Form 10-Q
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission File Number 1-6446
KINDER MORGAN, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Kansas 48-0290000
----------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Dallas, Suite 1000, Houston, Texas 77002
-------------------------------------- -----------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (713) 369-9000
--------------
-----------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___
The number of shares outstanding for each of the registrant's
classes of common stock, as of the latest practicable date was:
Common Stock, $5 par value; outstanding 114,409,373 shares as of
October 31, 2000.
<PAGE> 2
KINDER MORGAN, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
Contents
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
Consolidated Balance Sheets....................... 3-4
Consolidated Statements of Income................. 5
Consolidated Statements of Cash Flows............. 6
Notes to Consolidated Financial Statements........ 7-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 18-30
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................... 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................... 30
Item 6. Exhibits and Reports on Form 8-K..................... 30
SIGNATURE.................................................... 31
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (Unaudited)
Kinder Morgan, Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 19,198 $ 26,378
Restricted Deposits 272 51
Accounts Receivable 423,876 306,451
Receivable from Kinder Morgan Energy Partners - 330,000
Inventories 49,300 50,328
Gas Imbalances 54,263 51,024
Other 16,232 19,154
Net Current Assets of Discontinued Operations 10,434 58,991
----------- -----------
573,575 842,377
----------- -----------
Investments:
Kinder Morgan Energy Partners 1,707,470 1,791,768
Other 149,271 126,103
----------- -----------
1,856,741 1,917,871
----------- -----------
Property, Plant and Equipment 6,188,089 6,167,251
Less Accumulated Depreciation and Amortization 408,150 377,687
----------- -----------
5,779,939 5,789,564
----------- -----------
Deferred Charges and Other Assets 239,741 209,758
Net Non-current Assets of Discontinued
Operations 74,560 659,236
----------- -----------
Total Assets $ 8,524,556 $ 9,418,806
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE 4>
CONSOLIDATED BALANCE SHEETS (Unaudited)
Kinder Morgan, Inc. and Subsidiaries
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current Maturities of Long-term Debt $ - $ 7,167
Notes Payable - 574,400
Accounts Payable 330,663 224,625
Accrued Taxes 13,847 36,075
Gas Imbalances 42,487 74,992
Payable for Purchase of Thermo Companies 15,000 44,320
Reserve for Loss on Disposal of Discontinued
Operations 17,181 535,630
Other 127,670 206,620
----------- -----------
546,848 1,703,829
----------- -----------
Other Liabilities and Deferred Credits:
Deferred Income Taxes 2,161,382 2,228,553
Other 231,196 242,926
----------- -----------
2,392,578 2,471,479
----------- -----------
Long-term Debt 3,560,547 3,293,326
----------- -----------
Kinder Morgan-Obligated Mandatorily Redeemable
Preferred Capital Trust Securities of
Subsidiary Trusts Holding Solely Debentures
of Kinder Morgan 275,000 275,000
----------- -----------
Minority Interests in Equity of Subsidiaries 7,396 9,331
----------- -----------
Stockholders' Equity:
Common Stock-
Authorized - 150,000,000 Shares, Par Value
$5 Per Share
Outstanding - 114,352,762 and 112,665,977
Shares, Respectively, After Deducting 131,594
and 172,402 Shares Held in Treasury 572,422 564,192
Additional Paid-in Capital 1,188,072 1,203,008
Retained Deficit (15,143) (95,615)
Other (3,164) (5,744)
----------- -----------
Total Stockholders' Equity 1,742,187 1,665,841
----------- -----------
Total Liabilities and Stockholders' Equity $ 8,524,556 $ 9,418,806
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE 5>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Kinder Morgan, Inc. and Subsidiaries
(In Thousands except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues:
Natural Gas Sales $ 578,898 $ 299,191 $1,250,686 $ 736,854
Natural Gas Transportation and Storage 138,306 173,530 443,546 552,934
Other 31,859 23,961 85,187 65,888
---------- ---------- ---------- ----------
Total Operating Revenues 749,063 496,682 1,779,419 1,355,676
---------- ---------- ---------- ----------
Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales 576,370 318,291 1,233,715 772,517
Operations and Maintenance 38,391 38,559 117,927 125,744
General and Administrative 14,553 26,825 42,701 72,060
Depreciation and Amortization 27,012 31,674 80,784 119,664
Taxes, Other Than Income Taxes 7,241 8,938 20,926 25,753
Merger-related Costs - 10,962 - 10,962
---------- ---------- ---------- ----------
Total Operating Costs and Expenses 663,567 435,249 1,496,053 1,126,700
---------- ---------- ---------- ----------
Operating Income 85,496 61,433 283,366 228,976
---------- ---------- ---------- ----------
Other Income and (Deductions):
Kinder Morgan Energy Partners:
Equity in Earnings 34,562 - 99,287 -
Amortization of Excess Investment (6,927) - (21,366) -
Equity in Earnings (Losses) of Other
Equity Investments (1,783) 1,783 (7,399) 12,312
Interest Expense, Net (61,594) (61,410) (184,463) (187,223)
Minority Interests (5,975) (6,062) (18,012) (18,626)
Other, Net 588 13,906 11,152 33,699
---------- ---------- ---------- ----------
Total Other Income and (Deductions) (41,129) (51,783) (120,801) (159,838)
---------- ---------- ---------- ----------
Income from Continuing Operations
Before Income Taxes 44,367 9,650 162,565 69,138
Income Taxes 17,739 3,764 65,026 26,964
---------- ---------- ---------- ----------
Income from Continuing Operations 26,628 5,886 97,539 42,174
---------- ---------- ---------- ----------
Discontinued Operations, Net of Tax:
Loss from Discontinued Operations - (8,925) - (40,499)
Loss on Disposal of Discontinued
Operations - (11,479) - (11,479)
---------- ---------- ---------- ----------
Total Loss From Discontinued Operations - (20,404) - (51,978)
---------- ---------- ---------- ----------
Net Income (Loss) 26,628 (14,518) 97,539 (9,804)
Less - Preferred Dividends - - - 129
Less - Premium Paid on Preferred Stock
Redemption - - - 350
---------- ---------- ---------- ----------
Earnings (Loss) Available For Common Stock $ 26,628 $ (14,518) $ 97,539 $ (10,283)
========== ========== ========== ==========
Number of Shares Used in Computing Basic
Earnings Per Common Share (Thousands) 114,461 70,914 113,906 70,363
========== ========== ========== ==========
Basic Earnings (Loss) Per Common Share:
Continuing Operations $ 0.23 $ 0.08 $ 0.86 $ 0.59
Discontinued Operations - (0.12) - (0.58)
Loss on Disposal of Discontinued
Operations - (0.16) - (0.16)
---------- ---------- ---------- ----------
Total Basic Earnings (Loss) Per Common
Share $ 0.23 $ (0.20) $ 0.86 $ (0.15)
========== ========== ========== ==========
Number of Shares Used in Computing Diluted
Earnings Per Common Share (Thousands) 116,177 70,986 114,686 70,441
========== ========== ========== ==========
Diluted Earnings (Loss) Per Common Share:
Continuing Operations $ 0.23 $ 0.08 $ 0.85 $ 0.59
Discontinued Operations - (0.12) - (0.58)
Loss on Disposal of Discontinued
Operations - (0.16) - (0.16)
---------- ---------- ---------- ----------
Total Diluted Earnings (Loss) Per Common
Share $ 0.23 $ (0.20) $ 0.85 $ (0.15)
========== ========== ========== ==========
Dividends Per Common Share $ 0.05 $ 0.20 $ 0.15 $ 0.60
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Kinder Morgan, Inc. and Subsidiaries
Increase (Decrease) in Cash and Cash Equivalents
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from Continuing Operations $ 97,539 $ 42,174
Adjustments to Reconcile Income from Continuing
Operations to Net Cash Flows from Operating
Activities:
Depreciation and Amortization 80,784 119,664
Deferred Income Taxes 58,417 (1,994)
Equity in Earnings of Kinder Morgan Energy
Partners (77,921) -
Distributions from Kinder Morgan Energy Partners 84,315 -
Deferred Purchased Gas Costs 2,329 5,800
Net Gains on Sales of Facilities (2,130) (30,908)
Changes in Other Working Capital Items (3,225) (108,007)
Changes in Deferred Revenues (3,573) (11,665)
Other Non-cash Charges and Credits to Income (16,486) (11,078)
Other, Net (21,181) (18,727)
---------- ----------
Net Cash Flows Provided by (Used in) Continuing
Operations 198,868 (14,741)
Net Cash Flows Provided by (Used in)
Discontinued Operations (102,374) 138,288
---------- ----------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 96,494 123,547
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (74,114) (60,631)
Proceeds from Sales to Kinder Morgan Energy Partners 330,000 -
Acquisitions (19,412) (35,000)
Investments (41,712) (25,393)
Sale of Tom Brown, Inc. Stock 14,864 28,650
Sale of U.S. Government Securities - 1,092,415
Proceeds from Sales of Other Assets 11,415 89,701
---------- ----------
Net Cash Flows Provided by Continuing Investing
Activities 221,041 1,089,742
Net Cash Flows Provided by (Used in) Discontinued
Investing Activities 126,440 (51,686)
---------- ----------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 347,481 1,038,056
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term Debt, Net (313,200) (1,113,146)
Long-term Debt Retired (1,622) (5,167)
Premium Equity Participating Securities Contract Fee (654) (1,097)
Common Stock Issued 15,022 5,590
Other Financing (133,409) -
Preferred Stock Redeemed - (7,350)
Treasury Stock Issued 997 236
Treasury Stock Acquired (18) (545)
Cash Dividends, Common and Preferred (17,068) (42,458)
Minority Interests, Net (1,203) 934
---------- ----------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (451,155) (1,163,003)
---------- ----------
Net Decrease in Cash and Cash Equivalents (7,180) (1,400)
Cash and Cash Equivalents at Beginning of Period 26,378 16,247
---------- ----------
Cash and Cash Equivalents at End of Period $ 19,198 $ 14,847
========== ==========
For supplemental cash flow information, see Note 8.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. General
-------
In October 1999, K N Energy, Inc., a Kansas corporation, acquired
Kinder Morgan, Inc., a Delaware corporation, referred to in these
Notes as Kinder Morgan Delaware. K N Energy, Inc. then changed
its name to Kinder Morgan, Inc. Unless the context requires
otherwise, references to "we," "us," "our," or the "Company" are
intended to mean Kinder Morgan, Inc. (a Kansas corporation and
formerly known as K N Energy, Inc.) and its consolidated
subsidiaries. We have prepared the accompanying unaudited
consolidated financial statements under the rules and regulations
of the Securities and Exchange Commission. Under such rules and
regulations, we have condensed or omitted certain information and
notes normally included in financial statements prepared in
conformity with accounting principles generally accepted in the
United States. We believe, however, that our disclosures are
adequate to make the information presented not misleading. The
consolidated financial statements reflect all adjustments that
are, in the opinion of management, necessary for a fair
presentation of our financial results for the interim periods.
