UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 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, 2002
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: 1-11234
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0380342
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
500 Dallas Street, Suite 1000, Houston, Texas 77002
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 713-369-9000
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 Registrant had 129,928,618 common units outstanding at August 2, 2002.
1
KINDER MORGAN ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)...............................
Consolidated Statements of Income-Three and Six
Months Ended June 30, 2002 and 2001.......................... 3
Consolidated Balance Sheets-June 30, 2002 and
December 31, 2001............................................ 4
Consolidated Statements of Cash Flows-Six Months
Ended June 30, 2002 and 2001................................. 5
Notes to Consolidated Financial Statements................... 6-30
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations............................
Results of Operations........................................ 31
Financial Condition.......................................... 36
Information Regarding Forward-Looking Statements............. 39
Item 3: Quantitative and Qualitative Disclosures About
Market Risk.................................................... 40
` PART II. OTHER INFORMATION
Item 1: Legal Proceedings.............................................. 41
Item 2: Changes in Securities and Use of Proceeds...................... 41
Item 3: Defaults Upon Senior Securities................................ 41
Item 4: Submission of Matters to a Vote of Security Holders............ 41
Item 5: Other Information.............................................. 41
Item 6: Exhibits and Reports on Form 8-K............................... 41
Signature...................................................... 42
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Unit Amounts)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2002 2001 2002 2001
----------------- ----------------- --------------- -----------
Revenues
Natural gas sales $ 722,529 $ 411,558 $ 1,185,803 $ 1,047,308
Services 308,045 250,419 569,254 489,162
Product sales and other 60,362 73,778 138,944 227,930
------------- ------------ ----------- -----------
1,090,936 735,755 1,894,001 1,764,400
------------- ------------ ----------- -----------
Costs and Expenses
Gas purchases and other costs of sales 712,476 420,338 1,160,569 1,128,052
Operations and maintenance 98,464 91,174 185,755 186,179
Fuel and power 21,147 16,219 39,531 31,461
Depreciation and amortization 42,623 35,948 83,949 66,023
General and administrative 30,210 20,991 59,742 51,635
Taxes, other than income taxes 13,669 12,489 26,252 24,103
------------- ------------ ----------- -----------
918,589 597,159 1,555,798 1,487,453
------------- ------------ ----------- -----------
Operating Income 172,347 138,596 338,203 276,947
Other Income (Expense)
Earnings from equity investments 24,297 21,147 47,568 42,350
Amortization of excess cost of equity investments (1,394) (2,253) (2,788) (4,506)
Interest, net (43,864) (45,275) (82,886) (95,082)
Other, net 435 (677) 385 (403)
Minority Interest (2,221) (2,633) (5,048) (5,635)
------------- ------------ ------------- ------------
Income Before Income Taxes 149,600 108,905 295,434 213,671
Income Taxes (5,083) (4,679) (9,484) (7,778)
-------------- ------------- -------------- -------------
Net Income $ 144,517 $ 104,226 $ 285,950 $ 205,893
============= ============ ============= ============
General Partner's interest in Net Income $ 65,234 $ 50,606 $ 127,028 $ 92,228
Limited Partners' interest in Net Income 79,283 53,620 158,922 113,665
------------- ------------ ------------- ------------
Net Income $ 144,517 $ 104,226 $ 285,950 $ 205,893
============= ============ ============= ============
Basic Limited Partners' Net Income per Unit $ 0.48 $ 0.36 $ 0.96 $ 0.80
============= =========== ============= ===========
Diluted Limited Partners' Net Income per Unit $ 0.48 $ 0.36 $ 0.95 $ 0.80
============= =========== ============= ===========
Weighted Average Number of Units used in Computation of Limited Partners' Net Income per Unit
Basic 166,589 149,483 166,320 142,300
============= =========== ============= ===========
Diluted 166,761 149,686 166,505 142,493
============= =========== ============= ===========
The accompanying notes are an integral part of these consolidated financial statements.
