
refined products in markets served by Kinder Morgan Energy Partners' Pacific
operations. Operating and maintenance expense, combined with fuel and power
expense, for the Pacific operations increased 102.3%, to $8.2 million, during
the first quarter of 1999 compared to $4.1 million during the first quarter of
1998. This increase was primarily due to the inclusion of the results of
operations for the full first quarter of 1999 of the Pacific operations, which
Kinder Morgan Energy Partners acquired on March 6, 1998. Depreciation and
amortization expenses of the Pacific operations increased 217.5% to $7.7 million
during the first quarter of 1999 compared to $2.4 million during the first
quarter of 1998. This increase was primarily due to the inclusion of the results
of operations for the full first quarter of 1999 of the Pacific operations which
Kinder Morgan Energy Partners acquired on March 6, 1998.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
For 1998, the Pacific operations reported segment earnings of $140.1
million and total operating revenues of $221.4 million. The amounts reflect
strong demand for gasoline, jet fuel and diesel fuel in markets served by Kinder
Morgan Energy Partners' Pacific operations. Segment earnings included other
expense charges of $6.4 million, mainly the result of accrued expenses relating
to the Federal Energy Regulatory Commission rate case reserve. In 1998, the
Pacific operations had $42.0 million of operations, maintenance, fuel and power
expenses, and $25.2 million of
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<PAGE> 32
depreciation and amortization. Kinder Morgan Energy Partners acquired its
Pacific operations on March 6, 1998.
RESULTS OF OPERATIONS OF KINDER MORGAN ENERGY PARTNERS' MID-CONTINENT OPERATIONS
Three Months Ended March 31, 1999
Compared to Three Months Ended
March 31, 1998
Mid-continent operations consist of the North system, the Cypress pipeline,
the Painter gas processing plant, and Kinder Morgan Energy Partners' equity
investments in Shell CO(2) Company, Ltd., Plantation Pipe Line Company and the
Mont Belvieu fractionator. The Mid-continent operations realized $10.1 million
in segment earnings in the first quarter of 1999 compared to $9.4 million in the
year-earlier period. The 7% earnings increase in 1999 was primarily due to
earnings from Kinder Morgan Energy Partners' equity investment in Plantation
Pipe Line Company, which was acquired in September 1998. Segment revenues were
$10.6 million in the first quarter of 1999 and $10.1 million in the first
quarter of 1998. The 5% increase in segment revenue was the result of a 3%
increase in average tariff rates accompanied by a slight increase of 1% in
barrels transported. Combined operations, maintenance, fuel and power expenses
increased 9% to $3.7 million compared with last year's first quarter. This
increase was primarily due to these higher volumes. Depreciation and
amortization expense for the first quarter of 1999 was $2.6 million versus $1.9
million in the same period last year. The increase of $0.7 million in
depreciation and amortization expense represents Kinder Morgan Energy Partners'
amortization of goodwill associated with its investment in Plantation Pipe Line
Company.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
The Mid-continent operations earned $37.2 million in segment earnings for
1998 compared to $27.5 million in 1997. The 35% increase in earnings was
primarily driven by high returns from Kinder Morgan Energy Partners' investment
in Shell CO(2) Company, Ltd. Segment revenues were $38.3 million for 1998 and
$55.8 million for 1997. The revenue decrease was primarily related to the
Central Basin pipeline, which was contributed to Shell CO(2) Company, Ltd. in
March 1998 and later accounted for as an investment in that partnership. The
Mid-continent operations had $14.1 million of operations, maintenance, fuel and
power expenses, in 1998, compared with $17.1 million in 1997. The decrease was
due to lower volumes of product shipped on Mid-continent operations' pipelines
due to warmer winter months in 1998 and the contribution of the Central Basin
pipeline to Shell CO(2) Company, Ltd. Depreciation and amortization expenses
decreased in 1998 to $8.3 million from $9.0 million in 1997. This decrease was
primarily due to the contribution of the Central Basin pipeline to Shell CO(2)
Company, Ltd.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
In 1997, the Mid-continent operations reported $27.5 million in segment
earnings from total revenues of $55.8 million. This compares to 1996 segment
earnings of $28.7 million from revenues of $63.2 million. The decline in segment
earnings was primarily the result of the $2.5 million non-recurring gain
recognized in 1996 referred to above. The decrease in segment revenue was mainly
the result of the termination of gas processing at the Painter plant in August
1996 and the assignment of the Mobil gas processing agreement at the Bushton
plant to KN Processing, Inc. in April 1997. Revenues from the liquids pipelines
did not significantly change in 1997 as compared to 1996. Pipeline revenues were
$53.5 million in 1997 versus $54.0 million in 1996. Revenues from the Cypress
pipeline increased 11% to $6.2 million in 1997 from $5.6 million in 1996 due to
a 14% increase in throughput volumes. The North system's revenues decreased 3%
to $34.2 million in 1997 from $35.4 million in 1996 due to a 5% decrease in
barrels transported. Cost of products sold was $4.6 million in 1997 versus $7.7
million in 1996. The decrease was due to fewer purchase and sale contracts on
the liquids pipelines as well as the termination of
29
<PAGE> 33
purchase and sale contracts at the Painter plant. Operating and maintenance
expenses, combined with fuel and power expenses, were $17.1 million for 1997 and
$21.8 million for 1996.
A significant decrease in segment operating expenses resulted from the
assignment of the Mobil Agreement and the leasing of the Painter plant to Amoco
Oil Company in February 1997. Additionally, the decrease in volumes transferred
by the North system in 1997 resulted in a 4% decrease in its operating and fuel
costs. Taxes, other than income taxes, decreased $0.7 million, or 20%, in 1997
due to adjustments to the liquids pipelines' ad valorem tax valuations and
higher 1996 ad valorem tax provisions. Other non-operating income and expense
decreased $3.3 million in 1997 versus 1996. The decrease reflects the $2.5
million buyout payment received from Chevron in 1996 and a $0.6 million
contested product loss at the Mont Belvieu fractionator recorded in the fourth
quarter of 1997.
A decrease in the cumulative difference between book and tax depreciation
and the effect of a partial liquidating distribution of Kinder Morgan Natural
Gas Liquids Corporation, the corporate entity holding Kinder Morgan Energy
Partners' interest in the Mont Belvieu fractionator, resulted in a $2.1 million
reduction in income tax expense for 1997 compared to 1996. Mid-continent
operations reported depreciation and amortization expenses of $9.0 million in
1997, an increase of $0.5 million compared to 1996. This increase was primarily
due to additions to property, plant and equipment on Kinder Morgan Energy
Partners' North system.
RESULTS OF OPERATIONS OF KINDER MORGAN ENERGY PARTNERS' BULK TERMINALS SEGMENT
Three Months Ended March 31, 1999
compared to Three Months Ended
March 31, 1998
The bulk terminals segment reported earnings of $8.8 million in the first
quarter of 1999 compared to $2.5 million in the same period of 1998. Segment
revenues for the first quarters of 1999 and 1998 were $28.7 million and $5.8
million. The 1999 increase in operating results reflects Kinder Morgan Energy
Partners' acquisitions of Kinder Morgan Bulk Terminals, Inc. in July 1998 and
the Pier IX and Shipyard River terminals in December 1998. Excluding these
acquisitions, revenues from Kinder Morgan Energy Partners' other coal terminals
increased 25% in the first quarter of 1999 compared with the same period of
1988. The revenue increase was primarily the result of a 19% increase in coal
volumes transferred and a slight increase of 2% in average coal transfer rates.
Cost of products sold decreased 40% in 1999 compared with 1998's first quarter.
The decrease was mainly due to a lower number of coal purchase contracts for
coal marketing activity.
Operations and maintenance expenses, combined with fuel and power expenses,
totaled $16.4 million in the first quarter of 1999 and $2.1 million in the first
quarter of 1998. The increase in these expenses was the result of the 1998
business acquisitions. Excluding the acquired operations, combined expenses
decreased 5% compared to the first quarter of last year. The acquisitions
affected other expense categories as well. Depreciation and amortization
expenses, along with taxes, other than income taxes, were higher in the first
quarter of 1999 versus the comparable period in 1998. Depreciation and
amortization expenses were $1.8 million in 1999 and $0.4 million in 1998
primarily due to the ownership of additional assets upon the acquisition of
Kinder Morgan Bulk Terminals, Inc. and the Pier IX and Shipyard River terminals.
Taxes, other than income taxes, were $0.9 million in 1999 and $0.1 million in
1998.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
The bulk terminals segment reported earnings of $19.2 million in 1998
versus $10.7 million in 1997. Revenues from bulk terminal activity were $62.9
million for 1998 and $18.2 million for 1997. The increase in operating results
was directly affected by Kinder Morgan Energy Partners' acquisition of Kinder
Morgan Bulk Terminals, Inc., formerly Hall-Buck Marine, Inc., in July 1998 and
the inclusion of a full year of operations from the
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Grand Rivers terminal, acquired in September 1997. The increase in total segment
revenue was also driven by a 93% increase in revenues earned by the Red
Lightning energy services unit, which began operations in April 1997. Operations
and maintenance expenses, combined with fuel and power expenses, totaled $31.3
million in 1998 and $3.6 million in 1997. The increase was the result of 1998
business acquisitions and higher coal volumes transferred at Kinder Morgan
Energy Partners' Cora terminal. Depreciation and amortization expense was $3.9
million in 1998 and $1.1 million in 1997 primarily due to the acquisition of
Kinder Morgan Bulk Terminals, Inc. and the inclusion of a full year's
depreciation of the Grand Rivers terminal. Taxes, other than income taxes, were
$1.6 million in 1998 and $0.3 million in 1997. The increase in both depreciation
and taxes was primarily due to the addition of Kinder Morgan Bulk Terminals,
Inc.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
The bulk terminals segment reported net earnings of $10.7 million for 1997,
$6.3 million or 142%, higher than for 1996. Earnings from the coal terminals
increased 81%, primarily the result of increases in both coal tons transferred
and average transfer rates at the Cora terminal, as well as the addition of the
Grand Rivers terminal in September 1997. Segment revenues totaled $18.2 million,
up $10.1 million from 1996. The large increase is primarily due to the addition
of the Grand Rivers terminal and a 35% increase in revenues earned by the Cora
terminal. The increase in revenues from the Cora terminal resulted from a 17%
increase in volumes transferred, accompanied by a 6% increase in average
transfer rates. Operations and maintenance expenses, together with fuel and
power expenses, were $3.6 million in 1997 and $2.0 million in 1996. This
increase was primarily due to the acquisition of the Grand Rivers terminal and
increased volumes at the Cora terminal. Excluding the effect of the Grand Rivers
terminal, these operating costs increased 31% in 1997, mainly due to the
increase in coal tons transferred by the Cora terminal. Bulk terminals reported
immaterial depreciation and amortization expenses of $1.1 million in 1997
compared to $1.4 million in 1996.
OUTLOOK
Kinder Morgan Energy Partners intends to actively pursue a strategy to
increase Kinder Morgan Energy Partners' operating income. Kinder Morgan Energy
Partners will use a three-pronged strategy to accomplish this goal.
- COST REDUCTIONS. Kinder Morgan Energy Partners reduced its general and
administrative expenses by approximately $4 million when we acquired
Kinder Morgan G.P., Inc. in February 1997 and will continue to seek
further reductions where appropriate. Kinder Morgan Energy Partners
reduced operating expenses by $4.5 million in 1997 compared to 1996.
Since the acquisition of the Pacific operations in March 1998, Kinder
Morgan Energy Partners has reduced costs by more than $20 million per
year through the elimination of redundant general and administrative and
other expenses.
- INTERNAL GROWTH. Kinder Morgan Energy Partners intends to expand the
operations of its current facilities. Kinder Morgan Energy Partners has
taken a number of steps that we believe will increase revenues from
existing operations, including the following:
- the Pacific operations committed over $40 million to expand its
pipeline and storage facilities, including the approximately $30
million Southern California expansion which was completed in June 1999;
- the Cypress pipeline expanded its capacity by 25,000 barrels per day in
November 1997;
- earnings and cash flow, as historically related to the operations of
the Central Basin pipeline,
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increased in 1998 as a result of the partnership formed with Shell;
- the Heartland Pipeline Company joint venture with Conoco commenced in
April 1999 a $3.4 million expansion into the Omaha, Nebraska and
Council Bluffs, Iowa markets; and
- a $30 million rail project at the Grand Rivers terminal, expected to
enhance efficiency and speed of moving coal through the terminal.
- STRATEGIC ACQUISITIONS. Since January 1, 1998, Kinder Morgan Energy
Partners has made the following acquisitions:
- Shell CO(2) Company, Ltd., 20%, on March 5, 1998;
- SFPP, L.P. on March 6, 1998;
- Kinder Morgan Bulk Terminals, Inc. on July 1, 1998;
- Plantation Pipe Line Company: 24%, on September 15, 1998 and an
additional 27% on June 16, 1999; and
- Pier IX and Shipyard River terminals on December 18, 1998.
Kinder Morgan Energy Partners intends to seek opportunities to make
additional strategic acquisitions to expand existing businesses or to enter into
related businesses.
When deciding whether to make an acquisition Kinder Morgan Energy Partners
considers, among other factors:
- the volatility of cash flow generated by the acquired business;
- the timing of the return of investment in the acquired business; and
- whether that transaction would produce qualifying income.
The presence of qualifying income is important since the availability of
tax and economic benefits to Kinder Morgan Energy Partners depends, in large
part, on the classification of Kinder Morgan Energy Partners as a partnership
for federal income tax purposes.
The Internal Revenue Code provides that publicly-traded partnerships will,
as a general rule, be taxed as corporations. An exception exists for a
publicly-traded partnership in which 90% or more of its gross income for every
taxable year consists of qualifying income. Qualifying income includes income
and gains derived from the exploration, development, mining or production,
processing, refining, transportation, including pipelines, or marketing of any
mineral or natural resource including oil, natural gas or products of oil and
natural gas. Other types of qualifying income include interest, other than from
a financial business, dividends, gains from the sale of real property and gains
from the sale or other disposition of capital assets held for the production of
income that otherwise constitutes qualifying income. We believe it is extremely
unlikely that Kinder Morgan Energy Partners would pursue a transaction that
would cause it to have in excess of 10% of non-qualifying income and cause it to
be taxed as a corporation. However, we cannot assure you that Kinder Morgan
Energy Partners may not pursue a transaction that would cause it to derive less
than 90% of its gross income from sources which constitute qualifying income and
cause it to be taxed as a corporation.
We cannot assure you that Kinder Morgan Energy Partners will be able to
complete any acquisitions. We anticipate that Kinder Morgan Energy Partners will
finance acquisitions temporarily by borrowings under its credit facility and
permanently by a combination of debt and equity funding from the issuance of new
debt securities and units.
We believe that the increase in paid distributions per unit of Kinder
Morgan Energy Partners resulted from favorable operating results in 1998. On
April 12, 1999, Kinder Morgan Energy Partners declared a distribution of $0.70
per unit for the first quarter of 1999. We believe that future operating results
of Kinder Morgan Energy Partners will continue to support similar levels of
quarterly cash distributions; however, we cannot assure you that future
distributions will continue at those levels.
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LIQUIDITY AND CAPITAL RESOURCES
Kinder Morgan Energy Partners' primary cash requirements, in addition to
normal operating expenses, are debt service, sustaining capital expenditures,
discretionary capital expenditures and quarterly distributions to partners. In
addition to the use of cash generated from operations, Kinder Morgan Energy
Partners could meet its cash requirements through borrowings under its credit
facilities, issuing long-term notes or issuing additional units. We expect
Kinder Morgan Energy Partners to fund future cash distributions and to sustain
capital expenditures with existing cash and cash flows from its operating
activities. Expansion capital expenditures are expected to be funded through
additional borrowings by Kinder Morgan Energy Partners or issuance of additional
units. Interest payments are expected to be paid from cash flows from operating
activities and debt principal payments will be met by additional borrowings by
Kinder Morgan Energy Partners as they become due or by issuance of additional
units.
On May 14, 1999, Kinder Morgan Energy Partners made cash distributions to
its partners, including Kinder Morgan G.P., Inc., of $48.1 million, which was
funded by cash from Kinder Morgan Energy Partners' operations.
As of March 31, 1999, Kinder Morgan Energy Partners had cash reserves of
$33.3 million. Kinder Morgan Energy Partners funds its cash requirements for
partnership distributions through cash from operations. In addition, Kinder
Morgan Energy Partners uses cash from operating activities, available borrowings
under its credit facility and the issuance of securities to fund expansions,
acquisitions and operations. Therefore, cash balances of Kinder Morgan Energy
Partners do not have an impact on either its short-term or long-term liquidity.
Cash Provided by Operating Activities
Net cash provided by operating activities was $46.4 million for the three
months ended March 31, 1999, versus $21.5 million in the comparable period of
1998. The period-to-period increase of $24.9 million in cash flow from
operations was primarily the result of higher net earnings, non-cash
depreciation and amortization charges and distributions from equity investments.
Higher earnings and depreciation charges, chiefly due to business acquisitions
made during 1998, increased $27.1 million and $7.3 million, respectively, in the
first quarter of 1999 when compared to the same period in 1998. Distributions
from Kinder Morgan Energy Partners' investments in Shell CO(2) Company, Ltd. and
Plantation Pipe Line Company were the primary factors for the $6.5 million
increase in equity investment distributions. The overall increase in cash
provided by operating activities was partially offset by lower cash inflows
relative to net changes in working capital items, higher payments for pipeline
right-of-way easements and long-term payments under Kinder Morgan Energy
Partners' executive compensation plan.
Cash Used in Investing Activities
Net cash used in investing activities was $18.9 million for the three month
period ended March 31, 1999, compared to $91.3 million in the same year-earlier
period. The $72.4 million decrease reflects $61.8 million used for the March 6,
1998 acquisition of the Pacific operations and $25.0 million used for the March
5, 1998 cash investment in Shell CO(2) Company, Ltd. Lower overall funds used in
investing activities were partially offset by a $14.0 million increase in
capital expenditures driven primarily by continued investment in Kinder Morgan
Energy Partners' Pacific operations. Excluding the effect of cash used for asset
acquisitions, additions to property, plant and equipment were $18.4 million in
the first quarter of 1999 and $4.4 million in the first quarter of 1998. These
additions of property, plant and equipment include both expansion and
maintenance projects.
Cash Provided by or Used in Financing Activities
Net cash used in financing activities amounted to $25.9 million for the
three month period ended March 31, 1999. This increase of $143.5 million from
the comparable 1998
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period was the result of decreased net borrowings and contributions by Kinder
Morgan, G.P., Inc. The overall increase in cash used in financing activities was
partially offset by lower debt refinancing fees.
Overall debt financing activities provided $19.6 million in cash during the
three month period of 1999, versus $134.2 million during the comparable period
of 1998. The 1998 first quarter financing activities included borrowings made by
Kinder Morgan Energy Partners as part of the acquisition of the Pacific
operations. Distributions to all partners increased to $43.6 million in the
three month period ended March 31, 1999, compared to $10.0 million in the
comparable 1998 period. Higher distributions were the result of an increase in
distributed cash flows. In addition, the higher distributions were as a result
of an increase in the number of units, an increase in paid distributions per
unit and an increase in incentive distributions to Kinder Morgan G.P., Inc. as a
result of increased distributions to unitholders. Kinder Morgan Energy Partners
paid distributions of $0.65 per unit in the first quarter of 1999 compared to
$0.5625 per unit in the first quarter of 1998.
The partnership agreement requires Kinder Morgan Energy Partners to
distribute 100% of available cash, as defined in the partnership agreement, to
its partners within 45 days following the end of each calendar quarter in
accordance with their respective percentage interests. Available cash consists
generally of all cash receipts of Kinder Morgan Energy Partners and its
operating partnerships, less cash disbursements and net additions to reserves
and amounts payable to the former Santa Fe general partner in respect of its
0.5% special limited partnership interest in SFPP, L.P.
Kinder Morgan Energy Partners' debt instruments generally require Kinder
Morgan Energy Partners to maintain a reserve for future debt service
obligations. The purpose of the reserve is to lessen differences in the amount
of available cash from quarter to quarter due to the timing of required
principal and interest payments, which may only be required on a semi-annual or
annual basis, and to provide a source of funds to make those payments. Kinder
Morgan Energy Partners' debt instruments generally require Kinder Morgan Energy
Partners to set aside each quarter a portion of the principal and interest
payments due in the next six to twelve months.
Available cash of Kinder Morgan Energy Partners generally is distributed
98% to the limited partners, including the approximate 2% limited partner
interest of Kinder Morgan G.P., Inc., and 2% to Kinder Morgan G.P., Inc. This
general requirement is modified to provide for incentive distributions to be
paid to Kinder Morgan G.P., Inc. if quarterly distributions to unitholders
exceed specified targets.
In general, distributions by Kinder Morgan Energy Partners of available
cash constituting cash from operations for any quarter will be made in the
following manner:
- first, 98% to the holders of units pro rata and 2% to Kinder Morgan G.P.,
Inc. until the holders of units have received a total of $0.3025 per unit
for that quarter for each unit;
- second, 85% of any available cash then remaining to the holders of units
pro rata and 15% to Kinder Morgan G.P., Inc. until the holders of units
have received a total of $0.3575 per unit for that quarter for each unit;
- third, 75% of any available cash then remaining to all holders of units
pro rata and 25% to Kinder Morgan G.P., Inc. until the holders of units
have received a total of $0.4675 per unit for that quarter for each unit;
and
- fourth, 50% of any available cash then remaining to all holders of units
pro rata and 50% to Kinder Morgan G.P., Inc.
Cash incentive distributions are generally defined as all cash distributions to
Kinder Morgan G.P., Inc. that are in excess of 2% of the aggregate amount of
cash being distributed. Kinder Morgan G.P., Inc.'s cash incentive distribution
declared by Kinder Morgan Energy Partners for the first quarter of 1999 was
$13.1 million, while the cash incentive distribution paid during the first
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quarters of 1999 and 1998 were $10.7 million and $1.9 million, respectively.
Credit Facilities
Kinder Morgan Energy Partners has a $325 million revolving credit facility
with a syndicate of financial institutions. First Union National Bank is the
administrative agent under the agreement. Kinder Morgan Energy Partners and its
subsidiary Kinder Morgan Operating Limited Partnership "B" are co-borrowers
under its credit facility. Beginning in May 2000, the amount available under its
credit facility reduces on a quarterly basis, until terminating in February
2005. All amounts are due upon a change of control.
Kinder Morgan Energy Partners' operating partnerships and its other
restricted subsidiaries, as defined in the credit facility, of Kinder Morgan
Energy Partners, other than SFPP, L.P., have guaranteed Kinder Morgan Energy
Partners' obligations under its credit facility. Kinder Morgan Energy Partners
has guaranteed the obligations of Kinder Morgan Operating Limited Partnership
"B" under its credit facility. The credit facility is unsecured but requires
Kinder Morgan Energy Partners, in some circumstances, to provide cash collateral
to the lenders to secure letters of credit. A default by Kinder Morgan Energy
Partners on any of its indebtedness causes a default under this credit facility.
Interest on advances under the credit facility is generally payable
quarterly. Interest on loans accrues at Kinder Morgan Energy Partners' option at
a floating rate equal to either:
- First Union National Bank's base rate, but not less than the federal
funds rate plus 0.5% per year, or
- LIBOR, plus a margin that will vary from 0.75% to 1.25% per annum
depending upon the ratio of Kinder Morgan Energy Partners' debt to cash
flow.
The credit facility includes restrictions that are customary for this type
of facility, including:
- requirements to maintain various financial ratios;
- restrictions on the incurrence of additional indebtedness;
- restrictions on entering into mergers, consolidations and sales of
assets;
- restrictions on making investments;
- restrictions on additional liens;
- prohibitions on making cash distributions to holders of units more
frequently than quarterly;
- prohibitions on making cash distributions in excess of 100% of available
cash for the immediately preceding calendar quarter; and
- prohibitions on making any distribution to holders of units if an event
of default exists or would exist upon making that distribution.
As of March 31, 1999, Kinder Morgan Energy Partners was in compliance with
all of the restrictions relating to its credit facility and had no outstanding
borrowings under its credit facility. Kinder Morgan Energy Partners has used
previous borrowings of:
- approximately $142 million borrowed to refinance its first mortgage
notes, including a make whole prepayment premium, and the bank credit
facilities of two of its operating partnerships;
- approximately $25 million borrowed to fund its cash investment in Shell
CO(2) Company;
- approximately $100 million borrowed to fund part of the acquisition of
the Pacific operations, including post-closing adjustments;
- $100 million borrowed to fund part of the purchase price of its original
24% interest in Plantation Pipe Line Company;
- $35 million borrowed to refinance debt of Kinder Morgan Bulk Terminals,
Inc.
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that was outstanding at the time of the acquisition and to fund general
corporate purposes; and
- $35 million borrowed to finance the acquisition of the Pier IX terminal
and the Shipyard River terminal.
In addition, on June 16, 1999, Kinder Morgan Energy Partners borrowed
approximately $124.2 million under its credit facility to fund the purchase
price of an additional 27% of Plantation Pipe Line Company.
Kinder Morgan Energy Partners used approximately $230 million of proceeds
from the sale of senior notes in January 1999 to pay down outstanding balances
under its credit facility.
Kinder Morgan Energy Partners used approximately $210 million of proceeds
from a public offering of units in June 1998 to pay down outstanding balances
under its credit facility.
Kinder Morgan Energy Partners' first mortgage notes were incurred for the
original formation of Kinder Morgan Energy Partners. Kinder Morgan Energy
Partners under its credit facility borrowed the remainder of the indebtedness
incurred to refinance the first mortgage notes, for working capital and for
general partnership purposes. Kinder Morgan Energy Partners' first mortgage
notes bore interest at a fixed rate of 8.79% per year. The remaining
indebtedness under its credit facility incurred to refinance the first mortgage
notes bore interest at varying rates with a weighted average rate of
approximately 7.65% per year as of December 31, 1997. Kinder Morgan Energy
Partners' first mortgage notes were payable in 10 equal annual installments of
$11 million commencing in June 1998. The remaining indebtedness under its credit
facility incurred to refinance the first mortgage notes will mature in 1999.
As of March 31, 1999, SFPP, L.P. had long-term debt of $355 million that
consists of $244.0 million of first mortgage notes and $111.0 million borrowed
under SFPP, L.P.'s $175 million bank credit facility. The SFPP, L.P. first
mortgage notes are payable in annual installments through December 15, 2004. The
credit facility matures in August 2000. Kinder Morgan Energy Partners intends to
refinance some or all of the remaining SFPP, L.P. First Mortgage Notes as they
become payable. The credit facility permits SFPP, L.P. to refinance the $64
million of SFPP, L.P. first mortgage notes due on or before December 15, 1999,
plus a $31.5 million prepayment allowed on that date. The SFPP, L.P. credit
facility also provides for a working capital facility of up to $25 million.
Senior Notes
On January 29, 1999, Kinder Morgan Energy Partners issued $250 million of
6.30% senior notes due 2009. Interest on the senior notes is payable
semi-annually on February 1 and August 1 of each year beginning on August 1,
1999. The indenture governing the senior notes contains restrictions on the
ability of Kinder Morgan Energy Partners to enter into sale and leaseback
transactions, grant liens on its assets and merge or consolidate with other
entities. Each subsidiary that guarantees any senior debt of Kinder Morgan
Energy Partners must also guarantee the senior notes. Currently, the senior
notes are guaranteed by:
- all of Kinder Morgan Energy Partners' operating partnerships other than
SFPP, L.P.;
- Kinder Morgan Bulk Terminals, Inc.;
- Kinder Morgan Natural Gas Liquids Corporation; and
- Kinder Morgan CO(2), LLC.
Kinder Morgan Energy Partners may redeem the senior notes at any time, upon
not less than 30 and not more than 60 days notice, at a price equal to 100% of
the principal amount of the senior notes plus accrued interest to the redemption
date plus a penalty, if any. The redemption right is subject to the right of
holders of record on the relevant record date to receive interest due on an
interest payment date that is on or prior to the redemption date. The redemption
price will never be less than 100% of the
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principal amount of the senior notes plus accrued interest to the redemption
date.
The amount of the penalty will be equal to the excess, if any, of:
- the sum of the present values, calculated as of the redemption date, of:
-- each interest payment that, but for that redemption, would have been
payable on the senior notes being redeemed on each interest payment
date occurring after the redemption date excluding any accrued
interest for the period before the redemption date; and
-- the principal amount that would have been payable at the final
maturity of the senior notes if they had not been redeemed;
over
- the principal amount of the senior notes being redeemed.
The present value of those interest and principal payments will be
calculated by discounting the amount of each payment of interest or principal
from the date that the payment would have been payable, but for the redemption,
to the redemption date at a discount rate equal to the treasury yield, as
defined below, plus 25 basis points.
For purposes of determining the penalty, treasury yield means a rate of
interest per year equal to the weekly average yield to maturity of United States
Treasury Notes that have a constant maturity that corresponds to the remaining
term to maturity of the senior notes, calculated to the nearest 1/12th of a
year.
Capital Requirements for Recent Transactions
SHELL CO(2) COMPANY, LTD. On March 5, 1998, Kinder Morgan Energy Partners
transferred the Central Basin pipeline and $25 million in cash to Shell CO(2)
Company, Ltd. in exchange for a 20% limited partner interest in Shell CO(2)
Company. Kinder Morgan Energy Partners financed its cash investment in Shell
CO(2) Company through its credit facility.
SANTA FE PACIFIC PIPELINE PARTNERS. On March 6, 1998, Kinder Morgan Energy
Partners acquired substantially all of the assets of Santa Fe Pacific Pipeline
Partners, L.P. for an aggregate of approximately $1.4 billion, that consisted of
approximately 26.6 million units, $84.4 million in cash and the assumption of
various liabilities. Kinder Morgan Energy Partners financed the $84.4 million
cash portion of the purchase price and a portion of the transaction expenses
through its credit facility.
KINDER MORGAN BULK TERMINALS, INC. Kinder Morgan Energy Partners, effective
July 1, 1998, acquired Kinder Morgan Bulk Terminals, Inc. for approximately $100
million, consisting of approximately 2.1 million units and the assumption of
approximately $23 million of indebtedness. Kinder Morgan Energy Partners later
repaid the indebtedness with funds borrowed under its credit facility.
PLANTATION PIPE LINE COMPANY. On September 15, 1998, Kinder Morgan Energy
Partners acquired 24% of Plantation Pipe Line Company for $110 million. Kinder
Morgan Energy Partners borrowed $100 million under its credit facility, and paid
$10 million from its cash accounts. On June 16, 1999, Kinder Morgan Energy
Partners acquired an additional 27% of Plantation Pipe Line Company by borrowing
the approximately $124.2 million purchase price under its credit facility.
PIER IX TERMINAL AND SHIPYARD RIVER TERMINAL. On December 18, 1998, Kinder
Morgan Energy Partners acquired the Pier IX terminal, located in Newport News,
Virginia, and the Shipyard River terminal, located in Charleston, South
Carolina, for $35 million, which Kinder Morgan Energy Partners borrowed under
the credit facility.
YEAR 2000
Kinder Morgan Energy Partners has implemented a five phase program to
achieve Year 2000 compliance. Kinder Morgan Energy Partners is in the process of
the evaluation of both information technology systems and
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non-related systems including those that contain embedded technology.
Kinder Morgan Energy Partners has completed the system inventory phase. In
the system inventory phase, all hardware and critical software was inventoried
and a database of systems that needed further assessment was created.
Kinder Morgan Energy Partners completed the assessment phase in May 1999.
In the assessment phase, specific Year 2000 issues and solutions were
identified. Kinder Morgan Energy Partners accounting and managerial software, to
be shared with us, are products purchased at retail. For Year 2000 problems,
Kinder Morgan Energy Partners intends to rely on vendors' updates made available
to the general public, if any, or will replace that software as necessary.
Kinder Morgan Energy Partners has begun the system testing phase. In the
system testing phase, test of actual data on critical systems are run to ensure
that they will operate properly after the Year 2000. Kinder Morgan Energy
Partners anticipates completing the system testing phase by the end of August
1999.
Kinder Morgan Energy Partners has begun the remediation phase. In the
remediation phase, problems that arise in Kinder Morgan Energy Partners'
assessment and system testing phases are fixed. Kinder Morgan Energy Partners
anticipates completing the remediation of critical systems by the end of August
1999, and all other remediation by the end of October 1999.
Kinder Morgan Energy Partners has begun the contingency planning phase.
Kinder Morgan Energy Partners currently has plans in place for non-Year 2000
related contingencies and will modify these plans to address any specific
contingencies related to the Year 2000 problem. Initial drills of contingency
operations were held in the first quarter of 1999. Refinement of contingency
plans and employee training will continue throughout the year and be completed
in the fourth quarter of 1999.
Kinder Morgan Energy Partners does not believe it has material exposure to
third parties' failures to remediate the Year 2000 problem. Kinder Morgan Energy
Partners has not sought and does not intend to seek information from material
suppliers, customers, or service providers to determine the exact extent to
which Kinder Morgan Energy Partners would be affected by third parties' failures
to remediate the Year 2000 problem.
Kinder Morgan Energy Partners has identified as a worst case scenario that
Year 2000 failures of electricity and telecommunications providers will hinder
its ability to operate its pipelines by automation. In this event, Kinder Morgan
Energy Partners will operate the pipelines manually until its service providers
are able to resume services.
Kinder Morgan Energy Partners has budgeted $1.5 million, and to date has
spent approximately $600,000, to address the Year 2000 problem. Kinder Morgan
Energy Partners does not believe that any material expenditures will be required
to address the Year 2000 problem as it relates to existing systems. However,
uncertainty exists concerning the potential costs and effects associated with
any Year 2000 compliance. Therefore, Kinder Morgan Energy Partners cannot assure
you that unexpected Year 2000 compliance problems of either Kinder Morgan Energy
Partners or its vendors, customers, and service providers would not materially
and adversely affect Kinder Morgan Energy Partners' business, financial
condition or operating results.
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BUSINESS OF KINDER MORGAN, INC.
We are the sole stockholder of Kinder Morgan G.P., Inc., the general
partner of Kinder Morgan Energy Partners, L.P., a publicly-traded limited
partnership that manages a diverse group of assets used in the transportation,
storage and processing of energy products. We acquired Enron Liquids Pipeline
Company, the predecessor company to Kinder Morgan G.P., Inc., in February 1997.
We plan to implement an aggressive growth strategy to pursue strategic
acquisitions of these same types of assets and businesses, both on our own and
in cooperation with Kinder Morgan Energy Partners. Although we have not yet
reached a definitive agreement for any acquisition, we have had discussions with
several potential acquisition candidates and intend to move quickly toward the
advancement of these discussions and the implementation of an acquisition
strategy.
Our current earnings and cash flow are generated solely from cash
distributions received from Kinder Morgan G.P., Inc., which are in turn
generated by the operations of Kinder Morgan Energy Partners, its operating
limited partnerships and subsidiaries. Kinder Morgan G.P., Inc. owns and
receives quarterly distributions for:
- a 1% general partner interest in Kinder Morgan Energy Partners;
- 862,000 publicly-traded common units representing limited partner
interests in Kinder Morgan Energy Partners;
- a 1.0101% general partner interest in each of four subsidiary operating
partnerships of Kinder Morgan Energy Partners; and
- a cash incentive distribution based on the amount of available cash of
Kinder Morgan Energy Partners distributed to the holders of its common
units.
We believe that the stable cash flows of Kinder Morgan Energy Partners will
continue to provide us a secure source of revenues.
We also expect those revenues to grow due to Kinder Morgan Energy Partners'
growth-oriented strategy and Kinder Morgan G.P., Inc.'s right to an incentive
cash distribution under Kinder Morgan Energy Partners' partnership agreement.
Because of that right, Kinder Morgan G.P., Inc. has a strong incentive to
increase Kinder Morgan Energy Partners' unitholder distributions. That incentive
is a percentage of cash distributions made by Kinder Morgan Energy Partners,
which percentage increases up to 50%, as distributions to the common unitholders
of Kinder Morgan Energy Partners increase. Kinder Morgan Energy Partners has
announced raises in its quarterly distribution six times in nine quarters since
we acquired Kinder Morgan G.P., Inc. During that time, we have increased the per
unit quarterly cash distribution to the common unitholders of Kinder Morgan
Energy Partners by over 120%, from $0.315 to $0.70. At Kinder Morgan Energy
Partners' current per unit distribution, Kinder Morgan G.P., Inc.:
- receives approximately 29% of the cash distributed by Kinder Morgan
Energy Partners, which percentage consists of 27% from the incentive cash
distribution and 2% from the 2% general partner interest in Kinder Morgan
Energy Partners and its operating limited partnerships; and
- pursuant to the incentive cash distribution, shares equally, at the
maximum 50% level, with the common units in any increase in Kinder Morgan
Energy Partners' per unit cash distribution; each $0.01 increase in the
per common unit quarterly distribution of Kinder Morgan Energy Partners
results in Kinder Morgan G.P., Inc.'s receipt of an additional $488,157
based on the 48,815,690 common units currently outstanding.
Kinder Morgan G.P., Inc. received approximately $32.7 million in 1998 and
approximately $10.7 million in the first three months of 1999 from Kinder Morgan
Energy Partners due to the cash incentive distribution. For a detailed
description of the incentive cash distribution, see "Relevant Provisions of
Kinder Morgan Energy Partners' Partnership Agreement -- Cash Distribution
Policy," on page 79.
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<PAGE> 43
Our management, in its capacity as the management of Kinder Morgan G.P.,
Inc., has an established track record of acquisitions and efficient management
of the operations of Kinder Morgan Energy Partners. We intend to implement the
same strategy of strategic acquisitions, cost cuts and enhanced use of assets.
Since we are a business corporation with different cash distribution
requirements and tax characteristics than a publicly-traded limited partnership
like Kinder Morgan Energy Partners, we believe we will have the added
flexibility to pursue acquisitions which may not be suitable for or available to
Kinder Morgan Energy Partners. For example, we may pursue acquisitions of
companies that Kinder Morgan Energy Partners could not pursue due to:
- the nature of the target companies' income jeopardizing Kinder Morgan
Energy Partners' partnership tax status; or,
- the target companies' stockholders unwillingness to accept Kinder Morgan
Energy Partners' limited partnership units.
We may divide purchased assets between us and Kinder Morgan Energy Partners
as appropriate after we consider each entity's different characteristics and
strategies. We intend for this shared approach to allow us and Kinder Morgan
Energy Partners to combine acquisition resources and strategies so that both
entities potentially share the associated costs and maximize the value of the
acquired assets or businesses. This enhanced flexibility should permit Kinder
Morgan Energy Partners:
- to make acquisitions it could not otherwise make; and
- to increase its asset base to generate cash for its distributions to its
partners.
These actions may result in larger cash distributions by Kinder Morgan
Energy Partners to Kinder Morgan G.P., Inc. that would allow Kinder Morgan G.P.,
Inc. to make larger cash distributions to us.
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<PAGE> 44
BUSINESS OF 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
product/liquids pipeline systems containing over 5,000 miles of pipeline and
over 20 truck loading terminals. Kinder Morgan Energy Partners also operates 24
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 Pipe Line Company, 20% of Shell CO(2) Company, Ltd. and a
25% interest in a product processing facility.
Kinder Morgan Energy Partners' operations are grouped into three reportable
business segments:
- Pacific operations;
- Mid-continent operations; and
- Bulk terminals.
The following table reflects revenues and earnings in millions of dollars
for Kinder Morgan Energy Partners' segments for the periods indicated. Earnings
exclude interest and debt expense, general and administrative expense, minority
expense and other insignificant items. Kinder Morgan Energy Partners acquired
the Pacific operations on March 6, 1998. The amounts for the Pacific operations
reflect the historical performance of the Pacific operations and may not be
indicative of the results that would have occurred if the acquisition of the
Pacific operations had been completed on January 1, 1998, or that will be
obtained in the future. 1998 results of the bulk terminals segment include
results of Kinder Morgan Bulk Terminals, Inc. from July 1, 1998, and the Pier IX
terminal and the Shipyard River terminal from December 18, 1998.
<TABLE>
<CAPTION>
REVENUES EARNINGS
------------------------------- ------------------------------
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1998 1999 1998 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pacific operations........ $221.4 68.6% $ 60.7 60.7% $140.1 71.3% $42.4 69.1%
Mid-continent
operations.............. 38.3 11.9% 10.6 10.6% 37.2 18.9% 10.1 16.5%
Bulk terminals............ 62.9 19.5% 28.7 28.7% 19.2 9.8% 8.8 14.4%
------ ----- ------ ----- ------ ----- ----- -----
Total........... $322.6 100.0% $100.0 100.0% $196.5 100.0% $61.3 100.0%
</TABLE>
Kinder Morgan Energy Partners' objective is to increase unitholder
distributions through:
- the reduction of operating expenses;
- better use and expansion of its asset base; and
- selective, strategic acquisitions that help increase distributions to its
partners.
Kinder Morgan G.P., Inc.'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. With the
addition of the Pacific operations, Kinder Morgan Energy Partners became 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.
Generally, 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 risks relating to
shifts in commodity prices.
PRODUCTS TRANSPORTED ON KINDER MORGAN ENERGY PARTNERS' PIPELINES
Products transported on Kinder Morgan Energy Partners' pipelines include
refined petroleum products, natural gas liquids and carbon dioxide.
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<PAGE> 45
Refined petroleum products and their related uses are:
<TABLE>
<CAPTION>
PRODUCT USE
- ------- ---
<S> <C>
Gasoline................ Transportation
Jet/Kerosene............ Commercial and
military air
transportation
Distillate.............. Transportation, farm,
industrial and
commercial
Residual Fuels.......... Marine transportation
and power generation
</TABLE>
Natural gas liquids are typically extracted from natural gas in liquid form
under low temperatures and high pressure conditions. Natural gas liquids
products and their related uses are:
<TABLE>
<CAPTION>
PRODUCT USE
- ------- ---
<S> <C>
Propane................. Residential heating,
agricultural uses and
petrochemical
component
Isobutanes.............. Further processing
Natural Gasoline........ Further processing or
gasoline blending into
gasoline motor fuel
Ethane.................. Petrochemical
component
Normal Butane........... Petrochemical
component
</TABLE>
Carbon dioxide is used in enhanced oil recovery projects as a flooding
medium for recovering crude oil from mature oil fields.
PACIFIC OPERATIONS
Kinder Morgan Energy Partners' Pacific operations include interstate
pipelines regulated by the Federal Energy Regulatory Commission, intrastate
pipeline systems regulated by the California Public Utilities Commission in
California and non-regulated terminal operations.
Kinder Morgan Energy Partners plans to expand its presence in the rapidly
growing refined products market in the Western United States through
acquisitions that increase unitholder distributions and incremental expansions
of the Pacific operations. Since the acquisition of the Pacific operations,
Kinder Morgan Energy Partners has reduced costs by over $20 million per year
through the elimination of redundant general, administrative and other expenses.
The Pacific operations are split into a South region and a North region.
Combined, the two regions consist of five segments that serve six western states
with approximately 3,300 miles of refined petroleum products pipeline and
related terminal facilities.
The Pacific operations pipelines transport over one million barrels per day
of refined petroleum products. The three main product types transported are
gasoline, 63%, diesel fuel, 20% and jet fuel, 17%. The Pacific operations also
include 13 truck-loading terminals and provide pipeline service to approximately
44 customer-owned terminals, three commercial airports and 12 military bases.
These pipeline assets provide refined petroleum products to some of the
fastest growing populations in the United States. Significant population gains
have occurred in the southern California and San Francisco Bay areas, as well as
Las Vegas, Nevada and the Tucson-Phoenix, Arizona region. Pipeline
transportation of gasoline and jet fuel has a direct correlation with increases
or decreases in population. Kinder Morgan Energy Partners and we believe that
the increase in populations associated with the markets served by the Pacific
operations will continue in the future. Kinder Morgan Energy Partners intends to
expand the Pacific operations to meet increased demand resulting from these
positive demographic trends.
SOUTH REGION. The South region consists of three pipeline segments: the
West line, the East line and the San Diego line.
The West line consists of approximately 555 miles of primary pipeline and
currently transports products for approximately 50 shippers from seven
refineries and three pipeline terminals in the Los Angeles basin to Phoenix and
Tucson, Arizona and various intermediate commercial and military delivery
points. Also, a significant portion of West line
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<PAGE> 46
volumes are transported to Colton, California for local distribution and for
delivery to Calnev Pipeline, an unaffiliated transporter of refined petroleum
products to Las Vegas, Nevada and intermediate points. The West line serves
Kinder Morgan Energy Partners' terminals located in Colton and Imperial,
California as well as in Phoenix and Tucson.
The East line is comprised of two parallel lines originating in El Paso,
Texas and continuing approximately 300 miles west to the Tucson terminal and one
line continuing northwest approximately 130 miles from Tucson to Phoenix,
Arizona. All products received by the East line at El Paso come from a refinery
in El Paso or are delivered through connections with non-affiliated pipelines
from refineries in Odessa and Dumas, Texas and Artesia, New Mexico. The East
line serves Kinder Morgan Energy Partners' terminals located in Tucson and
Phoenix, Arizona.
In June 1999, Kinder Morgan Energy Partners completed an expansion of its
Southern California products pipeline system. The expansion involved the
construction of 13 miles of 16-inch diameter pipeline from Carson, California to
Norwalk, California. The new pipeline connects to an existing 16-inch diameter
pipeline from Norwalk to Colton and provides additional capacity between Carson
and Colton. Prior to the expansion, the pipeline between Carson and Colton
operated at maximum capacity. The additional pipe increased the capacity of the
system from 340,000 barrels per day to 520,000 barrels per day, an increase of
over 50%. The project cost approximately $30 million.
The San Diego line is a 135-mile pipeline serving major population areas in
Orange County, immediately south of Los Angeles, and San Diego. The same
refineries and terminals that supply the West line also supply the San Diego
Line. This line extends south to serve Kinder Morgan Energy Partners' terminals
in the cities of Orange and San Diego. On February 25, 1999, Kinder Morgan
Energy Partners announced an expansion of the San Diego line. The expansion
project will cost approximately $18 million and consists of the construction of
23 miles of 16 inch diameter pipe, and other related facilities. The new
facilities will increase capacity on the San Diego line by approximately 25% and
will increase the Pacific operation's capability to transport gasoline, diesel
and jet fuel to customers in the rapidly growing Orange County and San Diego,
California markets. Permitting for the project is underway with approval
expected in the fall of 1999.
NORTH REGION. The North region consists of two pipeline segments, the North
line and the Oregon line.
The North line consists of approximately 1,700 miles of pipeline in six
segments originating in Richmond, Concord and Bakersfield, California. This line
serves Kinder Morgan Energy Partners' terminals located in Brisbane, Bradshaw,
Chico, Fresno and San Jose, California, and Sparks, Nevada. The products
delivered through the North line come from refineries in the San Francisco Bay
and Bakersfield areas. The North line receives a small percentage of product
transported from various pipeline and marine terminals that deliver products
from foreign and domestic ports. A refinery located in Bakersfield supplies
substantially all of the products shipped through the Bakersfield-Fresno segment
of the North line. In October 1998, Kinder Morgan Energy Partners announced an
expansion of the Northern California products pipeline system serving the
Sacramento and Chico, California, and Reno, Nevada market areas. The expansion
will include the installation of additional horsepower at various pumping
facilities and reconfiguration of piping and related facilities. This segment of
the pipeline currently operates at its maximum capacity and the incremental
facilities will increase the capacity and throughput on the system by 20%. The
project will cost approximately $5 million and is projected to be in service by
September 1999.
The Oregon line is a 114-mile pipeline serving approximately ten shippers.
The Oregon line receives products from marine terminals in Portland, Oregon and
from Olympic pipeline. Olympic pipeline is a non-affiliated carrier that
transports products from
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<PAGE> 47
the Puget Sound, Washington area to Portland. From its origination point in
Portland, the Oregon line extends south and serves Kinder Morgan Energy
Partners' terminal located in Eugene, Oregon.
TRUCK LOADING TERMINALS. The Pacific operations include 13 truck-loading
terminals with an aggregate usable tank capacity of approximately 8.2 million
barrels. Terminals are located at destination points on each of the lines as
well as at various intermediate points along each line. The simultaneous
truck-loading capacity of each terminal ranges from 2 to 12 trucks. Kinder
Morgan Energy Partners provides the following services at these terminals:
- short-term product storage;
- truck loading;
- vapor recovery;
- deposit control additive injection;
- dye injection;
- oxygenate blending; and
- quality control.
The capacity of terminaling facilities varies throughout Kinder Morgan
Energy Partners' pipeline systems. Kinder Morgan Energy Partners does not own
terminal facilities at all pipeline delivery locations. At some locations,
Kinder Morgan Energy Partners makes product deliveries to facilities owned by
shippers or independent terminal operators. Kinder Morgan Energy Partners
provides truck loading and other terminal services as an additional service, and
charges a separate fee in addition to pipeline tariffs.
MARKETS. Currently the Pacific operations serve in excess of 100 shippers
in the refined products market, with the largest customers consisting of:
- major petroleum companies;
- independent refineries;
- the United States military; and
- independent marketers and distributors of products.
A substantial portion of product volume transported is gasoline. Demand for
gasoline depends on factors including prevailing economic conditions and
demographic changes in the markets served. Kinder Morgan Energy Partners and we
expect the majority of the Pacific operations' markets to maintain population
growth rates that exceed the national average for the foreseeable future.
Currently, the California gasoline market is approximately 900,000 barrels
per day. The Arizona gasoline market is served primarily by Kinder Morgan Energy
Partners at a market demand of 135,000 barrels per day. Nevada's gasoline market
is currently in excess of 50,000 barrels per day and Oregon's is approximately
98,000 barrels per day. The diesel and jet fuel market is approximately:
- 377,000 barrels per day in California;
- 78,000 barrels per day in Arizona;
- 72,000 barrels per day in Nevada; and
- 62,000 barrels per day in Oregon.
In the aggregate, Kinder Morgan Energy Partners transports over 1 million
barrels of petroleum products per day.
The volume of products transported is directly affected by the level of
end-user demand for those products in the geographic regions served. Some
product volumes can experience seasonal variations and overall volumes may be
slightly lower during the first and fourth quarters of each year.
SUPPLY. The majority of refined products supplied to the Pacific operations
come from the major refining centers around Los Angeles, San Francisco and Puget
Sound, as well as waterborne terminals. The waterborne terminals have three
central locations on the Pacific Coast:
- terminals operated by GATX, Mobil and others on the Washington and Oregon
coast;
- the Shore terminal on the Northern California coast; and
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<PAGE> 48
- terminals operated by GATX, Equilon and ATSC on the Southern California
coast.
COMPETITION. The most significant competitors to the Pacific operations
pipeline system are:
- proprietary pipelines owned and operated by major oil companies in the
area where the pipeline system delivers products; and
- refineries within Kinder Morgan Energy Partners' market areas with
related trucking arrangements.
Kinder Morgan Energy Partners and we believe that high capital costs,
tariff regulation and environmental permitting considerations make it unlikely
that a competing pipeline system comparable in size and scope will be built in
the foreseeable future. However, the possibility of the construction of
pipelines to serve specific markets is a continuing competitive factor.
Trucks may competitively deliver products in some short-distance markets.
Increased use of trucking by major oil companies has caused minor but notable
reductions in product volumes delivered to destinations close to refineries,
primarily to Orange and Colton, California. We cannot predict whether this trend
towards increased short-distance trucking will continue in the future.
Longhorn Partners Pipeline is a proposed joint venture project that would
begin transporting refined products from refineries on the Gulf Coast to El Paso
and other destinations in Texas. Increased product supply in the El Paso area
could result in some shift of volumes transported into Arizona from the West
line to the East line. While increased movements into the Arizona market from El
Paso would displace higher tariff volumes supplied from Los Angeles on the West
line, this shift of supply has not had, and we do not expect it to have, a
material adverse effect on operating results.
MID-CONTINENT OPERATIONS
The Mid-continent operations include:
- ownership of 51% of Plantation Pipe Line Company;
- the North system;
- ownership of 20% of Shell CO(2) Company;
- the Cypress pipeline;
- ownership of 50% of Heartland Pipeline Company;
- ownership of 25% of a natural gas liquids processor; and
- a gas processing plant.
Plantation Pipe Line Company
Kinder Morgan Energy Partners owns 51% of Plantation Pipe Line Company,
which owns and operates a 3,100 mile pipeline system throughout the southeastern
United States. Plantation Pipe Line Company serves the southeastern United
States. Kinder Morgan Energy Partners and we believe population increases in the
southeastern United States will lead to increased use and expansion of
Plantation Pipe Line Company's pipeline system.
MARKETS. Plantation Pipe Line Company ships products for approximately 50
shipper companies to terminals throughout the southeastern United States.
Plantation Pipe Line Company's principal customers are Gulf Coast refining and
marketing companies, fuel wholesalers and the United States Department of
Defense. In addition, Plantation Pipe Line Company services the Atlanta,
Georgia; Charlotte, North Carolina; and Washington, D.C. airports, where it
delivers jet fuel to major airlines.
SUPPLY. Products shipped on Plantation Pipe Line Company's pipelines
originate at various Gulf Coast refineries from which major integrated oil
companies and independent refineries and wholesalers ship refined petroleum
products. Plantation Pipe Line Company's pipelines can transport over 600,000
barrels of refined petroleum products per day.
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<PAGE> 49
COMPETITION. Plantation Pipeline Company competes primarily with the
Colonial Pipeline, which also runs from Gulf Coast refineries throughout the
southeastern United States and extends into the northeastern states.
North System
The North system is an approximate 1,600-mile interstate common carrier
pipeline of natural gas liquids and refined petroleum products. Because the
North system serves a relatively mature market, Kinder Morgan Energy Partners
intends to focus on increased volumes by remaining a reliable, cost-effective
provider of transportation services and by continuing to increase the range of
products transported and services offered.
The North system extends from south central Kansas to the Chicago area.
South central Kansas is a major hub for producing, gathering, storing,
separating and transporting natural gas liquids.
This table shows volumes in thousands of barrels of natural gas liquids
transported on the North system for delivery to the various markets for the
periods indicated. The category "other" includes natural gas liquid gathering
systems and Chicago originations other than volumes of refinery butanes to be
transported long distances. Decreases in volumes shipped on the North system in
1997 and 1998 are attributable to warmer than average winter months which
resulted in lower demand. We cannot assure you that this trend will not
continue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Petrochemicals................................. 2,861 1,125 684 1,200 1,040
Refineries and line reversal................... 10,478 9,765 9,536 10,600 10,489
Fuels.......................................... 10,039 7,763 10,500 7,976 6,150
Other.......................................... 6,551 7,114 8,126 7,399 5,532
------ ------ ------ ------ ------
Total................................ 29,929 25,767 28,846 27,175 23,211
</TABLE>
The North system has approximately 7.3 million barrels of storage capacity,
which includes caverns, steel tanks, pipeline volume and leased storage
capacity. This storage capacity provides operating efficiencies and flexibility
in meeting seasonal demand of shippers as well as propane storage for the
truck-loading terminals.
TRUCK-LOADING TERMINALS. The North system has seven propane truck-loading
terminals and one multi-product complex at Morris, Illinois, in the Chicago
area. The Morris terminal complex can load propane, normal butane, isobutane and
natural gasoline.
MARKETS. The North system currently serves approximately 50 shippers in the
upper Midwest market, including both users and wholesale marketers of natural
gas liquids. These shippers include all four major refineries in the Chicago
area. Wholesale marketers of natural gas liquids primarily make direct large
volume sales to major end-users, including propane marketers, refineries,
petrochemical plants, and industrial concerns. Market demand for natural gas
liquids varies according to the different end uses to which natural gas liquid
products may be applied. Demand for transportation services is influenced not
only by demand for natural gas liquids but also by the available supply of
natural gas liquids.
SUPPLY. Natural gas liquids extracted or separated at the Bushton gas
processing plant operated by KN Processing, Inc. have historically accounted for
a significant portion, approximately 40-50%, of the natural gas liquids
transported through the North system. Other sources of natural gas liquids
transported in the North system include major independent oil companies,
marketers, end-users and natural gas processors that use interconnecting
pipelines to transport natural gas liquids.
COMPETITION. The North system competes with other liquids pipelines and to
a
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<PAGE> 50
lesser extent rail carriers. In most cases, established pipelines are generally
the lowest cost alternative for the transportation of natural gas liquids and
refined petroleum products. Therefore, pipelines owned and operated by others
represent Kinder Morgan Energy Partners' primary competition. In the Chicago
area, the North system competes with other natural gas liquid pipelines that
deliver into the area and with rail car deliveries primarily from Canada. Other
Midwest pipelines and area refineries compete with the North system for propane
terminal deliveries. The North system also competes indirectly with pipelines
that deliver product to markets that the North system does not serve, including
the Gulf Coast market area.
Shell CO(2) Company, Ltd.
On March 5, 1998, Kinder Morgan Energy Partners and affiliates of Shell Oil
Company agreed to combine their carbon dioxide activities and assets into a
partnership, Shell CO(2) Company, Ltd., operated by Shell Oil. Kinder Morgan
Energy Partners acquired, through a newly created limited liability company, a
20% interest in Shell CO(2) Company, Ltd. in exchange for contributing its
Central Basin pipeline and approximately $25 million in cash. Shell Oil
contributed the following assets in exchange for an 80% interest in Shell CO(2)
Company, Ltd.:
- an approximate 45% interest in the McElmo Dome carbon dioxide reserves;
- an 11% interest in the Bravo Dome carbon dioxide reserves;
- an indirect 50% interest in the Cortez pipeline;
- a 13% interest in the Bravo pipeline; and
- various other related assets.
This combination of Kinder Morgan Energy Partners' and Shell Oil's assets
facilitates the marketing of carbon dioxide by the delivery of a complete
package of carbon dioxide supply, transportation and technical expertise to the
customer. Carbon dioxide is used in enhanced oil recovery projects as a flooding
medium for recovering crude oil from mature oil fields. By creating an area of
mutual interest in the continental United States, Kinder Morgan Energy Partners
will have the opportunity to participate with Shell Oil in various new carbon
dioxide projects in the region. Altura, Shell Oil's joint venture with Amoco, is
a major user of carbon dioxide in its West Texas fields.
Within the Permian Basin, the strategy of Shell CO(2) Company, Ltd. is to
offer customers "one-stop shopping" for carbon dioxide supply, transportation
and technical support service. Outside the Permian Basin, Shell CO(2) Company,
Ltd. intends to compete aggressively for new supply and transportation projects.
Kinder Morgan Energy Partners believes these projects will arise as other United
States oil producing basins mature and make the transition from primary
production to enhanced recovery methods.
Under the terms of the Shell CO(2) Company, Ltd. partnership agreement,
Kinder Morgan Energy Partners will receive a priority distribution of $14.5
million per year from 1998 through 2001. To the extent the amount paid to Kinder
Morgan Energy Partners over this period is in excess of Kinder Morgan Energy
Partners' percentage share, currently 20%, of Shell CO(2) Company, Ltd.'s
distributable cash flow for that period, discounted at 10%, Shell Oil will
receive a priority distribution during 2002 and 2003 equal to the amount of the
overpayment. If the priority distribution through 2003 does not make up the
overpayment, Kinder Morgan Energy Partners will be required to make a capital
contribution to Shell CO(2) Company, Ltd. for that difference. After 2003,
Kinder Morgan Energy Partners will participate in distributions according to its
ownership percentage.
MARKETS. The current size of market demand for carbon dioxide to be used in
enhanced oil recovery is approximately 1.1 billion cubic feet per day. Carbon
dioxide shippers can deliver approximately 1.3 billion cubic feet per day. Shell
CO(2) Company, Ltd.
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<PAGE> 51
controls 1 billion cubic feet per day of that capacity.
COMPETITION. Shell CO(2) Company, Ltd.'s primary competitors for the sale
of carbon dioxide include suppliers that have an ownership interest in McElmo
Dome, Bravo Dome and Sheep Mountain Dome carbon dioxide reserves. Shell CO(2)
Company, Ltd.'s ownership interests in the Cortez and Bravo pipelines are in
direct competition with Sheep Mountain pipeline. Shell CO(2) Company, Ltd. and
Sheep Mountain pipeline compete with one another for transportation of carbon
dioxide to the Denver City, Texas market area. We cannot assure you that new
carbon dioxide source fields will not be discovered which could compete with
Shell CO(2) Company, Ltd. or that new methodologies for enhanced oil recovery
may not replace carbon dioxide flooding.
Cypress Pipeline
The Cypress pipeline is an interstate pipeline system originating at
storage facilities in Mont Belvieu, Texas and extending 104 miles east to the
Lake Charles, Louisiana area. Mont Belvieu, located approximately 20 miles east
of Houston, is the largest hub for natural gas liquids gathering,
transportation, processing and storage in the United States.
MARKETS. The Cypress pipeline was built to service a major petrochemical
producer in the Lake Charles, Louisiana area under a 20-year ship-or-pay
agreement that expires in 2011. The contract requires a minimum volume of 30,000
barrels per day and in 1997, the producer agreed to ship a minimum of an
additional 13,700 barrels per day for five years. Also in 1997, Kinder Morgan
Energy Partners expanded the Cypress pipeline's capacity by 25,000 barrels per
day to 57,000 barrels per day. Kinder Morgan Energy Partners continues to pursue
projects that could increase volumes on the Cypress pipeline.
SUPPLY. The Cypress pipeline originates in Mont Belvieu, Texas where it is
able to receive ethane and ethane/propane mix from local storage facilities.
Mont Belvieu has facilities to separate natural gas liquids received from
several pipelines into ethane and other components. Additionally, pipeline
systems that transport natural gas liquids from major producing areas in Texas,
New Mexico, Louisiana, Oklahoma, and the Mid-continent region supply ethane and
ethane/propane mix to Mont Belvieu.
Heartland Pipeline Company
The Heartland Pipeline Company pipeline was completed in the fall of 1990.
Kinder Morgan Energy Partners and Conoco each own 50% of Heartland Pipeline
Company. Kinder Morgan Energy Partners operates the pipeline and Conoco operates
Heartland Pipeline Company's Des Moines terminal and serves as its managing
partner. In April 1999, Heartland Pipeline Company commenced a $3.4 million
expansion to Omaha, Nebraska and Council Bluffs, Iowa.
MARKETS. Heartland Pipeline Company provides transportation of refined
petroleum products from refineries in the Kansas and Oklahoma area to a Conoco
terminal in Lincoln, Nebraska and Heartland Pipeline Company's Des Moines
terminal. The demand for, and supply of, refined petroleum products in the
geographic regions served by Heartland Pipeline Company directly affect the
volume of refined petroleum products transported by Heartland Pipeline Company.
SUPPLY. Refined petroleum products transported by Heartland Pipeline
Company on the North system are supplied primarily from the National Cooperative
Refinery Association crude oil refinery in McPherson, Kansas and the Conoco
crude oil refinery in Ponca City, Oklahoma.
COMPETITION. Heartland Pipeline Company competes with other refined product
carriers in the geographic market it serves. Heartland Pipeline Company's
principal competitor is Williams Pipeline Company.
Mont Belvieu Fractionator
Kinder Morgan Energy Partners owns a 25% interest in the Mont Belvieu
fractionator, located approximately 20 miles east of Houston in Mont Belvieu,
Texas. The
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<PAGE> 52
fractionator is a 200,000-barrel per day full-service processing facility that
produces a range of products, including ethane, propane, normal butane,
isobutane and natural gasoline from a raw stream of natural gas liquids.
Enterprise Products Company operates the facility, which was built in 1980.
MARKETS. The fractionator is located in proximity to major end-users of its
specified products, ensuring consistent access to the largest domestic market
for natural gas liquid products. In addition, the Mont Belvieu hub has access to
deep-water port loading facilities via the Port of Houston, allowing access to
import and export markets.
SUPPLY. The Mont Belvieu fractionator is fed by six major natural gas
liquids pipelines, through several pipeline interconnects and unloading
facilities. The Mont Belvieu fractionator also can access supply from a variety
of other sources. Supply can either be brought directly into the facility or
into underground salt dome storage.
COMPETITION. The Mont Belvieu fractionator competes for volumes of natural
gas liquids with three other processing facilities located in the Mont Belvieu
hub and surrounding areas. Competitive factors for customers include primarily
the level of processing fees charged and the relative amount of available
capacity.
Painter Gas Processing Plant
The Painter plant, located near Evanston, Wyoming, is leased to Amoco Oil
Company, which operates the Painter plant fractionator and the associated Millis
terminal and storage facilities for its own account. Amoco also owns and
operates the nearby Amoco Painter complex gas plant.
Bulk Terminals
Kinder Morgan Energy Partners' bulk terminals consist of 24 bulk terminals,
which handle over 40 million tons of dry and liquid bulk products annually. The
bulk terminals include:
- five coal terminals;
- eight petroleum coke terminals; and
- eleven other bulk terminals.
Kinder Morgan Energy Partners plans to grow its bulk terminals business by:
- the expansion of the use of its existing facilities, particularly those
facilities which handle low-sulfur western coal;
- the design, construction and operation of new facilities for current and
prospective customers; and
- acquisitions that will allow Kinder Morgan Energy Partners to use its
operational expertise and customer relationships to improve the
performance of the acquired business.
We believe two additional trends will provide opportunity for growth in
Kinder Morgan Energy Partners' bulk terminals:
- increased demand for imported cement due to federally legislated highway
construction and limited domestic cement production may lead to higher
volumes at our import cement terminals; and
- increased imports of various foreign crude oils, which generate more
petroleum coke than domestic crude, may lead to opportunities for Kinder
Morgan Energy Partners' bulk terminals to operate additional petroleum
coke units at import facilities.
Coal Terminals
The Cora terminal is a high-speed, rail-to-barge coal transfer and storage
facility. Built in 1980, the terminal is located on approximately 480 acres of
land along the upper Mississippi River near Cora, Illinois, about 80 miles south
of St. Louis. The terminal has a capacity of about 15 million tons per year that
can be expanded to 20 million tons with capital additions. The terminal
currently is equipped to store up to 1.0 million tons of coal. This storage
provides customers the flexibility to coordinate their supplies of coal with the
demand at power plants. Storage capacity at the Cora terminal can be doubled
with additional capital investment.
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On September 4, 1997, Kinder Morgan Energy Partners acquired at a cost of
approximately $17 million the assets of BRT Transfer Terminal, Inc. and other
assets which now comprise the Grand Rivers terminal. Grand Rivers is a coal
transferring and storage facility located on the Tennessee River just above the
Kentucky Dam. The Grand Rivers terminal is operated on land under easements with
an initial expiration of July 2014. The terminal has current annual throughput
capacity of approximately 12-15 million tons with a storage capacity of
approximately 2 million tons. With capital improvements, the terminal could
handle 25 million tons annually.
On December 18, 1998, Kinder Morgan Energy Partners acquired the Pier IX
terminal, located in Newport News, Virginia. The terminal originally opened in
1983 and has the capacity to transfer approximately 12 million tons of coal
annually. It can store 1.3 million tons of coal on its 30-acre storage site and
can blend multiple coals to meet an individual customer's requirements. In
addition, the Pier IX terminal operates a cement facility, which has the
capacity to transfer over 400,000 tons of cement annually.
Kinder Morgan Energy Partners also operates the Los Angeles export coal
terminal and a smaller coal terminal in Mt. Vernon, Indiana.
MARKETS. Coal continues to dominate as the fuel for electric generation,
accounting for more than 55% of that fuel in the United States. Forecasts of
overall coal usage and power plant usage for the next 20 years show an increase
of about 1.5% per year. Current domestic supplies are predicted to last for
several hundred years. Most of Kinder Morgan Energy Partners' coal terminals'
volume is destined for use in coal-fired electric generation.
Kinder Morgan Energy Partners believes that obligations to comply with the
Clean Air Act Amendments of 1990 will cause shippers to increase the use of
low-sulfur coal from the western United States. Approximately 80% of the coal
loaded through the Cora and Grand Rivers terminals is low sulfur coal
originating from mines located in the western United States, including the Hanna
and Powder River basins in Wyoming, western Colorado and Utah. In 1998, four
major customers accounted for approximately 90% of all the coal loaded through
the Cora and Grand Rivers terminals.
Both the Pier IX terminal and the Los Angeles export coal terminal export
coal to foreign markets. Substantial portions of the coal loaded at these
facilities are covered by long term contracts. In addition, the Pier IX terminal
serves power plants on the eastern seaboard of the United States and imports
cement under a long term contract.
SUPPLY. Historically, the Cora and Grand Rivers terminals have moved coal
that originated in the mines of southern Illinois and western Kentucky. Many
shippers, however, particularly in the East, are now using western coal loaded
at the terminals or a mixture of western coal and other coals as a means of
satisfying environmental restrictions on the use of high-sulphur coal. Kinder
Morgan Energy Partners believes that Illinois and Kentucky coal producers and
shippers will continue to be important customers, but anticipates that growth in
volume through the terminals will be primarily due to western low sulfur coal
originating in Wyoming, Colorado and Utah.