You should read these consolidated financial statements in
conjunction with our consolidated financial statements and
related notes included in our 1999 Form 10-K. Certain prior
period amounts have been reclassified to conform to the current
presentation.
2. Business Combination
--------------------
On October 7, 1999, we completed our acquisition of Kinder Morgan
Delaware, the sole stockholder of the general partner of Kinder
Morgan Energy Partners, L.P. Kinder Morgan Energy Partners, the
nation's largest pipeline master limited partnership, owns and
operates product pipelines, bulk terminals, natural gas pipelines
and certain other businesses. Kinder Morgan Energy Partners'
1999 Form 10-K contains additional information on its businesses
and assets. We issued approximately 41.5 million shares of our
common stock in exchange for all of the outstanding shares of
Kinder Morgan Delaware. This transaction was a purchase for
accounting purposes, with the assets acquired and liabilities
assumed recorded at their respective estimated fair market values
as of the acquisition date. We began including the assets,
liabilities and results of operations of Kinder Morgan Delaware
with ours beginning with the October 1999 acquisition. Our 1999
Form 10-K contains additional information on this acquisition.
The following pro forma information gives effect to our
acquisition of Kinder Morgan Delaware as if the business
combination had occurred January 1, 1999. This unaudited pro
forma information should be read in conjunction with the
accompanying consolidated financial statements and with the
financial statements and other financial information included in
our 1999 Form 10-K. This pro forma information does not
necessarily indicate the financial results that would have
occurred if this acquisition had taken place on the date
indicated, nor should it necessarily be viewed as an indicator of
future financial results.
Nine Months Ended
Unaudited Pro Forma Financial Information September 30, 1999
----------------------------------------- -------------------------
(Dollars In Millions
Except Per Share Amounts)
Operating Revenues $ 3,748.4
Net Loss $ (2.3)
Diluted Loss Per Common Share $ (0.02)
Number of Shares Used in Computing Diluted Loss
Per Common Share (In Thousands) 112,124
<PAGE> 8
3. Accounting for Certain Equity Transactions by Affiliates
--------------------------------------------------------
We account for our investment in Kinder Morgan Energy Partners
(among other entities) under the equity method of accounting. In
each accounting period, we record our share of these investees'
earnings, and amortize any "excess" investment. We adjust the
amount of our excess investment when an equity method investee or
a consolidated subsidiary issues additional equity (or reacquires
equity shares) in any manner which alters our ownership
percentage. Differences between the per unit sales proceeds from
these equity issuances (or reacquisitions) and our underlying
book basis, as well as the pro rata portion of the excess
investment (including associated deferred taxes) which must be
written off, are recorded directly to paid-in capital rather than
being recognized as gains or losses.
4. Change in Accounting Estimate
-----------------------------
Based on a study of the useful lives of the underlying assets by
an independent third party, in July 1999, we changed our
depreciation rates associated with a portion of our property,
plant, and equipment acquired from MidCon Corp. in early 1998.
This change decreased "Depreciation and Amortization" by
approximately $9.7 million and $29.0 million for the quarter and
nine months ended September 30, 2000, respectively, and increased
"Income from Continuing Operations" and "Net Income" by
approximately $5.8 million ($0.05 per diluted share) and $17.4
million ($0.15 per diluted share) for the quarter and nine months
ended September 30, 2000, respectively, in comparison to the
amounts we would have recorded using the previous depreciation
rates.
5. Investments and Sales
---------------------
On October 4, 2000, we announced that we intended to contribute
approximately $300 million of assets to Kinder Morgan Energy
Partners. The largest asset we intend to contribute is Kinder
Morgan Texas Pipeline, Inc. We will also contribute the Casper
and Douglas Natural Gas Gathering and Processing Systems, our 50
percent interest in Coyote Gas Treating, LLC and our 25 percent
interest in Thunder Creek Gas Services, L.L.C. As consideration
for the sale, we will receive approximately $300 million, 50
percent in cash and 50 percent in Kinder Morgan Energy Partners
limited partnership units. We expect this transaction to close
during the fourth quarter.
In August 2000, Kinder Morgan Power Company, one of our wholly
owned subsidiaries, announced plans to build a 550-megawatt
electric power plant in Jackson, Michigan. All necessary
regulatory permits and approvals have been obtained, and
construction on the $250 million natural gas-fired plant has
begun. The plant is expected to begin producing power in June
2002. In May 2000, Kinder Morgan Power announced another 550-
megawatt facility which is currently being constructed near
Little Rock, Arkansas.
In April 2000, Kinder Morgan Energy Partners issued 4.5 million
limited partnership units in a public offering at a price of
$39.75 per unit, receiving total net proceeds (after underwriting
discount) of $171.3 million. We did not acquire any of these
units. This transaction reduced our percentage ownership of
Kinder Morgan Energy Partners from approximately 19.9% to
approximately 18.6% and had the associated effects of increasing
our investment in the net assets of Kinder Morgan Energy Partners
by $6.1 million and reducing (i) our excess investment in Kinder
Morgan Energy Partners by $81.1 million, (ii) associated
accumulated deferred income taxes by $30.0 million, (iii) paid-in
capital by $45.0 million and (iv) the monthly amortization of the
excess investment by approximately $176 thousand (see Note 3).
<PAGE> 9
On December 30, 1999, we entered into a contribution agreement
with several of our wholly owned subsidiaries and Kinder Morgan
Energy Partners. As a result, effective as of December 31, 1999,
we contributed all of our interests in the following to Kinder
Morgan Energy Partners: (i) our wholly owned subsidiary, Kinder
Morgan Interstate Gas Transmission LLC (formerly K N Interstate
Gas Transmission Co.), (ii) our wholly owned subsidiary, Kinder
Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.), which
owns a one-third interest in Trailblazer Pipeline Company and
(iii) our 49% interest in Red Cedar Gathering Company.
On September 30, 1999, we sold (to an unaffiliated party) our
interests in Stingray Pipeline Company, L.L.C., an offshore
pipeline that gathers natural gas, and West Cameron Dehydration
Company, L.L.C., which dehydrates natural gas for shippers on the
Stingray Pipeline. On June 30, 1999, we sold our interests in
the HIOS and UTOS offshore pipeline systems and related laterals
to Leviathan Gas Pipeline Partners, L. P. These two sales
yielded total cash proceeds of approximately $75 million,
resulted in a total pretax gain of approximately $28.9 million,
and substantially eliminated our investment in offshore assets.
On September 3, 1999, we sold 1,000,000 shares of preferred stock
of Tom Brown, Inc. for approximately $29 million in cash,
realizing a gain of $2.2 million (approximately $1.3 million
after tax, or $0.02 per diluted share).
Additional information on these and other investment/sale
transactions is included in our 1999 Form 10-K. Note 6 contains
information regarding sales of assets and businesses included in
discontinued operations.
6. Discontinued Operations
-----------------------
During the third quarter of 1999, we adopted and implemented a
plan to discontinue our direct marketing of non-energy products
and services (principally under the "Simple Choice" brand), which
activities had been carried on largely through our en*able joint
venture with PacifiCorp. During the fourth quarter of 1999, we
adopted and implemented plans to discontinue the following lines
of business: gathering and processing of natural gas, providing
field services to natural gas producers, commodity marketing of
natural gas and natural gas liquids, international operations and
West Texas pipelines. The accounting for the discontinuance of
these businesses is further described in Note 6 of Notes to
Consolidated Financial Statements included in our 1999 Form 10-K.
The estimated loss associated with discontinuing these businesses
remains subject to uncertainty with respect to the ultimate
proceeds to be received from the sale and the pre-disposal
operation of these assets (among other factors) and, accordingly,
the actual loss may differ materially from the estimate recorded
as of December 31, 1999. Any such difference will be recognized
in the period in which it is probable and estimable, and will be
classified in the same manner as the original estimated loss.
<PAGE> 10
Summarized financial data of discontinued operations are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(In Thousands)
Income Statement Data
---------------------
<S> <C> <C> <C> <C>
Operating Revenues:
Commodity Marketing $ - $1,110,755 $ 580,159 $2,608,987
Gathering and Processing 86,847 166,855 400,572 430,268
West Texas Pipelines - 16,679 8,336 47,221
International Operations 1,498 425 4,381 1,096
Loss From Discontinued Operations,
Net of Tax Benefit:
Commodity Marketing, net of $2,750
and $8,875 of tax - $ (4,301) - $ (13,881)
Gathering and Processing, net of
$515 and $8,315 of tax - (805) - (13,005)
West Texas Pipelines, net of $1,162
and $3,964 of tax - (1,817) - (6,200)
International Operations, net of
$417 and $590 of tax - (652) - (922)
en*able/Orcom, net of $863 and
$4,150 of tax - (1,350) - (6,491)
---------- ----------
$ (8,925) $ (40,499)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000
-------------------------------------------
Gathering and International
Processing Operations Total
------------- ------------- -------------
Balance Sheet Data (In Thousands)
------------------
<S> <C> <C> <C>
Net Current Assets of Discontinued Operations:
Cash and Cash Equivalents $ 5,093 $ 2,617 $ 7,710
Restricted Deposits 12,198 - 12,198
Accounts Receivable 58,631 2,356 60,987
Inventories 196 1,164 1,360
Gas Imbalances Receivable 12,899 - 12,899
Other Current Assets 3,450 534 3,984
Accounts Payable (71,628) (2,592) (74,220)
Accrued Taxes (4,071) (4) (4,075)
Gas Imbalances Payable (3,114) - (3,114)
Other Current Liabilities (3,688) (3,607) (7,295)
---------- ---------- ----------
$ 9,966 $ 468 $ 10,434
========== ========== ==========
Net Non-current Assets of Discontinued Operations:
Investments $ 37,677 $ 10,040 $ 47,717
Property, Plant and Equipment, Net 120,398 10,950 131,348
Deferred Charges (9,297) 7,960 (1,337)
Deferred Income Taxes (49,535) 780 (48,755)
Minority Interests in Equity of
Subsidiaries (53,646) (767) (54,413)
---------- ---------- ----------
$ 45,597 $ 28,963 $ 74,560
========== ========== ==========
</TABLE>
In our 1999 Form 10-K and our Form 10-Qs filed for the first and
second quarters of 2000, we provided information on the progress
made in disposing of our discontinued businesses. On October 30,
2000, we announced that we had entered into a definitive agree-
ment with Tom Brown, Inc. to distribute all the assets of the
Wildhorse Energy Partners, LLC joint venture to the members in
anticipation of dissolution of the joint venture. Formed in
1996, Wildhorse is owned 55 percent by us and 45 percent by Tom
Brown. Wildhorse will distribute all of the gathering and pro-
cessing assets to Tom Brown and we will receive the Wolf Creek
storage facility and cash in a transaction expected to close on
or before November 30, 2000. The remaining assets associated with
discontinued operations, representing a relatively small percent-
age of the total operations discontinued as of December 31, 1999,
are in various stages of the disposition process. Our divest-
iture process is expected to be substantially completed during
2000.
