SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
January 20, 2000
(Date of earliest event reported)
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 1-11234 76-0380342
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
1301 McKinney, Suite 3400
Houston, Texas 77010
(Address of principal executive offices, including zip code)
713-844-9500
(Registrant's telephone number, including area code)
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits.
(a) Financial Statements of the Businesses Acquired.
Filed herewith as Exhibit 99.1 are audited financial
statements as required by this Item 7 for the following entities,
interests in which were acquired by registrant as reported in a
Current Report on Form 8-K dated February 4, 2000:
(1) Kinder Morgan Interstate Gas Transmission LLC, a Colorado
single-member limited liability company;
(2) Trailblazer Pipeline Company, an Illinois general
partnership; and
(3) Red Cedar Gathering Company, a general partnership.
(b) Pro Forma Financial Information.
Filed herewith as Exhibit 99.2 is the Unaudited Pro Forma
Condensed Combined Statement of Income for the registrant, giving
effect to the acquisition of the above listed entities by the
registrant as described in a Current Report on Form 8-K dated
February 4, 2000. In addition, the Pro Forma Condensed Combined
Statement of Income gives effect to our acquisition from Columbia
Gulf Transmission Company on November 30, 1999 of an additional
33 1/3% interest in Trailblazer Pipeline Company.
(c) Exhibits.
The Exhibits listed in the Index to Exhibits are filed as
part of this Current Report on Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
KINDER MORGAN ENERGY PARTNERS, L.P.
By:
KINDER MORGAN G.P., INC.,
its general partner
By: /s/ Joseph Listengart
---------------------------
Joseph Listengart
Vice President, General Counsel and
Secretary
Date: March 28, 2000
EXHIBIT INDEX
Exhibit
Number Description
23.1 Consent of Independent Accountants
23.2 Consent of Independent Public Accountants
99.1 Financial statements of
Kinder Morgan Interstate Gas Transmission
LLC, Trailblazer Pipeline Company and Red
Cedar Gathering Company for the year ended
December 31, 1999.
99.2 Unaudited Pro Forma Condensed
Combined Statement of Income of Kinder Morgan
Energy Partners, L.P. for the fiscal year
ended December 31, 1999.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 333-25995, 333-66931
and 333-62155) and the incorporation by reference in the
Registration Statement on Form S-8 (No. 333-56343) of Kinder
Morgan Energy Partners, L.P. of our reports dated March 27, 2000
relating to the financial statements of Kinder Morgan Interstate
Gas Transmission LLC and Trailblazer Pipeline Company, which
appear in this Current Report on Form 8-K of Kinder Morgan Energy
Partners, L.P. dated March 28, 2000.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
Denver, Colorado
March 28, 2000
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in the Registration Statements on Form
S-3 (Nos. 333-25995, 333-66931 and 333-62155) and the
incorporation by reference in the Registration Statement on Form
S-8 (No. 333-56343) of Kinder Morgan Energy Partners, L.P. of our
report dated March 24, 2000 on the financial statements of Red
Cedar Gathering Company, included in this Current Report on Form
8-K of Kinder Morgan Energy Partners, L.P. dated March 28, 2000.
/s/Arthur Andersen LLP
-------------------------
Denver, Colorado
March 28, 2000
Report of Independent Accountants
To the Members of Kinder Morgan Interstate Gas Transmission LLC:
In our opinion, the accompanying statements of income, of cash
flows and of changes in member's equity present fairly, in all
material respects, the results of operations and the
cash flows of Kinder Morgan Interstate Gas Transmission LLC
(formerly K N Interstate Gas Transmission Co.) for the year ended
December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
March 27, 2000
STATEMENT OF INCOME
Kinder Morgan Interstate Gas Transmission LLC (Formerly K N
Interstate Gas Transmission Co.)
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
--------------
(In Thousands)
<S> <C>
Operating Revenues:
Natural Gas Transportation and Storage $ 112,732
Other 475
-----------
Total Operating Revenues 113,207
-----------
Operating Costs and Expenses:
Gas Purchases and Other Costs of Sales 13,954
Operations and Maintenance 23,379
General and Administrative 9,566
Depreciation and Amortization 16,985
Taxes, Other Than Income Taxes 4,608
Severance Costs 3,054
-----------
Total Operating Costs and Expenses 71,546
-----------
Operating Income 41,661
-----------
Other Expenses:
Interest Expense (27,119)
Other, Net (248)
-----------
Total Other Expenses (27,367)
------------
Income Before Income Taxes 14,294
Income Taxes 5,948
-----------
Net Income $ 8,346
===========
The accompanying notes are an integral part of these statements.
</TABLE>
STATEMENT OF CHANGES IN MEMBER'S EQUITY
Kinder Morgan Interstate Gas Transmission LLC (Formerly K N
Interstate Gas Transmission Co.)
<TABLE>
<CAPTION>
Net Income
Balance at Year Ended Transfer Push Down Balance at
December 31, December 31, To Member's Accounting December 31,
1998 1999 Equity(1) Adjustment(2) 1999
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Common Stock $ 10 $ - $ (10) $ - $ -
Additional Paid-in Capital 89,019 - (89,019) - -
Retained Earnings 71,749 8,346 (80,095) - -
Member's Capital - - 169,124 101,378 270,502
---------- ------------- ----------- ----------- -----------
Total Member's Equity $ 160,778 $ 8,346 $ - $ 101,378 $ 270,502
========== ============= =========== =========== ===========
(1) Change Form of Organization From a C Corporation to a Limited
Liability Company
(2) Push Down Accounting Adjustment Resulting From the Sale of
KMIGT to Kinder Morgan Energy Partners
The accompanying notes are an integral part of these statements.
</TABLE>
STATEMENT OF CASH FLOWS
Kinder Morgan Interstate Gas Transmission LLC (Formerly K N
Interstate Gas Transmission Co.)
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
--------------
(In Thousands)
<S> <C>
Cash Flows From Operating Activities:
Net Income $ 8,346
Adjustments to Reconcile Net Income to
Net Cash Flows From Operating Activities:
Depreciation and Amortization 16,985
Deferred Income Taxes 5,470
Provisions for Rate Refunds 25,662
Net Change in Regulatory Assets and Liabilities 17,144
Net Change in Exchange Gas Imbalances (7,429)
Decrease in Gas in Underground Storage 2,145
Decrease in Receivables 4,560
Decrease in Inventory 673
Decrease in Payables and Accrued Expenses (5,195)
Other, Net 640
----------
Net Cash Flows Provided by Operating Activities 69,001
----------
Cash Flows Used in Investing Activities:
Capital Expenditures (20,743)
Proceeds From Sales of Assets 11,004
----------
Net Cash Flows Used in Investing Activities (9,739)
----------
Cash Flows From Financing Activities:
Payments on Note to Associated Company (59,262)
----------
Net Cash Flows Used in Financing Activities (59,262)
----------
Net Change in Cash -
Cash and Cash Equivalents at Beginning of Year -
----------
Cash and Cash Equivalents at End of Year $ -
==========
The accompanying notes are an integral part of these statements.