3
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
2002 2001
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 32,041 $ 62,802
Accounts and notes receivable
Trade 479,004 215,860
Related parties 40,098 52,607
Inventories
Products 3,369 2,197
Materials and supplies 6,735 6,212
Gas imbalances 38,197 15,265
Gas in underground storage 33,033 18,214
Other current assets 71,624 194,886
----------- -----------
704,101 568,043
----------- -----------
Property, Plant and Equipment, net 5,982,816 5,082,612
Investments 448,110 440,518
Notes receivable 3,029 3,095
Intangibles, net 652,279 563,397
Deferred charges and other assets 115,612 75,001
----------- -----------
TOTAL ASSETS $ 7,905,947 $ 6,732,666
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable
Trade $ 325,971 $ 111,853
Related parties 34,651 9,235
Current portion of long-term debt 802,446 560,219
Accrued interest 43,418 34,099
Deferred revenues 3,726 2,786
Gas imbalances 60,354 34,660
Accrued other liabilities 218,201 209,852
----------- -----------
1,488,767 962,704
----------- -----------
Long-Term Liabilities and Deferred Credits
Long-term debt 2,997,410 2,231,574
Deferred revenues 27,956 29,110
Deferred income taxes 38,525 38,544
Other 234,233 246,464
----------- -----------
3,298,124 2,545,692
----------- -----------
Commitments and Contingencies
Minority Interest 39,010 65,236
----------- -----------
Partners' Capital
Common Units 1,871,905 1,894,677
Class B Units 124,768 125,750
i-Units 1,049,854 1,020,153
General Partner 64,377 54,628
Accumulated other comprehensive income (loss) (30,858) 63,826
------------ -----------
3,080,046 3,159,034
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 7,905,947 $ 6,732,666
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
4
Six Months Ended June 30,
-------------------------
2002 2001
----------- ------------
Cash Flows From Operating Activities
Net income $ 285,950 $ 205,893
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 83,949 66,023
Amortization of excess cost of equity
investments 2,788 4,506
Earnings from equity investments (47,568) (42,350)
Distributions from equity investments 37,259 29,544
Changes in components of working capital (16,302) (36,094)
Other, net (22,441) 54,519
------------ ------------
Net Cash Provided by Operating Activities 323,635 282,041
----------- ------------
Cash Flows From Investing Activities
Acquisitions of assets (816,220) (1,028,403)
Additions to property, plant and equipment
for expansion and maintenance projects (187,290) (109,190)
Sale of investments, property, plant and
equipment, net of removal costs 402 5,711
Contributions to equity investments (6,643) (1,899)
Other 1,152 (5,844)
----------- ------------
Net Cash Used in Investing Activities (1,008,599) (1,139,625)
----------- ------------
Cash Flows From Financing Activities
Issuance of debt 2,123,324 3,209,734
Payment of debt (1,195,306) (3,053,184)
Loans to related party -- (17,100)
Debt issue costs (159) (7,953)
Proceeds from issuance of common units 1,228 833
Proceeds from issuance of i-units -- 996,869
Distributions to partners:
Common units (148,070) (129,128)
Class B units (6,057) (2,790)
General Partner (117,284) (75,134)
Minority interest (4,959) (7,662)
Other, net 1,486 221
----------- ------------
Net Cash Provided by Financing Activities 654,203 914,706
----------- ------------
Increase (Decrease) in Cash and Cash Equivalents (30,761) 57,122
Cash and Cash Equivalents, beginning of period 62,802 59,319
----------- ------------
Cash and Cash Equivalents, end of period $ 32,041 $ 116,441
=========== ============
Noncash Investing and Financing Activities:
Assets acquired by the assumption of
liabilities $ 153,170 $ 257,304
The accompanying notes are an integral part of
these consolidated financial statements.
5
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
General
Unless the context requires otherwise, references to "we", "us", "our" or the
"Partnership" are intended to mean Kinder Morgan Energy Partners, L.P. We have
prepared the accompanying unaudited consolidated financial statements under the
rules and regulations of the Securities and Exchange Commission. Under such
rules and regulations, we have condensed or omitted certain information and
notes normally included in financial statements prepared in conformity with
accounting principles generally accepted in the United States of America. We
believe, however, that our disclosures are adequate to make the information
presented not misleading. The consolidated financial statements reflect all
adjustments that are, in the opinion of our management, necessary for a fair
presentation of our financial results for the interim periods. You should read
these consolidated financial statements in conjunction with our consolidated
financial statements and related notes included in our annual report on Form
10-K for the year ended December 31, 2001.
Critical Accounting Policies and Estimates
Our consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States. Certain amounts
included in or affecting our financial statements and related disclosures must
be estimated, requiring us to make certain assumptions with respect to values or
conditions that cannot be known with certainty at the time the financial
statements are prepared.
The preparation of our financial statements in conformity with generally
accepted accounting principles requires our management to make estimates and
assumptions that affect:
o the amounts we report for assets and liabilities;
o our disclosure of contingent assets and liabilities at the date of the
financial statements; and
o the amounts we report for revenues and expenses during the reporting
period.