<PAGE> 11
7. Accounts Receivable Sales Facility
----------------------------------
In September 1999, certain of our wholly owned subsidiaries
entered into a five-year agreement to sell their accounts
receivable in a transaction accounted for as a sale. This
transaction and the associated accounting is discussed in our
1999 Form 10-K. We received $150 million in proceeds from the
sale of receivables on September 30, 1999. In the first quarter
of 2000, we reduced our participation in this receivable sale
program by $124.9 million, principally as a result of the then-
pending disposition of our wholesale gas marketing business. On
April 25, 2000, we repaid the residual balance and terminated
this agreement.
8. Supplemental Cash Flow Information
----------------------------------
We consider all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
"Other, Net," presented as a component of "Net Cash Flows
Provided by Operating Activities" in the accompanying
Consolidated Statements of Cash Flows includes, among other
things, equity in undistributed earnings or losses of
unconsolidated subsidiaries (other than Kinder Morgan Energy
Partners) and joint ventures.
Nine Months Ended
September 30,
--------------------------
2000 1999
----------- -----------
(In Thousands)
CHANGES IN OTHER WORKING CAPITAL ITEMS
(Net of Effects of Acquisitions and Sales)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Accounts Receivable $ (2,518) $ 24,769
Materials and Supplies Inventory (1,688) 912
Gas in Underground Storage - Current (5,463) (4,788)
Other Current Assets (30,169) (17,638)
Accounts Payable 89,406 (90,338)
Other Current Liabilities (52,793) (20,924)
---------- ----------
$ (3,225) $ (108,007)
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Period for:
Interest, Net of Amount Capitalized $ 224,261 $ 250,598
========== ==========
Distributions on Preferred Capital Trust
Securities $ 10,956 $ 10,956
========== ==========
Income Taxes $ 7,141 $ 5,449
========== ==========
9. Business Segments
-----------------
In accordance with the manner in which we currently manage our
businesses, including the allocation of capital and evaluation of
business unit performance, we report our operations in the
following segments: (1) Natural Gas Pipeline Company of America
and certain associated entities, referred to as Natural, a major
interstate natural gas pipeline system; (2) Kinder Morgan Texas
Pipeline and certain associated entities, referred to as Kinder
Morgan Texas, a major intrastate natural gas pipeline system; (3)
Retail, the (largely regulated) distribution of natural gas to
retail customers and (4) Power and Other, the generation and sale
of electric power, together with various other activities not
constituting business segments. Prior to our December 31, 1999
sale to Kinder Morgan Energy Partners (see Note 5), we also owned
and operated Kinder Morgan Interstate. In October 2000, we
announced that we would contribute several assets to Kinder
Morgan Energy Partners,
<PAGE> 12
including Kinder Morgan Texas Pipeline. Additional information
on this pending transaction is contained in Note 5 of the
accompanying Notes to Consolidated Financial Statements.
The accounting policies we apply in the generation of segment
information are generally the same as those described in Note 1
of Notes to Consolidated Financial Statements included in our
1999 Form 10-K, except that items below the "Operating Income"
line are either not allocated to business segments or are not
considered by Management in its evaluation of business unit
performance. In addition, certain items included in operating
income (such as general and administrative expenses) are not
allocated to individual business segments. With adjustment for
these items, we currently evaluate business segment performance
primarily based on operating income in relation to the level of
capital employed. Intersegment sales are accounted for at market
prices, while asset transfers are made at either market value or,
in some instances, book value. As necessary for comparative
purposes, prior period results and balances have been
reclassified to conform to the current presentation.
BUSINESS SEGMENT INFORMATION (In Thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999
------------------------------------------ ------------------------------------------
Operating Revenues Operating Revenues
Income Before From Income Before From
Corporate External Intersegment Corporate External Intersegment
Costs Customers Revenues Costs Customers Revenues
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Natural (NGPL) $ 82,305 $ 172,160 $ - $ 78,805 $ 154,341 $ 190
Kinder Morgan
Interstate (KMIGT) - - - 14,543 21,382 7,273
Retail 4,875 41,585 - (1,399) 31,104 59
Kinder Morgan Texas
(KMTP) 3,957 515,694 - 1,726 275,975 -
Power and Other 8,912 19,624 49 5,545 13,880 49
---------- ---------- ---------- ---------- ---------- ----------
Consolidated 100,049 $ 749,063 $ 49 99,220 $ 496,682 $ 7,571
========== ========== ========== ==========
General and
Administrative
Expenses (14,553) (26,825)
Merger-related
Costs - (10,962)
---------- ----------
Operating Income 85,496 61,433
Other Income and
(Deductions) (41,129) (51,783)
---------- ----------
Income from
Continuing
Operations Before
Income Taxes $ 44,367 $ 9,650
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999
----------------------------------------- -------------------------------------------
Operating Revenues Operating Revenues
Income Before From Income Before From
Corporate External Intersegment Corporate External Intersegment
Costs Customers Revenues Costs Customers Revenues
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Natural (NGPL) $ 253,501 $ 441,031 $ (18) $ 224,528 $ 459,256 $ 1,132
Kinder Morgan
Interstate (KMIGT) - - - 41,285 70,025 10,032
Retail 30,993 146,171 - 14,714 137,164 64
Kinder Morgan Texas
(KMTP) 18,384 1,139,124 - 12,826 644,418 -
Power and Other 23,189 53,093 97 18,645 44,813 146
---------- ---------- ---------- ---------- ---------- ----------
Consolidated 326,067 $1,779,419 $ 79 311,998 $1,355,676 $ 11,374
========== ========== ========== ==========
General and
Administrative
Expenses (42,701) (72,060)
Merger-related
Costs - (10,962)
---------- ----------
Operating Income 283,366 228,976
Other Income and
(Deductions) (120,801) (159,838)
---------- ----------
Income from
Continuing
Operations Before
Income Taxes $ 162,565 $ 69,138
========== ==========
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
Assets at September 30, 2000
--------------------------------------------------------------------------------
Kinder
Morgan Kinder Power
Natural Interstate Retail Morgan Texas and Other Consolidated
------------ ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Continuing Operations $5,505,690 $ - $ 405,476 $ 327,491 $2,200,905 (1) $8,439,562
Discontinued Operations 84,994
----------
Consolidated $8,524,556
==========
(1)Principally the investment in Kinder Morgan Energy Partners
</TABLE>
GEOGRAPHIC INFORMATION
All but an insignificant amount of our assets and operations are
located in the continental United States.
10. Financing
---------
We have available a $500 million 364-day credit facility dated
October 25, 2000 (which contains terms and covenants similar to
our prior facility) and a $400 million amended and restated five-
year revolving credit agreement dated January 30, 1998. These
bank facilities can be used for general corporate purposes,
including backup for our commercial paper program, and include
covenants which are common in such arrangements. Our 1999 Form
10-K contains additional information concerning these covenants.
Under these bank facilities, we are required to pay a facility
fee based on the total commitment, whether used or unused, at a
rate which varies based on our senior debt rating. We had no
borrowings under our bank facilities at September 30, 2000 or at
October 25, 2000. Because we have both the intent and the
ability (through our five-year revolving credit facility) to re-
finance our commercial paper borrowings and the current maturi-
ties of our long-term debt on a long-term basis, these liabili-
ties, totaling $269.4 million at September 30, 2000, have been
included with "Long-term Debt" in the accompanying Consolidated
Balance Sheet.
The commercial paper we issue, which is supported by the bank
facilities, is comprised of unsecured short-term notes with
maturities not to exceed 270 days from the date of issue.
Commercial paper outstanding at September 30, 2000 and October
25, 2000 was $261.2 million and $256.5 million, respectively.
Our weighted-average interest rate on short-term borrowings
outstanding at September 30, 2000 was 6.98 percent. Average
short-term borrowings outstanding during the third quarter of
2000 were $240.3 million and our weighted-average interest rate
was 6.78 percent. Average short-term borrowings outstanding
during the first nine months of 2000 were $343.8 million and our
weighted-average interest rate was 6.42 percent.
On October 19, 2000, our Board of Directors declared a common
stock dividend of $0.05 per share payable on November 14, 2000 to
shareholders of record as of October 31, 2000.
11. Regulatory Matters
------------------
On July 17, 2000, Natural filed its Compliance Plan, including
pro forma tariff sheets, pursuant to FERC's Order Nos. 637 and
637-A. The FERC directed all interstate pipelines to file pro
forma tariff sheets to comply with new regulatory requirements in
the Orders regarding scheduling procedures, capacity
segmentation, imbalance management services and penalty credits,
or in the alternative, to explain why no changes to existing
tariff provisions are necessary. Natural's filing is currently
pending FERC action and any changes to its tariff provisions are
not expected to take effect until after the entire Order 637
process is finished for all interstate pipelines.
<PAGE> 14
On May 10, 2000, Chesapeake Panhandle Limited Partnership filed a
complaint with the FERC against Natural, MidCon Gas Products
Corp., MidCon Gas Services Corp., K N Energy, Inc. and us. The
complaint alleges that Natural collected an unlawful gathering
rate from Chesapeake for the period March 1998 through December
1999. Chesapeake is seeking a refund totaling $5.2 million. We
have responded and denied the allegations. On July 27, 2000, the
FERC issued an order commencing a preliminary non-public
investigation into the complaint. We believe that we have
meritorious defenses to the claim.
12. Comprehensive Income
--------------------
Statement of Financial Accounting Standards No. 130, Reporting of
Comprehensive Income, requires that enterprises report a total
for comprehensive income. The only difference between "net
income" and "comprehensive income" for us has been the unrealized
gain or loss on our investment in available-for-sale securities
which was recorded directly to stockholders' equity. During the
quarter ended March 31, 2000, we sold our only remaining
available-for-sale securities.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(Millions of Dollars)
Net Income $ 26.6 $ (14.5) $ 97.5 $ (9.8)
Gain (Loss) From Available-for-
Sale Securities - (0.5) 1.6 2.5
---------- ---------- ---------- ----------
Comprehensive Income (Loss) $ 26.6 $ (15.0) $ 99.1 $ (7.3)
========== ========== ========== ==========
</TABLE>
13. Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (the
"Statement"). The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes
in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. If
the derivatives meet these criteria, the Statement allows a
derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company
formally designate a derivative as a hedge and document and
assess the effectiveness of derivatives associated with trans-
actions that receive hedge accounting.
