Form 10-Q
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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 June 30, 2000
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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
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KINDER MORGAN, INC.
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(Exact name of registrant as specified in its charter)
Kansas 48-0290000
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Dallas, Suite 1000, Houston, Texas 77002
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (713) 369-9000
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1301 McKinney, Suite 3400, Houston, Texas
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(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 114,300,435 shares as of
July 31, 2000.
<PAGE> 2
KINDER MORGAN, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
Contents
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited) Number
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Consolidated Balance Sheets........................ 3 - 4
Consolidated Statements of Income.................. 5
Consolidated Statements of Cash Flows.............. 6
Notes to Consolidated Financial Statements......... 7 - 22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 22 - 34
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................... 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 35
Item 6. Exhibits and Reports on Form 8-K...................... 35
SIGNATURE....................................................... 36
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (Unaudited)
Kinder Morgan, Inc. and Subsidiaries
(Dollars in Thousands)
June 30, December 31,
2000 1999
----------- ------------
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 27,448 $ 26,378
Restricted Deposits 52 51
Accounts Receivable 373,282 306,451
Receivable from Kinder Morgan Energy Partners - 330,000
Inventories 65,340 50,328
Gas Imbalances 148,954 172,501
Other 13,434 19,154
Net Current Assets of Discontinued Operations - 58,991
----------- -----------
628,510 963,854
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Investments:
Kinder Morgan Energy Partners 1,714,010 1,791,768
Other 143,295 126,103
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1,857,305 1,917,871
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Property, Plant and Equipment 6,163,600 6,167,251
Less Accumulated Depreciation and
Amortization 390,556 377,687
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5,773,044 5,789,564
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Deferred Charges and Other Assets 238,438 209,758
Net Non-current Assets of Discontinued
Operations 112,079 659,236
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Total Assets $ 8,609,376 $ 9,540,283
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE> 4
CONSOLIDATED BALANCE SHEETS (Unaudited)
Kinder Morgan, Inc. and Subsidiaries
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current Maturities of Long-term Debt $ 7,167 $ 7,167
Notes Payable 292,500 574,400
Accounts Payable 252,736 224,625
Accrued Taxes 12,601 36,075
Gas Imbalances 151,603 196,469
Payable for Purchase of Thermo Companies 15,000 44,320
Net Current Liabilities of Discontinued
Operations 7,221 -
Reserve for Loss on Disposal of Discontinued
Operations 24,916 535,630
Other 170,666 206,620
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934,410 1,825,306
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Other Liabilities and Deferred Credits:
Deferred Income Taxes 2,147,936 2,228,553
Other 233,529 242,926
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2,381,465 2,471,479
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Long-term Debt 3,292,852 3,293,326
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Kinder Morgan-Obligated Mandatorily Redeemable
Preferred Capital Trust Securities of Subsidiary
Trusts Holding Solely Debentures of Kinder Morgan 275,000 275,000
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Minority Interests in Equity of Subsidiaries 7,362 9,331
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Stockholders' Equity:
Common Stock-
Authorized - 150,000,000 Shares, Par Value $5 Per
Share Outstanding - 114,247,647 and 112,665,977
Shares, Respectively, After Deducting 169,903
and 172,402 Shares Held in Treasury 572,088 564,192
Additional Paid-in Capital 1,186,341 1,203,008
Retained Deficit (36,057) (95,615)
Other (4,085) (5,744)
----------- -----------
Total Stockholders' Equity 1,718,287 1,665,841
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Total Liabilities and Stockholders' Equity $ 8,609,376 $ 9,540,283
=========== ===========
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 Six Months Ended
June 30, June 30,
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2000 1999 2000 1999
Operating Revenues: ------ ------ ------ ------
<S> <C> <C> <C> <C>
Natural Gas Sales $ 384,347 $ 227,529 $ 671,788 $ 437,663
Natural Gas Transportation and Storage 139,964 179,628 305,240 379,404
Other 25,533 24,570 53,328 41,927
---------- ---------- ---------- ----------
Total Operating Revenues 549,844 431,727 1,030,356 858,994
---------- ---------- ---------- ----------
Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales 380,768 248,321 657,345 454,226
Operations and Maintenance 37,858 41,899 79,536 87,185
General and Administrative 13,855 24,886 28,148 45,235
Depreciation and Amortization 27,011 43,850 53,772 87,990
Taxes, Other Than Income Taxes 6,878 8,304 13,685 16,815
Merger-related Costs - (2,916) - -
---------- ---------- ---------- ----------
Total Operating Costs and Expenses 466,370 364,344 832,486 691,451
---------- ---------- ---------- ----------
Operating Income 83,474 67,383 197,870 167,543
---------- ---------- ---------- ----------
Other Income and (Deductions):
Kinder Morgan Energy Partners:
Equity in Earnings 35,142 - 64,725 -
Amortization of Excess Investment (6,862) - (14,439) -
Equity in Earnings (Losses) of Other
Equity Investments (2,717) 3,956 (5,616) 10,529
Interest Expense, Net (62,470) (62,896) (122,869) (125,813)
Minority Interests (6,072) (6,585) (12,037) (12,564)
Other, Net 892 18,436 10,564 19,793
---------- ---------- ---------- ----------
Total Other Income and (Deductions) (42,087) (47,089) (79,672) (108,055)
---------- ---------- ---------- ----------
Income from Continuing Operations
Before Income Taxes 41,387 20,294 118,198 59,488
Income Taxes 16,560 7,914 47,287 23,200
---------- ---------- ---------- ----------
Income from Continuing Operations 24,827 12,380 70,911 36,288
Loss from Discontinued Operations, Net of
Tax - (14,788) - (31,574)
---------- ---------- ---------- ----------
Net Income (Loss) 24,827 (2,408) 70,911 4,714
Less - Preferred Dividends - 41 - 129
Less - Premium Paid on Preferred Stock
Redemption - 350 - 350
---------- ---------- ---------- ----------
Earnings (Loss) Available For Common Stock $ 24,827 $ (2,799) $ 70,911 $ 4,235
========== ========== ========== ==========
Number of Shares Used in Computing Basic
Earnings Per Common Share (Thousands) 114,196 70,689 113,627 70,087
========== ========== ========== ==========
Basic Earnings (Loss) Per Common Share:
Continuing Operations $ 0.22 $ 0.17 $ 0.62 $ 0.51
Discontinued Operations - (0.21) - (0.45)
---------- ---------- ---------- ----------
Total Basic Earnings (Loss) Per Common Share $ 0.22 $ (0.04) $ 0.62 $ 0.06
========== ========== ========== ==========
Number of Shares Used in Computing Diluted
Earnings Per Common Share (Thousands) 114,981 70,761 114,228 70,169
========== ========== ========== ==========
Diluted Earnings (Loss) Per Common Share:
Continuing Operations $ 0.22 $ 0.17 $ 0.62 $ 0.51
Discontinued Operations - (0.21) - (0.45)
---------- ---------- ---------- ----------
Total Diluted Earnings (Loss) Per Common
Share $ 0.22 $ (0.04) $ 0.62 $ 0.06
========== ========== ========== ==========
Dividends Per Common Share $ 0.05 $ 0.20 $ 0.10 $ 0.40
========== ========== ========== ==========
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>
Six Months Ended
June 30,
----------------------
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from Continuing Operations $ 70,911 $ 36,288
Adjustments to Reconcile Income from Continuing
Operations to Net Cash Flows from Operating Activities:
Depreciation and Amortization 53,772 87,990
Deferred Income Taxes 42,179 1,007
Equity in Earnings of Kinder Morgan Energy Partners (50,286) -
Distributions from Kinder Morgan Energy Partners 47,309 -
Deferred Purchased Gas Costs 2,988 7,277
Net Gains on Sales of Facilities (2,125) (17,797)
Changes in Other Working Capital Items (Note 8) (70,987) (110,989)
Changes in Deferred Revenues (2,656) (6,771)
Other Non-cash Charges and Credits to Income (17,597) (15,700)
Other, Net (5,978) (7,999)
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Net Cash Flows Provided by (Used in) Continuing
Operations 67,530 (26,694)
Net Cash Flows Provided by (Used in) Discontinued
Operations (115,490) 93,569
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NET CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES (47,960) 66,875
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (43,283) (35,842)
Proceeds from Sales to Kinder Morgan Energy Partners 330,000 -
Acquisitions (19,412) (35,000)
Investments (28,546) (1,172)
Sale of Tom Brown, Inc. Common Stock 14,864 -
Sale of U.S. Government Securities - 1,092,415
Proceeds from Sales of Other Assets 1,550 57,327
---------- ----------
Net Cash Flows Provided by Continuing Investing
Activities 255,173 1,077,728
Net Cash Flows Provided by (Used in) Discontinued
Investing Activities 129,366 (29,113)
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NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 384,539 1,048,615
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term Debt, Net (277,733) (1,068,396)
Long-term Debt Retired (791) (3,950)
PEPS Contract Fee (654) (1,097)
Common Stock Issued 12,957 6,329
Other Financing, Net (57,129) -
Preferred Stock Redeemed - (7,350)
Treasury Stock Issued 18 39
Treasury Stock Acquired (75) (56)
Cash Dividends, Common and Preferred (11,354) (28,287)
Minority Interests, Net (748) 1,410
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NET CASH FLOWS USED IN FINANCING ACTIVITIES (335,509) (1,101,358)
---------- ----------
Net Increase in Cash and Cash Equivalents 1,070 14,132
Cash and Cash Equivalents at Beginning of Period 26,378 16,247
---------- ----------
Cash and Cash Equivalents at End of Period $ 27,448 $ 30,379
========== ==========
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
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Effective with K N Energy, Inc.'s October 1999 acquisition of
Kinder Morgan, Inc., a Delaware corporation ("Kinder Morgan
Delaware"), K N Energy, Inc. changed its name to Kinder Morgan,
Inc. As used herein, "Kinder Morgan" refers to Kinder Morgan,
Inc. (a Kansas corporation and formerly K N Energy, Inc.) and its
consolidated subsidiaries unless the context otherwise requires
(see Note 2). In the opinion of Management, all adjustments
necessary for a fair presentation of the results for the
unaudited interim periods have been made. Amounts shown in the
Consolidated Balance Sheet for December 31, 1999, were derived
from the audited balance sheet included in Kinder Morgan's 1999
Annual Report on Form 10-K. Certain amounts for prior periods
have been reclassified to conform to the current presentation.