Therefore, the reported amounts of our assets and liabilities, revenues and
expenses and associated disclosures with respect to contingent assets and
obligations are necessarily affected by these estimates. We evaluate these
estimates on an ongoing basis, utilizing historical experience, consultation
with experts and other methods we consider reasonable in the particular
circumstances. Nevertheless, actual results may differ significantly from our
estimates. Any effects on our business, financial position or results of
operations resulting from revisions to these estimates are recorded in the
period in which the facts that give rise to the revision become known.
In preparing our financial statements and related disclosures, we must use
estimates in determining the economic useful lives of our assets, provisions for
uncollectible accounts receivable, exposures under contractual indemnifications
and various other recorded or disclosed amounts. However, we believe that
certain accounting policies are of more significance in our financial statement
preparation process than others. With respect to our environmental exposure, we
utilize both internal staff and external experts to assist us in identifying
environmental issues and in estimating the costs and timing of remediation
efforts. Often, as the remediation evaluation and effort progresses, additional
information is obtained, requiring revisions to estimated costs. In addition, we
are subject to litigation as the result of our business operations and
transactions. We utilize both internal and external counsel in evaluating our
potential exposure to adverse outcomes from judgments or settlements. To the
extent that actual outcomes differ from our estimates, or additional facts and
circumstances cause us to revise our estimates, our earnings will be affected.
These revisions are reflected in our income in the period in which they are
reasonably determinable.
Net Income Per Unit
We compute Basic Limited Partners' Net Income per Unit by dividing our
limited partners' interest in net income by the weighted average number of units
outstanding during the period. Diluted Limited Partners' Net Income per Unit
reflects the potential dilution, by application of the treasury stock method,
that could occur if options to issue units were exercised, which would result in
the issuance of additional units that would then share in our net income.
6
2. Acquisitions and Joint Ventures
During the first six months of 2002, we completed the following acquisitions.
Each of the acquisitions was accounted for under the purchase method and the
assets acquired and liabilities assumed were recorded at their estimated fair
market values as of the acquisition date. The preliminary amounts assigned to
assets and liabilities may be adjusted during a short period following the
acquisition. The results of operations from these acquisitions are included in
the consolidated financial statements from the effective date of acquisition.
Cochin Pipeline
In January 2002, we purchased an additional 10% ownership interest in the
Cochin Pipeline System from NOVA Chemicals Corporation for approximately $29
million in cash. We now own approximately 44.8% of the Cochin Pipeline System.
The transaction was effective December 31, 2001, and we allocated the purchase
price to property, plant and equipment in January 2002. We record our
proportional share of joint venture revenues and expenses and cost of joint
venture assets with respect to the Cochin Pipeline System as part of our
Products Pipelines business segment.
Laser Materials Services LLC
Effective January 1, 2002, we acquired all of the equity interests of Laser
Materials Services LLC for approximately $8.9 million and the assumption of
approximately $3.3 million of liabilities, including long-term debt of $0.4
million. Laser Materials Services LLC operates 59 transload facilities in 18
states. The facilities handle dry-bulk products, including aggregates, plastics
and liquid chemicals. The acquisition of Laser Materials Services LLC expanded
our growing terminal operations and is part of our Terminals business segment.
Our purchase price and our allocation to assets acquired and liabilities
assumed was as follows (in thousands):
Purchase price:
Cash paid, including transaction costs $ 8,916
Debt assumed 357
Liabilities assumed 2,967
------
Total purchase price $12,240
=======
Allocation of purchase price:
Current assets $ 879
Property, plant and equipment 11,361
-------
$12,240
=======
International Marine Terminals
Effective January 1, 2002, we acquired a 33 1/3% interest in International
Marine Terminals from Marine Terminals Incorporated. Effective February 1, 2002,
we acquired an additional 33 1/3% interest in IMT from Glenn Springs Holdings,
Inc. Our combined purchase price was approximately $40.5 million, including the
assumption of $40 million of long-term debt. IMT is a partnership that operates
a bulk terminal site in Port Sulphur, Louisiana. The Port Sulphur terminal is a
multi-purpose import and export facility, which handles approximately 7 million
tons annually of bulk products including coal, petroleum coke and iron ore. The
acquisition complements our existing bulk terminal assets, and we include IMT as
part of our Terminals business segment.