The Statement is effective for fiscal years beginning after June
15, 2000. The Statement cannot be applied retroactively. The
Statement must be applied to (i) derivative instruments and (ii)
certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December
31, 1997 (and, at our election, before January 1, 1998). We
enter into derivatives contracts solely for the purpose of
hedging exposures which accompany our normal business activities.
Because (i) we currently report our derivatives at fair value in
our consolidated balance sheets, (ii) the majority of our
derivatives activities would be considered cash flow hedges under
the Statement, (iii) the Statement provides for hedging
accounting treatment for this use of derivatives and (iv) because
we do not expect any material amount of hedge ineffectiveness, no
material impact on our earnings or financial position is expected
to result from adoption of the Statement.
<PAGE> 15
14. Interest Expense, Net
---------------------
"Interest Expense, Net" as presented in the accompanying
Consolidated Statements of Income is net of (i) the debt
component of the allowance for funds used during construction
("AFUDC - Interest"), (ii) in 1999, interest income related to
government securities associated with the acquisition of MidCon
Corp. (see Note 1(K) of Notes to Consolidated Financial
Statements included in our 1999 Form 10-K) and (iii) in the first
quarter of 2000, interest income attributable to our note
receivable from Kinder Morgan Energy Partners associated with the
sale of certain interests (see Note 5).
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(In Thousands)
2000 1999 2000 1999
----------- ----------- ----------- -----------
AFUDC - Interest $ 713 $ 388 $ 1,710 $ 699
Interest Income $ - $ - $ 2,647 $ 480
15. Other, Net
----------
"Other, Net" as presented in the accompanying Consolidated
Statement of Income for the three months ended September 30, 1999
principally consists of (i) an $11.4 million gain from the sale
of certain offshore assets, and (ii) a $2.2 million gain from the
sale of Tom Brown, Inc. Preferred Stock. For the nine months
ended September 30, 1999, "Other, Net" principally consists of
(i) the $28.9 million gain from the sale of certain offshore
assets and (ii) the $2.2 million gain from the sale of Tom Brown,
Inc. Preferred Stock. "Other, Net" for the nine months ended
September 30, 2000, principally consists of (i) $4.1 million due
to the recovery of note receivable proceeds in excess of its
carrying value, (ii) $3.9 million attributable to the settlement
of a regulatory matter for an amount less than that previously
reserved and (iii) $1.3 million attributable to a gain from the
sale of Tom Brown, Inc. Common Stock. Note 5 contains additional
information on certain of these matters.
16. Environmental and Legal Matters
-------------------------------
(A) Environmental Matters
On December 20, 1999, the U.S. Department of Justice (DOJ) filed
a Complaint against Natural on behalf of the U.S. Environmental
Protection Agency (EPA) in the Federal District Court of
Colorado, Civil Action 99-S-2419. The Complaint alleged that
Natural failed to obtain all of the necessary air quality permits
in 1979 when it constructed the Akron Compressor Station, which
consisted of three compressor engines in Weld County, Colorado.
Natural and the EPA, through the DOJ, have reached a tentative
settlement of this issue. The EPA has agreed to dismiss all
allegations and claims upon completion of the terms of the
settlement.
Based on current information, we do not believe that compliance
with federal, state and local environmental laws and regulations
will have a material adverse effect on our business, cash flows,
financial position or results of operations. In addition, the
clean-up programs in which we are engaged are not expected to
interrupt or diminish our ability to operate our businesses.
However, there can be no assurances that future events, such as
changes in existing laws, the promulgation of new laws, or the
development of new facts or conditions will not cause us to incur
significant costs.
<PAGE> 16
See Note 9(A) of Notes to Consolidated Financial Statements in
our 1999 Form 10-K for additional information regarding
environmental matters.
(B) Litigation Matters
"K N TransColorado, Inc. v. TransColorado Gas Transmission
Company, et. al," Case No. 00-CV-129, District Court, County of
Garfield, State of Colorado. On June 15, 2000, K N TransColorado
filed suit against Questar TransColorado and several of its
affiliated Questar entities, asserting claims for breach of
fiduciary duties, breach of contract, constructive trust,
rescission of the partnership agreement, breach of good faith and
fair dealing, tortious concealment, misrepresentation, aiding and
abetting a breach of fiduciary duty, dissolution of the
TransColorado partnership, and seeking a declaratory judgment,
among other claims. The TransColorado partnership has been made
a defendant for purposes of an accounting. The lawsuit stems
from Questar's failure to support the TransColorado partnership,
together with its decision to seek regulatory approval for a
project that competes with the Partnership, in breach of its
fiduciary duties as a partner. K N TransColorado seeks to
recover damages in excess of $152 million due to Questar's
breaches and, in addition, seeks punitive damages. In response
to the complaint, on July 28, 2000, the Questar entities filed a
counterclaim and third party claims against us and certain of our
entities for claims arising out of the construction and operation
of the TransColorado pipeline project. The claims allege, among
other things, that the Kinder Morgan entities interfered with and
delayed construction of the pipeline and made misrepresentations
about marketing of capacity. The Questar entities seek to
recover damages in excess of $185 million for an alleged breach
of fiduciary duty and other claims.
"Jack J. Grynberg v. K N Energy, Inc., Rocky Mountain Natural Gas
Company, and GASCO, Inc.," Civil Action No. 92-N-2000. On October
9, 1992, Jack J. Grynberg filed suit in the United States
District Court for the District of Colorado against us, Rocky
Mountain Natural Gas Company and GASCO, Inc. alleging that these
entities, the K N Entities, as well as K N Production Company
and K N Gas Gathering, Inc., have violated federal and state
antitrust laws. In essence, Grynberg asserts that the companies
have engaged in an illegal exercise of monopoly power, have
illegally denied him economically feasible access to essential
facilities to store, transport and distribute gas, and illegally
have attempted to monopolize or to enhance or maintain an exist-
ing monopoly. Grynberg also asserts certain state causes of
action relating to a gas purchase contract. In February 1999,
the Federal District Court granted summary judgment for the K N
Entities as to some of Grynberg's antitrust and state law claims,
while allowing other claims to proceed to trial. In addition
to monetary damages, Grynberg has requested that the K N Entities
be ordered to divest all interests in natural gas exploration,
development and production properties, all interests in distribu-
tion and marketing operations, and all interests in natural gas
storage facilities, in order to separate these interests from our
natural gas gathering and transportation system in northwest
Colorado. No trial date has been set.
"Jack J. Grynberg, individually and as general partner for the
Greater Green River Basin Drilling Program: 72-73 v. Rocky
Mountain Natural Gas Company and K N Energy, Inc.," Case No. 90-
CV-3686. On June 5, 1990, Jack J. Grynberg filed suit, which is
presently pending in Jefferson County District Court for
Colorado, against Rocky Mountain Natural Gas Company and us
alleging breach of contract and fraud. In essence, Grynberg
asserts claims that the named companies failed to pay Grynberg
the proper price, impeded the flow of gas, mismeasured gas,
delayed his development of gas reserves, and other claims arising
out of a contract to purchase gas from a field in northwest
Colorado. On February 13, 1997, the trial judge entered partial
summary judgment for Mr. Grynberg on his contract claim that he
failed to receive the proper price for his gas. This ruling
followed an appellate decision which was adverse to us on the
contract interpretation of the price issue, but which did not
address the question of whether Grynberg could legally receive
the price he claimed or whether he had illegally diverted gas
from a prior purchase. On August 29, 1997, the trial judge
stayed the
<PAGE> 17
summary judgment pending resolution of a proceeding at the FERC
to determine if Grynberg was entitled to administrative relief
from an earlier dedication of the same gas to interstate com-
merce. The background of that proceeding is described in the
immediately following paragraph. On March 15, 1999, an
Administrative Law Judge for the FERC ruled, after an evidentiary
hearing, that Mr. Grynberg had illegally diverted the gas when he
entered the contract with the named companies and was not
entitled to relief. Grynberg filed exceptions to this ruling.
In late March 2000, the FERC issued an order affirming in part
and denying in part the motions for rehearing of its Initial
Decision. The action in Colorado remains stayed pending final
resolution of the FERC proceeding.
"Jack J. Grynberg v. Rocky Mountain Natural Gas Company," Docket
No. GP91-8-008. On May 8, 1991, Grynberg filed a petition for
declaratory order with the FERC seeking a determination whether
he was entitled to the price he seeks in the Jefferson County
District Court proceeding referred to in the immediately
preceding paragraph. While Grynberg initially received a
favorable decision from the FERC, that decision was reversed by
the Court of Appeals for the District of Columbia Circuit on June
6, 1997. This matter has been remanded to the FERC for
subsequent proceedings. The matter was set for an expedited
evidentiary hearing, and an Initial Decision favorable to Rocky
Mountain was issued on March 15, 1999. That decision determined
that Grynberg had intentionally diverted gas from an earlier
dedication to interstate commerce in violation of the Natural Gas
Act and denied him equitable administrative relief. Grynberg
filed exceptions to this Initial Decision. In late March 2000,
the FERC issued an order affirming in part and denying in part
the motions for rehearing of its Initial Decision. In April
2000, we, together with the other parties, filed for rehearing.
"United States of America, ex rel., Jack J. Grynberg v. K N
Energy," Civil Action No. 97-D-1233, filed in the U.S. District
Court, District of Colorado. This action was filed pursuant to
the federal False Claim Act and involves allegations of
mismeasurement of natural gas produced from federal and Indian
lands. The Department of Justice has decided not to intervene
in support of the action. The complaint is part of a larger
series of similar complaints filed by Mr. Grynberg against 77
natural gas pipelines (approximately 330 other defendants). An
earlier single action making substantially similar allegations
against the pipeline industry was dismissed by Judge Hogan of the
U.S. District Court for the District of Columbia on grounds of
improper joinder and lack of jurisdiction. As a result, Mr.
Grynberg filed individual complaints in various courts throughout
the country. These cases were recently consolidated by the
Judicial Panel for Multidistrict Litigation, and transferred to
the District of Wyoming. Motions to Dismiss were filed on
November 19, 1999. Plaintiff filed his response on January 14,
2000 and defendants filed their Reply Brief on February 14, 2000.