The Cora terminal sits on the mainline of the Union Pacific Railroad and is
well positioned to receive coal shipments from the West. The Grand Rivers
terminal provides easy access to the Ohio-Mississippi River network, the
Tennessee-Tombigbee System and major trucking routes on the interstate highway
system. The Paducah & Louisville Railroad, a short-distance railroad, also
serves the Grand Rivers terminal with connections to seven rail lines including
the Union Pacific, CSX, Illinois Central and Burlington Northern. The Pier IX
terminal is served by the CSX Railroad, which transports coal from Appalachian
and other coal basins. Cement imported at the Pier IX terminal primarily
originates in Europe. The Union Pacific railroad serves the Los Angeles export
coal terminal.
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Petroleum Coke Terminals
With the acquisition of Kinder Morgan Bulk Terminals, Inc. on July 1, 1998,
Kinder Morgan Energy Partners owns or operates 8 petroleum coke terminals in the
United States. Petroleum coke is a by-product of the refining process and has
characteristics similar to coal. Petroleum coke supply in the United States has
increased in the last several years due to the increased use of coking units by
domestic refineries. Petroleum coke is used in domestic utility and industrial
steam generation facilities and is exported to foreign markets. Most of Kinder
Morgan Energy Partners' petroleum coke customers are large integrated oil
companies who choose to outsource the storage and loading of petroleum coke for
a fee.
Other Bulk Terminals
With the acquisition of Kinder Morgan Bulk Terminals, Inc. on July 1, 1998,
and the Shipyard River terminal on December 18, 1998, Kinder Morgan Energy
Partners owns or operates an additional 11 bulk terminals located primarily on
the Mississippi River and the West Coast. The other bulk terminals serve
customers in the alumina, cement, soda ash, ilminite, fertilizer, ore and other
industries seeking specialists who can build, own and operate bulk terminals.
Competition
CORA AND GRAND RIVERS TERMINALS. The Cora terminal and Grand Rivers
terminal compete with several coal terminals located in the general geographic
area, however, no significant new coal terminals have been constructed near the
Cora terminal or the Grand Rivers terminal in the last ten years. There are
significant barriers to entry for the construction of new coal terminals,
including the requirement for significant capital expenditures and restrictive
environmental permitting requirements. Kinder Morgan Energy Partners believes
the Cora terminal and the Grand Rivers terminal can compete successfully with
other terminals because of their favorable location, independent ownership,
available capacity, modern equipment and large storage area.
PIER IX TERMINAL. The Pier IX terminal competes primarily with two modern
coal terminals located in the same Virginia port complex as the Pier IX
terminal.
OTHER TERMINALS. Kinder Morgan Energy Partners' other bulk terminals
compete with numerous independent terminal operators and with other terminals
owned by oil companies and other industrial companies that chose not to
outsource terminal services and with numerous independent bulk terminal
operators. However, many of the other bulk terminals were constructed under
long-term contracts for specific customers. As a result, Kinder Morgan Energy
Partners believes other terminal operators would face a significant disadvantage
in competing for other business.
MAJOR CUSTOMERS
The following customers accounted for more than 10% of Kinder Morgan Energy
Partners' 1998 consolidated revenues:
<TABLE>
<S> <C>
- - Equilon Enterprises...... 13.2%
- - Tosco Group.............. 12.3%
- - Chevron.................. 11.0%
- - Arco..................... 10.9%
</TABLE>
Amoco Corporation accounted for more than 10% of Kinder Morgan Energy
Partners' 1996 and 1997 consolidated revenues and Mobil Corporation accounted
for more than 10% of Kinder Morgan Energy Partners' 1996 consolidated revenues.
Due to Kinder Morgan Energy Partners' acquisition of the Pacific Operations in
March 1998, Amoco Corporation and Mobil Corporation's percentage of Kinder
Morgan Energy Partners' consolidated revenues has decreased significantly.
EMPLOYEES
As of March 31, 1999, our operations, together with Kinder Morgan G.P.,
Inc. employed approximately 1,100 employees. The bulk of these are employed by
Kinder Morgan G.P., Inc. Upon completion of the offering and prior to an
acquisition, we will have four employees, our executives. We may
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<PAGE> 55
add employees as appropriate, when we acquire operating assets.
Approximately 150 hourly personnel at various terminals are represented by
four labor unions. No other employees of Kinder Morgan G.P., Inc. are members of
a union or have a collective bargaining agreement, and no union labor spends
time on our behalf. We and Kinder Morgan G.P., Inc. consider our relations with
our employees to be good.
REGULATION
Kinder Morgan Energy Partners is subject to various state and local laws
and regulations, as well as orders of regulatory agencies, for its activities
relating to:
- marketing;
- production;
- pricing;
- pollution;
- protection of the environment; and
- safety.
FEDERAL ENERGY REGULATORY COMMISSION. Some of Kinder Morgan Energy
Partners' pipelines are subject to regulation by the Federal Energy Regulatory
Commission under the Interstate Commerce Act.
The Interstate Commerce Act:
- requires Kinder Morgan Energy Partners to maintain just, reasonable and
nondiscriminatory rates for services on its pipelines that are able to be
changed within prescribed levels that are controlled by an inflation
index;
- permits interested persons to challenge proposed changes in rates upon a
showing that a portion of an increased rate is substantially in excess of
the pipeline's actual increase in costs; and
- authorizes the Federal Energy Regulatory Commission to suspend the
effectiveness of rates and to investigate these rates.
Under the current rules of the Federal Energy Regulatory Commission,
pipeline rates may be changed and justified using one of three
methods -- indexing, cost of service or market-based. Most pipeline owners elect
the indexing method. A cost of service approach may be used to justify rates if
a pipeline finds that the indexing method results in a rate which would not
produce sufficient revenue to enable it to recover prudently incurred costs. A
pipeline is also permitted to seek market-based rate treatment, and is permitted
on a prospective basis to charge competitive rates, if it can demonstrate that
it does not possess market power in the relevant market. In 1996 through 1998,
the application of the inflation index did not significantly affect the rates
charged by Kinder Morgan Energy Partners. The Federal Energy Regulatory
Commission can require a pipeline to change its rates and potentially to refund
shipper overpayments during the two years prior to the filing of a complaint and
during the time the complaint is awaiting a determination.
The Energy Policy Act of 1992 deemed petroleum pipeline rates that were in
effect prior to its enactment and had not been subject to complaint, protest or
investigation during the year prior to the passage of that act to be just and
reasonable. We believe that Kinder Morgan Energy Partners' rates for
transportation service on its North system and Cypress pipeline are within that
exception. Other rates on Kinder Morgan Energy Partners' Pacific operations are
not within the exception created by the Energy Policy Act.
UNITED STATES DEPARTMENT OF TRANSPORTATION. Kinder Morgan Energy Partners'
pipelines are subject to regulation by the United States Department of
Transportation with respect to their design, installation, testing,
construction, operation, replacement and management. In addition, Kinder Morgan
Energy Partners must permit access to and copying of records and make various
reports and provide information as required by the Secretary of Transportation.
Comparable regulation exists in some states in which Kinder Morgan Energy
Partners conducts pipeline operations. In addition, Kinder Morgan Energy
Partners' truck and
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bulk terminal loading facilities are subject to the Department of
Transportation's regulations dealing with the transportation of hazardous
materials for motor vehicles and rail cars. We believe that Kinder Morgan Energy
Partners is in substantial compliance with the Department of Transportation and
comparable state regulations.
SAFETY AND HEALTH. Kinder Morgan Energy Partners is also subject to the
requirements of the Federal Occupational Safety and Health Act and comparable
state statutes. We believe that Kinder Morgan Energy Partners is in substantial
compliance with that law's requirements, including general industry standards,
recordkeeping requirements, and monitoring of occupational exposure to hazardous
substances.
Kinder Morgan Energy Partners expects to increase expenditures in the
future to comply with higher industry and regulatory safety standards. These
expenditures cannot be accurately estimated at this time. Kinder Morgan Energy
Partners does not expect that they will have a material negative impact on its
business, except to the extent additional hydrostatic testing requirements are
imposed on its pipelines.
ENVIRONMENTAL. Kinder Morgan Energy Partners' operations and our future
operations are subject to federal, state and local laws and regulations relating
to protection of the environment. We believe that those operations and
facilities are in general compliance with those laws. Kinder Morgan Energy
Partners has an ongoing environmental compliance program. We will create that
type of program upon our acquisition of assets. However, risks of accidental
leaks or spills are associated with the transportation of natural gas liquids
and refined petroleum products, the handling and storage of bulk materials, the
separation of natural gas liquids and other activities. We cannot assure you
that significant costs and liabilities will not be incurred, including claims
for damages to property and persons resulting from operation of our or Kinder
Morgan Energy Partners' businesses. It is possible that other developments, such
as increasingly strict environmental laws and regulations and enforcement
policies, could result in increased costs and liabilities to Kinder Morgan
Energy Partners and us.
Environmental laws and regulations have changed substantially and rapidly
over the last 25 years, and we anticipate that there will be continuing changes.
The clear trend in environmental regulation is to place more restrictions and
limitations on activities that may impact the environment and endangered
species, such as emissions of pollutants, generation and disposal of wastes and
use and handling of chemical substances. Increasingly strict environmental
restrictions and limitations have resulted in increased operating costs for
Kinder Morgan Energy Partners and other similar businesses throughout the United
States. It is possible that the costs of compliance with environmental laws and
regulations will continue to increase. We will attempt to anticipate future
regulatory requirements that might be imposed and to plan accordingly to remain
in compliance with changing environmental laws and regulations and to minimize
the costs of compliance.
Kinder Morgan Energy Partners owns several properties that have been used
for many years for the transportation and storage of refined petroleum products
and natural gas liquids and the handling and storage of coal and other bulk
materials. Solid waste disposal practices within the petroleum industry have
improved over the years with the passage and implementation of various
environmental laws and regulations. A possibility exists that hydrocarbons and
other solid wastes may have been disposed of in, on or under various properties
owned by Kinder Morgan Energy Partners during the operating history of these
facilities. In these cases, hydrocarbons and other solid wastes could migrate
from their original disposal areas and have an adverse effect on soils and
groundwater. We do not believe that there presently exists significant surface
or subsurface contamination of Kinder Morgan Energy Partners assets by
hydrocarbons or other solid wastes not already identified and addressed. Kinder
Morgan Energy Partners has developed and maintains a reserve of funds to account
for the costs of cleanup at these sites.
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We and Kinder Morgan Energy Partners will generate both hazardous and
nonhazardous solid wastes that are subject to the requirements of the federal
Resource Conservation and Recovery Act and comparable state laws. The EPA may
consider the adoption of stricter disposal standards for nonhazardous waste. It
is possible that some wastes that are currently classified as nonhazardous,
which could include wastes currently generated during pipeline or bulk terminal
operations, may in the future be designated as hazardous wastes. Hazardous
wastes are subject to more rigorous and costly disposal requirements. Changes in
the regulations may result in additional capital expenditures or operating
expenses for us and Kinder Morgan Energy Partners.
The Comprehensive Environmental Response, Compensation and Liability Act,
also known as the Superfund law, imposes liability, without regard to fault or
the legality of the original conduct, on various classes of potentially
responsible persons for releases of hazardous substances into the environment.
These persons include the owner or operator of a site and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. The Superfund law also authorizes the EPA and, in some cases, others to
take actions in response to threats to the public health or the environment and
to seek to recover from the responsible people the costs they incur. Although
petroleum is excluded from the Superfund law's definition of a hazardous
substance, in the course of its ordinary operations we and Kinder Morgan Energy
Partners will generate wastes that may fall within the definition of a hazardous
substance. If we or Kinder Morgan Energy Partners are determined to be a
potentially responsible person, we or Kinder Morgan Energy Partners may be
responsible under the Superfund law for all or part of the costs required to
clean up sites at which these wastes have been disposed. Other than as described
under "Litigation and Other Contingencies -- Environmental" on page 56, we
believe that Kinder Morgan Energy Partners is in substantial compliance with the
Superfund law.
Kinder Morgan Energy Partners' operations are subject to the Clean Air Act
and comparable state laws. We believe that Kinder Morgan Energy Partners is in
substantial compliance with those laws. Numerous amendments to the Clean Air Act
were adopted in 1990. These amendments contain lengthy, complex provisions that
may result in the imposition over the next several years of pollution control
requirements with respect to air emissions from the operations of Kinder Morgan
Energy Partners' and our businesses. Depending on the nature of the EPA, state
and local interpretations of those laws, Kinder Morgan Energy Partners and we
may be required to incur capital expenditures over the next several years for
air pollution control equipment to maintain or operate our businesses. Those
interpretations are difficult to predict. We do not believe that any of these
interpretations will have a material negative effect on Kinder Morgan Energy
Partners or us.
LITIGATION AND OTHER CONTINGENCIES
KINDER MORGAN, INC.
We are not a party to any litigation.
KINDER MORGAN G.P., INC.
Kinder Morgan G.P., Inc. is a defendant in two proceedings relating to
alleged environmental violations for events relating to a fire that occurred at
the Morris storage field in September 1994. One proceeding has been brought by
the State of Illinois and one has been brought by the United States Department
of Transportation. We believe that the resolution of these items will not have a
material negative impact on Kinder Morgan G.P., Inc. or us.
KINDER MORGAN ENERGY PARTNERS
FEDERAL ENERGY REGULATORY COMMISSION. Some shippers of products have filed
complaints with the Federal Energy Regulatory Commission that seek substantial
refunds and reductions in the tariff rates on
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the pipelines operated by Kinder Morgan Energy Partners' Pacific operations.
The complaints allege that some pipeline tariff rates of the Pacific
operations are not entitled to be calculated under a prior method because there
was a substantial change in the economic circumstances of the pipeline that were
the basis of the rates. An initial decision by the Federal Energy Regulatory
Commission Administrative Law Judge was issued on September 25, 1997. That
decision determined that the Pacific operations' West line rates were entitled
to the prior calculation but that the rates on the East line, which transports
less than 10% of the Pacific operations' volumes, were not so entitled. That
decision also included generally adverse rulings to the Pacific operations
regarding cost of service issues.
On January 13, 1999, the Federal Energy Regulatory Commission issued an
opinion that affirmed the initial decision in major respects, including the
prior rate calculations of the West line. That opinion also modified parts of
the decision that were adverse to Kinder Morgan Energy Partners. Some of the
complainants have appealed the Federal Energy Regulatory Commission's decision
to the United States Court of Appeals for the District of Columbia circuit.
Kinder Morgan Energy Partners has reserved approximately $29 million on its
balance sheet for the East Line refunds specified in the Federal Energy
Regulatory Commission's opinion. The opinion with respect to the East line also
had the following impacts on Kinder Morgan Energy Partners. On April 1, 1999,
Kinder Morgan Energy Partners filed with the Federal Energy Regulatory
Commission new East line tariff rates consistent with the opinion. We believe
that these tariff reductions will reduce Kinder Morgan Energy Partners' revenues
on the East Line by approximately $5.5 million annually. In addition, Kinder
Morgan Energy Partners ceased accruing as an expense the $8 million it had been
accruing annually as an addition to reserves for the potential impact of this
litigation.
You should also read the description of Federal Energy Regulatory
Commission's proceedings involving Kinder Morgan Energy Partners' pipelines
described in note 15 to the Kinder Morgan Energy Partners consolidated financial
statements on page F-40.
CALIFORNIA PUBLIC UTILITIES COMMISSION. Some shippers of products filed
complaints before the California Public Utilities Commission that challenged the
rates charged for intrastate transportation of refined petroleum through the
Pacific operations' pipeline system in California. On June 18, 1998, a
California Public Utilities Commission Administrative Law Judge issued a ruling
in Kinder Morgan Energy Partners' favor and dismissed the complaints. That
ruling was affirmed by the California Public Utilities Commission on August 6,
1998. The shippers have filed an appeal with the California Supreme Court.
EASEMENTS. Southern Pacific Transportation Company has allowed Kinder
Morgan Energy Partners to construct and operate a significant portion of its
Pacific operations' pipeline under their railroad tracks. Southern Pacific
Transportation Company and its predecessors were given the right to construct
their railroad tracks under federal statutes enacted in 1871 and 1875. The 1871
statute was thought to be an outright grant of ownership that would continue
until the land ceased to be used for railroad purposes. Two United States
Circuit Courts, however, ruled in 1979 and 1980 that railroad rights-of-way
granted under laws similar to the 1871 statute provide only the right to use the
surface of the land for railroad purposes without any right to the underground
portion. If a court were to rule that the 1871 statute does not permit the use
of the underground portion for the operation of a pipeline, Kinder Morgan Energy
Partners may be required to obtain permission from the land owners to continue
to maintain its pipelines. Although we cannot assure you, we believe Kinder
Morgan Energy Partners could obtain permission over time at a cost that would
not have a material negative effect on the financial position or results of
operations of Kinder Morgan Energy Partners or us.
We believe that Kinder Morgan Energy Partners has the power of eminent
domain for
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the liquids pipelines in the states in which it operates, except for Illinois.
We also believe that Shell CO(2) Company, Ltd., a joint venture with Shell in
which Kinder Morgan Energy Partners owns an indirect 20% interest, does not have
the power of eminent domain for its carbon dioxide pipelines. Shell CO(2)
Company, Ltd.'s lack of the power of eminent domain or Kinder Morgan Energy
Partners' loss of the right to use or occupy the property on which its pipelines
are located could have a material negative effect on their businesses and, as a
result, on our business.
ENVIRONMENTAL. Since August 1991, SFPP, L.P. has been involved in a cleanup
ordered by the EPA related to ground water contamination in the vicinity of its
storage facilities and truck loading terminal at Sparks, Nevada. The EPA
approved the remediation plan in September 1992 and the remediation system began
operation in 1995. SFPP L.P. is presently involved in 18 ground water
hydrocarbon remediation efforts under administrative orders issued by the
California Regional Water Quality Control Board and two other state agencies.
Kinder Morgan Energy Partners had reserved $26.1 million on its balance sheet at
December 31, 1998 for the costs of remediation.
OTHER. In the ordinary course of its business, Kinder Morgan Energy
Partners is a defendant in various lawsuits relating to its assets. Although we
cannot assure you, we believe that the resolution of those items will not have a
material negative impact on Kinder Morgan Energy Partners or us.
EXECUTIVE OFFICES
The address of our principal executive offices is 1301 McKinney Street,
Suite 3400, Houston, Texas 77010 and our telephone number at this address is
(713) 844-9500.
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MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth specific information for our executive
officers and members of our board of directors. Directors are elected for
three-year staggered terms. The Class I director will serve until our annual
meeting in 2000. The Class II directors will serve until our annual meeting in
2001. The Class III directors will serve until our annual meeting in 2002.
Executive officers are elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
- ---- --- ----------------
<S> <C> <C>
Richard D. Kinder......................... 54 Class III Director, Chairman and Chief
Executive Officer
William V. Morgan......................... 56 Class III Director, Vice Chairman and
President
David G. Dehaemers, Jr. .................. 38 Treasurer
Michael C. Morgan......................... 30 Vice President
</TABLE>
In addition, the following individuals will be elected, and have agreed to
serve upon their election, as members of our Board of Directors upon the
completion of this offering:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
- ---- ---- ----------------
<S> <C> <C>
Fayez Sarofim............................ 70 Class II Director
Ted A. Gardner........................... 41 Class I Director
Gary Hultquist........................... 55 Class II Director
</TABLE>
Richard D. Kinder was elected as our Chairman and Chief Executive Officer
and as one of our directors in February 1997. He was simultaneously elected to
the same position with Kinder Morgan G.P., Inc. From October 1990 until December
1996, Mr. Kinder was President and Chief Operating Officer of Enron Corp. Mr.
Kinder was employed by Enron and its affiliates and predecessors for over 16
years. Mr. Kinder is also a director of TransOcean Offshore Inc., Baker Hughes
Incorporated, KN Energy, Inc. and Waste Management, Inc.
William V. Morgan was elected as our President and as a director in October
1996. In February 1997, he was also elected as our Vice Chairman. In addition,
Mr. Morgan was elected Director of Kinder Morgan G.P., Inc. in June 1994, Vice
Chairman of Kinder Morgan G.P., Inc. in February 1997 and President of Kinder
Morgan G.P., Inc. in November 1998. Mr. Morgan has held 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: 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.
David G. Dehaemers, Jr. was elected as our Vice President and Treasurer in
February 1997 and will be Chief Financial Officer upon the completion of this
offering. Mr. Dehaemers has been the Treasurer of Kinder Morgan G.P., Inc. since
February 1997 and Vice President and Chief Financial Officer of Kinder Morgan
G.P., Inc. since July 1997. He served as Secretary of Kinder Morgan G.P., Inc.
from February 1997 to August 1997. From October 1992 to January 1997, he was
Chief Financial Officer of Morgan Associates, Inc., an energy investment and
pipeline management company. Mr. Dehaemers was previously employed by the
national certified public accounting firms of Ernst & Whinney and Arthur Young.
He is a certified public accountant and received his undergraduate Accounting
degree from Creighton University in Omaha, Nebraska. Mr. Dehaemers received his
law degree from the University of
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Missouri-Kansas City and is a member of the Missouri Bar.
Michael C. Morgan was elected as our Vice President in February 1997, and
will be a Vice President of Corporate Development upon completion of this
offering. Mr. Morgan has been the Vice President, Corporate Development and
Investments of Kinder Morgan G.P., Inc. since February 1997. From August 1995
until February 1997, Mr. Morgan was an associate with McKinsey & Company, an
international management consulting firm. In 1995, Mr. Morgan received a Masters
in Business Administration from the Harvard Business School. From March 1991 to
June 1993, Mr. Morgan held various positions at PSI Energy, Inc., an electric
utility, including Assistant to the Chairman. Mr. Morgan received a Bachelor of
Arts in Economics and a Masters of Arts in Sociology from Stanford University in
1990. Mr. Morgan is the son of William V. Morgan.
Fayez Sarofim is President and Chairman of the Board of Fayez Sarofim &
Co., an investment advisory firm he founded in 1958. Mr. Sarofim is a director
of Argonaut Group, Inc., Unitrin, Inc. and Imperial Holly Corporation.
Ted A. Gardner has been a Managing Partner of First Union Capital Partners
and a Senior Vice President of First Union Corporation since 1990.
Gary Hultquist is the Managing Director of Hultquist Capital, LLC, an
investment and consulting firm based in San Francisco, California, Mr. Hultquist
has held that position with Hultquist Capital, LLC and its predecessor since
1988. Prior thereto, Mr. Hultquist served in management and as a partner at two
San Francisco area law firms where he specialized in intellectual property and
business litigation. Mr. Hultquist holds degrees in accounting, finance and law.
OPERATING OFFICERS OF KINDER MORGAN G.P., INC.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH US
- ---- --- ----------------
<S> <C> <C>
William V. Allison........................ 51 President, Pipelines Operations
Thomas B. Stanley......................... 48 Vice President, Bulk Terminals
Dixon B. Betz............................. 50 Chief Executive Officer, River Consulting,
Inc., Subsidiary
Roger M. Knouse........................... 47 Vice President, Houston Commercial
Operations, Pipelines
Mary F. Morgan............................ 45 Vice President, Pacific Customer Service
William W. White.......................... 52 Vice President, Pipeline Field Operations
</TABLE>
William V. Allison was elected President, Pipeline Operations of Kinder
Morgan G.P., Inc. in February 1999. Prior to that, he served as Vice President
and General Counsel of Kinder Morgan, G.P., Inc. since April 1998. From 1977 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 Federal Energy Regulatory Commission.
Mr. Stanley was elected President of Hall-Buck Marine, Inc., now known as
Kinder Morgan Bulk Terminals, Inc., in 1993, for which he has worked since 1980.
Mr. Stanley is a CPA with ten years' experience in public accounting, banking,
and insurance accounting prior to joining Hall-Buck. He received his bachelor's
degree from Louisiana State University in 1972.
Mr. Betz founded River Consulting, Inc., a subsidiary of Kinder Morgan Bulk
Terminals, Inc., in 1981 and has since served as its Chief Executive Officer.
Mr. Betz received a Bachelor of Science degree in Mathematics from Louisiana
State University in 1971.
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Roger M. Knouse was elected Vice President, Houston Commercial Operations,
Pipelines of Kinder Morgan G.P., Inc. in March 1998. Prior to that, he served as
Director of Business Development for Kinder Morgan G.P., Inc. from February 1997
until March 1998. Mr. Knouse was Director of Pipeline Services for Enron Liquid
Service Corp. from July 1995 until February 1997 and Director of Pipeline
Transportation for Enron Liquids Pipeline Company from January 1987 until July
1995. He held various operations and commercial positions with Enron Liquids
Pipeline Company from November 1973 until January 1987.
Mary F. Morgan was elected Vice President, Pacific Customer Service of
Kinder Morgan G.P., Inc. in March 1998. Prior to that, she was Director,
Customer Service Center for the former general partner of Santa Fe Pacific
Pipeline Partners, L.P. since 1997. Prior to this assignment, Ms. Morgan served
as Director, Products Movement and District Manager, Western District for the
former general partner of Santa Fe Pacific Pipeline Partners, L.P. Over the past
twenty years, she also served in various engineering and operations assignments
with the former general partner of Santa Fe, Exxon Pipeline Company, and Amoco
Production Company.
William M. White was elected Vice President, Pipeline Field Operations of
Kinder Morgan G.P., Inc. in March 1998. Previously, Mr. White served as Vice
President of Engineering for the former general partner of Santa Fe Pacific
Pipeline Partners, L.P. from 1993 until March 1998. Prior to that, he held
various engineering and operation positions with the former general partner of
Santa Fe Pacific Pipeline Partners, L.P. since December 1974. Mr. White
graduated from the University of Kentucky with a degree in Electrical
Engineering and he completed graduate work in Business Administration at the
University of Tulsa.
COMPENSATION OF DIRECTORS
We intend to compensate non-employee directors with stock option grants and
reimbursement of expenses relating to the conduct of their roles as directors.
Messrs. Kinder and Morgan each received $40,000 in 1997 and 1998 as compensation
for services as our directors.
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SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid to our directors and
the highest paid executive officers of Kinder Morgan G.P., Inc. for each of the
past two fiscal years. Bonus amounts were earned in the year shown and paid the
following year. All other compensation from us represents directors fees. All
other compensation from Kinder Morgan Energy Partners represents Kinder Morgan
G.P., Inc.'s contributions to its Savings Investment Plan, a 401(k) plan, the
imputed value of group term life insurance paid by Kinder Morgan G.P., Inc.
exceeding $50,000 and compensation attributable to allowed taxable moving
expenses. Prior to our acquisition of Enron Liquids Pipeline Company, the
predecessor to Kinder Morgan G.P., Inc., Mr. Allison served as President of
Enron Liquids Pipeline Company from January 1, 1997 until February 14, 1997.
<TABLE>
<CAPTION>
ANNUAL
ANNUAL COMPENSATION
COMPENSATION FROM KINDER
FROM KINDER MORGAN ALL OTHER
MORGAN, INC. ENERGY PARTNERS COMPENSATION
----------------- ----------------- ------------------
FROM
KINDER
MORGAN
SALARY BONUS SALARY BONUS FROM ENERGY
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) US PARTNERS
- --------------------------- ---- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard D. Kinder............. 1998 280,000 180,000 200,004 -- 40,000 $13,584
Director, Chairman and Chief
Executive Officer 1997 280,000 180,000 175,664 -- 40,000 12,757
William V. Morgan............. 1998 100,000 60,200 200,004 -- 40,000 64,562
Director, Vice Chairman 1997 100,000 60,200 175,685 -- 40,000 12,757
and President
William V. Allison............ 1998 -- -- 99,998 200,000 -- 11,366
President, Pipeline 1997 -- -- 22,917 -- -- --
Operations of Kinder
Morgan G.P., Inc.
David G. Dehaemers, Jr. ...... 1998 -- -- 141,247 200,000 -- 34,393
Vice President and Treasurer 1997 -- -- 101,910 130,000 -- 7,598
Michael C. Morgan............. 1998 -- -- 141,247 200,000 -- 50,421
Vice President 1997 -- -- 101,910 130,000 -- 7,539
</TABLE>
1999 STOCK AWARDS PLAN
Our 1999 Stock Awards Plan provides both our and our affiliated companies'
directors, officers and employees with an opportunity to acquire an economic
interest in us and additional incentive and reward opportunities based on our
profitable growth. In addition, the 1999 Stock Awards Plan aids us to attract
and retain outstanding personnel. The 1999 Stock Awards Plan provides for the
grant of:
- incentive stock options or nonqualified stock options;
- restricted stock awards;
- stock appreciation rights;
- performance awards; and
- phantom stock awards.
The aggregate number of shares of our common stock that may be issued under
the 1999 Stock Awards Plan may not exceed 2,000,000 shares. Awards covering more
than 250,000 shares may not be granted to any individual in any twelve-month
period. Shares of our common stock under awards which have expired, terminated
or been canceled or forfeited will be available for issuance or use in
connection with future awards.
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<PAGE> 64
GRANTS. We intend to grant, effective with the closing of this offering,
approximately 1,815,000 stock options to various key officers and employees of
Kinder Morgan, Inc. and Kinder Morgan G.P., Inc. The options will be granted at
exercise prices equal to the public offering price of our common stock in this
offering.
ADMINISTRATION. The 1999 Stock Awards Plan is administered by a
compensation committee of our board of directors. The compensation committee has
the power to determine which individuals will receive an award, the time or
times when the award will be made, the type of the award and the number of
shares of common stock to be issued under the award or the value of the award.
Only persons who at the time of the award are our employees, officers or
directors or of any of our subsidiaries will be eligible to receive an award
under the 1999 Stock Awards Plan.
OPTIONS. The 1999 Stock Awards Plan provides for two types of options:
incentive stock options and nonqualified stock options. The compensation
committee will designate the individuals to receive the options, the number of
shares subject to the options and the terms and conditions of each option
granted under the 1999 Stock Awards Plan. The term of any option granted under
the 1999 Stock Awards Plan shall be determined by the compensation committee;
provided, however, that the term of any incentive stock option cannot exceed ten
years from the date of the grant and any incentive stock option granted to an
employee who possesses more than 10% of the total combined voting power of all
classes of our shares or of our subsidiaries within the meaning of Section
422(b)(6) of the Internal Revenue Code must not be exercisable after the
expiration of five years from the date of grant.
The exercise price of options granted under the 1999 Stock Awards Plan is
determined by our compensation committee except that an option's exercise price
cannot be less than the fair market value of a share of common stock on the date
the option is granted, subject to adjustments. Further, the exercise price of
any incentive stock option granted to an employee who possesses more than 10% of
the total combined voting power of all classes of our shares or of our
subsidiaries within the meaning of Section 422(b)(6) of the Internal Revenue
Code must be at least 110% of the fair market value of the share at the time the
option is granted. The exercise price of options granted under the 1999 Stock
Awards Plan will be paid in full in a manner prescribed by our compensation
committee.
RESTRICTED STOCK AWARDS. Under a restricted stock award, common stock will
be issued or delivered to the grantee at the time the award is made without any
cash payment to us, except to the extent otherwise provided by our compensation
committee or required by law; provided, however, that the shares will be subject
to restrictions upon their disposition and obligations to forfeit the shares to
us as may be determined in the discretion of our compensation committee. The
restrictions on disposition may lapse based upon:
- our attainment of specific performance targets established by the
compensation committee that are based on:
-- the price per share of the common stock;
-- our earnings per share;
-- our revenue;
-- the revenue of one of our business units designated by the committee;
-- the return on stockholders' equity that we achieve; or
-- our pre-tax cash flow from operations;
- the grantee's tenure with us; or
- a combination of both factors.
We will retain custody of the common stock issued under a restricted stock award
until the disposition restrictions lapse. A grantee may not sell, transfer,
pledge, exchange, hypothecate, or otherwise dispose of the shares until the
expiration of the restriction period. However, upon the issuance to the
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<PAGE> 65
grantee of common stock under a restricted share award, except for the foregoing
restrictions, the grantee will have all the rights of one of our stockholders
for those shares, including the right to vote those shares and to receive all
dividends and other distributions paid to those shares.
STOCK APPRECIATION RIGHTS. A stock appreciation right permits the holder to
receive an amount, in cash, common stock, or a combination of the above as
determined by the compensation committee, equal to the number of stock
appreciation rights exercised by the holder multiplied by the excess of the fair
market value of common stock on the exercise date over the stock appreciation
rights' exercise price. Stock appreciation rights may or may not be granted in
connection with the grant of an option. A stock appreciation right may be
exercised in whole or in installments and at the time as determined by the
compensation committee.
PERFORMANCE AND PHANTOM STOCK AWARDS. The 1999 Stock Awards Plan permits
grants of performance awards and phantom stock awards, which may be paid in
cash, common stock, or a combination as determined by the compensation
committee. Performance awards granted under the 1999 Stock Awards Plan will have
a maximum value established by the compensation committee at the time of the
grant. A grantee's receipt of that amount will be contingent upon our
satisfaction, or any subsidiary, division or department of us of future
performance conditions established by the compensation committee prior to the
beginning of the performance period. The performance awards, however, are
subject to later revisions as the compensation committee deems appropriate to
reflect significant unforeseen events or changes. A performance award will
terminate if the grantee's employment or service with us terminates during the
applicable performance period except as otherwise provided by the compensation
committee at the time of grant.
Phantom stock awards granted under the 1999 Stock Awards Plan are awards of
common stock or rights to receive amounts equal to stock appreciation over a
specific period of time. The awards vest over a period of time or upon the
occurrence of specific events, established by the compensation committee,
without payment of any amounts by the holder, except to the extent required by
law. A phantom stock award will terminate if the grantee's employment or service
with us terminates during the applicable vesting period or, if applicable, the
occurrence of a specific event, or events, except as otherwise provided by the
compensation committee at the time of grant. In determining the value of
performance awards or phantom stock awards, the compensation committee must take
into account the grantee's responsibility level, performance, potential, other
awards under the 1999 Stock Awards Plan, and other consideration as it deems
appropriate. Payment may be made in a lump sum or in installments as prescribed
by the compensation committee. Any payment made in common stock will based upon
the fair market value of the common stock on the payment date.
RETIREMENT SAVINGS PLAN. Effective July 1, 1997, Kinder Morgan G.P., Inc.
established the Kinder Morgan Retirement Savings Plan, a defined contribution
401(k) plan, that permits all full-time employees of Kinder Morgan G.P., Inc. to
contribute 1% to 15% of base compensation, on a pre-tax or after-tax basis, into
participant accounts. In addition to a mandatory contribution equal to 4% of
base compensation per year for each plan participant, Kinder Morgan G.P., Inc.
may make discretionary contributions in years when specific performance
objectives are met. Any discretionary contributions are made during the first
quarter following the performance year. On March 1, 1999, an additional 2%
discretionary contribution was made to individual accounts based on 1998
financial targets to unitholders. All contributions, together with earnings
thereon, are immediately vested and not subject to forfeiture. Participants may
direct the investment of their contributions into a variety of investments. Plan
assets are held and distributed under a trust agreement. Because levels of
future compensation, participant contributions and investment yields cannot be
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<PAGE> 66
reliably predicted over the span of time contemplated by a plan of this nature,
it is impractical to estimate the annual benefits payable at retirement to the
individuals listed in the Summary Compensation Table above.
EXECUTIVE COMPENSATION PLAN. Under Kinder Morgan Energy Partners' Executive
Compensation Plan, executive officers of Kinder Morgan G.P., Inc. are eligible
for awards equal to a percentage of the incentive compensation value, which is
defined as cash distributions to Kinder Morgan G.P., Inc. during the four
calendar quarters preceding the date of redemption times eight, less a
participant adjustment factor, if any. Either the board of directors of Kinder
Morgan G.P., Inc. or a committee of the board will administer the Executive
Compensation Plan and will determine which employees will receive grants under
the plan and the amounts of such grants.
Under the executive plan, no eligible employee may receive a grant in
excess of 2%, and total awards under the executive plan may not exceed 10%. In
general, participants may redeem vested awards in whole or in part from time to
time by written notice. Kinder Morgan Energy Partners may, at its option, pay
the participant in units, provided, however, the unitholders approve the plan
prior to issuing those units, or in cash. Kinder Morgan Energy Partners may not
issue more than 200,000 units in the aggregate under the executive plan. Units
will not be issued to a participant unless the units have been listed for
trading on the principal securities exchange on which the units are then listed.
The executive plan terminates January 1, 2007, and any unredeemed awards
will be automatically redeemed. The board of directors of Kinder Morgan G.P.,
Inc. may, however, terminate the executive plan before that date, and upon early
termination, Kinder Morgan Energy Partners will redeem all unpaid grants of
compensation at an amount equal to the highest incentive compensation value,
using as the determination date any day within the previous twelve months,
multiplied by 1.5. The executive plan was established in July 1997 and on July
1, 1997, the board of directors of Kinder Morgan G.P., Inc. granted awards
totaling 2% of the incentive compensation value to each of Thomas King, David G.
Dehaemers, Jr. and Michael C. Morgan. Originally, 50% of the awards were to vest
on each of January 1, 2000 and January 1, 2002. No awards were granted during
1998.
All of Mr. King's awards were forfeited when he resigned as President of
Kinder Morgan G.P., Inc. on November 20, 1998. On January 4, 1999, after year
end, the awards granted to Mr. Dehaemers and Mr. Morgan were amended to provide
for the immediate vesting and pay-out of 50% of their awards, or 1% of the
incentive compensation value. The board of directors of Kinder Morgan G.P., Inc.
believed that accelerating the vesting and pay-out of the awards was in the best
interest of Kinder Morgan Energy Partners because it capped the total payment
the participants were entitled to receive for 50% of their awards.
UNIT OPTION PLAN. Under Kinder Morgan Energy Partners' Common Unit Option
Plan, key personnel of Kinder Morgan Energy Partners and its affiliates,
including non-employee directors of Kinder Morgan G.P., Inc., are eligible to
receive grants of options to acquire units. The total number of units available
under the Common Unit Option Plan is 250,000. None of the options granted under
the Common Unit Option Plan may be incentive stock options under Section 422 of
the Internal Revenue Code. If an option expires, or is otherwise terminated or
forfeited, without being exercised, the number of units covered by that option
will be available for a future award. The exercise price for an option may not
be less than the fair market value of a unit on the date of grant. Either the
board of directors of Kinder Morgan G.P., Inc. or a committee of the board of
directors will administer the Common Unit Option Plan. The Common Unit Option
Plan terminates on March 5, 2008.
No individual employee may be granted options for more than 10,000 units in
any year. The board of directors of Kinder Morgan G.P., Inc. or its compensation
committee will determine which employees will receive
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<PAGE> 67
options, the number of units to be covered by each option granted to an employee
and the terms and conditions of the options granted to employees, including the
duration and vesting of the options. At December 31, 1998, options for 194,500
units were granted to 89 employees of Kinder Morgan G.P., Inc. Forty percent of
the options will vest on the first anniversary of the date of grant and twenty
percent on each anniversary, thereafter. The options expire seven years from the
date of grant.
The Common Unit Option Plan also granted to each non-employee director of
Kinder Morgan G.P., Inc. as of April 1, 1998, an option to acquire 5,000 units
at an exercise price equal to the fair market value of the units on that date.
In addition, each new non-employee director will receive options to acquire
5,000 units on the first day of the month following his or her election. Forty
percent of the options will vest on the first anniversary of the date of grant
and twenty percent on each anniversary thereafter. The non-employee director
options will expire seven years from the date of grant.
The following tables show various information at December 31, 1998, and for
the fiscal year then ended for unit options to Kinder Morgan Energy Partners
granted to and exercised by the individuals named in the summary compensation
table above. Mr. Allison is the only person named in the summary compensation
table that has been granted options in Kinder Morgan Energy Partners' units. No
options have been granted at an option price below fair market value on the date
of grant.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL UNIT PRICE
UNITS OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED IN 1998 UNIT DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William V. Allison...... 10,000 5.14 $33.125 8/26/2005 $134,852 $314,263
</TABLE>
AGGREGATED OPTION EXERCISES IN 1998,
AND 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
UNITS UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT 1998 YEAR-END AT 1998 YEAR END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William V. Allison... -- -- -- 10,000 -- $31,250
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the underlying Kinder
Morgan Energy Partners units at year-end, minus the exercise price.
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<PAGE> 68
SPECIFIC RELATIONSHIPS AND RELATED TRANSACTIONS
On June 16, 1999, we entered into an exchange agreement with our current
stockholders to effect a recapitalization and to simplify our capital structure
so that after the exchange, we would have enough shares of common stock for our
public offering and we could offer our common stock to the public without a
class designation. The exchange will be effective as of the effectiveness of the
registration statement of which this prospectus is a part. Our stockholders will
exchange their shares of Class A Common Stock and Class B Common Stock for an
aggregate of 29,273,329 shares of common stock and 3,476,671 shares of
non-voting convertible common stock. Each existing share will be exchanged at a
rate of one existing share for 3,093.124292 new shares. The completion of the
exchange is conditioned upon the effectiveness of the registration statement,
the filing of the Company's restated certificate of incorporation and no pending
lawsuit or action that may prevent the completion of the transaction.
On May 7, 1999, we amended our existing credit facility with First Union
National Bank, as the administrative agent. The credit facility provides for a
$150 million term loan and a $15 million revolving loan commitment. In
connection with the credit facility, we paid First Union National Bank usual and
customary fees. We are currently in negotiations with First Union National Bank
for a commitment letter and term sheet to amend or replace the credit facility.
First Union National Bank is an affiliate of First Union Corporation, which
beneficially owns more than 10% of our common stock. For a more complete
description of the credit facility, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Kinder Morgan,
Inc. -- Credit Facilities."
Under Kinder Morgan Energy Partners' partnership agreement, Kinder Morgan
Energy Partners reimburses Kinder Morgan G.P., Inc. for its general and
administrative expenses incurred on behalf of Kinder Morgan Energy Partners. We
acquired Kinder Morgan G.P., Inc. in February 1997. Kinder Morgan Energy
Partners reimbursed Kinder Morgan G.P., Inc. for general and administrative
expenses of:
- $37.1 million for the year ended 1998; and
- $5.9 million for the year ended 1997.
The terms of all of the above transactions were at least as favorable to us as
those that could have been secured in arm's-length transactions.
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<PAGE> 69
SECURITY OWNERSHIP OF PRINCIPAL BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the beneficial ownership of our common stock that
will be issued upon the completion of the transactions contemplated in this
prospectus and held by:
- beneficial owners of 5% or more of our common stock and our non-voting
convertible common stock;
- our directors and those individuals indicated in this prospectus who will
be directors after the completion of this offering;
- our executive officers who are listed in the summary compensation table
in this prospectus; and
- our directors and executive officers as a group.
The shares shown below beneficially owned by William V. Morgan are owned by
Morgan Associates, Inc., a Kansas corporation, wholly-owned by Mr. Morgan.
The shares shown below beneficially owned by First Union Corporation
consist of 3,476,671 shares of non-voting convertible common stock and 1,435,209
shares of common stock. Upon completion of the offering, First Union Corporation
will own approximately 4.9% of our outstanding voting common stock. "Percent of
Class" shown in the table below is the percent of our outstanding aggregate
shares of common stock and non-voting convertible common stock.
The shares beneficially owned include both outstanding common stock and
common stock a person has the right to acquire within 60 days after the date of
this prospectus by exercise of non-voting convertible common stock, subject to
specific restrictions with respect to holders subject to the Bank Holding
Company Act of 1956. The asterisks in the table mean that the person holds less
than 1% of the shares.
<TABLE>
<CAPTION>
PERCENT OF CLASS
SHARES -------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
First Union Corporation................................... 4,911,880 15.00% 12.28%
One First Union Center
Charlotte, North Carolina 28288
Richard D. Kinder......................................... 19,319,036 58.99% 48.30%
William V. Morgan......................................... 7,291,113 22.26% 18.23%
Fayez Sarofim............................................. -- -- --
Ted A. Gardner............................................ 182,494 * *
Gary Hultquist............................................ -- -- --
David G. Dehaemers, Jr.................................... -- -- --
Michael C. Morgan......................................... -- -- --
All directors and executive officers as a group (7
persons)................................................ 26,792,643 81.81% 66.98%
========== ===== =====
</TABLE>
66
<PAGE> 70
DESCRIPTION OF OUR CAPITAL STOCK
Upon completion of the offering, the common stock offered in this
prospectus will be registered under the Securities Act of 1933. We will be
required to file periodic reports containing financial and other information
with the SEC.
Our restated certificate of incorporation currently authorizes our board of
directors to issue 25,000 shares of Class A Common Stock, of which 8,047 shares
are issued and outstanding, and 25,000 shares of Class B Common Stock, of which
2,541 shares are issued and outstanding. Our stockholders have approved the
restatement of our certificate of incorporation and our bylaws, the forms of
which are attached as exhibits to the registration statement of which this
prospectus is part. The newly restated certificate of incorporation will be
filed with the Secretary of State of Delaware as of the date of the
effectiveness of the registration statement. The following describes our capital
stock and the related rights as of the completion of the offering.
COMMON STOCK
Our restated certificate of incorporation authorizes our board of directors
to issue up to 215,000,000 shares of capital stock each with a par value of
$0.01 per share, of which:
- 5,000,000 shares are designated as preferred stock;
- 200,000,000 shares are designated as common stock, 36,523,329 shares of
which will be outstanding as of the completion of the offering, not
including any shares of common stock to be issued upon exercise of stock
options to be issued upon completion of the offering; and
- 10,000,000 shares are designated as non-voting convertible common stock,
3,476,671 shares of which will be outstanding as of the completion of the
offering.
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Each holder of non-voting convertible common stock is not entitled to
any voting rights. Each share of non-voting convertible common stock is
convertible, at the holder's option, subject to specific restrictions with
respect to holders subject to the Bank Holding Company Act of 1956, into one
share of common stock. Other than voting and conversion rights, the rights of
the common stock and non-voting convertible common stock are identical.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, holders of common stock and non-voting convertible
common stock are entitled to receive dividends, if any, as may be declared from
time to time by our board of directors. In the event of our liquidation,
dissolution or winding up, holders of common stock and non-voting convertible
common stock would be entitled to share in our assets remaining after the
payment of liabilities and liquidation preferences on any outstanding preferred
stock.
Holders of common stock and non-voting convertible common stock have no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock or the
non-voting convertible common stock. All outstanding shares of common stock and
non-voting convertible common stock are fully paid and nonassessable. The shares
of common stock offered by us in this offering, when issued and paid for, will
be fully paid and nonassessable.
The rights of the holders of the common stock may be modified by the board
of directors by amending our restated bylaws by a majority vote at any regular
or special meeting of our board of directors.
PREFERRED STOCK
Our board of directors is authorized to issue, without stockholder
authorization, in one or more designated series, up to 5,000,000 shares of
preferred stock with dividend, redemption, conversion and
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<PAGE> 71
exchange provisions as are provided in the particular series. Except as
expressly provided by law or as may be provided by resolution of our board of
directors, the preferred stock shall have no right or power to vote on any
question or in any proceeding or to be represented at, or to receive notice of,
any meeting of our stockholders. The issuance of preferred stock, or the
perception that an issuance might occur, could have the effect of delaying or
preventing a change in control transaction related to us.
We have established and designated two series of our preferred stock known
as:
- Series A Junior Participating Preferred Stock, par value $0.01 per share,
consisting of an aggregate of 200,000 shares; and
- Series B Junior Participating Preferred Stock, par value $0.01 per share,
consisting of an aggregate of 10,000 shares.
None of these series of preferred stock or any other shares of preferred stock
are issued or outstanding and our board of directors has no present plans to
issue any of the preferred stock other than the preferred stock subject to the
rights agreement described below.
REGISTRATION RIGHTS
According to the terms of an amended and restated registration rights
agreement to be effective upon the effectiveness of the registration statement
of which this prospectus is a part, our stockholders prior to this offering will
be entitled to demand registration rights for the 32,750,000 shares of our
capital stock outstanding prior to this offering any time after we become
eligible to file a registration statement on Form S-3. We shall not be required
to effect more than two registration statements for the holders of a majority of
those stockholders, other than Messrs. Kinder and Morgan, or more than two
registration statements for Messrs. Kinder and Morgan. We are not required to
effect more than one registration statement in any six month period. If our
board of directors determines a demand registration would have an adverse effect
on us, we may delay any demand registration for a period not to exceed 90 days.
In addition, these stockholders may participate in any public offering by us of
our common stock, other than this offering or an offering under a registration
statement on Form S-4 or Form S-8 or any other forms not available for
registering capital stock for sale to the public, subject to marketing
considerations as determined by our managing underwriter for that offering.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CHARTER AND BYLAW PROVISIONS
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. This section prevents a Delaware corporation
from engaging in a business combination which includes a merger or sale of more
than 10% of the corporation's assets with a stockholder who owns 15% or more of
the corporation's outstanding voting stock, as well as affiliates and associates
of any of those persons. That prohibition extends for three years following the
date that stockholder acquired that amount of stock unless:
- the transaction in which that stockholder acquired the stock is approved
by the board of directors prior to that date;
- upon completion of the transaction that resulted in the acquisition of
the stock, the stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
those shares owned by various employee benefit plans or persons who are
directors and also officers; or
- on or after the date the stockholder acquired the stock, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
stockholder.
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<PAGE> 72
A corporation may, at its option, exclude itself from Section 203 of the
Delaware General Corporation Law by amending its certificate of incorporation or
bylaws by action of its stockholders. The charter or bylaw amendment shall not
become effective until 12 months after the date it is adopted or applies to a
stockholder. We have not adopted that charter or bylaw amendment.
The terms of our restated certificate of incorporation, as well as the
concentration of ownership of the common stock and our ability to issue up to
five million shares of preferred stock may have the effect of discouraging
proposals by others to acquire a controlling interest in us, which could deprive
our stockholders of the opportunity to consider an offer to acquire their shares
at a premium price to them.
These provisions of our restated certificate of incorporation include:
- a classified board of directors consisting of three classes of directors
with each class to be elected separately in succeeding years;
- our directors may fix the number of our directors;
- any newly created directorship resulting from an increase in the number
of directors or a vacancy on our board of directors shall generally be
filled only by vote of a majority of the remaining directors in office,
even though less than a quorum;
- special meetings of our stockholders may be called only by our chairman
of the board or by a majority of our entire board of directors and no
stockholder or group of stockholders may call a special meeting of our
stockholders;
- the exclusive authority of our chairman to determine the procedures and
order of any stockholder meeting;
- subject to the rules of the New York Stock Exchange and for as long as
Richard D. Kinder and William V. Morgan own a majority of the outstanding
shares of common stock, the ability of a majority of our stockholders to
act by written consent;
- the power of our board of directors to make all decisions for any rights
plan adopted by our board of directors; and
- the requirement of a vote of 80% of our outstanding stockholders voting
as a single class to amend many of these anti-takeover provisions of our
restated certificate of incorporation.
In addition, our restated bylaws also include anti-takeover provisions
which include specific procedures for a stockholder to propose a nomination of
directors or proposals for other business for action at a stockholders meeting.
The existence of these provisions in our restated certificate of
incorporation and in our restated bylaws may reduce the market price of our
common stock.
These provisions of our restated certificate of incorporation, our restated
bylaws and of Section 203 of the Delaware General Corporation Law, together with
the ability of the board of directors to issue stock without further stockholder
action, could delay or frustrate the removal of incumbent directors or the
assumption of control by the holder of a large block of common stock even if the
removal or assumption would be beneficial, in the short term, to our
stockholders. The provisions could also discourage or make more difficult a
merger, tender offer or proxy contest even if the event would be favorable to
the interests of our stockholders.
The foregoing is a summary of the provisions of our restated certificate of
incorporation and restated bylaws. You are directed to the full text of these
documents which are attached as exhibits to the registration statement of which
this prospectus is part.
RIGHTS TO PURCHASE PREFERRED STOCK
Each share of our common stock and non-voting convertible common stock has
attached to it a right to purchase a share of our preferred stock. The rights
initially are
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represented only by the certificates for the common stock and non-voting
convertible common stock. The rights will not trade separately from the common
stock and non-voting convertible common stock until:
- there is a public announcement that a person or group other than various
stockholders prior to this offering has become a beneficial owner of 15%
or more of our outstanding common stock offering; or
- ten business days pass, or any later date as our board of directors may
fix by resolution, after the date a person or group commences a tender or
exchange offer that would result in that person or group becomes a
beneficial owner of 15% or more of our stock.
The rights can be exercised if and when the rights separate and prior to
the date of our announcement that any person or group has attained that status,
referred to as an acquiring person. Each right will entitle the holder to
purchase:
- 1/1000 of a share of Series A Junior Participating Preferred Stock for a
right relating to our common stock, or
- 1/1000 of a share of Series B Junior Participating Preferred Stock for a
right relating to our non-voting convertible common stock.
In either case, the exercise price for each right will be $ . Each
1/1000 of a share of Series A Junior Participating Preferred Stock and Series B
Junior Participating Preferred Stock will have economic and voting terms
equivalent to one share of our common stock or non-voting convertible common
stock, respectively.
Upon the date of the public announcement that any person or group has
become an acquiring person, each right will entitle its holder to purchase, for
the exercise price, a number of shares of common stock, that have a market value
of twice the exercise price. Each share of non-voting convertible common stock
will have a similar right to purchase non-voting convertible common stock for
the exercise price. Rights beneficially owned by acquiring persons or their
transferees will be void.
If we are involved in a merger or other business combination transaction or
50% or more of our consolidated assets or earning power are sold, after the date
of the public announcement that any person or group has become an acquiring
person, each holder of a right will have the right to receive a number of shares
of common stock or non-voting convertible common stock of the acquiring company
that have a market value of two times the exercise price of the right. The right
must be exercised at the then current exercise price of the right.
At any time after any person becomes an acquiring person and prior to the
acquisition by any person or group of a majority of our outstanding common
stock, our board of directors may exchange the rights at an exchange ratio of
one share of common stock per right, subject to adjustment. The rights may be
redeemed by our board of directors for $0.01 per right at any time prior to the
date of the public announcement that any person has become an acquiring person.
An acquiring persons' rights will be void and need not be redeemed or exchanged.
The terms of the rights may be amended by our board of directors without
the consent of the holders of the rights, except after the time that any person
becomes an acquiring person, when no amendment may be adopted which adversely
affects the interests of the holders of the rights other than the acquiring
person and its affiliates and associates. Until a right is exercised, the holder
will have no rights as our stockholder based on that right.
The rights will not prevent our takeover. However, the rights may cause
substantial dilution to a person or group that acquires 15% or more of our
common stock unless the rights are first redeemed by our board of directors.
This is just a summary of the rights and is qualified in its entirety by
reference to the rights agreement, which is attached as an exhibit to the
registration statement of which this prospectus is a part.
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TRANSFER AGENT AND REGISTRAR
EquiServe has agreed to serve as registrar and transfer agent for the
common stock and will receive a fee from us for serving in those capacities. All
fees charged by the transfer agent for transfers of common stock will be borne
by us and not by the holders of common stock, except that fees similar to those
customarily paid by stockholders for surety bond premiums to replace lost or
stolen certificates, taxes and other governmental charges, special charges for
services requested by a holder of common stock and other similar fees or charges
will be borne by the affected holder. There will be no charge to the holders of
our common stock for disbursements by us of cash distributions. We will
indemnify the transfer agent, its agents and each of their respective
shareholders, directors, officers and employees against all claims and losses
that may arise out of acts performed or omitted in respect of its activities,
except for any liability due to any negligence, gross negligence, bad faith or
intentional misconduct of the indemnified person or entity.
RESIGNATION OR REMOVAL
The transfer agent may at any time resign, by notice to us, or be removed
by us, that resignation or removal to become effective upon the appointment by
us of a successor transfer agent and registrar and its acceptance of that
appointment. If no successor has been appointed and accepted that appointment
within 30 days after notice of that resignation or removal, we are authorized to
act as the transfer agent and registrar until a successor is appointed.
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MATERIAL PROVISIONS OF
KINDER MORGAN ENERGY PARTNERS' PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of Kinder
Morgan Energy Partners' partnership agreement which could impact our results of
operations and/or those of Kinder Morgan Energy Partners. A copy of the
partnership agreement is filed as an exhibit to the registration statement of
which this prospectus is a part. Unless otherwise specifically described,
references in this prospectus to the term "partnership agreement" constitute
references to the partnership agreements of Kinder Morgan Energy Partners and
its operating partnerships collectively. The following discussion is qualified
in its entirety by reference to the partnership agreements for Kinder Morgan
Energy Partners and its operating partnerships.
ORGANIZATION AND DURATION
Kinder Morgan Energy Partners and each of the operating partnerships are
Delaware limited partnerships. Unless liquidated or dissolved at an earlier
time, under the terms of the partnership agreement, Kinder Morgan Energy
Partners and each of the operating partnerships will dissolve on December 31,
2082.
PURPOSE
The purpose of Kinder Morgan Energy Partners under the partnership
agreement is to serve as the limited partner in the operating partnerships and
to conduct any other business that may be lawfully conducted by a Delaware
limited partnership.
RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER
The authority of the general partner is limited in some respects under the
partnership agreement. The general partner is prohibited, without the prior
approval of holders of record of a majority of the outstanding units from, among
other things, selling or exchanging all or substantially all of Kinder Morgan
Energy Partners' assets in a single transaction or a series of related
transactions, including by way of merger, consolidation or other combination, or
approving on behalf of Kinder Morgan Energy Partners the sale, exchange or other
disposition of all or substantially all of the assets of Kinder Morgan Energy
Partners, provided that Kinder Morgan Energy Partners may mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of Kinder
Morgan Energy Partners' assets without that approval. Kinder Morgan Energy
Partners may sell all or substantially all of its assets under a foreclosure or
other realization upon the foregoing encumbrances without that approval. Except
as provided in the partnership agreement, any amendment to a provision of the
partnership agreement generally will require the approval of the holders of at
least 66 2/3% of the units. The general partner's ability to sell or otherwise
dispose of Kinder Morgan Energy Partners' assets is restricted by the terms of
Kinder Morgan Energy Partners' credit facility.
In general, the general partner may not take any action, or refuse to take
any reasonable action, without the consent of the holders of at least a majority
of the outstanding units of Kinder Morgan Energy Partners other than units owned
by the general partner and its affiliates, that would cause Kinder Morgan Energy
Partners to be treated as an association taxable as a corporation or otherwise
taxed as an entity for federal income tax purposes.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The general partner has agreed not to voluntarily withdraw as general
partner of Kinder Morgan Energy Partners prior to January 1, 2003 without the
approval of at least a majority of the outstanding units and furnishing an
opinion of counsel that the withdrawal will not cause Kinder Morgan Energy
Partners to be treated as an association taxable as a corporation or otherwise
taxed as an entity for federal income tax purposes or result in the loss of the
limited liability of any limited partner.
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On or after January 1, 2003, the general partner may without first
obtaining approval from the holders of units withdraw as general partner by
giving 90 days' written notice, and the withdrawal will not constitute a breach
of the partnership agreement. If an opinion of counsel cannot be obtained to the
effect that following the selection of a successor the general partner's
withdrawal would not result in the loss of limited liability of the holders of
units or cause Kinder Morgan Energy Partners to be treated as an association
taxable as a corporation or otherwise taxed as an entity for federal income tax
purposes, Kinder Morgan Energy Partners will be dissolved after the withdrawal.
However, the general partner may withdraw without approval of the holders of
units upon 90 days' notice to the limited partners if more than 50% of the
outstanding units, other than those held by the withdrawing general partner and
its affiliates, are held or controlled by one person and its affiliates. In
addition, the partnership agreement does not restrict Kinder Morgan, Inc.'s
ability to sell directly or indirectly, all or any portion of the capital stock
of the general partner to a third party without the approval of the holders of
units.
The general partner may not be removed unless the removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding units,
excluding units held by the general partner and its affiliates, provided that
specific other conditions are satisfied. Any removal is subject to the approval
of the successor general partner by the same vote and receipt of an opinion of
counsel that the removal and the approval of a successor will not result in the
loss of limited liability of any limited partner or cause Kinder Morgan Energy
Partners to be treated as an association taxable as a corporation or otherwise
taxed as an entity for federal income tax purposes.
If the withdrawal of the general partner where the withdrawal violates the
partnership agreement or removal of the general partner by the limited partners
under circumstances where cause exists, a successor general partner will have
the option to acquire the general partner interest of the departing general
partner in Kinder Morgan Energy Partners for a cash payment equal to the fair
market value of the interest. Under all other circumstances where the general
partner withdraws or is removed by the limited partners, the departing partner
will have the option to require the successor general partner to acquire the
general partner interest of the departing partner for that amount. In each case
the fair market value will be determined by agreement between the departing
partner and the successor general partner, or if no agreement is reached, by an
independent investment banking firm or other independent expert selected by the
departing partner and the successor general partner. If no expert can be agreed
upon, by the expert chosen by agreement of the expert selected by each of them.
In addition, Kinder Morgan Energy Partners would also be required to reimburse
the departing partner for all amounts due the departing partner, including
without limitation all employee related liabilities, including severance
liabilities, incurred in connection with the termination of the employees
employed by the departing partner for the benefit of Kinder Morgan Energy
Partners.
If the above-described option is not exercised by either the departing
partner or the successor general partner, as applicable, the departing partner's
general partner interest in Kinder Morgan Energy Partners will be converted into
units equal to the fair market value of the interest as determined by an
investment banking firm or other independent expert selected in the manner
described in the preceding paragraph.
The general partner may transfer all, but not less than all, of its general
partner interest in Kinder Morgan Energy Partners without the approval of the
limited partners to one of its affiliates or upon its merger or consolidation
into another entity or the transfer of all or substantially all of its assets to
another entity, provided in either case that entity:
- assumes the rights and duties of the general partner;
- agrees to be bound by the provisions of the partnership agreement; and
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- furnishes an opinion of counsel that the transfer would not result in the
loss of the limited liability of any limited partner or cause Kinder
Morgan Energy Partners to be treated as an association taxable as a
corporation or otherwise cause Kinder Morgan Energy Partners to be
subject to entity level taxation for federal income tax purposes.
In the case of any other transfer of the general partner interest in Kinder
Morgan Energy Partners, in addition to the foregoing requirements, the approval
of at least a majority of the units is required, excluding for those purposes
those interests held by the general partner and its affiliates.
Upon the withdrawal or removal of the general partner, Kinder Morgan Energy
Partners will be dissolved, wound up and liquidated, unless:
- the withdrawal or removal takes place following the approval of a
successor general partner; or
- within 180 days after the withdrawal or removal a majority of the holders
of units agree in writing to continue the business of Kinder Morgan
Energy Partners and to the appointment of a successor general partner.
ANTI-TAKEOVER AND RESTRICTED VOTING RIGHT PROVISIONS
The partnership agreement contains various provisions that are intended to
discourage a person or group from attempting to remove the general partner or
otherwise change the management of Kinder Morgan Energy Partners. If any person
or group other than the general partner and its affiliates acquires beneficial
ownership of 20% or more of the units, that person or group loses any and all
voting rights for all of the units beneficially owned or held by that person.
ISSUANCE OF ADDITIONAL SECURITIES
The partnership agreement allows the general partner to issue additional
limited or general partner interests and authorizes the general partner to cause
Kinder Morgan Energy Partners to issue additional securities of Kinder Morgan
Energy Partners for consideration and on terms and conditions as the general
partner establishes in its sole discretion without the approval of any limited
partners. In accordance with Delaware law and the partnership agreement, the
general partner may issue additional partnership interests, which, in its sole
discretion, may have special voting rights to which the units are not entitled.
LIMITED PRE-EMPTIVE RIGHT OF GENERAL PARTNER
The general partner has the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase units or other equity
securities of Kinder Morgan Energy Partners from Kinder Morgan Energy Partners
whenever, and on the same terms that, Kinder Morgan Energy Partners issues
securities to persons other than the general partner and its affiliates, to the
extent necessary to maintain the percentage interest of the general partner and
its affiliates in Kinder Morgan Energy Partners to that which existed
immediately prior to each that issuance.
LIMITED CALL RIGHT
If at any time 80% or more of the units are held by the general partner and
its affiliates, the general partner will have the right, which it may assign and
transfer to any of its affiliates or to Kinder Morgan Energy Partners, to
purchase all of the remaining units as of a record date to be selected by the
general partner, on at least 10 but not more than 60 days' notice. The purchase
price in the event of that purchase shall be the greater of:
- the average fair market price of limited partner interests of that class
as of the date five days prior to the mailing of written notice of its
election to purchase limited partner interests of that class; and
- the highest cash price paid by the general partner or any of its
affiliates for any units purchased within the 90 days preceding the date
the general
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partner mails notice of its election to purchase those units.
AMENDMENT OF PARTNERSHIP AGREEMENT AND
OTHER AGREEMENTS
Amendments to the partnership agreement may be proposed only by or with the
consent of the general partner. In order to adopt a proposed amendment, the
general partner is required to seek the written approval of the holders of the
number of units required to either approve an amendment or call a meeting of the
limited partners to consider and vote upon the proposed amendment, except as
described below. Proposed amendments must be approved by the holders of at least
66 2/3% of the outstanding units. Notwithstanding that requirement, no amendment
may be made which would:
- enlarge the obligations of any limited partner, without its consent;
- enlarge the obligations of the general partner, without its consent,
which may be given or withheld in its sole discretion;
- restrict in any way any action or right of the general partner as
described in the partnership agreement;
- modify the amounts distributable, reimbursable or otherwise payable by
Kinder Morgan Energy Partners to the general partner;
- change the term of existence of Kinder Morgan Energy Partners; or
- give any person the right to dissolve Kinder Morgan Energy Partners other
than the general partner's right to dissolve Kinder Morgan Energy
Partners with the approval of a majority of the outstanding units or
change the right of the general partner in any way.
The general partner may make amendments to the partnership agreement
without the approval of any limited partner or assignee of Kinder Morgan Energy
Partners to reflect:
- a change in the name of Kinder Morgan Energy Partners, the location of
the principal place of business of Kinder Morgan Energy Partners, the
registered agent or the registered office of Kinder Morgan Energy
Partners;
- admission, substitution, withdrawal or removal of partners in accordance
with the partnership agreement;
- a change that, in the sole discretion of the general partner, is
reasonable and necessary, or appropriate, to qualify or continue the
qualification of Kinder Morgan Energy Partners as a partnership in which
the limited partners have limited liability; or make a change that is
necessary or advisable in the opinion of the general partner to ensure
that Kinder Morgan Energy Partners will not be treated as an association
that is taxable as a corporation or otherwise subject to taxation as an
entity for federal income tax purposes;
- an amendment that is necessary, in the opinion of counsel to Kinder
Morgan Energy Partners, to prevent Kinder Morgan Energy Partners, the
general partner or their respective directors or officers from being in
any manner subject to the provisions of the Investment Company Act of
1940, the Investment Advisors Act of 1940, or the "plan asset"
regulations adopted under the Employee Retirement Income Security Act of
1974, regardless whether or not the regulations are substantially similar
to plan asset regulations currently applied or proposed by the United
States Department of Labor;
- an amendment that in the sole discretion of the general partner is
necessary or desirable in connection with the authorization of additional
limited or general partner interests;
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- any amendment expressly permitted in the partnership agreement to be made
by the general partner acting alone;
- an amendment effected, required or contemplated by a merger agreement
that has been approved under the terms of the partnership agreement; and
- any other amendments substantially similar to the foregoing.
In addition, the general partner may make amendments to the partnership
agreement without the consent of the holders if the amendments:
- do not adversely affect the limited partners in any material respect;
- are necessary or desirable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, ruling or regulation of
any federal or state agency or judicial authority or contained in any
federal or state statute;
- are necessary or desirable to facilitate the trading of the units or to
comply with any rule, regulation, guideline or requirement of any
securities exchange on which the units are or will be listed for trading,
compliance with any of which the general partner deems to be in the best
interests of Kinder Morgan Energy Partners and the holders of units; or
- are required to effect the intent of, or as contemplated by, the
partnership agreement.
The general partner will not be required to obtain an opinion of counsel as
to the tax consequences or the possible effect on limited liability of
amendments described in the two immediately preceding paragraphs. No other
amendments to the partnership agreement will become effective without the
approval of at least 95% of the units unless Kinder Morgan Energy Partners
obtains an opinion of counsel to the effect that amendment:
- will not cause Kinder Morgan Energy Partners to be treated as an
association taxable as a corporation or otherwise cause Kinder Morgan
Energy Partners to be subject to entity level taxation for federal income
tax purposes; and
- will not affect the limited liability of any limited partner in Kinder
Morgan Energy Partners or the limited partner of the operating
partnerships.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of limited partner interests in relation to
other types or classes of limited partner interests or the general partner
interests will require the approval of at least 66 2/3% of the type or class of
limited partner interests so affected.
MANAGEMENT
The general partner will manage and operate the activities of Kinder Morgan
Energy Partners, and the general partner's activities will be limited to the
management and operation. Holders of units will not direct or participate in the
management or operations of Kinder Morgan Energy Partners or any of the
operating partnerships. The general partner will owe a fiduciary duty to the
holders of units. Regardless of any limitation on obligations or duties, the
general partner will be liable, as the general partner of Kinder Morgan Energy
Partners, for all the debts of Kinder Morgan Energy Partners to the extent they
are not paid by Kinder Morgan Energy Partners, except to the extent that
indebtedness incurred by Kinder Morgan Energy Partners is made specifically non-
recourse for the general partner.