2. Business Combinations
---------------------
On October 7, 1999, K N Energy, Inc. completed the acquisition of
Kinder Morgan Delaware, the sole stockholder of the general
partner of Kinder Morgan Energy Partners, L.P. Kinder Morgan
Energy Partners, the nation's largest pipeline master limited
partnership, owns and operates one of the largest product
pipeline systems in the United States, serving customers in
sixteen states with more than 5,000 miles of pipeline and over
twenty associated terminals. Kinder Morgan Energy Partners also
operates 25 bulk terminal facilities which handle over 45 million
tons of coal, petroleum coke and other dry and liquid bulk
material annually. In addition, Kinder Morgan Energy Partners
currently owns 51 percent of Plantation Pipe Line Company, 100
percent of Kinder Morgan CO2 Company, Ltd. (formerly Shell CO2
Company, Ltd.) and certain natural gas operations previously
owned by Kinder Morgan, see Note 5. For additional information
regarding the business and assets of Kinder Morgan Energy
Partners, the reader is directed to Kinder Morgan Energy
Partners' 1999 Annual Report on Form 10-K.
To effect this business combination, K N Energy, Inc. issued
approximately 41.5 million shares of its common stock in exchange
for all of the outstanding shares of Kinder Morgan Delaware.
This acquisition was accounted for as a purchase for accounting
purposes and, accordingly, the assets acquired and liabilities
assumed were recorded at their respective estimated fair market
values as of the acquisition date. The allocation of the
purchase price resulted in an excess of the purchase price over
Kinder Morgan Delaware's share of the underlying equity in the
net assets of Kinder Morgan Energy Partners totaling $1.3
billion, with deferred taxes provided on this temporary book/tax
basis difference. This excess has been fully allocated to Kinder
Morgan Delaware's indirect investment in Kinder Morgan Energy
Partners (through its 100% ownership of Kinder Morgan G.P., Inc.,
owner of the general partner interest) and reflects the estimated
fair market value of this investment which is accounted for under
the equity method of accounting (see Note 3). This excess
investment is being amortized over 44 years, approximately the
estimated remaining useful life of Kinder Morgan Energy Partners'
assets, and is shown in the accompanying Consolidated Statements
of Income as "Amortization of Excess Investment" under the sub-
heading "Kinder Morgan Energy Partners" within "Other Income and
(Deductions)." The assets, liabilities and results of operations
of Kinder Morgan Delaware are included with those of Kinder
Morgan beginning with the October 1999 acquisition.
On February 22, 1999, Sempra Energy and Kinder Morgan announced
that their respective boards of directors had unanimously
approved a definitive agreement under which Sempra and Kinder
Morgan would combine in a stock-and-cash transaction valued in
the aggregate at $6.0 billion. On June 21, 1999, Sempra and
Kinder Morgan announced that they had mutually agreed to
terminate the merger agreement. Sempra reimbursed Kinder Morgan
$5.95 million for expenses incurred in connection with the
proposed merger. During the second
<PAGE> 8
quarter of 1999, Kinder Morgan recorded the reversal of the $2.9
million of previously-reported costs associated with the
terminated merger, reported in the accompanying Consolidated
Statement of Income for 1999 as "Merger-related Costs".
During the third quarter of 1998, Kinder Morgan completed its
acquisition (accounted for as a purchase) of interests in four
independent power plants in Colorado from the Denver-based Thermo
Companies ("Thermo"), representing approximately 380 megawatts of
electric generation capacity. The final scheduled payment for
this acquisition ($30 million) was made April 20, 2000, with
961,153 shares of Kinder Morgan common stock. Kinder Morgan has
retained $15 million of the purchase price which is payable to
the sellers at the earlier of the satisfaction of certain
contractual obligations or April 1, 2001.
3. Accounting for Certain Equity Transactions by Affiliates
--------------------------------------------------------
As discussed in Note 2, Kinder Morgan accounts for its investment
in Kinder Morgan Energy Partners (among other entities) under the
equity method of accounting. Under this method, in each
accounting period, Kinder Morgan records its share of these
investees' earnings, and amortizes any "excess" investment.
Under authoritative accounting guidelines, Kinder Morgan is
required to adjust the amount of its excess investment when an
equity method investee or a consolidated subsidiary issues
additional equity (or reacquires equity shares) in any manner
which alters Kinder Morgan's ownership percentage. Differences
between the per unit sales proceeds from these equity issuances
(or reacquisitions) and Kinder Morgan's 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
-----------------------------
Pursuant to a study of the useful lives of the underlying assets
by an independent third party, in July 1999, Kinder Morgan
changed the depreciation rates associated with the gas plant
acquisition adjustment recorded in conjunction with the
acquisition of MidCon Corp. (see Note 2 of Notes to Consolidated
Financial Statements included in Kinder Morgan's 1999 Annual
Report on Form 10-K). This change had the effect of decreasing
"Depreciation and Amortization" by approximately $9.7 million and
$19.3 million for the quarter and six months ended June 30, 2000,
respectively, and increasing "Income from Continuing Operations"
and "Net Income" by approximately $5.8 million ($0.05 per diluted
share) and $11.6 million ($0.10 per diluted share) for the
quarter and six months ended June 30, 2000, respectively, in
comparison to the amounts which would have been recorded util-
izing the previous depreciation rates.
5. Investments and Sales
---------------------
See Note 6 for information regarding sales of assets and
businesses included in discontinued operations.
In August 2000, Kinder Morgan Power Company, a wholly owned
subsidiary of Kinder Morgan, 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 is
scheduled to begin in August 2000. The plant is expected to
begin producing power in June 2002.
In May 2000, Kinder Morgan Power Company, and Southern Energy,
Inc., a subsidiary of Southern Company, announced plans to build
a 550-megawatt electric power plant southeast of Little Rock,
Arkansas. Construction the $250 million plant began in July
2000 in Pulaski County, Arkansas, and the plant is scheduled to
begin
<PAGE> 9
producing power by the second quarter of 2002. Gas transportation
service for the natural gas-fired plant will be provided by
Natural Gas Pipeline Company of America, another wholly owned
subsidiary of Kinder Morgan. Southern Company will add the elec-
tric output of the plant to its national portfolio of power
generation. The project is expected to be funded through a com-
bination of non-recourse debt securities and equity contri-
butions.
In the first quarter of 2000, Kinder Morgan sold the 918,367
shares of common stock of Tom Brown, Inc. it had held since early
1996 (see the discussion of the sale of preferred stock of Tom
Brown following). Kinder Morgan recorded a pre-tax gain of $1.3
million ($0.8 million after tax or approximately $0.01 per
diluted share), included in the accompanying Consolidated
Statement of Income for the 6 months ended June 30, 2000, under
the caption "Other, Net".
On December 30, 1999, Kinder Morgan entered into a contribution
agreement among Kinder Morgan, several of its wholly owned
subsidiaries and Kinder Morgan Energy Partners. As a result,
effective as of December 31, 1999, Kinder Morgan contributed all
of its interests in the following to Kinder Morgan Energy
Partners: (i) Kinder Morgan Interstate Gas Transmission LLC,
formerly K N Interstate Gas Transmission Co., a wholly owned
subsidiary which is referred to as "KMIGT" in these Notes, (ii)
Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.),
a wholly owned subsidiary and owner of a one-third interest in
Trailblazer Pipeline Company and (iii) Red Cedar Gathering
Company (a 49% interest). In exchange, Kinder Morgan Energy
Partners (i) issued to Kinder Morgan 9,810,000 common units
representing incremental limited partnership interests in Kinder
Morgan Energy Partners and (ii) during the first quarter of 2000,
made a payment to Kinder Morgan of $330 million in cash. Kinder
Morgan recorded a pre-tax gain of $158.8 million (approx-
imately $100.9 million after tax or $1.25 per diluted share)
in conjunction with the contribution of interests.
On September 30, 1999, Kinder Morgan sold (to an unaffiliated
party) its interests in Stingray Pipeline Company, L.L.C., an
offshore pipeline that gathers natural gas, and West Cameron
Dehydration Company, L.L.C., which dehydrates natural gas for
shippers on the Stingray Pipeline. Kinder Morgan received
approximately $24 million in cash from the sale and recorded a
pre-tax gain of $11.4 million (approximately $6.9 million after
tax or $0.10 per diluted share). With this sale, Kinder Morgan
completed divestiture of its major offshore interests.
On September 3, 1999, Kinder Morgan sold 1,000,000 shares of
preferred stock of Tom Brown, Inc. for approximately $29 million
in cash, realizing a pre-tax gain of $2.2 million (approximately
$1.3 million after tax or $0.02 per diluted share). The
preferred stock was originally issued to Kinder Morgan in 1996 as
part of Tom Brown, Inc.'s acquisition of K N Production Company.
The preferred stock was convertible into 1,666,000 shares of
common stock of Tom Brown, Inc., and paid dividends quarterly at
an annual rate of $1.75 per share.
In September 1999, Thunder Creek Gas Services, LLC, a joint
venture owned 25 percent by Kinder Morgan and 75 percent by Devon
Energy Corporation, placed into service a 126-mile-long trunkline
natural gas gathering system extending from Glenrock, Wyoming to
approximately 12 miles north of Gillette, Wyoming. The trunkline
has an initial capacity of 450 million cubic feet of natural gas
per day. The gathering system is located in the Powder River
Basin of northeast Wyoming. The expected total cost of the
system is approximately $111 million.
On June 30, 1999, Kinder Morgan sold its interests in the HIOS
and UTOS offshore pipeline systems and related laterals to
Leviathan Gas Pipeline Partners, L. P. Kinder Morgan received
approximately $51 million in cash in conjunction with the sale
and recorded a pre-tax gain of $17.5 million (approximately $10.7
million
<PAGE> 10
after tax or $0.15 per diluted share), included in the accompany-
ing Consolidated Statements of Income for the three months and
six months ended June 30, 1999 under the caption "Other, Net".
In May 1999, Kinder Morgan announced plans to build the Horizon
Pipeline. Kinder Morgan planned to own the pipeline jointly with
one or more other partners, through its wholly owned subsidiary
Natural Gas Pipeline Company of America, referred to as "Natural"
in these Notes. Also in May 1999, Nicor Gas signed a precedent
agreement for 300 MMcf per day with Horizon. In February 2000,
Nicor, Inc. announced that it had signed an agreement to become
an equal partner in the planned Horizon Pipeline with Natural.
The Horizon Pipeline is a $75 million natural gas pipeline that
will originate in Joliet, Illinois and extend 71 miles into
northern Illinois, connecting the emerging supply hub at Joliet
with Nicor Gas' distribution system and an existing Natural
pipeline. Construction is expected to be completed by the spring
of 2002. The initial capacity of the pipeline is proposed to be
380 MMcf of natural gas per day. The project is expected to be
funded through a combination of non-recourse debt securities and
equity contributions.