An oral argument on the Motion to Dismiss occurred on March 17,
2000. On July 20, 2000 the United States of America filed a
motion to dismiss those claims by Grynberg that deal with the
manner in which defendants valued gas produced from federal
leases.
"Quinque Operating Company, et. al. v. Gas Pipelines, et. al.,"
Cause No. 99-1390-CM, United States District Court for the
District of Kansas. This action was originally filed in Kansas
state court in Stevens County, Kansas as a class action against
approximately 245 pipeline companies and their affiliates,
including certain Kinder Morgan entities. The plaintiffs in the
case purport to represent a class of natural gas producers and
fee royalty owners who allege that they have been subject to
systematic gas mismeasurement by the defendants for more than 25
years. Subsequently, one of the defendants removed the action to
Kansas Federal District Court. Thereafter, we filed a motion
with the Judicial Panel for Multidistrict Litigation to
consolidate this action for pretrial purposes with the Grynberg
False Claim Act cases referred to above, because of common
factual questions. On April 10, 2000, the MDL Panel ordered that
this case be consolidated with the Grynberg federal False Claims
Act cases.
<PAGE> 18
"Dirt Hogs, Inc. v. Natural Gas Pipeline Company of America, et
al." There have been several related cases with Dirt Hogs, Inc.
with allegations of breach of contract, false representations,
improper requests for kickbacks and other improprieties.
Essentially, the plaintiff claims that it should have been
awarded extensive pipeline reclamation work without having to
qualify or bid as a qualifying contractor. Case No. Civ-98-231-
R, is a case which was dismissed in the U.S. District Court for
the Western District of Oklahoma because of pleading deficiencies
and is now on appeal to the 10th Circuit (Case No. 99-6-026). On
April 10, 2000, the 10th Circuit upheld the dismissal of this
action. Another case, arising out of the same factual
allegations, was filed by Dirt Hogs in the District Court, Caddo
County, Oklahoma (Case No. CJ-99-92), on March 29, 1999. By
agreement of all parties, this action is currently stayed. A
third related case, styled "Natural Gas Pipeline Company of
America, et al. v. Dirt Hogs, Inc." (Case No. 99-360-R), resulted
in a default judgement against Dirt Hogs. After initially
appealing the default judgement, Dirt Hogs dismissed their appeal
on September 1, 1999.
"K N Energy, Inc., et al. v. James P. Rode and Patrick R.
McDonald," Case No. 99CV1239, filed in the District Court,
Jefferson County, Division 8, Colorado. Defendants
counterclaimed and filed third party claims against several of
our former officers and/or directors. Messrs. Rode and McDonald
are former principal shareholders of Interenergy Corporation. We
acquired Interenergy on December 19, 1997 pursuant to a Merger
Agreement dated August 25, 1997. Rode and McDonald allege that K
N Energy committed securities fraud, common law fraud and
negligent misrepresentation as well as breach in contract.
Plaintiffs are seeking an unspecified amount of compensatory
damages, greater than $2 million, plus unspecified exemplary or
punitive damages, attorney's fees and their costs. We filed a
motion to dismiss, and on April 21, 2000, the Jefferson County
District Court Judge dismissed the case against us and the
individuals with prejudice. Defendants also filed a federal
securities fraud action in the United States District Court for
the District of Colorado on January 27, 2000 titled: "James P.
Rode and Patrick R. McDonald v. K N Energy, Inc., et al.," Civil
Action No. 00-N-190. This case initially raised the identical
state law claims contained in the counterclaim and third party
complaint in state court. Rode and McDonald filed an amended
Complaint, which dropped the state-law claims. This Complaint is
now the subject of a motion to dismiss filed by defendants. The
case has been stayed pending the outcome of these motions.
A third related class action case styled," Adams vs. Kinder
Morgan, Inc., et. al.," Civil Action No. 00-M-516, in the United
States District Court for the District of Colorado was served on
us on April 10, 2000. As of this date no class has been certi-
fied. We have filed a motion to dismiss this case, and the case
has been stayed pending the resolution of this motion.
We believe that we have meritorious defenses to all lawsuits and
legal proceedings in which we are defendants and will vigorously
defend against them. Based on our evaluation of the above
matters, and after consideration of reserves established, we
believe that the resolution of such matters will not have a
material adverse effect on our business, financial position or
results of operations.
See Note 9(B) of Notes to Consolidated Financial Statements of
our 1999 Form 10-K for additional information regarding legal
matters.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
-------
The following discussion should be read together with (i) the
accompanying consolidated financial statements and related notes
and (ii) the consolidated financial statements and related notes
and Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our 1999 Form 10-K. For
various reasons, including seasonal variations in energy demand
and prices, the interim results that follow may not directly
suggest what level of earnings to expect for an entire year. In
addition, certain previously reported
<PAGE> 19
amounts have been placed under different captions in the finan-
cial statements in order to report them where comparable items
are currently recorded.
We have both acquired and disposed of assets and businesses in
the recent past. In October 2000, we announced our intention to
contribute several assets to Kinder Morgan Energy Partners,
including Kinder Morgan Texas Pipeline. These changes in the
makeup of our portfolio of businesses may affect the comparison
of operating results and financial position between periods. Our
1999 Form 10-K and Notes 2 and 5 of the accompanying Notes to
Consolidated Financial Statements contain more information on
these transactions.
We manage our various businesses by, among other things,
allocating capital and monitoring operating performance. This
management process includes dividing the overall Company into
business segments so that performance can be effectively
monitored and reported for a limited number of discrete units.
Currently, we report our operations in the following segments:
<TABLE>
<CAPTION>
Business Unit Business Conducted Referred to As:
------------- ------------------ ---------------
<S> <C> <C>
Natural Gas Pipeline Company of Major interstate natural Natural
America and certain affiliates gas pipeline system
Kinder Morgan Texas Pipeline and Major intrastate natural gas Kinder Morgan Texas
certain affiliates pipeline system
Retail Natural Gas Distribution The regulated sale of natural Retail
gas to residential, commercial
and industrial customers
Power Generation and Other The construction and operation Power and Other
of electric generation
facilities, together with
other activities not
constituting business segments
</TABLE>
We also owned and operated Kinder Morgan Interstate Gas Trans-
mission LLC, an interstate natural gas pipeline system, re-
ferred to in this report as Kinder Morgan Interstate, until it
was sold to Kinder Morgan Energy Partners in December 1999. That
sale transaction, which also included interests in two joint
ventures, is discussed in our 1999 Form 10-K.
Certain information contained in this report may include "for-
ward-looking statements" within the meaning of the Private Secur-
ities Litigation Reform Act of 1995. These statements are subject
to risks and uncertainties and are based on the beliefs and
assumptions of our management, based on information currently
available to our management. When words such as "believes,"
"expects," "anticipates," "intends," "plans," "estimates,"
"should" or similar expressions are used, we are making forward-
looking statements.
Forward-looking statements are not guarantees of performance.
They involve risks, uncertainties and assumptions. Our future
results and stockholder values may differ materially from those
expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond
our ability to control or predict. These statements are
necessarily based upon various assumptions involving judgments
with respect to the future including, among others, the ability
to achieve cost savings and revenue growth, national,
international, regional and local economic, competitive and
regulatory conditions and
<PAGE> 20
developments, technological developments, capital market condi-
tions, inflation rates, interest rates, the political and eco-
nomic stability of oil producing nations, energy markets, weather
conditions, business and regulatory or legal decisions, the pace
of deregulation of retail natural gas and electricity, the timing
and extent of changes in commodity prices for oil, natural gas,
natural gas liquids, electricity and certain agricultural pro-
ducts, the timing and success of business development efforts,
and other uncertainties, all of which are difficult to predict
and many of which are beyond our control. Readers are cautioned
not to put undue reliance on any forward-looking statements.
For those statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securi-
ties Litigation Reform Act of 1995.
<TABLE>
<CAPTION>
Consolidated Financial Results
------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 749,063 $ 496,682 $ 252,381 $1,779,419 $1,355,676 $ 423,743
Gross Margin 172,693 178,391 (5,698) 545,704 583,159 (37,455)
General and
Administrative Expenses 14,553 26,825 (12,272) 42,701 72,060 (29,359)
Merger-related Costs N/A 10,962 N/A N/A 10,962 N/A
Operating Income 85,496 61,433 24,063 283,366 228,976 54,390
Income From Continuing
Operations 26,628 5,886 20,742 97,539 42,174 55,365
Loss From Discontinued
Operations, Net of Tax N/A (20,404) N/A N/A (51,978) N/A
Diluted Earnings (Loss)
Per Share:
Continuing Operations 0.23 0.08 0.15 0.85 0.59 0.26
Discontinued
Operations N/A (0.28) N/A N/A (0.74) N/A
</TABLE>
Our results for the quarter ended September 30, 2000, reflect an
increase of $252.4 million (50.8%) in operating revenues, a
decrease of $5.7 million (3.2%) in gross margin and an increase
of $24.1 million (39.2%) in operating income from the third
quarter of 1999. Operating results for 2000 do not include
revenues, costs and expenses of Kinder Morgan Interstate, which
was sold to Kinder Morgan Energy Partners effective December 31,
1999. The increase in operating revenues is due to increased
revenues at all operating segments, principally Kinder Morgan
Texas, partially offset by the absence of Kinder Morgan
Interstate revenues in the third quarter of 2000. The decline in
gross margin principally reflects the sale of Kinder Morgan
Interstate. General and administrative expenses decreased from
$26.8 million in the third quarter of 1999 to $14.5 million in
the third quarter of 2000, a decrease of $12.3 million (45.7%)
due to cost reductions implemented following the business
combination with Kinder Morgan Delaware as we discussed in our
1999 Form 10-K. These cost reductions principally resulted from
reductions in headcount and employee-related expenses, consoli-
dation of facilities and other efficiencies associated with
implementation of the plan for combining the two entities. The
increased operating income, which occurred despite the sale of
Kinder Morgan Interstate, reflects improved third-quarter 2000
performance by several operating segments as discussed following.
Our results for the nine months ended September 30, 2000, reflect
an increase of $423.7 million (31.3%) in operating revenues, a
decrease of $37.5 million (6.4%) in gross margin and an increase
of $54.4 million (23.8%) in operating income from the
corresponding period of 1999. Operating results for 2000 do not
include revenues, costs and expenses of Kinder Morgan Interstate,
which was sold to Kinder Morgan Energy Partners effective
December 31, 1999. The increase in operating revenues is due to
increased revenues at all operating segments, principally Kinder
Morgan Texas, partially offset by the absence of Kinder Morgan
Interstate
<PAGE> 21
revenues in 2000 results. The decline in gross margin principal-
ly reflects the sale of Kinder Morgan Interstate. General and
administrative expenses decreased from $72.1 million in the first
nine months of 1999 to $42.7 million in the first nine months of
2000, a decrease of $29.4 million (40.7%) due to cost reduction
measures implemented following the business combination with
Kinder Morgan Delaware. The increased operating income, which
occurred despite the sale of Kinder Morgan Interstate, reflects
improved 2000 performance by several operating segments as dis-
cussed following.