Kinder Morgan Energy Partners does not currently have any directors,
officers or employees. As is commonly the case with publicly-traded limited
partnerships, Kinder Morgan Energy Partners does not currently contemplate that
it will directly employ any of the persons responsible for managing or operating
Kinder Morgan Energy Partners'
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business or for providing it with services, and will instead reimburse the
general partner or its affiliates for the services of those persons.
REIMBURSEMENT OF EXPENSES. The general partner will receive no management
fee or similar compensation for its management of Kinder Morgan Energy Partners,
other than cash distributions. However, the general partner is entitled under
the partnership agreement to reimbursement on a monthly basis, or other basis as
the general partner may determine in its sole discretion, for all direct and
indirect expenses it incurs or payments it makes on behalf of Kinder Morgan
Energy Partners and all other necessary or appropriate expenses that can be
allocated to Kinder Morgan Energy Partners or otherwise reasonably incurred by
the general partner in connection with operating Kinder Morgan Energy Partners'
business. The partnership agreement provides that the general partner will
determine the fees and expenses that can be allocated to Kinder Morgan Energy
Partners in any reasonable manner determined by the general partner in its sole
discretion. The reimbursement for costs and expenses will be in addition to any
reimbursement to the general partner and its affiliates as a result of the
indemnification provisions of the partnership agreement.
INDEMNIFICATION. The partnership agreement provides that Kinder Morgan
Energy Partners will indemnify the general partner, any departing partner and
any person who is or was an officer or director of the general partner or any
departing partner, to the full extent permitted by law. Kinder Morgan Energy
Partners may also indemnify, any person who is or was an affiliate of the
general partner or any departing partner, any person who is or was an officer,
director, employee, partner, agent or trustee of the general partner, any
departing partner or any affiliate, or any person who is or was serving at the
request of the general partner or any affiliate of the general partner or any
departing partner as an officer, director, employee, partner, agent, or trustee
of another person. That indemnification may be made to the extent deemed
advisable by the general partner and to the full extent permitted by law.
Kinder Morgan Energy Partners' indemnification of these persons relates to
any and all losses, claims, damages, joint or several liabilities, expenses,
judgments, fines, penalties, interest, settlement and other amounts arising from
any and all claims, demands, actions, suits or proceedings, whether civil,
criminal, administrative or investigative, in which any indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as:
- the general partner, a departing partner or affiliate of either;
- an officer, director, employee, partner, agent or trustee of the general
partner, any departing partner or affiliate of either; or
- a person serving at the request of Kinder Morgan Energy Partners in
another entity in a similar capacity.
In each case the indemnitee must have acted in good faith and in a manner
which the indemnitee believed to be in or not opposed to the best interests of
Kinder Morgan Energy Partners. For any criminal proceeding, the indemnitee must
have had no reasonable cause to believe its conduct was unlawful. Any
indemnification under the partnership agreement will only be paid out of the
assets of Kinder Morgan Energy Partners, and the general partner will not be
personally liable for, or have any obligation to contribute or loan funds or
assets to Kinder Morgan Energy Partners to enable that indemnification. Kinder
Morgan Energy Partners is authorized to purchase or to reimburse the general
partner or its affiliates for the cost of insurance purchased on behalf of the
general partner and other persons. That purchase may be made as the general
partner determines against liabilities asserted against and expenses incurred by
those persons in connection with Kinder Morgan Energy Partners' activities,
whether or not Kinder Morgan Energy Partners would have the power to indemnify
that person against liabilities under the provisions described above.
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CONFLICTS AND AUDIT COMMITTEE. One or more directors who are neither
officers nor employees of the general partner or any of its affiliates will
serve as a conflicts and audit committee of the board of directors of the
general partner and will, at the request of the general partner, review specific
matters as to which the general partner believes there may be a conflict of
interest in order to determine if the resolution of that conflict proposed by
the general partner is fair and reasonable to Kinder Morgan Energy Partners. The
conflicts and audit committee will only review matters at the request of the
general partner, which has sole discretion to determine which matters to submit
to that committee. Any matters approved by the conflicts and audit committee
will be conclusively deemed to be fair and reasonable to Kinder Morgan Energy
Partners, approved by all partners of Kinder Morgan Energy Partners and not a
breach by the general partner of the partnership agreement or any duties it may
owe to Kinder Morgan Energy Partners. Additionally, it is possible that the
procedure in itself may constitute a conflict of interest.
TERMINATION AND DISSOLUTION
Kinder Morgan Energy Partners will continue until December 31, 2082, unless
sooner terminated under the partnership agreement. Kinder Morgan Energy Partners
will be dissolved upon:
- the election of the general partner to dissolve Kinder Morgan Energy
Partners, if approved by a majority of the units;
- the sale of all or substantially all of the assets and properties of
Kinder Morgan Energy Partners and its operating partnerships;
- the bankruptcy or dissolution of the general partner; or
- the withdrawal or removal of the general partner or any other event that
results in its ceasing to be the general partner other than by reason of
a transfer in accordance with the partnership agreement or withdrawal or
removal following approval of a successor.
However, Kinder Morgan Energy Partners will not be dissolved upon the
removal of a general partner if within 90 days after that event the partners
agree in writing to continue the business of Kinder Morgan Energy Partners and
to the appointment, effective as of the date of that event, of a successor
general partner. Upon a dissolution under bankruptcy, dissolution of the general
partner or withdrawal or removal of the general partner, at least a majority of
the units may also elect, within some time limitations, to reconstitute Kinder
Morgan Energy Partners and continue its business on the same terms and
conditions described in the partnership agreement by forming a new limited
partnership on terms identical to those described in the partnership agreement
and having as a general partner an entity approved by at least a majority of the
units, subject to receipt by Kinder Morgan Energy Partners of an opinion of
counsel that the exercise of that right will not result in the loss of the
limited liability of holders of units or cause Kinder Morgan Energy Partners or
the reconstituted limited partnership to be treated as an association taxable as
a corporation or otherwise subject to taxation as an entity for federal income
tax purposes.
CASH DISTRIBUTION POLICY
A principal objective of Kinder Morgan Energy Partners is to generate cash
from Kinder Morgan Energy Partners operations and to distribute available cash
to its partners in the manner described herein. Available cash generally means,
for any calendar quarter, all cash received by Kinder Morgan Energy Partners
from all sources, less all of its cash disbursements and net additions to
reserves. For purposes of cash distributions to holders of units, the term
available cash excludes the amount paid in respect of the 0.5% special limited
partner interest in SFPP, L.P. owned by the former general partner of SFPP,
L.P., which amount will equal 0.5% of the total cash distributions made each
quarter by SFPP, L.P. to its partners.
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The general partner's decisions regarding amounts to be placed in or
released from reserves may have a direct impact on the amount of available cash.
This is because increases and decreases in reserves are taken into account in
computing available cash. The general partner may, in its reasonable discretion,
subject to various limits, determine the amounts to be placed in or released
from reserves each quarter.
Cash distributions will be characterized as either distributions of cash
from operations or cash from interim capital transactions. This distinction
affects the amounts distributed to holders of units relative to the general
partner.
Cash from operations generally refers to the cash balance of Kinder Morgan
Energy Partners on the date Kinder Morgan Energy Partners commenced operations,
plus all cash generated by the operations of Kinder Morgan Energy Partners'
business, after deducting related cash expenditures, reserves, debt service and
various other items.
Cash from interim capital transactions will generally be generated only by
borrowings, sales of debt and equity securities and sales or other dispositions
of assets for cash, other than inventory, accounts receivable and other current
assets and assets disposed of in the ordinary course of business.
To avoid the difficulty of trying to determine whether available cash
distributed by Kinder Morgan Energy Partners is cash from operations or cash
from interim capital transactions, all available cash distributed by Kinder
Morgan Energy Partners from any source will be treated as cash from operations
until the sum of all available cash distributed as cash from operations equals
the cumulative amount of cash from operations actually generated from the date
Kinder Morgan Energy Partners commenced operations through the end of the
calendar quarter prior to that distribution. Any excess available cash,
irrespective of its source, will be deemed to be cash from interim capital
transactions and distributed accordingly.
If cash from interim capital transactions is distributed to each unit in an
aggregate amount per unit equal to the initial unit price of $11.00, the
distinction between cash from operations and cash from interim capital
transactions will cease, and both types of available cash will be treated as
cash from operations. The general partner does not anticipate that there will be
significant amounts of cash from interim capital transactions distributed.
The discussion below indicates the percentages of cash distributions
required to be made to the general partner and the holders of units. In the
following general discussion of how available cash is distributed, references to
available cash, unless otherwise stated, mean available cash that constitutes
cash from operations.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH. Kinder Morgan Energy Partners
will make distributions to its partners for each calendar quarter prior to
liquidation in an amount equal to 100% of its available cash for that quarter.
DISTRIBUTIONS OF CASH FROM OPERATIONS. Distributions by Kinder Morgan
Energy Partners of available cash constituting cash from operations for any
quarter will be made in the following manner:
- first, 98% to the holders of units pro rata and 2% to the general partner
until the holders of units have received a total of $0.3025 per unit for
that quarter in respect of each unit;
- second, 85% of any available cash then remaining to the holders of units
pro rata and 15% to the general partner until the holders of units have
received a total of $0.3575 per unit for that quarter in respect of each
unit;
- third, 75% of any available cash then remaining to all holders of units
pro rata and 25% to the general partner until the holders of units have
received a total of $0.4675 per unit for that quarter in respect of each
unit; and
- fourth, 50% of any available cash then remaining to all holders of units
pro rata and 50% to the general partner.
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In addition, if the first three distribution levels are reduced to zero, as
described below under "-- Quarterly Distributions of Available
Cash -- Adjustment of Target Distribution Levels" on page 80, all remaining
available cash will be distributed as cash from operations, 50% to the holders
of units pro rata and 50% to the general partner. These provisions are
inapplicable upon the dissolution and liquidation of Kinder Morgan Energy
Partners.
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS. Distributions on
any date by Kinder Morgan Energy Partners of available cash that constitutes
cash from interim capital transactions will be distributed 98% to all holders of
units pro rata and 2% to the general partner until Kinder Morgan Energy Partners
shall have distributed in respect of each unit available cash constituting cash
from interim capital transactions in an aggregate amount per unit equal to the
initial unit price.
As cash from interim capital transactions is distributed, it is treated as
if it were a repayment of the initial public offering price. To reflect that
repayment, the first three distribution levels will be adjusted downward by
multiplying each amount by a fraction, the numerator of which is the unrecovered
initial unit price immediately after giving effect to that repayment and the
denominator of which is the unrecovered initial unit price, immediately prior to
giving effect to that repayment. The unrecovered initial unit price includes the
amount by which the initial unit price exceeds the aggregate distribution of
cash from interim capital transactions per unit.
When payback of initial unit price is achieved, i.e., when the unrecovered
initial unit price is zero, then in effect the first three distribution levels
each will have been reduced to zero. Thereafter all distributions of available
cash from all sources will be treated as if they were cash from operations and
available cash will be distributed 50% to all holders of units pro rata and 50%
to the general partner.
ADJUSTMENT OF TARGET DISTRIBUTION LEVELS. The first three distribution
levels will be proportionately adjusted upward or downward, as appropriate, in
the event of any combination or subdivision of units, whether effected by a
distribution payable in units or otherwise, but not by reason of the issuance of
additional units for cash or property. For example, in connection with Kinder
Morgan Energy Partners' 2-for-1 split of the units on October 1, 1997, each of
the first three distribution levels were reduced to 50% of its initial level.
See "-- Quarterly Distributions of Available Cash -- Distributions of Cash from
Operations."
In addition, if a distribution is made of available cash constituting cash
from interim capital transactions, the first three distribution levels will be
adjusted downward proportionately, by multiplying each amount, as the same may
have been previously adjusted, by a fraction, the numerator of which is the
unrecovered initial unit price immediately after giving effect to that
distribution and the denominator of which is the unrecovered initial unit price
immediately prior to that distribution. For example, assuming the unrecovered
initial unit price is $11.00 per unit and if cash from interim capital
transactions of $5.50 per unit is distributed to holders of units, assuming no
prior adjustments, then the amount of the first three distribution levels would
each be reduced to 50% of its initial level. If and when the unrecovered initial
unit price is zero, the first three distribution levels each will have been
reduced to zero, and the general partner's share of distributions of available
cash will increase, in general, to 50% of all distributions of available cash.
The first three distribution levels may also be adjusted if legislation is
enacted which causes Kinder Morgan Energy Partners to become taxable as a
corporation or otherwise subjects Kinder Morgan Energy Partners to taxation as
an entity for federal income tax purposes. In that event, the first three
distribution levels for each quarter thereafter would be reduced to an amount
equal to the product of:
- each of the first three distribution levels multiplied by;
- one minus the sum of:
80
<PAGE> 84
- the maximum marginal federal income tax rate to which Kinder Morgan
Energy Partners is subject as an entity; plus
- any increase that results from that legislation in the effective overall
state and local income tax rate to which Kinder Morgan Energy Partners is
subject as an entity for the taxable year in which that quarter occurs,
after taking into account the benefit of any deduction allowable for
federal income tax purposes for the payment of state and local income
taxes.
For example, assuming Kinder Morgan Energy Partners was not previously
subject to state and local income tax, if Kinder Morgan Energy Partners were to
become taxable as an entity for federal income tax purposes and Kinder Morgan
Energy Partners became subject to a maximum marginal federal, and effective
state and local, income tax rate of 38%, then each of the distribution levels
would be reduced to 62% of the amount immediately prior to that adjustment.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of Kinder Morgan Energy Partners, unless Kinder Morgan
Energy Partners is reconstituted and continued as a new limited partnership, the
liquidator authorized to wind up the affairs of Kinder Morgan Energy Partners
will, acting with all of the powers of the general partner that the liquidator
deems necessary or desirable in its good faith judgment in connection therewith,
liquidate Kinder Morgan Energy Partners' assets and apply the proceeds of the
liquidation as follows:
- first towards the payment of all creditors of Kinder Morgan Energy
Partners and the creation of a reserve for contingent liabilities; and
- then to all partners in accordance with the positive balances in their
respective capital accounts.
Under some circumstances and subject to various limitations, the liquidator
may defer liquidation or distribution of Kinder Morgan Energy Partners' assets
for a reasonable period of time and/or distribute assets to partners in kind if
it determines that a sale would be impractical or would cause undue loss to the
partners.
Generally, any gain will be allocated between the holders of units and the
general partner in a manner that approximates their sharing ratios in the
various distribution levels. Holders of units and the general partner will share
in the remainder of Kinder Morgan Energy Partners' assets in proportion to their
respective capital account balances in Kinder Morgan Energy Partners.
Any loss or unrealized loss will be allocated to the general partner and
the holders of units: first, in proportion to the positive balances in the
partners' capital accounts until all the balances are reduced to zero; and
thereafter, to the general partner.
81
<PAGE> 85
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market or the availability of those shares for sale, could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon the closing of this offering, we will have an aggregate of 40,000,000
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options to purchase common
stock.
Of the 40,000,000 shares of common stock to be outstanding upon the closing
of this offering, the 7,250,000 shares offered in this prospectus will be
eligible for immediate sale in the public market without restriction, unless the
shares are purchased by our affiliates within the meaning of Rule 144 under the
Securities Act of 1933. The remaining 32,750,000 shares of common stock held by
existing stockholders upon the closing of this offering will be restricted
securities, as that term is defined in Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 under the Securities Act of
1933. Except as listed below, all of our directors, officers and stockholders
have agreed that, subject to specific limited exceptions, they will not sell,
directly or indirectly, any common stock without the prior consent of the
representatives of the underwriters for a period of 180 days from the date of
this prospectus. Richard D. Kinder and William V. Morgan have agreed not to sell
any of their common stock for two years. First Union Corporation, Ted A. Gardner
and some employees of First Union Corporation have agreed not to sell any of
their common stock for one year.
Subject to the provisions of Rules 144, 144(k) and 701, the following
amounts of shares of our common stock will be available for sale in the public
market, subject in the case of shares held by affiliates, to compliance with
specific volume restrictions:
- 6,139,851 shares, one year from the date of this prospectus; and
- 26,610,149 shares, two years from the date of this prospectus.
In general, under Rule 144, a person, or persons whose shares are
aggregated, including an affiliate who has beneficially owned shares for at
least one year is entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
- 1% of the number of shares of our outstanding common stock; or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of sale is filed,
subject to specific restrictions.
In addition, a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from our affiliate, that
affiliate's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
As of the completion of this offering, there will be outstanding under our
1999 Stock Awards Plan options to purchase 1,815,000 shares of our common stock
which will be eligible for sale in the public market from time to time subject
to the expiration of lock-up agreements and Rule 144. These stock options have
exercise prices equal to the initial public offering price of our common stock.
The possible sale of a significant number of shares by the holders may have an
adverse effect on the price of our common stock.
82
<PAGE> 86
We are unable to estimate the number of shares of our common stock that
will be sold under Rule 144, as this will depend on the market price for our
common stock, the personal circumstances of the sellers and other factors. We
cannot assure that a significant public market for our common stock will develop
or be sustained after this offering. Any future sale of substantial amounts of
common stock in the open market may adversely affect the market price of the
common stock offered in this prospectus.
We will file a registration statement on Form S-8 under the Securities Act
of 1933 to register the shares of common stock reserved for issuance under our
1999 Stock Awards Plan. As a result, shares issued upon exercise of stock
options granted under our 1999 Stock Awards Plan will be available, subject to
special rules for affiliates, for resale in the public market after the
effective date of the registration statement.
Under a registration rights agreement, after the closing of this offering,
subject to specific conditions, the holders of 32,750,000 shares of our
outstanding common stock will be entitled to specific demand and piggyback
registration rights. If those shares are registered under the Securities Act of
1933, those shares would be freely tradable without restriction under the
Securities Act of 1933, except for shares then purchased by affiliates. For a
more detailed description of this agreement, please see "Description of Our
Capital Stock -- Registration Rights."
LEGAL MATTERS
The validity of the common stock will be passed upon for us by the law firm
of Bracewell & Patterson, L.L.P., Houston, Texas. Various legal matters in
connection with the common stock offered by this prospectus are being passed
upon for the underwriters by the law firm of Andrews & Kurth L.L.P., New York,
New York.
EXPERTS
The consolidated financial statements of Kinder Morgan, Inc. and its
subsidiary as of and for the year ended December 31, 1998 and for the period
from February 14, 1997 to December 31, 1997, included in this Prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Enron Liquids Pipeline Company Inc. as of and
for the year ended December 31, 1996, and for the period ended February 14,
1997, included in this Prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Kinder Morgan Energy Partners and
its subsidiaries as of December 31, 1998 and 1997 and for each of the two years
in the period ended December 31, 1998, included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Kinder Morgan Energy Partners and
its subsidiaries for the year ended December 31, 1996 and included in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
83
<PAGE> 87
FORWARD-LOOKING STATEMENTS
Some information in this prospectus or any prospectus supplement may
contain forward-looking statements. Those statements use forward-looking words
including "anticipate," "believe," "intend," "continue," "estimate," "expect,"
"may," "will" or other similar words. These statements discuss future
expectations or contain projections. Specific factors which could cause actual
results to differ from those in the forward-looking statements, include:
- price trends and overall demand for natural gas liquids, refined
petroleum products, carbon dioxide, and coal in the United States.
Economic activity, weather, alternative energy sources, conservation and
technological advances may affect price trends and demand;
- if the Federal Energy Regulatory Commission or the California Public
Utilities Commission changes the tariff rates applicable to Kinder Morgan
Energy Partners' pipelines;
- our ability and Kinder Morgan Energy Partners' ability to integrate any
acquired operations into our existing operations;
- if railroads experience difficulties or delays in delivering products to
Kinder Morgan Energy Partners' bulk terminals;
- our ability and Kinder Morgan Energy Partners' ability to successfully
identify and close strategic acquisitions and make cost saving changes in
operations;
- shut-downs or cutbacks at major refineries, petrochemical plants,
utilities, military bases or other businesses that use Kinder Morgan
Energy Partners' services;
- the condition of the capital markets and equity markets in the United
States; and
- the political and economic stability of the oil producing nations of the
world.
In addition, Kinder Morgan Energy Partners' classification as a partnership
for federal income tax purposes means that generally it does not pay federal
income taxes on its net income. Kinder Morgan Energy Partners does, however, pay
taxes on the net income of subsidiaries that are corporations. Kinder Morgan
Energy Partners relies on a legal opinion from its counsel, and not a ruling
from the Internal Revenue Service, as to its proper classification for federal
income tax purposes. If Kinder Morgan Energy Partners were to be classified as a
corporation for tax purposes, its tax payment would decrease the amount of cash
available for distribution to its partners, including Kinder Morgan G.P., Inc.,
thus limiting the ability of Kinder Morgan G.P., Inc. to make distributions to
us.
When considering forward-looking statements, you should keep in mind the
risk factors described in "Risk Factors" above. The risk factors could cause our
actual results to differ materially from those contained in any forward-looking
statement. We disclaim any obligation to update the above list or to announce
publicly the result of any revisions to any of the forward looking statements to
reflect future events or developments.
You should consider the above information when reading any forward looking
statements in:
- this prospectus;
- press releases; or
- oral statements made by us or any of our officers or other persons acting
on our behalf.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, regarding
the common stock offered by this prospectus. This prospectus does not contain
all of the
84
<PAGE> 88
information included in the registration statement. For further information
about us and the common stock offered in this prospectus by this prospectus, you
may desire to review the registration statement, including its exhibits and
schedules. You may desire to review the full text of any contracts, agreements
or other documents filed as exhibits to the registration statement for a more
complete description of the matter involved. The registration statement,
including the exhibits and schedules, may be inspected and copied at the public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at
7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Chicago, Illinois 60661. Copies of this material can also be obtained
upon written request from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or
from the SEC's website on the internet at http://www.sec.gov. The SEC's
telephone number is 1-800-SEC-0330.
As a result of the offering, we will file periodic reports and other
information with the SEC. These reports and other information may be inspected
and copies at the public reference facilities at the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates or from the SEC's website on
the internet at http://www.sec.gov.
We intend to furnish our stockholders annual reports containing audited
financial statements.
85
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Kinder Morgan, Inc. Consolidated Financial Statements:
Report of Independent Accountants......................... F-2
Report of Independent Accountants......................... F-3
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Income......................... F-5
Consolidated Statements of Stockholders' Equity........... F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
Kinder Morgan Energy Partners, L.P. Consolidated Financial
Statements:
Report of Independent Accountants......................... F-14
Report of Independent Public Accountants.................. F-15
Consolidated Balance Sheets............................... F-16
Consolidated Statements of Income......................... F-17
Consolidated Statements of Partners' Capital.............. F-18
Consolidated Statements of Cash Flows..................... F-19
Notes to Consolidated Financial Statements................ F-20
</TABLE>
F-1
<PAGE> 90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kinder Morgan, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Kinder
Morgan, Inc. and its subsidiary (the Company) at December 31, 1997 and 1998 and
the results of their operations and their cash flows for the period from
February 14, 1997 to December 31, 1997 and for the year ended December 31, 1998
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards 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 audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Houston, Texas
March 31, 1999
F-2
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kinder Morgan, Inc.
In our opinion, the accompanying statements of income and of cash flows of
Enron Liquids Pipeline Company present fairly, in all material respects, the
results of its operations and its cash flows for the year ended December 31,
1996 and the period from January 1, 1997 to February 14, 1997 in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards 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
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
May 10, 1999
F-3
<PAGE> 92
KINDER MORGAN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999
------------------- --------------
1997 1998 (UNAUDITED)
------- ------- --------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 165 $13,873 $ 3,967
Accounts receivable -- related party (Note 8).... 510 13,645 6,179
Prepaid expenses................................. 283 1,126 3,479
------- ------- --------
Total current assets..................... 958 28,644 13,625
Investment in Partnership.......................... 22,300 41,959 44,141
Deferred charges and other assets.................. 1,089 3,679 4,801
------- ------- --------
Total assets............................. $24,347 $74,282 $ 62,567
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................. $ 291 $ 1,387 $ 2,974
Accrued liabilities (Note 8)..................... 641 13,634 6,711
Accrued taxes.................................... 948 1,556 5,545
------- ------- --------
Total current liabilities................ 1,880 16,577 15,230
Long-term debt..................................... 2,500 100,000 81,500
Deferred income taxes.............................. 185 205
------- ------- --------
Total liabilities........................ 4,565 116,577 96,935
------- ------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Series A Common Stock, par value $.01, 25,000
shares authorized, 8,047 issued and
outstanding................................... * * *
Series B Common Stock, par value $.01, 25,000
shares authorized, 2,541 issued and
outstanding................................... * * *
Additional paid-in capital....................... 18,144
Retained earnings (deficit)(Note 9).............. 1,638 (42,295) (34,368)
------- ------- --------
Total stockholders' equity (deficit)..... 19,782 (42,295) (34,368)
------- ------- --------
Total liabilities and stockholders'
equity................................. $24,347 $74,282 $ 62,567
======= ======= ========
</TABLE>
- ------------
* Rounds to zero.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 93
KINDER MORGAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PREDECESSOR (NOTE 1)
---------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, FEBRUARY 14,
YEAR ENDED 1997 TO 1997 TO YEAR ENDED THREE MONTHS
DECEMBER 31, FEBRUARY 14, DECEMBER 31, DECEMBER 31, ENDED
1996 1997 1997 1998 MARCH 31, 1999
------------ ------------ ------------ ------------ --------------
(IN THOUSANDS EXCEPT PER SHARE AND
NUMBER OF SHARES AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Partnership income.............. $1,886 $ 234 $ 4,577 $ 37,575 $14,220
------ ------- ------- --------- -------
Operating expenses:
Depreciation and amortization
expense.................... 182 21 67 603 256
General and administrative
expenses................... 2,658 332 1,025 877 124
------ ------- ------- --------- -------
Total operating
expenses............ 2,840 353 1,092 1,480 380
------ ------- ------- --------- -------
Operating income (loss)......... (954) (119) 3,485 36,095 13,840
Other income (expense):
Interest expense.............. -- -- (831) (4,507) (1,965)
Interest income............... 4,492 740 49 740 48
Other, net.................... (21) -- -- -- --
------ ------- ------- --------- -------
Income before tax............... 3,517 621 2,703 32,328 11,923
Income tax expense.............. 869 5,002 1,065 11,661 4,412
------ ------- ------- --------- -------
Net income (loss)............... $2,648 $(4,381) $ 1,638 $ 20,667 7,511
------ ------- ------- --------- -------
Earnings (loss) per common
share -- basic and diluted.... $ 2.65 $ (4.38) $154.70 $1,951.93 $709.39
====== ======= ======= ========= =======
Number of common shares used in
calculation................... 1,000,000 1,000,000 10,588 10,588 10,588
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 94
KINDER MORGAN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
SERIES B
SERIES A VOTING NONVOTING ADDITIONAL RETAINED
---------------- ---------------- PAID-IN EARNINGS
SHARES DOLLARS SHARES DOLLARS CAPITAL (DEFICIT) TOTAL
------ ------- ------ ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 14, 1997.............. 1,160 $ * $ 5 $ 5
Issuance of common stock................ 6,887 * 2,541 $ * 8,950 8,950
Contributed capital..................... 9,189 9,189
Net income................................ $ 1,638 1,638
----- ---- ----- ---- -------- -------- --------
Balance at December 31, 1997.............. 8,047 2,541 18,144 1,638 19,782
Issuance of common stock................
Contributed capital.....................
Dividends............................... (18,144) (64,600) (82,744)
Net income.............................. 20,667 20,667
----- ---- ----- ---- -------- -------- --------
Balance at December 31, 1998.............. 8,047 $ -- 2,541 $ -- $ -- $(42,295) $(42,295)
===== ==== ===== ==== ======== ======== ========
</TABLE>
- ------------
* Rounds to zero.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 95
KINDER MORGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR (NOTE 1)
---------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, FEBRUARY 14, THREE MONTHS
YEAR ENDED 1997 TO 1997 TO YEAR ENDED ENDED
DECEMBER 31, FEBRUARY 14, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1997 1998 1999
------------ ------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities: --
Net income (loss).................... $ 2,648 $ (4,381) $ 1,638 $ 20,667 $ 7,511
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 182 21 67 603 256
Distributions from investment in
Partnership...................... 2,604 4,753 30,715 12,035
Equity in earnings of
Partnership...................... (1,886) (4,577) (37,575) (14,220)
Deferred income taxes and other.... (1,275) 4,381 (435) (1,809) (852)
Changes in components of working
capital:
Accounts receivable.............. 366 828 (510) (13,135) 7,466
Prepaid expense.................. 48 16 (283) (843) (2,353)
Accounts payable................. (29) (145) 291 388 1,586
Accrued liabilities.............. 641 12,993 (6,924)
Accrued taxes.................... 18 (103) 948 608 3,989
Other, net....................... (167) (374) (416) 621 (321)
------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities......... 2,509 243 2,117 13,233 8,173
------- -------- -------- -------- --------
Cash flows from investing activities:
Acquisition of business.............. -- -- (21,745) -- --
Capital contributions to Partnership
investments........................ -- (223) (732) (12,487) --
(Increase) decrease in intercompany
receivable from Enron.............. (2,509) -- -- -- --
Property additions................... -- (20) -- -- --
------- -------- -------- -------- --------
Net cash used in investing
activities................... (2,509) (243) (22,477) (12,487) --
------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common
stock.............................. -- -- 8,955 -- --
Proceeds from contributed capital.... -- -- 9,189 -- 421
Proceeds from borrowings............. -- -- 15,000 112,050 --
Payment of long-term debt............ -- -- (12,500) (14,550) (18,500)
Dividends paid....................... -- -- -- (82,744) --
Debt issuance costs.................. -- -- (119) (1,794) --
------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities......... -- -- 20,525 12,962 (18,079)
------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents.......................... -- -- 165 13,708 (9,906)
Cash and cash equivalents, beginning of
period............................... -- -- -- 165 13,873
------- -------- -------- -------- --------
Cash and cash equivalents, end of
period............................... $ -- $ -- $ 165 $ 13,873 $ 3,967
======= ======== ======== ======== ========
Cash paid for:
Interest............................. $ -- $ -- $ 799 $ 2,668 $ 2,487
Income taxes......................... -- -- 522 693 87
</TABLE>
SUPPLEMENTARY INFORMATION OF NONCASH OPERATING AND INVESTING ACTIVITIES:
Prior to the purchase of Enron Liquids Pipeline Company on February 14,
1997, deferred tax liabilities of $28,478, affiliate receivables of $84,291, and
other working capital items were deemed paid through noncash contributions and
distributions with the predecessor company's parent.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 96
KINDER MORGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Kinder Morgan, Inc. (KMI or the Company), formerly KC Liquids Holding
Corporation, was formed in October 1996. From October 1996 to February 1997, the
Company had no operations or activities. Effective February 14, 1997, KMI
acquired all of the issued and outstanding stock of Enron Liquids Pipeline
Company (ELPC or the Predecessor Company) and renamed it Kinder Morgan G.P.,
Inc. (KMGP). Accordingly, the accompanying financial statements present: (a) the
financial position and results of operations of the Company as of and for the
year ended December 31, 1998 and (b) as of December 31, 1997 and for the period
February 14, 1997 to December 31, 1997; and the financial position and results
of operations of the Predecessor Company (a) for the period January 1, 1997 to
February 14, 1997 and (b) for the year ended December 31, 1996. KMGP owns
approximately 3.8% and 8.1% of Kinder Morgan Energy Partners, L.P. (the
Partnership) as of December 31, 1998 and 1997, respectively. At December 31,
1998 and 1997, the ownership interest consists of 2% general partner interests
and 862,000 common units of the Partnership. KMI's acquisition of KMGP was
accounted for under the purchase method of accounting. The purchase price of
KMGP was approximately $21,745,000. The financial statements of the Predecessor
Company do not include KMI's purchase accounting basis in KMGP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for 1998 and for the period February
14, 1997 to December 31, 1997 include the accounts of KMI and KMGP. The
financial statements for the year ended December 31, 1996 and for the period
January 1, 1997 to February 14, 1997 include the accounts of Enron Liquids
Pipeline Company, which is deemed to be the Predecessor Company to Kinder
Morgan, Inc. All intercompany transactions have been eliminated.
The following significant policies are followed by the Company in the
preparation of the consolidated financial statements:
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily
convertible into cash and have an original maturity of three months or less at
date of acquisition.
Debt Issue Costs
Debt issue costs of $1,282,000 and $0 at December 31, 1998 and 1997,
respectively, are included in deferred charges and other assets and are
amortized using the interest method over the term of the financings for which
they were incurred. The Company amortized $513,000 of debt issue costs in 1998.
Interest Income
For the year ended December 31, 1996 and the period from January 1, 1996 to
February 14, 1997 interest income represents accruals for interest on
intercompany amounts receivable from the
F-8
<PAGE> 97
Predecessor Company's parent. Interest was earned based upon the average monthly
balance at the monthly average LIBOR interest rate.
Investment in Partnership
The investment in the Partnership is accounted for under the equity method.
At December 31, 1998 and 1997, the Company's investment in the Partnership
exceeded its share of the underlying equity in the net assets of the Partnership
by approximately $9,210,000 and $9,610,000, respectively. This excess is being
amortized on a straight-line basis over 25 years which approximates the useful
lives of the Partnership's assets ranging from 2.5% to 12.5%. Amortization of
this excess in the amount of $400,000 and $390,000 for the periods ended
December 31, 1998 and 1997, respectively, is reflected as a reduction in equity
earnings from the investment in the Partnership.
Income Taxes
Income taxes are based on KMI, KMGP and ELPC each filing separate federal
income tax returns and are accounted for under the liability method prescribed
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes are determined based on temporary differences
between the financial reporting and tax basis of assets and liabilities using
enacted tax rates in effect during the years in which the differences are
expected to reverse.
Partnership Income
Income is recognized based on KMGP's share of earnings, including incentive
distributions, of the Partnership.
3. INVESTMENT IN PARTNERSHIP
Summarized financial information of the Company's investment in the
Partnership is presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
-------- ----------
<S> <C> <C>
Current assets.............................................. $ 21,792 $ 81,401
Noncurrent assets........................................... 291,114 2,070,871
Current liabilities......................................... 11,376 57,482
Long-term debt and other liabilities........................ 151,306 734,127
Partners' capital........................................... 150,224 1,360,663
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenues............................................... $71,250 $73,932 $322,617
Costs, expenses and other.............................. 59,350 56,195 219,011
------- ------- --------
$11,900 $17,737 $103,606
======= ======= ========
</TABLE>
On September 2, 1997, KMGP approved a two-for-one unit split of the
Partnership's outstanding common units representing limited partner interests in
the Partnership. The unit split entitled common unitholders to one additional
common unit for each common unit held. The issuance and mailing of split units
occurred on October 1, 1997 to unitholders of record on September 15, 1997. All
references to the number of common units held by KMGP in the financial
statements and related notes have been restated to reflect the effect of the
split.
F-9
<PAGE> 98
4. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, FEBRUARY 14,
YEAR ENDED 1997 TO 1997 TO YEAR ENDED
DECEMBER 31, FEBRUARY 14, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Current:
---
Federal................ $ 1,890 $ 28,044 $1,320 $11,591
State.................. 332 4,524 180 2,286
------- -------- ------ -------
Total
current...... 2,222 32,568 1,500 13,877
------- -------- ------ -------
Deferred:
Federal................ (1,202) (23,766) (450) (2,201)
State.................. (151) (3,800) 15 (15)
------- -------- ------ -------
Total
deferred..... (1,353) (27,566) (435) (2,216)
------- -------- ------ -------
869 5,002 $1,065 $11,661
======= ======== ====== =======
</TABLE>
An analysis of the effective income tax rate follows:
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM FEBRUARY 14,
YEAR ENDED JANUARY 1, 1997 1997 TO YEAR ENDED
DECEMBER 31, TO FEBRUARY 14, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
-------------- ---------------- ------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------- ------ ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal................. 1,231 35.0% 217 35.0% 946 35.0% 11,315 35.0%
State................... 118 3.3% 21 3.3% 127 4.7% 1,476 4.6%
Tax Expense on Sale of
Predecessor Assets.... 4,764 767.1%
Other................... (480) (13.6)% (8) (0.3)% (1,130) (3.5)%
----- ----- ----- ----- ----- ---- ------ -----
Total......... 869 24.7% 5,002 805.4% 1,065 39.4% 11,661 36.1%
===== ===== ===== ===== ===== ==== ====== =====
</TABLE>
Income taxes, as reflected in the Consolidated Statements of Income, differ from
the amounts computed by applying the statutory federal corporate tax rate to
income before income taxes, primarily due to state taxes net of federal benefits
for the year ended December 31, 1998, the period from February 14, 1997 to
December 31, 1997, and the year ended December 31, 1996. For the period from
January 1, 1997 to February 14, 1997, the tax expense reflects the sale of the
Predecessor Company's common stock on a stand-alone basis. The Predecessor
Company and KMI made the election under Internal Revenue Code Section 338(h)(10)
to treat this sale as an asset sale for tax purposes, resulting in a total tax
gain of approximately $85 million.
Deferred taxes at December 31, 1998 and 1997 consist of a deferred tax
asset of $2,545,000 and $620,000, respectively, related to net operating losses
of KMI, and the deferred tax liability related to the difference between the tax
and book basis of the investment in the Partnership, principally due to
accelerated depreciation.
At December 31, 1998, KMI has a tax net operating loss carry forward of
approximately $7,500,000 which expires in the years 2012-2018.
F-10
<PAGE> 99
5. DEBT
On February 14, 1997, KMI entered into a borrowing agreement with First
Union National Bank (First Union) in connection with the acquisition of the
common stock of KMGP. Pursuant to this agreement, KMI issued two notes in the
aggregate amount of $15,000,000, bearing interest, at KMI's option, at either
First Union's Base Rate plus one-half of 1% or LIBOR plus 2.5%. The notes were
payable August 31, 1999. Effective December 31, 1997, the borrowing agreement
was amended to provide a $15,000,000 facility note in place of the two notes
issued February 14, 1997. The borrowing agreement was amended again in 1998 to
provide a term loan commitment for an additional $85 million. Along with the
increased borrowing, the interest rate was changed to First Union's Base Rate
plus one-half of one percent or LIBOR plus three percent and the maturity date
was changed to May 31, 2000. KMI has pledged the stock of KMGP and KMGP's assets
as collateral for this term loan commitment. At December 31, 1998 and 1997, KMI
had principal amounts outstanding of $100 million and $2.5 million,
respectively. The carrying amounts of the long-term debt based upon prevailing
interest rates available to KMI at December 31, 1998 and 1997 approximated fair
value.
6. COMMON STOCK
Common stock at December 31, 1998 and 1997 consisted of 25,000 Series A
voting shares authorized, of which 8,047 were issued and outstanding; and 25,000
Series B nonvoting shares authorized, of which 2,541 were issued and
outstanding. Both series have a par value of $0.01 and, with the exception of
voting rights, have all of the same powers, preferences, rights and
qualifications.
7. LITIGATION, COMMITMENTS AND CONTINGENCIES
Through its investment in KMGP, in the ordinary course of business, the
Company is a defendant in various lawsuits relating to the Partnership's assets.
Although no assurance can be given, the Company believes, based on its
experience to date, that the ultimate resolution of such items will not have a
material, adverse impact on the Company's financial position or its results of
operations.
Environmental
KMGP is a defendant in two proceedings (one by the State of Illinois and
one by the Department of Transportation) relating to alleged environmental
violations for events relating to a fire that occurred at the Morris storage
field in September 1994. Although no assurance can be given, the Company
believes the ultimate resolution of these matters will not have a material,
adverse effect on the Partnership's financial position, results of operations,
or its ability to pay cash distributions to KMGP.
The Partnership is subject to environmental cleanup and enforcement actions
from time to time. In particular, the federal Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA or Superfund law) generally
imposes joint and several liability for cleanup and enforcement costs, without
regard to fault or the legality of the original conduct, on current or
predecessor owners and operators of a site. The operations of the Partnership
are also subject to federal, state and local laws and regulations relating to
protection of the environment. Although the Partnership believes its operations
are in general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance significant costs and liabilities will
not be incurred by the Partnership. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property or persons
resulting from the operations of the Partnership, could result in substantial
costs and liabilities to the Partnership which could affect future cash
distributions to KMGP.
F-11
<PAGE> 100
The Partnership, along with several other respondents, is involved in a
cleanup in connection with an acquisition made in 1998. This cleanup, ordered by
the United States Environmental Protection Agency (EPA), related to ground water
contamination in the vicinity of the Partnership's storage facilities and truck
loading terminal at Sparks, Nevada. The EPA approved the respondents'
remediation plan in September 1992 and the remediation system began operation in
1995. In addition, the Partnership is presently involved in 18 ground water
hydrocarbon remediation efforts under administrative orders issued by the
California Regional Water Quality Control Board and two other state agencies.
Although no assurance can be given, KMGP believes the ultimate resolutions of
these matters will not have a material, adverse effect on the Partnership's
financial position, result of operations, or its ability to pay cash
distributions to KMGP.
FERC
The Partnership and certain of its subsidiaries are defendants in several
actions in which the plaintiffs protest pipeline transportation rates with the
Federal Energy Regulatory Commission (FERC). These actions are currently
pending. The Plaintiffs seek to recover transportation overpayments and
interests.
The Company is not able to predict with certainty whether settlement
agreements will be completed with some or all of the complainants, the final
terms of any such settlement agreements that may be consummated, or the final
outcome of the FERC proceedings should they be carried through to their
conclusion, and it is possible that current or future proceedings could be
resolved in a manner adverse to the Partnership which could affect future cash
distributions to KMGP.
Commitments
Pursuant to the Partnership agreement, general and administrative expenses
are paid by KMGP on behalf of the Partnership. These costs are reimbursable by
the Partnership.
Effective July 1, 1997, KMGP established the Kinder Morgan Retirement
Savings Plan, a defined contribution 401(k) plan, that permits all full-time
employees of KMGP to contribute 1% to 15% of base compensation, on a pre-tax or
after-tax basis, into participant accounts. In addition to a mandatory
contribution equal to 4% of base compensation per year for each plan
participant, KMGP may make discretionary contributions in years when specific
performance objectives are met. Any discretionary contributions are made during
the first quarter following the performance year. On March 1, 1999 (subsequent
to year-end), an additional 2% discretionary contribution was made to individual
accounts based on 1998 financial targets to unitholders. KMGP contributions
during 1998 were approximately $1.1 million. All KMGP contributions are
reimbursable by the Partnership. All contributions, together with earnings
thereon, are immediately vested and not subject to forfeiture. Participants may
direct the investment of their contributions into a variety of investments. Plan
assets are held and distributed pursuant to a trust agreement.
During 1998, KMGP established a unit option plan, which provides that key
personnel are eligible to receive grants of options to acquire units of the
Partnership. The number of units available under the option plan is 250,000.
Either the board of directors of KMGP or a committee of the board of directors
of the Partnership will administer the option plan. The option plan terminates
in March 2008. As of December 31, 1998, 194,500 options were granted to certain
personnel of KMGP with a term of seven years at exercise prices equal to the
market price of the units at the grant date ($34.56 weighted average price). In
addition, 10,000 options were granted to nonemployee directors of the
Partnership. The options granted generally vest forty percent in the first year
and twenty percent each year thereafter.
During 1997, the Partnership established an Executive Compensation Plan for
certain executive officers of KMGP. The Partnership may, at its option and with
the approval of the unitholders, pay the participants in units instead of cash.
Eligible awards are equal to a formula based upon the cash distributions paid to
KMGP during the four calendar quarters preceding the date of redemption
F-12
<PAGE> 101
multiplied by eight (the Calculated Amount). Calculated amounts are accrued as
compensation expense and adjusted quarterly. Under the plan, no eligible
employee may receive a grant in excess of 2% and total awards under the Plan may
not exceed 10% of the Calculated Amount. The plan terminates January 1, 2007,
and any unredeemed awards will be automatically redeemed.
At December 31, 1998, certain executive officers of KMGP each had
outstanding awards totaling 2% of the Calculated Amount eligible to be granted
under the Plan. On January 4, 1999 (subsequent to year end) 50% of the awards
granted to these executive officers were vested and paid out. Each participant
continues to have a grant of 1% under the plan. All payments under the Plan are
reimbursable by the Partnership.
8. RELATED PARTY TRANSACTIONS
General and Administrative Expenses
Prior to the sale of ELPC to KMI, Enron and its affiliates were reimbursed
for certain corporate staff and support services rendered in managing and
operating the Predecessor Company. Such reimbursement was made pursuant to the
terms of the Omnibus Agreement executed among Enron and ELPC. After the sale of
ELPC to KMI, Enron and its affiliates are no longer affiliates to the Company
and general and administrative expenses incurred by the Company, through KMGP,
are all reimbursed by the Partnership as provided in the Partnership Agreement.
The Company and ELPC incurred approximately $38 million, $6.9 million, $0.3
million and $2.5 million of general and administrative expenses in 1998, the
period February 14, 1997 to December 31, 1997, the period January 1, 1997 to
February 14, 1997 and 1996, respectively, and are reflected net of the
reimbursements from the Partnership in the accompanying statement of income. The
receivable from related party of $13,645,000 and $510,000 at December 31, 1998
and 1997, respectively, represents general and administrative expenses incurred
by the Company to be reimbursed by the Partnership. Accrued liabilities in the
amount of $12,682,000 and $610,000 at December 31, 1998 and 1997, respectively,
represent general and administrative expenses accrued by the Company to be
reimbursed by the Partnership upon payment of the expenses.
Partnership Distributions
The Partnership Agreement of the Partnership provides for incentive
distributions payable to KMGP out of the Partnership's available cash in the
event that quarterly distributions to unitholders exceed certain specified
targets. In general, subject to certain limitations, if a quarterly distribution
to unitholders exceeds a target of $0.3025 per unit, the Company will receive
incentive distributions equal to (1) 15% of the portion of the quarterly
distribution per unit that exceeds $0.3025 per unit but is not more than
$0.3575, plus (2) 25% of that portion of the quarterly distribution per unit
that exceeds the quarterly distribution amount of $0.3575 but is not more than
$0.4675, plus (3) 50% of that portion of the quarterly distribution per unit
that exceeds $0.4675. The Company and the Predecessor Company received incentive
distributions of $32,700,000, $3,900,000, $0 and $101,000 during the year ended
December 31, 1998, the period February 14, 1997 to December 31, 1997, the period
January 1, 1997 to February 14, 1997 and the year ended December 31, 1996,
respectively.
9. DIVIDENDS
During 1998, the Board of Directors declared and paid dividends to
shareholders of record in the amount of $82.7 million, which was greater than
the amount of accumulated earnings and additional paid-in capital. Based upon
the advice of legal counsel and receipt of an independent, third-party appraisal
of the Company's valuation, the Board of Directors concluded the fair value of
the consolidated assets of the Company and its subsidiary exceeded the
consolidated debt and liabilities (including contingent liabilities).
F-13
<PAGE> 102
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Kinder Morgan Energy Partners, L.P.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows, and of partners'
capital present fairly, in all material respects, the financial position of
Kinder Morgan Energy Partners, L.P. (a Delaware Limited Partnership) and
subsidiaries (the Partnership) at December 31, 1998 and 1997, 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. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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 audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Houston, Texas
March 10, 1999
F-14
<PAGE> 103
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Kinder Morgan Energy Partners, L.P.
(Formerly Enron Liquids Pipeline, L.P.)
We have audited the accompanying consolidated balance sheet of Kinder
Morgan Energy Partners, L.P. (a Delaware limited partnership) and subsidiaries
as of December 31, 1996, and the related consolidated statements of income, cash
flows and partners' capital for the year ended December 31, 1996. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides 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 Kinder Morgan Energy
Partners, L.P. as of December 31, 1996, and the results of its operations and
its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 21, 1997
F-15
<PAGE> 104
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999
----------------------- --------------
1997 1998 (UNAUDITED)
-------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents.................... $ 9,612 $ 31,735 $ 33,276
Accounts and notes receivable................ 8,569 44,125 47,480
Inventories
Products.................................. 1,901 2,901 4,192
Materials and supplies.................... 1,710 2,640 2,561
-------- ---------- ----------
21,792 81,401 87,509
-------- ---------- ----------
Property, Plant and Equipment, at cost......... 290,620 1,836,719 1,854,703
Less accumulated depreciation................ 45,653 73,333 83,890
-------- ---------- ----------
244,967 1,763,386 1,770,813
-------- ---------- ----------
Equity Investments............................. 31,711 238,608 237,536
-------- ---------- ----------
Intangibles.................................... 8,291 58,536 58,173
Deferred charges and other assets.............. 6,145 10,341 15,815
-------- ---------- ----------
TOTAL ASSETS......................... $312,906 $2,152,272 $2,169,846
======== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable
Trade..................................... $ 4,423 $ 11,690 $ 6,322
Related parties........................... 507 13,952 12,127
Accrued liabilities.......................... 3,585 18,230 31,679
Accrued benefits............................. -- 9,415 7,801
Accrued taxes................................ 2,861 4,195 4,610
-------- ---------- ----------
11,376 57,482 62,539
-------- ---------- ----------
Long-Term Liabilities and Deferred Credits
Long-term debt............................... 146,824 611,571 631,205
Other........................................ 2,997 104,789 99,671
-------- ---------- ----------
149,821 716,360 730,876
-------- ---------- ----------
Commitments and Contingencies
Minority Interest.............................. 1,485 17,767 17,895
-------- ---------- ----------
Partners' Capital
Common Units................................. 146,840 1,348,591 1,344,140
General Partner.............................. 3,384 12,072 14,396
-------- ---------- ----------
150,224 1,360,663 1,358,536
-------- ---------- ----------
TOTAL LIABILITIES AND PARTNERS'
CAPITAL............................ $312,906 $2,152,272 $2,169,846
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 105
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------ MARCH 31,
1996 1997 1998 1999
-------- -------- -------- -----------
(IN THOUSANDS EXCEPT (UNAUDITED)
PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
Revenues............................................. $ 71,250 $ 73,932 $322,617 $100,049
Costs and Expenses
Cost of products sold.............................. 7,874 7,154 5,860 569
Operations and maintenance
Related party................................... 6,558 -- -- --
Other........................................... 12,322 15,039 65,022 21,166
Fuel and power..................................... 4,916 5,636 22,385 7,184
Depreciation and amortization...................... 9,908 10,067 37,321 12,054
General and administrative......................... 9,132 8,862 39,984 7,818
Taxes, other than income taxes..................... 3,467 2,943 12,140 4,271
-------- -------- -------- --------
54,177 49,701 182,712 53,062
-------- -------- -------- --------
Operating Income..................................... 17,073 24,231 139,905 46,987
Other Income (Expense)
Earnings from equity investments................... 5,675 5,724 25,732 7,955
Interest, net...................................... (11,939) (12,078) (38,600) (11,799)
Other, net......................................... 2,555 (701) (7,263) (11)
Minority Interest.................................... (121) (179) (985) (621)
-------- -------- -------- --------
Income Before Income Taxes and Extraordinary charge.. 13,243 16,997 118,789 42,511
Income Tax Benefit (Expense)......................... (1,343) 740 (1,572) (1,442)
-------- -------- -------- --------
Income Before Extraordinary charge................... 11,900 17,737 117,217 41,069
Extraordinary charge on early extinguishment of
debt............................................... -- -- (13,611) --
-------- -------- -------- --------
Net Income........................................... $ 11,900 $ 17,737 $103,606 $ 41,069
======== ======== ======== ========
Calculation of Limited Partners' Interest in Net
Income:
Income Before Extraordinary Charge................... $ 11,900 $ 17,737 $117,217 $ 41,069
Less: General Partner's interest in Net Income....... (218) (4,074) (33,447) (13,363)
-------- -------- -------- --------
Limited Partners' Income before extraordinary
charge............................................. 11,682 13,663 83,770 27,706
Less: Extraordinary charge on early extinguishment of
debt............................................... -- -- (13,611) --
-------- -------- -------- --------
Limited Partners' Net Income......................... $ 11,682 $ 13,663 $ 70,159 $ 27,706
======== ======== ======== ========
Net Income per Unit before extraordinary charge...... $ 0.90 $ 1.02 $ 2.09 $ 0.57
======== ======== ======== ========
Net Income per Unit for extraordinary charge......... -- $ -- $ 0.34 $ --
======== ======== ======== ========
Net Income per Unit.................................. $ 0.90 $ 1.02 $ 1.75 $ 0.57
======== ======== ======== ========
Number of Units used in Computation.................. 13,020 13,411 40,120 48,817
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE> 106
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
DEFERRED TOTAL
COMMON PARTICIPATION GENERAL PARTNERS'
UNITS UNITS PARTNER CAPITAL
---------- ------------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Partners' capital at December 31,
1995.................................. $ 105,100 $ 16,787 $ 1,229 $ 123,116
Net income............................ 10,136 1,546 218 11,900
Distributions......................... (14,236) (2,168) (268) (16,672)
---------- -------- -------- ----------
Partners' capital at December 31,
1996.................................. 101,000 16,165 1,179 118,344
Net income............................ 13,440 223 4,074 17,737
Transfer of deferred participation
units.............................. 16,388 (16,388) -- --
Net proceeds from issuance of common
units.............................. 33,678 -- -- 33,678
Capital contributions................. -- -- 345 345
Distributions......................... (17,666) -- (2,214) (19,880)
---------- -------- -------- ----------
Partners' capital at December 31,
1997.................................. 146,840 -- 3,384 150,224
Net income............................ 70,159 -- 33,447 103,606
Net proceeds from issuance of common
units.............................. 1,212,421 -- -- 1,212,421
Capital contributions................. 10,234 -- 2,678 12,912
Distributions......................... (91,063) -- (27,437) (118,500)
---------- -------- -------- ----------
Partners' capital at December 31,
1998.................................. $1,348,591 $ -- $ 12,072 $1,360,663
========== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE> 107
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------
1996 1997 1998 1999
-------- -------- ---------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Reconciliation of net income to net cash provided by
operating activities
Net income......................................... $ 11,900 $ 17,737 $ 103,606 $ 41,069
Extraordinary charge on early extinguishment of
debt............................................ -- -- 13,611 --
Depreciation and amortization...................... 9,908 10,067 37,321 12,054
Earnings from equity investments................... (5,675) (5,724) (25,732) (7,955)
Distributions from equity investments.............. 6,791 9,588 19,670 7,816
Changes in components of working capital
Accounts receivable............................. (2,264) 3,791 1,203 (3,357)
Inventories..................................... 198 (902) (734) (1,211)
Accounts payable................................ 2,096 (5,102) 197 (7,193)
Accrued liabilities............................. (1,997) 2,774 (14,115) 11,834
Accrued taxes................................... 149 557 (1,266) 414
El Paso Settlement................................. -- -- (8,000) --
Other, net......................................... 1,670 (834) 8,220 (7,106)
-------- -------- ---------- ---------
Net Cash Provided by Operating Activities............ 22,776 31,952 133,981 46,365
-------- -------- ---------- ---------
Cash Flows From Investing Activities
Acquisitions of assets............................. -- (20,038) (107,144) --
Additions to property, plant and equipment for
expansion and maintenance projects.............. (8,575) (6,884) (38,407) (18,347)
Sale of property, plant and equipment.............. -- 162 64 --
Contributions to equity investments................ (546) (3,532) (136,234) (552)
-------- -------- ---------- ---------
Net Cash Used in Investing Activities................ (9,121) (30,292) (281,721) (18,899)
-------- -------- ---------- ---------
Cash Flows From Financing Activities
Issuance of debt................................... 5,000 43,400 492,612 249,683
Payment of debt.................................... (1,718) (58,496) (407,797) (230,063)
Cost of refinancing long-term debt................. -- -- (16,768) (1,916)
Proceeds from issuance of common units............. -- 33,678 212,303 --
Contributions from General Partner's Minority
Interest........................................ -- -- 12,349 --
Distributions to partners
Common Units.................................... (16,404) (21,768) (93,352) (31,171)
General Partner................................. (268) (2,280) (27,450) (11,598)
Minority Interest............................... (168) (245) (1,614) (493)
Other, net......................................... -- (636) (420) (367)
-------- -------- ---------- ---------
Net Cash Provided by (Used in) Financing
Activities......................................... (13,558) (6,347) 169,863 (25,925)
-------- -------- ---------- ---------
Increase (Decrease) in Cash and Cash Equivalents..... 97 (4,687) 22,123 1,541
Cash and Cash Equivalents, Beginning of Period....... 14,202 14,299 9,612 31,735
-------- -------- ---------- ---------
Cash and Cash Equivalents, End of Period............. $ 14,299 $ 9,612 $ 31,735 $ 33,276
======== ======== ========== =========
Noncash Investing and Financing Activities
Contribution of net assets to partnership
investments..................................... $ -- $ -- $ 60,387 --
Assets acquired by the issuance of Common Units.... $ -- $ -- $1,003,202 --
Assets acquired by the assumption of liabilities... $ -- $ -- $ 569,822 --
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest (net of capitalized interest)............. $ 12,487 $ 12,611 $ 47,616 3,561
Income Taxes....................................... $ 397 $ 463 $ 1,354 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 108
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Sale of the stock of the General Partner
Kinder Morgan Energy Partners, L.P. (the "Partnership", formerly Enron
Liquids Pipeline, L.P.), a Delaware limited partnership was formed in August
1992. Effective February 14, 1997, Kinder Morgan, Inc. ("KMI") acquired all of
the issued and outstanding stock of Enron Liquids Pipeline Company, the general
partner, from Enron Liquids Holding Corp. ("ELHC"). At the time of the
acquisition, the general partner and the Partnership's subsidiaries were renamed
as follows: Kinder Morgan G.P., Inc. (the "general partner", formerly Enron
Liquids Pipeline Company); Kinder Morgan Operating L.P. "A" ("OLP-A", formerly
Enron Liquids Operating Limited Partnership); Kinder Morgan Operating L.P. "B"
("OLP-B", formerly Enron Transportation Services, L.P.); and Kinder Morgan
Natural Gas Liquids Corporation ("KMNGL", formerly Enron Natural Gas Liquids
Corporation).
General
The Partnership is a publicly traded Master Limited Partnership that
manages a diversified portfolio of midstream energy assets. It operates through
four operating limited partnerships, OLP-A, OLP-B, Kinder Morgan Operating L.P.
"C" ("OLP-C") and Kinder Morgan Operating L.P. "D" ("OLP-D") (collectively, the
"Operating Partnerships"). Kinder Morgan Bulk Terminals, Inc. (formerly
Hall-Buck Marine, Inc.) and its consolidated subsidiaries are owned and
controlled by OLP-C. OLP-D owns 99.5% of and controls SFPP, L.P.
Kinder Morgan G.P., Inc. is a wholly owned subsidiary of KMI and serves as
the sole general partner of the Partnership and the Operating Partnerships. The
Partnership and the Operating Partnerships are governed by Amended and Restated
Agreements of Limited Partnership and certain other agreements (collectively,
the "partnership agreements").
Prior to 1998, the Partnership reported three business segments: Liquids
Pipelines; Coal Transfer, Storage and Services; and Gas Processing and
Fractionation. Due to the acquisitions made in 1998, the Partnership now
competes in the following three reportable business segments: Pacific
Operations; Mid-Continent Operations; and Bulk Terminals. For the periods prior
to 1998, the previous Liquids Pipelines and Gas Processing and Fractionation
segments have been combined to present the current Mid-Continent Operations
segment.
The "Pacific Operations" include four common carrier refined petroleum
products pipelines covering approximately 3,300 miles and transporting
approximately one million barrels per day of refined petroleum products such as
gasoline, diesel and jet fuel. The Pacific Operations also include 13 truck
loading terminals. These operations serve approximately 44 customer-owned
terminals, three commercial airports and 12 military bases in six western
states.
The "Mid-Continent Operations" include two interstate common carrier
natural gas liquids ("NGL" or "NGLs") pipelines ("North System" and "Cypress
Pipeline"), a 20% equity interest in Shell CO(2) Company, Ltd., a 24% equity
interest in Plantation Pipe Line Company, a gas processing plant ("Painter
Plant") and a 25% indirect interest in an NGL fractionator in Mont Belvieu,
Texas. The North System includes a 1,600 mile common carrier pipeline that
transports, stores and delivers a full range of NGLs and refined products from
South Central Kansas to markets in the Midwest and has interconnects, using
third-party pipelines in the Midwest, to the eastern United States.
Additionally, the North System has eight truck loading terminals, which
primarily deliver propane throughout the upper Midwest. The Cypress Pipeline is
a 100 mile pipeline that transports ethane from Mont Belvieu, Texas, to the Lake
Charles, Louisiana area. Shell CO(2) Company, Ltd. produces, markets and
delivers carbon dioxide for enhanced oil recovery throughout the continental
United
F-20
<PAGE> 109
States. Plantation Pipe Line Company owns and operates a 3,100 mile common
carrier refined petroleum products pipeline serving the southeastern United
States. Amoco Oil Company operates the Painter Plant assets under an operating
lease agreement.
The "Bulk Terminals" segment consists of 24 bulk terminals that handle
approximately 50 million tons of coal, petroleum coke and other products
annually. The Partnership itself, or through Kinder Morgan Bulk Terminals, Inc.,
owns or operates these 24 bulk terminals located primarily on the Mississippi
River and the West Coast. The segment also includes two modern high speed
rail-to-barge coal transfer facilities ("Cora Terminal" and "Grand Rivers
Terminal"). The Cora Terminal transfers coal from rail to barge on the banks of
the Mississippi River near Cora, Illinois. The Grand Rivers Terminal is a coal
transfer, storage, and blending facility located on the Tennessee River near
Paducah, Kentucky. Other activities included in Bulk Terminals include the "Red
Lightning" energy services unit, which performs specialized coal services for
both the Cora Terminal and the Grand Rivers Terminal. River Consulting, Inc., a
major engineering and construction management company specializing in designing
and construction services for dry bulk material handling terminals is also
included in the Bulk Terminals segment. On December 18, 1998 the Partnership
acquired the Pier IX Terminal, located in Newport News, Virginia, and the
Shipyard River Terminal, located in Charleston, South Carolina.
Two-for-one Common Unit Split
On September 2, 1997, the Partnership's general partner approved a
two-for-one unit split of the Partnership's outstanding units representing
limited partner interests in the Partnership. The unit split entitled common
unitholders to one additional unit for each unit held. The issuance and mailing
of split units occurred on October 1, 1997 to unitholders of record on September
15, 1997. All references to the number of units and per unit amounts in the
consolidated financial statements and related notes have been restated to
reflect the effect of the split for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the assets, liabilities, and
results of operations of the Partnership and its majority-owned subsidiaries.
All significant intercompany items have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts 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.
Cash Equivalents
Cash equivalents are defined as all highly liquid short-term investments
with original maturities of three months or less.
Inventories
Inventories of products consist of natural gas liquids, refined petroleum
products and coal. These assets are valued at the lower of cost
(weighted-average cost method) or market. Materials and supplies are stated at
the lower of cost or market.
Property, Plant and Equipment
Property, plant and equipment is stated at its acquisition cost.
Expenditures for maintenance and repairs are charged to operations in the period
incurred. The cost of property, plant and
F-21
<PAGE> 110
equipment sold or retired and the related depreciation are removed from the
accounts in the period of sale or disposition. The provision for depreciation is
computed using the straight-line method based on estimated economic lives.
Generally, composite depreciation rates are applied to functional groups of
property having similar economic characteristics and range from 2.0% to 12.5%,
excluding certain short-lived assets such as vehicles. The original cost of
property retired is charged to accumulated depreciation and amortization, net of
salvage and cost of removal. No retirement gain or loss is included in income
except in the case of extraordinary retirements or sales.
Equity Method of Accounting
Investments in significant 20-50% owned and not controlled affiliates are
accounted for by the equity method of accounting, whereby the investment is
carried at cost of acquisition, plus the Partnership's equity in undistributed
earnings or losses since acquisition.
Excess of Cost Over Fair Value
The excess of the Partnership's cost over its underlying net assets is
being amortized using the straight-line method over the estimated remaining life
of the assets over a period not to exceed 40 years. Such amortization is
reflected primarily as amortization expense. The unamortized excess was
approximately $162.3 million and $8.3 million as of December 31, 1998 and 1997,
respectively, and such amounts are included within intangibles and equity
investments on the accompanying balance sheet of these amounts, approximately
$154.4 million relates to the 1998 acquisitions of the Partnership's 24% equity
interest of Plantation Pipeline Company and the purchase of Kinder Morgan Bulk
Terminals, Inc. and is being amortized over 40 years. Approximately $7.9 million
and $8.3 million at December 31, 1998 and 1997, respectively, relates to the
prior acquisitions of an NGL fractionator and a pipeline system and are being
amortized over a period of 15-25 years.
Revenue Recognition
Revenues for the pipeline operations are generally recognized based on
delivery of actual volume transported. Bulk terminal transfer service revenues
are recognized based on volumes loaded. Recognition of gas processing revenues
is based on volumes processed or fractionated. Revenues from energy related
product sales of the Red Lightning energy services unit are based on delivered
quantities of product.
Impairment of Long-Lived Assets
Under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the carrying value of
property and equipment is evaluated using undiscounted future cash flows when
events or circumstances indicate an impairment has occurred. To the extent
impairment is indicated to exist, an impairment loss will be recognized on a
discounted basis under SFAS No. 121 based on fair value.
Environmental Matters
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated. Generally, the timing of these accruals coincides with the
completion of a feasibility study or the Partnership's commitment to a formal
plan of action.
F-22
<PAGE> 111
Minority Interest
Minority interest consists of the approximate 1% general partner interest
in the Operating Partnerships, the 0.5% special limited partner interest in
SFPP, L.P. and the 50% interest in Globalplex Partners, a Louisiana joint
venture owned 50% and controlled by Kinder Morgan Bulk Terminals, Inc.
Income Taxes
The Partnership is not a taxable entity for Federal income tax purposes. As
such, no Federal income tax will be paid by the Partnership. Each partner will
be required to report on its tax return its allocable share of the taxable
income or loss of the Partnership. Taxable income or loss may vary substantially
from the net income or net loss reported in the consolidated statement of income
primarily because of accelerated tax depreciation.
The tax attributes of the Partnership's net assets flow directly to each
individual partner. Individual partners will have different investment bases
depending upon the timing and prices of acquisition of partnership units.
Further, each partner's tax accounting, which is partially dependent upon the
partner's individual tax position, may differ from the accounting followed in
the financial statements. Accordingly, there could be significant differences
between each individual partner's tax basis and the partner's proportionate
share of the net assets reported in the financial statements. FAS 109 requires
disclosure by a publicly held partnership of the aggregate difference in the
basis of its net assets for financial and tax reporting purposes. However, the
Partnership does not have access to information about each individual partner's
tax attributes in the Partnership, and the aggregate tax bases cannot be readily
determined. In any event, management does not believe that, in the Partnership's
circumstances, the aggregate difference would be meaningful information.
Net Income Per Unit
Net Income per Unit was computed by dividing limited partner's interest in
net income by the weighted average number of units outstanding during the
period.
3. ACQUISITIONS AND JOINT VENTURES
With respect to the following acquisitions and joint ventures, the results
of operations are included in the consolidated financial statements from the
effective date of acquisition.
Santa Fe
Kinder Morgan Operating L.P. "D" ("OLP-D"), a Delaware limited partnership,
acquired on March 6, 1998, 99.5% of SFPP, L.P. ("SFPP"), the operating limited
partnership of Santa Fe Pacific Pipeline Partners, L.P. ("Santa Fe"). The
transaction was accounted for under the purchase method of accounting and was
valued at more than $1.4 billion inclusive of liabilities assumed. The
Partnership acquired the interest of Santa Fe's common unit holders in SFPP in
exchange for approximately 26.6 million units (1.39 units of the Partnership for
each Santa Fe common unit). The Partnership paid $84.4 million to Santa Fe
Pacific Pipelines, Inc. (the "former SF General Partner") in exchange for the
general partner interest in Santa Fe. The $84.4 million was borrowed under the
Credit Facility (see Note 8). Also on March 6, 1998, SFPP redeemed from the
former SF General Partner a 0.5% interest in SFPP for $5.8 million. The
redemption was paid from SFPP's cash reserves. After the redemption, the former
SF General Partner continues to own a .5% special limited partner interest in
SFPP.
Assets acquired in this transaction comprise the Partnership's Pacific
Operations, which include over 3,300 miles of pipeline and thirteen owned and
operated terminals.
F-23
<PAGE> 112
Shell CO(2) Company
On March 5, 1998, the Partnership and affiliates of Shell Oil Company
("Shell") agreed to combine their CO(2) activities and assets into a
partnership, Shell CO(2) Company, Ltd., to be operated by a Shell affiliate. The
Partnership acquired, through a newly created limited liability company, a 20%
interest in Shell CO(2)Company, Ltd. in exchange for contributing the Central
Basin Pipeline and approximately $25 million in cash. The $25 million was
borrowed under the Credit Facility (see Note 8). The Partnership accounts for
its partnership interest in Shell CO(2) Company, Ltd. under the equity method.
The investment is included as part of the Mid-Continent Operations.
Under the terms of the Shell CO(2) Company, Ltd. partnership agreement, the
Partnership will receive a priority distribution of $14.5 million per year
during 1998 through 2001. To the extent the amount paid to the Partnership over
this period is in excess of the Partnership's percentage share (currently 20%)
of Shell CO(2) Company, Ltd.'s distributable cash flow for such period
(discounted at 10%), Shell will receive a priority distribution in equal amounts
of such overpayment during 2002 and 2003.