On March 31, 1999, the TransColorado Gas Transmission Company
("TransColorado"), an enterprise jointly owned by Kinder Morgan
and Questar Corp., placed in service a 280-mile-long natural gas
pipeline. This pipeline includes two compressor stations and
extends from near Rangely, Colorado, to its southern terminus at
the Blanco Hub near Aztec, New Mexico. The pipeline has a design
transmission capacity of approximately 300 million cubic feet of
natural gas per day. On October 14, 1998, TransColorado entered
into a $200 million revolving credit agreement with a group of
commercial banks. Kinder Morgan provides a corporate guarantee
for one-half of all amounts borrowed under the agreement.
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. None of these units were acquired
by Kinder Morgan. This transaction reduced Kinder Morgan's
percentage ownership of Kinder Morgan Energy Partners from
approximately 19.9% to approximately 18.6% and had the associated
effects of increasing Kinder Morgan's investment in the net
assets of Kinder Morgan Energy Partners by $6.1 million and
reducing (i) Kinder Morgan's 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).
6. Discontinued Operations
-----------------------
During the third quarter of 1999, Kinder Morgan 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 Kinder Morgan's en*able joint venture with PacifiCorp.
During the fourth quarter of 1999, Kinder Morgan adopted and
implemented plans to discontinue the following lines of business:
gathering and processing natural gas and providing field services
to natural gas producers, commodity marketing of natural gas and
natural gas liquids, international operations and West Texas
intrastate pipelines.
As further described in Note 6 of Notes to Consolidated Financial
Statements included in Kinder Morgan's 1999 Annual Report on Form
10-K, as of December 31, 1999, in accordance with the provisions
of Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, Kinder Morgan (i)
reclassified its consolidated financial statements to reflect
these businesses as discontinued operations and (ii) recorded an
estimate of the loss expected to result from the discontinuance
and disposal of
<PAGE> 11
these businesses, including both the estimated losses to be in-
curred upon sale and the estimated operating losses to be in-
curred prior to the projected disposal dates. This total
estimated loss is subject to uncertainty with respect to the
ultimate proceeds to be received from the sale and 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 reasonably estimable, and will be
classified in the same manner as the original estimated loss.
Summarized financial data of discontinued operations are as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
2000 1999
------ ------
(In Thousands)
<S> <C> <C>
Income Statement Data
---------------------
Operating Revenues:
Commodity Marketing $ 34 $ 869,231
Gathering and Processing $ 149,892 $ 145,986
West Texas Intrastate Pipelines $ - $ 12,444
International Operations $ 1,841 $ 185
Income (Loss) From Discontinued Operations, Net of
Tax Expense (Benefit):
Commodity Marketing, net of $(4,124) of tax - $ (6,451)
Gathering and Processing, net of $(3,110) of tax - (4,864)
West Texas Intrastate Pipelines, net of $87 of tax - 136
International Operations, net of $(128) of tax - (199)
e*nable/Orcom, net of $(2,180) of tax - (3,410)
-----------
$ (14,788)
===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
------ ------
(In Thousands)
<S> <C> <C>
Income Statement Data
---------------------
Operating Revenues:
Commodity Marketing $ 580,182 $ 1,498,232
Gathering and Processing $ 313,725 $ 263,413
West Texas Intrastate Pipelines $ 8,336 $ 30,542
International Operations $ 2,883 $ 671
Loss From Discontinued Operations, Net of Tax Benefit
Commodity Marketing, net of $(6,125) of tax - $ (9,580)
Gathering and Processing, net of $(7,800) of tax - (12,200)
West Texas Intrastate Pipelines, net of $(2,802)
of tax - (4,383)
International Operations, net of $(173) of tax - (270)
en*able/Orcom, net of $(3,287) of tax - (5,141)
-----------
$ (31,574)
===========
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
June 30, 2000
------------------------------------------
Gathering and International
Processing Operations Total
------------- ------------- --------
<S> <C> <C> <C>
Balance Sheet Data (In Thousands)
------------------
Net Current Assets (Liabilities) of Discontinued Operations:
Cash and Cash Equivalents $ 5,207 $ 855 $ 6,062
Restricted Deposits 4,376 - 4,376
Accounts Receivable 61,120 1,566 62,686
Inventories 4,408 1,164 5,572
Gas Imbalances Receivable 17,270 - 17,270
Other Current Assets 1,433 167 1,600
Accounts Payable (88,571) (2,545) (91,116)
Accrued Taxes (3,887) (4) (3,891)
Gas Imbalances Payable (4,136) - (4,136)
Other Current Liabilities (4,108) (1,536) (5,644)
---------- ---------- ----------
$ (6,888) $ (333) $ (7,221)
========== ========== ==========
Net Non-current Assets of Discontinued Operations:
Investments $ 34,500 $ 10,040 $ 44,540
Property, Plant and Equipment, Net 126,203 9,745 135,948
Deferred Charges 23,550 7,989 31,539
Deferred Income Taxes (46,941) 781 (46,160)
Minority Interests in Equity of Subsidiaries (53,021) (767) (53,788)
---------- ---------- ----------
$ 84,291 $ 27,788 $ 112,079
========== ========== ==========
</TABLE>
Kinder Morgan has essentially completed the disposition of its
investment in en*able/Orcom. Kinder Morgan sold its businesses
involved in providing field services to natural gas producers
(K N Field Services, Inc. and Compressor Pump and Engine, Inc.)
and MidCon Gas Products of New Mexico Corp., a wholly owned
subsidiary providing natural gas gathering, prior to the end of
1999. Kinder Morgan received $23.3 million in cash as
consideration for these sales.
Effective March 1, 2000, Kinder Morgan closed its previously
announced transaction with ONEOK, Inc. in which ONEOK purchased
Kinder Morgan's gathering and processing businesses in Oklahoma,
Kansas and West Texas. In addition, ONEOK purchased Kinder
Morgan's marketing and trading business, as well as certain
storage and transmission pipelines in the Mid-continent region.
As consideration, ONEOK paid Kinder Morgan approximately $108
million plus approximately $56 million for estimated net working
capital at closing (subject to post-closing adjustment). In
addition, ONEOK assumed (i) the operating lease associated with
the Bushton, Kansas processing plant and (ii) long-term through-
put capacity commitments on Natural and KMIGT.
During the second quarter of 2000, Kinder Morgan completed the
sale of three natural gas gathering systems and a natural gas
processing facility to WBI Holdings, Inc., the natural gas
pipeline unit of MDU Resources Group, Inc. for approximately $21
million. Gathering systems included in the sale were the Bowdoin
System located in north-central Montana, the Niobrara System
located in northeastern Colorado and northwestern Kansas, and the
Yenter System located in northeastern Colorado and western
Nebraska. The natural gas processing facility included in the
sale was the Yenter Plant, located northwest of Sterling,
Colorado.
The remaining assets associated with discontinued operations,
representing a relatively small percent of the total operations
discontinued as of December 31, 1999, are in various stages of
the disposition process. The process of divestiture is expected
to be completed during 2000.
<PAGE> 13
7. Accounts Receivable Sales Facility
----------------------------------
As more fully discussed in Kinder Morgan's 1999 Annual Report on
Form 10-K, in September 1999, certain wholly owned subsidiaries
of Kinder Morgan entered into a five-year agreement to sell all
of their accounts receivable in a transaction accounted for as a
sale of receivables in accordance with Statement of Financial
Accounting Standards No. 125, " Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities."
Accordingly, the accompanying Consolidated Balance Sheet for
December 31, 1999 reflects the portion of receivables transferred
to the financial institution as a reduction of Accounts
Receivable. Losses from the sale of these receivables are
included in "Other, Net" in the accompanying Consolidated
Statements of Income. Cash flows associated with this program
are included with "Accounts Receivable" under "Cash Flows from
Operating Activities" in the accompanying Consolidated Statements
of Cash Flows. Kinder Morgan received compensation for servicing
that was approximately equal to the amount an independent
servicer would receive. Accordingly, no servicing assets or
liabilities have been recorded. The full amount of the allowance
for possible losses has been retained by Kinder Morgan. The fair
value of this recourse liability approximated the allocated
allowance for doubtful accounts given the short-term nature of
the transferred receivables. Kinder Morgan received $150 million
in proceeds from the sale of receivables on September 30, 1999.
In the first quarter of 2000, Kinder Morgan reduced its
participation in this receivable sale program by $124.9 million,
principally as a result of its then-pending disposition of its
wholesale gas marketing business, see Note 6. On April 25, 2000,
Kinder Morgan repaid the residual balance and terminated the
agreement.
8. Supplemental Cash Flow Information
----------------------------------
Kinder Morgan considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. "Other, Net," presented as a component of "Net Cash
Flows Provided by (Used in) Operating Activities" in the
accompanying Consolidated Statements of Cash Flows includes,
among other things, equity in undistributed earnings of
unconsolidated subsidiaries (other than Kinder Morgan Energy
Partners) and joint ventures.
Six Months Ended
June 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 $ (25,506) $ 3,031
Materials and Supplies Inventory (1,147) 1,240
Gas in Underground Storage - Current (22,044) (12,300)
Other Current Assets (27,599) (849)
Accounts Payable 12,066 (84,987)
Other Current Liabilities (6,757) (17,124)
----------- ----------
$ (70,987) $ (110,989)
========== ==========
CASH FLOW INFORMATION
Cash Paid During the Period for:
Interest, Net of Amount Capitalized $ 126,058 $ 151,641
========== ==========
Distributions on Preferred Capital Trust
Securities $ 10,956 $ 10,956
========== ==========
Income Taxes $ 4,690 $ 2,052
========== ==========
<PAGE> 14
9. Business Segments
-----------------
In accordance with the manner in which Kinder Morgan currently
manages its businesses, including the allocation of capital and
evaluation of business unit performance, Kinder Morgan reports
its operations in the following segments: (1) Natural and certain
associated entities, referred to as "NGPL" a major interstate
natural gas pipeline system; (2) Kinder Morgan Texas Pipeline and
certain associated entities, referred to as "KMTP," 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 its December 31, 1999,
sale to Kinder Morgan Energy Partners (see Note 5), Kinder Morgan
also owned and operated KMIGT.
The accounting policies applied in the generation of segment
information are generally the same as those described in Note 1
of Notes to Consolidated Financial Statements included in Kinder
Morgan's 1999 Annual Report on 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, Kinder Morgan currently evaluates
business segment performance primarily based on operating income
in relation to the level of capital employed. Intersegment sales
are accounted for at market prices, while asset transfers are
made at either market value or, in some instances, book value.
As necessary for comparative purposes, prior period results and
balances have been reclassified to conform to the current
presentation.