The operating results by individual segment and explanations of
significant variances in results which follow are before
intersegment eliminations.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
Natural Gas Pipeline Company --------------------------------- ---------------------------------
---------------------------- Increase Increase
of America 2000 1999 (Decrease) 2000 1999 (Decrease)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In Thousands Except Systems Throughput)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Transportation and Storage $ 114,529 $ 130,732 $ (16,203) $ 373,821 $ 416,967 $ (43,146)
Other 57,632 23,799 33,833 67,193 43,421 23,772
--------- --------- --------- --------- --------- ---------
Total Operating Revenues 172,161 154,531 17,630 441,014 460,388 (19,374)
--------- --------- --------- --------- --------- ---------
Operating Costs and Expenses:
Gas Purchases and Other Costs
of Sales 49,772 35,283 14,489 64,794 82,667 (17,873)
Operations and Maintenance 13,945 13,545 400 44,348 48,031 (3,683)
Depreciation and Amortization 21,021 21,082 (61) 63,336 88,270 (24,934)
Taxes, Other Than Income Taxes 5,118 5,816 (698) 15,035 16,892 (1,857)
--------- --------- --------- --------- --------- ---------
Total Operating Expenses 89,856 75,726 14,130 187,513 235,860 (48,347)
--------- --------- --------- --------- --------- ---------
Operating Income Before Corporate
Costs $ 82,305 $ 78,805 $ 3,500 $ 253,501 $ 224,528 $ 28,973
========= ========= ========= ========= ========= =========
Systems Throughput (Trillion
Btus) 323.5 330.4 (6.9) 1,101.6 1091.2 10.4
========= ========= ========= ========= ========= =========
</TABLE>
Natural's operating income before corporate costs increased by
$3.5 million (4.4%) in the third quarter of 2000 from the third
quarter of 1999. Operating results for 2000 were positively
affected, relative to 1999, by (i) higher operational gas sales
revenue due primarily to higher gas prices and increased
operational efficiency and (ii) reduced ad valorem taxes. These
positive effects were partially offset by (i) reduced 2000
revenues due to sales of certain gathering assets and offshore
laterals (see Note 5 of the accompanying Notes to Consolidated
Financial Statements) and (ii) decreased 2000 unit revenues
largely attributable to both existing and planned competing
pipeline capacity (with the attendant reduced value of
transportation) in the upper Midwest, Natural's principal market
area; although, as discussed in our 1999 Form 10-K and in our
Form 10-Qs for the first two quarters of 2000, Natural continues
to experience success in retaining existing customers and
acquiring new customers.
Natural's operating income before corporate costs increased $29.0
million (12.9%) in the nine months ended September 30, 2000 from
the corresponding period in 1999. Year-to-date 2000 results were
affected positively, relative to 1999, by the same factors
affecting the third quarter, as discussed preceding. In
addition, results for 2000 were positively affected by (i) a
reduction in amortization resulting from the July 1999 change in
amortization rates (see Note 4 of the accompanying Notes to
Consolidated Financial Statements), (ii) increased 2000 storage
activity, (iii) favorable gas imbalance resolutions in 2000 and
(iv) reduced 2000 operations and maintenance expenses due to
successful cost control measures. Year-to-date 2000 results were
negatively affected, relative to 1999, by the absence, in 2000,
of revenues from assets that were sold and reduced 2000 unit
revenues due to market conditions as discussed in the previous
paragraph.
<PAGE> 22
In July 2000, Natural entered into agreements with Northern
Indiana Public Service ("NIPSCO"), a subsidiary of NiSource,
Inc., to extend the terms of its firm natural gas transportation
and storage services. The agreements total 295,100 MMBtus per
day of capacity beginning December 1, 2000 and December 1, 2001
and continuing through November 30, 2002. Natural and NIPSCO
also extended the terms of two storage agreements totaling 10.5
Bcf of capacity beginning December 1, 2000 and April 1, 2001
and continuing through March 31, 2003.
In September 2000, Natural announced that the Federal Energy
Regulatory Commission would support issuing the certificate of
public convenience and necessity to construct and operate the
Horizon pipeline. Final certification awaits a pending
environmental review. The Horizon Pipeline Company, a joint
venture of Natural and Nicor Inc., has proposed to construct 28.5
miles of 36-inch diameter pipe and 8,900 horsepower of
compression facilities and lease 380 MDth per day of firm
capacity on 42 miles of existing pipeline from Natural. The new
facilities and leased capacity would allow Horizon to transport
380 MDth of natural gas per day from near Joliet into McHenry
County, connecting the emerging supply hub at Joliet with the
northern part of the Nicor Gas distribution system and an
existing Natural pipeline. Construction on the $75 million
pipeline is expected to begin in the summer of 2001, with
completion projected in the spring of 2002. Nicor Gas has
committed to transport 300 MDth per day on the pipeline.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Kinder Morgan Interstate Gas Transmission September 30, 1999 September 30, 1999
----------------------------------------- ------------------ ------------------
(In Thousands Except Systems
Throughput)
<S> <C> <C>
Operating Revenues:
Transportation and Storage $ 28,517 $ 79,753
Other 138 304
----------- -----------
Total Operating Revenues 28,655 80,057
----------- -----------
Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales 2,992 3,683
Operations and Maintenance 4,844 16,291
Depreciation and Amortization 5,210 15,364
Taxes, Other Than Income Taxes 1,066 3,434
----------- -----------
Total Operating Expenses 14,112 38,772
----------- -----------
Operating Income Before Corporate Costs $ 14,543 $ 41,285
=========== ===========
Systems Throughput (Trillion Btus) 52.3 155.6
=========== ===========
</TABLE>
In December 1999, we contributed Kinder Morgan Interstate and
Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.),
as well as our interest in Red Cedar Gathering Company to Kinder
Morgan Energy Partners (see Note 5 of the accompanying Notes to
Consolidated Financial Statements).
<PAGE> 23
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
Increase Increase
Retail 2000 1999 (Decrease) 2000 1999 (Decrease)
------ ---------- ---------- ---------- ---------- ---------- ----------
(In Thousands Except Systems Throughput)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Gas Sales $ 26,035 $ 17,073 $ 8,962 $ 103,094 $ 94,747 $ 8,347
Transportation 11,356 10,245 1,111 31,177 30,459 718
Other 4,194 3,846 348 11,900 12,023 (123)
--------- --------- --------- --------- --------- ---------
Total Operating Revenues 41,585 31,164 10,421 146,171 137,229 8,942
--------- --------- --------- --------- --------- ---------
Operating Costs and Expenses:
Gas Purchases and Other Costs
of Sales 24,007 19,937 4,070 77,301 82,168 (4,867)
Operations and Maintenance 9,258 8,916 342 27,342 29,312 (1,970)
Depreciation and Amortization 2,928 2,841 87 8,705 8,526 179
Taxes, Other Than Income Taxes 517 869 (352) 1,830 2,509 (679)
--------- --------- --------- --------- --------- ---------
Total Operating Expenses 36,710 32,563 4,147 115,178 122,515 (7,337)
--------- --------- --------- --------- --------- ---------
Operating Income Before
Corporate Costs $ 4,875 $ (1,399) $ 6,274 $ 30,993 $ 14,714 $ 16,279
========= ========= ========= ========= ========= =========
Systems Throughput (Trillion
Btus) 15.8 12.1 3.7 49.3 38.8 10.5
========= ========= ========= ========= ========= =========
</TABLE>
Retail's operating income before corporate costs increased by
$6.3 million in the third quarter of 2000 from the third quarter
of 1999. Operating results for 2000 were positively impacted,
relative to 1999, by (i) increased irrigation volumes in 2000,
(ii) increased service revenues in 2000, (iii) reduced ad valorem
and use taxes in 2000 and (iv) reduced costs for certain
administrative functions due to renegotiation of a contract with
a third-party service provider.
Retail's operating income before corporate costs increased $16.3
million (110.6%) in the nine months ended September 30, 2000,
from the corresponding period in 1999. Year-to-date 2000 results
were positively affected, relative to 1999, by (i) increased
system throughput in 2000, although a portion of this increase
represents volumes transported for relatively low margins, (ii)
reduced cost of gas in 2000 achieved by utilizing lower cost gas
from storage (Retail utilizes the average cost inventory method
for its gas in underground storage), (iii) certain unfavorable
adjustments to gas costs affecting 1999 results and (iv) reduced
2000 operating expenses. These reduced operating expenses re-
sulted from (i) a reduction in advertising and marketing expenses
for the Choice Gas program, (ii) continued focus on efficient
operations and (iii) reduced ad valorem and use taxes.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
Increase Increase
Kinder Morgan Texas Pipeline 2000 1999 (Decrease) 2000 1999 (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
(In Thousands Except Systems Throughput)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Gas Sales $ 495,788 $ 260,337 $ 235,451 $1,084,635 $ 604,124 $ 480,511
Transportation and Storage 5,938 5,238 700 18,361 17,595 766
Other 13,968 10,400 3,568 36,128 22,699 13,429
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Revenues 515,694 275,975 239,719 1,139,124 644,418 494,706
---------- ---------- ---------- ---------- ---------- ----------
Operating Costs and Expenses:
Gas Purchases and Other Costs
of Sales 497,776 261,005 236,771 1,081,135 594,791 486,344
Operations and Maintenance 11,712 11,820 (108) 34,104 32,887 1,217
Depreciation and Amortization 712 616 96 2,105 1,819 286
Taxes, Other Than Income Taxes 1,537 808 729 3,396 2,095 1,301
---------- ---------- ---------- ---------- ---------- ----------
Total Operating Expenses 511,737 274,249 237,488 1,120,740 631,592 489,148
---------- ---------- ---------- ---------- ---------- ----------
Operating Income Before
Corporate Costs $ 3,957 $ 1,726 $ 2,231 $ 18,384 $ 12,826 $ 5,558
========== ========== ========== ========== ========== ==========
Systems Throughput (Trillion
Btus) 175.6 158.6 17.0 490.5 446.3 44.2
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 24
In October 2000, we announced that we would contribute several
assets to Kinder Morgan Energy Partners, including Kinder Morgan
Texas Pipeline. Additional information on this pending
transaction is contained in Note 5 of the accompanying Notes to
Consolidated Financial Statements.