Hall-Buck Marine, Inc.
Effective July 1, 1998, the Partnership acquired Hall-Buck Marine, Inc.
("Hall-Buck") for approximately $100 million. The transaction was accounted for
under the purchase method of accounting. Hall-Buck, headquartered in Sorrento,
Louisiana, is one of the nation's largest independent operators of dry bulk
terminals, operating twenty terminals on the Mississippi River, the Ohio River,
and the Pacific Coast. In addition, Hall-Buck owns all of the common stock of
River Consulting Incorporated, a nationally recognized leader in the design and
construction of bulk material facilities and port related structures.
The $100 million of consideration consisted of approximately 2.1 million
units and assumed indebtedness of $23 million. After the acquisition, the
Partnership changed the name of Hall-Buck Marine, Inc. to Kinder Morgan Bulk
Terminals, Inc. and accounts for its activity as part of the Bulk Terminals
business segment.
Pro Forma Information
The following summarized unaudited Pro Forma Consolidated Income Statement
information for the twelve months ended December 31, 1998 and 1997, assumes the
Partnership's acquisition of SFPP, Hall-Buck and its interest in Shell CO(2)
Company, Ltd. had occurred as of January 1, 1997. The unaudited Pro Forma
financial results have been prepared for comparative purposes only and may not
be indicative of the results that would have occurred if the Partnership had
acquired the assets of SFPP, Hall-Buck and its interest in Shell CO(2)Company,
Ltd. on the dates indicated or which will be attained in the future.
F-24
<PAGE> 113
Net Income for each of the Pro Forma periods does not include the
annualized effects of all the cost saving measures the company has achieved
since its acquisition of SFPP. Amounts presented below are in thousands, except
for per Common Unit amounts:
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Income Statement
Revenues.................................................... $371,033 $395,963
Operating Income............................................ 135,816 155,057
Net Income before extraordinary charge...................... 87,997 126,122
Net Income.................................................. 87,997 112,511
Net Income per unit before extraordinary charge............. $ 1.78 $ 1.89
Net Income per unit......................................... $ 1.78 $ 1.60
</TABLE>
Other Acquisitions
Cardlock Fuels System, Inc.
On August 26, 1998, the Partnership signed a series of definitive
agreements to form a joint venture with Cardlock Fuels System, Inc ("CFS"), an
affiliate of Southern Counties Oil Co., for the purpose of constructing
unattended, automated fueling stations adjacent to the Partnership's terminal
facilities within its Pacific Operations. The Partnership will provide the
terminal sites, and CFS will contribute its unattended, automated fueling
station expertise including marketing and electronic transaction processing
services. At December 31, 1998, the joint venture had selected and signed lease
agreements for activity at the Pacific Operations' Bradshaw and Reno terminals.
The joint venture has a target of up to ten sites within the next three years.
Plantation Pipe Line Company
On September 15, 1998, the Partnership acquired a 24% interest in
Plantation Pipe Line Company for $110 million. Plantation Pipe Line Company owns
and operates a 3,100 mile pipeline system throughout the southeastern United
States which serves as a common carrier of refined petroleum products to various
metropolitan areas, including Atlanta, Georgia; Charlotte, North Carolina; and
the Washington, D.C. area. The Partnership will account for its investment in
Plantation Pipe Line Company under the equity method of accounting and includes
its activity as part of the Mid-Continent Operations.
Pier IX and Shipyard River Terminals
On December 18, 1998, the Partnership acquired the Pier IX Terminal,
located in Newport News, Virginia, and the Shipyard River Terminal, located in
Charleston, South Carolina for $35 million. The Pier IX Terminal has the
capacity to transload approximately 12 million tons of coal annually. It can
store 1.3 million tons of coal on its 30 acre storage site and can blend
multiple coals to meet an individual customer's requirements. In addition, the
Pier IX Terminal operates a cement facility, which has the capacity to transload
over 400,000 tons of cement annually.
The Shipyard River Terminal is a 52 acre import-export dry and liquid bulk
product handling facility which can transload coal, asphalt, fertilizer and
other aggregates. Annual throughput capacity at Shipyard River Terminal is 2.5
million tons, with ground storage capacity of 250,000 tons.
The Partnership includes the activities of both terminals as part of the
Bulk Terminals business segment.
F-25
<PAGE> 114
4. INCOME TAXES
Certain operations of the Partnership are conducted through wholly-owned
corporate subsidiaries, which are taxable. Income/(Loss) before income tax
expense attributable to corporate operations was $(1.3) million, $2.5 million
and $3.6 million for the years ended December 31, 1998, 1997, and 1996,
respectively. For the periods ended December 31, 1998, 1997, and 1996,
respectively, the provision for income taxes consists of deferred income tax of
$0.0 million, $(1.1) million, and $0.9 million, respectively, and current income
tax of $1.6 million, $0.3 million and $0.4 million, respectively. The 1998
income tax provision includes $1.7 million related to the Partnership's share of
Plantation Pipe Line Company's income taxes. The net deferred tax liability of
$0.5 million and $2.1 million at December 31, 1998 and 1997, respectively,
consists of deferred tax liabilities of $1.3 million and $4.6 million,
respectively, and deferred tax assets of $0.8 million and $2.5 million,
respectively.
Reconciling items between income tax expense computed at the statutory rate
and actual income tax expense primarily include for the year ended: December 31,
1998, intercompany income and expense items eliminated in the consolidation of
the Partnership, amortization of certain intangibles, a change in estimate of
prior years' provision, former Hall-Buck Marine, Inc. employees' exercise of
stock options prior to acquisition by the Partnership and inclusion of the
Partnership's share of income tax expense from Plantation Pipe Line Company;
December 31, 1997, the effect of a change in estimate of prior years' provision,
a partial liquidating distribution and state income taxes; and December 31,
1996, state income taxes.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ---------------------
(YEARS) 1997 1998
----------- -------- ----------
<S> <C> <C> <C>
Pacific Operations
Land................................................... -- -- $ 55,021
Buildings.............................................. 31 -- 12,136
Machinery, vehicles and equipment...................... 8-40 -- 10,963
Pipelines and terminal equipment....................... 40-50 -- 1,435,221
Construction work-in-progress.......................... -- -- 20,400
Less accumulated depreciation..................... -- (27,189)
-------- ----------
Total..................................... -- 1,506,552
Mid-Continent Operations
Land................................................... -- 1,245 $ 1,326
Buildings.............................................. 15-30 6,887 7,154
Machinery, vehicles and equipment...................... 5-30 7,962 6,680
Pipelines and terminal equipment....................... 12-40 230,762 170,194
Construction work-in-progress.......................... -- 2,236 1,881
Less accumulated depreciation..................... (41,988) (39,982)
-------- ----------
Total..................................... 207,104 147,253
Bulk Terminals
Land................................................... -- 1,466 $ 4,792
Buildings.............................................. 30 34 71
Machinery, vehicles and equipment...................... 2-15 2,830 5,161
Terminal equipment..................................... 3-40 35,190 100,994
Construction work-in-progress.......................... -- 2,008 4,725
Less accumulated depreciation..................... (3,665) (6,162)
-------- ----------
Total..................................... 37,863 109,581
</TABLE>
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<PAGE> 115
6. EQUITY INVESTMENTS
The Partnership's significant equity investments consist of Plantation Pipe
Line Company (24%), Shell CO(2) Company, Ltd. (20%), Mont Belvieu Associates
(50%), Colton Transmix Processing Facility (50%) and Heartland Pipeline Company
(50%). Total equity investments consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------ -----------
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Plantation Pipe Line Company............................. $ -- $109,401 $108,661
Shell CO(2) Company, Ltd. ............................... -- 86,688 86,685
Mont Belvieu Associates.................................. 27,157 27,568 27,591
Colton Transmix Processing Facility...................... -- 5,187 4,697
Heartland Pipeline Company............................... 4,554 4,348 4,487
All Others............................................... -- 5,416 5,415
------- -------- --------
Total.......................................... $31,711 $238,608 $237,536
======= ======== ========
</TABLE>
The Partnership's earnings from equity investments is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -----------
1996 1997 1998 1999
------ ------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Plantation Pipe Line Company.................... $ -- $ -- $ 4,421 $2,919
Shell CO(2) Company, Ltd. ...................... -- -- 14,500 3,625
Mont Belvieu Associates......................... 4,968 5,009 4,577 599
Colton Transmix Processing Facility............. -- -- 803 386
Heartland Pipeline Company...................... 707 715 1,394 414
All Others...................................... -- -- 37 12
------ ------ ------- ------
Total................................. $5,675 $5,724 $25,732 $7,955
====== ====== ======= ======
</TABLE>
Summarized combined unaudited financial information for the Partnership's
significant equity investments is reported below (in thousands):
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- ---------
1996 1997 1998 1999
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Income Statement
Revenues....................................... $31,534 $38,299 $236,534 $51,835
Earnings before income taxes................... 11,971 12,259 110,050 23,603
Net income..................................... 11,971 12,259 87,918 17,634
</TABLE>
F-27
<PAGE> 116
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------ ---------
1997 1998 1999
------- -------- ---------
<S> <C> <C> <C> <C>
Current assets................................. $ 7,353 $117,582 $100,325
Non-current Assets............................. 53,842 398,073 316,218
Current liabilities............................ 4,885 50,669 48,643
Non-current liabilities........................ 11,790 159,318 155,328
Partners'/Owners' equity....................... 44,520 305,668 212,572
</TABLE>
7. GAS PROCESSING AND FRACTIONATION TRANSACTIONS
Chevron Contract Buyout
In 1996, the Partnership was notified by Chevron, the only gas processing
customer of the Painter Plant, that it was terminating the gas processing
agreement effective as of August 1, 1996. The gas processing agreement with
Chevron allowed for early termination by Chevron, subject to an approximate $2.9
million one time termination payment. On June 14, 1996, a force majeure event
occurred and the Painter Plant gas processing facilities were shut down. Chevron
subsequently disputed its obligation to pay the early termination payment. The
Partnership negotiated with Chevron to settle all claims between the two parties
under the gas processing agreement for $2.5 million.
Gas Processing and Terminal Lease to Amoco
On February 14, 1997, the Partnership executed an operating lease agreement
with Amoco Oil Company ("Amoco") for Amoco's use of the Painter Plant
fractionator and the Partnership's Millis Terminal and Storage Facility
("Millis") with the nearby Amoco Painter Complex Gas Plant. The lease generated
$1.0 million of cash flow in 1998 and 1997.
8. LONG-TERM DEBT
OLP-B
As of December 31, 1998, OLP-B has outstanding $23.7 million principal
amount of tax exempt bonds due 2024 issued by the Jackson-Union Counties
Regional Port District. Such bonds bear interest at a weekly floating market
rate. During 1998, the weighted-average interest rate on these bonds was
approximately 3.5% per annum. OLP-B has entered into an interest rate swap,
which fixes the interest rate at approximately 3.65% per annum during the period
from February 13, 1996 to December 31, 1999.
SFPP
SFPP's long-term debt primarily consists of its Series F first mortgage
notes and a bank credit facility. At December 31, 1998, the outstanding balances
under the Series F notes and bank credit facility were $244.0 million, and
$111.0 million, respectively. The annual interest rate on the Series F notes is
10.70%, the maturity is December 2004, and interest is payable semiannually in
June and December. The Series F notes are payable in annual installments of
$31.5 million in 1999, $32.5 million in 2000, $39.5 million in 2001, $42.5
million in 2002, and $37.0 million in 2003. The first mortgage notes may also be
prepaid beginning in 1999 in full or in part at a price equal to par plus, in
certain circumstances, a premium. The first mortgage notes are secured by
mortgages on substantially all of the properties of SFPP (the "Mortgaged
Property"). The notes contain certain covenants limiting the amount of
additional debt or equity that may be issued and limiting the amount of cash
distributions, investments, and property dispositions. The bank credit facility
provides for borrowings of up to $175 million due in August 2000 and interest,
at a short-term Eurodollar rate, payable quarterly. This bank credit facility is
used primarily for financing the first mortgage notes when due. Borrowings
($111.0 million at December 31, 1998) under this facility are also secured by
F-28
<PAGE> 117
the Mortgaged Property and are generally subject to the same terms and
conditions as the first mortgage notes. At December 31, 1998, the interest rate
on the credit facility debt was 5.465%.
Credit Facilities and Senior Notes
In February 1998, the Partnership refinanced OLP-A's first mortgage notes
and existing bank credit facilities with a $325 million secured revolving credit
facility ("Credit Facility") expiring in February 2005. On December 1, 1998, the
Credit Facility was amended to release the collateral and the Credit Facility
became unsecured. The Credit Facility had an outstanding balance of $230 million
at December 31, 1998. The Credit Facility provides for principal payments equal
to the amount by which the outstanding balance is in excess of the amount
available, which reduces quarterly commencing in May 2000. The Credit Facility
also provides, at the Partnership's option, a floating interest rate equal to
either the administrative agent's base rate (but not less than the Federal Funds
Rate plus 0.5% per year) or LIBOR plus a margin ranging from .75% to 1.25% per
year based on the Partnership's ratio of Funded Indebtedness to Cash Flow, as
defined in the Credit Facility. The Credit Facility contains certain restrictive
covenants including, but not limited to, the incurrence of additional
indebtedness, the making of investments, and making cash distributions other
than quarterly distributions from available cash as provided by the partnership
agreement. The Partnership has used the proceeds from the Credit Facility to
refinance the existing first mortgage notes of OLP-A, including a prepayment
premium, to fund the cash investments in Shell CO(2) Company, Ltd. and
Plantation Pipe Line Company, to refinance the debt associated with the Hall-
Buck acquisition, to fund the acquisition of the general partner interest in
Santa Fe (Note 3), and to fund the acquisition of the Pier IX Terminal and the
Shipyard River Terminal. The prepayment premium and the write-off of the
associated unamortized debt issue costs are reflected as an extraordinary charge
in the accompanying consolidated statement of income.
On November 6, 1998, the Partnership filed with the SEC a shelf
registration statement with respect to the sale from time to time of up to $600
million in debt and/or equity securities. On January 29, 1999, the Partnership
closed a public offering of $250 million in principal amount of 6.30% Senior
Notes due February 1, 2009 ("Notes") at a price to the public of 99.67% per
Note. In the offering, the Partnership received proceeds, net of underwriting
discounts and commissions, of approximately $248 million. The proceeds were used
to pay the outstanding balance on the Credit Facility and for working capital
and other proper partnership purposes. The Notes will be guaranteed on a full,
unconditional, and joint and several basis by all of the Partnership's
consolidating subsidiaries (excluding SFPP and the subsidiaries of Kinder Morgan
Bulk Terminals, Inc.) so long as any other debt obligations of the Partnership
are guaranteed by such subsidiaries. SFPP, which was acquired March 6, 1998,
will not be guaranteeing the public debt securities.
F-29
<PAGE> 118
Kinder Morgan Energy Partners, L.P., the parent company, has operations from
only investments in its subsidiaries. The following discloses the consolidating
financial information for the Partnership:
CONSOLIDATING STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
KINDER MORGAN COMBINED COMBINED ELIMINATIONS
ENERGY GUARANTOR NONGUARANTOR AND
PARTNERS, LP SUBS. SUBS. ADJUSTMENTS CONSOLIDATED
------------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues......................... $ -- $101,187 $221,430 $ -- $322,617
Costs and Expenses
Cost of products sold.......... -- 5,860 -- -- 5,860
Operations and maintenance..... -- 39,318 25,704 -- 65,022
Fuel and power................. -- 6,069 16,316 -- 22,385
Depreciation and
amortization................. -- 12,144 25,177 -- 37,321
General and administrative..... -- 11,047 28,937 -- 39,984
Taxes, other than income
taxes........................ -- 3,592 8,548 -- 12,140
-------- -------- -------- --------- --------
-- 78,030 104,682 -- 182,712
-------- -------- -------- --------- --------
Operating Income................. -- 23,157 116,748 -- 139,905
Other Income (Expense)
Earnings from equity
investments.................. 103,563 109,355 803 (187,989) 25,732
Interest, net.................. 47 (12,365) (26,282) -- (38,600)
Other, net..................... -- (845) (6,418) -- (7,263)
Minority Interest................ -- 496 -- (1,481) (985)
-------- -------- -------- --------- --------
Income Before Taxes and
Extraordinary charge........... 103,610 119,798 84,851 (189,470) 118,789
Income Tax Benefit (Expense)..... -- (1,572) -- -- (1,572)
-------- -------- -------- --------- --------
Income Before Extraordinary
charge......................... 103,610 118,226 84,851 (189,470) 117,217
Extraordinary charge on early
extinguishment of debt......... (4) (13,607) -- -- (13,611)
-------- -------- -------- --------- --------
Net Income....................... $103,606 $104,619 $ 84,851 $(189,470) $103,606
======== ======== ======== ========= ========
</TABLE>
F-30
<PAGE> 119
CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
KINDER MORGAN COMBINED COMBINED ELIMINATIONS
ENERGY GUARANTOR NONGUARANTOR AND
PARTNERS, LP SUBS. SUBS. ADJUSTMENTS CONSOLIDATED
------------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents........... $ 93 $ 16,980 $ 14,662 $ -- $ 31,735
Accounts and notes receivable....... 8,160 27,521 38,089 (29,645) 44,125
Inventories
Products.......................... -- 2,486 415 -- 2,901
Materials and supplies............ -- 1,850 790 -- 2,640
---------- ---------- ---------- ----------- ----------
8,253 48,837 53,956 (29,645) 81,401
---------- ---------- ---------- ----------- ----------
Property, Plant and Equipment, at
cost................................ -- 302,978 1,533,741 -- 1,836,719
Less accumulated depreciation....... -- 46,145 27,188 -- 73,333
---------- ---------- ---------- ----------- ----------
-- 256,833 1,506,553 -- 1,763,386
---------- ---------- ---------- ----------- ----------
Equity Investments.................... 1,356,643 1,293,478 10,534 (2,422,047) 238,608
---------- ---------- ---------- ----------- ----------
Intangibles........................... -- 58,536 -- -- 58,536
Deferred charges and other assets..... 233,066 5,548 1,958 (230,231) 10,341
---------- ---------- ---------- ----------- ----------
TOTAL ASSETS................. $1,597,962 $1,663,232 $1,573,001 $(2,681,923) $2,152,272
========== ========== ========== =========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable
Trade............................. $ -- $ 5,737 $ 5,953 $ -- $ 11,690
Related parties................... 7,046 20,950 15,601 (29,645) 13,952
Accrued liabilities................. 253 3,266 14,711 -- 18,230
Accrued benefits.................... -- 2,172 7,243 -- 9,415
Accrued taxes....................... -- 772 3,423 -- 4,195
---------- ---------- ---------- ----------- ----------
7,299 32,897 46,931 (29,645) 57,482
---------- ---------- ---------- ----------- ----------
Long-Term Liabilities and Deferred
Credits
Long-term debt...................... 230,000 256,293 355,509 (230,231) 611,571
Other............................... -- 4,921 99,868 -- 104,789
---------- ---------- ---------- ----------- ----------
230,000 261,214 455,377 (230,231) 716,360
---------- ---------- ---------- ----------- ----------
Minority Interest..................... -- (1,365) -- 19,132 17,767
---------- ---------- ---------- ----------- ----------
Partners' Capital
Limited Partner Interests........... -- 1,356,643 -- (1,356,643) --
General Partner Interests........... -- -- 1,065,404 (1,065,404) --
Special LP Interests................ -- -- 5,289 (5,289) --
Common Units........................ 1,348,591 -- -- -- 1,348,591
Kinder Morgan General Partner....... 12,072 13,843 -- (13,843) 12,072
---------- ---------- ---------- ----------- ----------
1,360,663 1,370,486 1,070,693 (2,441,179) 1,360,663
---------- ---------- ---------- ----------- ----------
TOTAL LIABILITIES AND
CAPITAL.................... $1,597,962 $1,663,232 $1,573,001 $(2,681,923) $2,152,272
========== ========== ========== =========== ==========
</TABLE>
F-31
<PAGE> 120
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
KINDER MORGAN COMBINED COMBINED ELIMINATIONS
ENERGY GUARANTOR NONGUARANTOR AND
PARTNERS, LP SUBS. SUBS. ADJUSTMENTS CONSOLIDATED
------------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Reconciliation of net income to net cash
provided by operating activities
Net income.................................. $ 103,606 $104,619 $ 84,851 $(189,470) $ 103,606
Extraordinary charge on early extinguishment
of debt................................... 4 13,607 -- -- 13,611
Depreciation and amortization............... -- 12,144 25,177 -- 37,321
Earnings from equity investments............ (103,563) (109,355) (803) 187,989 (25,732)
Distributions from equity investments....... 118,500 100,308 -- (199,138) 19,670
Changes in components of working capital
Accounts receivable....................... (193,033) 171,386 (9,682) 32,532 1,203
Inventories............................... -- (794) 60 -- (734)
Accounts payable.......................... 6,679 12,267 13,783 (32,532) 197
Accrued liabilities....................... 253 1,853 (16,221) -- (14,115)
Accrued taxes............................. -- (2,105) 839 -- (1,266)
El Paso Settlement........................ -- -- (8,000) -- (8,000)
Other, net................................ 322 9,240 (2,823) 1,481 8,220
--------- --------- -------- --------- ---------
Net Cash Provided by (Used in) Operating
Activities................................ (67,232) 313,170 87,181 (199,138) 133,981
--------- --------- -------- --------- ---------
Cash Flows From Investing Activities
Acquisitions of assets.................... (225) (128,418) 21,499 -- (107,144)
Additions to property, plant and equipment
for expansion and maintenance
projects................................ -- (16,001) (22,406) -- (38,407)
Sale of property, plant and equipment..... -- 44 20 -- 64
Contributions to equity investments....... -- (145,743) (491) 10,000 (136,234)
--------- --------- -------- --------- ---------
Net Cash Provided by (Used in) Investing
Activities................................ (225) (290,118) (1,378) 10,000 (281,721)
--------- --------- -------- --------- ---------
Cash Flows From Financing Activities
Issuance of debt.......................... 452,000 263,038 32,612 (255,038) 492,612
Payment of debt........................... (222,000) (157,863) (32,710) 4,776 (407,797)
Cost of refinancing long-term debt........ (3,160) (13,608) -- -- (16,768)
Proceeds from issuance of common units.... 212,303 -- -- -- 212,303
Contributions from GP interests........... -- 12,349 10,000 (10,000) 12,349
Distributions to partners
Limited Partner Interests................. -- (118,500) -- 118,500 --
General Partner Interests................. -- -- (80,638) 80,638 --
Special LP Interests...................... -- -- (405) 405 --
Common Units.............................. (93,352) -- -- -- (93,352)
Kinder Morgan General Partner............. (27,450) (1,209) -- 1,209 (27,450)
Minority Interest......................... -- -- -- (1,614) (1,614)
Other, net................................ (250,841) 159 -- 250,262 (420)
--------- --------- -------- --------- ---------
Net Cash Provided by (Used in) Financing
Activities................................ 67,500 (15,634) (71,141) 189,138 169,863
--------- --------- -------- --------- ---------
Increase/(Decrease) in Cash and Cash
Equivalents............................... 43 7,418 14,662 -- 22,123
Cash and Cash Equivalents, Beginning of
Period.................................... 50 9,562 -- -- 9,612
--------- --------- -------- --------- ---------
Cash and Cash Equivalents, End of Period.... $ 93 $ 16,980 $ 14,662 $ -- $ 31,735
========= ========= ======== ========= =========
</TABLE>
F-32
<PAGE> 121
Fair Value of Financial Instruments
The estimated fair value of the long-term debt based upon prevailing
interest rates available to the Partnership at December 31, 1998 and 1997 is
disclosed below.
Fair value as used in SFAS No. 107 -- "Disclosures About Fair Value of
Financial Instruments" represents the amount at which the instrument could be
exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term debt............................... $146,824 $158,343 $611,571 $645,873
</TABLE>
9. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In 1998, the Partnership adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which revises and standardizes the reporting
requirements for postretirement benefits. However, SFAS No. 132 does not change
the measurement and recognition of those benefits.
In connection with the acquisition of SFPP and Hall-Buck, the Partnership
acquired certain liabilities for pension and postretirement benefits. The
Partnership has a noncontributory defined benefit pension plan covering the
former employees of Hall-Buck. The benefits under this plan were based primarily
upon years of service and final average pensionable earnings. The Partnership
also provides medical and life insurance benefits to current employees, their
covered dependents and beneficiaries of SFPP and Kinder Morgan Bulk Terminals,
Inc. The Partnership also provides the same benefits to former salaried
employees of SFPP.
The SFPP postretirement benefit plan is frozen as no additional
participants may join the Plan. The Partnership will continue to fund the cost
associated with those employees currently in the Plan for medical benefits and
life insurance coverage during retirement.
Net periodic benefit costs for these plans include the following components
(in thousands):
<TABLE>
<CAPTION>
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
1998 1998
---------------- --------------------
<S> <C> <C>
Net periodic benefit cost
Service cost....................................... $ 98 $ 636
Interest cost...................................... 76 983
Expected return on plan assets..................... (70) --
Amortization of prior service cost................. -- (493)
Actuarial loss (gain).............................. -- (208)
----- -----
Net periodic benefit cost.......................... $ 104 $ 918
===== =====
Additional amounts recognized for 1998
Curtailment (gain) loss............................ $(425) $ --
</TABLE>
F-33
<PAGE> 122
Information concerning benefit obligations, plan assets, funded status and
recorded values for these plans follows (in thousands):
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
1998 1998
-------- --------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at January 1, 1998....................... $ -- $ --
Service cost................................................ 98 636
Interest cost............................................... 76 983
Plan participants' contributions............................ -- 117
Actuarial loss.............................................. -- 529
Acquisitions................................................ 2,201 13,039
Curtailment (gain).......................................... (425) --
Benefits paid from plan assets.............................. (88) (570)
------ --------
Benefit obligation at December 31, 1998..................... $1,862 $ 14,734
====== ========
Change in Plan Assets
Fair value of plan assets at January 1, 1998................ $ -- $ --
Actual return on plan assets................................ 136 --
Acquisitions................................................ 1,628 --
Employer contributions...................................... 157 453
Plan participants' contributions............................ -- 117
Benefits paid from plan assets.............................. (88) (570)
------ --------
Fair value of plan assets at December 31, 1998.............. $1,833 $ --
====== ========
Funded status............................................... $ (29) $(14,734)
Unrecognized net transition obligation...................... 3 --
Unrecognized net actuarial (gain)........................... (187) (1,831)
Unrecognized prior service (benefit)........................ -- (2,270)
------ --------
(Accrued) benefit cost...................................... $ (213) $(18,835)
====== ========
Weighted-Average assumptions at December 31, 1998
Discount rate............................................... 7.0% 7.0%
Expected return on plan assets.............................. 8.5% --
Rate of compensation increase............................... 4.0% 4.0%
</TABLE>
The unrecognized prior service credit will be amortized straight-line over
the remaining expected service to retirement (5.6 years). For 1998, the assumed
health care cost trend rate for medical costs was 9% and is assumed to decrease
gradually to 5% by 2005 and remain constant thereafter.
A one-percentage change in assumed health care cost trend rates would have
the following effects (in thousands):
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
BENEFITS
1998
--------------
<S> <C>
Effect on total of service and interest cost components
1-Percentage point increase................................. $ 103
1-Percentage point decrease................................. $ (93)
Effect on postretirement benefit obligation
1-Percentage point increase................................. $ 1,655
1-Percentage point decrease................................. $(1,490)
</TABLE>
F-34
<PAGE> 123
MULTIEMPLOYER PLANS AND OTHER BENEFITS. With the acquisition of Hall-Buck,
the Partnership participates in multi-employer pension plans for the benefit of
its employees who are union members. Partnership contributions to these plans
were $0.6 million from the period of acquisition through December 31, 1998.
These plans are not administered by the Partnership and contributions are
determined in accordance with the provisions of negotiated labor contracts.
Other benefits include a self-insured health and welfare insurance plan and an
employee health plan where employees may contribute for their dependents' health
care costs. Amounts charged to expense for these plans were $0.5 million from
the period of acquisition through December 31, 1998.
The Partnership terminated the Employee Stock ownership Plan (the "ESOP")
held by Hall-Buck for the benefit of its employees on August 13, 1998. All
participants became fully vested retroactive to July 1, 1998, the effective date
of the acquisition. The assets remaining in the plan will be distributed during
1999.
The Partnership assumed River Consulting, Inc.'s (a consolidating affiliate
of Hall-Buck Marine, Inc.), savings plan under Section 401(k) of the Internal
Revenue Code. This savings plan allowed eligible employees to contribute up to
10 percent of their compensation on a pre-tax basis, with the Partnership
matching 2.5 percent of the first 5 percent of the employees' wage. Matching
contributions are vested at the time of eligibility, which is one year after
employment. Effective January 1, 1999, this savings plan was merged into the
retirement savings plan of the general partner.
10. PARTNERS' CAPITAL
At December 31, 1998, Partners' capital consisted of 47,959,690 units held
by third parties and 862,000 units held by the general partner. Together, these
48,821,690 units represent the limited partners' interest and an effective 98%
interest in the Partnership, excluding the general partner's incentive
distribution. At December 31, 1997 and 1996 there were 14,111,200 and 13,020,000
units outstanding, respectively. The general partner interest represents an
effective 2% interest in the Partnership, excluding the general partner's
incentive distribution. On February 14, 1997, the 1,720,000 deferred
participation units held by the general partner were converted to common units
and 858,000 of these units were sold to a third party. Since the deferred
participation units owned by the general partner are now common units, they are
no longer separately disclosed. In addition to the units issued for the
acquisition of SFPP and Hall-Buck (see Note 3), the Partnership issued 6,070,578
units in June 1998 related to a primary public offering.
For purposes of maintaining partner capital accounts, the partnership
agreement specifies that items of income and loss shall be allocated among the
partners in accordance with their respective percentage interests. Normal
allocations according to percentage interests are done only, however, after
giving effect to any priority income allocations in an amount equal to incentive
distributions allocated 100% to the general partner.
Incentive distributions allocated to the general partner are determined by
the amount quarterly distributions to unitholders exceed certain specified
target levels. For the years ended December 31, 1998 and 1997, the Partnership
distributed $2.4725 and $1.8775, respectively, per unit. The distributions for
1998 and 1997 required incentive distributions to the general partner in the
amount of $32,737,571 and $3,935,852, respectively. The increased incentive
distribution paid for 1998 over 1997 reflects the increase in amount distributed
per unit as well as the issuance of additional units in 1998.
On January 13, 1999, the Partnership declared a cash distribution for the
quarterly period ended December 31, 1998, of $0.65 per unit. The distribution
was paid on February 12, 1999, to unitholders of record as of January 29, 1999,
and required an incentive distribution to the general partner of $10,717,464.
Since this distribution was declared after the end of the quarter, no amount is
shown in the December 31, 1998 balance sheet as a Distribution Payable.
F-35
<PAGE> 124
11. CONCENTRATIONS OF CREDIT RISK
Four customers of the Partnership each accounted for over 10% of
consolidated revenues for 1998. In 1997, only one customer accounted for more
than 10% of consolidated revenues. See Note 14 for more information on major
customers. Additionally, a portion of the Partnership's revenues is derived from
transportation services to oil and gas refining and marketing companies in the
Midwest. Although this concentration could affect the Partnership's overall
exposure to credit risk inasmuch as these customers could be affected by similar
economic or other conditions, management believes that the Partnership is
exposed to minimal credit risk. The Partnership generally does not require
collateral for its receivables.
12. RELATED PARTY TRANSACTIONS
Revenues and Expenses
Revenues for the year ended December 31, 1996 include transportation
charges and product sales to an Enron subsidiary, Enron Gas Liquids, Inc., of
$7.7 million. Another Enron subsidiary, Enron Gas Processing Company ("EGP"),
provided services in connection with a gas processing agreement with Mobil as
well as storage and other services to the Partnership and charged $6.6 million
for the year ended December 31, 1996. Management believes that these charges
were reasonable. As a result of KMI's acquisition of all of the common stock of
the general partner, Enron and its affiliates are no longer affiliates of the
Partnership.
The Partnership leases approximately 17 million barrels per day of North
System capacity to Heartland Pipeline Company ("Heartland") under a lease
agreement, which will expire in 2010. Revenues earned from Heartland for the
lease rights were approximately $0.9 million for each of the years ended
December 31, 1998, 1997 and 1996.
General and Administrative Expenses
Prior to the sale of the general partner, Enron and its affiliates were
reimbursed for certain corporate staff and support services rendered to the
general partner in managing and operating the Partnership. Such reimbursement
was made pursuant to the terms of the Omnibus Agreement executed among Enron,
the Partnership and the general partner at the time of formation of the
Partnership. For the year ended December 31, 1996, the amounts reimbursed to
Enron were $5.8 million.
After the sale of the general partner, the general partner provides the
Partnership with general and administrative services and is entitled to
reimbursement of all direct and indirect costs related to the business
activities of the Partnership. The general partner incurred $38.0 million in
general and administrative expenses in 1998 and $6.9 million in general and
administrative expenses in 1997.
Partnership Distributions
Kinder Morgan G.P., Inc. (the "general partner") serves as the sole general
partner of the four operating partnerships as well as the sole general partner
of the Partnership. Pursuant to the partnership agreements, the general partner
interests represent a 1% ownership interest in the Partnership, and a direct
1.0101% ownership interest in the operating partnerships. Together then, the
general partner owns an effective 2% interest in the operating partnerships,
excluding incentive distributions; the 1.0101% direct general partner ownership
interest (accounted for as minority interest in the consolidated financial
statements of the Partnership) and the 0.9899% ownership interest indirectly
owned via its 1% ownership interest in the Partnership.
At December 31, 1998, the general partner owned 862,000 units, representing
approximately 1.8% of the outstanding units. The partnership agreements
governing the operation of the Partnership and the operating partnerships
require the partnerships to distribute 100% of the "Available Cash" (as defined
in the partnership agreements) to the partners within 45 days
F-36
<PAGE> 125
following the end of each calendar quarter in accordance with their respective
percentage interests. Available Cash consists generally of all cash receipts of
the partnerships, less all of their cash disbursements, net additions to
reserves, and amounts payable to the former Santa Fe General Partner in respect
of its 0.5% interest in SFPP, L.P.
In general, Available Cash for each quarter is distributed, first, 98% to
the limited partners and 2% to the general partner until the limited partners
have received a total of $0.3025 per unit for such quarter, second, 85% to the
limited partners and 15% to the general partner until the limited partners have
received a total of $0.3575 per unit for such quarter, third, 75% to the limited
partners and 25% to the general partner until the limited partners have received
a total of $0.4675 per unit for such quarter, and fourth, thereafter 50% to the
limited partners and 50% to the general partner. Incentive distributions are
generally defined as all cash distributions paid or payable to the general
partner that are in excess of 2% of the aggregate amount of cash being
distributed. The general partner's declared incentive distributions for the
years ended December 31, 1998, 1997, and 1996 were $32,737,571, $3,935,852 and
$100,571, respectively.
13. LEASES AND COMMITMENTS
The Partnership has entered into certain operating leases. Including
probable elections to exercise renewal options, the leases have remaining terms
ranging from one to forty-five years. Future commitments related to these leases
at December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 4,886
2000........................................................ 3,951
2001........................................................ 3,781
2002........................................................ 4,209
2003........................................................ 4,052
Thereafter.................................................. 31,924
-------
Total minimum payments............................ $52,803
=======
</TABLE>
Total minimum payments have not been reduced for future minimum sublease
rentals aggregating approximately $3.2 million. Total lease expenses, including
related variable charges, incurred for the years ended December 31, 1998, 1997,
and 1996 were $3.7 million, $1.3 million and $1.5 million, respectively.
The primary shipper on the Cypress Pipeline has the right until 2011 to
purchase up to a 50% joint venture interest in the pipeline at a price based on,
among other things, the construction cost of the Cypress Pipeline, plus
adjustments for expansions. If the customer exercises its rights under the
option, management anticipates that no loss will accrue to the Partnership.
Under a joint tariff agreement, the Partnership's North System is obligated
to pay minimum tariff revenues of approximately $2.0 million per contract year
to an unaffiliated pipeline company subject to certain adjustments. This
agreement expires March 1, 2013, but provides for a five-year extension at the
option of the Partnership.
During 1998, the Partnership established a unit option plan, which provides
that key personnel are eligible to receive grants of options to acquire units.
The number of units available under the option plan is 250,000. The option plan
terminates in March 2008. As of December 31, 1998, 194,500 options were granted
to certain personnel with a term of seven years at exercise prices equal to the
market price of the units at the grant date ($34.56 weighted average price). In
addition, 10,000 options were granted to non-employee directors of the
Partnership. The options granted generally vest forty percent in the first year
and twenty percent each year thereafter.
The Partnership applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for unit options granted under the
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<PAGE> 126
Partnership's option plan. Pro forma information regarding changes in net income
and per unit data if the accounting prescribed by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation," had been
applied is not material. No compensation expense has been recorded since the
options were granted at exercise prices equal to the market prices at the date
of grant.
During 1997, the Partnership established an Executive Compensation Plan for
certain executive officers of the general partner. The Partnership may, at its
option and with the approval of the unitholders, pay the participants in units
instead of cash. Eligible awards are equal to a formula based upon the cash
distributions paid to the general partner during the four calendar quarters
preceding the date of redemption multiplied by eight (the "Calculated Amount").
Calculated amounts are accrued as compensation expense and adjusted quarterly.
Under the plan, no eligible employee may receive a grant in excess of 2% and
total awards under the Plan may not exceed 10% of the Calculated Amount. The
plan terminates January 1, 2007, and any unredeemed awards will be automatically
redeemed.
At December 31, 1998, certain executive officers of the general partner had
outstanding awards totaling 2% of the Calculated Amount eligible to be granted
under the Plan. On January 4, 1999 (subsequent to year end) 50% of the awards
granted to these executive officers were vested and paid out. Each participant
continues to have a grant of 1% under the plan.
14. REPORTABLE SEGMENTS
The Partnership has adopted SFAS No. 131 -- "Disclosures About Segments of
an Enterprise and Related Information." The Partnership competes in three
reportable business segments: Pacific Operations, Mid-Continent Operations and
Bulk Terminals (see Note 1). The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (see
Note 2). The Partnership evaluates performance based on each segments' earnings,
which excludes general and administrative expenses, third-party debt costs,
unallocable non-affiliated interest income and expense, and minority interest.
The Partnership's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment involves different products and marketing strategies.
Financial information by segment follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Revenues
Pacific Operations..................................... $ -- $ -- $ 221,430
Mid-Continent Operations............................... 63,191 55,777 38,271
Bulk Terminals......................................... 8,059 18,155 62,916
-------- -------- ----------
Total Segments......................................... $ 71,250 $ 73,932 $ 322,617
======== ======== ==========
Operating Income
Pacific Operations..................................... $ -- $ -- $ 145,685
Mid-Continent Operations............................... 21,804 22,389 13,632
Bulk Terminals......................................... 4,401 10,709 20,572
-------- -------- ----------
Total Segments......................................... $ 26,205 $ 33,098 $ 179,889
======== ======== ==========
Earnings from equity investments
Pacific Operations..................................... $ -- $ -- $ 803
Mid-Continent Operations............................... 5,675 5,724 24,892
Bulk Terminals......................................... -- -- 37
-------- -------- ----------
Total Segments......................................... $ 5,675 $ 5,724 $ 25,732
======== ======== ==========
</TABLE>
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<PAGE> 127
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Other, net
Pacific Operations..................................... $ -- $ -- $ (6,418)
Mid-Continent Operations............................... 2,605 (707) (80)
Bulk Terminals......................................... 21 (1) (765)
-------- -------- ----------
Total Segments......................................... $ 2,626 $ (708) $ (7,263)
======== ======== ==========
Income tax benefit (expense)
Pacific Operations..................................... $ -- $ -- $ --
Mid-Continent Operations............................... (1,343) 740 (972)
Bulk Terminals......................................... -- -- (600)
-------- -------- ----------
Total Segments......................................... $ (1,343) $ 740 $ (1,572)
======== ======== ==========
Segment earnings
Pacific Operations..................................... $ -- $ -- $ 140,070
Mid-Continent Operations............................... 28,741 27,482 37,156
Bulk Terminals......................................... 4,422 10,708 19,244
-------- -------- ----------
Total Segments(1)...................................... $ 33,163 $ 38,190 $ 196,470
======== ======== ==========
Assets at December 31
Pacific Operations..................................... $ -- $ -- $1,549,523
Mid-Continent Operations............................... 255,679 254,084 381,881
Bulk Terminals......................................... 33,625 54,710 186,298
-------- -------- ----------
Total Segments(2)...................................... $289,304 $308,794 $2,117,702
======== ======== ==========
Depreciation and amortization
Pacific Operations..................................... $ -- $ -- $ 25,177
Mid-Continent Operations............................... 8,542 9,009 8,274
Bulk Terminals......................................... 1,366 1,058 3,870
-------- -------- ----------
Total Segments......................................... $ 9,908 $ 10,067 $ 37,321
======== ======== ==========
Capital expenditures
Pacific Operations..................................... $ -- $ -- $ 23,925
Mid-Continent Operations............................... 7,969 4,310 4,531
Bulk Terminals......................................... 606 2,574 9,951
-------- -------- ----------
Total Segments......................................... $ 8,575 $ 6,884 $ 38,407
======== ======== ==========
</TABLE>
(1) The following reconciles segment earnings to net income.
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Segment earnings........................................ $ 33,163 $ 38,190 $196,470
Interest and corporate administrative expenses(a)....... (21,263) (20,453) (92,864)
-------- -------- --------
Net Income.............................................. $ 11,900 $ 17,737 $103,606
======== ======== ========
</TABLE>
- ------------
(a) Includes interest and debt expense, general and administrative expenses,
minority interest expense and other insignificant items.
F-39
<PAGE> 128
(2) The following reconciles segment assets to consolidated assets.
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Segment assets........................................... $289,304 $308,794 $2,117,702
Corporate assets(a)...................................... 14,299 4,112 34,570
-------- -------- ----------
Total assets............................................. $303,603 $312,906 $2,152,272
======== ======== ==========
</TABLE>
- ------------
(a) Includes cash, cash equivalents and certain unallocable deferred charges.
Although the Partnership's 1998 revenues were derived from a wide customer
base, revenues from one customer of the Partnership's Pacific Operations and
Bulk Terminals segments represented approximately $42.5 million (13.2%) of the
Partnership's consolidated revenues. Three other customers of the Pacific
Operations accounted for more than 10% of total revenues. These customers had
revenues of approximately $39.7 million (12.3%), $35.29 million (11.0%) and
$35.28 million (10.9%), respectively, of total revenues. For the year ended
December 31, 1997, revenues from one customer of the Mid-Continent Operations
segment represented approximately $8.8 million (11.9%) of total revenues. For
the year ended December 31, 1996, revenues from two customers of the
Mid-Continent Operations segment represented approximately $8.9 million (12.4%)
and $7.4 million (10.4%), respectively, of total revenues.
15. LITIGATION AND OTHER CONTINGENCIES
The tariffs charged for interstate common carrier pipeline transportation
for the Partnership's pipelines are subject to rate regulation by the Federal
Energy Regulatory Commission ("FERC") under the Interstate Commerce Act ("ICA").
The ICA requires, among other things, that petroleum products (including NGLs)
pipeline rates be just and reasonable and non-discriminatory. Pursuant to FERC
Order No. 561, effective January 1, 1995, petroleum pipelines are able to change
their rates within prescribed ceiling levels that are tied to an inflation
index. FERC Order No. 561-A, affirming and clarifying Order No. 561, expands the
circumstances under which petroleum pipelines may employ cost-of-service
ratemaking in lieu of the indexing methodology, effective January 1, 1995. For
each of the years ended December 31, 1998, 1997, and 1996, the application of
the indexing methodology did not significantly affect the Partnership's rates.
Tariffs charged by SFPP are subject to certain proceedings involving shippers'
protests regarding the interstate rates, as well as practices and the
jurisdictional nature of certain facilities and services on the Pacific
Operations' pipeline systems.
FERC Proceedings
In September 1992, El Paso Refinery, L.P. ("El Paso") filed a
protest/complaint with the FERC challenging SFPP's East Line rates from El Paso,
Texas to Tucson and Phoenix, Arizona, challenging SFPP's proration policy and
seeking to block the reversal of the direction of flow of SFPP's six inch
pipeline between Phoenix and Tucson. At various dates following El Paso's
September 1992 filing, other shippers on SFPP's South System, including Chevron
U.S.A. Products Company ("Chevron"), Navajo, ARCO Products Company ("ARCO"),
Texaco Refining and Marketing Inc. ("Texaco"), Refinery Holding Company, L.P. (a
partnership formed by El Paso's long-term secured creditors that purchased El
Paso's refinery in May 1993), Mobil Oil Corporation and Tosco Corporation, filed
separate complaints, and/or motions to intervene in the FERC proceeding,
challenging SFPP's rates on its East and West Lines. Certain of these parties
also claimed that a gathering enhancement charge at SFPP's Watson origin pump
station in Carson, California was charged in violation of the ICA. In subsequent
procedural rulings, the FERC consolidated these challenges (Docket Nos.
OR92-8-000, et al.) and ruled that they must proceed as a complaint proceeding,
with the burden of proof being placed on the complaining parties. Such parties
must show that SFPP's rates and practices at issue violate the requirements of
the Interstate Commerce Act.
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<PAGE> 129
Hearings in the FERC proceeding commenced on April 9, 1996 and concluded on
July 19, 1996. The parties completed the filing of their post-hearing briefs on
December 9, 1996. An initial decision by the FERC Administrative Law Judge was
issued on September 25, 1997 (the "Initial Decision").
The Initial Decision upheld SFPP's position that "changed circumstances"
were not shown to exist on the West Line, thereby retaining the just and
reasonable status of all West Line rates that were "grandfathered" under the
Energy Policy Act of 1992 ("EPACT"). Accordingly, such rates are not subject to
challenge, either for the past or prospectively. The Administrative Law Judge's
decision specifically excepted from that ruling SFPP's Tariff No. 18 for
movement of jet fuel from Los Angeles to Tucson, which was initiated subsequent
to the enactment of EPACT.
The Initial Decision also included rulings that were generally adverse to
SFPP on such cost of service issues as the capital structure to be used in
computing SFPP's 1985 starting rate base under FERC Opinion 154-B, the level of
income tax allowance, and the recoverability of civil and regulatory litigation
expense and certain pipeline reconditioning costs. The Administrative Law Judge
also ruled that a gathering enhancement service at SFPP's Watson origin pump
station in Carson, California was subject to FERC jurisdiction and ordered that
a tariff for that service and supporting cost of service documentation be filed
no later than 60 days after a final FERC order on this matter.
As of December 31, 1998, the matters at issue were pending before the FERC
commissioners for a final decision. On January 13, 1999, the FERC issued its
Opinion No. 435, which affirmed in part and modified in part the Initial
Decision. In Opinion No. 435, the FERC ruled that all but one of the West Line
rates are "grandfathered" as just and reasonable and that "changed
circumstances" had not been shown to satisfy the complainants' threshold burden
necessary to challenge those rates. The FERC further held that the one
"non-grandfathered" West Line tariff did not require rate reduction.
Accordingly, all complaints against the West Line rates were dismissed without
any requirement that SFPP reduce, or pay any reparations for, any West Line
rate.
With respect to the East Line rates, Opinion No. 435 reversed in part and
affirmed in part the Initial Decision's ruling regarding the methodology of
calculating the rate base for the East Line. Among other things, Opinion No. 435
modified the Initial Decision concerning the date in reference to which the
starting rate base would be calculated and the income tax allowance and
allowable cost of equity used to calculate the rate base. In addition, Opinion
No. 435 ruled that no reparations would be owed to any complainant for any
period prior to the date on which that complainant's complaint was filed, thus
reducing the potential reparations period for most complainants by two years.
Several parties to the proceeding have filed a petition with the United States
Court of Appeals for the District of Columbia circuit for review of Opinion No.
435. SFPP has sought rehearing from the FERC and has also sought review from the
United States Courts of Appeals for the District of Columbia Circuit of Opinion
No. 435. The Partnership believes Opinion No. 435 substantially reduces the
negative impact of the Initial Decision.
In December 1995, Texaco filed an additional FERC complaint, which involves
the question of whether a tariff filing was required for movements on certain of
SFPP's lines upstream of its Watson, California station origin point (the
"Sepulveda Lines") and, if so, whether those rates may be set in that proceeding
and what those rates should be. Texaco's initial complaint was followed by
several other West Line shippers filing similar complaints and/or motions to
intervene, all of which have been consolidated into Docket Nos. OR96-2-000 et
al. Hearings before an Administrative Law Judge were held in December 1996 and
the parties completed the filing of final post-hearing briefs on January 31,
1997.
On March 28, 1997, the Administrative Law Judge issued an initial decision
holding that the movements on SFPP's Sepulveda Lines are not subject to FERC
jurisdiction. On August 5, 1997, the FERC reversed that decision and found the
Sepulveda Lines to be subject to the jurisdiction of the FERC. SFPP was ordered
to make a tariff filing within 60 days to establish an initial rate for these
facilities. The FERC reserved decision on reparations until it ruled on the
newly-filed rates. On October 6, 1997, SFPP filed a tariff establishing the
initial interstate rate for movements on the
F-41
<PAGE> 130
Sepulveda Lines from Sepulveda Junction to Watson Station at the preexisting
rate of five cents per barrel, along with supporting cost of service
documentation. Subsequently, several shippers filed protests and motions to
intervene at the FERC challenging that rate. On October 27, 1997, SFPP made a
responsive filing at the FERC, requesting that these protests be held in
abeyance until the FERC ruled on SFPP's request for rehearing of the August 5,
1997 order, and also indicating that SFPP intended to defend the new tariff both
on the basis of its cost of service and as a market-based rate. On November 5,
1997, the FERC issued an order accepting the new rate effective November 6,
1997, subject to refund, and referred the proceeding to a settlement judge. On
December 10, 1997, following a settlement conference held at the direction of
the FERC, the settlement judge recommended that the settlement procedures be
terminated. On December 24, 1997, FERC denied SFPP's request for rehearing of
the August 5, 1997 decision. On December 31, 1997, SFPP filed an application for
market power determination, which, if granted, will enable it to charge
market-based rates for this service.
On October 22, 1997, ARCO Products Company, Mobil Oil Corporation and
Texaco Refining and Marketing, Inc. filed another complaint at the FERC (Docket
No. OR98-1-000) challenging the justness and reasonableness of all of SFPP's
interstate rates. The complaint again challenges SFPP's East and West Line rates
and raises many of the same issues, including a renewed challenge to the
grandfathered status of West Line rates, that have been at issue in Docket Nos.
OR92-8-000, et al. The complaint includes an assertion that the acquisition of
SFPP and the cost savings anticipated to result from the acquisition constitute
"changed circumstances" that provide a basis for terminating the "grandfathered"
status of SFPP's otherwise protected rates. The complaint also seeks to
establish that SFPP's grandfathered interstate rates from the San Francisco Bay
area to Reno, Nevada and from Portland to Eugene, Oregon are also subject to
"changed circumstances" and, therefore, can be challenged as unjust and
unreasonable. On November 26, 1997, Ultramar Diamond Shamrock Corporation filed
a similar complaint at the FERC (Docket No. OR98-2-000). Both reparations and
prospective rate deductions are sought for movements on all of the lines.
SFPP filed answers to both complaints with the FERC on November 21, 1997
and December 22, 1997, respectively, and intends to vigorously defend all of the
challenged rates. On January 20, 1998, the FERC issued an order accepting the
complaints and consolidating both complaints into one proceeding, but holding
them in abeyance pending a Commission decision on review of the Initial Decision
in Docket Nos. OR92-8-000 et al. In a companion order to Opinion No. 435, the
FERC directed the complainants to amend their complaints, as may be appropriate,
consistent with the terms and conditions of its orders, including Opinion No.
435.
Applicable rules and regulations in this field are vague, relevant factual
issues are complex and there is little precedent available regarding the factors
to be considered or the method of analysis to be employed in making a
determination of "changed circumstances", which is the showing necessary to make
"grandfathered" rates subject to challenge. The Partnership believes, after
consultation with FERC counsel, that the acquisition of SFPP, standing alone,
should not be found to constitute "changed circumstances", however, the
realization of the cost savings anticipated to arise from the acquisition may
increase the risk of a finding of "changed circumstances".
If "changed circumstances" are found, SFPP rates previously "grandfathered"
under EPACT may lose their "grandfathered" status and, if such rates are found
to be unjust and unreasonable, shippers may be entitled to a prospective rate
reduction together with reparations for periods from the date of the complaint
to the date of the implementation of the new rates.
The Partnership is not able to predict with certainty whether settlement
agreements will be completed with some or all of the complainants, the final
terms of any such settlement agreements that may be consummated, or the final
outcome of the FERC proceedings should they be carried through to their
conclusion, and it is possible that current or future proceedings could be
resolved in a manner adverse to the Partnership.
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<PAGE> 131
California Public Utilities Commission Proceeding
A complaint was filed with the California Public Utilities Commission on
April 7, 1997 by ARCO Products Company, Mobil Oil Corporation and Texaco
Refining and Marketing Inc. against SFPP, L.P. The complaint challenges rates
charged by SFPP for intrastate transportation of refined petroleum products
through its pipeline system in the State of California and requests prospective
rate adjustments. On October 1, 1997, the complainants filed testimony seeking
prospective rate reductions aggregating approximately $15 million per year. On
November 26, 1997, SFPP filed responsive testimony defending the justness and
reasonableness of its rates. The rebuttal testimony was filed on December 12,
1997 and hearings before the Administrative Law Judge were completed on January
15, 1998. Briefing and oral arguments were made in March 1998, and on June 18,
1998, a California Public Utilities Commission ("CPUC") Administrative Law Judge
issued a ruling in the Partnership's favor and dismissed the complaints. On
August 6, 1998, the CPUC affirmed the Judge's decision. The shippers have
appealed the CPUC's decision for rehearing before the CPUC. The Partnership
believes it has adequate reserves recorded for any adverse decision related to
this matter.
SPTC Easements
SFPP and Southern Pacific Transportation Company ("SPTC") are engaged in a
judicial reference proceeding to determine the extent, if any, to which the rent
payable by SFPP for the use of pipeline easements on rights-of-way held by SPTC
should be adjusted pursuant to existing contractual arrangements (Southern
Pacific Transportation Company vs. Santa Fe Pacific Corporation, SFP Properties,
Inc., Santa Fe Pacific Pipelines, Inc., SFPP, L.P., et al., Superior Court of
the State of California for the County of San Francisco, filed August 31, 1994).
This matter was tried in the latter part of 1996 and the court issued its
Statement of Tentative Decision in January 1997. The Statement of Tentative
Decision indicated that the court intended to establish a new base annual rental
for the subject rights-of-way at a level, subject to inflation adjustments, that
is adequately provided for by the amounts accrued by SFPP through December 31,
1998.
On May 7, 1997, the judge issued a Statement of Decision and Judgment that
reaffirmed the conclusions set forth in his January 1997 Statement of Tentative
Decision. This Statement of Decision and Judgment was filed on June 30, 1997
with the Superior Court for the County of San Francisco, under which court's
jurisdiction it is subject to appeal by SPTC. On May 30, 1997, SPTC filed a
motion for a new trial and the motion was denied on June 26, 1997. SPTC and SFPP
filed motions of appeal in July and August 1997, respectively. The case is
currently pending before the Court of Appeals for the First Appellate District
of the State of California. The Partnership believes it has adequate reserves
recorded for any adverse decision related to this matter.
Environmental Matters
The Partnership is subject to environmental cleanup and enforcement actions
from time to time. In particular, the federal Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA" or "Superfund" law) generally
imposes joint and several liability for cleanup and enforcement costs, without
regard to fault or the legality of the original conduct, on current or
predecessor owners and operators of a site. The operations of the Partnership
are also subject to Federal, state and local laws and regulations relating to
protection of the environment. Although the Partnership believes its operations
are in general compliance with applicable environmental regulations, risks of
additional costs and liabilities are inherent in pipeline and terminal
operations, and there can be no assurance significant costs and liabilities will
not be incurred by the Partnership. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property or persons
resulting from the operations of the Partnership, could result in substantial
costs and liabilities to the Partnership.
F-43
<PAGE> 132
Since August 1991, SFPP, along with several other respondents, has been
involved in one cleanup ordered by the United States Environmental Protection
Agency ("EPA") related to ground water contamination in the vicinity of SFPP's
storage facilities and truck loading terminal at Sparks, Nevada. The EPA
approved the respondents' remediation plan in September 1992 and the remediation
system began operation in 1995. In addition, SFPP is presently involved in 18
ground water hydrocarbon remediation efforts under administrative orders issued
by the California Regional Water Quality Control Board and two other state
agencies. The Partnership has recorded a reserve for environmental claims in the
amount of $26.1 million at December 31, 1998.
Morris Storage Facility
The general partner is a defendant in two proceedings (one by the State of
Illinois and one by the Department of Transportation) relating to alleged
environmental violations for events relating to a fire that occurred at the
Morris storage field in September, 1994. Although no assurance can be given, the
Partnership believes that the ultimate resolution of these matters will not have
a material adverse effect on its financial position or results of operations.
Other
The Partnership, in the ordinary course of business, is a defendant in
various lawsuits relating to the Partnership's assets. Although no assurance can
be given, the Partnership believes, based on its experience to date, that the
ultimate resolution of such items will not have a material adverse impact on the
Partnership's financial position or results of operations.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
OPERATING OPERATING NET INCOME
REVENUES INCOME NET INCOME PER UNIT
--------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C>
1998
First Quarter(1)...................... $ 36,741 $15,091 $ 353 $(0.12)
Second Quarter........................ 82,044 39,371 30,313 0.50
Third Quarter......................... 101,900 41,623 35,116 0.52
Fourth Quarter........................ 101,932 43,820 37,824 0.55
1997
First Quarter......................... $ 19,132 $ 5,927 $ 3,428 $ 0.26
Second Quarter........................ 16,036 4,800 2,866 0.15
Third Quarter......................... 17,385 5,315 3,754 0.20
Fourth Quarter........................ 21,379 8,189 7,689 0.41
</TABLE>
- ------------
(1) Note: 1998 First Quarter includes an extraordinary charge of $13,611 due to
an early extinguishment of debt. Net Income before extraordinary charge was
$13,964 and Net Income per Unit before extraordinary charge was $0.52.
F-44
<PAGE> 133
UNDERWRITING
Kinder Morgan, Inc. and the underwriters named below have entered into an
underwriting agreement for the shares of common stock being offered. Subject to
various conditions, each underwriter has severally agreed to purchase the number
of shares of common stock indicated in the following table. Goldman, Sachs & Co.
and PaineWebber Incorporated are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
PaineWebber Incorporated....................................
-------
Total.......................................................
=======
</TABLE>
If the underwriters sell more shares than the total number shown in the
table above, the underwriters have an option to buy up to an additional
1,087,500 shares of common stock from Kinder Morgan, Inc. to cover those sales.
They may exercise that option for 30 days. If any shares are purchased under
that option, the underwriters will severally purchase shares in approximately
the same proportion as shown in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by Kinder Morgan, Inc. Amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
Paid by Kinder Morgan, Inc.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
Common stock sold by the underwriters to the public will initially be
offered at the initial public offering price shown on the cover of this
prospectus. Any common stock sold by the underwriter to securities dealers may
be sold at a discount of up to $ per share from the initial public offering
price. Any securities dealers may resell any common stock purchased from the
underwriters to other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
Kinder Morgan, Inc. has agreed with the underwriters not to dispose of or
hedge any common stock or securities convertible into or exchangeable for shares
of common stock for 180 days without the prior written consent of the
representatives. In addition, Richard D. Kinder, Director, Chairman and Chief
Executive Officer, and William V. Morgan, Director, Vice Chairman and President,
have agreed with the underwriters not to dispose of or hedge any common stock or
securities convertible into or exchangeable for shares of common stock for two
years without the prior written consent of the representatives. Kinder Morgan,
Inc.'s remaining executive officers have agreed with the underwriters not to
dispose of or hedge any common stock or securities convertible into or
exchangeable for shares of common stock for 180 days without the prior written
consent of the representatives. Finally, First Union Corporation and some of its
employees, one of Kinder Morgan, Inc.'s principal stockholders, has agreed with
the underwriters not to dispose of or hedge any common stock or securities
convertible into or exchangeable for shares of common stock for one year without
the prior written consent of the representatives. The restrictions that apply to
Kinder Morgan, Inc. do not affect issuances under any existing employee benefit
plans. See "Shares Available for Future Sale" for a discussion of transfer
restrictions.
Prior to the offering, there has been no public market for the shares.
Kinder Morgan,
U-1
<PAGE> 134
Inc. will negotiate the initial public offering price with the representatives.
Among the factors to be considered in determining the initial public offering
price of the shares, in addition to prevailing market conditions, will be Kinder
Morgan, Inc.'s historical performance, estimates of Kinder Morgan, Inc.'s
business potential and earnings prospects, an assessment of Kinder Morgan,
Inc.'s management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the New York
Stock Exchange in the over-the-counter market or otherwise.
Some of the underwriters and their affiliates have from time to time
performed various investment banking and financial advisory services for Kinder
Morgan, Inc. and its affiliates for which they have received customary fees and
reimbursement of their out-of-pocket expenses. Within the twelve months
preceding this offering, Goldman, Sachs & Co. and PaineWebber Incorporated acted
as underwriters of an equity offering by Kinder Morgan Energy Partners in June
of 1998 and Goldman, Sachs & Co. acted as an underwriter of a debt offering by
Kinder Morgan Energy Partners in January of 1999.
Goldman, Sachs Credit Partners L.P., an affiliate of Goldman, Sachs & Co.,
served as syndication agent and a lender under the Kinder Morgan Energy Partners
credit facility for which it received customary fees and out-of-pocket expense
reimbursement.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Kinder Morgan, Inc. estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $ .
Kinder Morgan, Inc. has agreed to indemnify the several underwriters
against various liabilities, including liabilities under the Securities Act of
1933.
U-2
<PAGE> 135
------------------------------------------------------
------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the common stock offered in this prospectus, but only
under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 9
Use of Proceeds................................. 15
Capitalization.................................. 16
Dilution........................................ 17
Dividend Policy................................. 18
Selected Historical Consolidated Financial Data
of Kinder Morgan, Inc......................... 19
Selected Historical Consolidated Financial and
Operating Data of Kinder Morgan Energy
Partners...................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
Business of Kinder Morgan, Inc.................. 39
Business of Kinder Morgan Energy Partners....... 41
Management...................................... 57
Specific Relationships and Related
Transactions.................................. 65
Security Ownership of Principal Beneficial
Owners and Management......................... 66
Description of Our Capital Stock................ 67
Material Provisions of Kinder Morgan Energy
Partners' Partnership Agreement............... 72
Shares Eligible for Future Sale................. 82
Legal Matters................................... 83
Experts......................................... 83
Forward-Looking Statements...................... 84
Where You Can Find More Information............. 84
Index to Financial Statements................... F-1
Underwriting.................................... U-1
</TABLE>
---------------------------
Through and including , 1999, the 25th day after the date of
this prospectus, all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and for an unsold allotment or subscription.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
7,250,000 Shares
KINDER MORGAN, INC.
Common Stock
---------------------------
[LOGO]
---------------------------
GOLDMAN, SACHS & CO.
PAINEWEBBER INCORPORATED
Representatives of the Underwriters
------------------------------------------------------
------------------------------------------------------
<PAGE> 136
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Shown below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered in this prospectus. With the exception
of the Securities and Exchange Commission registration fee, the NASD filing fee
and the New York Stock Exchange filing fee, the amounts shown below are
estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $46,357
NASD filing fee.............................................
New York Stock Exchange listing fee......................... 36,800
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer agent and registrar fees...........................
Miscellaneous...............................................
--------
TOTAL.............................................
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under specific circumstances
and subject to specific limitations. Kinder Morgan, Inc.'s restated certificate
of incorporation and restated bylaws provide that Kinder Morgan, Inc. shall
indemnify its directors and officers to the full extent permitted by Delaware
General Corporation Law, including in circumstances in which indemnification is
otherwise discretionary under Delaware law.
In addition to the indemnification provided for in Kinder Morgan, Inc.'s
restated certificate of incorporation, Kinder Morgan, Inc. plans to enter into
agreements to indemnify its directors and executive officers. These agreements,
among other things, will provide for indemnification of Kinder Morgan, Inc.'s
directors and executive officers for specific expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any person in any
action or proceeding, including any action by or in the right of Kinder Morgan,
Inc., arising out of that person's services as a director or executive officer
of Kinder Morgan, Inc., any subsidiary of Kinder Morgan, Inc. or any other
company or enterprise to which the person provides services at Kinder Morgan,
Inc.'s request. Kinder Morgan, Inc. believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. Kinder Morgan, Inc.'s restated certificate of incorporation provides
for that limitation of liability.
Policies of insurance are maintained by Kinder Morgan, Inc. under which its
directors and officers are insured, within the limits and subject to the
limitations of the policies, against specific
II-1
<PAGE> 137
expenses in connection with the defense of, and specific liabilities which might
be imposed as a result of, actions, suits or proceedings to which they are
parties by reason of being or having been directors or officers.
Reference is also made to the Underwriting Agreement filed as Exhibit 1.1
to the Registration Statement for information concerning the Underwriters'
obligation to indemnify Kinder Morgan, Inc. and its officers and directors in
various circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On the effective date of this registration statement, under an exchange
agreement among Kinder Morgan, Inc. and all of its stockholders, Kinder Morgan,
Inc. will issue 29,273,329 shares of common stock and 3,476,671 shares of
non-voting convertible common stock in exchange for all of its shares of capital
stock then outstanding consisting of 8,047 shares of Class A Common Stock and
2,541 shares of Class B Common Stock. The offering and sale of the common stock
and non-voting convertible common stock under the exchange agreement were and
will be exempt from registration under Section 3(a)(9) of the Securities Act of
1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<C> <S>
***1.1 -- Form of Underwriting Agreement by and among Kinder
Morgan, Inc., Goldman, Sachs & Co. and PaineWebber
Incorporated.
**2.1 -- Purchase Agreement dated October 18, 1997, among Kinder
Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc.,
Santa Fe Pacific Pipeline Partners, L.P., Santa Fe
Pacific Pipelines, Inc. and SFP Pipeline Holdings, Inc.
(Exhibit 2.1 to Amendment No. 1 to Kinder Morgan Energy
Partners' Registration Statement on Form S-4 (File No.
333-44519) filed February 4, 1998).
**2.2 -- Master Agreement dated as of January 1, 1998, among Shell
Western E&P Inc., Shell Western Pipelines Inc., Shell
Cortez Pipeline Company, Shell CO(2) LLC, Shell CO(2)
General LLC, Shell Land & Energy Company, Kinder Morgan
Operating L.P. "A" and Kinder Morgan CO(2), LLC (Exhibit
2.2 to Kinder Morgan Energy Partners' Current Report on
Form 8-K (File No. 001-11234) filed March 18, 1998).
**2.3 -- First Amended and Restated Agreement of Limited
Partnership dated as of March 5, 1998, by and between
Shell CO(2) General LLC, Kinder Morgan CO(2), LLC and
Shell CO(2) LLC (Exhibit 2.3 to Kinder Morgan Energy
Partners' Current Report on Form 8-K (File No. 001-11234)
filed March 18, 1998).
**2.4 -- Amendment to the Limited Partnership Agreement of Shell
CO(2) Company, Ltd. dated as of September 30, 1998
(Exhibit 2.4 to Kinder Morgan Energy Partners' Annual
Report on Form 10-K (File No. 001-11234) filed March 15,
1999).
</TABLE>
II-2
<PAGE> 138
<TABLE>
<C> <S>
**2.5 -- Assumption and Indemnification Agreement dated as of
January 1, 1998, among Shell CO(2) General LLC, Shell
CO(2) General LLC, Shell Western E&P Inc., Shell Western
Pipelines Inc., Shell Cortez Pipeline Company, Shell Land
& Energy Company, Kinder Morgan CO(2), LLC, Kinder Morgan
Operating L.P. "A" and Shell CO(2) Company, Ltd. (Exhibit
2.4 to Kinder Morgan Energy Partners' Current Report on
Form 8-K (File No. 001-11234) filed March 18, 1998).
**2.6 -- Guaranty and Indemnification Agreement dated as of
January 1, 1998, between Shell Western E&P Inc. and
Kinder Morgan Energy Partners, L.P. (Exhibit 2.5 to
Kinder Morgan Energy Partners' Current Report on Form 8-K
(File No. 001-11234) filed March 18, 1998).
***2.7 -- Exchange Agreement dated June 16, 1999, among Kinder
Morgan, Inc. and all of its stockholders.
***3.1 -- Form of Restated Certificate of Incorporation of Kinder
Morgan, Inc.
*3.2 -- Form of Restated Bylaws of Kinder Morgan, Inc.
***3.3 -- Form of Certificate of Designations of Series A Junior
Participating Preferred Stock and Series B Junior
Participating Preferred Stock.