<PAGE> 15
BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
------------------------------------------------------------------------
Power
NGPL KMIGT Retail KMTP and Other Consolidated
------ ------ ------ ------ --------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from
External Customers $120,877 $ - $ 36,163 $ 373,511 $ 19,293 $ 549,844
Intersegment ==========
Revenues $ (78) $ - $ - $ - $ 48 $ (30)
Operating Income ==========
Before Corporate
Costs $ 79,246 $ - $ 6,331 $ 3,097 $ 8,655 $ 97,329
General and Administrative Expenses (13,855)
----------
Operating Income 83,474
Other Income and (Deductions) (42,087)
----------
Income from Continuing Operations,
Before Income Taxes $ 41,387
==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
-------------------------------------------------------------------------
Power
NGPL KMIGT Retail KMTP and Other Consolidated
------ ------ ------ ------ --------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from
External Customers $ 152,008 $ 23,529 $ 36,218 $ 204,116 $ 15,856 $ 431,727
Intersegment =========
Revenues $ 350 $ 1,476 $ (15) $ - $ 48 $ 1,859
Operating Income =========
Before Corporate
Costs $ 67,259 $ 12,390 $ 785 $ 2,113 $ 6,806 $ 89,353
General and Administrative Expenses (24,886)
Merger-related Costs 2,916
---------
Operating Income 67,383
Other Income and (Deductions) (47,089)
---------
Income from Continuing
Operations, Before Income Taxes $ 20,294
=========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000
--------------------------------------------------------------------------
Power
NGPL KMIGT Retail KMTP and Other Consolidated
------ ------ ------ ------ --------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from
External Customers $ 268,871 $ - $ 104,586 $ 623,430 $ 33,469 $1,030,356
Intersegment ==========
Revenues $ (18) $ - $ - $ - $ 48 $ 30
Operating Income ==========
Before Corporate
Costs $ 171,196 $ - $ 26,118 $ 14,427 $ 14,277 $ 226,018
General and Administrative Expenses (28,148)
----------
Operating Income 197,870
Other Income and (Deductions) (79,672)
----------
Income from Continuing
Operations, Before Income Taxes $ 118,198
==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
-------------------------------------------------------------------------
Power
NGPL KMIGT Retail KMTP and Other Consolidated
------ ------ ------ ------ --------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from
External Customers $ 304,915 $ 48,643 $106,060 $ 368,443 $ 30,933 $ 858,994
Intersegment =========
Revenues $ 942 $ 2,759 $ 5 $ - $ 97 $ 3,803
Operating Income =========
Before Corporate
Costs $ 145,723 $ 26,742 $ 16,113 $ 11,100 $ 13,100 $ 212,778
General and Administrative Expenses (45,235)
---------
Operating Income 167,543
Other Income and (Deductions) (108,055)
---------
Income from Continuing Operations,
Before Income Taxes $ 59,488
=========
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
Assets at June 30, 2000
-------------------------------------------------------------------------
Power
NGPL KMIGT Retail KMTP and Other Consolidated
------ ------ ------ ------ --------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Continuing
Operations $5,607,933 $ - $ 373,162 $ 297,613 $2,218,589(1) $ 8,497,297
Discontinued
Operations 112,079
-----------
Consolidated $ 8,609,376
===========
(1)Principally the investment in Kinder Morgan Energy Partners
</TABLE>
GEOGRAPHIC INFORMATION
All but an insignificant amount of Kinder Morgan's assets and
operations are located in the continental United States.
10. Financing
---------
Kinder Morgan has available a $550 million 364-day credit
facility dated November 18, 1999 and a $400 million amended and
restated five-year revolving credit agreement dated January 30,
1998. These bank facilities can be used for general corporate
purposes, including backup for Kinder Morgan's commercial paper
program, and include covenants which are common in such
arrangements (see Note 12 of Notes to Consolidated Financial
Statements included in Kinder Morgan's 1999 Annual Report on Form
10-K for additional information concerning these covenants).
Under these bank facilities, Kinder Morgan is required to pay a
facility fee based on the total commitment, whether used or
unused, at a rate which varies based on Kinder Morgan's senior
debt rating. There were no borrowings under the bank facilities
at June 30, 2000 or at August 1, 2000.
Commercial paper issued by Kinder Morgan and supported by the
bank facilities are unsecured short-term notes with maturities
not to exceed 270 days from the date of issue. Commercial paper
outstanding at June 30, 2000 and August 1, 2000, was $292.5
million and $246.6 million, respectively. The weighted-average
interest rates on short-term borrowings outstanding at June 30,
2000 was 7.18 percent. Average short-term borrowings outstanding
during the second quarter of 2000 were $275.1 million and the
weighted-average interest rate was 6.53 percent. Average short-
term borrowings outstanding during the first six months of 2000
were $395.5 million and the weighted-average interest rate was
6.32 percent.
On July 20, 2000, the Kinder Morgan board of directors declared a
common stock dividend of $0.05 per share payable on August 14,
2000 to shareholders of record as of July 31, 2000.
11. Regulatory Matters
------------------
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 Kinder
Morgan. 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. Kinder Morgan has responded and denied the allegations.
On July 27, 2000, the FERC issued an order commencing a
preliminary non-public investigation into the complaint. The
Company believes it has meritorious defenses to the claim.
On March 29, 2000, Kinder Morgan announced that it had reached a
settlement with the Federal Energy Regulatory Commission ("FERC")
regarding issues surrounding the interpretation of FERC Order
No. 497 (which governs the conduct of interstate pipelines
and affiliated gas marketers on their systems) relative to
<PAGE> 17
KMIGT, NGPL and Westar Transmission Company. KMIGT has been sold
to Kinder Morgan Energy Partners, and Westar has been sold to
ONEOK, see Notes 5 and 6. Combined, Kinder Morgan agreed to pay
a civil penalty and refunds totaling $5.75 million in conjunction
with the settlement, which also eliminated the potential for any
civil action or prolonged regulatory proceedings. The matters
resolved related to periods prior to the October 1999 K N Energy-
Kinder Morgan merger and, to some extent, periods prior to K N
Energy's January 1998 acquisition of MidCon Corp. The payment
had no detrimental effect on Kinder Morgan's earnings due to
the existence of previously established reserves for this matter.
In April 2000, Kinder Morgan filed appeals against 11 Nebraska
municipalities that have adopted rate ordinances prohibiting the
collection of a surcharge (associated with the P-0802 contract
entered into in 1973) to recover costs Retail incurred in
purchasing natural gas for its customers. Kinder Morgan alleges
that these municipalities failed to determine an appropriate
overall amount for Retail's rates and that the municipalities
failed to follow the appropriate process, as set up by the
Nebraska legislature, to review the P-0802 contract. When Retail
opened its distribution system to competitive supplies in 1998,
participating municipalities were made aware of the surcharge and
passed ordinances allowing it.
12. Comprehensive Income
--------------------
Statement of Financial Accounting Standards No. 130, "Reporting
of Comprehensive Income," effective for fiscal years beginning
after December 15, 1997, requires that enterprises report a total
for comprehensive income. The only difference between "net in-
come" and "comprehensive income" for Kinder Morgan has been the
unrealized gain or loss on its investment in available-for-sale
securities, which was recorded directly to stockholders' equity.
During the quarter ended March 31, 2000, Kinder Morgan sold its
available-for-sale securities, 918,367 shares of Tom Brown, Inc.
Common Stock (see Note 5). In conjunction with this sale, Kinder
Morgan recorded a reclassification adjustment of $1.6 million to
"Accumulated Comprehensive Income", resulting in comprehensive
income for the quarter of $47.7 million. There was no difference
between net income and comprehensive income for the quarter ended
June 30, 2000. For the six months ended June 30, 2000,
comprehensive income was $72.5 million, reflecting the first-
quarter transaction described preceding. For the quarter ended
June 30, 1999, Kinder Morgan recorded an unrealized after-tax
investment gain of $1.9 million, resulting in comprehensive
income for the period of $(0.5) million. For the six months
ended June 30, 1999, Kinder Morgan recorded an unrealized after-
tax investment gain of $3.0 million, resulting in comprehensive
income for the period of $7.7 million.
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
transactions that receive hedge accounting.
The Statement is effective for fiscal years beginning after June
15, 2000. The Statement cannot be applied retroactively. The
Statement must be applied to (i) derivative instruments and (ii)
certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December
31, 1997
<PAGE> 18
(and, at Kinder Morgan's election, before January 1, 1998).
Kinder Morgan has not quantified the impacts of adopting the
Statement on its financial position or results of operations.
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
(see Note 1(K) of Notes to Consolidated Financial Statements
included in Kinder Morgan's 1999 Annual Report on Form 10-K) and
(iii) in the first quarter of 2000, interest income attributable
to Kinder Morgan's note receivable from Kinder Morgan Energy
Partners associated with the sale of certain interests, see
Note 5.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
(In Thousands)
2000 1999 2000 1999
------- ------- ------- -------
AFUDC - Interest $ 285 $ 98 $ 997 $ 311
Interest Income $ - $ - $ 2,647 $ 480
15. Other, Net
----------
"Other, Net" as presented in the accompanying Consolidated
Statement of Income for the three months and six months ended
June 30, 1999 principally consists of the $17.5 million gain from
the sale of certain offshore assets, see Note 5. "Other, Net"
for the six months ended June 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, see Note 11 and (iii) $1.3 million
attributable to a gain from the sale of Tom Brown, Inc. Common
Stock, see Note 5.
16. Accounts Receivable
-------------------
The caption "Accounts Receivable" in the accompanying
Consolidated Balance Sheets is presented net of allowances for
doubtful accounts of $1.2 million at June 30, 2000, and $1.7
million at December 31, 1999.
17. Environmental and Legal Matters
-------------------------------
(A) Environmental Matters
On December 20, 1999, the U.S. Department of Justice filed a
Complaint on behalf of the U.S. Environmental Protection Agency
in the Federal District Court of Colorado, Civil Action 99-S-
2419, against Natural alleging that Natural failed to obtain all
of the necessary air quality permits in 1979 when it constructed
the Akron Compressor Station, which consisted of three compressor
engines in Weld County, Colorado. Natural constructed and then
operated the facility until August 1996 when it was sold to High
Plains Gathering System. High Plains sold one of the compressor
engines to Colorado Interstate Gas Company in October 1997.
The complaint makes the standard request for penalties up to the
statutory maximums for each day of violation. Natural has filed
a motion to dismiss this case and is in discussions with the U.S.
Department of Justice. Natural has prepared a number of defenses
to the complaint and plans to defend the action vigorously.
<PAGE> 19
Although Kinder Morgan cannot express an opinion as to the
probable outcome of this case, Kinder Morgan believes that this
proceeding will not have a material adverse effect on Kinder
Morgan's business, cash flows, financial position or results of
operations.