Our purchase price and our allocation to assets acquired, liabilities assumed
and minority interest was as follows (in thousands):
Purchase price:
Cash received, net of transaction costs $(3,781)
Debt assumed 40,000
Liabilities assumed 4,249
-------
Total purchase price $40,468
=======
Allocation of purchase price:
Current assets $6,600
Property, plant and 31,781
equipment
Deferred charges and other assets 139
Minority interest 1,948
-------
$40,468
=======
7
Kinder Morgan Tejas
Effective January 31, 2002, we acquired all of the equity interests of Tejas
Gas, LLC, a wholly-owned subsidiary of InterGen (North America), Inc., for
approximately $726.7 million and the assumption of approximately $103.8 million
of liabilities. As of June 30, 2002, we have paid $688.2 million and established
a $37.6 million reserve for a final working capital settlement payment. We made
a final working capital settlement payment of $38.4 million in July 2002.
Tejas Gas, LLC is primarily comprised of a 3,400-mile natural gas intrastate
pipeline system that extends from south Texas along the Mexico border and the
Texas Gulf Coast to near the Louisiana border and north from near Houston to
east Texas. The acquisition expands our natural gas operations within the State
of Texas. The acquired assets are referred to as Kinder Morgan Tejas in this
report and are included in our Natural Gas Pipelines business segment.
The allocation of our purchase price to the assets and liabilities of Kinder
Morgan Tejas is preliminary, pending minor purchase price adjustments. It was
based on an independent appraisal of fair market values as follows (in
thousands):
Purchase price:
Cash paid, including transaction $726,655
costs
Liabilities assumed 103,787
--------
Total purchase price $830,442
========
Allocation of purchase price:
Current assets $ 72,610
Property, plant and equipment,
incl cushion 688,769
Goodwill 69,063
--------
$830,442
========
The $69.1 million of goodwill was assigned to our Natural Gas Pipelines
business segment and the entire amount is expected to be deductible for tax
purposes.
Trailblazer Pipeline Company
On December 12, 2001, we announced that we had signed a definitive agreement
to acquire the remaining 33 1/3% ownership interest in Trailblazer Pipeline
Company from Enron Trailblazer Pipeline Company for $68 million in cash. We
closed the transaction on May 6, 2002 and we now own 100% of Trailblazer
Pipeline Company. During the first quarter of 2002, we paid $12.0 million to CIG
Trailblazer Gas Company, an affiliate of El Paso Corporation, in exchange for
CIG's relinquishment of its rights to become a 7% to 8% equity owner in
Trailblazer Pipeline Company in mid-2002.
Our purchase price and our allocation to assets acquired, liabilities assumed
and minority interest was as follows (in thousands):
Purchase price:
Cash paid, including costs $ 80,125
--------
Total purchase price $ 80,125
========
Allocation of purchase price:
Property, plant and equipment $ 41,409
Goodwill 15,000
Minority interest 23,716
--------
$ 80,125
========
The $15.0 million of goodwill was assigned to our Natural Gas Pipelines
business segment and the entire amount is expected to be deductible for tax
purposes.
Milwaukee Bagging Operations
Effective May 1, 2002, we purchased a bagging operation facility adjacent to
our Milwaukee, Wisconsin dry-bulk terminal for $8.5 million. The purchase
enhances the operations at our Milwaukee terminal, which is capable of handling
up to 150,000 tons per year of fertilizer and salt for de-icing and livestock
purposes. The Milwaukee bagging operations are included in our Terminals
business segment.
8
Our purchase price and our allocation to assets acquired and liabilities
assumed was as follows (in thousands):
Purchase price:
Cash paid, including transaction costs $ 8,500
--------
Total purchase price $ 8,500
========
Allocation of purchase price:
Current assets $ 40
Property, plant and equipment 3,140
Goodwill 5,320
--------
$ 8,500
========
The $5.3 million of goodwill was assigned to our Terminals business segment
and the entire amount is expected to be deductible for tax purposes.
Pro Forma Information
The following summarized unaudited Pro Forma Consolidated Income Statement
information for the six months ended June 30, 2002 and 2001, assumes all of the
acquisitions we have made since January 1, 2001, including the ones listed
above, had occurred as of January 1, 2001. We have prepared these unaudited Pro
Forma financial results for comparative purposes only. These unaudited Pro Forma
financial results may not be indicative of the results that would have occurred
if we had completed these acquisitions as of January 1, 2001 or the results that
will be attained in the future. Amounts presented below are in thousands, except
for the per unit amounts:
Pro Forma
Six Months Ended
June 30,
2002 2001
---- ----
(Unaudited)
Revenues $2,136,649 $3,756,445
Operating Income 343,469 326,274
Net Income 294,461 269,514
Basic and diluted Limited Partners' Net Income $ 1.00 $ 0.85
per unit
3. Litigation and Other Contingencies
Federal Energy Regulatory Commission Proceedings
SFPP, L.P.