</TABLE>
KINDER MORGAN INTERSTATE GAS TRANSMISSION LLC
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Kinder Morgan Interstate Gas Transmission LLC ("KMIGT," formerly
K N Interstate Gas Transmission Co.) was a wholly owned
subsidiary of Kinder Morgan, Inc. (formerly K N Energy, Inc.)
until its sale to Kinder Morgan Energy Partners, L.P. ("Kinder
Morgan Energy Partners") in December 1999 (see Note 3). In
connection with the sale to Kinder Morgan Energy Partners and in
conjunction with the name change referred to above, KMIGT was
converted from a Colorado "C" corporation to a Colorado single-
member limited liability company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Accounting
The financial statements were prepared in accordance with
generally accepted accounting principles, except that no earnings
per share data have been provided because KMIGT is a wholly owned
subsidiary of Kinder Morgan Energy Partners.
(b) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses. Actual results could differ
from these estimates.
(c) Accounting for Regulatory Activities
KMIGT is regulated by and subject to the regulations and
accounting procedures of the Federal Energy Regulatory Commission
("FERC"). In addition, KMIGT meets the criteria for application
of and accordingly, follows the accounting and reporting
requirements of Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation", which prescribes the circumstances in which the
application of generally accepted accounting principles is
affected by the economic effects of regulation.
(d) Associated Company Transactions
Kinder Morgan, Inc. charges KMIGT for non-labor costs incurred on
behalf of KMIGT, and for direct labor and related expenses for
personnel who perform services for the benefit of KMIGT. KMIGT
recognized $83.1 million in transportation and storage revenues
for 1999, or 73% of total operating revenues from natural gas
services to associated companies. Components of transportation
and storage revenues from natural gas services to associated
companies are as follows:
1999 Revenues From Percent of Total
Associated Companies Operating Revenues
KN Marketing, L.P. $ 57,387,976 51%
KN Retail 15,778,264 14%
Wildhorse Energy
Partners, LLC 7,236,808 6%
Other 2,720,272 2%
------------ ---
Total $ 83,123,320 73%
============ ---
(e) Depreciation
Depreciation is computed based on the straight-line method over
the estimated useful lives of assets. The range of estimated
useful lives of assets is 7-40 years (transmission assets: 40
years).
(f) Gas in Underground Storage
KMIGT maintains gas in its underground storage facilities on
behalf of certain third parties and receives a fee for its
storage services.
(g) Cash Flow Information
KMIGT considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
KMIGT made no cash payments for interest or income taxes during
1999.
(h) Revenue Recognition
KMIGT recognizes transportation and storage revenues on an
accrual basis in the month these services are provided under the
terms of its approved FERC tariffs.
3. SALE OF KMIGT TO KINDER MORGAN ENERGY PARTNERS, L.P.
On December 30, 1999, Kinder Morgan, Inc. entered into a
Contribution Agreement among Kinder Morgan, Inc., several of its
wholly owned subsidiaries and Kinder Morgan Energy Partners. As
a result, effective as of December 31, 1999, Kinder Morgan, Inc.
contributed, among other things, all of its interest in KMIGT to
Kinder Morgan Energy Partners. In accordance with authoritative
accounting guidelines, an adjustment to push down the increase in
the basis of Kinder Morgan Energy Partners' investment in KMIGT
resulting from the application of the purchase method of
accounting for its acquisition of KMIGT is reflected in the
accompanying Statement of Member's Equity as an increase in
Member's Equity of $101.4 million.
4. REGULATORY MATTERS
On January 23, 1998, KMIGT filed a general rate case with the
FERC requesting a $30.2 million increase in annual revenues. As a
result of the FERC's action, KMIGT was allowed to place its rates
into effect on August 1, 1998, subject to refund, and provisions
for refund were recorded based on expected ultimate resolution.
On November 3, 1999, KMIGT filed a comprehensive Stipulation and
Agreement to resolve all issues in this proceeding. The FERC
approved the Stipulation and Agreement on December 22, 1999. The
settlement rates have been placed in effect, and refunds for past
periods will be made in early 2000. As of December 31, 1999, the
Partnership had accrued $36.6 million for these rate refunds.
5. LITIGATION AND ENVIRONMENTAL MATTERS
United States of America, ex rel., Jack J. Grynberg v. K N
Energy, Civil Action No. 97-D-1233, filed in the U.S. District
Court, District of Colorado. This action was filed pursuant to
the federal False Claim Act and involves allegations of
mismeasurement of natural gas produced from federal and Indian
lands. The Department of Justice has decided not to intervene in
support of the action. The complaint is part of a larger series
of similar complaints filed by Mr. Grynberg against 77 natural
gas pipelines, including KMIGT, (approximately 330 other
defendants). An earlier single action making substantially
similar allegations against the pipeline industry was dismissed
by Judge Hogan of the U.S. District Court for the District of
Columbia on grounds of improper joinder and lack of jurisdiction.
As a result, Mr. Grynberg filed individual complaints in various
courts throughout the country. These cases were recently
consolidated by the Judicial Panel for Multidistrict Litigation,
and transferred to the District of Wyoming. Motions to Dismiss
were filed on November 19, 1999. Plaintiff filed his response on
January 14, 2000 and defendants filed their Reply Brief on
February 14, 2000. An oral argument on the Motion to Dismiss
occurred on March 17, 2000. KMIGT believes it has a meritorious
position in this matter, and does not expect this lawsuit to have
a material adverse effect on KMIGT's business, cash flows,
financial position or results of operations.
KMIGT is a party to litigation (other than that specifically
noted) which arises in the normal course of business. Management
regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual
disposition of these matters. Management believes that the
effect on KMIGT's results of operations, financial position or
cash flows, if any, from the disposition of these matters will
not be material.
6. INCOME TAXES
For income tax purposes, KMIGT was treated as a C Corporation for
1999, and as such was subject to federal and state income taxes.
See Note 1 regarding the conversion of KMIGT from a C corporation
to a single-member limited liability company.