**3.4 -- Second Amended and Restated Agreement of Limited
Partnership of Kinder Morgan Energy Partners, L.P. dated
as of February 14, 1997 (Exhibit 3.1 to the Amendment No.
1 to Kinder Morgan Energy Partners' Registration
Statement on Form S-4 (File No. 333-44519) filed February
4, 1998).
***4.1 -- Specimen Certificate representing shares of common stock.
**4.2 -- Indenture dated as of January 29, 1999 among Kinder
Morgan Energy Partners, the guarantors listed on the
signature page thereto and U.S. Trust Company of Texas,
N.A., as trustee, relating to Senior Debt Securities
(Exhibit 4.1 to Kinder Morgan Energy Partners' Current
Report on Form 8-K (File No. 001-11234) filed February
16, 1999).
**4.3 -- First Supplemental Indenture dated as of January 29, 1999
among Kinder Morgan Energy Partners, the subsidiary
guarantors listed on the signature page thereto and U.S.
Trust Company of Texas, N.A., as trustee, relating to
$250,000,000 of 6.30% Senior Notes due February 1, 2009
(Exhibit 4.2 to Kinder Morgan Energy Partners' Current
Report on Form 8-K (File No. 001-11234) filed February
16, 1999).
**4.4 -- Amended and Restated Credit Agreement dated as of
December 1, 1998 among Kinder Morgan Energy Partners,
Kinder Morgan Operating L.P. "B," the subsidiary
guarantors listed on the signature page thereto, the
lenders party thereto and First Union National Bank, as
agent (Exhibit 4.4 to Kinder Morgan Energy Partners'
Annual Report on Form 10-K for 1998 (File No. 001-11234)
filed March 15, 1999).
**4.5 -- First Amendment, dated December 21, 1998, to Amended and
Restated Credit Agreement among Kinder Morgan Energy
Partners, Kinder Morgan Operating L.P. "B," the
subsidiary guarantors listed on the signature page
thereto, the lenders party thereto and First Union
National Bank, as agent (Exhibit 4.5 to Kinder Morgan
Energy Partners' Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
**4.6 -- First Mortgage Note Agreement dated December 8, 1988,
among Southern Pacific Pipe Lines Partnership, L.P. now
known as SFPP, L.P.) and the Purchasers listed on
Schedule A (a conformed composite of 54 separate
agreements, identical except for signatures) (Exhibit 4.2
to Santa Fe Pacific Pipeline Partners, L.P.'s Annual
Report on Form 10-K for 1988 (File No. 1-110066)).
</TABLE>
II-3
<PAGE> 139
<TABLE>
<C> <S>
**4.7 -- Consent and Amendment dated as of December 19, 1997,
between the noteholders and SFPP, L.P. (a conformed
composite of the separate agreements with each
noteholder, identical except for signatures) (Exhibit
4.14.1 to Kinder Morgan Energy Partners' Annual Report on
Form 10-K for 1997 (File No. 001-11234) filed March 31,
1998).
**4.8 -- Deed of Trust, Security Agreement and Fixture Filing,
dated December 8, 1988, between SFPP, L.P., its general
partner, Chicago Title Insurance Company and Security
Pacific National Bank (Exhibit 4.3 to Santa Fe Pacific
Pipeline Partners, L.P.'s Annual Report on Form 10-K for
1988 (File No. 1-110066)).
**4.9 -- Trust Agreement dated December 19, 1988, between SFPP,
L.P., its general partner and Security Pacific National
Bank (Exhibit 4.4 to Santa Fe Pacific Pipeline Partners,
L.P.'s Annual Report on Form 10-K for 1988 (File No.
1-110066)).
**4.10 -- Amended and Restated Credit Agreement dated as of August
11, 1997, among SFPP, L.P., Bank of America National
Trust and Savings Association, as agent, Texas Commerce
Bank National Association, as syndication agent, Bank of
Montreal, as documentation agent, BancAmerica Securities,
Inc., as arranger, and the lenders that are signatories
thereto. As the maximum allowable borrowings under this
facility do not exceed 10% of the Registrant's total
assets, this instrument is not filed as an exhibit to
this Report, however, the Registrant agrees to furnish a
copy of that instrument to the Securities and Exchange
Commission upon request.
**4.11 -- Amended and Restated Credit Agreement dated as of June
18, 1998, among Kinder Morgan, Inc. and First Union
National Bank (Exhibit 10.2 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
**4.12 -- First Amendment to Credit Agreement dated as of August
26, 1998, among Kinder Morgan, Inc. and First Union
National Bank (Exhibit 10.3 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
**4.13 -- Second Amendment to Credit Agreement dated as of
September 8, 1998, among Kinder Morgan, Inc. and First
Union National Bank (Exhibit 10.4 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K (File No.
001-11234) filed March 15, 1999).
***4.14 -- Third Amendment to Credit Agreement dated as of May 7,
1999, among Kinder Morgan, Inc. and First Union National
Bank.
***4.15 -- Form of Rights Agreement between Kinder Morgan, Inc. and
First Chicago Trust Company of New York, as rights agent.
***5 -- Form of opinion of Bracewell & Patterson, L.L.P. as to
the legality of the securities registered in this
prospectus.
**10.1 -- Employment Agreement effective as of February 14, 1997,
between Kinder Morgan G.P., Inc. and William V. Morgan
(Exhibit 10.1 to Kinder Morgan Energy Partners, L.P.'s
Quarterly Report on Form 10-Q (File No. 001-11234) filed
May 14, 1997).
***10.2 -- Kinder Morgan, Inc. 1999 Stock Awards Plan.
***10.3 -- Amended and Restated Registration Rights Agreement dated
as of June 16, 1997, among Kinder Morgan, Inc. and its
stockholders.
***10.4 -- Form of Indemnity Agreement between Kinder Morgan, Inc.
and each of its officers and directors.
</TABLE>
II-4
<PAGE> 140
<TABLE>
<C> <S>
*21 -- List of Subsidiaries
***23.1 -- Consent of Bracewell & Patterson, L.L.P. (included in
Exhibit 5)
***23.2 -- Consent of Arthur Andersen LLP
***23.3 -- Consent of PricewaterhouseCoopers LLP
*27 -- Financial Data Schedule
</TABLE>
- ------------
* Previously filed.
** Incorporated by reference as indicated.
*** Filed herewith.
(b) Financial Statement Schedules
All financial statement schedules are omitted because the information is
not required, is not material or is otherwise included in the financial
statements or related notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant under the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas
on June 17, 1999.
KINDER MORGAN, INC.
By: /s/ RICHARD D. KINDER
----------------------------------
Richard D. Kinder
Chairman and Chief Executive
Officer
---------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated below:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD D. KINDER Director, Chairman and Chief June 17, 1999
- ----------------------------------------------------- Executive Officer
Richard D. Kinder
/s/ WILLIAM V. MORGAN Director, Vice Chairman and June 17, 1999
- ----------------------------------------------------- President
William V. Morgan
/s/ DAVID G. DEHAEMERS, JR. Vice President and Treasurer June 17, 1999
- ----------------------------------------------------- (principal financial and
David G. Dehaemers, Jr. accounting officer)
</TABLE>
II-6
<PAGE> 142
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
***1.1 -- Form of Underwriting Agreement by and among Kinder
Morgan, Inc., Goldman, Sachs & Co. and PaineWebber
Incorporated.
**2.1 -- Purchase Agreement dated October 18, 1997, among Kinder
Morgan Energy Partners, L.P., Kinder Morgan G.P., Inc.,
Santa Fe Pacific Pipeline Partners, L.P., Santa Fe
Pacific Pipelines, Inc. and SFP Pipeline Holdings, Inc.
(Exhibit 2.1 to Amendment No. 1 to Kinder Morgan Energy
Partners' Registration Statement on Form S-4 (File No.
333-44519) filed February 4, 1998).
**2.2 -- Master Agreement dated as of January 1, 1998, among Shell
Western E&P Inc., Shell Western Pipelines Inc., Shell
Cortez Pipeline Company, Shell CO(2) LLC, Shell CO(2)
General LLC, Shell Land & Energy Company, Kinder Morgan
Operating L.P. "A" and Kinder Morgan CO(2), LLC (Exhibit
2.2 to Kinder Morgan Energy Partners' Current Report on
Form 8-K (File No. 001-11234) filed March 18, 1998).
**2.3 -- First Amended and Restated Agreement of Limited
Partnership dated as of March 5, 1998, by and between
Shell CO(2) General LLC, Kinder Morgan CO(2), LLC and
Shell CO(2) LLC (Exhibit 2.3 to Kinder Morgan Energy
Partners' Current Report on Form 8-K (File No. 001-11234)
filed March 18, 1998).
**2.4 -- Amendment to the Limited Partnership Agreement of Shell
CO(2) Company, Ltd. dated as of September 30, 1998
(Exhibit 2.4 to Kinder Morgan Energy Partners' Annual
Report on Form 10-K (File No. 001-11234) filed March 15,
1999).
**2.5 -- Assumption and Indemnification Agreement dated as of
January 1, 1998, among Shell CO(2) General LLC, Shell
CO(2) General LLC, Shell Western E&P Inc., Shell Western
Pipelines Inc., Shell Cortez Pipeline Company, Shell Land
& Energy Company, Kinder Morgan CO(2), LLC, Kinder Morgan
Operating L.P. "A" and Shell CO(2) Company, Ltd. (Exhibit
2.4 to Kinder Morgan Energy Partners' Current Report on
Form 8-K (File No. 001-11234) filed March 18, 1998).
**2.6 -- Guaranty and Indemnification Agreement dated as of
January 1, 1998, between Shell Western E&P Inc. and
Kinder Morgan Energy Partners, L.P. (Exhibit 2.5 to
Kinder Morgan Energy Partners' Current Report on Form 8-K
(File No. 001-11234) filed March 18, 1998).
***2.7 -- Exchange Agreement dated June 16, 1999, among Kinder
Morgan, Inc. and all of its stockholders.
***3.1 -- Form of Restated Certificate of Incorporation of Kinder
Morgan, Inc.
*3.2 -- Form of Restated Bylaws of Kinder Morgan, Inc.
***3.3 -- Form of Certificate of Designations of Series A Junior
Participating Preferred Stock and Series B Junior
Participating Preferred Stock.
**3.4 -- Second Amended and Restated Agreement of Limited
Partnership of Kinder Morgan Energy Partners, L.P. dated
as of February 14, 1997 (Exhibit 3.1 to the Amendment No.
1 to Kinder Morgan Energy Partners' Registration
Statement on Form S-4 (File No. 333-44519) filed February
4, 1998).
***4.1 -- Specimen Certificate representing shares of common stock.
</TABLE>
II-7
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
**4.2 -- Indenture dated as of January 29, 1999 among Kinder
Morgan Energy Partners, the guarantors listed on the
signature page thereto and U.S. Trust Company of Texas,
N.A., as trustee, relating to Senior Debt Securities
(Exhibit 4.1 to Kinder Morgan Energy Partners' Current
Report on Form 8-K (File No. 001-11234) filed February
16, 1999).
**4.3 -- First Supplemental Indenture dated as of January 29, 1999
among Kinder Morgan Energy Partners, the subsidiary
guarantors listed on the signature page thereto and U.S.
Trust Company of Texas, N.A., as trustee, relating to
$250,000,000 of 6.30% Senior Notes due February 1, 2009
(Exhibit 4.2 to Kinder Morgan Energy Partners' Current
Report on Form 8-K (File No. 001-11234) filed February
16, 1999).
**4.4 -- Amended and Restated Credit Agreement dated as of
December 1, 1998 among Kinder Morgan Energy Partners,
Kinder Morgan Operating L.P. "B," the subsidiary
guarantors listed on the signature page thereto, the
lenders party thereto and First Union National Bank, as
agent (Exhibit 4.4 to Kinder Morgan Energy Partners'
Annual Report on Form 10-K for 1998 (File No. 001-11234)
filed March 15, 1999).
**4.5 -- First Amendment, dated December 21, 1998, to Amended and
Restated Credit Agreement among Kinder Morgan Energy
Partners, Kinder Morgan Operating L.P. "B," the
subsidiary guarantors listed on the signature page
thereto, the lenders party thereto and First Union
National Bank, as agent (Exhibit 4.5 to Kinder Morgan
Energy Partners' Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
**4.6 -- First Mortgage Note Agreement dated December 8, 1988,
among Southern Pacific Pipe Lines Partnership, L.P. now
known as SFPP, L.P.) and the Purchasers listed on
Schedule A (a conformed composite of 54 separate
agreements, identical except for signatures) (Exhibit 4.2
to Santa Fe Pacific Pipeline Partners, L.P.'s Annual
Report on Form 10-K for 1988 (File No. 1-110066)).
**4.7 -- Consent and Amendment dated as of December 19, 1997,
between the noteholders and SFPP, L.P. (a conformed
composite of the separate agreements with each
noteholder, identical except for signatures) (Exhibit
4.14.1 to Kinder Morgan Energy Partners' Annual Report on
Form 10-K for 1997 (File No. 001-11234) filed March 31,
1998).
**4.8 -- Deed of Trust, Security Agreement and Fixture Filing,
dated December 8, 1988, between SFPP, L.P., its general
partner, Chicago Title Insurance Company and Security
Pacific National Bank (Exhibit 4.3 to Santa Fe Pacific
Pipeline Partners, L.P.'s Annual Report on Form 10-K for
1988 (File No. 1-110066)).
**4.9 -- Trust Agreement dated December 19, 1988, between SFPP,
L.P., its general partner and Security Pacific National
Bank (Exhibit 4.4 to Santa Fe Pacific Pipeline Partners,
L.P.'s Annual Report on Form 10-K for 1988 (File No.
1-110066)).
**4.10 -- Amended and Restated Credit Agreement dated as of August
11, 1997, among SFPP, L.P., Bank of America National
Trust and Savings Association, as agent, Texas Commerce
Bank National Association, as syndication agent, Bank of
Montreal, as documentation agent, BancAmerica Securities,
Inc., as arranger, and the lenders that are signatories
thereto. As the maximum allowable borrowings under this
facility do not exceed 10% of the Registrant's total
assets, this instrument is not filed as an exhibit to
this Report, however, the Registrant agrees to furnish a
copy of that instrument to the Securities and Exchange
Commission upon request.
</TABLE>
II-8
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
**4.11 -- Amended and Restated Credit Agreement dated as of June
18, 1998, among Kinder Morgan, Inc. and First Union
National Bank (Exhibit 10.2 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
**4.12 -- First Amendment to Credit Agreement dated as of August
26, 1998, among Kinder Morgan, Inc. and First Union
National Bank (Exhibit 10.3 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K for 1998
(File No. 001-11234) filed March 15, 1999).
**4.13 -- Second Amendment to Credit Agreement dated as of
September 8, 1998, among Kinder Morgan, Inc. and First
Union National Bank (Exhibit 10.4 to Kinder Morgan Energy
Partners, L.P.'s Annual Report on Form 10-K (File No.
001-11234) filed March 15, 1999).
***4.14 -- Third Amendment to Credit Agreement dated as of May 7,
1999, among Kinder Morgan, Inc. and First Union National
Bank.
***4.15 -- Form of Rights Agreement between Kinder Morgan, Inc. and
First Chicago Trust Company of New York, as rights agent.
***5 -- Form of opinion of Bracewell & Patterson, L.L.P. as to
the legality of the securities registered in this
prospectus.
**10.1 -- Employment Agreement effective as of February 14, 1997,
between Kinder Morgan G.P., Inc. and William V. Morgan
(Exhibit 10.1 to Kinder Morgan Energy Partners, L.P.'s
Quarterly Report on Form 10-Q (File No. 001-11234) filed
May 14, 1997).
***10.2 -- Kinder Morgan, Inc. 1999 Stock Awards Plan.
***10.3 -- Amended and Restated Registration Rights Agreement dated
as of June 16, 1997, among Kinder Morgan, Inc. and its
stockholders.
***10.4 -- Form of Indemnity Agreement between Kinder Morgan, Inc.
and each of its officers and directors.
*21 -- List of Subsidiaries)
***23.1 -- Consent of Bracewell & Patterson, L.L.P. (included in
Exhibit 5)
***23.2 -- Consent of Arthur Andersen LLP
***23.3 -- Consent of PricewaterhouseCoopers LLP
*27 -- Financial Data Schedule
</TABLE>
- ------------
* Previously filed.
** Incorporated by reference as indicated.
*** Filed herewith.
II-9
<PAGE> 1
EXHIBIT 1.1
KINDER MORGAN, INC.
Common Stock
(par value $0.01 per share)
UNDERWRITING AGREEMENT
----------------------
_________, 1999
Goldman, Sachs & Co.
PaineWebber Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Kinder Morgan, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters"), for whom Goldman,
Sachs & Co. and PaineWebber Incorporated are acting as representatives (the
"Representatives"), an aggregate of 7,250,000 shares of common stock ("Stock")
of the Company (the "Firm Shares") and, at the election of the Underwriters, up
to 1,087,500 additional shares of Stock (the "Optional Shares") of the Company.
The Firm Shares and the Optional Shares which the Underwriters elect to purchase
pursuant to Section 2 hereof are collectively called the "Shares."
The Company, Kinder Morgan Energy Partners, L.P., a Delaware limited
partnership, ("KMEP"), Kinder Morgan Operating L.P. "A," a Delaware limited
partnership ("OLP-A"), Kinder Morgan Operating L.P. "B," a Delaware limited
partnership ("OLP-B"), Kinder Morgan Operating L.P. "C," a Delaware limited
partnership ("OLP-C"), Kinder Morgan Operating L.P. "D," a Delaware limited
partnership ("OLP-D" and, together with OLP-A, OLP-B and OLP-C, the "Operating
Partnerships"), SFPP, L.P., a Delaware limited partnership ("SFPP"), Kinder
Morgan Bulk Terminals, Inc., a Louisiana corporation ("KMBT"), Kinder Morgan
Natural Gas Liquids Corporation, a Delaware corporation ("KMNGL Corp."), Kinder
Morgan CO2, LLC, a Delaware limited liability company ("KM-LLC"),
Plantation Pipeline Company, a Delaware and Virginia corporation ("PPLC") and
Kinder Morgan G.P., Inc., a Delaware corporation (the "General Partner"), in its
individual capacity and in its capacity as the general partner of KMEP and each
of the Operating Partnerships, are collectively referred to herein as the
"Kinder Morgan Entities."
<PAGE> 2
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-78165) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act is hereinafter called
a "Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the
Act to be part of the Initial Registration Statement at the time it was declared
effective, each as amended at the time such part of the Initial Registration
Statement became effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, are hereinafter
collectively called the "Registration Statement"; and such final prospectus, in
the form first filed pursuant to Rule 424(b) under the Act, is hereinafter
called the "Prospectus");
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through the Representatives expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit
2
<PAGE> 3
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company by
an Underwriter through the Representatives expressly for use therein;
(d) None of the Kinder Morgan Entities has sustained since the date
of the latest audited financial statements included in the Prospectus any
material loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been any material change in the capitalization or long-term debt of the
Kinder Morgan Entities or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' or unitholders' equity or
results of operations of the Company and its subsidiaries, taken as a whole,
otherwise than as set forth or contemplated in the Prospectus;
(e) Each of the Kinder Morgan Entities has good and marketable title
(or indefeasible title in the State of Texas) in fee simple to all real property
and good and marketable title to all personal property owned by them, in each
case free and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the value of
such property and do not materially interfere with the use made and proposed to
be made of such property by the Kinder Morgan Entities; and any real property
and buildings held under lease by a Kinder Morgan Entity is held under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not materially interfere with the use made and proposed to be made of such
property and buildings by that Kinder Morgan Entity;
(f) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to conduct the activities conducted by
it, to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. The
Company was organized for the purpose of acquiring the entire equity interest in
Enron Liquids Pipeline Company, the predecessor company to the General Partner,
on February 14, 1997. Except as described in the Prospectus, the Company has not
engaged in any business activities other than in connection with its
organization, the acquisition and ownership of the General Partner and this
offering. The Company is duly licensed or qualified to do business and is in
good standing as a foreign corporation in all jurisdictions in which the nature
of the activities conducted by it or the character of the assets owned or leased
by it makes such licensing or qualification necessary (except where the failure
to be so licensed or qualified would not have a material adverse effect on the
financial condition, results of operations or business of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"). Complete and
correct copies of the Certificate of Incorporation of the Company, and all
amendments thereto,
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<PAGE> 4
and of the By-laws of the Company, and all amendments thereto (the "By-laws"),
have been delivered to the Underwriters;
(g) KMEP and each of the Operating Partnerships is a limited
partnership duly formed, validly existing and in good standing under the laws of
the State of Delaware. KMEP and each of the Operating Partnerships has all
necessary partnership power and authority to conduct the activities conducted by
it, to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. KMEP and
each of the Operating Partnerships is duly licensed or qualified to do business
and is in good standing as a foreign limited partnership in all jurisdictions in
which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such licensing or qualification necessary
(except where the failure to be so licensed or qualified would not have a
Material Adverse Effect. Complete and correct copies of the Certificate of
Limited Partnership of KMEP and each of the Operating Partnerships, and all
amendments thereto, and of the Agreement of Limited Partnership of KMEP, as
amended and restated (the "KMEP Agreement") and the Agreement of Limited
Partnership of OLP-A, as amended and restated (the "OLP-A Agreement"), the
Agreement of Limited Partnership of OLP-B, as amended and restated (the "OLP-B
Agreement"), the Agreement of Limited Partnership of OLP-C, as amended and
restated (the "OLP-C Agreement"), and the Agreement of Limited Partnership of
OLP-D, as amended and restated (the "OLP-D Agreement" and, together with the
OLP-A Agreement, the OLP-B Agreement and the OLP-C Agreement, the "Operating
Partnership Agreements"), have been delivered to the Underwriters;
(h) SFPP is a limited partnership duly formed, validly existing and
in good standing under the laws of the State of Delaware. SFPP has all necessary
partnership power and authority to conduct the activities conducted by it, to
own or lease all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus. SFPP is duly
licensed or qualified to do business and in good standing as a foreign limited
partnership in all jurisdictions in which the nature of the activities conducted
by it or the character of the assets owned or leased by it makes such licensing
or qualification necessary (except where the failure to be so licensed or
qualified would not have a Material Adverse Effect. Complete and correct copies
of the Certificate of Limited Partnership of SFPP and of the Agreement of
Limited Partnership of SFPP, as amended and restated (the "SFPP Agreement"), and
all amendments thereto have been delivered to the Underwriters;
(i) Each of the General Partner and KMNGL Corp. is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. KM-LLC is a limited liability company duly formed, validly
existing and in good standing under the laws of the State of Delaware. KMBT is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Louisiana. Each of the General Partner, KMNGL Corp., KM-LLC and
KMBT has all necessary corporate or limited liability company power and
authority, as the case may be, to conduct all the activities conducted by it, to
own or lease all the assets owned or leased by it and to conduct its business as
described in the Registration
4
<PAGE> 5
Statement and the Prospectus. Each of the General Partner, KMNGL Corp., KM-LLC
and KMBT is duly licensed or qualified to do business and is in good standing as
a foreign corporation or foreign limited liability company, as the case may be,
in all jurisdictions in which the nature of the activities conducted by it or
the character of the assets owned or leased by it makes such licensing or
qualification necessary (except where the failure to be so licensed or qualified
would not have a Material Adverse Effect. Complete and correct copies of the
certificate of incorporation and of the by-laws of the General Partner, KMNGL
Corp. and KMBT and the limited liability agreement of KM-LLC and all amendments
to such documents have been delivered to the Underwriters;
(j) To the knowledge of the Company, each of Heartland Company
("Heartland") and Mont Belvieu Associates ("Mont Belvieu") is a general
partnership duly formed and validly existing under the laws of the State of
Texas and Shell CO2 Company Ltd. ("Shell CO2") is a limited partnership duly
formed, validly existing and in good standing under the laws of the State of
Delaware. PPLC is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. To the knowledge of the Company, each of
Heartland, Mont Belvieu and Shell CO2 has all necessary partnership power and
authority to conduct the activities conducted by it, to own or lease all the
assets owned or leased by it and to conduct its business as described in the
Registration Statement and the Prospectus, except as would not have a Material
Adverse Effect. To the knowledge of the Company, each of Heartland, Mont Belvieu
and Shell CO2 is duly licensed or qualified to do business and is in good
standing as a foreign partnership in all jurisdictions in which the nature of
the activities conducted by it or the character of the assets owned or leased by
it makes such licensing or qualification necessary (except where the failure to
be so licensed or qualified would not have a Material Adverse Effect);
(k) The only subsidiaries (as such term is defined in the rules and
regulations of the Commission under the Act and the Exchange Act) of the Company
or other entities in which the Company, KMEP, the General Partner, any of the
Operating Partnerships or SFPP has an equity ownership interest of 50% or more
and which own assets or conduct business are those listed on Schedule II hereto;
(l) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus. Richard
D. Kinder, Morgan Associates, Inc. ("MAI"), First Union Corporation and certain
employees of First Union Corporation and its affiliates ("First Union") are the
sole stockholders of the Company. The Company owns all of the issued and
outstanding shares of capital stock of the General Partner; such shares of
capital stock are duly authorized, validly issued, fully paid and
non-assessable;
(m) The General Partner is the sole general partner of KMEP with a
1% general partner interest in KMEP; such general partner interest is duly
authorized by the KMEP
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<PAGE> 6
Agreement and was validly issued to the General Partner; and, the General
Partner owns such general partner interest free and clear of all liens,
encumbrances, security interests, equities, charges or claims (except for such
liens, encumbrances, security interests, equities, charges or claims as are not,
individually or in the aggregate, material to such ownership or as described in
the Registration Statement or the Prospectus);
(n) The General Partner is the sole general partner of each of the
Operating Partnerships with a 1.0101% general partner interest in each of the
Operating Partnerships; such general partner interests are duly authorized by
the respective Operating Partnership Agreement, and were validly issued to the
General Partner; and the General Partner owns such general partner interests
free and clear of all liens, encumbrances, security interests, equities, charges
or claims (except for such liens, encumbrances, security interests, equities,
charges or claims as are not, individually or in the aggregate, material to such
ownership or as described in the Registration Statement or the Prospectus);
(o) KMEP is the sole limited partner of each of the Operating
Partnerships with a 98.9899% limited partner interest in each of the Operating
Partnerships; such limited partner interests, in each of such partnerships, are
duly authorized by the respective Operating Partnership Agreement, and were
validly issued to KMEP and are fully paid and non-assessable (except as
non-assessability may be affected by certain provisions of the Delaware Revised
Limited Partnership Act (the "Delaware Act")); and KMEP owns such limited
partner interests free and clear of all liens, encumbrances, security interests,
equities, charges or claims (except for such liens, encumbrances, security
interests, equities, charges or claims as are not, individually or in the
aggregate, material to such ownership or as described in the Registration
Statement or the Prospectus, including the security interest securing certain
debt of the KMEP and OLP-B);
(p) OLP-A owns all of the issued and outstanding capital stock of
KMNGL Corp. and all of the issued and outstanding member interests of KM-LLC;
all of such capital stock and such member interests are duly authorized, validly
issued, fully paid and non-assessable; OLP-C owns all of the issued and
outstanding capital stock of KMBT; all of such capital stock is duly authorized,
validly issued, fully paid and non-assessable. OLP-A owns all of such capital
stock of KMNGL, OLP-A owns the sole member interest of KM-LLC, and OLP-C owns
all of such capital stock of KMBT, in each case free and clear of all liens,
encumbrances, security interests, equities, charges or claims (except for such
liens, encumbrances, security interests, equities, charges or claims as are not,
individually or in the aggregate, material to such ownership or as described in
the Registration Statement or the Prospectus);
(q) OLP-D is the sole general partner of SFPP with a 99.5% general
partner interest; such general partner interest is duly authorized by the SFPP
Agreement, and was validly issued to OLP-D; and OLP-D owns such general partner
interest free and clear of all liens, encumbrances, security interests,
equities, charges or claims (except for such liens, encumbrances, security
interests, equities, charges or claims as are not, individually or in the
aggregate, material to such ownership or as described in the Registration
Statement or the
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<PAGE> 7
Prospectus); Santa Fe Pacific Pipelines, Inc. (the "SF Limited
Partner") is the sole limited partner of SFPP with a 0.5% non-voting, limited
partner interest; such limited partner interest is duly authorized by the SFPP
Agreement, and validly issued to the SF Limited Partner and fully paid and
non-assessable (except as non-assessability may be affected by certain
provisions of the Delaware Act);
(r) OLP-A is a general partner of Heartland with a 50% general
partner interest in Heartland and is an owner of PPLC with a 51% interest in
PPLC. KMNGL Corp. is a general partner of Mont Belvieu with a 50% general
partner interest in Mont Belvieu, and KM-LLC is a limited partner of Shell CO2,
with a 20% limited partner interest in Shell CO2; such general partner interests
and such limited partner interests are duly authorized by the respective
partnership agreements of Heartland, Mont Belvieu and Shell CO2, and were
validly issued by each of Heartland, Mont Belvieu and Shell CO2, respectively,
and in the case of such limited partner interests, are fully paid and
non-assessable (except as such non-assessability may be affected by certain
provisions of the Delaware Act); and, OLP-A and KMNGL Corp. own such general
partner interests in Heartland and Mont Belvieu, respectively, and KM-LLC owns
such limited partner interest, free and clear of all liens, encumbrances,
security interests, equities, charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims as are not,
individually or in the aggregate, material to such ownership or as described in
the Registration Statement or the Prospectus);
(s) The Shares have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be duly
and validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(t) The Company has all necessary corporate power and authority to
enter into this Agreement and consummate the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding agreement of the Company and is enforceable
against the Company in accordance with the terms hereof;
(u) The issue and sale of the Shares by the Company, the compliance
by the Company with all of the provisions of this Agreement, the consummation of
the transactions contemplated herein and the application by the Company of the
net proceeds from the offering and sale of the Shares in the manner set forth in
the Prospectus under "Use of Proceeds" will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which any of the Kinder Morgan Entities is a party or
by which any of the Kinder Morgan Entities is bound or to which any of the
property or assets of the Kinder Morgan Entities are subject, nor will such
action result in any violation of the provisions of the certificate of
incorporation, by-laws, partnership agreement or other organizational documents,
as the case may be, of any of the Kinder Morgan Entities or any statute or any
order, rule or regulation of
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<PAGE> 8
any court or governmental agency or body having jurisdiction over any of the
Kinder Morgan Entities or any of the properties of any such entities, except
where such occurrence will not prevent the consummation of the transactions
contemplated herein or would not have a Material Adverse Effect; and no consent,
approval, authorization, order, registration or qualification of or with any
court or governmental agency or body having jurisdiction over any of the Kinder
Morgan Entities or any of the properties of such entities is required for the
issuance and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration under the
Act of the Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters;
(v) None of the Kinder Morgan Entities is (a) in violation of its
certificate of incorporation, by-laws, partnership agreement or other
organizational documents, as the case may be, or (b) in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or any of
its properties may be bound, except for such violations and defaults as would
not have a Material Adverse Effect;
(w) The statements set forth in the Prospectus under the caption
"Description of Our Capital Stock," insofar as they purport to constitute a
summary of the terms of the capital stock of the Company and the provisions of
the laws and documents referred to therein, are accurate, complete and fair in
all material respects;
(x) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending, or, to the knowledge of the Company,
threatened, to which any of the Kinder Morgan Entities is a party or of which
any property of any Kinder Morgan Entity is the subject which, if determined
adversely to the respective Kinder Morgan Entity, would individually or in the
aggregate have a Material Adverse Effect;
(y) Neither the Company nor the General Partner is, nor after giving
effect to the offering and sale of the Shares will be, (i) a "holding company"
or a "subsidiary company" of a "holding company" or an "affiliate" thereof,
within the meaning of the Public Utility Holding Company Act of 1935, as
amended, or (ii) an "investment company," a person "controlled by" an
"investment company" or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(z) Arthur Andersen LLP and PricewaterhouseCoopers LLP, who have
certified certain financial statements of the Kinder Morgan Entities, and in the
case of PricewaterhouseCoopers LLP, who has also certified certain financial
statements of SFPP, are each independent public accountants as required by the
Act and the rules and regulations of the Commission thereunder;
(aa) The Company has reviewed its operations and that of its
subsidiaries to
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<PAGE> 9
evaluate the extent to which the business or operations of the Company or any of
its subsidiaries will be affected by the Year 2000 Problem. As a result of such
review, the Company does not believe that the Year 2000 Problem would have a
Material Adverse Effect, or result in any material loss or interference with
their business or operations. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, transmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000;
(bb) There are no preemptive rights or other rights to subscribe for
or to purchase, nor any restrictions upon the voting or transfer of, any shares
of stock of the Company pursuant to its Certificate of Incorporation or other
governing documents or any agreement or other instrument to which the Company is
a party or by which the Company may be bound except as described in the
Prospectus. The offering and sale of Shares as contemplated by this Agreement
does not give rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any Stock or other securities
of the Company. Except for certain grants made under the Company's 1999 Stock
Awards Plan, there are no outstanding options or warrants to purchase any Shares
or other securities of the Company;
(cc) The financial statements and schedules included in the
Registration Statement or the Prospectus present fairly the consolidated
financial condition of the Company and KMEP as of the respective dates thereof
and the consolidated results of operations and cash flows of the Company and
KMEP for the respective periods covered thereby, all in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the entire period involved, except as otherwise disclosed in the
Prospectus. No other financial statements or schedules of the Company and KMEP
are required by the Act, the Exchange Act or the rules and regulations of the
Commission under such acts to be included in the Registration Statement or the
Prospectus. The statements included in the Registration Statement with respect
to the accountants pursuant to Rule 509 of Regulation S-K of the Rules and
Regulations are true and correct in all material respects; and
(dd) The Company and the General Partner maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not
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<PAGE> 10
jointly, to purchase from the Company, at a purchase price per share of
$________, the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional Shares as provided
below, the Company agrees to issue and sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase from the
Company, at the purchase price per share set forth in clause (a) of this Section
2, that portion of the number of Optional Shares as to which such election shall
have been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 1,087,500 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. Certificates for the Shares to be purchased by each Underwriter
hereunder, in definitive form, and in such authorized denominations and
registered in such names as the Representatives may request upon at least
forty-eight hours' prior notice to the Company, shall be delivered by or on
behalf of the Company to the Representatives for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the purchase
price therefor by wire transfer of Federal (same-day) funds to the account
specified by the Company to Goldman, Sachs & Co. at least forty-eight hours in
advance. The Company will cause the certificates representing the Shares to be
made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery (as defined below) with respect thereto at the office of
Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004 (the "Designated
Office"). The time and date of such delivery and payment shall be, with respect
to the Firm Shares, 9:30 a.m., New York City time, on _______, 1999 or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on
the date specified by the Representatives in the written notice given by the
Representatives of the Underwriters' election to purchase such Optional Shares,
or such other time and date as the Representatives and the Company may agree
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<PAGE> 11
upon in writing. Such time and date for delivery of the Firm Shares is herein
called the "First Time of Delivery," such time and date for delivery of the
Optional Shares, if not the First Time of Delivery, is herein called the "Second
Time of Delivery," and each such time and date for delivery is herein called a
"Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(j) hereof, will be delivered at the offices
of Andrews & Kurth L.L.P. at 600 Travis, Suite 4200, Houston, Texas 77002 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
12:00 p.m., New York City time, on the New York Business Day next preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement or, if applicable, such earlier time as
may be required by Rule 430A(a)(3) under the Act; to make no further amendment
or any supplement to the Registration Statement or Prospectus which shall be
disapproved by you promptly after reasonable notice thereof; to advise you
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus or suspending any
such qualification, to promptly use its best efforts to obtain the withdrawal of
such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify
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as a foreign corporation or to file a general consent to service of process in
any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to time,
to furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any event shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a Prospectus in connection with
sales of any of the Shares at any time nine months or more after the time of
issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule 158
under the Act);
(e) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus not to
directly or indirectly, offer, sell, contract to sell or otherwise dispose of,
except as provided hereunder any securities of the Company that are
substantially similar to the Shares, including but not limited to any securities
that are convertible into or exercisable or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar securities (other
than (i) as contemplated by the Prospectus in connection with the acquisition of
assets, businesses or the capital stock or other ownership interests of
businesses by any of the Kinder Morgan Entities in exchange for any securities
of the Company that are substantially similar to the Shares, if the
recipient(s) of such securities agree(s) not to offer, sell, contract to
sell, or otherwise dispose of during such lock-up period any of such securities
received in connection with such acquisition(s) and (ii) pursuant to employee
stock option plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of this
Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as reasonably
practicable after the end of each
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<PAGE> 13
fiscal year an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flows of the Company and its consolidated
subsidiaries certified by independent public accountants) and, as soon as
reasonably practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice of issuance,
the Shares on the New York Stock Exchange (the "Exchange");
(j) To file with the Commission such information on Form 10-Q or
Form 10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b) under the Act,
the Company shall file a Rule 462(b) Registration Statement with the Commission
in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date
of this Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing any Agreement
among Underwriters, this Agreement, the Blue Sky Memorandum, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares; (iii) any filing fees
and expenses in connection with the qualification of the Shares for offering and
sale under state securities laws as provided in Section 5(b) hereof, but not
including the fees and disbursements of counsel for the Underwriters in
connection with such qualification; (iv) all fees and expenses in connection
with listing the Shares on the New York Stock Exchange; (v) any filing fees in
connection with securing any required review by the National Association of
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<PAGE> 14
Securities Dealers, Inc. of the terms of the sale of the Shares; (vi) the cost
of preparing the stock certificates; (vii) the cost and charges of any transfer
agent or registrar; and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that, except as
provided in this Section, and Sections 8 and 11 hereof, the Underwriters will
pay all of their own costs and expenses, including the fees of their counsel,
stock transfer taxes on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Andrews & Kurth L.L.P., counsel for the Underwriters, shall have
furnished to you such written opinion or opinions, dated such Time of Delivery,
with respect to the matters covered in paragraphs (i) (insofar as it relates to
the due formation and good standing of the Company in Delaware and the Company's
power and authority to conduct its business as described in the Registration
Statement and the Prospectus, as amended or supplemented), (xiii), (xvi)
(insofar as it relates to the statements set forth in the Prospectus under the
caption "Underwriting") and (xxii) of subsection (c) below and a letter
substantially similar to the letter required to be delivered by Bracewell &
Patterson, L.L.P. pursuant to subsection (c) below as well as such other related
matters as you may reasonably request, and such counsel shall have received such
papers and information as they may reasonably request to enable them to pass
upon such matters;
(c) Bracewell & Patterson, L.L.P., counsel for the Company shall
have furnished to you its written opinion, dated such Time of Delivery, in form
and substance satisfactory to you, to the collective effect that:
(i) Each of the Company, the General Partner, KMEP, OLP-A,
OLP-B, OLP-C, OLP-D and SFPP has been duly incorporated or formed, as
applicable, and is validly existing and in good standing under the laws
of its jurisdiction of incorporation and each such entity has the
partnership or corporate power and authority,
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<PAGE> 15
as the case may be, to conduct its business as described in the
Registration Statement and the Prospectus, as amended or supplemented.
To the knowledge of such counsel after due inquiry, each of such
entities is duly qualified to do business and is in good standing as a
foreign corporation or foreign limited partnership, as the case may be,
in all jurisdictions in which the nature of the activities conducted by
it or the character of the assets owned or leased by it makes such
licensing or qualification necessary, except in the case where the
failure to be so qualified would not reasonably be expected to have a
Material Adverse Effect;
(ii) The General Partner is the sole general partner of KMEP
with a 1% general partner interest in the KMEP; such general partner
interest is duly authorized by the KMEP Agreement and was validly
issued to the General Partner; and, to the knowledge of such counsel
after due inquiry, the General Partner owns such general partner
interest free and clear of all liens, encumbrances, security interests,
equities, charges or claims (except for such liens, encumbrances,
security interests, equities, charges or claims as are not,
individually or in the aggregate, material to such ownership or as
described in the Registration Statement or the Prospectus, as amended
or supplemented);
(iii) The General Partner is the sole general partner of each
of the Operating Partnerships with a 1.0101% general partner interest
in each of the Operating Partnerships; such general partner interests
are duly authorized by the respective Operating Partnership Agreements
and were validly issued to the General Partner; and to the knowledge
of such counsel after due inquiry, the General Partner owns such
general partner interests free and clear of all liens, encumbrances,
security interests, equities, charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims as are
not, individually or in the aggregate, material to such ownership or as
described in the Registration Statement or the Prospectus, as amended
or supplemented, and except as provided in the Operating Partnership
Agreements);
(iv) OLP-D is the sole general partner of SFPP with a 99.5%
general partner interest in SFPP; such general partner interest is duly
authorized by the SFPP Agreement and was validly issued to OLP-D; and
to the knowledge of such counsel after due inquiry, OLP-D owns such
general partner interest free and clear of all liens, encumbrances,
security interests, equities, charges or claims as are not,
individually or in the aggregate, material to such ownership or as
described in the Registration Statement or the Prospectus, as amended
or supplemented, or the OLP-D Agreement); the SF Limited Partner is the
sole limited partner of SFPP with a 0.5% non-voting, limited partner
interest in SFPP; and such limited partner interest is duly authorized
by the SFPP Agreement and was validly issued to the SF Limited Partner;
(v) At the Time of Delivery after giving effect to the issuance
of the Firm Shares, to the knowledge of such counsel after due inquiry,
the capitalization of the Company will consist of 40,000,000 Shares
(41,087,500 Shares if all of the Optional Shares are issued); to the
knowledge of such counsel after due inquiry, such Shares will
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<PAGE> 16
be the only equity interests of the Company that are issued and
outstanding at the applicable Time of Delivery; all of such Shares of
the Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform as to legal
matters in all material respects to the description thereof contained
in the Prospectus under the caption "Description of Our Capital Stock"
as amended or supplemented;
(vi) KMEP is the sole limited partner of each of the Operating
Partnerships with a 98.9899% limited partner interest in each of the
Operating Partnerships; such limited partnership interests, in the case
of each of the Operating Partnerships, are duly authorized by the
respective Operating Partnership Agreements, were validly issued to
KMEP and are fully paid and non-assessable (except as non-assessability
may be affected by certain provisions of the Delaware Act); and, to the
knowledge of such counsel after due inquiry, KMEP owns such limited
partner interests free and clear of all liens, encumbrances, security
interests, equities, charges or claims (except for such liens,
encumbrances, security interests, equities, charges or claims (i) as
are not, individually or in the aggregate, material to such ownership
(ii) as described in the Registration Statement or the Prospectus, as
amended or supplemented, or (iii) arising out of the pledge by KMEP of
the limited partner interests of the Operating Partnerships to secure
certain indebtedness of KMEP and OLP-B);
(vii) None of the Shares, when paid for by the Underwriters in
accordance with the terms of this Agreement, will be subject to any
preemptive or similar right under (i) the Delaware General Corporation
Law (the "DGCL") or (ii) any instrument, document, contract or
agreement filed as an exhibit to the Registration Statement. Except as
described in the Registration Statement or the Prospectus and pursuant
to the Company's 1999 Stock Awards Plan, to the knowledge of such
counsel after due inquiry, there is no commitment or arrangement to
issue, and there are no outstanding options, warrants or other rights
calling for the issuance of, any Shares or share of capital stock of
the Company to any person or any security or other instrument that by
its terms is convertible into, exercisable for and exchangeable into
Shares.
(viii) No consent, approval, authorization, order, registration
or qualification of or with any federal, Delaware or Texas court or
governmental agency or body is required under federal or Texas law, the
DGCL or the Delaware Act for the issue and sale of the Shares being
delivered at such Time of Delivery or the consummation by the Company
of the transactions contemplated by this Agreement, except such as have
been obtained under the Act and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws or by the By-laws and rules of
the National Association of Securities Dealers, Inc. in connection with
the purchase and distribution of the Shares by the Underwriters;
(ix) To the knowledge of such counsel after due inquiry, there
are no contracts or other documents of a character required to be filed
as an exhibit to the
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<PAGE> 17
Registration Statement as amended or supplemented that are not filed
as required;
(x) To the knowledge of such counsel after due inquiry, except
as disclosed in the Registration Statement or the Prospectus, as
amended or supplemented, no person or entity has the right to require
the registration under the Act of Shares or other securities of the
Company by reason of the filing or effectiveness of the Registration
Statement, which has not been waived;
(xi) Upon delivery of the certificates evidencing the Shares
against payment therefor as provided in this Agreement, the
Underwriters will acquire the Shares free of all adverse claims (as
such term is defined in Section 8-302 of the Uniform Commercial Code as
in effect in the State of Texas (the "UCC")), assuming (i) the
Underwriters are acting in good faith, (ii) the Underwriters have no
notice of any adverse claim (as such term is used in Section 8-302 of
the UCC) and (iii) the certificates evidencing the Shares are
registered in the names of the Underwriters or endorsed to the
Underwriters or nominees of the Underwriters;
(xii) To the knowledge of such counsel after due inquiry and
other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending or threatened to which the Kinder
Morgan Entities or any of its subsidiaries is a party or of which any
property of the Kinder Morgan Entities or any of its subsidiaries is
the subject which, if determined adversely to the Kinder Morgan
Entities or any of its subsidiaries, would individually or in the
aggregate reasonably expected to have a Material Adverse Effect;
(xiii) This Agreement has been duly authorized, executed and
delivered by the Company;
(xiv) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated including the use
of proceeds of the sale of the Shares) will not (a) result in a breach
or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument filed or incorporated by reference as
an exhibit to the Registration Statement, (b) result in any violation
of the provisions of the certificate of incorporation, by-laws or other
formation document, as applicable, of any of the Kinder Morgan
Entities, (c) breach or otherwise violate an existing obligation of any
of the Kinder Morgan Entities under any court or administrative order,
judgment or decree of which such counsel has knowledge after due
inquiry, or (d) violate any applicable provisions of the federal laws
of the United States, the laws of the State of Texas, the DGCL or the
Delaware Act;
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(xv) To the knowledge of such counsel after due inquiry, none of
the Kinder Morgan Entities are in violation of their partnership
agreement, certificate of incorporation, by-laws or other formation
documents, as applicable, or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument filed or incorporated by
reference as an exhibit to the Registration Statement to which any of
the Kinder Morgan Entities is a party or by which any of them or any of
their properties may be bound, which violation or default would
reasonably be expected to have a Material Adverse Effect;
(xvi) The statements set forth in the Prospectus under the
captions "Business of Kinder Morgan Energy Partners--Regulation,"
"Description of Our Capital Stock," and "Shares Eligible for Future
Sale" insofar as they purport to constitute a summary of, as
applicable, the provisions of federal law and the DGCL and the Restated
Certificate of Incorporation, Restated Bylaws, Registration Rights
Agreement and Rights Agreement, in each case, accurately presents and
summarizes in all material respects the matters described therein;
(xvii) The Shares have been approved for listing on the New York
Stock Exchange, subject only to official notice of issuance;
(xviii) The Company has all necessary corporate power and
authority to enter into this Agreement and to consummate the
transactions contemplated thereby. The issuance and sale by the Company
of the Shares to the Underwriters pursuant to this Agreement has been
duly authorized by all necessary corporate action; and the Shares, when
issued and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth therein, will be validly issued,
fully paid and non-assessable;
(xix) The Registration Statement and the Prospectus and any
further amendment and supplements thereto made by the Company prior to
the applicable Time of Delivery (other than, in each case, the
financial statements and schedules included therein, as to which such
counsel need not express an opinion) comply as to form in all material
respects with the requirements of the Act and the rules and regulations
promulgated thereunder;
(xx) Neither the Company nor the General Partner is (a) a
"holding company" or a "subsidiary company" of a "holding company" or
an "affiliate" thereof, within the meaning of the Public Utility
Holding Company Act of 1935, as amended, or (b) an "Investment Company"
or an entity "controlled" by an "Investment Company," as such terms are
defined in the Investment Company Act;
(xxi) Each of KMEP and SFPP and each of the Operating
Partnerships is classified as a partnership for federal income tax
purposes; and
(xxii) The Registration Statement was declared effective under
the Act by the Commission and to the knowledge of such counsel after
due inquiry, no order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose has been
instituted or is pending, threatened or contemplated. Any required
filing of the Prospectus relating to the sale of the Shares pursuant to
Rule 424(b) under the Act has been made in the manner and within the
time period required by such rule.
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Such counsel shall also deliver a letter to the effect that they have
participated in conferences with officers and other representatives of the
Company, representatives of the Company's accountants, representatives of the
Underwriters and counsel for the Underwriters at which conferences the contents
of the Registration Statement and Prospectus and related matters were discussed
and, based upon such participation and review, and relying as to materiality in
part upon the factual statements of officers and other representatives of the
Company and others, no facts have come to their attention that have caused them
to believe that the Registration Statement (other than the financial statements
and related schedules and other financial data, as to which such counsel need
not comment), at the time it became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that the
Prospectus (other than the financial statements and related schedules and other
financial data contained therein, as to which such counsel need not comment), as
of the date of such Prospectus or as of the date of such letter, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Such letter may state
that, because the primary purpose of such counsel's engagement was not to
establish or confirm factual matters or financial matters and because of the
wholly or partially non-legal character of many of the statements contained in
the Registration Statement and the Prospectus, such counsel is not passing upon
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus (except to the extent expressly set forth in paragraphs (v) and (xvi)
of this Section 7(c)), and they have not independently verified the accuracy,
completeness or fairness of such statements (except as aforesaid); and that,
without limiting the foregoing, they assume no responsibility for, have not
independently verified and have not been asked to comment on the accuracy,
completeness or fairness of the financial statements and related schedules
included in the Registration Statement or the Prospectus or the exhibits to the
Registration Statement, and they have not examined the financial or other
records from which such financial statements and related schedules and other
financial data contained therein were derived. Such counsel also may state that,
although certain portions of the Registration Statement (including financial
statements and related schedules) have been included therein on the authority of
"experts" within the meaning of the Act, they are not experts with respect to
any portion of the Registration Statement, including, without limitation, such
financial statements and related schedules and other financial data contained
therein.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than federal law, Texas law,
the DGCL and the Delaware Act.
(d) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent to
the date of this Agreement and also at each Time of Delivery, the independent
accountants of the Company who have certified the financial statements of the
Company and its subsidiaries included in the Registration Statement shall have
furnished to you a letter or letters, dated the respective dates of delivery
thereof, in
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<PAGE> 20
form and substance satisfactory to you, to the effect set forth in Annex I
hereto, and with respect to such letter dated such Time of Delivery, as to such
other matters as you may reasonably request;
(e) (i) None of the Kinder Morgan Entities shall have sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the partners' capital or capital stock, as applicable, or long-term
debt of the Company or any of the other Kinder Morgan Entities, or any change,
or any development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' or unitholders' equity or
results of operations of the Company or any of the other Kinder Morgan Entities,
otherwise than as set forth or contemplated in the Prospectus, the effect of
which, in any such case described in clause (i) or (ii), is in the judgment of
the Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded any of the Kinder Morgan Entities' debt
securities or preferred stock by any "nationally recognized statistical rating
organization," as that term is defined by the Commission for purposes of Rule
436(g)(2) under the Act, and (ii) no such organization shall have publicly
announced that it has under surveillance or review, with possible negative
implications, its rating of any of the Kinder Morgan Entities' debt securities
or preferred stock;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange; (ii) a suspension or material
limitation in trading in the Company's or in KMEP's securities on the New York
Stock Exchange; (iii) a general moratorium on commercial banking activities
declared by either federal or New York or Texas State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the effect
of any such event specified in this clause (iv) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares being delivered at such Time of Delivery
on the terms and in the manner contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been
duly listed, subject to notice of issuance, on the Exchange;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from Richard D. Kinder, Morgan Associates, Inc.,
First Union
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<PAGE> 21
Corporation and certain employees of First Union Corporation and its affiliates,
and each of the Company's executive officers substantially to the effect set
forth in subsection 5(e) hereof in form and substance satisfactory to you;
except that the applicable periods shall be two years for Richard D. Kinder and
Morgan Associates, Inc. and one year for First Union Corporation and for certain
employees of First Union Corporation and its affiliates rather than the 180 days
set forth in subsection 5(e) hereof.
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and warranties of
the Company herein at and as of such Time of Delivery, as to the performance by
the Company of all of its obligations hereunder to be performed at or prior to
such Time of Delivery, as to the matters set forth in subsections (a) and (e) of
this Section and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission
21
<PAGE> 22
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the
22
<PAGE> 23
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection (d),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Kinder Morgan Entities under this Section
8 shall be in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company
(including any person who, with his or her consent, is named in the Registration
Statement as about to become a director of the Company) and to each person, if
any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours
23
<PAGE> 24
within which to procure another party or other parties satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company that you have so arranged for the
purchase of such Shares, or the Company notifies you that it has so arranged for
the purchase of such Shares, you or the Company shall have the right to postpone
such Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
of the Shares to be purchased at such Time of Delivery, then the Company shall
have the right to require each non-defaulting Underwriter to purchase the number
of Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, the Company, or
any officer or director or controlling person of the Company and shall survive
delivery of and payment for the Shares.
24
<PAGE> 25
11. If this Agreement shall be terminated pursuant to Sections 7(b),
7(g) or 9 hereof, the Company shall not then be under any liability to any
Underwriter except as provided in Sections 6 and 8 hereof; but, if for any other
reason any Shares are not delivered by or on behalf of the Company as provided
herein, the Company will reimburse the Underwriters through you for all
out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Shares not so delivered,
but the Company shall then be under no further liability to any Underwriter
except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs &Co. on behalf of you as the
Representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary; provided, however, that any notice
to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company by you upon
request. Any such statements, requests, notices or agreements shall take effect
upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls any of the Company or any Underwriter, and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
25
<PAGE> 26
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Company and one for each of the Representatives
plus one for each counsel counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters and
the Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
KINDER MORGAN, INC.
By:
Richard D. Kinder
Chairman of the Board and Chief
Executive Officer
Accepted as of the date hereof:
Goldman, Sachs & Co.
PaineWebber Incorporated
By:
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
26
<PAGE> 27
SCHEDULE I
MAXIMUM
NUMBER OF
NUMBER OF FIRM OPTIONAL SHARES
SHARES TO BE WHICH MAY BE
PURCHASED PURCHASED
-------------- ---------------
Goldman, Sachs & Co...................... $
PaineWebber Incorporated.................
Total...........................
<PAGE> 28
SCHEDULE II
List of subsidiaries (as such term is defined in the rules and
regulations of the Commission under the Act and the Exchange Act) of the Company
or other entities in which the Company, the General Partner, KMEP, any of the
Operating Partnerships or SFPP, L.P. has an equity ownership interest of at
least 50% and which owns assets or conducts business:
Heartland Company
Mont Belvieu Associates
Kinder Morgan Energy Partners, L.P.
Kinder Morgan G.P., Inc.
Kinder Morgan CO2, LLC
Kinder Morgan Natural Gas Liquids Corporation
Kinder Morgan Bulk Terminals, Inc.
Kinder Morgan Operating L.P. "A"
Kinder Morgan Operating L.P. "B"
Kinder Morgan Operating L.P. "C"
Kinder Morgan Operating L.P. "D"
Plantation Pipe Line Company
River Consulting, Inc.
SFPP, L.P.
Western Plant Services, Inc.
<PAGE> 29
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiary (the "Company") and Kinder
Morgan Energy Partners, L.P. (the "Partnership") within the meaning of
the Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules examined by them and
included in the Prospectus or the Registration Statement comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified
Public Accountants of the unaudited consolidated interim financial
statements of the Company and the Partnership for the periods specified
in such letter;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus and on the basis of specified procedures
including inquiries of officials of the Company and the Partnership who
have responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements
referred to in paragraph (vii)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations, nothing came to
their attention that caused them to believe that the unaudited
condensed consolidated financial statements do not comply as to form in
all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Partnership for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included or incorporated by reference
in the Partnership's Annual Reports on Form 10-K for such fiscal years;
(v) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company as of and for the year ended December 31, 1998, the period from
February 14, 1997 to December 31, 1997, the period from January 1, 1997
to February 14, 1997, and the year ended December 31, 1996 included in
the Prospectus agrees with the corresponding amounts (after
restatements where applicable) in the audited consolidated financial
statements for such periods.
(vi) They have compared the information in the Prospectus under
selected
<PAGE> 30
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused
them to believe that this information does not conform in all material
respects with the disclosure requirements of Items 301, 302 and
402, respectively, of Regulation S-K;
(vii) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and the Partnership,
inspection of the minute books of the Company and the Partnership
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and the
Partnership responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus do not
comply as to form in all material respects with the
applicable accounting requirements of the Act and the
related published rules and regulations, or (ii) any
material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows
included in the Prospectus for them to be in conformity with
generally accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were
derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited
consolidated financial statements included in the
Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in
clause (A) and any unaudited income statement data and
balance sheet items included in the Prospectus and referred
to in clause (B) were not determined on a basis
substantially consistent with the basis for the audited
consolidated financial statements included in the
Prospectus;
(D) as of a specified date not more than five days
prior to the date of
<PAGE> 31
such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon
exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding
on the date of the latest financial statements included in
the Prospectus) or any increase in the consolidated
long-term debt of the Company and the Partnership, or any
decreases in consolidated net current assets or
stockholders' or unitholders' equity or other items
specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter;
and
(E) for the period from the date of the latest
financial statements included in the Prospectus to the
specified date referred to in clause (D) there were any
decreases in consolidated net revenues or operating profit
or the total or per share amounts of consolidated net income
or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in
each case as compared with the comparable period of the
preceding year and with any other period of corresponding
length specified by the Representatives, except in each case
for decreases or increases which the Prospectus discloses
have occurred or may occur or which are described in such
letter; and
(viii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vii) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Company and the Partnership, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain
of such amounts, percentages and financial information with the
accounting records of the Company and the Partnership and have found
them to be in agreement.
<PAGE> 1
EXHIBIT 2.7
EXCHANGE AGREEMENT
This Exchange Agreement (the "Agreement") is made and entered into
effective as of June 16, 1999, by and among Kinder Morgan, Inc., a Delaware
corporation (the "Company"), and all of its stockholders as listed on the
signature pages hereto (collectively the "Stockholders" and individually a
"Stockholder").
1. Introduction. On May 10, 1999, the Company filed a registration
statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission for the public offering of its common stock, par value $0.01
per share. In connection with that public offering (the "Offering"), the Company
and the Stockholders desire to effect a recapitalization of the Company. There
are currently outstanding 8,047 shares of the Company's Class A Common Stock and
2,541 shares of the Company's Class B Common Stock. The Board of Directors of
the Company and the Stockholders have approved the amendment and restatement of
the Company's Restated Certificate of Incorporation (the "Restated
Certificate"), which amendment and restatement will provide for common stock,
par value $0.01 per share (the "Common Stock") and non-voting convertible common
stock, par value $0.01 per share (the "Non-Voting Common Stock").
2. Exchange. Effective as of the Closing Date, as defined below, the
Company shall exchange with the Stockholders the number of shares of existing
Class A Common Stock and Class B Common Stock held by each Stockholder as set
forth on Exhibit A attached hereto ("Exhibit A") for the number of shares of
Common Stock and Non-Voting Common Stock as set forth on Exhibit A. Subject to
the requirement that no fractional shares be issued, all exchanges will be made
at a rate of one existing share for 3093.124292 new shares. No fractional shares
of Common Stock or Non-Voting Common Stock will be issued upon the exchange;
rather, the number of shares of Common Stock or Non-Voting Common Stock to be
issued based on the exchange ratio set forth above will be rounded up or down to
the nearest whole share.
3. Closing. The closing of the exchange (the "Closing") will, subject to
Section 9 hereof, take place immediately upon the Registration Statement, or any
amendment thereto, being declared effective by the Securities and Exchange
Commission, with such date to be the "Closing Date."
4. Deliveries.
(a) By Stockholders. On the date hereof, the Stockholders shall
deliver to the Company all certificates representing the Class A Common Stock
and Class B Common
<PAGE> 2
Stock listed on Exhibit A either executed in blank or together with stock powers
executed in blank.
(b) By the Company. Promptly after the Closing, the Company shall
deliver to each Stockholder certificates representing the shares of Common Stock
and Non-Voting Common Stock listed on Exhibit A to be issued in favor of such
Stockholder.
5. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Stockholders as follows as of the date hereof and
as of the Closing Date:
(a) The Company has full power and authority to execute, deliver and
perform this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated herein.
(b) The execution and delivery by the Company of this Agreement and the
performance of its obligations contemplated hereby have been duly and validly
authorized by all necessary action of the Company.
(c) This Agreement has been duly executed and delivered by a duly
authorized officer of the Company and constitutes the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
its terms and conditions except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (whether applied in a proceeding at law or in equity).
(d) The shares of Common Stock and Non-Voting Common Stock, upon
issuance in accordance with the terms hereof, shall be duly authorized, fully
paid and nonassessable.
6. Representations and Warranties of the Stockholders. Each Stockholder
hereby represents and warrants, severally and not jointly, as follows as of the
date hereof and as of the Closing Date:
(a) The Stockholder has full legal capacity to execute, deliver and
perform this Agreement and to perform his, her or its obligations hereunder and
to consummate the transactions contemplated herein.
(b) This Agreement has been duly executed and delivered by the
Stockholder (or if the Stockholder is an entity, by a duly authorized officer of
the Stockholder) and
-2-
<PAGE> 3
constitutes the legal, valid and binding obligations of the Stockholder,
enforceable against the Stockholder in accordance with its respective terms and
conditions except as such enforce ment may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity (whether applied
in a proceeding at law or in equity).
(c) All shares of Class A Common Stock or Class B Common Stock of the
Company that the Stockholder is to deliver to the Company pursuant to Section 4
above are free and clear of all liens, assessments, charges, claims, pledges,
security interests and other encumbrances.
(d) The Stockholder acknowledges that the Common Stock and Non-Voting
Common Stock constitute securities under the Securities Act of 1933, as amended
("Securities Act"), and applicable state securities laws (collectively, "Acts").
The Stockholder acknowledges that the Common Stock and Non-Voting Common Stock
have not been registered under the Acts in reliance on available exemptions from
the registration requirements thereof.
(e) The Stockholder has such knowledge and experience in financial and
business matters that the Stockholder is capable of evaluating the merits and
risks of his, her or its acquisition of the Common Stock and Non-Voting Common
Stock The Stockholder has had access to and an opportunity to inspect all
relevant information relating to the Company sufficient to enable the
Stockholder to evaluate the merits and risks of his, her or its acquisition of
the Common Stock and Non-Voting Common Stock . The Stockholder also has had the
opportunity to ask questions and receive answers respecting, and to obtain such
additional information as the Stockholder has desired regarding, the business,
financial condition and affairs of the Company. The Stockholder has received a
copy of the Registration Statement.
(f) The Stockholder's acquisition of the Common Stock and Non-Voting
Common Stock is for the Stockholder's own account, is for investment purposes,
and is without a view to, or for offer or sale for the Company in connection
with, any distribution of the Common Stock and Non-Voting Common Stock. The
Stockholder is not participating and does not have a participation in any such
distribution or the underwriting of any such distribution.
(g) The Stockholder understands that Common Stock and Non-Voting Common
Stock must be held for an indefinite period of time unless such stock
subsequently is registered under the Acts or exemptions from the registration
requirements thereof are available. The Stockholder understands that upon
issuance of the shares Common Stock and
-3-
<PAGE> 4
Non-Voting Common Stock in accordance with this Agreement, a new holding period
for purposes of Rule 144 promulgated under the Securities Act may begin with
respect to such shares.
(h) Each Stockholder acknowledges that Bracewell & Patterson, L.L.P.,
counsel to the Company, has not represented nor does represent such
Stockholder's interests in the negotiation, execution or performance of this
Agreement and that such Stockholder has been advised to seek its own counsel for
such purposes. Each Stockholder represents and affirms that such Stockholder is
not relying on any oral statement made by the Company or any agent or
representative of the Company in making its decision to enter into this
Agreement or to consummate the transactions contemplated hereby.
(i) The Stockholder acknowledges that upon issuance, the certificates
representing the Common Stock and Non-Voting Common Stock shall have the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS ("ACTS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACTS OR AN OPINION
OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS
NOT REQUIRED.
7. Survival of Representations and Warranties. The representations and
warranties made by the Company and the Stockholders herein shall survive beyond
the date hereof for the maximum period permitted by applicable law.
8. Terminations. The Company and the First Union Corporation hereby agree
to the termination effective as of the Closing Date of the Common Stock
Subscription Agreement dated February 14, 1997, between the Company and First
Union Corporation. The Company and the Stockholders hereby acknowledge that the
Shareholders Agreement dated as of February 14, 1997, among the Company and
certain of the Stockholders, as supplemented, shall terminate according to its
terms upon the consummation of the Offering. In addition, the Company and the
Stockholders agree to the termination effective as of the termination of that
Shareholders Agreement of all Shareholder Agreement Supplements dated September
3, 1998, executed by the Company and certain Stockholders.
9. Conditions to Closing. The Company shall be authorized to effect the
Closing, cancel the certificates representing the Class A Common Stock and the
Class B Common Stock and issue the certificates representing the Common Stock
and Non-Voting Common
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<PAGE> 5
Stock on the Closing Date upon the satisfaction on or prior to the Closing Date
of all of the following conditions:
(a) The Company and the Stockholders shall have executed an Amended and
Restated Registration Rights Agreement that amends and restates in its entirety
the Registration Rights Agreement dated as of February 14, 1997, among the
Company, Richard D. Kinder, Morgan Associates, Inc. and First Union Corporation,
as amended.
(b) The SEC shall have declared the Registration Statement effective.
(c) The Company shall have filed the Restated Certificate of
Incorporation, in the form previously approved by the Stockholders, with the
Secretary of State of Delaware and such filing shall have been accepted.
(d) No suit, action or other proceeding shall be pending in which there
is sought any remedy to restrain, enjoin or otherwise prevent the consummation
of this Agreement or the transactions in connection herewith.
10. Notices. Any notice, request, instruction, correspondence or other
document to be given hereunder by either party to the other (herein collectively
called "Notice") shall be in writing and delivered in person or by courier
service requiring acknowledgment of receipt of delivery or mailed by certified
mail, postage prepaid and return receipt requested, or by telecopier, to the
addresses for notice as set forth in the Shareholders Agreement of the Company.
Notice given by personal delivery, courier service or mail shall be effective
upon actual receipt. Notice given by telecopier shall be confirmed by
appropriate answer back and shall be effective upon actual receipt if received
during the recipient's normal business hours, or at the beginning of the
recipient's next business day after receipt if not received during the
recipient's normal business hours. All Notices by telecopier shall be confirmed
promptly after transmission in writing by certified mail or personal delivery.
Any party may change any address to which Notice is to be given to it by giving
Notice as provided above of such change of address.
11. Governing Law. The provisions of this Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Delaware
(excluding any conflicts-of-law rule or principle that might refer same to the
laws of another jurisdiction), except to the extent that same are mandatorily
subject to the laws of another jurisdiction pursuant to the laws of such other
jurisdiction.
-5-
<PAGE> 6
12. Entire Agreement; Amendments and Waivers. This Agreement constitutes
the entire agreement between the parties hereto pertaining to the subject matter
hereof and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, and there are no
warranties, representations or other agreements between the parties in
connection with the subject matter hereof except as set forth specifically
herein or contemplated hereby. No supplement, modification or waiver of this
Agreement shall be binding unless executed in writing by the party to be bound
thereby. The failure of a party to exercise any right or remedy shall not be
deemed or constitute a waiver of such right or remedy in the future. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provision hereof (regardless of whether similar), nor shall
any such waiver constitute a continuing waiver unless otherwise expressly
provided. Each party to this Agreement agrees that (a) no other party to this
Agreement (including its agents and representatives) has made any
representation, warranty, covenant or agreement to or with such party relating
to the transactions contemplated hereby, other than those expressly set forth
herein, and (b) such party has not relied upon any representation, warranty,
covenant or agreement relating to the transactions contemplated hereby, other
than those referred to in clause (a) above.
13. Binding Effect and Assignment. This Agreement is binding upon and
inures to the benefit of the parties hereto and their respective permitted
successors and assigns; but neither this Agreement nor any of the rights,
benefits or obligations hereunder shall be assigned, by operation of law or
otherwise, by any party hereto without the prior written consent of the Company,
Richard D. Kinder, Morgan Associates, Inc. and First Union Corporation. Nothing
in this Agreement, express or implied, is intended to confer upon any person or
entity other than the parties hereto and their respective permitted successors
and assigns, any rights, benefits or obligations hereunder.
14. Severability. If any provision of the Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, the Company, Richard
D. Kinder, Morgan Associates, Inc. and First Union Corporation shall promptly
meet and negotiate substitute provisions for those rendered or declared illegal
or unenforceable, but all of the remaining provisions of this Agreement shall
remain in full force and effect.
15. Headings. The headings of the sections herein are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
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<PAGE> 7
16. Execution. This Agreement may be executed in multiple counterparts
each of which shall be deemed an original and all of which shall constitute one
instrument.
-7-
<PAGE> 8
This Agreement is executed and delivered by the Company and the
Stockholders on the date first set forth above.
COMPANY:
KINDER MORGAN, INC.