SFPP, L.P. is the subsidiary limited partnership that owns our Pacific
operations, excluding the CALNEV pipeline and related terminals acquired from
GATX Corporation. Tariffs charged by SFPP are subject to certain proceedings
involving shippers' complaints regarding the interstate rates, as well as
practices and the jurisdictional nature of certain facilities and services, on
our Pacific operations' pipeline systems. The Federal Energy Regulatory
Commission complaints seek approximately $137 million in tariff refunds and
approximately $22 million in prospective annual tariff reductions.
OR92-8, et al. proceedings. In September 1992, El Paso Refinery, L.P.
filed a protest/complaint with the FERC:
o challenging SFPP's East Line rates from El Paso, Texas to Tucson and
Phoenix, Arizona;
o challenging SFPP's proration policy; and
o seeking to block the reversal of the direction of flow of SFPP's
six-inch pipeline between Phoenix and Tucson.
At various subsequent dates, the following other shippers on SFPP's South
System filed separate complaints, and/or motions to intervene in the FERC
proceeding, challenging SFPP's rates on its East and/or West Lines:
o Chevron U.S.A. Products Company;
o Navajo Refining Company;
o ARCO Products Company;
o Texaco Refining and Marketing Inc.;
9
o Refinery Holding Company, L.P. (a partnership formed by El Paso Refinery's
long-term secured creditors that purchased its refinery in May 1993);
o Mobil Oil Corporation; and
o Tosco Corporation.
Certain of these parties also claimed that a gathering enhancement fee at SFPP's
Watson Station in Carson, California was charged in violation of the Interstate
Commerce Act.
The FERC consolidated these challenges in Docket Nos. OR92-8-000, et al., and
ruled that they are complaint proceedings, with the burden of proof on the
complaining parties. These parties must show that SFPP's rates and practices at
issue violate the requirements of the Interstate Commerce Act.
A FERC administrative law judge held hearings in 1996, and issued an initial
decision on September 25, 1997. The initial decision agreed with SFPP's position
that "changed circumstances" had not been shown to exist on the West Line, and
therefore held that all West Line rates that were "grandfathered" under the
Energy Policy Act of 1992 were deemed to be just and reasonable and were not
subject to challenge, either for the past or prospectively, in the Docket No.
OR92-8 et al. proceedings. SFPP's Tariff No. 18 for movement of jet fuel from
Los Angeles to Tucson, which was initiated subsequent to the enactment of the
Energy Policy Act, was specifically excepted from that ruling.
The initial decision also included rulings generally adverse to SFPP on such
cost of service issues as:
o the capital structure to be used in computing SFPP's 1985 starting rate
base ;
o the level of income tax allowance; and
o the recovery of civil and regulatory litigation expenses and certain
pipeline reconditioning costs.
The administrative law judge also ruled that SFPP's gathering enhancement
service at Watson Station was subject to FERC jurisdiction and ordered SFPP to
file a tariff for that service, with supporting cost of service documentation.
SFPP and other parties asked the Commission to modify various rulings made in
the initial decision. On January 13, 1999, the FERC issued its Opinion No. 435,
which affirmed certain of those rulings and reversed or modified others.
With respect to SFPP's West Line, the FERC affirmed that all but one of the
West Line rates are "grandfathered" as just and reasonable and that "changed
circumstances" had not been shown to satisfy the complainants' threshold burden
necessary to challenge those rates. The FERC further held that the rate stated
in Tariff No. 18 did not require rate reduction. Accordingly, the FERC dismissed
all complaints against the West Line rates without any requirement that SFPP
reduce, or pay any reparations for, any West Line rate.
With respect to the East Line rates, Opinion No. 435 made several changes in
the initial decision's methodology for calculating the rate base. It held that
the June 1985 capital structure of SFPP's parent company at that time, rather
than SFPP's 1988 partnership capital structure, should be used to calculate the
starting rate base and modified the accumulated deferred income tax and
allowable cost of equity used to calculate the rate base. It also ruled that
SFPP would not owe reparations to any complainant for any period prior to the
date on which that complainant's complaint was filed, thus reducing by two years
the potential reparations period claimed by most complainants.
SFPP and certain complainants sought rehearing of Opinion No. 435 by the
FERC. In addition, ARCO, RHC, Navajo, Chevron and SFPP filed petitions for
review of Opinion No. 435 with the U.S. Court of Appeals for the District of
Columbia Circuit, all of which were either dismissed as premature or held in
abeyance pending FERC action on the rehearing requests.