Components of the income tax provision applicable to federal and
state income taxes for the year ended December 31, 1999, are as
follows:
1999
Taxes Currently Payable:
Federal $ 1,403,798
State (925,807)
-----------
477,991
-----------
Taxes Deferred:
Federal $ 3,260,935
State 2,209,503
-----------
5,470,438
-----------
Total Income Tax Provision $ 5,948,429
===========
The difference between the statutory federal income tax rate and
KMIGT's effective income tax rate is summarized as follows:
Federal Income Tax Rate 35.0%
State Income Tax 5.6%
Other 1.0%
-----
Effective Tax Rate 41.6%
=====
7. SEVERANCE COSTS
Severance costs of $3.1 million, as shown in the accompanying
Statement of Income, represent primarily KMIGT's allocated share
of severance costs incurred by Kinder Morgan, Inc. during 1999.
Report of Independent Accountants
To the Partners of Trailblazer Pipeline Company:
In our opinion, the accompanying statements of income, of cash
flows and of changes in partners' equity present fairly, in all
material respects, the results of operations and the cash flows
of Trailblazer Pipeline Company for the year ended December 31,
1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audit. We conducted our audit of these statements in accordance
with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Denver, Colorado
March 27, 2000
TRAILBLAZER PIPELINE COMPANY
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
<S> <C>
OPERATING REVENUES:
Transportation Services $ 33,711,148
-------------
OPERATING EXPENSES:
Operations and Maintenance 2,827,408
Depreciation 16,972,560
Taxes Other Than Income 878,938
-------------
Total Operating Expenses 20,678,906
-------------
OPERATING INCOME 13,032,242
OTHER INCOME:
Interest Income 978,921
-------------
INTEREST EXPENSE:
Interest on Long-term Debt 3,295,847
Amortization of Debt Issuance Costs 161,000
Interest Expense on Rate Refund 404,185
-------------
Total Interest Expense 3,861,032
-------------
NET INCOME TO PARTNERS $ 10,150,131
=============
The accompanying notes are an integral part of these statements.
</TABLE>
TRAILBLAZER PIPELINE COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
<S> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net Income to Partners $ 10,150,131
-------------
Adjustment to Reconcile Net Income to Partners
to Net Cash Flows Provided
By Operating Activities:
Depreciation 16,972,560
Amortization of Debt Expense 141,312
Decrease in Depreciation Rate Adjustment (6,831,397)
Increase in Capacity Rate Refund 11,806,930
Other Noncash Charges (Credits) to Income (274,509)
Changes in Certain Operating Assets and
Liabilities:
Decrease in Accounts Receivable (1,188,273)
Increase in Other Assets 1,851
Decrease in Prepayments and Other (39,756)
Decrease in Gas Imbalance Cashout Assets (16,668)
Decrease in Interest Payables (350.348)
Decrease in Accounts Payable and Other (739,302)
Decrease in Taxes Other Than Income (168,555)
Decrease in Refund to Shippers (939,476)
-------------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 28,524,500
-------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital Expenditures, Net of Contributions (154,229)
-------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment of Long-Term Debt (10,100,000)
Distributions to Partners: (8,400,079)
-------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (18,500,079)
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,870,192
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,846,445
-------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,716,637
=============
The accompanying notes are an integral part of these statements.
</TABLE>
TRAILBLAZER PIPELINE COMPANY
STATEMENT OF CHANGES IN PARTNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
Enron
NGPL- Trailblazer
Total Trailblazer LLC KMOLP Pipeline Co.
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
PARTNERS' EQUITY-Beginning Balance $ 80,402,256 $ 26,800,752 $ 26,800,752 $ 26,800,752
Net Income to Partners 10,150,131 3,383,377 3,383,377 3,383,377
Distributions to Partners:
Earnings (8,400,079) (2,800,026) (2,800,026) (2,800,026)
Refund to Shippers (939,476) (313,159) (313,159) (313,159)
------------- ------------- ------------- -------------
PARTNERS' EQUITY-Ending Balance $ 81,212,832 $ 27,070,944 $ 27,070,944 $ 27,070,944
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
TRAILBLAZER PIPELINE COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION AND STATUS OF PARTNERSHIP
Trailblazer Pipeline Company ("Trailblazer") is an Illinois
partnership which owns and operates a 436-mile pipeline system
and is engaged in the transmission of natural gas for others in
interstate commerce from Colorado through southeastern Wyoming to
Beatrice, Nebraska.
The partners in Trailblazer are NGPL-Trailblazer, LLC, Kinder
Morgan Operating L.P. "A" ("KMOLP") and Enron Trailblazer Pipeline
Company, each with a 33 1/3% interest. Trailblazer is managed by
a committee consisting of management representatives from each of
the partners. Trailblazer has no employees. Natural Gas
Pipeline Company of America (Natural), a subsidiary of Kinder
Morgan, Inc., provides the personnel to operate the pipeline for
which it is reimbursed at cost.
On November 30, 1999, KMOLP purchased the one-third interest of
Trailblazer formerly owned by Columbia Gulf Transmission Company.
On December 31, 1999, the entity NGPL-Trailblazer, Inc. (which
owned one-third interest in Trailblazer) was purchased by KMOLP.
NGPL Trailblazer, Inc.'s name was subsequently changed to
NGPL-Trailblazer, LLC.
By the Federal Energy Regulatory Commission's order issued March
14, 1997 in Docket No. CP96-506-000, Trailblazer was authorized
to construct and operate a new 5,200 horsepower compressor unit
in Lincoln County, Nebraska (Compressor Station No. 602).
Compressor Station No. 602 was placed in service on July 16, 1997
and increased Trailblazer's firm design day capacity by
approximately 104,528 Mcf/day to 402,000 Mcf/day.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Trailblazer is regulated by and subject to the regulations and
accounting procedures of the Federal Energy Regulatory Commission
(FERC). In addition, Trailblazer meets the criteria for
application of and, accordingly, follows the accounting and
reporting requirements of Statement of Financial Accounting
Standard No. 71 ,"Accounting for the Effects of Certain Types of
Regulation" for regulated enterprises.
Use of Estimates
The process of preparing financial statement in conformity with
generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Such estimates primarily
relate to unsettled transactions and events as of the date of the
financial statements. Accordingly, upon settlement, actual
results may differ from the estimated amounts. Management
believes that these estimates and assumptions provide a
reasonable basis for the fair presentation of Trailblazer's
financial position and results of operations.