Kinder Morgan Texas's operating income before corporate costs
increased by $2.2 million (129.3%) in the third quarter of 2000
from the third quarter of 1999. Operating results were
positively impacted in 2000, relative to 1999, by (i) increased
throughput volumes, principally due to additional gas sales and
(ii) increased natural gas liquids revenues resulting from an
increase in the average price of natural gas liquids from $0.36
per gallon in 1999 to $0.53 per gallon in 2000. These positive
effects were partially offset by (i) slightly reduced natural gas
liquids sales volumes, (ii) increased depreciation expenses and
(iii) increased ad valorem taxes.
Kinder Morgan Texas's operating income before corporate costs
increased by $5.6 million (43.3%) in the nine months ended
September 30, 2000, from the corresponding period in 1999. Year-
to-date 2000 results were affected principally by the same
factors affecting the third quarter, as discussed preceding,
except that on a year-to-date basis, natural gas liquids volumes
were higher in 2000 than in 1999. The increased volumes in 2000
were due to the fact that no processing was done in January and
February of 1999 at a processing facility at which Kinder Morgan
Texas leases capacity. Year-to-date results were also negatively
impacted by slightly higher operations and maintenance expenses
in 2000.
On October 31, 2000, Kinder Morgan Texas announced that it had
entered into a long-term natural gas transportation and storage
agreement with Calpine Corporation, a fully integrated electric
power company, making Kinder Morgan Texas the primary natural gas
transporter for Calpine in the Texas Gulf Coast and Houston Ship
Channel markets. Under the agreement, which begins January 1,
2001, Calpine will have access to up to 375,000 MMBtus of firm
natural gas transportation service per day from Kinder Morgan
Texas for a period of 10 years. In July 2000, Kinder Morgan
Texas announced that it had entered into a new natural gas sales
and transportation agreement with Calpine. Under this agreement,
Kinder Morgan Texas will supply Calpine's Pasadena II gas-fired
cogeneration facility in Texas with 60,000 MMBtus of natural gas
per day - about 75 percent of the amount of natural gas the plant
will burn. The contract will continue through the summer of 2002.
Kinder Morgan Texas currently supplies 100 percent of the natural
gas Calpine burns at its Pasadena I plant.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
Increase Increase
Power and Other 2000 1999 (Decrease) 2000 1999 (Decrease)
--------------- ---------- ---------- ---------- ---------- ---------- ----------
(In Thousands Except Systems Throughput)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 19,674 $ 13,929 $ 5,745 $ 53,191 $ 44,959 $ 8,232
--------- --------- --------- --------- --------- ---------
Operating Costs and Expenses:
Gas Purchases and Other Costs
of Sales 4,816 3,156 1,660 10,468 9,906 562
Operations and Maintenance 3,526 2,924 602 12,231 9,900 2,331
Depreciation and Amortization 2,351 1,925 426 6,638 5,685 953
Taxes, Other Than Income Taxes 69 379 (310) 665 823 (158)
--------- --------- --------- --------- --------- ---------
Total Operating Expenses 10,762 8,384 2,378 30,002 26,314 3,688
--------- --------- --------- --------- --------- ---------
Operating Income Before
Corporate Costs $ 8,912 $ 5,545 $ 3,367 $ 23,189 $ 18,645 $ 4,544
========= ========= ========= ========= ========= =========
</TABLE>
Power and Other operating income before corporate costs increased
by $3.4 million (60.7%) in the third quarter of 2000 from the
third quarter of 1999. Operating results were positively impacted
in 2000, relative to 1999, by
<PAGE> 25
(i) profits from development of a 550-megawatt electric generat-
ing plant near Little Rock, Arkansas and (ii) increased earnings
from other activities, principally our agreement with HS
Resources, Inc. as described in our 1999 Form 10-K. These posi-
tive effects were partially offset by (i) increased fuel costs
in 2000 for power generation and (ii) increased 2000 operations
and maintenance and depreciation expenses.
Power and Other operating income before corporate costs increased
by $4.5 million (24.4%) in the nine months ended September 30,
2000, from the corresponding period in 1999. Year-to-date 2000
results were affected by the same factors affecting the third
quarter, as discussed in the preceding paragraph.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
Increase Increase
Other Income and (Deductions) 2000 1999 (Decrease) 2000 1999 (Decrease)
----------------------------- ---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Kinder Morgan Energy Partners:
Equity in Earnings $ 34,562 $ - $ 34,562 $ 99,287 $ - $ 99,287
Amortization of Excess
Investment (6,927) - (6,927) (21,366) - (21,366)
Equity in Earnings of Other
Equity Investments (1,783) 1,783 (3,566) (7,399) 12,312 (19,711)
Interest Expense (61,594) (61,410) (184) (184,463) (187,223) 2,760
Minority Interests (5,975) (6,062) 87 (18,012) (18,626) 614
Other, Net 588 13,906 (13,318) 11,152 33,699 (22,547)
--------- --------- --------- --------- --------- ---------
Total $ (41,129) $ (51,783) $ 10,654 $(120,801) $(159,838) $ 39,037
========= ========= ========= ========= ========= =========
</TABLE>
The equity in earnings of Kinder Morgan Energy Partners and
associated amortization during 2000 result from our October 1999
acquisition of Kinder Morgan Delaware. Kinder Morgan Energy
Partners' Form 10-Q for the third quarter of 2000 contains
additional information about its results of operations. The
decrease in "Equity in Earnings of Other Equity Investments" from
the third quarter of 1999 to the third quarter of 2000 and from
the first nine months of 1999 to the first nine months of 2000 is
principally due to the sale of various equity method investments.
In addition, 2000 results reflect increased losses from the
TransColorado pipeline joint venture. "Other, Net" in the third
quarter of 2000 principally consists of miscellaneous gains from
asset sales. Third-quarter 1999 "Other, Net" included (i) an
$11.4 million gain from the sale of Stingray Pipeline Company,
L.L.C. and (ii) a $2.2 million gain from the sale of preferred
stock of Tom Brown, Inc. Additional information on these matters
is contained in Notes 2 and 5 of the accompanying Notes to
Consolidated Financial Statements.
"Other, Net" for the nine months ended September 30, 2000
includes (i) $4.1 million due to the recovery of note receivable
proceeds in excess of its carrying value, (ii) $3.9 million due
to the settlement of a regulatory matter for an amount less than
that previously reserved, (iii) a $1.3 million gain from the sale
of common stock of Tom Brown, Inc. and (iv) miscellaneous gains
from the sale of assets. "Other, Net" for the nine months ended
September 30, 1999 included (i) a $17.5 million gain from the
sale of certain offshore assets, (ii) an $11.4 million gain from
the sale of Stingray Pipeline Company, L.L.C., (iii) a $2.2
million gain from the sale of preferred stock of Tom Brown, Inc.
and (iv) dividend income from preferred stock of Tom Brown, Inc.
prior to its sale.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Income Taxes - Continuing --------------------------------- ---------------------------------
------------------------- Increase Increase
Operations 2000 1999 (Decrease) 2000 1999 (Decrease)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Income Tax Provision $ 17,739 $ 3,764 $ 13,975 $ 65,026 $ 26,964 $ 38,062
========= ========= ========= ========= ========= =========
Effective Tax Rate 40.0% 39.0% 1.0% 40.0% 39.0% 1.0%
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE> 26
The increase of $14.0 million in the income tax provision from
the third quarter of 1999 to the third quarter of 2000 is
composed of (i) an increase of $13.5 million due to an increase
in pretax income and (ii) an increase of $0.5 million due to an
increase in the effective tax rate in 2000. The increase of
$38.1 million in the income tax provision from the first nine
months of 1999 to the first nine months of 2000 is composed of
(i) an increase of $36.4 million due to an increase in pretax
income and (ii) an increase of $1.7 million due to an increase in
the effective tax rate in 2000. In each case, the increased
effective tax rate is principally due to an increased provision
for state income taxes.
Discontinued Operations
-----------------------
During the third quarter of 1999, we adopted and implemented a
plan to discontinue the direct marketing of non-energy products
and services (principally under the "Simple Choice" brand), which
activities had been carried on largely through our en*able joint
venture with PacifiCorp. During the fourth quarter of 1999, we
adopted and implemented plans to discontinue the following lines
of business: gathering and processing of natural gas, providing
field services to natural gas producers, commodity marketing of
natural gas and natural gas liquids, international operations and
West Texas pipelines. Our 1999 Form 10-K contains additional
information on these matters. Note 6 of the accompanying Notes
to Consolidated Financial Statements contains (i) information
concerning the status of disposition efforts with respect to
these assets, (ii) certain financial information with respect to
discontinued operations and (iii) our remaining investment in
these businesses.
Liquidity and Capital Resources
-------------------------------
The following table illustrates the sources of our invested
capital. The balances at December 31, 1998 and thereafter
reflect the incremental capital associated with our acquisition
of MidCon Corp., including our post-acquisition refinancings
completed in 1998. The balances at December 31, 1999 and
September 30, 2000 also reflect the impacts associated with our
acquisition of Kinder Morgan Delaware and our sale of certain
assets to Kinder Morgan Energy Partners. Notes 2 and 5 of the
accompanying Notes to Consolidated Financial Statements contain
additional information on these transactions. Our capitalization
will be affected by, among other things, the maturity of two
securities in 2001, see "Net Cash Flows from Financing Activi-
ties" following.
<PAGE> 27
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Long-term Debt $3,560,547 $3,293,326 $3,300,025 $ 553,816 $ 423,676
Common Equity 1,742,187 1,665,841 1,216,821 606,132 519,794
Preferred Stock - - 7,000 7,000 7,000
Capital Trust Securities 275,000 275,000 275,000 100,000 -
---------- ---------- ---------- ---------- ----------
Capitalization 5,577,734 5,234,167 4,798,846 1,266,948 950,470
Short-Term Debt (2) - 581,567 1,702,013 (1) 359,951 156,271
---------- ---------- ---------- ---------- ----------
Invested Capital $5,577,734 $5,815,734 $6,500,859 $1,626,899 $1,106,741
========== ========== ========== ========== ==========
Capitalization:
---------------
Long-term Debt 63.8% 62.9% 68.8% 43.7% 44.6%
Common Equity 31.2% 31.8% 25.4% 47.8% 54.7%
Preferred Stock - - 0.1% 0.6% 0.7%
Capital Trust Securities 5.0% 5.3% 5.7% 7.9% -
Invested Capital:
-----------------
Total Debt 63.8% 66.6% 76.9% 56.2% 52.4%
Equity, Including Capital
Trust Securities 36.2% 33.4% 23.1% 43.8% 47.6%
(1) Includes the $1,394,846 Substitute Note assumed in
conjunction with the acquisition of MidCon Corp., which
note was repaid in January 1999.