Based on current information and taking into account accruals
established for environmental matters, Kinder Morgan does not
believe that compliance with federal, state and local
environmental laws and regulations will have a material adverse
effect on Kinder Morgan's business, cash flows, financial
position or results of operations. In addition, the clean-up
programs in which Kinder Morgan is engaged are not expected to
interrupt or diminish Kinder Morgan's ability to operate its
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 Kinder Morgan to incur significant costs.
See Note 9(A) of Notes to Consolidated Financial Statements of
Kinder Morgan's Annual Report on Form 10-K for the year ended
December 31, 1999, for additional information regarding
environmental matters.
(B) Litigation Matters
"K N TransColorado, Inc. v. TransColorado Gas Transmission Com-
pany, et. al," Case No. 00-CV-129, District Court, County of Gar-
field, 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, re-
cission of the partnership agreement, breach of good faith and
fair dealing, tortious concealment, mistrepresentation, 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 re-
cover 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 Kinder Morgan and
certain Kinder Morgan entities for claims arising out of the con-
struction 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 pipe-
line 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 Kinder
Morgan, Rocky Mountain Natural Gas Company and GASCO, Inc.
alleging that these entities, referred to here as the "K N
Entities," as well as K N Production Company and K N Gas
Gathering, Inc., have violated federal and state antitrust laws.
In essence, Grynberg asserts that the companies have engaged in
an illegal exercise of monopoly power, have illegally denied him
economically feasible access to essential facilities to store,
transport and distribute gas, and illegally have attempted to
monopolize or to enhance or maintain an existing monopoly.
Grynberg also asserts certain state causes of action relating to
a gas purchase contract. In February 1999, the Federal District
Court granted summary judgment 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 distribution and
marketing operations, and all interests in natural gas storage
facilities, separating these interests from Kinder Morgan's
natural gas gathering and transportation system in northwest
Colorado. No trial date has been set.
<PAGE> 20
"Jack J. Grynberg, individually and as general partner for the
Greater Green River Basin Drilling Program: 72-73 v. Rocky
Mountain Natural Gas Company and K N Energy, Inc.," Case No.
90-CV-3686. On June 5, 1990, Jack J. Grynberg filed suit, which
is presently pending in Jefferson County District Court for
Colorado, against Rocky Mountain Natural Gas Company and Kinder
Morgan alleging breach of contract and fraud. In essence,
Grynberg asserts claims that the named companies failed to pay
Grynberg the proper price, impeded the flow of gas, mismeasured
gas, delayed his development of gas reserves, and other claims
arising out of a contract to purchase gas from a field in
northwest Colorado. On February 13, 1997, the trial judge
entered partial summary judgment for Mr. Grynberg on his contract
claim that he failed to receive the proper price for his gas.
This ruling followed an appellate decision which was adverse to
Kinder Morgan on the contract interpretation of the price issue,
but which did not address the question of whether Grynberg could
legally receive the price he claimed or whether he had illegally
diverted gas from a prior purchase. On August 29, 1997, the
trial judge stayed the summary judgment pending resolution of a
proceeding at the FERC to determine if Grynberg was entitled to
administrative relief from an earlier dedication of the same gas
to interstate commerce. The background of that proceeding is
described 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, Kinder Morgan, 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.
<PAGE> 21
"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, Kinder Morgan 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.
"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 de-
ficiencies 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 counter-
claimed and filed third party claims against several former
K N Energy officers and/or directors. Messrs. Rode and McDonald
are former principal shareholders of Interenergy Corporation.
Interenergy was acquired by K N Energy on December 19, 1997
pursuant to a Merger Agreement dated August 25, 1997. Rode and
McDonald allege that K N Energy committed securities fraud,
common law fraud and negligent misrepresentation as well as
breach in contract. Plaintiffs are seeking an unspecified amount
of compensatory damages, greater than $2 million, plus un-
specified exemplary or punitive damages, attorney's fees and
their costs. Kinder Morgan filed a motion to dismiss, and on
April 21, 2000, the Jefferson County District Court Judge
dismissed the case against Kinder Morgan 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 Kinder Morgan on
April 10, 2000. As of this date no class has been certified.
Kinder Morgan has filed a motion to dismiss this case, and the
case has been stayed pending the resolution of this motion.
Kinder Morgan believes it has meritorious defenses to all
lawsuits and legal proceedings in which it is a defendant and
will vigorously defend against them. Based on its evaluation of
the above matters, and after consideration of reserves
established, Kinder Morgan believes that the resolution of such
matters will not have a material adverse effect on Kinder
Morgan's business, financial position or results of operations.
<PAGE> 22
See Note 9(B) of Notes to Consolidated Financial Statements of
Kinder Morgan's Annual Report on Form 10-K for the year ended
December 31, 1999, for additional information regarding legal
matters.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
-------
As used in this report, "Kinder Morgan" refers to Kinder Morgan,
Inc. (a Kansas corporation, formerly K N Energy, Inc.) and its
consolidated subsidiaries. The following discussion should be
read in conjunction with (i) the accompanying Consolidated
Financial Statements and related Notes and (ii) the Consolidated
Financial Statements, related Notes and Management's Discussion
and Analysis of Financial Condition and Results of Operations
included in Kinder Morgan's 1999 Annual Report on Form 10-K. Due
to the seasonal variation in energy demand, among other factors,
the following interim results may not be indicative of the
results to be expected for an entire year. As discussed in Notes
2 and 5 of the accompanying Notes to Consolidated Financial
Statements, Kinder Morgan has engaged in acquisition and
divestiture transactions (and may engage in additional such
transactions) which may affect the comparison of results of
operations between periods.
In accordance with the manner in which Kinder Morgan currently
manages its businesses, including the allocation of capital and
evaluation of business unit performance, Kinder Morgan reports
its operations in the following segments: (1) Natural Gas
Pipeline Company of America and certain associated entities,
referred to as "NGPL," a major interstate natural gas pipeline
system; (2) Kinder Morgan Texas Pipeline and certain associated
entities, referred to as "KMTP," 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 its December 31, 1999, sale to Kinder Morgan Energy
Partners (see Note 5 of the accompanying Notes to Consolidated
Financial Statements), Kinder Morgan also owned and operated
Kinder Morgan Interstate Gas Transmission LLC (formerly K N
Interstate Gas Transmission Co.), which is referred to in this
report as "KMIGT." Certain prior period results and balances
have been reclassified to conform to the current presentation.
Certain information contained in this report may include "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to
risks and uncertainties and are based on the beliefs and
assumptions of Kinder Morgan's management, based on information
currently available to Kinder Morgan's management. When words
such as "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "should" or similar expressions are used, Kinder
Morgan is making forward-looking statements.
Forward-looking statements are not guarantees of performance.
They involve risks, uncertainties and assumptions. The future
results and stockholder values of Kinder Morgan may differ
materially from those expressed in these forward-looking
statements. Many of the factors that will determine these
results and values are beyond Kinder Morgan's ability to control
or predict. These statements are necessarily based upon various
assumptions involving judgments with respect to the future
including, among others, the ability to achieve synergies and
revenue growth, national, international, regional and local
economic, competitive and regulatory conditions and developments,
technological developments, capital market conditions, inflation
rates, interest rates, the political and economic stability of
oil producing nations, energy markets, weather conditions,
business and regulatory or legal decisions, the pace of
deregulation of retail natural gas and electricity, the timing
and extent of changes in commodity prices for oil, natural gas,
natural gas liquids, electricity and certain agricultural
products, the timing and success of business development efforts,
and other uncertainties, all of which are
<PAGE> 23
difficult to predict and many of which are beyond Kinder Morgan's
control. Readers are cautioned not to put undue reliance on any
forward-looking statements. For those statements, Kinder Morgan
claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform
Act of 1995.
<TABLE>
<CAPTION>
Consolidated Financial Results
------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
------ ------ ---------- ------ ------ ----------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 549,844 $ 431,727 $118,117 $1,030,356 $ 858,994 $ 171,362
Gross Margin 169,076 183,406 (14,330) 373,011 404,768 (31,757)
General and Administrative
Expenses 13,855 24,886 (11,031) 28,148 45,235 (17,087)
Merger-related Costs - (2,916) 2,916 - - -
Operating Income 83,474 67,383 16,091 197,870 167,543 30,327
Income From Continuing
Operations 24,827 12,380 12,447 70,911 36,288 34,623
Loss From Discontinued
Operations, Net of Tax N/A (14,788) N/A N/A (31,574) N/A
Diluted Earnings (Loss) Per
Share:
Continuing Operations $ 0.22 0.17 $ 0.05 $ 0.62 0.51 $ 0.11
Discontinued Operations N/A $ (0.21) N/A N/A $ (0.45) N/A
</TABLE>
Kinder Morgan's results for the quarter ended June 30, 2000,
reflect an increase of $118.1 million (27.4%) in operating
revenues, a decrease of $14.3 million (7.8%) in gross margin and
an increase of $16.1 million (23.9%) in operating income from the
second quarter of 1999. Operating results for 2000 do not
include revenues, costs and expenses of KMIGT, which was sold to
Kinder Morgan Energy Partners effective December 31, 1999. The
increase in operating revenues is principally due to increased
revenues at KMTP, partially offset by the absence of KMIGT
revenues in the second quarter of 2000. The decline in gross
margin principally reflects the sale of KMIGT. General and
administrative expenses decreased from $24.9 million in the
second quarter of 1999 to $13.9 million in the second quarter of
2000, a decrease of $11.0 million (44.3%) due to cost reduction
measures implemented following the business combination with
Kinder Morgan Delaware. The credit for merger-related costs
reimbursement included in results for the second quarter of 1999
is associated with the proposed merger with Sempra Energy that
was not consummated. For additional information on these
matters, see Notes 2 and 5 of the accompanying Notes to
Consolidated Financial Statements. The increased operating
income, which occurred despite the sale of KMIGT, reflects
improved second-quarter 2000 performance by several operating
segments as discussed following.
Kinder Morgan's results for the six months ended June 30, 2000,
reflect an increase of $171.4 million (19.9%) in operating
revenues, a decrease of $31.8 million (7.8%) in gross margin and
an increase of $30.3 million (18.1%) in operating income from the
corresponding period of 1999. Operating results for 2000 do not
include revenues, costs and expenses of KMIGT, which was sold to
Kinder Morgan Energy Partners effective December 31, 1999. The
increase in operating revenues is principally due to increased
revenues at KMTP, partially offset by the absence of KMIGT
revenues in 2000 results. The decline in gross margin
principally reflects the sale of KMIGT. General and
administrative expenses decreased from $45.2 million in the first
six months of 1999 to $28.1 million in the first six months of
2000, a decrease of $17.1 million (37.8%) due to cost reduction
measures implemented following the business combination with
Kinder Morgan Delaware. For additional information on these
matters, see Notes 2 and 5 of the accompanying Notes to
Consolidated Financial
<PAGE> 24
Statements. The increased operating income, which occurred
despite the sale of KMIGT, reflects improved 2000 performance by
several operating segments as discussed following.