Cash Flow Information
Cash equivalents are recorded at cost, which approximates market.
For purposes of reporting cash flows, all liquid investments with
maturities at date of purchase of three months or less are
considered cash equivalents. Cash paid for interest during 1999
was $3.6 million.
Depreciation
Depreciation is computed on a straight-line method at a composite
annualized rate of 3.6% for the year ended December 31, 1999.
Revenue Recognition
Trailblazer recognizes transportation revenues on an accrual
basis as these services are provided under the terms of its
approved FERC tariffs.
(3) LONG-TERM AND SHORT-TERM BORROWINGS
On September 23, 1992, under the terms of a Note Purchase
Agreement ("Agreement"), Trailblazer issued and sold an aggregate
principal amount of $101 million of Senior Secured Notes ("Notes")
to a syndicate of fifteen insurance companies. Security for the
Notes is provided principally by an assignment of certain
Trailblazer transportation contracts.
Effective April 29, 1997, an amendment to the Agreement was
added. This amendment allows Trailblazer to include several
additional transportation contracts as security for the Notes,
adds a limitation on the amount of additional money that
Trailblazer can borrow, and relieves Trailblazer from the
security deposit obligation.
The Notes have a fixed annual interest rate of 8.03% and will be
repaid in semi-annual principal installments of $5.05 million
plus interest from March 1, 1993 through September 1, 2002, the
final maturity date.
On December 29, 1999, Trailblazer entered into a revolving credit
agreement with Toronto Dominion, Inc. providing for loans up to
$10 million. This agreement provides for an interest rate of
LIBOR plus 0.525% on the current loan and is due on December 27,
2000.
(4) RESTRICTIONS ON PARTNERSHIP DISTRIBUTIONS
Under the terms of the Agreement, as amended, and the revolving
credit agreement with Toronto Dominion, Inc., partnership
distributions are restricted by certain financial covenants.
(5) REFUNDS DUE SHIPPERS
Amounts billed to shippers include a provision for deferred
income taxes. Trailblazer has traditionally advanced these
amounts to its partners as a distribution of earnings. The
amount of deferred taxes collected in excess of 35% tax rate,
which has been advanced to the partners, has been quantified and
identified as the refunds due shippers. Trailblazer intends to
reduce prospective cash distributions to the partners to offset
the annual refund to its shippers and, accordingly, has reflected
a comparable amount as amounts recoverable or receivable from
partners. An amount will be deducted from partners' equity annually
representing the cash distribution which has been foregone in order
to make this annual refund.
(6) INCOME TAXES
Income taxes are the responsibility of the partners and are not
reflected in these financial statements. However, the
Trailblazer tariff includes an allowance for income taxes
calculated as if it were a corporation. As discussed in Note 5,
amounts collected by Trailblazer as an allowance for deferred
income taxes have historically been paid currently to partners
and recorded in the financial statements as a distribution of
earnings. Trailblazer's current tariff includes a deduction or
negative allowance for deferred income taxes associated with
current differences between book depreciation and tax
depreciation at the statutory rate. Trailblazer reflects the
resulting refunds to shippers in the accompanying financial
statements as a reduction in the distribution of earnings to
partners. Deferred taxes in excess of the statutory rate are
discussed in Note 5.
(7) MAJOR CUSTOMERS
Revenues recognized by Trailblazer from major customers for the
year ended December 31, 1999 were:
Amount %
------ --
KN Marketing LP (affiliated company) $ 5,939,467 15.6
Barrett Resources Corp. 5,623,903 14.8
Western Gas Resources, Inc. 5,081,056 13.4
Union Pacific Fuels, Inc. 4,932,441 13.0
Natural (affiliated company) 555,858 1.5
------------ ----
$ 22,132,725 58.3
============ ====
(8) RELATED PARTY TRANSACTIONS
Natural billed Trailblazer $2.8 million for costs incurred as
operator of the pipeline for the year ended December 31, 1999.
(9) TRAILBLAZER RATE CASE FILING
On July 1, 1997, Trailblazer filed a rate case with the FERC
(Docket No. RP97-408). The timing of the rate case filing was in
accordance with the requirements of Trailblazer's previous rate
case settlement in Docket No. RP93-55. The FERC issued an order
on July 31, 1997 which suspended the rates to be effective
January 1, 1998. Major issues in the rate case include throughput
levels used in the design of the rates, level of depreciation
rates, return on investment and the cost of service treatment of
the Columbia settlement revenues. Trailblazer filed a proposed
settlement agreement with the Administrative Law Judge ("ALJ") on
May 8, 1998. The presiding ALJ certified the settlement to the
FERC in an order dated June 25, 1998. The FERC issued an order on
October 19, 1998 remanding the settlement, which was contested by
two parties, to the presiding ALJ for further action. A revised
settlement was filed on November 20, 1998. The presiding ALJ
certified the revised settlement to the FERC on January 25, 1999.
On March 16, 2000, the only contesting party withdrew its
rehearing request, reflecting a commercial agreement reached with
Trailblazer. A motion to terminate the proceeding is pending
before the presiding ALJ. The settlement of Docket No. RP97-408
is expected to result in a $1.0 million increase in revenues over
the previous settlement.
(10) LITIGATION
On March 25, 1998, CIG Trailblazer Gas Company ("CIG
Trailblazer") filed a lawsuit, subsequently amended on February
3, 1999, against the three partners of Trailblazer. CIG
Trailblazer purchased Tennessee Trailblazer Gas Company's
("Tennessee Trailblazer") agreement ("Tennessee agreement") dated
November 1, 1982 with the Trailblazer partners. The Tennessee
agreement gave Tennessee Trailblazer the right to participate as
an equity owner and partner in Trailblazer expansions beyond
Trailblazer's original certificated capacity of 525,000 Mcf/D.
The agreement also gave Tennessee Trailblazer the right to attend
management committee meetings of Trailblazer. CIG Trailblazer
claims in the lawsuit, that as owners of the Tennessee agreement
it has a right to attend management committee meetings but has
been excluded from them by the management committee of
Trailblazer. CIG Trailblazer also claims that it had the right to
participate in the 1997 expansion of Trailblazer. CIG Trailblazer
also filed a separate lawsuit on February 2, 1999 requesting a
declaratory order that once they become a partner in Trailblazer
under the 1982 agreement, CIG Trailblazer will not be required to
contribute or sell the Wyoming Interstate Company to Trailblazer.