On March 15, 1999, as required by the FERC's order, SFPP submitted a
compliance filing implementing the rulings made in Opinion No. 435, establishing
the level of rates to be charged by SFPP in the future, and setting forth the
amount of reparations that would be owed by SFPP to the complainants under the
order. The complainants contested SFPP's compliance filing.
On May 17, 2000, the FERC issued its Opinion No. 435-A, which modified
Opinion No. 435 in certain respects. It denied requests to reverse its rulings
that SFPP's West Line rates and Watson Station gathering enhancement facilities
fee are entitled to be treated as "grandfathered" rates under the Energy Policy
Act. It suggested, however, that if SFPP had fully recovered the capital costs
of the gathering enhancement facilities, that might form the basis of an amended
"changed circumstances" complaint.
10
Opinion No. 435-A granted a request by Chevron and Navajo to require that
SFPP's December 1988 partnership capital structure be used to compute the
starting rate base from December 1983 forward, as well as a request by SFPP to
vacate a ruling that would have required the elimination of approximately $125
million from the rate base used to determine capital structure. It also granted
two clarifications sought by Navajo, to the effect that SFPP's return on its
starting rate base should be based on SFPP's capital structure in each given
year (rather than a single capital structure from the outset) and that the
return on deferred equity should also vary with the capital structure for each
year. Opinion No. 435-A denied the request of Chevron and Navajo that no income
tax allowance be recognized for the limited partnership interests held by SFPP's
corporate parent, as well as SFPP's request that the tax allowance should
include interests owned by certain non-corporate entities. However, it granted
Navajo's request to make the computation of interest expense for tax allowance
purposes the same as for debt return.
Opinion No. 435-A reaffirmed that SFPP may recover certain litigation costs
incurred in defense of its rates (amortized over five years), but reversed a
ruling that those expenses may include the costs of certain civil litigation
with Navajo and El Paso. It also reversed a prior decision that litigation costs
should be allocated between the East and West Lines based on throughput, and
instead adopted SFPP's position that such expenses should be split equally
between the two systems.
As to reparations, Opinion No. 435-A held that no reparations would be
awarded to West Line shippers and that only Navajo was eligible to recover
reparations on the East Line. It reaffirmed that a 1989 settlement with SFPP
barred Navajo from obtaining reparations prior to November 23, 1993, but allowed
Navajo reparations for a one-month period prior to the filing of its December
23, 1993 complaint. Opinion No. 435-A also confirmed that FERC's indexing
methodology should be used in determining rates for reparations purposes and
made certain clarifications sought by Navajo.
Opinion No. 435-A denied Chevron's request for modification of SFPP's
prorationing policy. That policy required customers to demonstrate a need for
additional capacity if a shortage of available pipeline space existed. SFPP's
prorationing policy has since been changed to eliminate the "demonstrated need"
test.
Finally, Opinion No. 435-A directed SFPP to revise its initial compliance
filings to reflect the modified rulings. It eliminated the refund obligation for
the compliance tariff containing the Watson Station gathering enhancement fee,
but required SFPP to pay refunds to the extent that the initial compliance
tariff East Line rates exceeded the rates produced under Opinion No. 435-A.
In June 2000, several parties filed requests for rehearing of rulings made in
Opinion No. 435-A. Chevron and RHC both sought reconsideration of the FERC's
ruling that only Navajo is entitled to reparations for East Line shipments. SFPP
sought rehearing of the FERC's:
o decision to require use of the December 1988 partnership capital
structure for the period 1984-88 in computing the starting rate base;
o elimination of civil litigation costs;
o refusal to allow any recovery of civil litigation settlement payments;
and
o failure to provide any allowance for regulatory expenses in prospective
rates.
On July 17, 2000, SFPP submitted a compliance filing implementing the rulings
made in Opinion No. 435-A, together with a calculation of reparations due to
Navajo and refunds due to other East Line shippers. SFPP also filed a tariff
stating revised East Line rates based on those rulings.
ARCO, Chevron, Navajo, RHC, Texaco and SFPP sought judicial review of
Opinion No. 435-A in the U.S. Court of Appeals for the District of Columbia
Circuit. All of those petitions except Chevron's were either dismissed as
premature or held in abeyance pending action on the rehearing requests. On
September 19, 2000, the court dismissed Chevron's petition for lack of
prosecution, and subsequently denied a motion by Chevron for reconsideration of
that dismissal.
On September 13, 2001, the FERC issued Opinion No. 435-B, which ruled on
requests for rehearing and comments on SFPP's compliance filing. Based on those
rulings, the FERC directed SFPP to submit a further revised compliance filing,
including revised tariffs and revised estimates of reparations and refunds.