Operating income for each of Kinder Morgan's business segments,
as well as interest expense, other income and deductions and
income taxes were affected by various factors which are described
within the corresponding individual discussions which follow.
Following are operating results by individual segment (before
intersegment eliminations), including explanations of significant
variances in results between the periods presented.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 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 $ 114,714 $ 135,616 $ (20,902) $ 259,292 $ 286,235 $ (26,943)
Other 6,085 16,742 (10,657) 9,561 19,622 (10,061)
--------- --------- --------- --------- --------- ---------
Total Operating Revenues 120,799 152,358 (31,559) 268,853 305,857 (37,004)
--------- --------- --------- --------- --------- ---------
Operating Costs and
Expenses:
Gas Purchases and Other
Costs of Sales 1,222 30,411 (29,189) 15,022 47,384 (32,362)
Operations and Maintenance 14,145 15,552 (1,407) 30,403 34,486 (4,083)
Depreciation and
Amortization 21,197 33,524 (12,327) 42,315 67,188 (24,873)
Taxes, Other Than Income
Taxes 4,989 5,612 (623) 9,917 11,076 (1,159)
--------- --------- --------- --------- --------- ---------
Total Operating Expenses 41,553 85,099 (43,546) 97,657 160,134 (62,477)
--------- --------- --------- --------- --------- ---------
Operating Income Before
Corporate Costs $ 79,246 $ 67,259 $ 11,987 $ 171,196 $ 145,723 $ 25,473
========= ========= ========= ========= ========= =========
Systems Throughput (Trillion
Btus) 341.1 340.1 1.0 774.6 760.8 13.8
========= ========= ========= ========= ========= =========
</TABLE>
NGPL's operating income before corporate costs increased by $12.0
million (17.8%) in the second quarter of 2000 from the second
quarter of 1999. Operating results for 2000 were positively
impacted, relative to 1999, 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
operating expenses reflecting continued cost control measures.
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), (ii) reduced 2000 operational gas sales,
which NGPL expects to make up later in the year, and (iii)
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,
NGPL's principal market area; although, as discussed following
and in Kinder Morgan's 1999 Annual Report on Form 10-K, NGPL
continues to experience success in retaining existing customers
and acquiring new customers.
NGPL's operating income before corporate costs increased $25.5
million (17.5%) in the six months ended June 30, 2000, over the
corresponding period in 1999. Year-to-date results were affected
by the same factors affecting the second quarter, as discussed
preceding. In addition, results for 2000 were positively
affected by a $3.3 million refund of previously expensed
transportation charges from an unaffiliated interstate pipeline.
In March 2000, Kinder Morgan announced that it had reached a
settlement with the Federal Energy Regulatory Commission (the
"FERC") regarding issues surrounding the interpretation of FERC
Order No. 497 to several entities currently or formerly owned by
Kinder Morgan, including Natural Gas Pipeline Company of America
<PAGE> 25
("Natural"). For additional information on this matter, see Note
11 of the accompanying Notes to Consolidated Financial State-
ments.
Also in March 2000, Kinder Morgan announced that it had filed a
"motion to dismiss" in Colorado Federal District Court and will
vigorously defend itself against a complaint filed by the
Department of Justice alleging that Natural failed to obtain all
necessary air quality permits when constructing a compressor
station in Colorado more than 20 years ago. For additional
information on this matter, see Note 17 of the accompanying Notes
to Consolidated Financial Statements.
During the first quarter of 2000, Natural announced that it had
(i) fully subscribed its 130 Bcf of nominated storage capacity
until at least January 1, 2001, as a result of entering into
contracts for 25 Bcf of firm nominated storage service under two
separate three-year contracts and (ii) entered into contracts
with Ameren Corporation for up to 245,000 MMBtu per day of
natural gas transportation through a four-year term which began
on April 1, 2000.
In April 2000, Natural announced that it had initiated
HubAmerica, a new program designed to facilitate the movement of
natural gas from Chicago and other MidWest regions to markets
served directly by Natural or through interconnecting pipelines.
In connection with establishment of HubAmerica, Natural signed a
letter of intent with Duke Energy's Texas Eastern Transmission
Corporation for a long-term reciprocal natural gas pipeline
capacity lease. Under the agreement, the two pipelines will
lease capacity on each other's systems to offer seamless
transportation services of natural gas from the Chicago area to
eastern markets. HubAmerica will provide direct access to major
markets in Illinois, Indiana, Iowa and Wisconsin, and indirect
access to Dallas, Houston, St. Louis, Kansas City and markets on
the West Coast, East Coast and Southeastern states through
numerous downstream interstate and intrastate pipelines.
HubAmerica will offer firm and interruptible transportation
services in conjunction with other Natural services, such as
parking and loaning transactions and other storage and balancing
services.
In May 2000, Kinder Morgan and Southern Energy, Inc. announced
plans to build a 550-megawatt electric power plant southeast of
Little Rock, Arkansas. The gas-fired plant is scheduled to begin
producing power by the second quarter of 2002. Gas
transportation service for the plant will be provided by Natural.
Kinder Morgan intends to continue increasing throughput on
Natural by supplying gas transportation service to power plants -
both those in which Kinder Morgan will have an ownership
interest, as well as those owned by third party electricity
providers.
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 MMBtu 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.
<PAGE> 26
<TABLE>
<CAPTION>
Kinder Morgan Interstate Three Months Ended Six Months Ended
Gas Transmission June 30, 1999 June 30, 1999
------------------------ ------------------ ----------------
(In Thousands Except Systems
Throughput)
<S> <C> <C>
Operating Revenues:
Transportation and Storage $ 24,948 $ 51,236
Other 57 166
----------- -----------
Total Operating Revenues 25,005 51,402
----------- -----------
Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales 1,140 691
Operations and Maintenance 5,397 11,447
Depreciation and Amortization 5,009 10,154
Taxes, Other Than Income Taxes 1,069 2,368
----------- -----------
Total Operating Expenses 12,615 24,660
----------- -----------
Operating Income Before Corporate Costs $ 12,390 $ 26,742
=========== ===========
Systems Throughput (Trillion Btus) 48.6 103.3
=========== ===========
</TABLE>
Effective December 31, 1999, Kinder Morgan contributed KMIGT and
Kinder Morgan Trailblazer LLC (formerly NGPL-Trailblazer, Inc.),
as well as its interest in Red Cedar Gathering Company to Kinder
Morgan Energy Partners in exchange for $330 million in cash plus
approximately 9.8 million Kinder Morgan Energy Partners common
units. See Note 5 of the accompanying Notes to Consolidated
Financial Statements for more information regarding this
transaction. In March 2000, Kinder Morgan announced that it had
reached a settlement with the FERC regarding issues surrounding
the interpretation of FERC Order 497 to several entities
currently or formerly owned by Kinder Morgan, including KMIGT.
For additional information on this matter, see Note 11 of the
accompanying Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
Increase Increase
K N Retail 2000 1999 (Decrease) 2000 1999 (Decrease)
---------- ------ ------ ---------- ------ ------ ----------
(In Thousands Except Systems Throughput)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Gas Sales $ 23,149 $ 22,905 $ 244 $ 77,059 $ 77,674 $ (615)
Transportation 8,564 9,017 (453) 19,821 20,214 (393)
Other 4,450 4,281 169 7,706 8,177 (471)
--------- --------- --------- --------- --------- ---------
Total Operating Revenues 36,163 36,203 (40) 104,586 106,065 (1,479)
--------- --------- --------- --------- --------- ---------
Operating Costs and Expenses:
Gas Purchases and Other
Costs of Sales 17,988 21,678 (3,690) 53,294 62,231 (8,937)
Operations and Maintenance 8,272 10,146 (1,874) 18,084 20,396 (2,312)
Depreciation and
Amortization 2,888 2,840 48 5,777 5,685 92
Taxes, Other Than Income
Taxes 684 754 (70) 1,313 1,640 (327)
--------- --------- --------- --------- --------- ---------
Total Operating Expenses 29,832 35,418 (5,586) 78,468 89,952 (11,484)
--------- --------- --------- --------- --------- ---------
Operating Income Before
Corporate Costs $ 6,331 $ 785 $ 5,546 $ 26,118 $ 16,113 $ 10,005
========= ========= ========= ========= ========= =========
Systems Throughput (Trillion
Btus) 11.7 9.5 2.2 33.5 26.7 6.8
========= ========= ========= ========= ========= =========
</TABLE>
Retail's operating income before corporate costs increased by
$5.5 million in the second quarter of 2000 from the second
quarter of 1999. Operating results for 2000 were positively
impacted, relative to 1999, by (i) increased system throughput in
2000, although a portion of this increase represents volumes
transported for
<PAGE> 27
relatively low margins, (ii) reduced cost of gas achieved by
utilizing lower cost gas from storage (K N Retail utilizes the
average cost inventory method for its gas in underground
storage), (iii) certain unfavorable adjustments to gas cost
affecting 1999 results and (iv) reduced operating expenses
reflecting (1) a reduction in advertising and marketing expenses
for the Choice Gas program, (2) continued focus on efficient
operations and (3) 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 $10.0
million (62.1%) in the six months ended June 30, 2000, over the
corresponding period in 1999. Year-to-date results were affected
by essentially the same factors affecting the second quarter, as
discussed preceding.
In May 2000, Kinder Morgan announced the results of Retail's
Residential/Commercial Choice Gas Programs in Nebraska and
Wyoming. During the selection periods, which ran from mid-April
to early May, customers had the opportunity to select from six
natural gas suppliers in Nebraska and three natural gas suppliers
in Wyoming. In both states Retail received 75% or more of the
residential/commercial gas sales market. The residential/com-
mercial market represents approximately 86,000 customers and
16.0 Bcf of natural gas per year in Nebraska and 10,000 customers
and 1.5 Bcf per year in Wyoming.
In March 2000, Kinder Morgan announced the results of Retail's
Agricultural Choice Gas Program, which provides agricultural
customers in Nebraska (approximately 10,000 customers, a 6.6 Bcf
per year market) the option to select their natural gas supplier.
During the selection period, which ran from January 20 to March
15, customers in Nebraska had the opportunity to select from six
natural gas suppliers. Retail received the largest share of the
market with 50%, which represents a small increase in market
share over the previous year, with the next largest market share
going to Midwest United Energy at 32%.
Kinder Morgan recently filed appeals with respect to recovery of
certain surcharges in Nebraska, see "Regulatory Matters".