On March 1, 2000, all parties reached an agreement and documents
formally disposing of both suits were executed, signed by the
presiding Judge and filed in the Wyoming Court. The settlement
of the litigation does not result in any current change in the
ownership of Trailblazer. The settlement does clarify the rights
of CIG Trailblazer under the Tennessee agreement, allowing CIG
Trailblazer to acquire an ownership interest in the next
expansion of Trailblazer.
RED CEDAR GATHERING COMPANY
Financial Statements
For The Years Ended December 31, 1999 And 1998
Together With Report Of Independent Public Accountants
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Red Cedar Gathering Company:
We have audited the accompanying balance sheets of RED CEDAR
GATHERING COMPANY (a Colorado joint venture) as of December 31,
1999 and 1998, and the related statements of operations, changes
in partners' equity and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Red Cedar Gathering Company as of December 31, 1999 and 1998,
and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Denver, Colorado,
March 24, 2000.
RED CEDAR GATHERING COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,708,864 $ 7,285,669
Accounts receivable - trade 11,155,446 11,033,193
Inventories - 43,583
Prepaids and other 284,874 302,693
------------- -------------
Total current assets 23,149,184 18,665,138
------------- -------------
PROPERTY AND EQUIPMENT
Pipeline 53,863,004 51,838,812
Machinery and equipment 67,093,541 60,008,396
Building and site improvements 2,228,714 2,169,423
Land 422,054 422,054
Right of way 1,192,576 943,409
------------- -------------
124,799,889 115,382,094
Less-Accumulated depreciation
and Amortization (24,106,181) (18,245,287)
------------- -------------
100,693,708 97,136,807
Construction work-in-progress 2,489,885 4,618,267
------------- -------------
Total property and equipment 103,183,593 101,755,074
------------- -------------
PREPAID INTEREST (Note 4) 4,602,826 5,030,996
DEBT ISSUANCE COSTS AND OTHER,
Net of accumulated amortization
of $165,093 and $67,053,
respectively 1,136,269 1,183,188
------------- -------------
TOTAL ASSETS $ 132,071,872 $ 126,634,396
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
RED CEDAR GATHERING COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY 1999 1998
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable - trade $ 8,278,449 $ 4,969,839
Interest payable 564,665 564,665
Property taxes payable 449,998 550,000
Accrued payroll and bonus 287,753 179,512
Deferred credits 167,715 186,204
Advance payments from related
party 10,369 104,287
------------- -------------
Total current liabilities 9,758,949 6,554,507
------------- -------------
LONG-TERM DEBT 55,000,000 55,000,000
CAPITAL LEASE 614,571 701,814
COMMITMENTS (Note 7)
PARTNERS' EQUITY:
Contributions 24,000,000 24,000,000
Retained earnings 42,698,352 40,378,075
------------- -------------
Total partners' equity 66,698,352 64,378,075
------------- -------------
TOTAL ASSETS $ 132,071,872 $ 126,634,396
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
RED CEDAR GATHERING COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
REVENUES:
Gas gathering and compression $ 64,363,062 $ 49,165,113
Purchase gas revenue 54,332,597 15,701,585
------------- -------------
Total revenues 118,695,659 64,866,698
OPERATING COSTS AND EXPENSES:
Operating 30,776,526 21,384,771
Purchased gas 50,563,346 10,188,285
Depreciation and amortization 6,177,039 4,889,516
General and administrative 1,559,614 1,343,657
Property taxes 175,134 554,124
------------- -------------
Total operating costs and 89,251,659 38,360,353
expenses ------------- -------------
Operating income 29,444,000 26,506,345
------------- -------------
OTHER INCOME (EXPENSE):
Interest expense, net of
capitalized interest of
approximately $78,000 in 1999
and $59,000 in 1998 (3,797,334) (4,228,955)
Interest income 518,004 735,023
Other 155,607 291,475
------------- -------------
Total other expense, net (3,123,723) (3,202,457)
------------- -------------
NET INCOME BEFORE EXTRAORDINARY ITEM 26,320,277 23,303,888
EXTRAORDINARY LOSS ON RETIREMENT
OF DEBT - (1,994,262)
------------- -------------
NET INCOME $ 26,320,277 $ 21,309,626
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
RED CEDAR GATHERING COMPANY
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Total
Retained Partners'
Contributions Earnings Equity
<S> <C> <C> <C>
BALANCES, December 31, 1997 $ 24,000,000 $ 32,868,449 $ 56,868,449
Net income - 21,309,626 21,309,626
Distributions - (13,800,000) (13,800,000)
------------- ------------- -------------
BALANCES, December 31, 1998 24,000,000 40,378,075 64,378,075
Net income - 26,320,277 26,320,277
Distributions - (24,000,000) (24,000,000)
------------- ------------- -------------
BALANCES, December 31, 1999 $ 24,000,000 $ 42,698,352 $ 66,698,352
============= ============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
RED CEDAR GATHERING COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,320,277 $ 21,309,626
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 6,177,039 4,889,516
Amortization of prepaid interest 428,170 107,030
Non-cash portion of
extraordinary item - 746,027
(Gain) loss on sale of assets (2,360) 2,756
Non-cash gathering fees (87,243) (238,186)
Operating assets and liabilities
Decrease (increase) in-
Receivables (122,253) (4,812,879)
Inventories 43,583 28,082
Prepaids and other 17,819 67,874
Other assets (64,026) -
Decrease (increase) in-
Interest payable - 151,125
Property taxes payable (100,002) 195,413
Trade payables 3,308,610 2,367,436
Deferred credits (18,489) 53,542
Accrued payroll and bonuses 108,241 (285,198)
Advance payments from related
party (93,918) 104,287
------------- -------------
Net cash provided by operating 35,915,448 24,686,451
activities ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions (7,496,053) (9,023,731)
Proceeds from sale of vehicle 3,800 2,340
------------- -------------
Net cash used in investing
activities (7,492,253) (9,021,391)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt - 55,000,000
Repayment of long-term debt - (53,800,000)
Financing costs, including prepaid
interest - (6,175,302)
Distributions to partners (24,000,000) (13,800,000)
------------- -------------
Net cash used in financing
activities (24,000,000) (18,775,302)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,423,195 (3,110,242)
CASH AND CASH EQUIVALENTS, beginning
of period 7,285,669 10,395,911
------------- -------------
CASH AND CASH EQUIVALENTS, end of
period $ 11,708,864 $ 7,285,669
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
RED CEDAR GATHERING COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business
Red Cedar Gathering Company ("Red Cedar" or the "Company") was
organized in August 1994. For the period from December 30, 1997
to March 30 ,1998, the Company was owed 60% by K N Gas Gathering,
Inc. ("KNGG") and 40% by the Southern Ute Tribe (the "Tribe").