Opinion No. 435-B denied SFPP's requests for rehearing, which involved the
capital structure to be used in computing starting rate base, SFPP's ability
to recover litigation and settlement costs incurred in connection with the
11
Navajo and El Paso civil litigation, and the provision for regulatory costs in
prospective rates. However, it modified the Commission's prior rulings on
several other issues. It reversed the ruling that only Navajo is eligible to
seek reparations, holding that Chevron, RHC, Tosco and Mobil are also eligible
to recover reparations for East Line shipments. It ruled, however, that Ultramar
is not eligible for reparations in the Docket No. OR92-8 et al. proceedings .
The FERC also changed prior rulings that had permitted SFPP to use certain
litigation, environmental and pipeline rehabilitation costs that were not
recovered through the prescribed rates to offset overearnings (and potential
reparations) and to recover any such costs that remained by means of a surcharge
to shippers. Opinion No. 435-B required SFPP to pay reparations to each
complainant without any offset for unrecovered costs. It required SFPP to
subtract from the total 1995-1998 supplemental costs allowed under Opinion No.
435-A any overearnings not paid out as reparations, and allowed SFPP to recover
any remaining costs from shippers by means of a five-year surcharge beginning
August 1, 2000. Opinion No. 435-B also ruled that SFPP would only be permitted
to recover certain regulatory litigation costs through the surcharge, and that
the surcharge could not include environmental or pipeline rehabilitation costs.
Opinion No. 435-B directed SFPP to make additional changes in its revised
compliance filing, including:
o using a remaining useful life of 16.8 years in amortizing its starting
rate base, instead of 20.6 years;
o removing the starting rate base component from base rates as of August
1, 2001;
o amortizing the accumulated deferred income tax balance beginning in
1992, rather than 1988;
o listing the corporate unitholders that were the basis for the income tax
allowance in its compliance filing and certifying that those companies are
not Subchapter S corporations; and
o "clearly" excluding civil litigation costs and explaining how it limited
litigation costs to FERC-related expenses and assigned them to appropriate
periods in making reparations calculations.
On October 15, 2001, Chevron and RHC filed petitions for rehearing of
Opinion No. 435-B. Chevron asked the FERC to clarify:
o the period for which Chevron is entitled to reparations; and
o whether East Line shippers that have received the benefit of
Commission-prescribed rates for 1994 and subsequent years must show that
there has been a substantial divergence between the cost of service and
the change in the Commission's rate index in order to have standing to
challenge SFPP rates for those years in pending or subsequent proceedings.
RHC's petition contended that Opinion No. 435-B should be modified on
rehearing, to the extent it:
o suggested that a "substantial divergence" standard applies to complaint
proceedings challenging the total level of SFPP's East Line rates
subsequent to the Docket No. OR92-8 et al. proceedings;
-- ---
o required a substantial divergence to be shown between SFPP's cost of
service and the change in the FERC oil pipeline index in such subsequent
complaint proceedings, rather than a substantial divergence between the
cost of service and SFPP's revenues; and
o permitted SFPP to recover 1993 rate case litigation expenses through a
surcharge mechanism.
ARCO, Ultramar and SFPP filed petitions for review of Opinion No. 435-B (and
in SFPP's case, Opinion Nos. 435 and 435-A) in the U.S. Court of Appeals for the
District of Columbia Circuit. The court consolidated the Ultramar and SFPP
petitions with the consolidated cases held in abeyance and ordered that the
consolidated cases be returned to its active docket.
On November 7, 2001, the FERC issued an order ruling on the petitions for
rehearing of Opinion No. 435-B. The Commission held that Chevron's eligibility
for reparations should be measured from August 3, 1993, rather than the
September 23, 1992 date sought by Chevron. The Commission also clarified its
prior ruling with respect to the "substantial divergence" test, holding that in
order to be considered on the merits, complaints challenging the SFPP rates set
by applying the Commission's indexing regulations to the 1994 cost of service
derived under the Opinion No. 435 orders must demonstrate a substantial
divergence between the indexed rates and the pipeline's actual cost of service.
Finally, the FERC held that SFPP's 1993 regulatory costs should not be included
in the surcharge for the recovery of supplemental costs.
On December 7, 2001, Chevron filed a petition for rehearing of the FERC's
November 7, 2001 order. The petition requested the Commission to specify whether
Chevron would be entitled to reparations for the two year period prior to the
August 3, 1993 filing of its complaint.