(2) At September 30, 2000, $269.4 million of short-term
obligations have been reclassified to long-term debt due to
our intent and ability to refinance them on a long-term
basis (see Note 10 of the accompanying Notes to Consoli-
dated Financial Statements).
</TABLE>
As discussed in Note 5 to the accompanying consolidated financial
statements, in April 2000, Kinder Morgan Energy Partners issued
4.5 million limited partnership units in a public offering. We
did not acquire any of these units and, accordingly, our
percentage ownership of Kinder Morgan Energy Partners was reduced
by approximately 1.3 percent. In accordance with the policy
described in Note 3 of the accompanying Notes to Consolidated
Financial Statements, various balance sheet accounts, including
paid-in-capital, were also affected. Kinder Morgan Energy Part-
ners has adopted an aggressive acquisition strategy and it is
expected that future acquisitions will be financed, in part, by
issuance of additional limited partnership units. Therefore, it
is expected that future similar transactions will occur. Never-
theless, because (i) it is Kinder Morgan Energy Partners' policy
that such acquisitions be accretive to cash flow per common unit,
(ii) the general partner interest is not diluted by such trans-
actions and (iii) for a given level of cash distribution, the
incentive distribution structure results in relatively larger
distributions to the general partner as the number of limited
partnership units outstanding increases, it is not anticipated
that additional transactions will collectively have an adverse
effect on cash flows or earnings from this investment.
CASH FLOWS
----------
The following discussion of cash flows should be read in
conjunction with the Statements of Consolidated Cash Flows and
related supplemental information included in our 1999 Form 10-K
and the accompanying Consolidated Statements of Cash Flows,
including the related supplemental disclosures.
Net Cash Flows from Operating Activities
----------------------------------------
"Net Cash Flows Provided by Operating Activities" decreased from
$123.5 million for the nine months ended September 30, 1999 to
$96.5 million for the nine months ended September 30, 2000, a
decline of $27.0 million (21.9%). This decline is primarily due
to an increase in cash flows used for discontinued operations,
which increased from a source of $138.3 million in the first nine
months of 1999 to a use of $102.4 million in the first
<PAGE> 28
nine months of 2000, a $240.7 million increased use of cash re-
flecting (i) $124.9 million of cash outflow in 2000 attributable
to the termination of our receivable sale program and (ii) 124.9
million of cash inflow in 1999 attributable to the receivable
sale program (see "Net Cash Flows from Financing Activities"
following). The decline in "Net Cash Flows Provided by Operating
Activities" for discontinued operations was partially offset by
an increase in cash flows provided by continuing operations,
which increased from a use of $14.7 million for the nine months
ended September 30, 1999 to a source of $198.9 million for the
nine months ended September 30, 2000. This $213.6 million of
increased cash flow is primarily due to (i) $84.3 million of cash
distributions received in the first nine months of 2000
attributable to our interest in Kinder Morgan Energy Partners
(see Note 2 of the accompanying Notes to Consolidated Financial
Statements and the discussion following), (ii) a decrease in cash
used for working capital of $104.8 million during the first nine
months of 2000 and (iii) a decrease in cash used in the first
nine months of 2000 to make interest payments reflecting the
decreased average debt balance outstanding. Partially offsetting
this increase were January 2000 payments associated with December
1999 gas supply purchases.
In general, distributions from Kinder Morgan Energy Partners are
declared in the month following the end of the quarter to which
they apply and are paid in the month following the month of
declaration to the general partner and unit holders of record as
of the end of the declaration month. Therefore, the accompanying
Statement of Consolidated Cash Flows for the nine months ended
September 30, 2000 reflects the receipt of a total of $84.3
million of cash distributions from Kinder Morgan Energy Partners
for the fourth quarter of 1999 and the first six months of 2000.
The cash distributions attributable to our interest for the three
months and nine months ended September 30, 2000 total $37.0
million and $105.4 million, respectively. The increase in
distributions during 2000 reflects, among other factors, the
December 31, 1999 transfer of certain properties from us to
Kinder Morgan Energy Partners (see Note 5 of the accompanying
Notes to Consolidated Financial Statements).
Net Cash Flows from Investing Activities
----------------------------------------
"Net Cash Flows Provided by Investing Activities" decreased from
$1.0 billion for the nine months ended September 30, 1999 to
$347.5 million for the nine months ended September 30, 2000, a
decline of $690.6 million principally due to the sale of
approximately $1.1 billion of government securities during the
first nine months of 1999, with the proceeds utilized to repay
the Substitute Note assumed in conjunction with the January 1998
acquisition of MidCon Corp. (see "Cash Flows From Financing
Activities" following and Note 2 of Notes to Consolidated
Financial Statements included in our 1999 Form 10-K). Partially
offsetting this decrease was (i) $330 million of cash received
during 2000 from the sale of certain interests to Kinder Morgan
Energy Partners (see Note 5 of the accompanying Notes to
Consolidated Financial Statements) and (ii) cash flows of
discontinued investing activities increasing from a use of $51.7
million in the first nine months of 1999 to a source of $126.4
million in the first nine months of 2000, which was principally a
result of the $163.9 million of proceeds received from ONEOK for
the sale of gathering and processing businesses in Oklahoma,
Kansas and West Texas (see Note 6 of the accompanying Notes to
Consolidated Financial Statements). We are in the process of
monetizing our remaining investment in discontinued businesses,
see "Discontinued Operations" elsewhere herein.
Net Cash Flows from Financing Activities
----------------------------------------
"Net Cash Flows Used in Financing Activities" decreased from
approximately $1.2 billion for the nine months ended September
30, 1999 to $451.2 million for the nine months ended September
30, 2000, a decline of approximately $711.8 million. This
decrease was principally due to the first-quarter 1999 repayment
of the $1.39 billion Substitute Note as discussed preceding,
partially offset by increased short-term borrowings
<PAGE> 29
during the same period, as well as reduced cash payments for
dividends in 2000. Partially offsetting these effects were in-
creased 2000 cash used for miscellaneous financing activities.
As further discussed in Note 10 of the accompanying Notes to
Consolidated Financial Statements, our principal sources of short-
term liquidity are our revolving bank facilities totaling $900
million. At September 30, 2000, we had $261.2 million of
commercial paper (which is backed by the bank facilities) issued
and outstanding. The corresponding amount outstanding was $256.5
million at October 25, 2000. After inclusion of applicable
letters of credit, the remaining available borrowing capacity
under the bank facilities was $670.5 million and $625.2 million
at September 30, 2000 and October 25, 2000, respectively. As
described in our 1999 Form 10-K, our bank facilities and certain
of our operating lease arrangements contain covenants related to
our ratio of debt to total capitalization, consolidated net worth
and debt ratings. For additional information on utilization of
these facilities, see Note 10 of the accompanying Notes to
Consolidated Financial Statements.
On March 1, 2001, our $400 million of Reset Put Securities will
either (i) have their interest rate reset and remain outstanding
with a maturity date of March 1, 2021 as a result of the exercise
of a call option by Morgan Stanley & Co. or (ii) be redeemed by
us as a result of the automatic exercise of a mandatory put by
First Trust National Association on behalf of the holders in the
event that Morgan Stanley fails to exercise its call option. If
we redeem the Reset Put Securities, the required funds are
expected to be provided principally by incremental short-term
borrowing. It is not currently possible to determine which
outcome will result because the principal economic decision is
dependent upon interest rates in effect at the time the decision
must be made. These securities are included in "Long-term Debt"
in the accompanying Consolidated Balance Sheets.
In November 1998, we sold $460 million principal amount of
premium equity participating securities in a public offering.
These securities obligated the holders to purchase a certain
amount of our Common Stock based on the market price at the end
of a three-year period. In November 2001, the maturity of these
securities will result in our receipt of $460 million in cash
and, based on the current market price of our Common Stock, the
issuance of approximately 13.4 million shares of common stock.
The cash proceeds are expected to be used to retire the $400
million of 6.45% Senior Notes which mature concurrently with the
premium equity participating securities and to repay a portion of
short-term borrowings then outstanding.
In September 1999, we established an accounts receivable sales
facility that provided up to $150 million of additional
liquidity. In accordance with this agreement, we received
proceeds of $150 million on September 30, 1999. Cash flows
associated with this facility are included with "Cash flows from
Operating Activities" in the accompanying Consolidated Statements
of Cash Flows. In February 2000, we reduced our participation in
this receivables sales program by $124.9 million, principally as
a result of our then-pending disposition of our wholesale gas
marketing business. On April 25, 2000, we repaid the residual
balance and terminated the agreement.
Regulatory Matters
------------------
See Note 11 of the accompanying Notes to Consolidated Financial
Statements for information regarding regulatory matters. The
reader is also directed to Notes 8(A) and 8(B) of Notes to
Consolidated Financial Statements of our 1999 Form 10-K for
additional information on regulatory matters.
Environmental and Legal Matters
-------------------------------
See Note 16 of the accompanying Notes to Consolidated Financial
Statements for information regarding environmental and legal
matters. The reader is also directed to Notes 9(A) and 9(B) of
Notes to Consolidated
<PAGE> 30
Financial Statements of our 1999 Form 10-K for additional infor-
mation on our pending litigation and environmental matters. We
believe we have established adequate reserves such that the reso-
lution of pending litigation and environmental matters will not
have a material adverse impact on our business, cash flows,
financial position or results of operations.
Business Strategy
-----------------
The reader is directed to our 1999 Form 10-K for a discussion of
business strategy.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
There have been no material changes in market risk exposures that
would affect the quantitative and qualitative disclosures
presented as of December 31, 1999, in the "Risk Management"
section of Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our 1999 Form
10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The reader is directed to Note 16 of the accompanying Notes to
Consolidated Financial Statements in Part I, Item 1, which is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27.1 Financial Data Schedule*
*Included in SEC copy only.
(B) Reports on Form 8-K
(1) Current Report on Form 8-K dated November 6, 2000 was
filed pursuant to Items 7 and 9 of that form.
Pursuant to Item 9 of that form, in Item 7 we filed an exhibit
containing presentation materials for use at a meeting with
analysts and others on November 6, 2000.
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
KINDER MORGAN, INC.
(Registrant)
November 13, 2000 /s/ C. Park Shaper
----------------------------------
C. Park Shaper
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 32
EXHIBIT INDEX
27.1 Financial Data Schedule*
*Included in SEC copy only.