On March 30, 1998, KNGG and the Tribe entered into a revised
Joint Venture Agreement that restructured the original Red Cedar
Joint Venture Agreement wherein the Tribe increased its ownership
in Red Cedar to 51% through the exercise of the option to acquire
an additional 11% interest. Under this same agreement, KNGG will
receive 60% of all cash distributions made from Red Cedar
earnings generated between January 1, 1998 and August 31, 2002,
and the Tribe will receive the remaining 40% of all such cash
distributions. The Tribe's ownership will automatically increase
4% on September 1, 2004 and 4% on September 1, 2009 pursuant to
the terms of the revised Joint Venture Agreement and the option
exercise.
Effective December 31, 1999, KNGG's 49% interest in the Company
was transferred to Kinder Morgan Energy Partners, L.P. ("KMEP").
The Company is primarily engaged in natural gas gathering,
treating and marketing in the San Juan Basin area of Colorado.
Management
Red Cedar is managed by a management committee (the "Management
Committee"), which at yearend consists of three members appointed
by KMEP and four members appointed by the Tribe. The Management
Committee is authorized to make substantially all decisions and
take all actions necessary to effectively manage the assets,
liabilities and opportunities of the Company. Red Cedar's onsite
President and Chief Operating Officer makes day-to-day operating
decisions.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. These estimates and assumptions
affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Property and Equipment
Property and equipment consists primarily of natural gas
gathering systems including pipelines, compressor stations and
treatment facilities. Expenditures that increase capacities or
extend useful lives are capitalized. Routine maintenance,
repairs and renewal costs are expensed as incurred.
Interest expense allocable to the cost of constructing new
facilities is capitalized as part of the cost of the asset up to
the point when operations commence. Capitalized interest in 1999
and 1998 was approximately $78,000 and $59,000, respectively.
The Company evaluates its long-lived assets for impairment when
events or changes in circumstances indicate that the related
carrying amount of the assets may not be recoverable. Generally,
the basis for making such assessments is future cash flow
projections. No impairments have been recorded to date.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term
trade receivables and payables and long-term debt. The carrying
values of cash and cash equivalents, short-term trade receivables
and payables approximate fair value due to their short-term
nature. The fair value for long-term debt is estimated based on
current rates available for similar debt with similar maturities
and securities.
Depreciation and Amortization
Depreciation and amortization is provided for in amounts
sufficient to relate the cost of assets to operations,
principally on the straight-line method, over the estimated
service lives of the assets. Estimated service lives for natural
gas gathering equipment and facilities are as follows:
Asset Number of Years
Right-of-way 42
Pipeline 25
Machinery and equipment 3 to 25
Building and site improvements 25
The Company incurred fees, legal costs and other expenses in
obtaining its bank debt. Such costs were capitalized and are
being amortized over the life of the debt, using the effective
interest method.
Purchased Gas and Sales
The Company enters into commitments to purchase and sell third-
party natural gas. Volumes of purchases are generally matched
for each month's delivery commitments. The price differential
for each combination of purchase and sales contract results in a
net fixed gross margin to Red Cedar. These contracts are
generally short-term in nature. Red Cedar recognizes the gross
purchase and sale amounts in the statement of operations in the
month of settlement. Although the Company is not subject to
price risk on these contracts, Red Cedar is exposed to credit
risk of the counterparties non-performance. Red Cedar has not
experienced any events of non-performance.
Statements of Cash Flows
For purposes of the statements of cash flows, all highly liquid
investments with an original maturity of three months or less are
considered to be cash equivalents. Cash used in operating
activities during the years ended December 31, 1999 and 1998,
includes cash payments for interest of approximately $3,447,000
and $5,275,000, respectively (including approximately $1,077,000
paid to related parties in 1998).
Income Taxes
The owners of Red Cedar have organized the Company as a joint
venture and accordingly, the Company does not pay federal or
state income taxes. The taxable income or loss of the Company,
which may vary substantially from income or loss reported for
financial reporting purposes, is included in the state and
federal tax returns of the joint venture partners, where and as
applicable.
New Accounting Principles
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its
fair value. It also requires that changes in the derivative's
fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS 133 is effective for fiscal years
beginning after June 15, 2000. The Company has not yet
quantified the impacts of adopting SFAS 133 on its financial
statements and has not determined the timing of, or method of,
adoption of SFAS 133. However SFAS 133 could increase volatility
in earnings and other comprehensive income.
Reclassifications
Certain amounts in prior year have been reclassified to conform
to the 1999 presentation.
2. RELATED PARTY TRANSACTIONS:
Tribe and Affiliates
The Company pays monthly right-of-way fees to the Tribe pursuant
to the Right-of-Way Agreement and Amendment of Commercial Lease,
as amended August 31, 1994. Payments to the Tribe related to
such fees amounted to approximately $2,570,000 and $2,178,000
during the years ended December 31, 1999 and 1998, respectively.
The Company had a payable to the Tribe related to such fees of
approximately $219,000 and $211,000 at December 31, 1999 and
1998, respectively.
Also, the Company had revenues earned of approximately
$12,020,000 and $8,376,000 during 1999 and 1998, respectively, in
gas gathering and compression revenue from Red Willow, an
affiliate of the Tribe. Amounts receivable from Red Willow at
December 31, 1999 and 1998 were approximately $1,744,000 and
$772,000, respectively.
During 1999, Red Willow purchased certain working interest in oil
and gas properties from Cedar Ridge LLC ("Cedar Ridge"), a former
affiliate. In 1997, Red Cedar had financed the construction and
acquisition of portions of a pipeline and certain compression
facilities through a capital lease with Cedar Ridge and an
unrelated third party. Cedar Ridge agreed to fund the
construction and acquisition of the facilities and lease them to
Red Cedar for a ten-year period, at the conclusion of which, Red
Cedar agreed to purchase the facilities for a bargain purchase
option. Red Willow (formerly Cedar Ridge) paid approximately
$1,376,000 for construction of these facilities. Red Cedar
repays this lease by reducing the amount charged to Red Willow
(formerly Cedar Ridge) for gathering fees, by $0.06 per MMBtu,
for all volumes of gas delivered to Red Cedar greater than 8,500
MMBtu per day through December 31, 2010 and extendible
indefinitely thereafter at the option of both parties. The
imputed value of this rate reduction was recorded as property and
equipment and capital lease at the time of entering into the
transaction. The net book value of the facilities and the
principal outstanding associated with these facilities at
December 31, 1999 and 1998, are approximately $992,000 and
$1,038,000, respectively. Repayments of the capital lease are
calculated based on the deliveries of gas to the Red Cedar
gathering system by Red Willow (formerly Cedar Ridge) over 8,500
MMBtu per day or by the passage of time, such that, the
outstanding principal balance of the lease will be zero at the
end of the lease term. All amounts outstanding are classified as
a long-term capital lease in the December 31, 1999 balance sheet.