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 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 $ 356,884 $ 189,793 $ 167,091 $ 588,847 $ 343,787 $ 245,060
Transportation and Storage 5,206 5,187 19 12,423 12,357 66
Other 11,421 9,136 2,285 22,160 12,299 9,861
--------- --------- --------- --------- --------- ---------
Total Operating Revenues 373,511 204,116 169,395 623,430 368,443 254,987
--------- --------- --------- --------- --------- ---------
Operating Costs and Expenses:
Gas Purchases and Other Costs
of Sales 357,570 190,072 167,498 583,359 333,786 249,573
Operations and Maintenance 11,197 10,650 547 22,392 21,067 1,325
Depreciation and Amortization 717 616 101 1,393 1,203 190
Taxes, Other Than Income
Taxes 930 665 265 1,859 1,287 572
--------- --------- --------- --------- --------- ---------
Total Operating Expenses 370,414 202,003 168,411 609,003 357,343 251,660
--------- --------- --------- --------- --------- ---------
Operating Income Before
Corporate Costs $ 3,097 $ 2,113 $ 984 $ 14,427 $ 11,100 $ 3,327
========= ========= ========= ========= ========= =========
Systems Throughput (Trillion
Btus) 170.7 142.2 28.5 314.9 287.7 27.2
========= ========= ========= ========= ========= =========
</TABLE>
KMTP's operating income before corporate costs increased by $1.0
million (46.6%) in the second quarter of 2000 from the second
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
<PAGE> 28
revenues resulting from an increase in the average price of
natural gas liquids from $0.28 per gallon in 1999 to $0.44 per
gallon in 2000. These positive affects were partially offset by
(i) reduced natural gas liquids sales volumes and (ii) increased
operating expenses mainly due to additional plant turnaround
and chemical costs.
KMTP's operating income before corporate costs increased by $3.3
million (30.0%) in the six months ended June 30, 2000, over the
corresponding period in 1999. Year-to-date results were affected
principally by the same factors affecting the second 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 at the Shell Central plant in January and February 1999.
In March 2000, Kinder Morgan announced that Kinder Morgan Texas
Pipeline had (i) renewed its natural gas and transportation
contract with Reliant Energy HL&P (the electric utility which
serves the greater Houston, Texas metropolitan area) through
March 1, 2004 and (ii) entered into a new transportation services
agreement with Reliant Energy HL&P beginning in 2002 and
extending through 2012. Reliant Energy, as a consolidated
enterprise (which includes, in addition to HL&P, Entex - the gas
distribution utility which serves the Houston Texas metropolitan
area), constitutes KMTP's (and Kinder Morgan Inc.'s) largest
customer. See Note 19 of Notes to Consolidated Financial
Statements included in Kinder Morgan's 1999 Annual Report on Form
10-K.
In July 2000, KMTP announced that it had entered into a new
natural gas sales and transportation agreement with Calpine, a
fully integrated electric power company. Under this agreement,
KMTP will supply Calpine's Pasadena II gas-fired cogeneration
facility in Texas with 60,000 MMBtu 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.
KMTP currently supplies 100 percent of the natural gas Calpine
burns at its Pasadena I plant.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 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 $ 19,341 $ 15,904 $ 3,437 $ 33,517 $ 31,030 $ 2,487
--------- --------- --------- --------- --------- ---------
Operating Costs and Expenses:
Gas Purchases and Other Costs
of Sales 3,910 3,075 835 5,652 6,750 (1,098)
Operations and Maintenance 4,292 3,958 334 8,705 6,976 1,729
Depreciation and Amortization 2,209 1,861 348 4,287 3,760 527
Taxes, Other Than Income
Taxes 275 204 71 596 444 152
--------- --------- --------- --------- --------- ---------
Total Operating Expenses 10,686 9,098 1,588 19,240 17,930 1,310
--------- --------- --------- --------- --------- ---------
Operating Income Before
Corporate Costs $ 8,655 $ 6,806 $ 1,849 $ 14,277 $ 13,100 $ 1,177
========= ========= ========= ========= ========= =========
</TABLE>
Power and Other operating income before corporate costs increased
by $1.8 million (27.2%) in the second quarter of 2000 from the
second quarter of 1999. Operating results were positively
impacted in 2000, relative to 1999, by (i) 2.8 million of second-
quarter profits from development of a 550-megawatt electric
generating plant near Little Rock, Arkansas (see the discussion
following), (ii) reduced Power operating expenses and (iii) in-
creased earnings from other activities, principally Kinder
Morgan's agreement with HS Resources, Inc. as described in Kinder
Morgan's 1999 Annual Report on Form 10-K. These positive effects
were partially offset by (i) increased fuel costs for power
generation, (ii) reduced electricity sales prices and (iii) de-
creased earnings from certain telecommunications assets used
primarily by internal business segments.
<PAGE> 29
Power and Other operating income before corporate costs increased
by $1.2 million (9.0%) in the six months ended June 30, 2000,
over the corresponding period in 1999. Year-to-date results were
affected principally by the same factors affecting the second
quarter, as discussed preceding.
In May 2000, Kinder Morgan and Southern Energy, Inc., a unit of
Southern Company, announced plans to build a 550-megawatt
electric power plant southeast of Little Rock, Arkansas.
Construction on the $250 million plant began this summer in
Pulaski County, with the plant scheduled to begin producing power
by the second quarter of 2002. The natural gas-fired generating
station will be the first in a series of electric power plants
Kinder Morgan plans to build using its proprietary Orion con-
figuration to help meet the nation's growing demand for elec-
tricity. The Orion technology combines the operational flex-
ibility and responsiveness of a simple-cycle peaking plant with
the fuel efficiency of combined-cycle technology. This allows
the plants to be started and stopped quickly, enabling rapid
response to changes in the marketplace. Gas transportation ser-
vice for the plant will be provided by NGPL. As part of the
agreement, Kinder Morgan Power is receiving a development fee and
profit from turn-key construction of the plant, which will be
recorded as revenue over the two-year construction period.
In August 2000, Kinder Morgan Power Company, a wholly owned
subsidiary of Kinder Morgan, 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 is
scheduled to begin in August 2000. The plant is expected to
begin producing power in June 2002.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 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 $ 35,142 $ - $ 35,142 $ 64,725 $ - $ 64,725
Amortization of Excess
Investment (6,862) - (6,862) (14,439) - (14,439)
Equity in Earnings of Other
Equity Investments (2,717) 3,956 (6,673) (5,616) 10,529 (16,145)
Interest Expense (62,470) (62,896) 426 (122,869) (125,813) 2,944
Minority Interests (6,072) (6,585) 513 (12,037) (12,564) 527
Other, Net 892 18,436 (17,544) 10,564 19,793 (9,229)
--------- --------- --------- --------- --------- ---------
Total Other Income (Deductions) $ (42,087) $ (47,089) $ 5,002 $ (79,672) $(108,055) $ 28,383
========= ========= ========= ========= ========= =========
</TABLE>
The equity in earnings of Kinder Morgan Energy Partners and
associated amortization during 2000 reflect the October 1999
acquisition of Kinder Morgan Delaware, see Note 2 of the
accompanying Notes to Consolidated Financial Statements. For
additional information regarding the results of operations of
Kinder Morgan Energy Partners, the reader is directed to Kinder
Morgan Energy Partners' quarterly report on Form 10-Q for the
period ended June 30, 2000.
The decrease in "Equity in Earnings of Other Equity Investments"
from the second quarter of 1999 to the second quarter of 2000 and
from the first six months of 1999 to the first six months of 2000
is principally due to the sale of various equity method invest-
ments, see Note 5 of the accompanying Notes to Consolidated
Financial Statements. In addition, 2000 results reflect increased
losses from the TransColorado pipeline joint venture.
"Other, Net" in the second quarter of 2000 principally consists
of miscellaneous gains from asset sales. Second-quarter 1999
"Other, Net" included (i) a $17.5 million gain from the sale of
certain offshore assets and (ii) dividend income associated with
the preferred stock of Tom Brown, Inc., which was sold in the
third quarter of
<PAGE> 30
1999. For additional information with respect to these sales,
see Note 5 of the accompanying Notes to Consolidated Financial
Statements.
"Other, Net" for the six months ended June 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 attributable to
the settlement of a regulatory matter for an amount less than
that previously reserved, see "Regulatory Matters," (iii) $1.3
million attributable to a gain from the sale of common stock of
Tom Brown, Inc. and (iv) miscellaneous gains from the sale of
assets. "Other, Net" for the six months ended June 30, 1999
includes a $17.5 million gain from the sale of certain offshore
assets and dividend income from preferred stock of Tom Brown,
Inc. sold during the third quarter of 1999, in each case as
discussed preceding.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Income Taxes From Continuing ---------------------------------- ----------------------------------
---------------------------- Increase Increase
Operations 2000 1999 (Decrease) 2000 1999 (Decrease)
---------- ------ ------ ---------- ------ ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Income Tax Provision $ 16,560 $ 7,914 $ 8,646 $ 47,287 $ 23,200 $ 24,087
========= ========= ========= ========= ========= =========
Effective Tax Rate 40.0% 39.0% 1.0% 40.0% 39.0% 1.0%
========= ========= ========= ========= ========= =========
</TABLE>
The increase of $8.6 million in the income tax provision from the
second quarter of 1999 to the second quarter of 2000 is composed
of (i) an increase of $8.2 million attributable to an increase in
pre-tax income and (ii) an increase of $0.4 million attributable
to an increase in the effective tax rate in 2000. The increase
of $24.1 million in the income tax provision from the first six
months of 1999 to the first six months of 2000 is composed of (i)
an increase of $22.9 million attributable to an increase in pre-
tax income and (ii) an increase of $1.2 million attributable to
an increase in the effective tax rate in 2000. In each case, the
increase in the effective tax rate is principally due to an
increased provision for state income taxes.
Discontinued Operations
-----------------------
During the third quarter of 1999, Kinder Morgan adopted a plan to
discontinue the direct marketing of non-energy products and
services (principally under the "Simple Choice" brand), which
activities had been carried on largely through Kinder Morgan's
en*able joint venture with PacifiCorp. During the fourth quarter
of 1999, Kinder Morgan adopted and implemented plans to
discontinue the following lines of business: gathering and
processing natural gas and providing field services to natural
gas producers, commodity marketing of natural gas and natural gas
liquids, international operations and West Texas intrastate
pipelines.
As further described in Note 6 of Notes to Consolidated Financial
Statements included in Kinder Morgan's 1999 Annual Report on Form
10-K, as of December 31, 1999, in accordance with the provisions
of Accounting Principles Board Opinion No. 30, " Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and In-
frequently Occurring Events and Transactions," Kinder Morgan (i)
reclassified its consolidated financial statements to reflect
these businesses as discontinued operations and (ii) recorded an
estimate of the loss expected to result from the discontinuance
and disposal of these businesses, including both the estimated
losses to be incurred upon sale and the estimated operating
losses to be incurred prior to the projected disposal dates.