By: /s/ WILLIAM V. MORGAN
------------------------------------
William V. Morgan
President
STOCKHOLDERS:
/s/ RICHARD D. KINDER
---------------------------------------
Richard D. Kinder
MORGAN ASSOCIATES, INC.
By: /s/ WILLIAM V. MORGAN
------------------------------------
William V. Morgan
President
-8-
<PAGE> 9
FIRST UNION CORPORATION
By: /s/ TED GARDNER
------------------------------------
Ted Gardner
Senior Vice President
/s/ W. BARNES HAUPTFUHRER
---------------------------------------
W. Barnes Hauptfuhrer
/s/ TED A. GARDNER
---------------------------------------
Ted A. Gardner
/s/ SCOTT B. PERPER
---------------------------------------
Scott B. Perper
/s/ KEVIN J. ROCHE
---------------------------------------
Kevin J. Roche
/s/ MARGARET M. ROCHE
---------------------------------------
Margaret M. Roche
/s/ JAMES C. COOK
---------------------------------------
James C. Cook
/s/ FREDERICK W. EUBANK II
---------------------------------------
Frederick W. Eubank II
/s/ L. WATTS HAMRICK III
---------------------------------------
L. Watts Hamrick III
-9-
<PAGE> 10
/s/ DAVID B. CARSON
---------------------------------------
David B. Carson
/s/ CHERYL S. CARSON
---------------------------------------
Cheryl S. Carson
/s/ DAVID N. MORRISON
---------------------------------------
David N. Morrison
/s/ PEARCE A. LANDRY
---------------------------------------
Pearce A. Landry
-10-
<PAGE> 11
Exhibit A
<TABLE>
<CAPTION>
Shares of Shares of Shares of
Class A Class B Shares of Non-Voting
Common Stock Common Stock Common Stock Common Stock
Stockholder Held Held to be issued to be issued
- ------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Richard D. Kinder 5,801 444.8 19,319,036
Morgan Associates, Inc. 2,246 111.2 7,291,113
First Union Corporation 1,588 1,435,209 3,476,671
W. Barnes Hauptfuhrer 41 126,818
Ted A. Gardner 59 182,494
Scott B. Perper 42 129,911
Kevin J. and Margaret M. Roche 41 126,818
James C. Cook 38 117,539
Frederick W. Eubank II 38 117,539
L. Watts Hamrick III 38 117,539
David B. and Cheryl S. Carson 32 98,980
David N. Morrison 38 117,539
Pearce A. Landry 30 92,794
----- ----- ---------- ---------
Total 8,047 2,541 29,273,329 3,476,671
===== ===== ========== =========
</TABLE>
-11-
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
KINDER MORGAN, INC.
The name of the corporation is Kinder Morgan, Inc. (the
"Corporation"). The name of the Corporation as originally incorporated was KC
Liquids Holding Corporation and its original Certificate of Incorporation was
filed with the Delaware Secretary of State on October 31, 1996. On February 13,
1997, the Corporation filed with the Delaware Secretary of State a Certificate
of Amendment to its Certificate of Incorporation that, in part, changed the
Corporation's name to Kinder Morgan, Inc. This Restated Certificate of
Incorporation, which restates, integrates and further amends the Company's
Restated Certificate of Incorporation, was duly adopted in accordance
with ss. 242 and ss. 245 of the General Corporation Law of the
State of Delaware ("DGCL").
ARTICLE I
The name of the Corporation is Kinder Morgan, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, County of New Castle,
Wilmington, Delaware 19801. The name of the Corporation's registered agent at
such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
DGCL; provided, however, that if the consummation by Kinder Morgan G.P., Inc.,
a Delaware corporation (the "General Partner"), Kinder Morgan Energy Partners,
L.P., a Delaware limited partnership ("KMEP"), or any of KMEP's operating
limited partnership or subsidiaries of any purchase, sale, investment,
divestment or any other transaction is determined by the board of directors of
the General Partner to be fair and reasonable to such entities, as applicable,
such transaction shall not be within the power of the Corporation, including,
but not limited to, any such action that was originally offered to the
Corporation and was disclosed to the board of directors of General Partner by
any director or officer of both General Partner and the Corporation; provided,
however, that if the board of directors of the General Partner later determines
to abandon such transaction, such transaction shall again be within the
corporate power of the Corporation.
ARTICLE IV
Section 1. Authorized Capital. The Corporation shall be authorized to
issue two hundred and fifteen million (215,000,000) shares of capital stock,
of which (i) two hundred million (200,000,000) shares shall be shares of
common stock, $.01 par value per share ("Common Stock"), (ii) ten million
(10,000,000)
<PAGE> 2
shares shall be shares of Non-Voting Convertible Common Stock, par value $0.01
per share ("Non-Voting Common Stock"), and (iii) five million (5,000,000) shares
shall be shares of preferred stock, $.01 par value per share ("Preferred
Stock").
Section 2. Preferred Stock. The Board of Directors is hereby expressly
authorized, subject to any limitations prescribed by applicable law, to provide
from time to time for the issuance of shares of Preferred Stock in one or more
series, and to determine the number of shares of each series and to fix for
each series of Preferred Stock such voting powers, full or limited or no voting
powers, and such designations, preferences and relative, participating,
optional or other special rights, and such qualifications, limitations or
restrictions thereof, as shall be stated and expressed in the resolution or
resolutions adopted by the Board of Directors or a duly authorized committee
thereof providing for the issue of such series.
Section 3. Common Stock.
(a) Exclusive Rights. Subject to the rights of the holders of
any series of Preferred Stock and except as otherwise provided by law,
the Common Stock shall have the exclusive right to vote for the
election of directors of the Corporation (each a "Director") and for
all other purposes. The number of authorized shares of Common Stock,
Non-Voting Common Stock and Preferred Stock may be increased or
decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority in
voting power of the stock of the Corporation entitled to vote thereon
irrespective of the provisions of Section 242(b)(2) of the DGCL (or
any successor provision thereto), and no vote of the holders of either
the Common Stock, Non-Voting Common Stock or the Preferred Stock
voting separately as a class shall be required therefor.
(b) Voting Rights. Each outstanding share of Common Stock
shall entitle the holder thereof to one vote on each matter properly
submitted to the stockholders of the Corporation for their vote,
consent, waiver, release or other action; provided, however, that,
except as otherwise required by law, holders of Common Stock shall not
be entitled to vote on any amendment to this Restated Certificate of
Incorporation (including any Certificate of Designations relating to
any series of Preferred Stock) that relates solely to the terms of one
or more outstanding series of Preferred Stock if the holders of such
affected series are entitled, either separately or together with the
holders of one or more other such series, to vote thereon pursuant to
this Restated Certificate of Incorporation (including any Certificate
of Designations relating to any series of Preferred Stock) or pursuant
to the DGCL. Except as required by law, the holders of the Non-Voting
Common Stock shall have no right to vote on any matters for which a
vote of the stockholders of the Corporation is taken.
(c) Ranking. Except with respect to voting and conversion
rights, the Common Stock and the Non-Voting Common Stock shall be in
all respects have the same powers, preferences, rights and
qualifications (including dividend rights and rights on liquidation,
dissolution and winding up) and shall rank pari passu with each other.
(d) Dividends. Subject to all of the rights of any class of
stock ranking senior to the Common Stock and Non-Voting Common Stock as
to dividends, dividends may be paid upon the Common Stock and
Non-Voting Common Stock as and when declared by the Board of
Directors out of funds and other assets legally available for
the payment of dividends. The Board of Directors may declare a
dividend or distribution upon both the Common Stock and
the Non-Voting Common Stock in shares of any authorized class or series
of capital stock of the Corporation only if such dividend is declared
and paid proportionately to all holders of Common Stock and Non-Voting
Common Stock as follows: (i) in Common Stock to the holders of Common
Stock and in Non-Voting Common Stock to the holders of Non-Voting
Common Stock, or (ii) in any authorized class or series of capital
stock to the holders of both Common Stock and Non-Voting Common Stock.
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<PAGE> 3
(e) Conversion.
(i) Any holder of Non-Voting Common Stock shall have the
right, at its option, at any time and from time to time, to
convert, subject to the terms and provisions of this Section
3(e) of Article IV, any or all of such holder's shares of
Non-Voting Common Stock into fully paid and non-assessable
shares of Common Stock at the rate (subject to adjustment as
provided below) of one share of Common Stock for each share
of Non-Voting Common Stock surrendered for conversion;
provided, however, if the holder in any such conversion is
subject to the Bank Holding Company Act of 1956, as amended
(12 U.S.C. ss.1841, et. seq.) and the regulations promulgated
thereunder (collectively and including any successor
provisions, the "BHCA Act"), such conversion may be made only
if:
(A) the BHCA Act would not prohibit such holder from
holding such shares of Common Stock; and
(B) such shares of Common Stock to be received upon
such conversion will be (1) distributed or sold (a) in
connection with any public equity offering registered
under the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder (the
"Securities Act"), (b) in a "broker's transaction" (as
defined in Rule 144(g) under the Securities Act) pursuant
to Rule 144 under the Securities Act or any similar rule
then in force, (c) to a person or group (within the
meaning of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) of persons if, after such
distribution or sale, such person or group of persons
would not, in the aggregate, own, control or have the
right to acquire more than 2% of the outstanding
securities of the Corporation entitled to vote on the
election of directors of the Corporation, or (d) to a
person or group (within the meaning of the Exchange Act)
of persons if, prior to such sale, such persons or group
of persons had control of the Corporation, or (2) held,
distributed or sold in any other manner permitted
under the BHCA;
provided, further, that if the holder converts any shares of
the Non-Voting Common Stock as provided in clauses (A) and
(B) above and any distribution or sale of the Common Stock
fails to occur for any reason, such holder may convert the
Common Stock into the Non-Voting Common Stock converted in
anticipation of such distribution or sale.
(ii) Such conversion right shall be exercised by the
surrender to the Corporation of the shares of the applicable
Non-Voting Common Stock to be converted in the manner
provided above at any time during usual business hours at its
principal place of business, accompanied by (A) written
notice that the holder elects to convert such shares of
Non-Voting Common Stock and specifying the name or names
(with address) in which a certificate or certificates for
shares of the Common Stock are to be issued; (B) if so
required by the Corporation, a written instrument or
instruments of transfer in form reasonably satisfactory to
the
-3-
<PAGE> 4
Corporation duly executed by the holder or its duly
authorized legal representative; (C) transfer tax stamps or
funds therefor, if required pursuant to Section 3(e)(iv) of
this Article IV, and (D) a certificate in form satisfactory
to the Corporation stating that the holder has satisfied all
applicable conditions to conversion, including without
limitation the restrictions described in Section 3(e)(i) of
this Article IV, and the Corporation may rely upon such
Certificate as to the holder's compliance with any such
conditions or restrictions without any investigation by the
Corporation as to such matters. As promptly as practicable
after the surrender, as herein provided, of any shares of
Non-Voting Common Stock for conversion pursuant to Section
3(e)(i) of this Article IV, the Corporation shall deliver to
or upon the written order of the holder of such shares of
Non-Voting Common Stock so surrendered a certificate or
certificates representing the number of fully paid and
non-assessable shares of the Common Stock into which such
shares of Common Stock may be or have been converted in
accordance with the provisions of this Section 3(e) of
Article IV. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date that
such shares of Non-Voting Common Stock shall have been
surrendered in satisfactory form for conversion, and the
person or persons entitled to receive the shares of Common
Stock deliverable upon conversion of such shares of
Non-Voting Common Stock shall be treated for all purposes as
having become the record holder or holders of such shares of
Common Stock at such appropriate time. Notwithstanding the
foregoing, a holder's identification of the person or persons
entitled to receive any shares of Common Stock deliverable
upon conversion shall not be deemed an approval by the
Corporation of a transfer or conversion that would result in
a violation of any applicable law or restriction on transfer
or conversion and shall not be deemed a waiver by the
Corporation or any other person of any right or restriction
regarding any such transfer or conversion.
(iii) So long as shares of each of the Common Stock and
Non-Voting Common Stock are outstanding or authorized or
reserved for issuance, the Corporation shall not, without the
affirmative vote of the holders of a majority of the Common
Stock and the Non-Voting Common Stock, each voting separately
as a class, effect any stock split, reclassification,
reorganization, recapitalization, combination or subdivision
of Common Stock or Non-Voting Common Stock, unless the
Corporation shall also contemporaneously effect a stock split,
stock dividend, reclassification, reorganization combination
on subdivision on the same terms with respect to the other
class. The Corporation will not, by amendment of its Restated
Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, share exchange,
dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed
hereunder by the Corporation, including without limitation the
adjustments required under this Section 3(e)(iii) of Article
IV, and will at all times in good faith assist in the carrying
out of all the provisions of this Section 3(e)(iii) of Article
IV, and in the taking of all such action as may be necessary
or appropriate in order to protect the conversion rights of
the holders of Non-Voting Common Stock against dilution or
other impairment.
(iv) The Corporation shall pay any and all issue and
other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on
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<PAGE> 5
conversion of shares of Non-Voting Common Stock pursuant
hereto; provided, that the Corporation shall not be obligated
to pay any transfer taxes resulting from any transfer
requested by any holder in connection with any such
conversion.
(v) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common
Stock, free of preemptive rights, solely for the purpose of
effecting the conversion of the shares of Non-Voting Common
Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of
all outstanding shares of Non-Voting Common Stock into Common
Stock; and if at any time the number of authorized but
unissued shares of each class shall not be sufficient to
effect the conversion of all then outstanding shares of the
other class, the Corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in
reasonable best efforts to obtain the requisite stockholder
approval of any necessary amendment to this Restated
Certificate of Incorporation.
(vi) In the event of a merger or consolidation of the
Corporation with or into another entity (whether or not the
Corporation is the survey entity), the holders of the
Non-Voting Common Stock shall be entitled to receive the same
per share consideration as the per share consideration, if
any, received by any holder of the Common Stock in such merger
on consolidation; provided, however, that if the per share
consideration consists of voting capital stock, proper
provision shall be made so that the holders of the Non-Voting
Common Stock shall receive non-voting capital stock
convertible into that voting capital stock in the same manner
and with the stock provisions as set forth in this Section 3
of Article IV.
Section 4. Record Holders. The Corporation shall be entitled to treat
the person in whose name any share of its stock is registered in the records of
the Corporation, or with any agent of the Corporation employed as the stock
transfer agent of the Corporation, as the owner thereof for all purposes, and
the Corporation shall not be bound to recognize any equitable or other claim
to, or interest in, such share on the part of any other person or entity,
whether or not the Corporation shall have notice of such claim, except as
expressly provided by applicable law.
-5-
<PAGE> 6
ARTICLE V
Section 1. Annual Meetings of Stockholders. The annual meetings of
stockholders of the Corporation (each a "Stockholder" and collectively,
"Stockholders") shall be held on such date and at such place and time as may be
fixed by resolution of the Board of Directors.
Section 2. Calling of Special Meetings of Stockholders. Subject to the
rights of the holders of any series of Preferred Stock and to the requirements
of applicable law, special meetings of Stockholders may be called only by
either (a) the Chairman of the Board of Directors, or (b) by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
Directors which the Corporation would have if there were no vacancies (the
"Whole Board").
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 2 of Article
V may be altered, amended or repealed in any respect, nor may any provision
inconsistent therewith be adopted, unless such alteration, amendment, repeal or
adoption is approved by the affirmative vote of the holders of at least eighty
(80) percent of the combined voting power of the then outstanding shares of the
Corporation's stock entitled to vote generally in the election of Directors
("Voting Stock"), voting together as a single class.
Section 3. Chairman of Stockholder Meetings. Each annual and special
meeting of Stockholders shall be presided over by a Chairman, who shall have
the exclusive authority to, among other things, determine (a) whether business
and nominations have been properly brought before such meetings, (b) the order
in which business and nominations properly brought before such meeting shall be
considered, and (c) whether or not a quorum is present, shall have the power to
adjourn such meeting from time to time, without any notice other than
announcement at the meeting of the time and place of the holding of the
adjourned meeting. The Chairman of each annual and special meeting shall be the
Chairman of the Board of Directors, or such person as shall be appointed by the
resolution approved by the majority of the Whole Board. If a meeting is
adjourned for more than thirty (30) days, or if after an adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at such
meeting. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally called.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 3 of Article
V may be altered, amended or repealed in any respect, nor may any provision
inconsistent therewith be adopted, unless such alteration, amendment, repeal or
adoption is approved by the affirmative vote of the holders of at least eighty
(80) percent of the combined voting power of the outstanding shares of Voting
Stock, voting together as a single class.
Section 4. Election of Directors.
(a) Method of Election. Election of Directors at all meetings
of the Stockholders at which Directors are to be elected need not be
by written ballot and instead may be made by voice vote.
-6-
<PAGE> 7
(b) Required Vote. At all meetings of Stockholders at which
Directors are to be elected, a plurality of the combined voting power
of the then outstanding shares of Voting Stock cast thereat shall
elect Directors. Each share of Common Stock shall be entitled to one
vote, in person or by proxy. Each share of any series of Preferred
Stock shall be entitled to that number of votes as designated by the
Board of Directors (or a committee thereof) in the resolution
establishing such issuance or series. Cumulative voting for the
election of Directors is expressly not permitted.
Section 5. Matters Other Than the Election of Directors.
(a) Method of Voting. Unless and except to the extent that
the By-Laws of the Corporation shall so require, all voting by
Stockholders, except the election of Directors of the Corporation,
need not be by written ballot and instead may be made by voice vote.
(b) Required Vote. Subject to the rights of holders of any
series of Preferred Stock, and except as otherwise provided by law,
applicable stock exchange rules or this Restated Certificate of
Incorporation, in all matters other than the election of Directors,
the affirmative vote of a majority of the shares present in person or
represented by proxy at the meeting and entitled to vote on the matter
shall be the act of the Stockholders.
Section 6. Inspectors of Elections; Opening and Closing the Polls. To
the extent required by applicable law, the Board of Directors by resolution
shall appoint one or more inspectors, which inspector or inspectors may include
individuals who serve the Corporation in other capacities, including, without
limitation, as officers, employees, agents or representatives, to act at the
meetings of Stockholders and make a written report thereof. One or more persons
may be designated as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate has been appointed to act or is able to act
at a meeting of Stockholders, the Chairman of the meeting shall appoint one or
more inspectors to act at the meeting. Each inspector, before discharging his
or her duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall have the duties prescribed by law.
The Chairman of the meeting shall fix and announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the Stockholders will vote at a meeting.
Section 7. Stockholder Inspection of Corporate Records. Except as
otherwise provided by applicable law, the Board of Directors shall have the
power to determine from time to time whether and, if allowed, under what
conditions, circumstances and regulations the books and records of the
Corporation shall be open to inspection by the Stockholders, and the
Stockholders' ability to inspect any of the books and records or any other
document of the Corporation are and shall be restricted or limited according to
the determination of the Board of Directors.
Section 8. Written Consent. Subject to the rules and regulations of
the New York Stock Exchange, or any other exchange on which the Corporation's
securities are listed, and until the date on which Richard D. Kinder, William
V. Morgan and their affiliates no longer own a majority of the combined voting
power of the then outstanding shares of Voting Stock, any action permitted or
-7-
<PAGE> 8
required by law, this Restated Certificate of Incorporation or the Bylaws of
the Corporation to be taken at a special meeting of stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding Voting Stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to its registered office in the state
of incorporation, its principal place of business, or an officer or agent of
the Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Subject to the above provisions of this Section 8 of Article V and the
rights of the holders of any series of Preferred Stock, any action otherwise
required or permitted to be taken by the Stockholders must be effected at a
duly called annual or special meeting of Stockholders and may not be effected
without such a meeting by any consent in writing by such holders.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Section 8 of Article
V may be altered, amended or repealed in any respect, nor may any provision
inconsistent therewith be adopted, unless such alteration, amendment, repeal or
adoption is approved by the affirmative vote of the holders of at least eighty
(80) percent of the combined voting power of the then outstanding shares of
Voting Stock, voting together as a single class.
ARTICLE VI
Section 1. Corporate Governance. Subject to Article IX hereof, the
business and affairs of the Corporation shall be managed by or under the
direction of its Board of Directors. Only the directors shall have the power to
elect or appoint the officers of the Corporation; no officer may be elected or
appointed by the stockholders of the Corporation.
Section 2. Number. Subject to the rights of the holders of any series
of Preferred Stock, the number of Directors constituting the Whole Board shall
not be less than one. Subject to the rights of the holders of any series of
Preferred Stock, the number of Directors shall be fixed from time to time
exclusively pursuant to a resolution adopted by a majority of the Whole Board.
Section 3. Qualifications.
(a) Age. No person shall be nominated for election, nor
elected, as a Director of the Corporation if such person (i) has
attained the age of 80 as of such nomination or election, or (ii) will
attain the age of 80 prior to the expiration of the term of office
such person is being nominated or elected for.
(b) Convictions. No person may be a Director of the
Corporation after conviction of any offense under applicable law
punishable by a term of imprisonment exceeding one year or by death
during the period after such conviction that such person in connection
with
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such conviction is incarcerated, on parole, subject to court order or
supervision, or subject to supervision of any agency of a state or the
federal government.
Section 4. Tenure. The Directors, other than those who may be elected
by the holders of any series of Preferred Stock pursuant to the applicable
Certificate of Designations, shall be divided, with respect to the time for
which they severally hold office, into three classes. The initial Class I
Directors shall serve for a term expiring at the first annual meeting of
Stockholders following the filing of this Restated Certificate of
Incorporation; the initial Class II Directors shall serve for a term expiring
at the second annual meeting of Stockholders following the filing of this
Restated Certificate of Incorporation; and the initial Class III Directors
shall serve for a term expiring at the third annual meeting of Stockholders
following the filing of this Restated Certificate of Incorporation. Each
Director shall hold office until his or her successor shall have been duly
elected and qualified. At each annual meeting of Stockholders, commencing with
the first annual meeting after the filing of this Restated Certificate of
Incorporation (i) Directors elected to succeed those Directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of Stockholders after their election, with each Director to hold
office until his or her successor shall have been duly elected and qualified,
and (ii) if authorized by a resolution of the Board of Directors, Directors may
be elected to fill any vacancy on the Board of Directors, regardless of how
such vacancy shall have been created.
Section 5. Vacancies. Subject to applicable law and the rights of the
holders of any series of Preferred Stock, vacancies resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
and newly created directorships resulting from any increase in the authorized
number of Directors, shall be filled only by the affirmative vote of a majority
of the remaining Directors, even if less than a quorum of the Board of
Directors and not, unless so provided by a majority of the Whole Board, by
Stockholders, and Directors so chosen shall hold office for a term expiring at
the annual meeting of Stockholders at which the term of office of the class to
which they have been elected expires and until such Director's successor shall
have been duly elected and qualified. No decrease in the number of authorized
Directors constituting the Whole Board shall shorten the term of any incumbent
Director.
Section 6. Removal. Subject to the rights of the holders of any series
of Preferred Stock, any Director, or the entire Board of Directors, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of at least eighty (80) percent of the combined voting
power of the then outstanding shares of Voting Stock, voting together as a
single class.
Section 7. Rights of Classes Separately to Elect Directors.
Notwithstanding anything else contained in this Restated Certificate of
Incorporation, whenever holders of any one or more series of Preferred Stock
shall have the right, voting separately by class, classes or series, to elect
Directors at any annual or special meeting of Stockholders, the election, term
of office, filling of vacancies and other features of such directorships shall
be governed by the provisions of this Restated Certificate of Incorporation,
including any applicable resolutions of the Board of Directors adopted pursuant
to Article IV hereof. Directors so elected shall not be divided into classes
and shall be elected by such holders annually unless expressly provided
otherwise by those provisions or resolutions, and, during the prescribed terms
of office of those Directors, the Board of Directors shall
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<PAGE> 10
consist of a number of Directors equal to the number of those Directors plus
the number of Directors determined as provided in Section 2 of Article VI.
Section 8. Amendment. Notwithstanding any other provisions of this
Restated Certificate of Incorporation, and notwithstanding that a lesser
percentage may be permitted from time to time by applicable law, no provision
of this Article VI may be altered, amended or repealed in any respect, nor may
any provision inconsistent therewith be adopted, unless such alteration,
amendment, repeal or adoption is approved by the affirmative vote of the
holders of at least eighty (80) percent of the combined voting power of the
then outstanding shares of Voting Stock, voting together as a single class.
ARTICLE VII
Section 1. Director Amendment of By-Laws. In furtherance and not in
limitation of the powers conferred by applicable law, the Board of Directors is
expressly authorized and empowered to make, alter, amend and repeal any or all
of the provisions of the By-Laws of the Corporation by a majority vote at any
regular or special meeting of the Board of Directors or by written consent.
Section 2. Stockholder Amendment of By-Laws. Stockholders may make,
alter, amend and repeal the By-Laws of the Corporation only by the affirmative
vote of the holders of at least eighty (80) percent of the combined voting
power of the then outstanding shares of Voting Stock, voting together as a
single class.
ARTICLE VIII
Section 1. Elimination of Certain Liability of Directors. A Director
of the Corporation shall not be personally liable to the Corporation or its
Stockholders for monetary damages for breach of fiduciary duty as a Director to
the fullest extent authorized by the DGCL, as the same exists or as may
hereafter be amended, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its Stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the Director derived an improper personal benefit. If
the DGCL is amended to authorize corporate action further limiting or
eliminating the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the DGCL, as so amended. No amendment, alteration or repeal
of, nor the adoption of any provision inconsistent with, any provision of this
Section 1 of Article VIII, which shall in any manner increase the actual or
potential liability of any Director of the Corporation, shall apply to or have
any effect on the liability or alleged liability of any such Director for or
with respect to actions or omissions of such Director occurring prior to such
amendment, alteration, repeal or adoption.
Section 2. Indemnification and Insurance.
(a) Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the
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<PAGE> 11
fact that he or she, or a person of whom he or she is the legal
representative, is or was a Director or officer of the Corporation or,
while a Director or officer of the Corporation, is or was serving at
the request of the Corporation as a Director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust
or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a Director, officer, employee or agent or
in any other capacity while serving as a Director, officer, employee
or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the DGCL, as the same exists or may
hereafter be amended, against all expense, liability and loss
(including attorneys' fees, judgments, fines, amounts paid or to be
paid in settlement, and excise taxes or penalties arising under the
Employee Retirement Income Security Act of 1974) reasonably incurred
or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a
Director or officer and shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except
as provided in paragraph (b) hereof, the Corporation shall indemnify
any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the Board of Directors.
The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the DGCL
requires, the payment of such expenses incurred by a Director or
officer in his or her capacity as a Director or officer (and not in
any other capacity in which service was or is rendered by such person
while a Director or officer, including, without limitation, service to
an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such Director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such
Director or officer is not entitled to be indemnified under this
Section or otherwise. The Corporation may, by action of the Board of
Directors, provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing
indemnification of Directors and officers.
(b) Right of Claimant to Bring Suit. If a claim under
paragraph (a) of this Section is not paid in full by the Corporation
within 30 days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and,
if successful in whole or in part, the claimant shall be entitled to
be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a
claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is
required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the
DGCL for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its
directors, independent legal counsel, or its Stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because
he or she has met the applicable standard of conduct set forth in the
DGCL, nor an actual determination by the Corporation (including its
directors, independent
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<PAGE> 12
legal counsel, or its Stockholders) that the claimant has not met such
applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable
standard of conduct. In addition, the claimant shall be presumed to
have met the applicable standard of conduct unless adjudicated
otherwise.
(c) Non-Exclusivity of Rights. The right to indemnification
and the payment of expenses incurred in defending a proceeding in
advance of its final disposition conferred in this Section shall not
be exclusive of any other right which any person may have or hereafter
acquire under any statute, provision of this Restated Certificate of
Incorporation, By-Laws, agreement, vote of Stockholders or
disinterested Directors of the Corporation or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, officer, employee or
agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise against any such expense, liability
or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under
the DGCL.
(e) Continuing Directors. All references in this Article VIII
to a Director shall also be deemed to refer to any such Director
acting in his or her capacity as Continuing Director, as defined in
Article IX.
Section 3. Amendment. No amendment, alteration or repeal of, nor the
adoption of any provision inconsistent with, any provisions of this Article
VIII, which shall in any manner increase the actual or potential liability of
any Corporate Affiliate or shall apply to or have any effect on the liability
or alleged liability of any such Corporate Affiliate for or with respect to
actions or omissions of such Corporate Affiliate occurring prior to such
amendment, alteration, repeal or adoption.
Notwithstanding any other provisions of this Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may be permitted
from time to time by applicable law, no provision of this Article VIII may be
altered, amended or repealed in any respect, nor may any provision inconsistent
therewith be adopted, unless such alteration, amendment, repeal or adoption is
approved by the affirmative vote of the holders of at least eighty (80) percent
of the combined voting power of the then outstanding shares of Voting Stock,
voting together as a single class.
ARTICLE IX
The Board of Directors is expressly authorized to cause the
Corporation to issue rights pursuant to Section 157 of the DGCL and, in that
connection, to enter into any agreements necessary or convenient for such
issuance and to enter into other agreements necessary and convenient to the
conduct of the business of the Corporation. Any such agreement may include
provisions limiting, in certain circumstances, the ability of the Board of
Directors of the Corporation to redeem the securities issued pursuant thereto
or to take other action thereunder or in connection therewith unless there is a
specified number or percentage of Continuing Directors, as defined below, then
in office. Pursuant to Section 141(a) of the DGCL, the Continuing Directors
shall have the power and authority to make all decisions and determinations,
and to exercise or perform such other acts, that any such agreement provides
that such Continuing Directors shall make, exercise or perform. For
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<PAGE> 13
purposes of this Article IX and any such agreement, the term "Continuing
Directors" shall mean (a) those Directors who were members of the Board of
Directors of the Corporation at the time the Corporation entered into such
agreement and any Director who subsequently becomes a member of the Board of
Directors, if such Director's nomination for election to the Board of Directors
is recommended or approved by the majority vote of the Continuing Directors
then in office, or (2) such members of the Board of Directors designated in, or
in the manner provided in, such agreement as Continuing Directors.
ARTICLE X
The Corporation reserves the right at any time from time to time to
amend, alter, change or repeal any provision contained in this Restated
Certificate of Incorporation, and any other provisions authorized by the laws
of the State of Delaware at the time in force may be added or inserted, in the
manner now or hereafter prescribed by applicable law; and all rights,
preferences and privileges of whatsoever nature conferred upon Stockholders,
Directors or any other persons whomsoever by and pursuant to this Restated
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article X.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed by Richard D. Kinder, its Chairman
and Chief Executive Officer, on this ___ day of _____________, 1999.
By:
--------------------------------------
Richard D. Kinder
Chairman and Chief Executive Officer
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<PAGE> 1
EXHIBIT 3.3
FORM
of
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
and
SERIES B JUNIOR PARTICIPATING PREFERRED STOCK
of
KINDER MORGAN, INC.
- --------------------------------------------------------------------------------
(Pursuant to Section 151 of the
Delaware General Corporation Law)
- --------------------------------------------------------------------------------
Kinder Morgan, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (hereinafter called
the "Corporation"), hereby certifies that the following resolution was adopted
by the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on _____________,
1999:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Restated
Certificate of Incorporation of the Corporation (the "Restated Certificate of
Incorporation"), the Board of Directors hereby creates two series of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Section 1. Designation and Amount. The shares of these series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and "Series B Junior Participating Preferred Stock" (the
"Series B Preferred Stock, and, collectively with the Series A
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<PAGE> 2
Preferred Stock, the "Series Preferred Stock") and the number of shares
constituting the Series A Preferred Stock shall be 200,000 and the Series B
Preferred Stock shall be 10,000. Such numbers of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of either series of Series Preferred Stock to
a number less than the number of shares of such series then outstanding plus the
number of shares reserved for issuance upon the exercise of outstanding options,
rights or warrants or upon the conversion of any outstanding securities issued
by the Corporation convertible into such series of Series Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any other stock) ranking prior and superior to the
Series Preferred Stock with respect to dividends, the holders of shares of
Series Preferred Stock shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the last day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series Preferred Stock,
in an amount (if any) per share (rounded to the nearest cent), subject to the
provision for adjustment hereinafter set forth, equal to 1000 times the
aggregate per share amount of all cash dividends, and 1000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of common stock, par
value $0.01 per share (the "Common Stock"), of the Corporation or a subdivision
of the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series Preferred
Stock. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) Dividends due pursuant to paragraph (A) of this Section
shall begin to accrue and be cumulative on outstanding shares of Series
Preferred Stock from the Quarterly Dividend Payment Date next preceding the date
of issue of such shares, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which case
dividends
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<PAGE> 3
on such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
A Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 1000 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided the Restated Certificate of
Incorporation, including any other Certificate of Designations creating a series
of Preferred Stock or any similar stock, or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C) Except as set forth herein, or as otherwise required by
law, holders of Series Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series Preferred Stock as provided in Section 2 are
in arrears, thereafter and until all accrued and
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<PAGE> 4
unpaid dividends and distributions, whether or not declared, on shares of Series
Preferred Stock outstanding shall have been paid in full, the Corporation shall
not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series Preferred Stock, except dividends paid ratably on the Series
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Corporation ranking junior (as
to dividends and upon dissolution, liquidation or winding up) to the
Series Preferred Stock.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein or in
the Restated Certificate of Incorporation, including any Certificate of
Designations creating a series of Preferred Stock or any similar stock, or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation the holders of shares
of Series Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1000 times the aggregate amount to be distributed per share to holders of shares
of Common Stock plus an amount equal to any accrued and unpaid dividends. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction the
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<PAGE> 5
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series Preferred Stock shall at the same time be similarly exchanged or changed
into an amount per share, subject to the provision for adjustment hereinafter
set forth, equal to 1000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged; provided, however,
that if the holders of shares of Common Stock are entitled, in connection with
any such transaction, to receive any voting securities, the holders of the
Series B Preferred Stock shall be entitled to receive securities identical in
all respects to such securities, except that such securities shall be
non-voting. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. Conversion.
(A) Any holder of Series B Preferred Stock shall have the
right, at its option, at any time and from time to time, to convert, subject to
the terms and provisions of this Section 8, any or all of such holder's shares
of Series B Preferred Stock into fully paid and non-assessable shares of Series
A Preferred Stock at the rate (subject to adjustment as provided below) of one
share of Series A Preferred Stock for each share of Series B Preferred Stock
surrendered for conversion; provided, however, if the holder in any such
conversion is subject to the Bank Holding Company Act of 1956, as amended (12
U.S.C. ss. 1841, et. seq.) and the regulations promulgated thereunder
(collectively and including any successor provisions, the "BHCA Act"), such
conversion may be made only if:
(i) the BHCA Act would not prohibit such holder from holding
such shares of Series A Preferred Stock; and
(ii) such shares of Series A Preferred Stock to be received
upon such conversion will be (1) distributed or sold (a) in connection
with any public equity offering registered under the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder
(the "Securities Act"), (b) in a "broker's transaction" (as defined in
Rule 144(g) under the Securities Act) pursuant to Rule 144 under the
Securities Act or any
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<PAGE> 6
similar rule then in force, (c) to a person or group (within the
meaning of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of persons if, after such distribution or sale, such
person or group of persons would not, in the aggregate, own, control or
have the right to acquire more than 2% of the outstanding securities of
the Corporation entitled to vote on the election of directors of the
Corporation, (d) to a person or group (within the meaning of the
Exchange Act) of persons if, prior to such sale, such persons or group
of persons had control of the Corporation, or (2) held, distributed or
sold in any other manner permitted under the BHCA;
provided, further, that if the holder converts any shares of the Series
B Preferred Stock as provided in clauses (i) and (ii) above and any
distribution or sale of the Series A Preferred Stock fails to occur for
any reason, such holder may convert the Series A Preferred Stock into
the Series B Preferred Stock converted in anticipation of such
distribution or sale.
(B) Such conversion right shall be exercised by the surrender
to the Corporation of the shares of the applicable Series B Preferred Stock to
be converted in the manner provided above at any time during usual business
hours at its principal place of business, accompanied by (i) written notice that
the holder elects to convert such shares of Series B Preferred Stock and
specifying the name or names (with address) in which a certificate or
certificates for shares of the Series A Preferred Stock are to be issued; (ii)
if so required by the Corporation, a written instrument or instruments of
transfer in form reasonably satisfactory to the Corporation duly executed by the
holder or its duly authorized legal representative; (iii) transfer tax stamps or
funds therefor, if required pursuant to Section 8(D) hereof, and (iv) a
certificate in form satisfactory to the Corporation stating that the holder has
satisfied all applicable conditions to conversion, including without limitation
the restrictions described in Section 8(A) hereof and the Corporation may rely
upon such Certificate as to the holder's compliance with any such conditions of
restrictions without any investigation by the Corporation as to such matters. As
promptly as practicable after the surrender, as herein provided, of any shares
of Series B Preferred Stock for conversion pursuant to Section 8(A) hereof, the
Corporation shall deliver to or upon the written order of the holder of such
shares of Series B Preferred Stock so surrendered a certificate or certificates
representing the number of fully paid and non-assessable shares of the Series A
Preferred Stock into which such shares of Series B Preferred Stock may be or
have been converted in accordance with the provisions of this Section 8. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date that such shares of Series B Preferred Stock shall have
been surrendered in satisfactory form for conversion, and the person or persons
entitled to receive the shares of Series A Preferred Stock deliverable upon
conversion of such shares of Series B Preferred Stock shall be treated for all
purposes as having become the record holder or holders of such shares of Series
A Preferred Stock at such appropriate time. Notwithstanding the foregoing, a
holder's identification of the person or persons entitled to receive any shares
of Series A Preferred Stock deliverable upon conversion shall not be deemed an
approval by the Corporation of a transfer or conversion that would result in a
violation of any applicable law or restriction on transfer or conversion and
shall not be deemed a waiver by the Corporation or any other person of any right
or restriction regarding any such transfer or conversion.
6
<PAGE> 7
(C) So long as shares of each of the Series A Preferred Stock
and Series B Preferred Stock are outstanding or authorized or reserved for
issuance, the Corporation shall not, without the affirmative vote of the holders
of a majority of the Series A Preferred Stock and the Series B Preferred Stock,
each voting separately as a class, effect any stock split, stock dividend,
reclassification, reorganization, recapitalization, combination or subdivision
or consolidation of Series A Preferred Stock or Series B Preferred Stock unless
the Corporation shall also contemporaneously effect a stock split, stock
dividend, reclassification, reorganization, recapitalization, combination or
subdivision on the same terms with respect to the other class. The Corporation
will not, by amendment of its Restated Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation ,merger, share exchange,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, and will at all times in good faith
assist in the carrying out of all the provisions of this Section (C), and in the
taking of all such action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Series B Preferred Stock against
dilution or other impairment.
(D) The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Series A Preferred Stock on conversion of shares of Series B Preferred Stock
pursuant hereto, provided, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(E) The Corporation shall at all time reserve and keep
available out of its authorized but unissued shares of Series A Preferred Stock,
free of preemptive rights, solely for the purpose of effecting the conversion of
the shares of Series B Preferred Stock, such number of its shares of Series B
Preferred Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series B Preferred Stock into Series A
Preferred Stock, and if at any time the number of authorized but unissued shares
of each class shall not be sufficient to effect the conversion of all then
outstanding shares of the other class, the Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Series A Preferred Stock such number of shares
as shall be sufficient for such purpose.
Section 9. Amendment. The Restated Certificate of Incorporation shall
not be amended in any manner, including in a merger or consolidation, which
would alter, change, or repeal the powers, preferences or special rights of the
Series Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Series
Preferred Stock, voting together as a single class.
Section 10. Rank. The Series Preferred Stock shall rank, with respect
to the payment of dividends and upon liquidation, dissolution and winding up,
junior to all series of Preferred Stock.
7
<PAGE> 1
EXHIBIT 4.1
KINDER MORGAN, INC.
A full statement of the designations, preferences and relative, participating,
optional or other special rights of each class of stock of the Corporation or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights will be furnished by the Corporation, without charge,
to any stockholder who so requests, upon application to the Transfer Agent
named on the face hereof or to the office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -
TEN ENT -
JT TEN -
as tenants in common
as tenants by the entireties
as joint tenants with right
of survivorship and not as tenants
in common
UNIF GIFT MIN ACTE Custodian
(Cust)
(Minor)
under Uniform Gifts to Minors
Act
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney,
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRE-
SPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTER-
ATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
X
(SIGNATURE)
X
(SIGNATURE)
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in a Rights Agreement between Kinder Morgan, Inc. and First Chicago
Trust Company of New York, as Rights Agent, as amended from time to time (the
"Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices of
Kinder Morgan, Inc. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. Kinder Morgan, Inc. will mail to the
holder of this certificate a copy of the Rights Agreement without charge after
receipt of a written request therefor. Under certain circumstances, Rights that
are or were acquired or beneficially owned by Acquiring Persons (as defined in
the Rights Agreement) may become null and void.
<PAGE> 2
C
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
COMMON STOCK
PAR VALUE $0.01 PER SHARE
KINDER MORGAN, INC.
CUSIP 494553 10 0
SEE REVERSE FOR CERTAIN DEFINITIONS
This is to Certify that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Kinder Morgan, Inc. (hereinafter called the Corporation), transferable on the
books of the Corporation by the holder hereof in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
and the shares represented hereby are issued and shall be held subject to all
of the provisions of the CorporationGs Certificate of Incorporation, to all of
which the holder by acceptance hereof assents. This Certificate is not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
Countersigned and Registered:
FIRST CHICAGO TRUST COMPANY OF NEW YORK
as Transfer Agent and Registrar
By:
Authorized Signature
Chairman of the Board
Secretary
<PAGE> 1
THIRD AMENDMENT
THIS THIRD AMENDMENT to the Credit Agreement referred to below (this
"Third Amendment"), is made and entered into as of this 7th day of May, 1999 by
and among KINDER MORGAN, INC., a corporation organized under the laws of
Delaware (the "Borrower"), the Lenders party to the Credit Agreement (as
defined below) and identified on the signature pages hereto, and FIRST UNION
NATIONAL BANK, as Administrative Agent for the Lenders.
Statement of Purpose
The Lenders have extended certain credit facilities to the Borrower
pursuant to the Amended and Restated Credit Agreement dated as of June 18, 1998
as amended by the First Amendment dated as of August 26, 1998 and the Second
Amendment dated as of September 8, 1998 (as so amended and as further amended,
restated, supplemented or otherwise modified, the "Credit Agreement"), by and
among the Borrower, the Lenders and the Administrative Agent.
The Borrower has requested that the Lenders amend the Credit Agreement
to, among other things, modify certain provisions of Article X of the Credit
Agreement and amend the Credit Agreement to extend another Term Loan to the
Borrower in an aggregate principal amount of Sixty-Five Million Dollars
($65,000,000) in order to pay a dividend to the shareholders of the Borrower,
and the Lenders have agreed to do so, but only on the terms and conditions set
forth below in this Third Amendment.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. Definitions. All capitalized undefined terms used in this Third
Amendment shall have the meanings assigned thereto in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is, effective
as of the date hereof and subject to the satisfaction of the conditions
precedent set forth in Section 5 hereof, hereby amended as follows:
(a) Article I is hereby amended in the following manner:
(i) by amending and restating, in their entirety, the
following definitions:
"Additional Term Loan Funding Percentage" shall equal the
corresponding percentage set forth on Schedule 1 hereto.
"Aggregate Commitment" means the aggregate amount of the
Lenders' Commitments hereunder, as such amount may be reduced or
modified at any time or from time to time pursuant to the terms
hereof. On the Third Amendment Effective Date, the Aggregate
Commitment shall be One Hundred Sixty-Five Million Dollars
($165,000,000).
<PAGE> 2
"KMI Dividend" means the collective reference to (a) a
dividend not in excess of Seventy-Five Million Dollars ($75,000,000)
paid to the shareholders of the Borrower in part on the Closing Date
and the remainder during 1998 (the "1998 KMI Dividend") and (b) a
dividend not in excess of Sixty-Five Million Dollars ($65,000,000) to
be paid to the shareholders of the Borrower on the Third Amendment
Effective Date.
"Term Loan Commitment" means (a) as to any Lender, the
obligation of such Lender to make the Term Loans for the account of
the Borrower hereunder in an aggregate principal amount not to exceed
the amount set forth opposite such Lender's name on Schedule 1 hereto,
as such amount may be reduced or modified at any time or from time to
time pursuant to the terms hereof and (b) as to all Lenders, the
aggregate commitment to make Term Loans. The Term Loan Commitment of
all Lenders on the Closing Date shall be Eighty-Five Million Dollars
($85,000,000) and the Term Loan Commitment as of the Third Amendment
Effective Date shall be increased by Sixty-Five Million Dollars
($65,000,000) for a total Term Loan Commitment of One Hundred Fifty
Million Dollars ($150,000,000) for all of the Lenders.
(ii) by inserting in alphabetical order the following
newly defined terms:
"Third Amendment" means that certain Third Amendment to this
Agreement dated as of May 7, 1999 by and among the Borrower, the
Lenders and the Administrative Agent.
"Third Amendment Effective Date" means the date of the Third
Amendment or such later Business Day upon which each condition
described in Section 5 to the Third Amendment shall be satisfied or
waived in all material respects in a manner satisfactory to the
Administrative Agent.
(b) Section 2.7 of the Credit Agreement shall be amended in its
entirety by inserting the following Section 2.7 in lieu thereof:
"SECTION 2.7. Use of Proceeds. The Borrower shall use the
proceeds of the Revolving Credit Loans solely (a) prior to August 19,
1998, for future general corporate purposes in an amount not greater
than $5,600,000, (b) prior to December 31, 1998, to finance
investments permitted by Section 11.3(d), make dividends and
distributions permitted by Section 11.6(e) and pay income taxes and
Interest Expense, (c) on or after December 31, 1998, to finance
investments permitted by Section 11.3(d) and (d) to pay certain fees
and expenses incurred in connection with the transactions contemplated
hereby."
(c) Section 4.1 of the Credit Agreement, Term Loans, is hereby
amended and restated in its entirety to read as set forth below:
Term Loans. Subject to the terms and conditions of this
Agreement, each Lender severally agrees to make (i) a Term Loan to the
Borrower on the Closing Date in a principal amount equal to such
Lender's Term Loan Commitment on the Closing Date
2
<PAGE> 3
and (ii) an additional Term Loan to the Borrower on the Third
Amendment Effective Date in a principal amount equal to such Lender's
Additional Term Loan Funding Percentage of $65,000,000.
(d) Section 4.2(a), Procedure for Advance of Term Loans, is hereby
amended and restated in its entirety to read as set forth below:
(a) The Borrower shall give the Administrative Agent
irrevocable prior written notice in the form attached hereto as
Exhibit C-2 prior to 11:00 a.m. (Charlotte time) on the Closing
Date or, as applicable, the Third Amendment Effective Date
requesting that, as applicable, the Lenders make (a) a Term Loan
in the original principal amount of $85,000,000 as a Base Rate
Loan on the Closing Date and (b) a Term Loan in the original
principal amount of $65,000,000 as a Base Rate Loan on the Third
Amendment Effective Date.
(e) Section 4.2(c), Procedure for Advance of Term Loan, is hereby
amended and restated in its entirety to read as set forth below:
(c) Not later than 1:00 p.m. (Charlotte time) on the
Closing Date or, as applicable, the Third Amendment Effective
Date, each Lender will make available to the Administrative Agent
for the account of the Borrower, at the office of the
Administrative Agent in funds immediately available to the
Administrative Agent, the amount of such Lender's Term Loans. The
Borrower hereby irrevocably authorizes the Administrative Agent
to disburse the proceeds of the Term Loans in immediately
available funds by wire transfer in accordance with the Notice of
Account Designation delivered pursuant to Section 6.2(f). Any
amount borrowed under this Section 4.2 and subsequently repaid or
prepaid may not be reborrowed.
(f) Section 4.6, Use of Proceeds, is hereby amended and restated in
its entirety to read as set forth below:
The Borrower shall use the proceeds of the Term Loans
solely to (a) finance the KMI Dividend; provided, that any
proceeds of the Term Loans not used to pay the 1998 KMI Dividend
on the Closing Date shall be invested in accordance with Section
11.3(b) pending payment of the remaining 1998 KMI Dividend, (b)
repay the Existing Facility and (c) pay certain fees and expenses
incurred in connection with the transactions contemplated hereby.
(g) Article X, Financial Covenants, is hereby amended by inserting
the following paragraph after the last paragraph thereof:
For the purposes of calculating KMI Cash Flow and KMEP
Cash Flow in Sections 10.1 through and including 10.4 with
respect to (i) the Fiscal Quarter
3
<PAGE> 4
ending June 30, 1999, such KMI Cash Flow and KMEP Cash Flow shall
equal such KMI Cash Flow and KMEP Cash Flow for such Fiscal
Quarter times four (4), (ii) the Fiscal Quarter ending September
30, 1999, such KMI Cash Flow and KMEP Cash Flow shall equal such
KMI Cash Flow and KMEP Cash Flow for the period of two (2)
consecutive Fiscal Quarters ending on such Fiscal Quarter end
times two (2) and (iii) for the Fiscal Quarter ending December
31, 1999, such KMI Cash Flow and KMEP Cash Flow shall equal such
KMI Cash Flow and KMEP Cash Flow for the period of three (3)
consecutive Fiscal Quarters ending on such Fiscal Quarter end
times four-thirds (4/3).
3. Amended and Restated Term Note. Each Term Note executed on the
Closing Date shall be replaced with an Amended and Restated Term Note dated as
of the Third Amendment Effective Date in the aggregate principal amount of One
Hundred Fifty Million Dollars ($150,000,000) (the "Amended and Restated Term
Notes").
4. Update to Schedule 1. Schedule1 attached hereto hereby amends and
replaces in its entirety Schedule 1 attached to the Credit Agreement.
5. Conditions of Effectiveness. This Third Amendment shall become
effective when, and only when, the Administrative Agent shall have received the
following, in form and substance satisfactory to the Administrative Agent:
(a) Counterparts of this Third Amendment executed by the
Borrower, the Administrative Agent and each of the Lenders.
(b) An executed original Amended and Restated Term Note made
payable to each Lender in an amount equal to such Lender's Term Loan
Commitment.
(c) Certified copies of (i) the resolutions of the Board of
Directors of the Borrower approving this Third Amendment and (ii) all
documents, evidencing other necessary corporate action and
governmental approvals, if any, with respect to this Third Amendment
and the matters contemplated hereby.
(d) A certificate of the Secretary or an Assistant Secretary of
the Borrower certifying (i) that the charter documents and the bylaws
of the Borrower delivered on the Closing Date have not been amended or
modified in any respect, and (ii) as to the incumbency and the names
and true signatures of its officers authorized to sign this Third
Amendment to which it is a party and other documents to be delivered
hereunder.
(e) A certificate as of a recent date of the good standing of the
Borrower under the laws of its jurisdiction of organization.
(f) A favorable opinion of Morrison & Hecker, L.L.P., counsel to
the Borrower, addressed to the Administrative Agent and the Lenders
with respect to the Borrower, the Third Amendment, the Loan Documents
and as to such other matters as the Administrative Agent or any Lender
may reasonably request.
4
<PAGE> 5
6. Limited Amendment. Except as expressly amended herein, the Credit
Agreement and each other Loan Document shall continue to be, and shall remain,
in full force and effect. This Third Amendment shall not be deemed (a) to be a
waiver of, or consent to, or a modification or amendment of, any other term or
condition of the Credit Agreement or any other Loan Document or (b) to
prejudice any other right or rights which the Administrative Agent or Lenders
may now have or may have in the future under or in connection with the Credit
Agreement or the other Loan Documents or any of the instruments or agreements
referred to therein, as the same may be amended, restated or otherwise modified
from time to time.
7. Representations and Warranties. By its execution hereof, the
Borrower hereby certifies on behalf of itself and its Subsidiaries that each of
the representations and warranties set forth in the Credit Agreement and the
other Loan Documents is true and correct as of the date hereof as if fully set
forth herein (except for any such representations and warranties made as of a
specific date which shall be true and correct as of such date) and that as of
the date hereof no Default or Event of Default has occurred and is continuing.
8. Governing Law. This Third Amendment shall be governed by and
construed in accordance with the laws of the State of North Carolina.
9. Counterparts. This Third Amendment may be executed in separate
counterparts, each of which when executed and delivered is an original but all
of which taken together constitute one and the same instrument.
[Signature Pages Follow]
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be duly executed as of the date and year first above written.
[CORPORATE SEAL] KINDER MORGAN, INC.,
as Borrower
By
--------------------------------------
Name:
--------------------------------
Title:
-------------------------------
FIRST UNION NATIONAL BANK, as
Administrative Agent and Lender
By
--------------------------------------
Name:
--------------------------------
Title:
-------------------------------
[Third Amendment]
<PAGE> 7
LENDERS:
SOCIETE GENERALE, SOUTHWEST AGENCY
By
--------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 8
SENIOR DEBT PORTFOLIO
By:
-------------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 9
AMARA-2 FINANCE LTD.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 10
CERES FINANCE LTD.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 11
AERIES FINANCE LTD.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 12
CAPTIVA FINANCE LTD.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 13
ELC (CAYMAN) LTD.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 14
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 15
PILGRIM PRIME RATE TRUST
By: PILGRIM INVESTMENTS, INC.
as its Investment Manager
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 16
PILGRIM AMERICA HIGH INCOME
INVESTMENTS LTD.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
[SIGNATURE PAGES CONTINUE]
[Third Amendment]
<PAGE> 17
SCHEDULE 1
LENDERS AND TERM LOAN COMMITMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL TERM LOAN
LENDER FUNDING PERCENTAGE TERM LOAN COMMITMENT TERM LOAN PERCENTAGE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aeries Finance Ltd. 0.0000000000% $1,250,000 .8333333333
c/o Stanfield Capital Partners
330 Madison Avenue, 27th Floor
New York, NY 10017
Attention: Christopher A. Bondy
Telephone: (212) 284-4304
Telecopy: (212) 284-4320
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
Amara-2 Finance Ltd. 0.0000000000% $1,500,000 1.0000000000%
c/o Stanfield Capital Partners
330 Madison Avenue, 27th Floor
New York, NY 10017
Attention: Christopher A. Bondy
Telephone: (212) 284-4304
Telecopy: (212) 284-4320
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
Captiva Finance Ltd. 0.0000000000% $1,250,000 .8333333333
c/o Stanfield Capital Partners
330 Madison Avenue, 27th Floor
New York, NY 10017
Attention: Christopher A. Bondy
Telephone: (212) 284-4304
Telecopy: (212) 284-4320
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
Ceres Finance Ltd. 0.0000000000% $3,500,000 2.333333333%
c/o Stanfield Capital Partners
330 Madison Avenue, 27th Floor
New York, NY 10017
Attention: Christopher A. Bondy
Telephone: (212) 284-4304
Telecopy: (212) 284-4320
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
ELC (Cayman) Ltd. 0.0000000000% $7,500,000 5.0000000000%
One First Union Center, TW-10
301 South College Street
Charlotte, NC 28288-0743
Attention: Roshan White
Telephone No. (704) 383-9380
Telecopy No.: (704) 383-1507
Email: [email protected]
</TABLE>
<PAGE> 18
<TABLE>
Schedule 1 - cont.
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
First Union National Bank 100.0000000000% $75,000,000 50.0000000000%
c/oFirst Union Capital Partners
One First Union Center
301 South College Street, 5th Floor
Charlotte, NC 28288-0732
Attention: Ted A. Gardner
Telephone No.: (704) 374-4769
Telecopy No.: (704) 374-6711
- ------------------------------------------------------------------------------------------------------------------------------
Pilgrim America Prime Rate Trust 0.0000000000% $7,500,000 5.0000000000%
40 N. Central Avenue, Suite 1200
Phoenix, AZ 85004
Attention: Robert Wilson
Telephone: (602) 417-8128
Telecopy: (602) 417-8327
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
Pilgrim America High Income Investments Ltd. 0.0000000000% $7,500,000 5.0000000000%
40 N. Central Avenue, Suite 1200
Phoenix, AZ 85004
Attention: Robert Wilson
Telephone: (602) 417-8128
Telecopy: (602) 417-8327
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
The Prudential Insurance Company of America 0.0000000000% $15,000,000 10.0000000000%
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Attention: Greg Bondick
Telephone: (214) 720-6206
Telecopy: (214) 720-6299
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
Senior Debt Portfolio 0.0000000000% $15,000,000 10.0000000000%
c/o Eaton Vance
The Eaton Vance Building
255 State Street
Boston, MA 02109
Attention: Prime Rate, 8th Floor
Attention: Gretchen Burgstresser
Telephone: (617) 654-8404
Telecopy: (617) 695-9594
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
Societe Generale, Southwest Agency 0.0000000000% $15,000,000 10.0000000000%
1111 Bagby Street #2020
Houston, TX 77002
Attention: Richard Gould*
Telephone: (713) 759-6324
Telecopy: (713) 650-0824
E-mail: [email protected]
- ------------------------------------------------------------------------------------------------------------------------------
Total: 100.0000000000% $150,000,000 100.0000000000%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 19
Schedule 1 - cont.
LENDERS AND REVOLVING CREDIT COMMITMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
REVOLVING CREDIT REVOLVING CREDIT
LENDER COMMITMENT COMMITMENT PERCENTAGE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First Union National Bank $15,000,000 100.0000000000%
c/o First Union Capital Partners
One First Union Center
301 South College Street, 5th Floor
Charlotte, NC 28288-0732
Attention: Ted A. Gardner
Telephone No.: (704) 374-4769
Telecopy No.: (704) 374-6711
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 4.15
- --------------------------------------------------------------------------------
KINDER MORGAN, INC.
and
FIRST CHICAGO TRUST COMPANY OF NEW YORK,
as Rights Agent
Rights Agreement
Dated as of ________________, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Certain Definitions.............................................................................1
Section 2. Appointment of Rights Agent.....................................................................7
Section 3. Issue of Right Certificates.....................................................................7
Section 4. Form of Right Certificates......................................................................9
Section 5. Countersignature and Registration..............................................................10
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated,
Destroyed, Lost or Stolen Right Certificates...................................................11
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights..................................12
Section 8. Cancellation and Destruction of Right Certificates.............................................14
Section 9. Status and Availability of Preferred Shares....................................................14
Section 10. Preferred Shares Record Date...................................................................15
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.............................16
Section 12. Certificate of Adjustment......................................................................29
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power...........................29
Section 14. Fractional Rights and Fractional Shares........................................................31
Section 15. Rights of Action...............................................................................33
Section 16. Agreement of Right Holders.....................................................................34
Section 17. Right Certificate Holder Not Deemed a Stockholder..............................................35
Section 18. Concerning the Rights Agent....................................................................35
Section 19. Merger or Consolidation or Change of Name of Rights Agent......................................36
Section 20. Duties of Rights Agent.........................................................................37
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
Section 21. Change of Rights Agent.........................................................................41
Section 22. Issuance of New Right Certificates.............................................................42
Section 23. Redemption.....................................................................................42
Section 24. Exchange.......................................................................................44
Section 25. Notice of Certain Events.......................................................................46
Section 26. Notices........................................................................................47
Section 27. Supplements and Amendments.....................................................................48
Section 28. Successors.....................................................................................49
Section 29. Benefits of this Agreement.....................................................................49
Section 30. Severability...................................................................................49
Section 31. Governing Law..................................................................................50
Section 32. Counterparts...................................................................................50
Section 33. Descriptive Headings...........................................................................50
Section 34. Administration.................................................................................50
Exhibit A.......................................................................................................A-1
Exhibit B.......................................................................................................B-1
Exhibit C.......................................................................................................C-1
</TABLE>
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<PAGE> 4
RIGHTS AGREEMENT
Agreement, dated as of ________________, 1999, between Kinder Morgan,
Inc., a Delaware corporation (the "Company"), and First Chicago Trust Company of
New York (the "Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each share of
common stock, par value $0.01 per share, of the Company (a "Voting Common
Share") and each share of non-voting convertible common stock, par value $0.01
per share, of the Company (a "Non-Voting Common Share") outstanding on the Close
of Business on ____________________, 1999 (the "Record Date") and has authorized
the issuance of one Right with respect to each additional Voting Common Share
and Non-Voting Common Share that shall become outstanding between the Record
Date and the earliest of the Close of the Business on the Distribution Date, the
Redemption Date and the Close of Business on the Final Expiration Date, each
Right distributed or issued in respect of a Voting Common Share representing the
right to purchase one one-thousandth of a share of Series A Preferred Stock (as
hereinafter defined) and each Right distributed or issued in respect of a
Non-Voting Common Share representing the Right to purchase one one-thousandth of
a Share of Series B Preferred Stock (as hereinafter defined), or, in either
case, such different amount and/or kind of securities as shall be hereinafter
provided.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
<PAGE> 5
"Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the Voting Common Shares of the Company then outstanding but
shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii) any
employee benefit plan of the Company or any Subsidiary of the Company, (iv) any
entity holding Voting Common Shares for or pursuant to the terms of any such
employee benefit plan, or (v) any Grandfathered Stockholder. Notwithstanding the
foregoing, (1) no Person shall become an "Acquiring Person" as the result of an
acquisition of Voting Common Shares by the Company which, by reducing the number
of shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 15% or more of the Voting Common Shares of the Company
then outstanding; provided, however, that if a Person shall so become the
Beneficial Owner of 15% or more of the Voting Common Shares of the Company then
outstanding by reason of an acquisition of Voting Common Shares by the Company
and shall, after such share purchases by the Company, become the Beneficial
Owner of an additional 1% of the outstanding Voting Common Shares of the
Company, then such Person shall be deemed to be an "Acquiring Person"; (2) no
Person shall become an "Acquiring Person" as the result of a transfer of Voting
Common Shares to such Person by a Grandfathered Stockholder; provided, however,
that if a Person who would otherwise be an Acquiring Person but for the
provisions of this clause (2), shall, after the transfer to such Person of
shares of Voting Common Stock by such Grandfathered Stockholder, become the
Beneficial Owner of an additional 1% of the outstanding Voting Common Shares of
the Company, then such Person shall be deemed to be an "Acquiring Person"; and
(3) if the Board of Directors of the Company determines in good faith that a
Person who would otherwise be an "Acquiring Person," as defined pursuant to the
foregoing provisions of this paragraph, has become
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<PAGE> 6
such inadvertently, and such Person divests as promptly as practicable a
sufficient number of Voting Common Shares so that such Person would no longer be
an "Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph, then such Person shall not be deemed to have become an "Acquiring
Person" for any purposes of this Agreement.
"Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on the date of this Agreement.
A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with
respect to a bona fide public offering of securities), written or
otherwise, or upon the exercise of conversion rights, exchange rights,
rights (other than the Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed to be the
Beneficial Owner of, or to beneficially own, securities tendered
pursuant to a tender or exchange offer made pursuant to, and in
accordance with, the applicable rules and regulations promulgated under
the Exchange Act by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted
for purchase or exchange; or (B) the right to vote
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<PAGE> 7
pursuant to any agreement, arrangement or understanding; provided,
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, any security if the agreement, arrangement or
understanding to vote such security (1) arises solely from a revocable
proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act and
(2) is not also then reportable on Schedule 13D under the Exchange Act
(or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities), written or otherwise, for the purpose
of acquiring, holding, voting (except to the extent contemplated by the
proviso to Section (B) of the immediately preceding paragraph (ii)) or
disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
"Business Day" shall mean any day other than a Saturday, Sunday, or a
day on which banking institutions in the State of Texas are authorized or
obligated by law or executive order to close.
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<PAGE> 8
"Close of Business" on any given date shall mean 5:00 P.M., Houston,
Texas time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., Houston, Texas time, on the next succeeding
Business Day.
"Common Shares" when used with reference to the Company shall mean the
Voting Common Shares or Non-Voting Common Shares. "Common Shares" when used with
reference to any Person other than the Company shall mean the capital stock (or
equity interest) with the greatest voting power of such other Person or, if such
other Person is a Subsidiary of another Person, the Person or Persons which
ultimately control such first-mentioned Person.
"common stock equivalents" shall have the meaning set forth in
Section 11(a)(iii)(B)(3) hereof.
"Company" shall have the meaning set forth in the introduction hereof.
"Current Value" shall have the meaning set forth in Section
11(a)(iii)(A)(1) hereof.
"Distribution Date" shall have the meaning set forth in Section 3(a)
hereof.
"equivalent preferred shares" shall have the meaning set forth in
Section 11(b) hereof.
"Exchange Ratio" shall have the meaning set forth in Section 24(a)
hereof.
"Final Expiration Date" shall mean __________________ _______, 2009.
"Grandfathered Stockholder" shall mean (i) Richard D. Kinder ("Kinder")
or William V. Morgan ("Morgan"), and their Affiliates and Associates.
"Person" shall mean any individual, firm, corporation, partnership,
limited partnership, limited liability partnership, business trust, limited
liability company, unincorporated association or other entity, and shall include
any successor (by merger or otherwise) of such entity.
"Preferred Shares" shall mean shares of Series A Preferred Stock or
Series B Preferred Stock.
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<PAGE> 9
"Purchase Price" shall have the meaning set forth in Section 7(b)
hereof.
"Redemption Date" shall have the meaning set forth in Section 23
hereof.
"Right" shall have the meaning set forth in the introduction hereof.
"Rights Agent" shall have the meaning set forth in the introduction
hereof.
"Right Certificate" shall mean a certificate evidencing a Series A
Right or a Series B Right in substantially the form of Exhibit B hereto.
"Series A Preferred Stock" shall mean the Series A Junior Participating
Preferred Stock, par value $0.01 per share, of the Company having such rights
and preferences upon adoption as are set forth in the form of Certificate of
Designations set forth in Exhibit A hereto.
"Series A Right" shall mean a Right to purchase shares of Series A
Preferred Stock, subject to adjustment as set forth herein.
"Series B Preferred Stock" shall mean the Series B Junior Participating
Preferred Stock, par value $0.01 per share, of the Company having such rights
and preferences upon adoption as are set forth in the form of Certificate of
Designations set forth as Exhibit A hereto.
"Series B Right" shall mean a Right to purchase shares of Series B
Preferred Stock, subject to adjustment as set forth herein.
"Section 11(a)(ii) Trigger Date" shall have the meaning set forth in
Section 11(a)(iii) hereof.
"Shares Acquisition Date" shall mean the earlier of the date of (i) the
public announcement by the Company or an Acquiring Person that an Acquiring
Person has become such or (ii) the public disclosure of facts by the Company or
an Acquiring Person indicating that an Acquiring Person has become such.
"Spread" shall have the meaning set forth in Section 11(a)(iii)(A)
hereof.
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<PAGE> 10
"Subsidiary" of any Person shall mean any Person of which a majority of
the voting power of the voting equity securities or equity interest is owned,
directly or indirectly, by such Person.
"Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Summary of Rights" shall mean the Summary of Rights to Purchase
Preferred Shares in substantially the form of Exhibit C hereto.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Right Certificates.
(A) Until the earlier of (i) the tenth day after the Shares
Acquisition Date or (ii) the tenth Business Day (or such later date as may be
determined by action of the Board of Directors prior to such time as any Person
becomes an Acquiring Person) after the date of the commencement by any Person
of, or of the first public announcement of the intention of any Person to
commence, a tender or exchange offer the consummation of which would result in
any Person becoming an Acquiring Person (such earlier date being referred to
herein as the "Distribution Date"), (x) the Rights will be evidenced (subject to
the provisions of Section 3(b) hereof) by the certificates for Common Shares
registered in the names of the holders thereof (which certificates shall also be
deemed to be Right Certificates) and not by separate Right Certificates, and (y)
the right to receive Right Certificates will be transferable only in connection
with the transfer of Common Shares. As
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<PAGE> 11
soon as practicable after the Distribution Date, the Company will prepare and
execute, the Rights Agent will countersign, and the Company will send or cause
to be sent (and the Rights Agent will, if requested, at the expense of the
Company, send) by first-class, insured, postage-prepaid mail, to each record
holder of Common Shares as of the Close of Business on the Distribution Date, at
the address of such holder shown on the records of the Company, a Right
Certificate evidencing one Right for each Common Share so held. As of the
Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(B) On the Record Date, or as soon as practicable thereafter,
the Company will send a copy of the Summary of Rights by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the Close of
Business on the Record Date, at the address of such holder shown on the records
of the Company. With respect to certificates for Common Shares outstanding as of
the Record Date, until the Close of Business on the Distribution Date, the
Rights will be evidenced by such certificates registered in the names of the
holders thereof together with a copy of the Summary of Rights attached thereto.
Until the Close of Business on the Distribution Date (or the earlier of the
Redemption Date or the Close of Business on the Final Expiration Date), the
surrender for transfer of any certificate for Common Shares outstanding on the
Record Date, with or without a copy of the Summary of Rights attached thereto,
shall also constitute the transfer of the Rights associated with the Common
Shares evidenced thereby.
(C) Certificates for Common Shares which become outstanding
(including, without limitation, reacquired Common Shares referred to in the last
sentence of this paragraph (c)) after the Record Date but prior to the earliest
of the Close of Business on the Distribution Date,
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<PAGE> 12
the Redemption Date or the Close of Business on the Final Expiration Date shall
have impressed on, printed on, written on or otherwise affixed to them the
following legend:
This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in a Rights Agreement between Kinder
Morgan, Inc. and First Chicago Trust Company of New York, as Rights
Agent, as amended from time to time (the "Rights Agreement"), the terms
of which are hereby incorporated herein by reference and a copy of
which is on file at the principal executive offices of Kinder Morgan,
Inc. Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. Kinder Morgan, Inc. will mail
to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. Under
certain circumstances, Rights that are or were acquired or beneficially
owned by Acquiring Persons (as defined in the Rights Agreement) may
become null and void.