Other
Interest payments to related parties in 1998 totaled
approximately $1,077,000 and was paid 50% to KNGG and 50% to the
Tribe. This interest related to $12,000,000 of subordinated
notes payable to KNGG and the Tribe that was outstanding during
1998 and was repaid in full on October 23, 1998, from proceeds
from the $55 million Senior Notes ("Senior Notes"), (Note 4).
3. LINE OF CREDIT:
When entering into the Senior Notes agreement discussed below,
the Company entered into a $25.0 million revolving credit
agreement ("Revolver") with a consortium of investors that is
administered by Chase Bank of Texas, N.A. The amount available
to the Company under the Revolver at December 31, 1999 was $25.0
million. Borrowings under the Revolver bear interest at rates
based upon the Eurodollar base rate plus a margin or a base rate
plus a margin, at the borrower's option. The Revolver is due on
October 22, 2001. There were no borrowings made under the terms
of this Revolver during December 31, 1999 and 1998. A commitment
fee of $0.002 per $1 of unused availability under the Revolver is
payable to the investors in quarterly installments. The Revolver
is guaranteed by KMEP and the Tribe.
4. LONG-TERM DEBT:
On October 23, 1998, the Company sold $55 million aggregate
principal amount of Senior Notes due October 31, 2010, in a
private placement offering. The $55 million was sold in ten
different notes in varying amounts with identical terms.
The Senior Notes bear interest at an annual rate of 6.16%;
interest is payable semiannually on April 30 and October 31. The
principal is to be repaid in seven equal installments beginning
on October 31, 2004 and ending on October 31, 2009 with any
remainder due on October 31, 2010. The Senior Notes and the
Revolver require the Company to comply with certain financial and
non-financial covenants. The Senior Notes and the Revolver are
secured by a first priority lien on the ownership interests of
KMEP and the Tribe as described in an intercreditor agreement
between the Revolver banks and the Senior Note holders. The
Senior Notes are also guaranteed by KMEP and the Tribe. The fair
market value of these Senior Notes are estimated at $50,600,000.
Prior to the sale of the Senior Notes, the Company entered into a
treasury rate lock, for the purpose of securing its debt price
during the marketing period, which was treated as an anticipatory
hedge. The Company closed out this anticipatory hedge prior to
the closing date of the Senior Notes sale for a cash payment made
to the counterparty of $5,094,094. This amount has been
classified as prepaid interest and is being amortized using the
effective interest method over the life of the Senior Notes.
The proceeds from the Senior Notes and operating cash flows were
used to repay the $12,000,000 of subordinated notes payable to
KNGG and the Tribe in 1998. Accordingly, the Company expensed
$746,027 of unamortized debt issuance costs related to these
notes as an extraordinary item in 1998.
Concurrent with the sale of the Senior Notes and the repayment of
the subordinated notes to KNGG and the Tribe in 1998, two
interest rate swaps were terminated with a combined payment to
the counterparty of $1,248,235. This payment was classified as
an extraordinary item in the statement of operations for the year
ended December 31, 1998.
5. CONCENTRATION OF CREDIT RISK:
Substantially all of the Company's accounts receivable at
December 31, 1999 and 1998, result from gas gathering,
compression fees and marketing revenues from other companies in
the oil and gas industry. This concentration of customers may
impact the Company's overall credit risk, either positively or
negatively, in that these entities may be similarly affected by
industry-wide changes in economic or other conditions. Such
receivables are generally not collateralized.
6. MAJOR CUSTOMERS:
Major customers contributing greater than 10% to the Company's
gross revenues, consist of the following:
1999 1998
Dynegy 28% 19%
Vastar 22% 31%
Amoco 12% 12%
Red Willow (an affiliate) 10% 13%
The marketing arrangement with Dynegy terminated at the end of
1999.
7. COMMITMENTS:
Leases
The Company leases certain compressor stations and vehicles,
under various operating leases which are scheduled to expire in
2004. The future minimum lease payments required under these
leases are as follows:
2000 $ 3,724,000
2001 3,296,000
2002 2,507,000
2003 2,103,000
2004 426,000
--------------
Total $ 12,056,000
Total lease expense for the years ended December 31, 1999 and
1998 was $3,464,000 and $2,289,000, respectively.
Commitments to Purchase and Sell Natural Gas
Red Cedar has entered into the following contracts to purchase
and sell natural gas for the period from January 1, 2000 to
December 31, 2000:
Quantity per day Price per Mbtu
Purchase 10,000 MMBtu Inside FERC El Paso-San
Juan Basin Index less $.0075
Sell 15,000 MMBtu Inside FERC El Paso-San
Juan Basin Index plus $.0025
The Company generally purchases the remaining natural gas from
various suppliers in which the Company has contracts that are
settled monthly at the index price in order to satisfy the
remaining 5,000 MMBTU per day sales commitment. Red Cedar
generates approximately $.00025 per MMBtu on the remaining 5,000
MMBtu per day sales commitment for marketing services.
Unaudited Pro Forma Combined Statement of Income
The following unaudited pro forma combined statements of
income have been prepared from our historical financial statements
to give effect to:
* Our acquisition from Kinder Morgan Inc. effective as of
December 31, 1999, of Kinder Morgan Interstate Gas Transmission
LLC, a 33 1/3% interest in Trailblazer Pipeline Company and a 49%
interest in Red Cedar Gathering Company in exchange for 9,810,000
common units and $330 million in cash; and
* Our acquisition from Columbia Gulf Transmission Company on
November 30, 1999, of a 33 1/3% interest in Trailblazer Pipeline
Company for $37.6 million in cash.
The unaudited pro forma combined statements of income reflect
adjustments as if the above acquisitions had occurred on
January 1, 1999. The pro forma adjustments reflected in the
accompanying unaudited pro forma statements of income were
prepared using the purchase method of accounting. The pro
forma adjustments are based on preliminary estimates,
contractual obligations and certain assumptions that we believe
are reasonable under the circumstances.