This total estimated loss is subject to uncertainty with respect
to the ultimate proceeds to be received from the sale and oper-
ation of these assets (among other factors) and, accordingly, the
actual loss may differ materially from the estimate recorded as
of December 31, 1999.
<PAGE> 31
Any such difference will be recognized in the period in which it
is reasonably estimable and classified in the same manner as the
original estimated loss.
The reader is directed to Note 6 of the accompanying Notes to
Consolidated Financial Statements for (i) information concerning
the status of disposition efforts with respect to these assets,
(ii) certain financial information with respect to discontinued
operations and (iii) Kinder Morgan's remaining investment in
these businesses.
Liquidity and Capital Resources
-------------------------------
The following table illustrates the sources of Kinder Morgan's
invested capital. The balances at December 31, 1998, and
subsequent reflect the incremental capital associated with the
acquisition of MidCon Corp., including the post-acquisition
refinancings completed in 1998. The balances at December 31,
1999 and June 30, 2000 also reflect the impacts associated with
the acquisition of Kinder Morgan Delaware and the sale of certain
assets to Kinder Morgan Energy Partners (for additional
information on these transactions, see Notes 2 and 5 of the
accompanying Notes to Consolidated Financial Statements).
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Long-term Debt $3,292,852 $3,293,326 $3,300,025 $ 553,816 $ 423,676
Common Equity 1,718,287 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 5,286,139 5,234,167 4,798,846 1,266,948 950,470
Short-Term Debt 299,667 581,567 1,702,013(1) 359,951 156,271
---------- ---------- ---------- ---------- ----------
Invested Capital $5,585,806 $5,815,734 $6,500,859 $1,626,899 $1,106,741
========== ========== ========== ========== ==========
Capitalization:
---------------
Long-term Debt 62.3% 62.9% 68.8% 43.7% 44.6%
Common Equity 32.5% 31.8% 25.4% 47.8% 54.7%
Preferred Stock - - 0.1% 0.6% 0.7%
Capital Trust Securities 5.2% 5.3% 5.7% 7.9% -
Invested Capital:
-----------------
Total Debt 64.3% 66.6% 76.9% 56.2% 52.4%
Equity, Including Capital
Trust Securities 35.7% 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.
</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. None
of these units were acquired by Kinder Morgan and, accordingly,
Kinder Morgan's 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 Partners has adopted an aggressive
acquisition strategy and it is expected that future acquisitions
will be financed, in part, by issuance of additional limited
partner units. Therefore, it is expected that future similar
transactions will occur. Nevertheless, because (i) it is Kinder
Morgan Energy Partners' policy that such acquisitions be accre-
tive to cash flow per common unit, (ii) the general partner in-
terest is not diluted by such transactions and (iii) for a given
level of cash distribution, the incentive distribution structure
<PAGE> 32
results in relatively larger distributions to the general partner
as the number of limited units outstanding increases, it is not
anticipated that additional transactions will collectively have
an adverse affect 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 Kinder Morgan's 1999
Annual Report on 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 (Used in) Operating Activities"
decreased from a source of $66.9 million for the six months ended
June 30, 1999 to a use of $48.0 million for the six months ended
June 30, 2000, a decline of $114.9 million. This decline is
primarily due to an increase in cash flows used for discontinued
operations, which increased from a source of $93.6 million in the
first six months of 1999 to a use of $115.5 million in the first
six months of 2000, a $209.1 million increased use of cash
reflecting (i) $124.9 million of cash outflow attributable to the
reduced utilization of Kinder Morgan's receivable sale program,
see "Net Cash Flows from Financing Activities" following and (ii)
a $63.9 million source of cash in the first six months of 2000
for discontinued operations working capital items, compared to a
$125.0 million source of cash in the first six months of 1999.
This decline in cash provided by working capital items for
discontinued operations principally reflected decreased cash
provided from the net of accounts receivable and accounts payable
during the first six months of 2000, over and above the effect of
the receivable sales program. The decline in "Net Cash Flows
Provided by (Used in) Operating Activities" for discontinued
operations was partially offset by an increase in cash flows
provided by continuing operations, which increased from a use of
$26.7 million for the six months ended June 30, 1999 to a source
of $67.5 million for the six months ended June 30, 2000. This
$94.2 million of increased cash is primarily due to (i) $47.3
million of cash distributions received in the first six months of
2000 attributable to Kinder Morgan's 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 the net of accounts receivable
and accounts payable during the first six months of 2000 and
(iii) a decrease in cash used in the first six 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 six months ended
June 30, 2000 reflects the receipt of a total of $47.3 million of
cash distributions from Kinder Morgan Energy Partners for the
fourth quarter of 1999 and the first quarter of 2000. The cash
distributions attributable to Kinder Morgan's interest for the
three months and six months ended June 30, 2000 total $37.0
million and $68.4 million, respectively. The increase in
distributions during 2000 reflects, among other factors, the
December 31, 1999 transfer of certain properties from Kinder
Morgan to Kinder Morgan Energy Partners, see Note 5 of the
accompanying Notes to Consolidated Financial Statements.
<PAGE> 33
Net Cash Flows from Investing Activities
----------------------------------------
"Net Cash Flows Provided by Investing Activities" decreased from
$1.0 billion for the six months ended June 30, 1999 to $384.5
million for the six months ended June 30, 2000, a decline of
$664.1 million principally due to the sale of approximately $1.1
billion of government securities during the first six 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 Kinder Morgan's 1999 Annual Report on Form
10-K. Partially offsetting this decrease was (i) $330 million of
cash received during the first six months of 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 $29.1 million in the first six months of
1999 to a source of $129.4 million in the first six months of
2000, which primarily consists 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. Kinder
Morgan is in the process of monetizing its 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 $1.1 billion for the six months ended June 30, 1999
to $335.5 million for the six months ended June 30, 2000, a
decline of approximately $765.8 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 during the same period, as
well as reduced cash payments for dividends in 2000. Partially
offsetting these effects were increased 2000 cash used for
miscellaneous financing activities.
As further discussed in Note 10 of the accompanying Notes to
Consolidated Financial Statements, Kinder Morgan's principal
sources of short-term liquidity are its revolving bank facilities
totaling $950 million. At June 30, 2000, Kinder Morgan had
$292.5 million of commercial paper (which is backed by the bank
facilities) issued and outstanding. The corresponding amount
outstanding was $246.6 million at August 1, 2000. After
inclusion of applicable letters of credit, the remaining
available borrowing capacity under the bank facilities was $639.2
million and 685.1 million at June 30, 2000 and August 1, 2000,
respectively. As described in Kinder Morgan's 1999 Annual Report
on Form 10-K, Kinder Morgan's bank facilities and certain of its
operating lease arrangements contain covenants related to Kinder
Morgan's 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.
As more fully discussed in Kinder Morgan's 1999 Annual Report on
Form 10-K, in September 1999, Kinder Morgan established a
receivables sales facility that provided up to $150 million of
additional liquidity. In accordance with this agreement,
proceeds of $150 million were received on September 30, 1999. In
accordance with authoritative accounting guidelines, 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, Kinder Morgan reduced its
participation in this receivable sales program by $124.9 million,
principally as a result of its then-pending disposition of its
wholesale gas marketing business, see Note 7 of the accompanying
Notes to Consolidated Financial Statements. On April 25, 2000,
Kinder Morgan repaid the residual balance and terminated the
agreement.
<PAGE> 34
Regulatory Matters
------------------
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 Kinder
Morgan. 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. Kinder Morgan has responded and denied the allegations.
On July 27, 2000, the FERC issued an order commencing a
preliminary non-public investigation into the complaint. The
Company believes it has meritorious defenses to the claim.
On March 29, 2000, Kinder Morgan announced that it had reached a
settlement with the FERC regarding issues surrounding the
interpretation of FERC Order 497 (which governs the conduct of
interstate pipelines and affiliated gas marketers on their
systems) relative to KMIGT, Natural and Westar Transmission
Company. KMIGT has been sold to Kinder Morgan Energy Partners
and Westar has been sold to ONEOK, see Notes 4 and 5 of the
accompanying Notes to Consolidated Financial Statements.
Combined, Kinder Morgan agreed to pay a civil penalty and refunds
totaling $5.75 million in conjunction with the settlement, which
also eliminated the potential for any civil action or prolonged
regulatory proceedings. The matters resolved related to periods
prior to the October 1999 K N Energy-Kinder Morgan merger and, to
some extent, periods prior to K N Energy's January 1998
acquisition of MidCon Corp. The payment had no detrimental
effect on Kinder Morgan's earnings due to the existence of
previously established reserves.
In April 2000, Kinder Morgan filed appeals against 11 Nebraska
municipalities that have adopted rate ordinances prohibiting the
collection of a surcharge (associated with the P-0802 contract
entered into in 1973) to recover costs Retail incurred in
purchasing natural gas for its customers. Kinder Morgan alleges
that these municipalities failed to determine an appropriate
overall amount for Retail's rates and that the municipalities
failed to follow the appropriate process, as set up by the
Nebraska legislature, to review the P-0802 contract. When Retail
opened its distribution system to competitive supplies in 1998,
participating municipalities were made aware of the surcharge and
passed ordinances allowing it.
Environmental and Legal Matters
-------------------------------
See Note 17 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 Financial Statements of Kinder Morgan's
Annual Report on Form 10-K for the year ended December 31, 1999,
for additional information on Kinder Morgan's pending litigation
and environmental matters. Kinder Morgan believes it has
established adequate reserves such that the resolution of pending
litigation and environmental matters will not have a material
adverse impact on Kinder Morgan's business, cash flows, financial
position or results of operations.
Business Strategy
-----------------
The reader is directed to Kinder Morgan's 1999 Annual Report on
Form 10K 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
<PAGE> 35
and Analysis of Financial Condition and Results of Operations
contained in Kinder Morgan's Annual Report on Form 10-K for the
year ended December 31, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The reader is directed to Note 17 of the accompanying Notes to
Consolidated Financial Statements in Part I, Item 1, which is in-
corporated 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 April 20, 2000 was
filed pursuant to Items 2 and 7 of that form.
Pursuant to Item 7 of that form, Kinder Morgan disclosed that
substantially the same information as that required by Item 7
(pro forma financial information) has been previously reported
by Kinder Morgan on its Form 10-K for the year ended December
31, 1999.
<PAGE> 36
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)
August 14, 2000 /s/ C. Park Shaper
----------------------------------
C. Park Shaper
Vice President and Chief Financial
Officer(Principal Financial and
Accounting Officer)
<PAGE> 37
EXHIBIT INDEX
27.1 Financial Data Schedule*
*Included in SEC copy only.