With respect to such certificates containing the foregoing legend,
until the Close of Business on the Distribution Date, the Rights associated with
the Common Shares represented by certificates shall be evidenced by such
certificates alone, and the surrender for transfer of any such certificate shall
also constitute the transfer of the Rights associated with the Common Shares
represented thereby. In the event that the Company purchases or acquires any
Common Shares after the Record Date but prior to the Close of Business on the
Distribution Date, any Rights associated with such Common Shares shall be deemed
canceled and retired so that the Company shall not be entitled to exercise any
Rights associated with the Common Shares which are no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit B hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any
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<PAGE> 13
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the other provisions of this
Agreement, the Right Certificates shall entitle the holders thereof to purchase
such number of one one-thousandths of a Preferred Share as shall be set forth
therein at the Purchase Price, but the number of one one-thousandths of a
Preferred Share and the Purchase Price shall be subject to adjustment as
provided herein.
Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Chief Executive Officer, its President, any of its Vice Presidents, or its
Treasurer, either manually or by facsimile signature, shall have affixed thereto
the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or any Assistant Secretary of the Company, either manually or by
facsimile signature. The Right Certificates shall be countersigned by the Rights
Agent and shall not be valid for any purpose unless so countersigned, either
manually or by facsimile. In case any officer of the Company who shall have
signed any of the Right Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Right Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the person who signed such Right Certificates had not ceased to
be such officer of the Company; and any Right Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Right Certificate, shall be a proper officer of the Company to sign such
Right Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration of the transfer of the
Right Certificates issued hereunder.
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<PAGE> 14
Such books shall show the names and addresses of the respective holders of the
Right Certificates, the number of Rights evidenced on its face by each of the
Right Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 14 hereof, at any time after the Close of Business
on the Distribution Date, and prior to the earlier of the Redemption Date or the
Close of Business on the Final Expiration Date, any Right Certificate or Right
Certificates (other than Right Certificates representing Rights that have become
void pursuant to Section 11(a)(ii) hereof or that have been exchanged pursuant
to Section 24 hereof) may be transferred, split up, combined or exchanged for
another Right Certificate or Right Certificates, entitling the registered holder
to purchase a like number of one one-thousandths of a Preferred Share as the
Right Certificate or Right Certificates surrendered then entitled such holder to
purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Right Certificate or Right Certificates shall make such request in
writing delivered to the Rights Agent, and shall surrender the Right Certificate
or Right Certificates to be transferred, split up, combined or exchanged at the
principal office of the Rights Agent. Thereupon the Rights Agent shall
countersign and deliver to the person entitled thereto a Right Certificate or
Right Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient for any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or
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<PAGE> 15
destruction, of indemnity or security reasonably satisfactory to them, and, at
the Company's request, reimbursement to the Company and the Rights Agent of all
reasonable expenses incidental thereto, and upon surrender to the Rights Agent
and cancellation of the Right Certificate if mutilated, the Company will make
and deliver a new Right Certificate of like tenor to the Rights Agent for
delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(A) The registered holder of any Right Certificate (other than
a holder whose Rights have become void pursuant to Section 11(a)(ii) hereof or
have been exchanged pursuant to Section 24 hereof) may exercise the Rights
evidenced thereby in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
on the reverse side thereof duly executed, to the Rights Agent at its principal
office, together with payment of the Purchase Price for each one one-thousandth
of a Preferred Share as to which the Rights are exercised, prior to the earliest
of (i) the Close of Business on the Final Expiration Date, (ii) the time at
which the right to exercise the Rights terminates pursuant to Section 23 hereof,
or (iii) the time at which the right to exercise the Rights terminates pursuant
to Section 24 hereof.
(B) The purchase price for each one one-thousandth of a
Preferred Share to be purchased upon the exercise of a Right shall initially be
________________ Dollars ($________) (the "Purchase Price"), shall be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof and shall
be payable in lawful money of the United States of America in accordance with
paragraph (c) below.
(C) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase and certificate duly
executed, accompanied by payment of the Purchase
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<PAGE> 16
Price for the number of one one-thousandths of a Preferred Share to be purchased
and an amount equal to any applicable transfer tax required to be paid by the
holder of such Right Certificate in accordance with Section 9 hereof by cash,
certified check, cashier's check or money order payable to the order of the
Company, the Rights Agent shall thereupon promptly (i) (A) requisition from any
transfer agent of the Preferred Shares certificates for the number of one
one-thousandths of a Preferred Share to be purchased and the Company hereby
irrevocably authorizes its transfer agent to comply with all such requests, or
(B) requisition from any depositary agent for the Preferred Shares depositary
receipts representing such number of one one-thousandths of a Preferred Share as
are to be purchased (in which case certificates for the Preferred Shares
represented by such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company hereby directs the depositary agent to comply
with such request, (ii) when appropriate, requisition from the Company the
amount of cash to be paid in lieu of issuance of fractional Preferred Shares in
accordance with Section 14 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Right Certificate, registered in such name or names as
may be designated by such holder and (iv) when appropriate, after receipt,
deliver such cash to or upon the order of the registered holder of such Right
Certificate.
(D) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 14 hereof.
(E) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered
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<PAGE> 17
holder upon the occurrence of any purported exercise as set forth in this
Section 7 unless such registered holder shall have (i) completed and signed the
certificate following the form of election to purchase set forth on the reverse
side of the Right Certificate surrendered for such exercise and (ii) provided
such additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all canceled Right Certificates to the Company, or shall, at the written request
of the Company, destroy such canceled Right Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. Status and Availability of Preferred Shares.
(A) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all Preferred Shares delivered
upon exercise of Rights shall, at the time of delivery of the certificates for
such Preferred Shares (subject to payment of the Purchase Price), be duly and
validly authorized and issued and fully paid and non-assessable shares.
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<PAGE> 18
(B) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Right
Certificates or of any Preferred Shares upon the exercise of Rights. The Company
shall not, however, be required to pay any transfer tax which may be payable in
respect of any transfer or delivery of Right Certificates to a person other
than, or the issuance or delivery of certificates or depositary receipts for the
Preferred Shares in a name other than that of, the registered holder of the
Right Certificate evidencing Rights surrendered for exercise or to issue or to
deliver any certificates or depositary receipts for Preferred Shares upon the
exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company's reasonable satisfaction that
no such tax is due.
(C) The Company covenants and agrees that it will cause to be
reserved and kept available, out of its authorized and unissued Preferred Shares
or any Preferred Shares held in its treasury, the number of Preferred Shares
that will be sufficient to permit the exercise in full of all outstanding Rights
in accordance with Section 7 hereof.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made.
Prior to the exercise of the Rights evidenced thereby, the holder of a Right
Certificate shall not be entitled to any rights of a holder of Preferred Shares
for which the Rights shall be exercisable, including, without
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<PAGE> 19
limitation, the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(A)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Shares
payable in Preferred Shares, (B) subdivide the outstanding Preferred
Shares, (C) combine the outstanding Preferred Shares into a smaller
number of Preferred Shares or (D) issue any shares of its capital stock
in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective
date of such subdivision, combination or reclassification, and the
number and kind of shares of capital stock issuable on such date, shall
be proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive the aggregate number and
kind of shares of capital stock which, if such Right had been exercised
immediately prior to such date, he would have owned upon such exercise
and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification; provided, however, that in no event
shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the
Company issuable upon exercise of one Right. So long as both
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<PAGE> 20
Series A Rights and Series B Rights are outstanding, the Corporation
shall not effect any of the actions set forth in Clauses (A), (B), (C)
or (D) of this paragraph with respect to either the Series A Preferred
Stock or the Series B Preferred Stock unless the Corporation shall also
contemporaneously effect a like transaction with respect to the other
such series; provided, however, that in the event that such a
transaction is effected with respect to one such Series But no such
shares of the other Series Are outstanding, the Purchase Price in
effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination or reclassification,
and the number and kind of shares of capital stock issuable upon such
date, shall be proportionately adjusted with respect to the holders of
Rights exercisable for shares of such series that are not outstanding
as if such a dividend, subdivision, combination or reclassification had
been effected with respect to the shares of such series.
(ii) Subject to the following paragraph of this subparagraph
(ii) and to Section 24 of this Agreement, in the event any Person shall
become an Acquiring Person, each holder of a Right shall thereafter
have a right to receive, upon exercise thereof at a price equal to the
then current Purchase Price multiplied by the number of one
one-thousandths of a Preferred Share for which a Right is then
exercisable, in accordance with the terms of this Agreement and in lieu
of Preferred Shares, such number of (x) Voting Common Shares in the
case of Series A Rights and (y) Non-Voting Common Shares in the case of
Series B Rights as shall, in either case, equal the result obtained by
(x) multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is then
exercisable and dividing that product by (y) 50% of the then current
per share market price
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<PAGE> 21
of the Company's Voting Common Shares (determined pursuant to Section
11(d) hereof) on the date such Person became an Acquiring Person. In
the event that any Person shall become an Acquiring Person and the
Rights shall then be outstanding, the Company shall not take any action
that would eliminate or diminish the benefits intended to be afforded
by the Rights.
From and after the occurrence of such an event, any Rights
that are or were acquired or beneficially owned by such Acquiring
Person (or any Associate or Affiliate of such Acquiring Person) on or
after the earlier of (x) the date of such event and (y) the
Distribution Date shall be void and any holder of such Rights shall
thereafter have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate shall be issued pursuant to
Section 3 that represents Rights beneficially owned by an Acquiring
Person whose Rights would be void pursuant to the preceding sentence or
any Associate or Affiliate thereof; no Right Certificate shall be
issued at any time upon the transfer of any Rights to an Acquiring
Person whose Rights would be void pursuant to the preceding sentence or
any Associate or Affiliate thereof or to any nominee of such Acquiring
Person, Associate or Affiliate; and any Right Certificate delivered to
the Rights Agent for transfer to an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or
Affiliate thereof shall be canceled.
(iii) In the event that the number of Common Shares which are
authorized by the Company's certificate of incorporation and not
outstanding or subscribed for, or reserved or
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<PAGE> 22
otherwise committed for issuance for purposes other than upon exercise
of the Rights, are not sufficient to permit the holder of each Right to
purchase the number of Common Shares to which he would be entitled upon
the exercise in full of the Rights in accordance with the foregoing
subparagraph (ii) of paragraph (a) of this Section 11, or should the
Board of Directors so elect, the Company shall: (A) determine the
excess of (1) the value of the Common Shares issuable upon the exercise
of a Right (calculated as provided in the last sentence of this
subparagraph (iii)) pursuant to Section 11(a)(ii) hereof (the "Current
Value") over (2) the Purchase Price (such excess, the "Spread"), and
(B) with respect to each Right, make adequate provision to substitute
for such Common Shares, upon payment of the applicable Purchase Price,
any one or more of the following having an aggregate value determined
by the Board of Directors to be equal to the Current Value: (1) cash,
(2) a reduction in the Purchase Price, (3) Common Shares or other
equity securities of the Company (including, without limitation,
shares, or units of shares, of preferred stock which the Board of
Directors of the Company has determined to have the same value as
shares of Common Stock (such shares of preferred stock, "common stock
equivalents")), (4) debt securities of the Company, or (5) other
assets; provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within thirty
(30) days following the first occurrence of an event triggering the
rights to purchase Common Shares described in Section 11(a)(ii) (the
"Section 11(a)(ii) Trigger Date"), then the Company shall be obligated
to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, shares of Common Stock (to the
extent available) and then, if necessary, cash, which shares and cash
have an aggregate value equal
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<PAGE> 23
to the Spread. If the Board of Directors of the Company shall determine
in good faith that it is likely that sufficient additional Common
Shares could be authorized for issuance upon exercise in full of the
Rights, the thirty (30) day period set forth above may be extended to
the extent necessary, but not more than ninety (90) days after the
Section 11(a)(ii) Trigger Date, in order that the Company may seek
stockholder approval for the authorization of such additional shares
(such period, as it may be extended, the "Substitution Period"). To the
extent that the Company determines that some action need be taken
pursuant to the first and/or second sentences of this Section
11(a)(iii), the Company (x) shall provide, subject to Section 7(e)
hereof and the last paragraph of Section 11(a)(ii) hereof, that such
action shall apply uniformly to all outstanding Rights; provided,
however, that in the event any security is issued in lieu of Common
Shares, any such securities to be issued to the holders of Series B
Rights shall be non-voting, even if the securities issued to the
holders of the Series A Rights are voting securities, but the terms of
the securities issued to the holders of the Series A Rights and the
Series B Rights shall be identical with respect to all other matters,
and (y) may suspend the exercisability of the Rights until the
expiration of the Substitution Period in order to seek any
authorization of additional shares and/or to decide the appropriate
form of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall make a public announcement, and shall deliver to the
Rights Agent a statement, stating that the exercisability of the Rights
has been temporarily suspended. At such time as the suspension is no
longer in effect, the Company shall make another public announcement,
and deliver to the Rights Agent a statement, so stating. For purposes
of this Section 11(a)(iii), the value
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<PAGE> 24
of the Common Shares shall be the current per share market price (as
determined pursuant to Section 11(d)(i) hereof) of the Voting Common
Shares on the Section 11(a)(ii) Trigger Date and the value of any
common stock equivalent shall be deemed to have the same value as the
Common Shares on such date.
(B) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of either series of
Preferred Shares entitling them (for a period expiring within 45 calendar days
after such record date) to subscribe for or purchase Preferred Shares (or shares
having the same rights, privileges and preferences as the Preferred Shares
("equivalent preferred shares")) or securities convertible into Preferred Shares
or equivalent preferred shares at a price per Preferred Share or equivalent
preferred share (or having a conversion price per share, if a security
convertible into Preferred Shares or equivalent preferred shares) less than the
then current per share market price of the Preferred Shares (as defined in
Section 11(d)) on such record date, the Purchase Price to be in effect after
such record date shall be adjusted by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of Preferred Shares outstanding on such record date plus the
number of Preferred Shares which the aggregate offering price of the total
number of Preferred Shares and/or equivalent preferred shares so to be offered
(and/or the aggregate initial conversion price of the convertible securities so
to be offered) would purchase at such current market price and the denominator
of which shall be the number of Preferred Shares outstanding on such record date
plus the number of additional Preferred Shares and/or equivalent preferred
shares to be offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less
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<PAGE> 25
than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. In case such subscription price may be paid
in a consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(C) In case the Company shall fix a record date for the making
of a distribution to all holders of either series of the Preferred Shares
(including any such distribution made in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation) of
evidences of indebtedness or assets (other than a regular quarterly cash
dividend or a dividend payable in Preferred Shares) or subscription rights or
warrants (excluding those referred to in Section 11(b) hereof), the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the then current per share market
price of the Preferred Shares on such record date multiplied by the number of
Preferred Shares then outstanding, less the aggregate fair market value (as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
the assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants and the denominator of which shall be such
current per share market price of the Preferred Shares multiplied
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<PAGE> 26
by the number of Preferred Shares then outstanding; provided, however, that in
no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(D)(i) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the purpose
of this Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive Trading
Days (as such term is hereinafter defined) immediately prior to such date;
provided, however, that in the event that the current per share market price of
the Security is determined during a period following the announcement by the
issuer of such Security of (A) a dividend or distribution on such Security
payable in shares of such Security or securities convertible into such shares,
or (B) any subdivision, combination or reclassification of such Security and
prior to the expiration of 30 Trading Days after the ex-dividend date for such
dividend or distribution, or the record date for such subdivision, combination
or reclassification, then, and in each such case, the current per share market
price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Security is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal
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<PAGE> 27
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Security is listed or
admitted to trading or, if the Security is not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ") or such other system then in use, or, if on any
such date the Security is not quoted by any such organization, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the Security selected by the Board of Directors of the
Company. The term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Security is listed or admitted to trading is
open for the transaction of business or, if the Security is not listed or
admitted to trading on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Shares shall be the
"current per share market price" of the Series A Preferred Stock,
determined in accordance with the method set forth in Section 11(d)(i).
If the shares of Series A Preferred Stock are not publicly traded, the
"current per share market price" of the Preferred Shares shall be
conclusively deemed to be the current per share market price of the
Voting Common Shares as determined pursuant to Section 11(d)(i)
(appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof), multiplied by
1000. If neither the Voting Common Shares nor the shares of Series A
Preferred Stock are publicly held or so listed or traded, "current per
share market price" shall mean the fair value per share as determined
in
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<PAGE> 28
good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights
Agent.
(E) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one ten-millionth
of a Preferred Share or one ten-thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than three years
from the date of the transaction which requires such adjustment.
(F) If as a result of an adjustment made pursuant to Section
11(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock of the Company other than Preferred
Shares, the number of such other shares so receivable upon exercise of any Right
shall thereafter be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(G) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
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<PAGE> 29
(H) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-thousandths of a Preferred Share (calculated to the nearest one
ten-millionth of a Preferred Share) obtained by (i) multiplying (x) the number
of one one-thousandths of a share covered by a Right immediately prior to this
adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(I) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights in substitution
for any adjustment in the number of one one-thousandths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one hundred-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Right Certificates have been distributed, shall be at least 10 days later
than the date of the public
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<PAGE> 30
announcement. If Right Certificates have been distributed, upon each adjustment
of the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Right
Certificates on such record date Right Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Right Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates to be so distributed shall be issued, executed
and countersigned in the manner provided for herein and shall be registered in
the names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(J) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-thousandths of a Preferred Share issuable upon
the exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-thousandths of a Preferred Share which were expressed in the initial Right
Certificates issued hereunder.
(K) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-thousandth of the then par value of
the Preferred Shares issuable upon exercise of the Rights, the Company shall
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Company may validly and legally issue fully paid and
non-assessable Preferred Shares at such adjusted Purchase Price.
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<PAGE> 31
(L) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(M) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that it in its sole discretion shall determine
to be advisable in order that any (i) combination or subdivision of the
Preferred Shares, (ii) issuance wholly for cash of any Preferred Shares at less
than the current market price, (iii) issuance wholly for cash of Preferred
Shares or securities which by their terms are convertible into or exchangeable
for Preferred Shares, (iv) dividends on Preferred Shares payable in Preferred
Shares or (v) issuance of any rights, options or warrants referred to
hereinabove in Section 11(b), hereafter made by the Company to holders of its
Preferred Shares shall not be taxable to such stockholders.
(N) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise other than by payment of dividends in Common
Shares) into a
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<PAGE> 32
greater or lesser number of Common Shares, then in any such case (i) the number
of one one-thousandths of a Preferred Share purchasable after such event upon
proper exercise of each Right shall be determined by multiplying the number of
one one-thousandths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (ii) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
Section 12. Certificate of Adjustment. Whenever an adjustment is made
as provided in Sections 11 and 13 hereof, the Company shall promptly (a) prepare
a certificate setting forth such adjustment, and a brief statement of the facts
accounting for such adjustment, (b) file with the Rights Agent and with each
transfer agent for the Common Shares or the Preferred Shares a copy of such
certificate and (c) mail a brief summary thereof to each holder of a Right
Certificate in accordance with Section 25 hereof. The Rights Agent shall be
fully protected in relying on any such certificate and on any adjustment therein
contained and shall not be obligated or responsible for calculating any
adjustment nor shall it be deemed to have knowledge of such an adjustment unless
and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
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<PAGE> 33
In the event that, at any time after a Person becomes an Acquiring
Person, directly or indirectly, (i) the Company shall consolidate with, or merge
with and into, any other Person, (ii) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that (A) each holder of a Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise thereof at a price equal
to the then current Purchase Price multiplied by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the number of one
one-thousandths of a Preferred Share for which a Right is then exercisable and
dividing that product by (y) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (B) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer, all
the obligations and duties of the Company pursuant to this Agreement; (C) the
term
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<PAGE> 34
"Company" shall thereafter be deemed to refer to such issuer; and (D) such
issuer shall take such steps (including, but not limited to, the reservation of
a sufficient number of its Common Shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to the Common Shares thereafter deliverable upon the exercise of
the Rights; provided, however, that in lieu of Common Shares of such other
Person, the holders of Series B Certificates shall be entitled to receive a like
number of shares of capital stock or other equity interests identical to the
Common Shares of such other person in all respects, except that such shares or
other interests shall be non-voting. The Company covenants and agrees that it
shall not consummate any such consolidation, merger, sale or transfer unless
prior thereto the Company and such issuer shall have executed and delivered to
the Rights Agent a supplemental agreement so providing. The Company shall not
enter into any transaction of the kind referred to in this Section 13 if at the
time of such transaction there are any rights, warrants, instruments or
securities outstanding or any agreements or arrangements which, as a result of
the consummation of such transaction, would eliminate or substantially diminish
the benefits intended to be afforded by the Rights. The provisions of this
Section 13 shall similarly apply to successive mergers or consolidations or
sales or other transfers. For purposes hereof, the "earning power" of the
Company and its Subsidiaries shall be determined in good faith by the Company's
Board of Directors on the basis of the operating earnings of each business
operated by the Company and its Subsidiaries during the three fiscal years
preceding the date of such determination (or, in the case of any business not
operated by the Company or any Subsidiary during three full fiscal years
preceding such date, during the period such business was operated by the Company
or any Subsidiary).
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<PAGE> 35
Section 14. Fractional Rights and Fractional Shares.
(A) The Company shall not be required to issue fractions of
Rights or to distribute Right Certificates which evidence fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered holders of
the Right Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price for any
day shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Rights are not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading or, if
the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by NASDAQ
or such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Rights
selected by the Board of Directors of the Company. If on any such date no such
market maker is making a market in the Rights, the fair value of the Rights on
such date as determined in good faith by the Board of Directors of the Company
shall be used.
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<PAGE> 36
(B) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-thousandth of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
one-thousandth of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it; provided, that such agreement shall
provide that the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Shares represented by such depositary receipts. In lieu of
fractional Preferred Shares that are not integral multiples of one
one-thousandth of a Preferred Share, the Company shall pay to each registered
holder of Right Certificates at the time such Rights are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of one Preferred Share as the fraction of one Preferred Share that such
holder would otherwise receive upon the exercise of the aggregate number of
rights exercised by such holder. For the purposes of this Section 14(b), the
current market value of a Preferred Share shall be the closing price of a share
of Series A Preferred Stock (as determined pursuant to the second sentence of
Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
such exercise.
(C) The holder of a Right by the acceptance of the Right
expressly waives any right to receive fractional Rights or fractional shares
upon exercise of a Right (except as provided above).
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<PAGE> 37
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares) may, without the consent of the
Rights Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), on his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(A) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(B) after the Distribution Date, the Right Certificates are
transferable only on the registry books maintained by the Rights Agent if
surrendered at the principal office of the Rights
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<PAGE> 38
Agent, duly endorsed or accompanied by a proper instrument of transfer with a
completed form of certification; and
(C) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on
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demand of the Rights Agent, its reasonable expenses and counsel fees and other
disbursements incurred in the administration and execution of this Agreement and
the exercise and performance of its duties hereunder. The Company also agrees to
indemnify the Rights Agent for, and to hold it harmless against, any loss,
liability, or expense, incurred without negligence, bad faith or willful
misconduct on the part of the Rights Agent, for anything done or omitted by the
Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim or
liability in connection therewith. The indemnification provided for hereunder
shall survive the expiration of the Rights and the termination of this
Agreement. The costs and expenses of enforcing this right of indemnification
shall also be paid by the Company.
The Rights Agent may conclusively rely upon and shall be protected and
shall incur no liability for or in respect of any action taken, suffered or
omitted by it in connection with its administration of this Agreement in
reliance upon any Right Certificate or certificate for Preferred Shares or for
other securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons. Notwithstanding anything in this Agreement to the
contrary, in no event shall the Rights Agent be liable for special, indirect or
consequential loss or damage of any kind whatsoever (including but not limited
to lost profits), even if the Rights Agent has been advised of the likelihood of
such loss or damage and regardless of the form of the action.
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Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any
corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the corporate trust
business of the Rights Agent or any successor Rights Agent, shall be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible for appointment as a successor
Rights Agent under the provisions of Section 21 hereof. In case at the time such
successor Rights Agent shall succeed to the agency created by this Agreement,
any of the Right Certificates shall have been countersigned but not delivered,
any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned;
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such
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<PAGE> 41
cases such Right Certificates shall have the full force provided in the Right
Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations expressly set forth in this Agreement and no implied
duties or obligations shall be read into this Agreement against the Rights
Agent. The Rights Agent shall perform those duties and obligations upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates, by their acceptance thereof, shall be bound:
(A) Before the Rights Agent acts or refrains from acting, it
may consult with legal counsel (who may be legal counsel for the Company), and
the opinion of such counsel shall be full and complete authorization and
protection to the Rights Agent as to any action taken or omitted by it in good
faith and in accordance with such opinion.
(B) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
President, a Vice President, the Treasurer or the Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(C) The Rights Agent shall be liable hereunder only for its
own negligence, bad faith or willful misconduct.
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(D) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except as to its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(E) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any adjustment required under the provisions of
Sections 11 or 13 hereof or responsible for the manner, method or amount of any
such adjustment or the ascertaining of the existence of facts that would require
any such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Preferred Shares to be issued
pursuant to this Agreement or any Right Certificate or as to whether any
Preferred Shares will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
(F) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
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<PAGE> 43
(G) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the President, a Vice President, the
Secretary or the Treasurer of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken or suffered to be taken by it in good faith in accordance
with instructions of any such officer. Any application by the Rights Agent for
written instructions from the Company may, at the option of the Rights Agent,
set forth in writing any action proposed to be taken or omitted by the Rights
Agent under this Agreement and the date on or after which such action shall be
taken or such omission shall be effective. The Rights Agent shall not be liable
for any action taken by, or omission of, the Rights Agent in accordance with a
proposal included in any such application on or after the date specified in such
application (which date shall not be less than ten Business Days after the date
any officer of the Company actually receives such application, unless any such
officer shall have consented in writing to an earlier date) unless, prior to
taking any such action (or the effective date in the case of an omission), the
Rights Agent shall have received, in response to such application, written
instructions with respect to the proposed action or omission specifying a
different action to be taken or omitted.
(H) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
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<PAGE> 44
(I) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct, provided reasonable care was exercised in
the selection and continued employment thereof.
(J) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(K) The Rights Agent shall not be required to take notice or
be deemed to have notice of any fact, event or determination (including, without
limitation, any dates or events defined in this Agreement or the designation of
any Person as an Acquiring Person, Affiliate or Associate) under this Agreement
unless and until the Rights Agent shall be specifically notified in writing by
the Company of such fact, event or determination.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares and the Preferred Shares by registered or certified mail,
and, at the expense of the Company, to the holders of the Right Certificates by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the
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case may be, and to each transfer agent of the Common Shares and the Preferred
Shares by registered or certified mail, and to the holders of the Right
Certificates by first-class mail. If the Rights Agent shall resign or be removed
or shall otherwise become incapable of acting, the Company shall appoint a
successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right Certificate
(who shall, with such notice, submit his Right Certificate for inspection by the
Company), then the registered holder of any Right Certificate may apply to any
court of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be an entity organized and doing business under the laws of the United
States or of any state of the United States, in good standing, having an office
in the United States which is authorized under such laws to exercise corporate
trust powers and is subject to supervision or examination by federal or state
authority, and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $100 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares and the Preferred Shares, and mail
a notice thereof in writing to the registered holders of the Right Certificates.
Failure to give any notice provided for in this Section 21, however, or any
defect
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therein, shall not affect the legality or validity of the resignation or removal
of the Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. Redemption.
(A) The Board of Directors of the Company may, at its option,
at any time prior to such time as any Person becomes an Acquiring Person, redeem
all but not less than all the then outstanding Rights at a redemption price of
$0.01 per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such redemption
price being hereinafter referred to as the "Redemption Price"). The redemption
of the Rights by the Board of Directors may be made effective at such time, on
such basis and subject to such conditions as the Board of Directors in its sole
discretion may establish.
(B) Immediately upon the time of the effectiveness of the
redemption of the Rights pursuant to paragraph (a) of this Section 23 or such
earlier time as may be determined by the Board of Directors of the Company in
the action ordering such redemption (although not earlier than the time of such
action) (such time the "Redemption Date"), and without any further action and
without any notice, the right to exercise the Rights shall terminate and the
only right thereafter of the holders of Rights shall be to receive the
Redemption Price. The Company shall promptly give
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public notice of any such redemption; provided, however, that the failure to
give, or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of Directors ordering
the redemption of the Rights pursuant to paragraph (a), the Company shall mail a
notice of redemption to all the holders of the then outstanding Rights at their
last addresses as they appear upon the registry books of the Rights Agent or,
prior to the Distribution Date, on the registry books of the transfer agent for
the Common Shares. Any notice which is mailed in the manner herein provided
shall be deemed given, whether or not the holder receives the notice. If the
payment of the Redemption Price is not included with such notice, each such
notice shall state the method by which the payment of the Redemption Price will
be made. Neither the Company nor any of its Affiliates or Associates may redeem,
acquire or purchase for value any Rights at any time in any manner other than
that specifically set forth in this Section 23 or in Section 24 hereof, other
than in connection with the purchase of Common Shares prior to the Distribution
Date.
Section 24. Exchange.
(A) The Board of Directors of the Company may, at its option,
at any time after any Person becomes an Acquiring Person, exchange all or part
of the then outstanding and exercisable Rights (which shall not include Rights
that have become void pursuant to the provisions of Section 11(a)(ii) hereof)
for Common Shares at an exchange ratio of one Voting Common Share per Series A
Right and one Non-Voting Common Share per Series B Right, appropriately adjusted
to reflect any stock split, stock dividend or similar transaction occurring
after the date hereof (such exchange ratio being hereinafter referred to as the
"Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall
not be empowered to effect such exchange at any time after
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any Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Voting
Common Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of a
majority of the Voting Common Shares then outstanding.
(B) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of Common Shares equal to
the number of such Rights held by such holder multiplied by the Exchange Ratio.
The Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.
(C) In any exchange pursuant to this Section 24, the Board of
Directors, at its option, may substitute Preferred Shares for Common Shares
exchangeable for Rights, at the initial rate of one one-thousandth of a share of
Series A Preferred Stock for each Voting Common Share
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and one one-thousandth of a share of Series B Preferred Stock for each
Non-Voting Common Share, as appropriately adjusted to reflect adjustments in the
voting rights of the shares of Series A Preferred Stock pursuant to the terms
thereof, so that the fraction of a share of Series A Preferred Stock delivered
in lieu of each Voting Common Share shall have the same voting rights as one
Common Share and so that the same number of Preferred Shares shall be delivered
in exchange for each Right.
(D) In the event that there shall not be sufficient Common
Shares or Preferred Shares authorized by the Company's certificate of
incorporation and not outstanding or subscribed for, or reserved or otherwise
committed for issuance for purposes other than upon exercise of Rights, to
permit any exchange of Rights as contemplated in accordance with this Section
24, the Company shall take all such action as may be necessary to authorize
additional Common Shares or Preferred Shares for issuance upon exchange of the
Rights.
(E) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current per share market value of a whole Common Share.
For the purposes of this paragraph (e), the current per share market value of a
whole Common Share shall be the closing price of a Voting Common Share (as
determined pursuant to the second sentence of Section 11(d)(i) hereof) for the
Trading Day immediately prior to the date of exchange pursuant to this Section
24.
Section 25. Notice of Certain Events.
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(A) In case the Company shall after the Distribution Date
propose (i) to pay any dividend payable in stock of any class to the holders of
its Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action,
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at least 10 days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of the Common Shares and/or
Preferred Shares, whichever shall be the earlier.
(B) In case any event set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail or overnight delivery, postage prepaid, addressed (until another address is
filed in writing with the Rights Agent) as follows:
Kinder Morgan, Inc.
1301 McKinney, Suite 3400
Houston, Texas 77010
Attention: Mr. Joseph Listengart
Copy to:
Bracewell & Patterson, LLP
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2787
Attention: Mr. David L. Ronn
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by registered or certified mail or overnight delivery
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and shall be deemed given upon receipt and, addressed (until another address is
filed in writing with the Company) as follows:
First Chicago Trust Company of New York
150 Royall Street
Canton, Massachusetts 02021
Attn: Mr. Scott Lanciloti
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Company may from time to
time, and the Rights Agent shall, if the Company so directs, supplement or amend
this Agreement without the approval of any holders of Right Certificates in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
or to make any change to or delete any provision hereof or to adopt any other
provisions with respect to the Rights which the Company may deem necessary or
desirable; provided, however, that from and after such time as any Person
becomes an Acquiring Person, this Agreement shall not be amended or supplemented
in any manner which would adversely affect the interests of the holders of
Rights (other than an Acquiring Person and its Affiliates and Associates). Any
supplement or amendment authorized by this Section 27 will be evidenced by a
writing signed by the Company and the Rights Agent. Notwithstanding anything in
this Agreement to the contrary, no supplement or amendment that changes the
rights and duties of the Rights Agent under this Agreement will be
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effective against the Rights Agent without the execution of such supplement or
amendment by the Rights Agent.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or entity other than the Company, the Rights
Agent and the registered holders of the Right Certificates (and, prior to the
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
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Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 34. Administration. The Board of Directors of the Company shall
have the exclusive power and authority to administer and interpret the
provisions of this Agreement and to exercise all rights and powers specifically
granted to the Board of Directors or the Company or as may be necessary or
advisable in the administration of this Agreement. All such actions,
calculations, determinations and interpretations which are done or made by the
Board of Directors in good faith shall be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties and
shall not subject the Board of Directors to any liability to the holders of the
Rights.
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed and their respective corporate seals to be
hereunder affixed and attested, all as of the day and year first above written.
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Attest: KINDER MORGAN, INC.
By:
- ---------------------------------- -------------------------------------
William V. Morgan, President
Attest: First Chicago Trust Company of New York,
as Rights Agent
By:
- ---------------------------------- -------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
<PAGE> 56
EXHIBIT A
FORM
of
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
and
SERIES B JUNIOR PARTICIPATING PREFERRED STOCK
of
KINDER MORGAN, INC.
- --------------------------------------------------------------------------------
(Pursuant to Section 151 of the
Delaware General Corporation Law)
- --------------------------------------------------------------------------------
Kinder Morgan, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (hereinafter called
the "Corporation"), hereby certifies that the following resolution was adopted
by the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on _____________,
1999:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Restated
Certificate of Incorporation of the Corporation (the "Restated Certificate of
Incorporation"), the Board of Directors hereby creates two series of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Section 1. Designation and Amount. The shares of these series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and "Series B Junior Participating Preferred Stock" (the
"Series B Preferred Stock, and, collectively with the Series A
A-1
<PAGE> 57
Preferred Stock, the "Series Preferred Stock") and the number of shares
constituting the Series A Preferred Stock shall be 200,000 and the Series B
Preferred Stock shall be 10,000. Such numbers of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of either series of Series Preferred Stock to
a number less than the number of shares of such series then outstanding plus the
number of shares reserved for issuance upon the exercise of outstanding options,
rights or warrants or upon the conversion of any outstanding securities issued
by the Corporation convertible into such series of Series Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any other stock) ranking prior and superior to the
Series Preferred Stock with respect to dividends, the holders of shares of
Series Preferred Stock shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the last day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series Preferred Stock,
in an amount (if any) per share (rounded to the nearest cent), subject to the
provision for adjustment hereinafter set forth, equal to 1000 times the
aggregate per share amount of all cash dividends, and 1000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of common stock, par
value $0.01 per share (the "Common Stock"), of the Corporation or a subdivision
of the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series Preferred
Stock. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) Dividends due pursuant to paragraph (A) of this Section
shall begin to accrue and be cumulative on outstanding shares of Series
Preferred Stock from the Quarterly Dividend Payment Date next preceding the date
of issue of such shares, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which case
dividends
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on such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
A Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 1000 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided the Restated Certificate of
Incorporation, including any other Certificate of Designations creating a series
of Preferred Stock or any similar stock, or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C) Except as set forth herein, or as otherwise required by
law, holders of Series Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series Preferred Stock as provided in Section 2 are
in arrears, thereafter and until all accrued and
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unpaid dividends and distributions, whether or not declared, on shares of Series
Preferred Stock outstanding shall have been paid in full, the Corporation shall
not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series Preferred Stock, except dividends paid ratably on the Series
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Corporation ranking junior (as
to dividends and upon dissolution, liquidation or winding up) to the
Series Preferred Stock.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein or in
the Restated Certificate of Incorporation, including any Certificate of
Designations creating a series of Preferred Stock or any similar stock, or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation the holders of shares
of Series Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1000 times the aggregate amount to be distributed per share to holders of shares
of Common Stock plus an amount equal to any accrued and unpaid dividends. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series Preferred
Stock were entitled immediately prior to such event under the preceding sentence
shall be adjusted by multiplying such amount by a fraction the
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<PAGE> 60
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series Preferred Stock shall at the same time be similarly exchanged or changed
into an amount per share, subject to the provision for adjustment hereinafter
set forth, equal to 1000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged; provided, however,
that if the holders of shares of Common Stock are entitled, in connection with
any such transaction, to receive any voting securities, the holders of the
Series B Preferred Stock shall be entitled to receive securities identical in
all respects to such securities, except that such securities shall be
non-voting. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. Conversion.
(A) Any holder of Series B Preferred Stock shall have the
right, at its option, at any time and from time to time, to convert, subject to
the terms and provisions of this Section 8, any or all of such holder's shares
of Series B Preferred Stock into fully paid and non-assessable shares of Series
A Preferred Stock at the rate (subject to adjustment as provided below) of one
share of Series A Preferred Stock for each share of Series B Preferred Stock
surrendered for conversion; provided, however, if the holder in any such
conversion is subject to the Bank Holding Company Act of 1956, as amended (12
U.S.C. ss. 1841, et. seq.) and the regulations promulgated thereunder
(collectively and including any successor provisions, the "BHCA Act"), such
conversion may be made only if:
(i) the BHCA Act would not prohibit such holder from holding
such shares of Series A Preferred Stock; and
(ii) such shares of Series A Preferred Stock to be received
upon such conversion will be (1) distributed or sold (a) in connection
with any public equity offering registered under the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder
(the "Securities Act"), (b) in a "broker's transaction" (as defined in
Rule 144(g) under the Securities Act) pursuant to Rule 144 under the
Securities Act or any
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similar rule then in force, (c) to a person or group (within the
meaning of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of persons if, after such distribution or sale, such
person or group of persons would not, in the aggregate, own, control or
have the right to acquire more than 2% of the outstanding securities of
the Corporation entitled to vote on the election of directors of the
Corporation, (d) to a person or group (within the meaning of the
Exchange Act) of persons if, prior to such sale, such persons or group
of persons had control of the Corporation, or (2) held, distributed or
sold in any other manner permitted under the BHCA;
provided, further, that if the holder converts any shares of the Series
B Preferred Stock as provided in clauses (i) and (ii) above and any
distribution or sale of the Series A Preferred Stock fails to occur for
any reason, such holder may convert the Series A Preferred Stock into
the Series B Preferred Stock converted in anticipation of such
distribution or sale.
(B) Such conversion right shall be exercised by the surrender
to the Corporation of the shares of the applicable Series B Preferred Stock to
be converted in the manner provided above at any time during usual business
hours at its principal place of business, accompanied by (i) written notice that
the holder elects to convert such shares of Series B Preferred Stock and
specifying the name or names (with address) in which a certificate or
certificates for shares of the Series A Preferred Stock are to be issued; (ii)
if so required by the Corporation, a written instrument or instruments of
transfer in form reasonably satisfactory to the Corporation duly executed by the
holder or its duly authorized legal representative; (iii) transfer tax stamps or
funds therefor, if required pursuant to Section 8(D) hereof, and (iv) a
certificate in form satisfactory to the Corporation stating that the holder has
satisfied all applicable conditions to conversion, including without limitation
the restrictions described in Section 8(A) hereof and the Corporation may rely
upon such Certificate as to the holder's compliance with any such conditions of
restrictions without any investigation by the Corporation as to such matters. As
promptly as practicable after the surrender, as herein provided, of any shares
of Series B Preferred Stock for conversion pursuant to Section 8(A) hereof, the
Corporation shall deliver to or upon the written order of the holder of such
shares of Series B Preferred Stock so surrendered a certificate or certificates
representing the number of fully paid and non-assessable shares of the Series A
Preferred Stock into which such shares of Series B Preferred Stock may be or
have been converted in accordance with the provisions of this Section 8. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date that such shares of Series B Preferred Stock shall have
been surrendered in satisfactory form for conversion, and the person or persons
entitled to receive the shares of Series A Preferred Stock deliverable upon
conversion of such shares of Series B Preferred Stock shall be treated for all
purposes as having become the record holder or holders of such shares of Series
A Preferred Stock at such appropriate time. Notwithstanding the foregoing, a
holder's identification of the person or persons entitled to receive any shares
of Series A Preferred Stock deliverable upon conversion shall not be deemed an
approval by the Corporation of a transfer or conversion that would result in a
violation of any applicable law or restriction on transfer or conversion and
shall not be deemed a waiver by the Corporation or any other person of any right
or restriction regarding any such transfer or conversion.
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<PAGE> 62
(C) So long as shares of each of the Series A Preferred Stock
and Series B Preferred Stock are outstanding or authorized or reserved for
issuance, the Corporation shall not, without the affirmative vote of the holders
of a majority of the Series A Preferred Stock and the Series B Preferred Stock,
each voting separately as a class, effect any stock split, stock dividend,
reclassification, reorganization, recapitalization, combination or subdivision
or consolidation of Series A Preferred Stock or Series B Preferred Stock unless
the Corporation shall also contemporaneously effect a stock split, stock
dividend, reclassification, reorganization, recapitalization, combination or
subdivision on the same terms with respect to the other class. The Corporation
will not, by amendment of its Restated Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation ,merger, share exchange,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, and will at all times in good faith
assist in the carrying out of all the provisions of this Section (C), and in the
taking of all such action as may be necessary or appropriate in order to protect
the conversion rights of the holders of Series B Preferred Stock against
dilution or other impairment.
(D) The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Series A Preferred Stock on conversion of shares of Series B Preferred Stock
pursuant hereto, provided, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(E) The Corporation shall at all time reserve and keep
available out of its authorized but unissued shares of Series A Preferred Stock,
free of preemptive rights, solely for the purpose of effecting the conversion of
the shares of Series B Preferred Stock, such number of its shares of Series B
Preferred Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series B Preferred Stock into Series A
Preferred Stock, and if at any time the number of authorized but unissued shares
of each class shall not be sufficient to effect the conversion of all then
outstanding shares of the other class, the Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Series A Preferred Stock such number of shares
as shall be sufficient for such purpose.
Section 9. Amendment. The Restated Certificate of Incorporation shall
not be amended in any manner, including in a merger or consolidation, which
would alter, change, or repeal the powers, preferences or special rights of the
Series Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Series
Preferred Stock, voting together as a single class.
Section 10. Rank. The Series Preferred Stock shall rank, with respect
to the payment of dividends and upon liquidation, dissolution and winding up,
junior to all series of Preferred Stock.
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<PAGE> 63
EXHIBIT B
Form of Right Certificate
Certificate No. R- _______ Rights
NOT EXERCISABLE AFTER ________ __, 2009 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.01 PER RIGHT AND TO
EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS THAT ARE OR WERE ACQUIRED OR BENEFICIALLY OWNED BY AN
ACQUIRING PERSON OR ANY ASSOCIATES OR AFFILIATES THEREOF (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT) OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID.
Series [A/B] Right Certificate
KINDER MORGAN, INC.
This certifies that _______________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of ____________ ___, 1999 (the "Rights Agreement"), between
Kinder Morgan, Inc., a Delaware corporation (the "Company"), and First Chicago
Trust Company of New York (the "Rights Agent"), to purchase from the Company at
any time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., Houston, Texas time, on ________ __, 2009, at
the principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-thousandth of a fully paid non-assessable share of Series
[A/B] Junior Participating Preferred Stock, par value $0.01 per share (the
"Preferred Shares"), of the Company, at a purchase price of $________ per one
one-thousandth of a Preferred Share (the "Purchase Price"), upon presentation
and surrender of this Right Certificate with the certification and the Form of
Election to Purchase duly executed. The number of Rights evidenced by this Right
Certificate (and the number of one one-thousandths of a Preferred Share which
may be purchased upon exercise hereof) set forth above, and the Purchase Price
set forth above, are the number and Purchase Price as of ________ __, 1999,
based on the Preferred Shares as constituted at such date. As provided in the
Rights Agreement, the Purchase Price and the number of one one-thousandths of a
Preferred Share which may be purchased upon the exercise of the Rights evidenced
by this Right Certificate are subject to modification and adjustment upon the
happening of certain events.
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<PAGE> 64
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation by its _______________________________ this ______ day
of ____________, 1999.
KINDER MORGAN, INC.
By:
--------------------------------
William V. Morgan, President
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<PAGE> 65
From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, if the Rights evidenced by this Right
Certificate are or were at any time on or after the earlier of (x) the date of
such event and (y) the Distribution Date (as such term is defined in the Rights
Agreement) acquired or beneficially owned by an Acquiring Person or an Associate
or Affiliate of an Acquiring Person (as such terms are defined in the Rights
Agreement), such Rights shall become void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, at the Company's
option, the Rights evidenced by this Certificate (i) may be redeemed by the
Company at a redemption price of $0.01 per Right or (ii) may be exchanged in
whole or in part for shares of the Company's Common Stock, par value $0.01 per
share, the Company's non-voting convertible common stock, par value $0.01 per
share, or Preferred Shares.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement, or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
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<PAGE> 66
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of ____________, ____.
Attest: KINDER MORGAN, INC.
By:
-----------------------------------
Countersigned:
First Chicago Trust Company of New York,
Rights Agent
By:
------------------------------------
Authorized Signature
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Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Right Certificate.)
FOR VALUE RECEIVED _____________________ hereby sells, assigns and
transfers unto
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint _____________________________,
Attorney, to transfer the within Right Certificate on the books of the
within-named Company, with full power of substitution.
Dated:
--------------
----------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
- --------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
----------------------------
Signature
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<PAGE> 68
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Right Certificate.)
To KINDER MORGAN, INC.:
The undersigned hereby irrevocably elects to exercise ________________
Rights represented by this Right Certificate to purchase the Preferred Shares
issuable upon the exercise of such Rights and requests that certificates for
such Preferred Shares to issued in the name of:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated:
----------------
------------------------------
Signature
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<PAGE> 69
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
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<PAGE> 70
Form of Reverse Side of Right Certificate -- continued
- --------------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
------------------------
Signature
- --------------------------------------------------------------------------------
NOTICE
The signature in the foregoing Forms of Assignment and Election must
conform to the name as written upon the face of this Right Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
B-8
<PAGE> 71
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On _______________, 1999, the Board of Directors of Kinder Morgan, Inc.
(the "Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $0.01 per share
(the "Voting Common Shares") and each share of non-voting convertible common
stock, par value $0.01 per share, of the Company ("a Non-Voting Common Share,
and together with the Voting Common Shares, the "Common Shares") outstanding on
____________ __, 1999 (the "Record Date") to the stockholders of record on that
date. Each Right distributed in respect of the Voting Common Shares entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share (the
"Series A Preferred Shares"), of the Company, at a price of $_________ per one
one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment, and each Right distributed in respect of the Non-Voting Common
Shares entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series B Junior Participating Preferred Stock, par
value $0.01 per share (the "Series B Preferred Shares, and, together with the
Series A Preferred Shares, the "Preferred Shares"). The description and terms of
the Rights are set forth in a Rights Agreement (the "Rights Agreement") between
the Company and First Chicago Trust Company of New York, as Rights Agent (the
"Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (other
than certain "Grandfathered Stockholders") (an "Acquiring Person") has acquired
beneficial ownership of 15% or more of the outstanding Voting Common Shares or
(ii) 10 business days (or such later date as may be determined by action of the
Board of Directors prior to such time as any Person becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in any Person
becoming an Acquiring Person (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
Common Share certificates outstanding as of the Record Date, by such Common
Share certificate with a copy of this Summary of Rights attached thereto.
The Rights Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Shares. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Share certificates issued after the Record Date or upon transfer or new
issuance of Common Shares will contain a notation incorporating the Rights
Agreement by reference. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the surrender for transfer of any certificates for
Common Shares outstanding as of the Record Date, even without such notation or a
copy of this Summary of Rights being attached thereto, will also constitute the
transfer of the Rights associated with the Common Shares represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common
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<PAGE> 72
Shares as of the Close of Business on the Distribution Date and such separate
Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on _______________, 2009 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed by
the Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-thousandths
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a quarterly dividend
payment of 1000 times the dividend declared per Voting Common Share. In the
event of liquidation, the holders of the Preferred Shares will be entitled to an
aggregate payment of 1000 times the aggregate payment made per Voting Common
Share. Each Series A Preferred Share will have 1000 votes, voting together with
the Voting Common Shares. In the event of any merger, consolidation or other
transaction in which Common Shares are exchanged, each Preferred Share will be
entitled to receive 1000 times the amount received per Common Share; provided,
however, that in the event that the holders of Common Shares are entitled to
receive any voting securities in connection with any such transaction, holders
of the Series B Preferred Shares shall be entitled to receive non-voting
securities that are otherwise identical with the voting securities received by
the holders of Common Shares. These rights are protected by customary
antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-thousandth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one Common Share.
From and after the occurrence of an event described in Section
11(a)(ii) of the Rights Agreement, if the Rights evidenced by this Right
Certificate are or were at any time on or after the earlier of (x) the date of
such event and (y) the Distribution Date (as such term is defined in the
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Rights Agreement) acquired or beneficially owned by an Acquiring Person, or an
Associate or Affiliate of an Acquiring Person (as such terms are defined in the
Rights Agreement), such Rights shall become void, and any holder of such Rights
shall thereafter have no right to exercise such Rights.
In the event that, at any time after a Person becomes an Acquiring
Person, the Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold,
proper provision will be made so that each holder of a Right will thereafter
have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction will have a market value
of two times the exercise price of the Right. In the event that any person
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person and its
Affiliates and Associates (which will thereafter be void), will thereafter have
the right to receive upon exercise that number of Common Shares having a market
value of two times the exercise price of the Right. Rights issued to holders of
Voting Common Shares will, in such event, represent the right to purchase
additional Voting Common Shares, and rights distributed to the holders of
Non-Voting Common Shares will represent the right to purchase additional
Non-Voting Common Shares. If the Company does not have sufficient Common Shares
to satisfy such obligation to issue Common Shares, or if the Board of Directors
so elects, the Company shall deliver upon payment of the exercise price of a
Right an amount of cash or securities equivalent in value to the Common Shares
issuable upon exercise of a Right; provided that, if the Company fails to meet
such obligation within 30 days following the later of (x) the first occurrence
of an event triggering the right to purchase Common Shares and (y) the date on
which the Company's right to redeem the Rights expires, the Company must
deliver, upon exercise of a Right but without requiring payment of the exercise
price then in effect, Common Shares (to the extent available) and cash equal in
value to the difference between the value of the Common Shares otherwise
issuable upon the exercise of a Right and the exercise price then in effect. The
Board of Directors may extend the 30-day period described above for up to an
additional 60 days to permit the taking of action that may be necessary to
authorize sufficient additional Common Shares to permit the issuance of Common
Shares upon the exercise in full of the Rights.
At any time after any Person becomes an Acquiring Person and prior to
the acquisition by any person or group of a majority of the outstanding Voting
Common Shares, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by such person or group which have become void), in
whole or in part, at an exchange ratio of one Voting Common Share per Series A
Right and one Non-Voting Common Share per Series B Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
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At any time prior to the time any Person becomes an Acquiring Person,
the Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $0.01 per Right (the "Redemption Price"). The redemption of
the Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person becomes an Acquiring Person no such amendment may
adversely affect the interests of the holders of the Rights (other than the
Acquiring Person and its Affiliates and Associates).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the Agreement has been filed with the Securities and Exchange
Commission as an Exhibit to an Amendment No. 1 to Registration Statement on Form
S-1 dated ___________ ____, 1999. A copy of the Agreement is available free of
charge from the Company. This summary description of the Rights does not purport
to be complete and is qualified in its entirety by reference to the Agreement,
which is hereby incorporated herein by reference.
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EXHIBIT 5.1
_________, 1999
Kinder Morgan, Inc.
1301 McKinney, Suite 3400
Houston, Texas 77010
Ladies and Gentlemen:
We have acted as counsel to Kinder Morgan, Inc., a Delaware corporation (the
"Company"), in connection with the proposed sale of 7,250,000 shares (8,337,500
if the over-allotment option granted to the underwriters is exercised in full)
(the "Shares") of its common stock, par value $0.01 per share (the "Common
Stock").
A Registration Statement on Form S-1 (Registration No. 333-78165) (including
all amendments thereto, the "Registration Statement") relating to the Shares
has been filed with the Securities and Exchange Commission under the Securities
Act of 1933, as amended.
We have examined originals or copies of (1) the Registration Statement; (2) the
Restated Certificate of Incorporation of the Company, as amended; (3) the
Bylaws of the Company, as amended; (4) certain resolutions of the Board of
Directors of the Company; and (5) such other documents and records as we have
deemed necessary and relevant for purposes hereof. In addition, we have relied
on certificates of officers of the Company as to certain matters of fact
relating to this opinion and have made such investigations of law as we have
deemed necessary and relevant as a basis hereof.
We have assumed the genuineness of all signatures, the authenticity of all
documents, certificates and records submitted to us as originals, the
conformity to original documents, certificates and records of all documents,
certificates and records submitted to us as copies, and the truthfulness of all
statements of fact contained therein.
Based on the foregoing, and subject to the limitations set forth herein, and
having due regard for such legal considerations as we deem relevant, we are of
the opinion that:
The Shares have been duly authorized and (subject to the Registration
Statement becoming effective, applicable Blue Sky laws being complied
with and the filing of the Company's Restated Certificate of
Incorporation with the Secretary of State of Delaware), when issued
<PAGE> 2
Kinder Morgan, Inc.
_________, 1999
Page 2
against receipt of the consideration therefor in the manner
contemplated by the Registration Statement, will be legally issued,
fully paid and nonassessable.
The foregoing opinion is based on and is limited to the law of the State of
Texas and the relevant law of the United States of America, and we render no
opinion with respect to the laws of any other jurisdiction.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
reference to us under "Legal Matters" in the prospectus included in the
Registration Statement. By giving such consent we do not admit that we are
experts with respect to any part of the Registration Statement, including this
exhibit, within the meaning of the term "expert" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission issued thereunder.
Very truly yours,
Bracewell & Patterson, L.L.P.
<PAGE> 1
EXHIBIT 10.2
KINDER MORGAN, INC.
1999 STOCK AWARDS PLAN
I. PURPOSE
The purpose of the KINDER MORGAN, INC. 1999 STOCK AWARDS PLAN (the
"Plan") is to provide a means through which Kinder Morgan, Inc., a Delaware
corporation (the "Company"), and its Affiliates, may attract able persons to
enter the employ of the Company and to provide a means whereby those individuals
upon whom the responsibilities of the successful administration and management
of the Company rest, and whose present and potential contributions to the
welfare of the Company are of importance, can acquire and maintain stock
ownership, thereby strengthening their concern for the welfare of the Company
and their desire to remain in the Company's employ. A further purpose of the
Plan is to provide such individuals with additional incentive and reward
opportunities designed to enhance the profitable growth of the Company.
Accordingly, the Plan provides for granting Incentive Stock Options, options
which do not constitute Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock Awards, Performance Awards, Phantom Stock Awards, or any
combination of the foregoing, as is best suited to the circumstances of the
particular individual as provided herein.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan
unless specifically modified by any paragraph:
(a) "Affiliates" means any "parent corporation" of the Company and any
"subsidiary corporation" of the Company within the meaning of Code Sections
424(e) and (f), respectively.
(b) "Award" means, individually or collectively, any Option, Restricted
Stock Award, Phantom Stock Award, Performance Award or Stock Appreciation Right.
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" means the occurrence of any of the following
events: (i) the Company shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity other than a previously wholly-owned subsidiary of the Company) unless,
immediately following such merger, consolidation or other reorganization,
Richard D. Kinder and William V. Morgan are the chairman of the board of
directors and vice-chairman of the board of directors, respectively, of the
surviving entity, (ii) the Company sells, leases or exchanges all or
substantially all of its assets to any other person or entity (other than
Richard D. Kinder, William V. Morgan or a wholly-owned subsidiary of the
Company), (iii) the Company is to be dissolved and liquidated, (iv) any person
or entity (other than Richard D. Kinder or William V. Morgan), including a
"group" as contemplated by Section 13(d)(3) of the 1934 Act (other than any
group containing Richard D. Kinder or William V. Morgan), acquires or gains
ownership or control (including, without limitation, power to vote) of more than
50% of the outstanding shares
<PAGE> 2
of the Company's voting stock (based upon voting power), or (v) as a result of
or in connection with a contested election of directors, the persons who were
directors of the Company before such election shall cease to constitute a
majority of the Board.
(e) "Change of Control Value" shall mean (i) the per share price
offered to stockholders of the Company in any merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to stockholders of the Company in any tender offer or exchange
offer whereby a Change of Control takes place, or (iii) if such Change of
Control occurs other than pursuant to a tender or exchange offer, the Fair
Market Value per share of the shares into which Awards are exercisable, as
determined by the Committee, whichever is applicable. In the event that the
consideration offered to stockholders of the Company consists of anything other
than cash, the Committee shall determine the fair cash equivalent of the portion
of the consideration offered which is other than cash.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any Section of the Code shall be deemed to include any
amendments or successor provisions to any Section and any regulations under such
Section.
(g) "Committee" means the Compensation Committee of the Board which
shall be (i) constituted so as to permit the Plan to comply with Rule 16b-3, and
(ii) constituted so as to satisfy the requirements of a "compensation committee"
under Section 162(m) of the Code and applicable interpretive authority
thereunder.
(h) "Company" means Kinder Morgan, Inc.
(i) "Director" means an individual elected to the Board by the
stockholders of the Company or by the Board under applicable corporate law who
is serving on the Board on the date the Plan is adopted by the Board or is
elected to the Board after such date.
(j) "Employee" means any person (including an officer or a Director) in
an employment relationship with the Company or any Affiliate.
(k) "Fair Market Value" means, as of any specified date, the closing
sales price of the Stock (i) reported by the interdealer quotation system on
which the Stock is quoted on that date, or (ii) if the Stock is listed on a
national stock exchange, reported on the stock exchange composite tape on that
date; or, in either case, if no prices are reported on that date, on the last
preceding date on which such price of the Stock is so reported. If the Stock is
traded over the counter at the time a determination of its fair market value is
required to be made hereunder, its fair market value shall be deemed to be equal
to the average between the reported high and low or closing bid and asked prices
of Stock on the most recent date on which Stock was publicly traded. 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.
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<PAGE> 3
(l) "Holder" means an individual who has been granted an Award.
(m) "Incentive Stock Option" means an incentive stock option within the
meaning of Section 422(b) of the Code.
(n) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(o) "Nonqualified Stock Option" means an option granted under Paragraph
VII of the Plan to purchase Stock which does not constitute an Incentive Stock
Option.
(p) "Option" means an Award granted under Paragraph VII of the Plan and
includes both Incentive Stock Options to purchase Stock and Nonqualified Stock
Options to purchase Stock.
(q) "Option Agreement" means a written agreement between the Company
and a Holder with respect to an Option.
(r) "Performance Award" means an Award granted under Paragraph X of the
Plan.
(s) "Performance Award Agreement" means a written agreement between the
Company and a Holder with respect to a Performance Award.
(t) "Phantom Stock Award" means an Award granted under Paragraph XI of
the Plan.
(u) "Phantom Stock Award Agreement" means a written agreement between
the Company and a Holder with respect to a Phantom Stock Award.
(v) "Plan" means the Kinder Morgan, Inc. 1999 Stock Awards Plan, as
amended from time to time.
(w) "Restricted Stock Agreement" means a written agreement between the
Company and a Holder with respect to a Restricted Stock Award.
(x) "Restricted Stock Award" means an Award granted under Paragraph IX
of the Plan.
(y) "Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act,
as such may be amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.
(z) "Spread" means, in the case of a Stock Appreciation Right, an
amount equal to the excess, if any, of the Fair Market Value of a share of Stock
on the date such right is exercised over the exercise price of such Stock
Appreciation Right; provided, however, the Committee may establish, in its sole
discretion, in any Stock Appreciation Rights Agreement, the maximum amount of
Spread attributable to a Stock Appreciation Right.
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<PAGE> 4
(aa) "Stock" means the common stock, $.01 par value of the Company.
(bb) "Stock Appreciation Right" means an Award granted under Paragraph
VIII of the Plan.
(cc) "Stock Appreciation Rights Agreement" means a written agreement
between the Company and a Holder with respect to an Award of Stock Appreciation
Rights.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective upon the date of its adoption by the Board,
provided that the Plan is approved by the stockholders of the Company within
twelve months before or after the date the Plan is adopted by the Board. No
further Awards may be granted under the Plan after the expiration of ten years
from the date of its adoption by the Board. The Plan shall remain in effect
until all Awards granted under the Plan have been satisfied or expired.
IV. ADMINISTRATION
(a) Committee. The Plan shall be administered by the Committee.
(b) Powers. Subject to the provisions of the Plan, the Committee shall
have sole authority, in its discretion, to determine which individuals shall
receive an Award, the time or times when such Award shall be made, whether an
Incentive Stock Option, Nonqualified Option or Stock Appreciation Right shall be
granted, the number of shares of Stock which may be issued under each Option,
Stock Appreciation Right or Restricted Stock Award, and the value of each
Performance Award and Phantom Stock Award. In making such determinations the
Committee may take into account the nature of the services rendered by the
respective individuals, their present and potential contributions to the
Company's success and such other factors as the Committee in its discretion
shall deem relevant.
(c) Additional Powers. The Committee shall have such additional powers
as are delegated to it by the other provisions of the Plan. Subject to the
express provisions of the Plan, the Committee is authorized to construe the Plan
and the respective agreements executed thereunder, to prescribe such rules and
regulations relating to the Plan as it may deem advisable to carry out the Plan,
and to determine the terms, restrictions and provisions of each Award, including
such terms, restrictions and provisions as shall be requisite in the judgment of
the Committee to cause designated Options to qualify as Incentive Stock Options,
and to make all other determinations necessary or advisable for administering
the Plan. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in any agreement relating to an Award in the manner
and to the extent it shall deem expedient to carry it into effect. The
determinations of the Committee on the matters referred to in this Article IV
shall be conclusive.
(d) Expenses. All expenses and liabilities incurred by the Committee in
the administration of this Plan shall be borne by the Company. The Committee may
employ attorneys,
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<PAGE> 5
consultants, accountants or other persons to assist the Committee in the
carrying out of its duties hereunder.
V. STOCK SUBJECT TO THE PLAN
(a) Stock Grant and Award Limits. The Committee may from time to time
grant Awards to one or more individuals determined by it to be eligible for
participation in the Plan in accordance with the provisions of Paragraph VI.
Subject to Paragraph XII, the aggregate number of shares of Stock that may be
issued under the Plan shall not exceed 2,000,000 shares. Awards with respect to
more than 250,000 shares of Stock shall not be granted to any individual in any
12-month period. Shares of Stock shall be deemed to have been issued under the
Plan only to the extent actually issued and delivered pursuant to an Award. To
the extent that an Award expires or is canceled or the rights of its Holder
terminate, any Stock subject to such Award shall again be available for grant
under this Plan. Separate stock certificates shall be issued by the Company for
those shares acquired pursuant the exercise of an Incentive Stock Option and for
those shares acquired pursuant to the exercise of a Nonqualified Stock Option.
(b) Stock Offered. The stock to be offered pursuant to the grant of an
Award may be authorized but unissued Stock or Stock previously issued and
outstanding and reacquired by the Company.
VI. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are
Employees or Directors of the Company or an Affiliate. Incentive Stock Options
may not be granted to any individual who is not an Employee. An Award may be
granted on more than one occasion to the same person, and, subject to the
limitations set forth in the Plan, such Award may include an Incentive Stock
Option or a Nonqualified Stock Option, a Stock Appreciation Right, a Restricted
Stock Award, a Performance Award, a Phantom Stock Award or any combination
thereof.
VII. STOCK OPTIONS
(a) Option Period. The term of each Option shall be as specified by the
Committee at the date of grant.
(b) Limitations on Exercise of Option. An Option shall be exercisable
in whole or in such installments and at such times as determined by the
Committee; provided, however, that an Incentive Stock Option shall not be
exercisable after the expiration of ten (10) years from the date of grant.
(c) Special Limitations on Incentive Stock Options. To the extent that
the aggregate Fair Market Value (determined at the time the respective Incentive
Stock Option is granted) of Stock with respect to which Incentive Stock Options
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its Affiliates exceeds
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<PAGE> 6
$100,000, such Incentive Stock Options shall be treated as Nonqualified Stock
Options as determined by the Committee. The Committee shall determine, in
accordance with applicable provisions of the Code, regulations thereunder and
other administrative pronouncements, which of a Holder's Incentive Stock Options
will not constitute Incentive Stock Options because of such limitation and shall
notify the Holder of such determination as soon as practicable after such
determination. No Incentive Stock Option shall be granted to an individual if,
at the time the Option is granted, such individual owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or of an Affiliate, unless (i) at the time such Option is granted the
exercise price is at least 110% of the Fair Market Value of the Stock subject to
the Option, and (ii) such Option by its terms is not exercisable after the
expiration of five years from the date of grant.
(d) Option Agreement. Each Option shall be evidenced by an Option
Agreement in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Committee from time to time shall approve,
including, without limitation, provisions to qualify an Incentive Stock Option
under Section 422 of the Code. An Option Agreement may provide for the payment
of the exercise price, in whole or in part, (i) in cash, (ii) by the delivery of
a number of shares of Stock theretofore owned by the Holder, (iii) by an
election by the Holder to have the Company withhold shares of Stock issuable
upon exercise of the Option, or (iv) by any combination of the preceding, having
a Fair Market Value equal to such exercise price. Each Option shall specify the
effect of termination of employment (by retirement, disability, death or
otherwise) on the exercisability of the Option. Each Option Agreement may also
include, without limitation, provisions relating to (i) vesting of Options,
subject to the provisions hereof accelerating such vesting on a Change of
Control, (ii) tax matters (including provisions (A) permitting the delivery of
additional shares of Stock or the withholding of shares of Stock from those
acquired upon exercise to satisfy federal or state income tax withholding
requirements and (B) dealing with any other applicable employee wage withholding
requirements), and (iii) any other matters not inconsistent with the terms and
provisions of this Plan that the Committee shall in its sole discretion
determine. The terms and conditions of the respective Option Agreements need not
be identical.
(e) Exercise Price and Payment. The price at which a share of Stock may
be purchased upon exercise of an Option shall be determined by the Committee,
but (i) such exercise price shall not be less than the Fair Market Value of
Stock on the date the Option is granted, and (ii) such exercise price shall be
subject to adjustment as provided in Paragraph XII. The Option or a portion
thereof may be exercised by delivery of an irrevocable notice of exercise to the
Company. The exercise price of the Option or portion thereof shall be paid in
full in the manner prescribed by the Committee.
(f) Stockholder Rights and Privileges. The Holder shall be entitled to
all the privileges and rights of a stockholder only with respect to such shares
of Stock as have been purchased under the Option and for which certificates of
Stock have been registered in the Holder's name.
(g) Options and Rights in Substitution for Stock Options Granted by
Other Corporations. Options and Stock Appreciation Rights may be granted under
the Plan from time to time in
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<PAGE> 7
substitution for stock options held by individuals who become Employees or
Directors as a result of a merger or consolidation of the employing corporation
with the Company or any Affiliate, or the acquisition by the Company or an
Affiliate of the assets of the employing corporation, or the acquisition by the
Company or an Affiliate of stock of the employing corporation with the result
that such employing corporation becomes an Affiliate.
VIII. STOCK APPRECIATION RIGHTS
(a) Stock Appreciation Rights. A Stock Appreciation Right is the right
to receive an amount equal to the Spread with respect to a share of Stock upon
the exercise of such Stock Appreciation Right. Stock Appreciation Rights may be
granted in connection with the grant of an Option, in which case the Option
Agreement will provide that the exercise of Stock Appreciation Rights will
result in the surrender of the right to purchase the shares under the Option as
to which the Stock Appreciation Rights were exercised, and that the exercise of
the Option will result in the surrender of the right to exercise the Stock
Appreciation Rights with respect to the shares as to which the Option was
exercised. Alternatively, Stock Appreciation Rights may be granted independently
of Options in which case each Award of Stock Appreciation Rights shall be
evidenced by a Stock Appreciation Rights Agreement which shall contain such
terms and conditions as may be approved by the Committee. The Spread with
respect to a Stock Appreciation Right may be payable either in cash, shares of
Stock with a Fair Market Value equal to the Spread or in a combination of cash
and shares of Stock. With respect to Stock Appreciation Rights that are subject
to Section 16 of the 1934 Act, however, the Committee shall, except as provided
in Paragraph XII(c), retain sole discretion (i) to determine the form in which
payment of the Stock Appreciation Right will be made (i.e., cash, Stock or any
combination thereof) or (ii) to approve an election by a Holder to receive cash
in full or partial settlement of Stock Appreciation Rights. Each Stock
Appreciation Rights Agreement shall specify the effect of termination of
employment (by retirement, disability, death or otherwise) on the exercisability
of the Stock Appreciation Rights.