The column entitled "Kinder Morgan Energy Partners Historical"
includes earnings from equity investments from our 33 1/3%
interest in Trailblazer Pipeline Company ("Trailblazer")
acquired on November 30, 1999.
The column entitled "Acquired Assets Historical" consists of
the historical results of operations of Kinder Morgan
Interstate Gas Transmission LLC, a 33 1/3% equity interest in
Trailblazer Pipeline Company and a 49% equity interest in Red
Cedar Gathering Company for the year ended December 31, 1999.
The Trailblazer consolidating adjustments consist of the
adjustments required to consolidate the results of operations
of Trailblazer.
The pro forma adjustments to operating expenses and general and
administrative expenses reflect reductions that are
contractually guaranteed under the terms of an agreement
whereby Kinder Morgan, Inc. will continue to operate, on our
behalf, Kinder Morgan Interstate Gas Transmission LLC.
The pro forma adjustments to depreciation and amortization
reflect:
* The reduction in estimated depreciation expense as a result
of the reduced cost of property, plant and equipment; and
* An adjustment to include a full year of depreciation for
Kinder Morgan Interstate Gas Transmission LLC.
The pro forma adjustments to the amortization of excess cost of
equity investments reflect the amortization of the excess cost of
our investment in Red Cedar Gathering Company over our share of
the book value of the underlying net assets of Red Cedar Gathering
Company.
The pro forma adjustment to interest, net reflects the reversal of
Kinder Morgan Interstate Gas Transmission LLC's historical
interest expense and the incremental interest expense on the
additional $367.6 million in debt incurred with respect to the
acquisitions at a rate of 6.17%, our average borrowing rate for
1999.
The pro forma adjustments to minority interest, general partner's
interest in net income and limited partners' net income give
effect to the allocation of pro forma net income to the general
partner and the limited partners resulting from the utilization of
partnership sharing ratios.
The general partner's interest in net income includes incentive
distributions the general partner would have received based on
total distributions. These incentive distributions are greater
under the pro forma statements due to our announced $0.05 increase
in per unit quarterly distributions resulting from cash flow
attributable to all of the acquired interests and the issuance of
the 9,810,000 common units to Kinder Morgan, Inc. as consideration
for the acquired interests.
The pro forma adjustment to income tax benefit (expense) reflects
the reversal of Kinder Morgan Interstate Gas Transmission LLC's
historical income tax expense.
The pro forma adjustment to merger-related and severance costs
reflects the removal of non-recurring charges unrelated to the
acquisition transactions reflected in these pro forma combined
statements of income.
The unaudited pro forma combined statements of income do not
purport to present the results of operations of Kinder Morgan
Energy Partners had the assumed acquisitions and assumed events
occurred on the dates specified, nor are they necessarily
indicative of the results of operations that may be achieved in
the future. The unaudited pro forma combined statements of income
do not give effect to any operating efficiencies or cost savings
that may be realized as a result of the acquisition, primarily
related to reduction of duplicative operating, general and
administrative expenses, other than those cost savings which are
contractually guaranteed.
The unaudited pro forma combined statements of income should be
read in conjunction with the historical financial statements,
including the related notes which are included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
Pro Forma Combined Statement of Income
Twelve Months Ended December 31, 1999
<TABLE>
<CAPTION>
Acquired Trailblazer
Partnership Assets Consolidating Combined Pro Forma Pro Forma
Historical Historical Adjustments Historical Adjustments Combined
---------- ---------- ----------- ---------- ----------- ---------
(In thousands, except per unit amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 428,749 $113,207 $ 33,711 $ 575,667 $ - $575,667
--------- -------- --------- --------- -------- --------
Operating expenses 143,107 37,333 2,827 183,267 (12,514) 170,753
Depreciation and amortization 46,469 16,985 16,973 80,427 (4,710) 75,717
General and administrative 35,612 9,566 - 45,178 (3,516) 41,662
Taxes, other than income taxes 16,154 4,608 879 21,641 - 21,641
Merger-related and Severance Costs - 3,054 - 3,054 (3,054) -
--------- -------- --------- --------- -------- --------
241,342 71,546 20,679 333,567 (23,794) 309,773
--------- -------- --------- --------- -------- --------
Operating Income 187,407 41,661 13,032 242,100 23,794 265,894
Other Income (Expense)
Earnings from equity investments 42,918 16,280 (3,666) 55,532 - 55,532
Amortization of excess cost of
equity investments (4,254) - 24 (4,230) (1,110) (5,340)
Interest, net (52,605) (27,119) (2,882) (82,606) 4,631 (77,975)
Other, net 14,085 (248) - 13,837 - 13,837
Gain on sale of equity interest and
special charges 10,063 - - 10,063 - 10,063
Minority Interest (2,891) - (3,383) (6,274) (616) (6,890)
--------- -------- --------- --------- -------- --------
Income Before Income Taxes and
Extraordinary charge 194,723 30,574 3,125 228,422 26,699 255,121
Income Tax Benefit (Expense) (9,826) (5,948) - (15,774) 5,948 (9,826)
--------- -------- --------- --------- -------- --------
Income Before Extraordinary charge 184,897 24,626 3,125 212,648 32,647 245,295
Extraordinary charge on early
extinguishment of debt (2,595) - - (2,595) - (2,595)
--------- -------- --------- --------- -------- --------
Net Income $ 182,302 $ 24,626 $ 3,125 $ 210,053 $ 32,647 $242,700
========= ======== ========= ========= ======== ========
Calculation of Limited Partners' Interest in Income Before Extraordinary item:
Income Before Extraordinary charge $ 184,897 $ 60,398 $245,295
Less: General Partners' interest in Net
Income (56,273) (22,793) (79,066)
Limited Partners' Net Income Before --------- -------- --------
Extraordinary item 128,624 37,605 166,229
--------- -------- --------
Less: Extraordinary charge on early
extinguishment of debt (2,595) - (2,595)
--------- -------- --------
Limited Partners' Net Income $ 126,029 $ 37,605 $163,634
========= ======== ========
Net Income per Unit Before
Extraordinary charge $ 2.63 $ 0.20 $ 2.83
========= ======== ========
Extraordinary charge per Unit $ (0.06) $ 0.01 $ (0.05)
========= ======== ========
Net Income per Unit $ 2.57 $ 0.21 $ 2.78
========= ======== ========
Declared distribution per unit $ 2.85 $ 0.20 $ 3.05
========= ======== ========
Number of Units used in Computation 48,974 9,810 58,784
========= ======== ========
</TABLE>