(b) Other Terms and Conditions. At the time of such Award, the
Committee may, in its sole discretion, prescribe additional terms, conditions or
restrictions relating to Stock Appreciation Rights, including, but not limited
to, rules pertaining to termination of employment (by retirement, disability,
death or otherwise) of a Holder prior to the expiration of such Stock
Appreciation Rights. Such additional terms, conditions or restrictions shall be
set forth in the Stock Appreciation Rights Agreement made in conjunction with
the Award. Such Stock Appreciation Rights Agreements may also include, without
limitation, provisions relating to (i) vesting of Awards, subject to the
provisions hereof accelerating vesting on a Change of Control, (ii) tax matters
(including provisions covering applicable wage withholding requirements), and
(iii) any other matters not inconsistent with the terms and provisions of this
Plan, that the Committee shall in its sole discretion determine. The terms and
conditions of the respective Stock Appreciation Rights Agreements need not be
identical.
(c) Exercise Price. The exercise price of each Stock Appreciation Right
shall be determined by the Committee, but such exercise price (i) shall not be
less than the Fair Market Value of a share of Stock on the date the Stock
Appreciation Right is granted (or such greater exercise price as may be required
if such Stock Appreciation Right is granted in connection with an Incentive
Stock
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<PAGE> 8
Option that must have an exercise price equal to 110% of the Fair Market Value
of the Stock on the date of grant pursuant to Paragraph VII(c)), and (ii) shall
be subject to adjustment as provided in Paragraph XII.
(d) Exercise Period. The term of each Stock Appreciation Right shall be
as specified by the Committee at the date of grant.
(e) Limitations on Exercise of Stock Appreciation Right. A Stock
Appreciation Right shall be exercisable in whole or in such installments and at
such times as determined by the Committee.
IX. RESTRICTED STOCK AWARDS
(a) Forfeiture Restrictions to be Established by the Committee. Shares
of Stock that are the subject of a Restricted Stock Award shall be subject to
restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances (the
"Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by
the Committee in its sole discretion, and the Committee may provide that the
Forfeiture Restrictions shall lapse upon (i) the attainment of targets
established by the Committee that are based on (A) the price of a share of
Stock, (B) the Company's earnings per share, (C) the Company's revenue, (D) the
revenue of a business unit of the Company designated by the Committee, (E) the
return on stockholders' equity achieved by the Company, or (F) the Company's
pre-tax cash flow from operations, (ii) the Holder's continued employment or
service with the Company or an Affiliate for a specified period of time, or
(iii) a combination of any two or more of the factors listed in clauses (i) and
(ii) of this sentence. Each Restricted Stock Award may have different Forfeiture
Restrictions, in the discretion of the Committee. The Forfeiture Restrictions
applicable to a particular Restricted Stock Award shall not be changed except as
permitted by Paragraph IX(b) or Paragraph XII.
(b) Other Terms and Conditions. Stock awarded pursuant to a Restricted
Stock Award shall be represented by a stock certificate registered in the name
of the Holder of such Restricted Stock Award. The Holder shall have the right to
receive dividends with respect to Stock subject to a Restricted Stock Award, to
vote Stock subject thereto and to enjoy all other stockholder rights, except
that (i) the Holder shall not be entitled to delivery of the stock certificate
until the Forfeiture Restrictions shall have expired, (ii) the Company shall
retain custody of the Stock until the Forfeiture Restrictions shall have
expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate
or otherwise dispose of the Stock until the Forfeiture Restrictions shall have
expired, and (iv) a breach of the terms and conditions established by the
Committee pursuant to the Restricted Stock Agreement shall cause a forfeiture of
the Restricted Stock Award. At the time of such Award, the Committee may, in its
sole discretion, prescribe additional terms, conditions or restrictions relating
to Restricted Stock Awards, including, but not limited to, rules pertaining to
the termination of employment or service (by retirement, disability, death or
otherwise) of a Holder prior to expiration of the Forfeiture Restrictions. Such
additional terms, conditions or restrictions shall be set forth in a Restricted
Stock Agreement made in conjunction with the Award. Such Restricted Stock
Agreement may also include, without limitation, provisions relating to (i)
subject to the provisions
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<PAGE> 9
hereof accelerating vesting on a Change of Control, vesting of Awards, (ii) tax
matters (including provisions (A) covering any applicable employee wage
withholding requirements and (B) prohibiting an election by the Holder under
Section 83(b) of the Code), and (iii) any other matters not inconsistent with
the terms and provisions of this Plan that the Committee shall in its sole
discretion determine. The terms and conditions of the respective Restricted
Stock Agreements need not be identical.
(c) Payment for Restricted Stock. The Committee shall determine the
amount and form of any payment for Stock received pursuant to a Restricted Stock
Award, provided that in the absence of such a determination, a Holder shall not
be required to make any payment for Stock received pursuant to a Restricted
Stock Award, except to the extent otherwise required by law.
(d) Agreements. At the time any Award is made under this Paragraph IX,
the Company and the Holder shall enter into a Restricted Stock Agreement setting
forth each of the matters as the Committee may determine to be appropriate. The
terms and provisions of the respective Restricted Stock Agreements need not be
identical.
X. PERFORMANCE AWARDS
(a) Performance Period. The Committee shall establish, with respect to
and at the time of each Performance Award, a performance period over which the
performance of the Holder shall be measured.
(b) Performance Awards. Each Performance Award shall have a maximum
value established by the Committee at the time of such Award.
(c) Performance Measures. A Performance Award shall be awarded to an
individual contingent upon future performance of the individual, the Company, an
Affiliate or any division or department thereof by or in which he or she is
employed during the performance period. The Committee shall establish the
performance measures applicable to such performance prior to the beginning of
the performance period but subject to such later revisions as the Committee
shall deem appropriate to reflect significant, unforeseen events or changes.
(d) Awards Criteria. In determining the value of Performance Awards,
the Committee shall take into account an individual's responsibility level,
performance, potential, other Awards and such other considerations as it deems
appropriate.
(e) Payment. Following the end of the performance period, the Holder of
a Performance Award shall be entitled to receive payment of an amount, not
exceeding the maximum value of the Performance Award, based on the achievement
of the performance measures for such performance period, as determined by the
Committee. Payment of a Performance Award may be made in cash, Stock or a
combination thereof, as determined by the Committee. Payment shall be made in a
lump sum or in installments as prescribed by the Committee. Any payment to be
made in Stock shall be based on the Fair Market Value of the Stock on the
payment date. If a payment of cash is to be made
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<PAGE> 10
on a deferred basis, the Committee shall establish whether interest shall be
credited, the rate thereof and any other terms and conditions applicable
thereto.
(f) Termination of Employment or Service. A Performance Award shall
terminate if the Holder does not remain continuously in the employ or service of
the Company or an Affiliate at all times during the applicable performance
period, except as may be determined by the Committee or as may otherwise be
provided in the Award at the time granted.
(g) Agreements. At the time any Award is made under this Paragraph X,
the Company and the Holder shall enter into a Performance Award Agreement
setting forth each of the matters contemplated hereby, and, in addition such
matters are set forth in Paragraph IX(b) as the Committee may determine to be
appropriate. The terms and provisions of the respective agreements need not be
identical.
XI. PHANTOM STOCK AWARDS
(a) Phantom Stock Awards. Phantom Stock Awards are rights to receive
shares of Stock (or cash in an amount equal to the Fair Market Value thereof),
or rights to receive an amount equal to any appreciation in the Fair Market
Value of Stock (or portion thereof) over a specified period of time, which vest
over a period of time or upon the occurrence of an event (including without
limitation a Change of Control) as established by the Committee, without payment
of any amounts by the Holder thereof (except to the extent otherwise required by
law) or satisfaction of any performance criteria or objectives. Each Phantom
Stock Award shall have a maximum value established by the Committee at the time
of such Award.
(b) Award Period. The Committee shall establish, with respect to and at
the time of each Phantom Stock Award, a period over which or the event upon
which the Award shall vest with respect to the Holder.
(c) Awards Criteria. In determining the value of Phantom Stock Awards,
the Committee shall take into account an individual's responsibility level,
performance, potential, other Awards and such other considerations as it deems
appropriate.
(d) Payment. Following the end of the vesting period for a Phantom
Stock Award, the Holder of a Phantom Stock Award shall be entitled to receive
payment of an amount, not exceeding the maximum value of the Phantom Stock
Award, based on the then vested value of the Award. Payment of a Phantom Stock
Award may be made in cash, Stock or a combination thereof as determined by the
Committee. Payment shall be made in a lump sum or in installments as prescribed
by the Committee in its sole discretion. Any payment to be made in Stock shall
be based on the Fair Market Value of the Stock on the payment date. Cash
dividend equivalents may be paid during or after the vesting period with respect
to a Phantom Stock Award, as determined by the Committee. If a payment of cash
is to be made on a deferred basis, the Committee shall establish whether
interest shall be credited, the rate thereof and any other terms and conditions
applicable thereto.
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<PAGE> 11
(e) Termination of Employment or Service. A Phantom Stock Award shall
terminate if the Holder does not remain continuously in the employ or service of
the Company or an Affiliate at all times during the applicable vesting period,
except as may be otherwise determined by the Committee or as set forth in the
Award at the time of grant.
(f) Agreements. At the time any Award is made under this Paragraph XI,
the Company and the Holder shall enter into a Phantom Stock Award Agreement
setting forth each of the matters contemplated hereby and, in addition, such
matters as are set forth in Paragraph IX(b) as the Committee may determine to be
appropriate. The terms and provisions of the respective agreements need not be
identical.
XII. RECAPITALIZATION OR REORGANIZATION
(a) The shares with respect to which Awards may be granted are shares
of Stock as presently constituted, but if, and whenever, prior to the expiration
of an Award theretofore granted, the Company shall effect a subdivision or
consolidation by the Company, the number of shares of Stock with respect to
which such Award may thereafter be exercised or satisfied, as applicable, (i) in
the event of an increase in the number of outstanding shares shall be
proportionately increased, and the exercise 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 exercise price per
share shall be proportionately increased.
(b) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise or satisfaction, as applicable, of an
Award theretofore granted, the Holder shall be entitled (or entitled to
purchase, if applicable) under such Award, in lieu of the number of shares of
Stock then covered by such Award, to the number and class of shares of stock and
securities to which the Holder would have been entitled pursuant to the terms of
the recapitalization if, immediately prior to such recapitalization, the Holder
had been the holder of record of the number of shares of Stock then covered by
such Award.
(c) In the event of a Change of Control, the Committee, in its
discretion, may determine that outstanding Awards shall immediately vest and
become exercisable or satisfiable, as applicable. In addition, individual Option
Agreements, Stock Appreciation Rights Agreements, Restricted Stock Agreements,
Performance Award Agreements or Phantom Stock Award Agreements may provide that
upon a Change of Control, the Awards subject to such agreements shall
immediately vest and become exercisable or satisfiable, as applicable. The
Committee, in its discretion, may determine that upon the occurrence of a Change
of Control, each Award other than an Option outstanding hereunder shall
terminate within a specified number of days after notice to the Holder, and such
Holder shall receive, with respect to each share of Stock subject to such Award,
cash in an amount equal to the excess, if any, of the Change of Control Value
over any exercise price or purchase price paid, if applicable. Further, in the
event of a Change of Control, the Committee, in its discretion, shall act to
effect one or more of the following alternatives with respect to outstanding
Options, which may vary among individual Holders and which may vary among
Options held by any individual Holder: (i) determine a limited period of time on
or before a specified date (before or
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<PAGE> 12
after such Change of Control) after which specified date all unexercised Options
and all rights of Holders thereunder shall terminate, (2) require the mandatory
surrender to the Company by selected Holders of some or all of the outstanding
Options held by such Holders (irrespective of whether such Options are then
exercisable under the provisions of the Plan) as of a date, before or after such
Change of Control, specified by the Committee, in which event the Committee
shall thereupon cancel such Options and the Company shall pay to each Holder an
amount of cash per share equal to the excess, if any, of the Change of Control
Value of the shares subject to such Option over the exercise price(s) under such
Options for such shares, (3) make such adjustments to Options then outstanding
as the Committee deems appropriate to reflect such Change of Control (provided,
however, that the Committee may determine in its sole discretion that no
adjustment is necessary to Options then outstanding), or (4) provide that
thereafter upon any exercise of an Option theretofore granted the Holder shall
be entitled to purchase under such Option, in lieu of the number of shares of
Stock then covered by such Option, the number and class of shares of stock or
other securities or property (including, without limitation, cash) to which the
Holder 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 Holder had been
the holder of record of the number of shares of Stock then covered by such
Option. The provisions contained in this paragraph shall not terminate any
rights of the Holder to further payments pursuant to any other agreement with
the Company following a Change of Control.
(d) In the event of changes in the outstanding Stock by reason of
recapitalizations, reorganizations, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the date
of the grant of any Award and not otherwise provided for by this Paragraph XII,
any outstanding Awards and any agreements evidencing such Awards shall be
subject to adjustment by the Committee at its discretion as to the number and
price of shares of Stock or other consideration subject to such Awards. In the
event of any such change in the outstanding Stock, the aggregate number of
shares available under the Plan may be appropriately adjusted by the Committee,
whose determination shall be conclusive.
(e) The existence of the Plan and the Awards granted hereunder shall
not affect in any way the right or power of the Board or the stockholders 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 ahead of or
affecting Stock or the rights thereof, 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.
(f) Any adjustment provided for in Subparagraphs (a), (b), (c) or (d)
above shall be subject to any stockholder action required by corporate law.
(g) 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 of obligations of the Company convertible into such shares
or other
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<PAGE> 13
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 Awards theretofore granted or the exercise price per
share, if applicable.
XIII. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Awards 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 no change in any Award theretofore granted may be
made which would impair the rights of the Holder without the consent of the
Holder (unless such change is required in order to cause the benefits under the
Plan to qualify as performance-based compensation within the meaning of Section
162(m) of the Code and applicable interpretive authority thereunder), and
provided, further, that the Board may not, without approval of the stockholders,
amend the Plan:
(a) to increase the maximum number of shares which may be issued on
exercise or surrender of an Award, except as provided in Paragraph XII;
(b) to change the class of individuals eligible to receive Awards or
materially increase the benefits accruing to individuals under the Plan;
(c) to extend the maximum period during which Awards may be granted
under the Plan;
(d) to modify materially the requirements as to eligibility for
participation in the Plan; or
(e) to decrease any authority granted to the Committee hereunder in
contravention of Rule 16b-3.
XIV. MISCELLANEOUS
(a) No Right to An Award. Neither the adoption of the Plan by the
Company nor any action of the Board or the Committee shall be deemed to give an
individual any right to be granted an Award to purchase Stock, a right to a
Stock Appreciation Right, a Restricted Stock Award, a Performance Award or a
Phantom Stock Award or any of the rights hereunder except as may be evidenced by
an Award or by an Option Agreement, Stock Appreciation Rights Agreement,
Restricted Stock Agreement, Performance Award Agreement or Phantom Stock Award
Agreement 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. The
Company shall not be required to establish any special or separate fund or to
make any other segregation of funds or assets to assure the payment of any
Award.
(b) Rights Unsecured. The right of an individual to receive Stock, cash
or any other payment under this Plan shall be an unsecured claim against the
general assets of the Company. The
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<PAGE> 14
Company may, but shall not be obligated to, acquire shares of Stock from time to
time in anticipation of its obligations under this Plan, but a Holder shall have
no right in or against any shares of Stock so acquired. All Stock shall
constitute the general assets of the Company and may be disposed of by the
Company at such time and for such purposes as it deems appropriate.
(c) No Employment Rights Conferred. Nothing contained in the Plan shall
(i) confer upon any individual any right with respect to continuation of
employment or service with the Company or an Affiliate or (ii) interfere in any
way with the right of the Company to terminate an individual's employment or
service at any time.
(d) Other Laws; Withholding. The Company shall not be obligated to
issue any Stock pursuant to any Award granted under the Plan at any time when
the shares covered by such Award 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 issuance and sale of such
shares. Unless the Awards and Stock covered by this Plan have been registered
under the Securities Act of 1993, or the Company has determined that such
registration is unnecessary, each Holder exercising an Award under this Plan may
be required by the Company to give representation in writing that such Holder is
acquiring such shares for his or her own account for investment and not with a
view to, or for sale in connection with, the distribution of any part thereof.
No fractional shares of Stock shall be delivered, nor shall any cash in lieu of
fractional shares be paid. The Company shall have the right to deduct in
connection with all Awards any taxes required by law to be withheld and to
require any payments required to enable it to satisfy its withholding
obligations.
(e) No Restriction on Corporate Action. Nothing contained in the Plan
shall be construed to prevent the Company or an Affiliate from taking any
corporate action which is deemed by the Company or an Affiliate to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Award made under the Plan. No Holder,
beneficiary or other person shall have any claim against the Company or an
Affiliate as a result of any such action.
(f) Restrictions on Transfer. An Award shall not be transferable
otherwise than by will or the laws of descent and distribution and shall be
exercisable during the Holder's lifetime only by such Holder or the Holder's
guardian or legal representative.
(g) Beneficiary Designation. Each Holder may name, from time to time,
any beneficiary or beneficiaries (who may be named contingently or successively)
to whom any benefit under the Plan is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each designation will
revoke all prior designations by the same Holder, shall be in a form prescribed
by the Committee, and will be effective only when filed by the Holder in writing
with the Committee during his or her lifetime. In the absence of any such
designation, benefits remaining unpaid at the Holder's death shall be paid to
his or her estate.
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<PAGE> 15
(h) Rule 16b-3. It is intended that the Plan and any grant of an Award
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 Award would
disqualify the Plan or such Award under, or would otherwise not comply with,
Rule 16b-3, such provision or Award shall be construed or deemed amended to
conform to Rule 16b-3.
(i) Section 162(m). If the Plan is subject to Section 162(m) of the
Code, it is intended that the Plan comply fully with and meet all the
requirements of Section 162(m) of the Code so that Options and Stock
Appreciation Rights granted hereunder and, if determined by the Committee,
Restricted Stock Awards, shall constitute "performance-based" compensation
within the meaning of such Section. If any provision of the Plan would
disqualify the Plan or would not otherwise permit the Plan to comply with
Section 162(m) as so intended, such provision shall be construed or deemed
amended to conform to the requirements or provisions of Section 162(m); provided
that no such construction or amendment shall have an adverse effect on the
economic value to a Holder of any Award previously granted hereunder.
(j) Indemnification. Each person who is or shall have been a member of
the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be a party or in which he
may be involved by reason of any action taken or failure to act under the Plan
and against and from any and all amounts paid by him in settlement thereof, with
the Company's approval, or paid by him in satisfaction of any judgment in any
such action, suit, or proceeding against him, provided he shall give the Company
an opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights or indemnification to
which such persons may be entitled under the Company's Articles of Incorporation
or Bylaws, as a matter of law, or otherwise, or any power that the Company may
have to indemnify them or hold them harmless.
(k) Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing by the Board, Kinder Morgan, Inc. has caused this document to be duly
executed in its name and behalf by its proper officer thereunto duly authorized
as of this 16th day of June, 1999.
By: /s/ WILLIAM V. MORGAN
----------------------------------
William V. Morgan
President
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<PAGE> 1
EXHIBIT 10.3
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
among
KINDER MORGAN, INC.
and its Stockholders
-----------------
Dated as of June 16, 1999
and effective as set forth herein
-----------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
SECTION 1. Definitions.....................................................................................1
SECTION 2. Securities Subject to this Agreement............................................................2
(a) Registrable Securities..........................................................................2
(b) Holders of Registrable Securities...............................................................2
SECTION 3. Demand Registration.............................................................................3
(a) Request for Demand Registration.................................................................3
(b) Company Obligation to Register..................................................................3
(c) Underwriting Procedures.........................................................................4
(d) Selection of Underwriters.......................................................................4
SECTION 4. Piggy-Back Registration.........................................................................4
SECTION 5. Holdback Agreements.............................................................................5
(a) Restrictions on Public Sale by Holders..........................................................5
(b) Restrictions on Public Sale by the Company......................................................5
SECTION 6. Registration Procedures.........................................................................5
(a) Obligations of the Company......................................................................5
(b) Seller Information..............................................................................8
(c) Notice to Discontinue...........................................................................9
SECTION 7. Registration Expenses...........................................................................9
SECTION 8. Indemnification; Contribution..................................................................10
(a) Indemnification by the Company.................................................................10
(b) Indemnification by Holders.....................................................................10
(c) Conduct of Indemnification Proceedings.........................................................10
(d) Contribution...................................................................................11
(e) Survival.......................................................................................11
SECTION 9. Rules 144 and 144A.............................................................................12
SECTION 10. Limitation on Registration Rights of Others....................................................13
SECTION 11. Miscellaneous..................................................................................13
(a) Recapitalizations, Exchanges, Etc..............................................................13
(b) No Inconsistent Agreements.....................................................................13
(c) Remedies.......................................................................................13
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
(d) Amendments and Waivers.........................................................................13
(e) Notices........................................................................................13
(f) Successors and Assigns.........................................................................14
(g) Effectiveness..................................................................................14
(h) Counterparts...................................................................................14
(i) Headings.......................................................................................14
(j) Governing Law..................................................................................14
(k) Severability...................................................................................14
(l) Entire Agreement...............................................................................15
</TABLE>
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<PAGE> 4
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is dated as of June 16, 1999, but effective as set forth in
Section 11(g) below, by and among KINDER MORGAN, INC., a Delaware corporation
(the "Company"), and its Stockholders listed on the signature pages hereto
(individually, a "Stockholder" and collectively, the "Stockholders").
Statement of Purpose
The Stockholders are the holders of all of the outstanding capital
stock of the Company described on Schedule 1 hereto. The Company has agreed to
provide registration rights with respect to the Registrable Securities (as
hereinafter defined) as set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
SECTION 1. Definitions. For the purposes of this Agreement, in
addition to the terms defined elsewhere in this Agreement, the following terms
have the meanings set forth below:
"Approved Underwriter" shall have the meaning assigned thereto in
Section 3(d).
"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company as in effect on the date hereof.
"Commission" means the Securities and Exchange Commission or any
similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means (a) the common stock of the Company, par value
$0.01 per share and (b) any other capital stock into which such stock is
reclassified or reconstituted.
"Company Underwriter" shall have the meaning assigned thereto in
Section 4.
"Demand Registration" means a demand registration requested by the
holders of Registrable Securities pursuant to Section 3.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holders' Counsel" shall have the meaning assigned thereto in Section
6(a)(i).
"Inspector" shall have the meaning assigned thereto in Section
6(a)(viii).
"Kinder" means Richard D. Kinder and his assignees pursuant to this
Agreement.
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<PAGE> 5
"Morgan" means Morgan Associates, Inc. and its assignees pursuant to
this Agreement.
"NASD" means the National Association of Securities Dealers, Inc.
"Person" means any individual, firm, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
limited liability company, government (or an agency or political subdivision
thereof) or other entity of any kind, and shall include any successor (by
merger or otherwise) of such entity.
"Public Offering" means a public offering of the Common Stock pursuant
to a registration statement declared effective under the Securities Act.
"Records" shall have the meaning assigned thereto in Section
6(a)(viii).
"Registrable Securities" means all shares of Common Stock now or
hereafter acquired by any party hereto (including pursuant to Section 11(f),
but excluding the Company) or his, her or its successors or assigns, whether
pursuant to conversion or exercise of securities convertible into Common Stock
or options, warrants or other rights to subscribe for Common Stock or
otherwise, and any other common equity securities of the Company issued in
exchange for, upon a reclassification of, or in a distribution with respect to,
the Common Stock.
"Registration Expenses" shall have the meaning assigned thereto in
Section 7.
"Requesting Holders" shall have the meaning assigned thereto in
Section 3(a).
"Securities Act" means the Securities Act of 1933, as amended.
SECTION 2. Securities Subject to this Agreement.
(a) Registrable Securities. For the purposes of this Agreement,
Registrable Securities will cease to be Registrable Securities when (i) a
registration statement covering such Registrable Securities has been declared
effective under the Securities Act by the Commission and such Registrable
Securities have been disposed of pursuant to such effective registration
statement or (ii) the entire amount of Registrable Securities proposed to be
sold by a party hereto in a single sale are or, in the opinion of counsel
reasonably satisfactory to the Company, may be distributed to the public in
such single sale pursuant to Rule 144 (or any successor provision then in
force) under the Securities Act.
(b) Holders of Registrable Securities. A Person is deemed to be a
holder of Registrable Securities whenever such Person owns of record
Registrable Securities, or holds an option, warrant or other right to purchase,
or a security convertible into, Registrable Securities whether or not such
acquisition or conversion has actually been effected. If the Company receives
conflicting instructions, notices or elections from two or more Persons with
respect to the same Registrable
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<PAGE> 6
Securities, the Company may act upon the basis of the instructions, notice or
election received from the registered owner of such Registrable Securities.
Registrable Securities issuable upon exercise of an option, warrant or other
right or upon conversion of another security shall be deemed outstanding for
the purposes of this Agreement.
SECTION 3. Demand Registration.
(a) Request for Demand Registration. At any time after the Company has
qualified for Form S-3 (or any successor form), (i) the holders of a majority
of the Registrable Securities then outstanding (excluding any Registrable
Securities owned by Kinder or Morgan) or (ii) Kinder or Morgan (in either case
of clause (i) or (ii), the "Requesting Holders") may make a written request for
registration of Registrable Securities under the Securities Act, and under the
securities or blue sky laws of any jurisdiction reasonably designated by the
Requesting Holders (subject to the limitations in Section 6(a) (iv); provided,
that (1) subject to Section 3(c), the Company will not be required to effect
more than two registrations under each of clause (i) and (ii) pursuant to this
Section 3 (a), (2) the Company will not be required to effect any such
registration within a period beginning on the effective date of a registration
statement filed by the Company on its behalf covering a public offering of its
Common Stock and ending on the later of (A) 180 days thereafter and (B) the
expiration of any lock-up period required by the underwriters in connection
therewith and (3) the Company may, if the Board of Directors determines in the
exercise of its reasonable judgment that to effect such Demand Registration at
such time would have an adverse effect on the Company, defer such Demand
Registration for a single period not to exceed 90 days. The Company shall
exercise reasonable good faith efforts to qualify to register Registrable
Securities on Form S-3 (or any successor form) as soon as such registration is
available after the Company's initial Public Offering.
(b) Company Obligation to Register. Each request for a Demand
Registration pursuant to Section 3(a) shall specify the amount of the
Registrable Securities proposed to be sold, the intended method of disposition
thereof and the jurisdictions in which registration is reasonably desired. Upon
a request for a Demand Registration, the Company shall promptly and in any
event at least 30 days prior to the filing date give notice of such request to
all other holders of Registrable Securities. Such other holders shall, subject
to Section 3(c), be entitled to participate in such registration on the same
basis as the Requesting Holders; provided that such holders notify the Company
of their desire to be included in the registration statement within 10 days
after receipt of such notice from the Company. A registration shall not
constitute a Demand Registration until it has become effective and remains
continuously effective for a period of not less than six months or such shorter
period which will terminate when all Registrable Securities covered by such
Registration Statement (i) have been sold (but not before the expiration of the
90-day period referred to in Section 4(3) of the Securities Act and Rule 174
thereunder, if applicable), or (ii) may, in the opinion of counsel reasonably
satisfactory to the Company, be distributed to the public in a single sale
pursuant to Rule 144 (or any successor provision then in force) under the
Securities Act. In any registration initiated as a Demand Registration, the
Company shall pay all Registration Expenses in connection therewith, whether or
not such Demand Registration becomes effective, unless such Demand Registration
does not become effective due to the actions or inactions of the holders of the
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<PAGE> 7
Registrable Securities included in such Registration Statement, in which case
such holders shall be responsible for the Registration Expenses.
(c) Underwriting Procedures. If the Requesting Holders so elect, the
offering of such Registrable Securities pursuant to such Demand Registration
shall be in the form of a firm commitment underwritten offering and the
managing underwriter or underwriters selected for such offering shall be the
Approved Underwriter selected in accordance with Section 3(d). In such event,
if the Approved Underwriter advises the Company, which advice shall be
confirmed in writing, that in its opinion marketing considerations require a
limitation on the number of securities to be sold, the Company shall include in
such registration only the number of Registrable Securities which, in the good
faith opinion of such Underwriter, can be sold, selected in the following
order:
(i) in the case of Section 3(a)(i), first, the Registrable
Securities requested to be included by the holders of Registrable Securities
(other than Kinder and Morgan), pro rata, based on the number of Registrable
Securities owned by each such Person; and second, the Registrable Securities
requested to be included by Kinder and Morgan, pro rata, based on the number of
Registrable Securities owned by each such Person.
(ii) in the case of Section 3(a)(ii), first, the Registrable
Securities requested to be included by Kinder and Morgan, pro rata, based on
the number of Registrable Securities owned by each such Person; and second, the
Registrable Securities requested to be included by the holders of Registrable
Securities (other than Kinder and Morgan), pro rata, based on the number of
Registrable Securities owned by each such Person.
(d) Selection of Underwriters. In connection with requesting a Demand
Registration of Registrable Securities pursuant to Section 3(a), the Company
shall select a managing underwriter or underwriters (the "Approved
Underwriter"); provided, that the Approved Underwriter shall, in any case, be
reasonably acceptable to the Requesting Holders.
SECTION 4. Piggy-Back Registration. At any time after the initial
Public Offering of the Company, if the Company proposes to file a registration
statement under the Securities Act with respect to an offering of Common Stock
by the Company for its own account, or an offering of Common Stock for the
account of any stockholder of the Company or any group of such stockholders
(other than a registration statement on Form S-4 or S-8 or any successor forms
or any other forms not available for registering capital stock for sale to the
public), then the Company shall give notice of such proposed filing to each
holder of Registrable Securities at least 30 days before the anticipated filing
date, and such notice shall describe in detail the proposed registration and
distribution (including whether the offering will be underwritten and those
jurisdictions where registration under the securities or blue sky laws is
intended) and offer such holders the opportunity to register the number of
Registrable Securities as each such holder may request. The Company shall use
its best efforts, within 10 days of the notice provided for in the preceding
sentence, to cause the managing underwriter or underwriters of a proposed
underwritten offering (the "Company Underwriter") to permit the holders of
Registrable Securities who have requested to participate in the registration
for such offering to include such Registrable Securities in such offering on
the same
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<PAGE> 8
terms and conditions as the securities of the Company included therein,
including execution of an underwriting agreement in customary form.
Notwithstanding the foregoing, if the Company Underwriter delivers a written
opinion to the holders of Registrable Securities that marketing considerations
require a limitation on the number of securities to be sold, then the amount of
securities in excess of the amount to be registered for sale by the Company to
be offered for the account of holders of Registrable Securities requesting
registration shall be reduced pro rata based on the Registrable Securities held
by each such holder, to the extent necessary to reduce the total securities to
be included in the offering to the amount recommended by the Company
Underwriter. The Company shall bear all Registration Expenses in connection
with any registration pursuant to this Section 4.
SECTION 5. Holdback Agreements.
(a) Restrictions on Public Sale by Holders. To the extent not
inconsistent with applicable law, each holder of Registrable Securities agrees
not to effect any public sale or distribution of any Registrable Securities or
of any securities convertible into or exchangeable or exercisable for such
Registrable Securities, including a sale pursuant to Rule 144 under the
Securities Act, during the period beginning on the filing of such registration
statement and ending on the later of (i) 180 days after the effective date of
such registration statement or the commencement of a public distribution of the
Registrable Securities pursuant to such registration statement or (ii) the
expiration of any lock-up period required by the underwriters, if any, of such
offering.
(b) Restrictions on Public Sale by the Company. The Company agrees not
to effect any public sale or distribution of any of its securities, or any
securities convertible into or exchangeable or exercisable for such securities
(except pursuant to registrations on Form S-4 or S-8 or any successor to such
forms or any other forms not available for registering capital stock for sale
to the public) during the period beginning on the filing of any registration
statement in which the holders of Registrable Securities are participating and
ending on the later of (i) 90 days after the effective date of any such
registration statement and (ii) the expiration of any lock-up period required
by the underwriters, if any, of such offering.
SECTION 6. Registration Procedures.
(a) Obligations of the Company. Whenever registration of Registrable
Securities has been requested pursuant to Sections 3 or 4, the Company shall
use its reasonable best efforts to effect the registration and sale of such
Registrable Securities in accordance with the intended method of distribution
thereof as quickly as practicable, and in connection with any such request, the
Company shall, as expeditiously as possible:
(i) prepare and file with the Commission (as promptly as
practicable, but in any event not later than 90 days after receipt of a request
to file a registration statement with respect to Registrable Securities,
subject to extension as provided in Section 3(a)(iii)) a registration statement
on any form for which the Company then qualifies or which counsel for the
Company shall deem appropriate and which form shall be available for the sale
of such Registrable Securities
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<PAGE> 9
in accordance with the intended method of distribution thereof, and use its
best efforts to cause such registration statement to become effective;
provided, that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall (A) provide counsel
selected by the holders of a majority of the Registrable Securities being
registered in such registration ("Holders' Counsel") with an adequate and
appropriate opportunity to participate in the preparation of such registration
statement and each prospectus included therein (and each amendment or
supplement thereto) to be filed with the Commission, which documents shall be
subject to the review of Holders' Counsel, and (B) notify the Holders' Counsel
and each seller of Registrable Securities of any stop order issued or, to the
Company's knowledge, threatened by the Commission and take all reasonable
action required to prevent the entry of such stop order or to remove it if
entered;
(ii) (A) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for a period of not less than six months or such shorter period which
will terminate when all Registrable Securities covered by such registration
statement (I) have been sold (but not before the expiration of the 90-day
period referred to in Section 4(3) of the Securities Act and Rule 174
thereunder, if applicable), or (II) may, in the opinion of counsel reasonably
satisfactory to the Company, be distributed to the public in a single sale
pursuant to Rule 144 (or any successor provision then in force) under the
Securities Act, and (B) comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration statement;
(iii) as soon as reasonably possible, furnish to each seller
of Registrable Securities, prior to filing a registration statement, copies of
such registration statement as it is proposed to be filed, and thereafter such
number of copies of such registration statement, each amendment and supplement
thereto (in each case including all exhibits thereto), the prospectus included
in such registration statement (including each preliminary prospectus) and such
other documents as each such seller may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such seller;
(iv) use its reasonable best efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of
such jurisdictions as any seller of Registrable Securities reasonably requests,
and to continue such qualification in effect in such jurisdictions for as long
as is permissible pursuant to the laws of such jurisdictions, or for as long as
any such seller requests or until all of such Registrable Securities are sold,
whichever is shortest, and do any and all other acts and things which may be
reasonably necessary or advisable to enable any such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller; provided, that the Company shall not be obligated to effect, or take
any action to effect, any such registration or qualification in any particular
jurisdiction in which the Company would be required to execute a general
consent to service of process in effecting such registration or qualification
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act or applicable rules or
regulations thereunder;
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<PAGE> 10
(v) use its reasonable best efforts to cause the Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
by virtue of the business and operations of the Company to enable the seller or
sellers of Registrable Securities to consummate the disposition of such
Registrable Securities;
(vi) notify each seller of Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event as a
result of which, the prospectus included in such registration statement
contains an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances under which they were made, and
the Company shall promptly prepare a supplement or amendment to such prospectus
and furnish to each seller a reasonable number of copies of a supplement to or
an amendment of such prospectus as may be necessary so that, after delivery to
the purchasers of such Registrable Securities, such prospectus shall not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances under which they were made;
(vii) enter into and perform customary agreements (including
an underwriting agreement in customary form with the Approved Underwriter or
Company Underwriter, if any, selected as provided in Sections 3 or 4) and take
such other actions as are reasonably required in order to expedite or
facilitate the disposition of such Registrable Securities;
(viii) make available for inspection by any seller of
Registrable Securities, any managing underwriter participating in any
disposition pursuant to such registration statement, Holders' Counsel and any
attorney, accountant or other agent retained by any such seller or any managing
underwriter (each, an "Inspector" and collectively, the "Inspectors"), all
financial and other records, pertinent corporate documents and properties of
the Company and its subsidiaries (collectively, the "Records") as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's and its subsidiaries' officers,
directors and employees, and the independent public accountants of the Company,
to supply all information reasonably requested by any such Inspector in
connection with such registration statement. Records that the Company
determines, in good faith, to be confidential and which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (A)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in the registration statement or to confirm that no such
misstatement or omission has been made, (B) the release of such Records is
ordered pursuant to a subpoena or other order from a court of competent
jurisdiction, or (C) the information in such Records has been made generally
available to the public or is required to be filed with the Commission. Each
seller of Registrable Securities agrees that it shall, upon learning that
disclosure of such Records is sought in a court of competent jurisdiction, give
notice to the Company and allow the Company, at the Company's expense, to
undertake appropriate action to prevent disclosure of the Records deemed
confidential;
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<PAGE> 11
(ix) if such sale is pursuant to an underwritten offering,
obtain a "cold comfort" letter from the Company's independent public
accountants in customary form and covering such matters of the type customarily
covered by "cold comfort" letters as Holders' Counsel or the managing
underwriters reasonably request;
(x) furnish, at the request of any seller of Registrable
Securities on the date such securities are delivered to the underwriters for
sale pursuant to such registration or, if such securities are not being sold
through underwriters, on the date the registration statement with respect to
such securities becomes effective, an opinion, dated such date, of counsel
representing the Company for the purposes of such registration, addressed to
the underwriters, if any, and to the seller making such request, covering such
legal matters with respect to the registration in respect of which such opinion
is being given as such seller or underwriters may reasonably request and are
customarily included in such opinions;
(xi) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable but no later than 15
months after the effective date of the registration statement, an earnings
statement covering a period of 12 months beginning after the effective date of
the registration statement, in a manner which satisfies the provisions of
Section 11(a) of the Securities Act;
(xii) cause all such Registrable Securities to be listed on
each securities exchange on which similar securities issued by the Company are
then listed; provided, that the applicable listing requirements are satisfied;
(xiii) keep each seller of Registrable Securities advised in
writing as to the initiation and progress of any registration under Sections 3
or 4;
(xiv) provide officers' certificates and other customary
closing documents;
(xv) cooperate with each seller of Registrable Securities and
each underwriter participating in the disposition of such Registrable
Securities and their respective counsel in connection with any filings required
to be made with the NASD; and
(xvi) use its reasonable best efforts to take all other steps
necessary to effect the registration of the Registrable Securities contemplated
hereby and cooperate with the holders of such Registrable Securities to
facilitate the disposition of such Registrable Securities pursuant thereto.
(b) Seller Information. The Company shall be entitled to require each
seller of Registrable Securities as to which any registration is being effected
to furnish to the Company such information regarding the distribution of such
securities as the Company may from time to time reasonably request in writing.
In addition, each seller shall be required to enter into and perform customary
agreements (including an underwriting agreement in customary form with the
Approved
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<PAGE> 12
Underwriter or Company Underwriter, if any, selected as provided in Sections 3
or 4) and take such other actions as are reasonably required in order to
expedite or facilitate the disposition of such Registrable Securities.
(c) Notice to Discontinue. Each holder of Registrable Securities
agrees that, upon receipt of any notice from the Company of the happening of
any event of the kind described in Section 6(a) (vi), such holder shall
forthwith discontinue disposition of Registrable Securities pursuant to the
registration statement covering such Registrable Securities until such holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section 6(a)(vi) and, if so directed by the Company, such holder shall deliver
to the Company (at the Company's expense) all copies, other than permanent file
copies then in such holder's possession, of the prospectus covering such
Registrable Securities which is current at the time of receipt of such notice.
If the Company shall give any such notice, the Company shall extend the period
during which such registration statement shall be maintained effective pursuant
to this Agreement (including without limitation the period referred to in
Section 6(a)(ii)) by the number of days during the period from and including
the date of the giving of such notice pursuant to Section 6(a)(vi) to and
including the date when the holder shall have received the copies of the
supplemented or amended prospectus contemplated by and meeting the requirements
of Section 6(a)(vi).
SECTION 7. Registration Expenses.
(a) The Company shall pay all of its expenses (other than underwriting
discounts and commissions) arising from or incident to the performance of, or
compliance with, this Agreement, including without limitation, (i) Commission,
stock exchange and NASD registration and filing fees, (ii) all fees and
expenses incurred in complying with securities or blue sky laws (including
reasonable fees, charges and disbursements of counsel in connection with blue
sky qualifications of the Registrable Securities), (iii) all printing,
engraving, messenger and delivery expenses, and (iv) the fees, charges and
disbursements of counsel to the Company and of its independent public
accountants and any other accounting and legal fees, charges and expenses
incurred by the Company (including without limitation any fees and expenses in
connection with any "cold comfort" letters and any special audits incident to
or required by any registration or qualification) regardless of whether such
registration statement is declared effective, unless such registration
statement does not become effective due to the actions or inactions of the
holders of the Registrable Securities included in such registration statement.
(b) The Company will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
securities to be registered on each securities exchange on which securities of
the same class are then listed or the qualification for trading of the
securities to be registered in each inter-dealer quotation system in which
securities of the same class are then traded, and rating agency fees.
(c) In connection with each registration requested pursuant to Section
3, the Company will pay the reasonable fees and disbursements of the Holders'
Counsel.
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SECTION 8. Indemnification; Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify,
to the full extent permitted by law, each holder of Registrable Securities, its
officers, directors, partners, employees and agents and each Person who
controls (within the meaning of the Securities Act or the Exchange Act) such
holder from and against any and all losses, claims, damages, liabilities and
expenses (including reasonable costs of investigation and, subject to Section
8(c), reasonable fees, disbursements and other charges of legal counsel)
arising out of or based upon any untrue, or alleged untrue, statement of a
material fact contained in any registration statement, prospectus or
preliminary prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except insofar as
the same are caused by or contained in any information furnished in writing to
the Company by such holder expressly for use therein.
(b) Indemnification by Holders. In connection with any registration
statement in which a holder of Registrable Securities is participating pursuant
to Sections 3 or 4, each such holder shall furnish to the Company in writing
such information with respect to such holder as the Company may reasonably
request or as may be required by law for use in connection with any such
registration statement or prospectus and each holder agrees to indemnify, to
the extent permitted by law, the Company, any underwriter retained by the
Company and their respective directors, officers, employees and each Person who
controls the Company or such underwriter (within the meaning of the Securities
Act and the Exchange Act) to the same extent as the foregoing indemnity from
the Company to the holders, but only with respect to any such information
furnished in writing by such holder expressly for use in such registration
statement. Notwithstanding the provisions of this Section 8(b), a holder of
Registrable Securities shall not be required to pay any indemnification in an
amount in excess of the net proceeds received by such holder in the offering to
which such registration statement relates.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder (the "Indemnified Party") agrees to give prompt
notice to the indemnifying party (the "Indemnifying Party") after the receipt
by the Indemnified Party of any notice of the commencement of any action, suit,
proceeding or investigation or threat thereof made in writing for which the
Indemnified Party intends to claim indemnification or contribution pursuant to
this Agreement; provided, that the failure so to notify the Indemnifying Party
shall not relieve the Indemnifying Party of any liability that it may have to
the Indemnified Party hereunder, unless (and then solely to the extent that)
the Indemnifying Party is materially prejudiced thereby. If notice of
commencement of any such action is given to the Indemnifying Party as above
provided, the Indemnifying Party shall be entitled to participate in and, to
the extent it may wish, jointly with any other Indemnifying Party similarly
notified, to assume the defense of such action at its own expense, with counsel
chosen by it and reasonably satisfactory to such Indemnified Party. The
Indemnified Party shall have the right to employ separate legal counsel in any
such action and participate in the defense thereof, but the fees, disbursements
and other charges of such legal counsel shall be paid by the Indemnified Party
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<PAGE> 14
unless (i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying
Party fails to assume the defense of such action with legal counsel reasonably
satisfactory to the Indemnified Party in its reasonable judgment or (iii) the
named parties to any such action (including any impleaded parties) have been
advised by such legal counsel that either (A) representation of such
Indemnified Party and the Indemnifying Party by the same legal counsel would be
inappropriate under applicable standards of professional conduct or (B) there
may be one or more legal defenses available to it which are different from or
additional to those available to the Indemnifying Party. In either of such
cases the Indemnifying Party shall not have the right to assume the defense of
such action on behalf of such Indemnified Party. No Indemnifying Party shall be
liable for any settlement entered into without its written consent, which
consent shall not be unreasonably withheld, unless such settlement contains an
unconditional release of the Indemnified Party.
(d) Contribution. If the indemnification provided for in this Section
8 from the Indemnifying Party is unavailable to an Indemnified Party hereunder
in respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault and the relative
benefit of the Indemnifying Party and Indemnified Party in connection with the
actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
faults of such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been made by, or relates to information
supplied by, such Indemnifying Party or Indemnified Party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Sections 8(a), 8(b)
and 8(c), any fees, charges or expenses (including reasonable fees,
disbursements and other charges of legal counsel) reasonably incurred by such
party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 8(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 8(d), a holder of
Registrable Securities shall not be required to contribute any amount in excess
of the amount by which the net proceeds received by such holder in the offering
to which such registration statement relates exceeds the amount of any damages
that such holder has otherwise been required to pay. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person.
(e) Survival. The indemnity and contribution covenants contained in
this Section 8 shall remain operative and in full force and effect regardless
of (i) any investigation made by or on behalf of a holder or any person
controlling a holder, (ii) any sale of any Registrable Securities pursuant
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<PAGE> 15
to this Agreement and receipt by the holders of the proceeds thereof, or (iii)
any termination of this Agreement for any reason, including after the initial
filing of the registration statement to which these indemnity and contribution
covenants relate.
SECTION 9. Rules 144 and 144A. The Company covenants that it shall
duly and timely file any reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by
the Commission thereunder; and that it shall take such further action as each
holder of Registrable Securities may reasonably request (including providing
any information necessary to comply with Rules 144 and 144A under the
Securities Act), all to the extent required from time to time to enable such
holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by Rule 144 or Rule 144A
under the Securities Act, as such rules may be amended from time to time, or
any similar rules or regulations hereafter adopted by the Commission. The
Company shall, upon the request of any holder of Registrable Securities,
deliver to such holder a written statement as to whether it has complied with
such requirements. Without limiting the foregoing, the Company agrees that:
(a) it will, if required by law, maintain a registration statement
(containing such information and documents as the Commission shall specify)
with respect to the Common Stock under Section 12 of the Exchange Act and will
timely file such information, documents and reports as the Commission may
require or prescribe for companies whose stock has been registered pursuant to
said Section 12;
(b) it will, if a registration statement with respect to the Common
Stock under Section 12 is effective, or if required by Section 15(d) of the
Exchange Act, make whatever filings with the Commission or otherwise make
generally available to the public such financial and other information as may
be necessary to enable the holders of Registrable Securities to be permitted to
sell shares of Common Stock pursuant to the provisions of Rule 144 or 144A
promulgated under the Securities Act (or any successor rule or regulation
thereto); and
(c) it will, at any time when any holder of Registrable Securities
desires to make sales of any Registrable Securities in reliance on Rule 144A
under the Securities Act (or any successor rule or regulation), provide such
holder and any prospective purchaser therefrom with the information required by
Rule 144A and otherwise cooperate with the holder in connection with such sale.
The Company represents and warrants that any registration statement or
any information document or report filed with the Commission in connection with
the foregoing or any information so made public shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements contained therein,
in light of the circumstances under which they were made, not misleading. The
Company agrees to indemnify and hold harmless (or to the extent the same is not
enforceable, make contribution to) the seller of Registrable Securities, its
partners, officers, directors, employees and agents and each broker, dealer or
underwriter (within the meaning of the Securities Act) acting for any such
seller in connection with any offering or sale by such seller of Registrable
Securities or any person, firm
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or corporation controlling (within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act) such seller and any such
broker, dealer or underwriter from and against any and all losses, claims,
damages, liabilities or expenses (or actions in respect thereof) arising out of
or resulting from any breach of the foregoing representation or warranty, all
on terms and conditions comparable to those set forth in Section 8.
SECTION 10. Limitation on Registration Rights of Others. The Company
represents and warrants that it has not granted to any Person the right to
request or require the Company to register any securities issued by the
Company. The Company covenants and agrees that, so long as any Person holds any
Registrable Securities in respect of which any registration rights provided for
in Section 3 remain in effect, the Company will not, directly or indirectly,
grant to any Person or agree to or otherwise become obligated to grant any
registration rights with priority over or that conflict with the registration
rights granted herein.
SECTION 11. Miscellaneous.
(a) Recapitalizations, Exchanges, Etc. The provisions of this
Agreement shall apply, to the full extent set forth herein with respect to the
Common Stock, to any and all shares of capital stock of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) which may be issued in respect of, in exchange for or in
substitution of, the Common Stock and shall be appropriately adjusted for any
stock dividends, splits, reverse splits, combinations, recapitalizations and
the like occurring after the date hereof.
(b) No Inconsistent Agreements. The Company shall not enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the designated holders of the Registrable Securities in this
Agreement.
(c) Remedies. The holders of the Registrable Securities, in addition
to being entitled to exercise all rights granted by law, including recovery of
damages, shall be entitled to specific performance of their rights under this
Agreement. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agrees to waive in any action for
specific performance the defense that a remedy at law would be adequate.
(d) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company has obtained the prior written consent of the holders of at
least 85% of the Registrable Securities.
(e) Notices. All notices, demands and other communications provided
for or permitted hereunder shall be made in writing and shall be by registered
or certified first-class mail, return receipt requested, telecopy, recognized
overnight courier service or personal delivery.
-13-
<PAGE> 17
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial overnight courier service; five business
days after being deposited in the mail, postage prepaid, if mailed; and when
receipt is acknowledged if telecopied to the following addresses:
if to the Company:
Kinder Morgan, Inc.
1301 McKinney
Suite 3400
Houston, Texas 77010
Attention: Richard D. Kinder
Telecopy: (713) 844-9570
if to the Stockholders, as set forth on the signature pages hereto.
(f) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties and
the registration rights and the other obligations of the Company contained in
this Agreement shall with respect to any Registrable Security be automatically
transferred to any subsequent holder of Registrable Securities (excluding any
person who acquires such securities in a transaction with respect to which a
registration statement under the Securities Act is effective at the time or
pursuant to a sale complying with Rule 144 under the Securities Act).
Notwithstanding any transfer of such rights, all of the obligations of the
Company hereunder shall survive any such transfer and shall continue to inure
to the benefit of all transferees.
(g) Effectiveness. This Agreement shall be effective upon the
Company's Registration Statement on Form S-1 filed on May 10, 1999 or any
amendment thereto being declared effective by the Securities and Exchange
Commission.
(h) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(i) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(j) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without regard to the
principles of conflicts of law of such state.
(k) Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the validity, legality
and enforceability of any such provision in every other respect and of the
-14-
<PAGE> 18
remaining provisions hereof shall not be in any way impaired, it being intended
that all of the rights and privileges of the holders of Registrable Securities
shall be enforceable to the fullest extent permitted by law.
(l) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect
of the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
[SIGNATURE PAGES TO FOLLOW]
-15-
<PAGE> 19
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed and delivered under seal as of the day and year first above written.
KINDER MORGAN, INC.
By: /s/ WILLIAM V. MORGAN
----------------------------------------
Name: William V. Morgan
Title: President
1301 McKinney, Suite 3400
Houston, TX 77010
Attention: Richard D. Kinder
Telecopy: (713) 844-9570
/s/ RICHARD D. KINDER
-------------------------------------------
RICHARD D. KINDER
1301 McKinney, Suite 3400
Houston, TX 77010
Telecopy: (713) 844-9570
MORGAN ASSOCIATES, INC.
By: /s/ WILLIAM V. MORGAN
----------------------------------------
William V. Morgan
President
1301 McKinney, Suite 3400
Houston, TX 77010
(713) 844-9570
-16-
<PAGE> 20
FIRST UNION CORPORATION
By: /s/ TED A. GARDNER
----------------------------------------
Ted A. Gardner
Title: Managing Partner
One First Union Center
301 S. College Street, 5th Floor
Charlotte, North Carolina 28288-0732
Attention: Ted A. Gardner
Telecopy: (704) 374-6711
/s/ DAVID B. CARSON
-------------------------------------------
DAVID B. CARSON
5417 Challisford Lane
Charlotte, NC 28226
Telecopy:
/s/ CHERYL S. CARSON
-------------------------------------------
CHERYL S. CARSON
5417 Challisford Lane
Charlotte, NC 28226
Telecopy:
/s/ JAMES C. COOK
-------------------------------------------
JAMES C. COOK
201 Hillside Avenue - C
Charlotte, NC 28209
Telecopy:
/s/ FREDERICK W. EUBANK II
-------------------------------------------
FREDERICK W. EUBANK II
2145 Malvern Road
Charlotte, NC 28207
Telecopy:
-17-
<PAGE> 21
/s/ TED A. GARDNER
-------------------------------------------
TED A. GARDNER
1326 Dilworth Road
Charlotte, NC 28203
Telecopy:
/s/ W. BARNES HAUPTFUHRER
-------------------------------------------
W. BARNES HAUPTFUHRER
923 Granville Road
Charlotte, NC 28207
Telecopy:
/s/ PEARCE A. LANDRY
-------------------------------------------
PEARCE A. LANDRY
1008 Mount Vernon Ave.
Charlotte, NC 28203
Telecopy:
/s/ DAVID N. MORRISON
-------------------------------------------
DAVID N. MORRISON
2415 Charlotte Drive
Charlotte, NC 28203
Telecopy:
/s/ SCOTT B. PERPER
-------------------------------------------
SCOTT B. PERPER
3715 Columbine Circle
Charlotte, NC 28211
Telecopy:
/s/ L. WATTS HAMRICK III
-------------------------------------------
L. WATTS HAMRICK III
217 Huntley Place
Charlotte, NC 28207
Telecopy:
-18-
<PAGE> 22
/s/ KEVIN J. ROCHE
-------------------------------------------
KEVIN J. ROCHE
7700 Baltusroll Lane
Charlotte, NC 28210
Telecopy:
/s/ MARGARET M. ROCHE
-------------------------------------------
MARGARET M. ROCHE
7700 Baltusroll Lane
Charlotte, NC 28210
Telecopy:
-19-
<PAGE> 23
SCHEDULE 1
Ownership of Shares
<TABLE>
<CAPTION>
Shares of Shares of
Stockholder Common Stock Non-Voting
----------- ------------ Common Stock
------------
<S> <C> <C>
Richard D. Kinder 19,319,036
Morgan Associates, Inc. 7,291,113
First Union Corporation 1,435,209 3,476,671
W. Barnes Hauptfuhrer 126,818
Ted A. Gardner 182,494
Scott B. Perper 129,911
Kevin J. and Margaret M. Roche 126,818
James C. Cook 117,539
Frederick W. Eubank II 117,539
L. Watts Hamrick III 117,539
David B. and Cheryl S. Carson 98,980
David N. Morrison 117,539
Pearce A. Landry 92,794
---------- ---------
Total 29,273,329 3,476,671
========== =========
</TABLE>
-20-
<PAGE> 1
EXHIBIT 10.4
INDEMNITY AGREEMENT
This Indemnity Agreement ("Agreement") is made and entered into as of June
__, 1999, by and between Kinder Morgan, Inc., a Delaware corporation
("Company"), and ____________ ("Indemnitee").
Introduction
Indemnitee has been and is an officer and/or director of the Company and/or
an officer and/or director of certain of the Company's direct and indirect
subsidiaries (the "Subsidiaries"). The parties desire that the Company provide
indemnification (including advancement of expenses) to Indemnitee effective as
of the date Indemnitee became or does become an officer or director of the
Company or any of the Subsidiaries against any and all liabilities asserted
against Indemnitee to the fullest extent permitted by the Delaware General
Corporation Law ("Act"), as the Act presently exists and may be expanded from
time to time. Based on such premise, and for certain good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. Service. Indemnitee will serve at the will of the Company or under
separate contract, if such exists, as a director and/or officer of the Company
and the Subsidiaries (including in certain circumstances, as a shareholder of a
separate corporation for insurance purposes which corporation shall be
controlled and directed by the Company or the Subsidiaries) for so long as
Indemnitee is duly elected and qualified in accordance with the Bylaws of the
Company and the bylaws or other governing documents of the applicable
Subsidiaries, until Indemnitee's death, or the tender of his resignation to the
Company or until his removal in accordance with the Bylaws of the Company and
the bylaws or other governing documents of the applicable Subsidiaries.
2. Indemnification. The Company shall, or shall cause the applicable
Subsidiary to, indemnify Indemnitee as follows:
2.1. The Company shall indemnify Indemnitee when Indemnitee was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company), by
reason of the fact that Indemnitee is or was a director, officer, employee or
agent of the Company or the Subsidiaries (or additionally as a shareholder of a
Subsidiary), or is or was serving at the request of the Company or the
Subsidiaries as a director, officer, shareholder, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with
such action, suit or proceeding if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and its Subsidiaries, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that Indemnitee
<PAGE> 2
did not act in good faith and in a manner which Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company and its
Subsidiaries, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that Indemnitee's conduct was unlawful.
2.2. The Company shall indemnify Indemnitee when Indemnitee was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company or the Subsidiaries (or additionally
as a shareholders of a Subsidiary), or is or was serving at the request of the
Company or the Subsidiaries as a director, officer, shareholder, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by Indemnitee in connection with the defense or settlement of such
action or suit if Indemnitee acted in good faith and in a manner that Indemnitee
reasonably believed to be in or not opposed to the best interests of the Company
and it Subsidiaries and except that no indemnification pursuant to this
Agreement shall be made in respect of any claim, issue or matter as to which
Indemnitee shall have been adjudged to be liable to the Company or its
Subsidiaries unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
2.3. To the extent that Indemnitee has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections
2.1 or 2.2, or in defense of any claim, issue or matter therein, or when the
Delaware Court of Chancery or the court in which such action or suit was brought
otherwise determines Indemnitee is fairly and reasonably entitled to Indemnity
for such expenses the Company shall indemnify Indemnitee against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2.4. Any indemnification under Sections 2.1 and 2.2 (unless ordered by a
court) shall be made by the Company only as authorized in the specific case upon
a determination, in accordance with the procedures set forth in Section 3, that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct set forth in such Sections 2.1 and
2.2. Such determination shall be made (1) by a majority vote of the board of
directors of the Company who are not parties to such action, suit or proceeding
even though less than a quorum, (2) if there are no such directors or, if such
directors so direct, by independent legal counsel in a written opinion, or (3)
by the stockholders of the Company.
2.5. Expenses (including attorneys' fees) incurred by Indemnitee in
defending any civil, criminal, administrative, or investigative action, suit or
proceeding shall be paid by the Company in advance of the final disposition of
such action, suit or proceeding upon receipt by the Company from Indemnitee of a
Statement of Undertaking in substantially the form set forth in Exhibit A, in
which Indemnitee undertakes to repay such amount if it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized in this Section 2; provided, however, that should more than one
person other than Indemnitee be made or threatened
-2-
<PAGE> 3
to be made a party to the same civil, criminal, administrative or
investigative action, suit or proceeding, the Company shall advance the
attorneys' fees of the counsel who represents such group of persons, unless
Indemnitee is advised that the retention of separate counsel by Indemnitee is
necessary, in which case the Company shall also advance the expenses of such
separate counsel.
2.6. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 2 shall not be deemed exclusive of any other
rights to which Indemnitee may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office, shall continue after Indemnitee has ceased to be a
director, officer, employee or agent of the Company or the Subsidiaries, and
shall inure to the benefit of the heirs, executors and administrators of
Indemnitee.
3. Determination of Right to Indemnification. For the purpose of making the
determination of whether to indemnify Indemnitee in a specific case under
Section 2.3, the board of directors of the Company, independent legal counsel or
stockholders, as the case may be, shall make the determination in accordance
with the following procedures:
3.1. Indemnitee shall submit to the board of directors a Statement of
Request for Indemnification in substantially the form set forth in Exhibit B, in
which Indemnitee states that Indemnitee has met the applicable standard of
conduct set forth in Sections 2.1 and 2.2.
3.2. Indemnitee's submission of a Statement of Request for Indemnification
to the board of directors shall create a rebuttable presumption that Indemnitee
has met the applicable standard of conduct set forth in Sections 2.1 and 2.2
and, therefore, is entitled to indemnification under Section 2. The Company
shall cause, the board of directors, independent legal counsel or stockholders,
as the case may be, to confirm, within 10 days after submission of the Statement
of Request for Indemnification, specifically that Indemnitee is so entitled,
unless it or they possess clear and convincing evidence to rebut the foregoing
presumption, which evidence shall be disclosed to Indemnitee with particularity
in a sworn written statement signed by all persons who participated in the
determination and voted to deny indemnification. If the board of directors,
independent legal counsel or stockholders fail to deny that Indemnitee is
entitled to Indemnification within 10 days after submission of the Statement of
Request for Indemnification, the presumption that Indemnity is entitled to
Indemnitee shall continue until rebutted.
4. Merger, Consolidation or Change in Control. If the Company is a
constituent corporation in a merger or consolidation, whether the Company is the
resulting or surviving corporation or is absorbed as a result thereof, or if
there is a change of control of the Company, Indemnitee shall stand in the same
position under this Agreement with respect to the resulting, surviving or
changed corporation as Indemnitee would have with respect to the Company if its
separate existence had continued or if there had been no change in the control
of the Company.
5. Certain Definitions. For the purposes of this Agreement, the following
terms shall have the indicated meanings and understandings:
-3-
<PAGE> 4
5.1. The term "other enterprise" includes, among others, employee benefit
plans and civic, non-profit and charitable organizations, whether or not
incorporated.
5.2. The term "fines" includes any excise taxes assessed on Indemnitee with
respect to any employee benefit plan.
5.3. The term "serving at the request of the Company" includes any service,
at the request or with the express or implied authorization of the Company, as a
director, officer, shareholder, employee or agent of another corporation,
partnership, joint venture, trust or other enter prise, which service imposes
duties on, or involves services by, Indemnitee with respect to such corporation,
partnership, joint venture, trust or other enterprise, its participants or
beneficiaries. If Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of such other
enterprise, its participants or beneficiaries, Indemnitee shall be deemed to
have acted in a manner not opposed to the best interests of the Company.
5.4. The term "change of control" includes any change in the ownership of a
majority of the outstanding voting securities of the Company or in the
composition of a majority of the members of the board of directors of the
Company.
6. Attorney' Fees. If Indemnitee institutes any legal action to enforce
Indemnitee's rights under this Agreement, or to recover damages for breach of
this Agreement, Indemnitee, if Indemnitee prevails in whole or in part, shall be
entitled to recover from the Company all fees and expenses (including attorney's
fees) incurred by Indemnitee in connection therewith.
7. Deposit of Funds In Trust. If the Company voluntarily decides to
dissolve or to file a petition for relief under the applicable bankruptcy,
moratorium or similar laws, then not later than 10 days prior to such
dissolution or filing, the Company shall deposit in trust for the sole and
exclusive benefit of Indemnitee a cash amount equal to all amounts previously
authorized to be paid to Indemnitee hereunder, such amounts to be used to
discharge the Company's obligations to Indemnitee hereunder. Any amounts in such
trust not required for such purpose shall be returned to the Company. This
Section 7 shall not apply to the dissolution of the Company in connection with a
transaction as to which Section 4 applies.
8. Amendments to Act. This Agreement is intended to provide indemnity to
Indemnitee to the fullest extent allowed under Delaware law. Accordingly, to the
extent permitted by law, if the Act permits greater indemnity than the indemnity
set forth herein, or if any amendment is made to the Act expanding the indemnity
permissible under Delaware law, the indemnity obligations contained herein
automatically shall be expanded, without the necessity of action on the part of
any party, to the extent necessary to provide to Indemnitee the fullest
indemnity permissible under Delaware law.
9. Conflicts. As stated above, this Agreement is intended to provide
indemnity to Indemnitee to the fullest extent allowed under Delaware law. To the
extent a Subsidiary is not governed by Delaware law, this Agreement shall
control and the Company shall indemnify
-4-
<PAGE> 5
Indemnitee pursuant to the terms of this Agreement to the extent that the
Subsidiary's charter, bylaws or other governing documents or the applicable
State's statutes do not provide such indemnity.
10. Miscellaneous Provisions.
10.1. Survival. The provisions of this Agreement shall survive the
termination of Indemnitee's service as a director or officer of the Company and
shall relate back to Indemnitee's election as an officer or director of the
Company or any Subsidiary if prior to the date hereof.
10.2. Entire Agreement. This Agreement constitutes the full understanding
of the parties and a complete and exclusive statement of the terms and
conditions of their agreement relating to the subject matter hereof and
supersedes all prior negotiations, understandings and agree ments, whether
written or oral, between the parties, their affiliates, and their respective
principals, shareholders, directors, officers, employees, consultants and agents
with respect thereto.
10.3. Amendments and Waivers. No alteration, modification, amendment,
change or waiver of any provision of this Agreement shall be effective or
binding on any party hereto unless the same is in writing and is executed by all
parties hereto.
10.4. Modification and Severability. If a court of competent jurisdiction
declares that any provision of this Agreement is illegal, invalid or
unenforceable, then such provision shall be modified automatically to the extent
necessary to make such provision fully legal, valid or enforce able. If such
court does not modify any such provision as contemplated herein, but instead
declares it to be wholly illegal, invalid or unenforceable, then such provision
shall be severed from this Agreement, this Agreement and the rights and
obligations of the parties hereto shall be construed as if this Agreement did
not contain such severed provision, and this Agreement otherwise shall remain in
full force and effect.
10.5. Enforceability. This Agreement is enforceable by and against the
Company, the Indemnitee and their respective executors, legal representatives,
administrators, heirs, successors and assignees.
10.6. Governing Law. This Agreement is governed by, construed under, and
enforced in accordance with the laws of the State of Delaware without reference
to the conflict-of- laws provisions thereof.
10.7. Multiple Counterparts. This Agreement may be executed by the parties
hereto in multiple counterparts, each of which shall be deemed an original for
all purposes, and all of which together shall constitute one and the same
instrument.
-5-
<PAGE> 6
The parties hereto have executed this Agreement to be effective as of the
date first written above.
COMPANY:
KINDER MORGAN, INC.
By:
------------------------------
William V. Morgan
President
INDEMNITEE:
----------------------------------
Name:
-----------------------------
-6-
<PAGE> 7
EXHIBIT A
STATEMENT OF UNDERTAKING
STATE OF TEXAS $
$
COUNTY OF HARRIS $
I, __________, being first duly sworn, depose and say as follows:
1. This Statement of Undertaking is submitted pursuant to the Indemnity
Agreement dated June __, 1999 between Kinder Morgan, Inc., a Delaware
corporation ("Company"), and me.
2. I hereby undertake to repay this advancement of expenses if it is
ultimately determined that I am not entitled to be indemnified by the Company.
3. I hereby undertake to repay any advancement of expenses related to my
Indemnification by the Company if it is ultimately determined that I am not
entitled to be indemnified by the Company.
4. I am requesting the advancement of expenses in connection with the
following action, suit or proceeding:
I have executed this Statement of Undertaking on ________________________.
-------------------------------
Signature
-------------------------------
Print Name
Subscribed and sworn to before me on ____________________________________.
-------------------------------
Notary Public in and for
said state and county
My commission expires:
--------
<PAGE> 8
EXHIBIT B
STATEMENT OF REQUEST FOR INDEMNIFICATION
STATE OF TEXAS $
$
COUNTY OF HARRIS $
I, ___________________, being first duly sworn, depose and say as follows:
1. This Statement of Request for Indemnification is submitted pursuant to
the Indemnity Agreement dated June __, 1999, between Kinder Morgan, Inc., a
Delaware corporation ("Company"), and me.
2. I am requesting indemnification against expenses (including attorneys'
fees) and, with respect to any action not by or in the right of the Company,
judgments, fines and amounts paid in settlement, all of which have been actually
and reasonably incurred by me in connection with a certain action, suit or
proceeding to which I am a party or am threatened to be made a party by reason
of the fact that I am or was a director and/or officer of the Company.
3. With respect to all matters related to any such action, suit or
proceeding, I acted in good faith and in a manner I reasonably believed to be in
or not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, I had no reason to believe that my conduct was
unlawful.
4. I am requesting indemnification in connection with the following suit,
action or proceeding:
I have executed this Statement of Request for Indemnification on
___________________________.
------------------------------
Signature
------------------------------
Print Name
Subscribed and sworn to before me on ____________________________________.
------------------------------
Notary Public in and for
said state and county
My Commission expires:
--------
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Registration Statement of our report dated February 21, 1997 included in Kinder
Morgan Energy Partners, L.P.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, and to all references to our Firm included in this
Registration Statement.
ARTHUR ANDERSEN LLP
Houston, Texas
June 17, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated March 10, 1999, March 31, 1999 and May 10, 1999, relating to the
financial statements of Kinder Morgan Energy Partners, L.P., Kinder Morgan, Inc.
and Enron Liquids Pipeline Company, respectively, which appear in such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Houston, Texas
June 17, 1999