12
On January 7, 2002, SFPP and RHC filed petitions for review of the FERC's
November 7, 2001 order in the U.S. Court of Appeals for the District of Columbia
Circuit. On January 8, 2002, the court consolidated those petitions with the
petitions for review of Opinion Nos. 435, 435-A and 435-B. On January 24, 2002,
the court ordered the consolidated proceedings to be held in abeyance until the
FERC acts on Chevron's request for rehearing of the November 7, 2001 order.
SFPP submitted its compliance filing and tariffs implementing Opinion No.
435-B and the Commission's November 7, 2001 order on November 20, 2001. Motions
to intervene and protest were subsequently filed by ARCO, Mobil (which now
submits filings under the name ExxonMobil), RHC, Navajo and Chevron, alleging
that SFPP:
o should have calculated the supplemental cost surcharge differently;
o did not provide adequate information on the taxpaying status of its
unitholders; and
o failed to estimate potential reparations for ARCO.
On December 10, 2001, SFPP filed a response to those claims. On December 14,
2001, SFPP filed a revised compliance filing and new tariff correcting an error
that had resulted in understating the proper surcharge and tariff rates.
On December 20, 2001, the FERC's Director of the Division of Tariffs and
Rates Central issued two letter orders rejecting SFPP's November 20, 2001 and
December 14, 2001 tariff filings because they were not made effective
retroactive to August 1, 2000. On January 11, 2002, SFPP filed a request for
rehearing of those orders by the Commission, on the ground that the FERC has no
authority to require retroactive reductions of rates filed pursuant to its
orders in complaint proceedings.
Motions to intervene and protest the December 14, 2001 corrected submissions
were filed by Navajo, ARCO and ExxonMobil. Ultramar requested leave to file an
out-of-time intervention and protest of both the November 20, 2001 and December
14, 2001 submissions. On January 14, 2002, SFPP responded to those filings to
the extent they were not mooted by the orders rejecting the tariffs in question.
On February 15, 2002, the Commission denied rehearing of the Director of the
Division of Tariffs and Rates Central's letter orders. On February 21, 2002,
SFPP filed a motion requesting that the Commission clarify whether it intended
SFPP to file a retroactive tariff or simply make a compliance filing calculating
the effects of Opinion No. 435-B back to August 1, 2000; in the event the order
was clarified to require a retroactive tariff filing, SFPP asked the Commission
to stay that requirement pending judicial review.
On April 8, 2002, SFPP filed a petition for review of the Commission's
February 15, 2002 Order in the U.S. Court of Appeals for the District of
Columbia Circuit. BP West Coast Products, LLC (formerly ARCO); ExxonMobil; Tosco
Corporation; and Ultramar, Inc. and Valero Energy Corporation filed motions to
intervene in that proceeding. On April 9, 2002, the Court of Appeals
consolidated SFPP's petition with the petitions for review of the Commission's
prior orders and directed the parties "to file motions to govern future
proceedings" by May 9, 2002. Motions were filed by SFPP, RHC, Navajo, Chevron
and the "Indicated Parties" (BP West Coast Products, ExxonMobil, Ultramar and
Tosco). The FERC requested that the Court continue to hold the consolidated
cases in abeyance pending the completion of proceedings before the agency on
rehearing.
On June 25, 2002, the Court granted the ExxonMobil and Valero Energy motions
to intervene, and directed intervenors on the side of petitioners to notify the
court of that status and provide a statement of issues to be raised. ExxonMobil
filed a notice on July 2, 2002; Ultramar, Inc. and Valero Energy on July 10,
2002. On July 12, 2002, SFPP responded to the ExxonMobil notice in order to urge
the Court not to rely on ExxonMobil's categorization of the issues and party
alignments in allocating briefing.
On May 31, 2002, SFPP filed FERC Tariff No. 70, which implemented the
FERC's annual indexing adjustment. Motions to intervene and protest were filed
by Navajo and Chevron, contesting any indexing adjustment to the litigation
surcharge permitted by Opinion No. 435-B. On June 28, 2002, the FERC's Director
of the Division of Tariffs and Rates rejected Tariff No. 70 on the ground that
the surcharge should not be indexed. On July 2, 2002, SFPP filed FERC Tariff No.
73 to replace Tariff No. 70 in compliance with that decision, which resulted in
an average reduction from Tariff No. 70 of approximately $.0002 per barrel.
Sepulveda proceedings. In December 1995, Texaco filed a complaint at FERC
(Docket No. OR96-2) alleging that movements on SFPP's Sepulveda pipelines (Line
Sections 109 and 110) to Watson Station, in the Los Angeles
13
basin, were subject to FERC's jurisdiction under the Interstate Commerce Act,
and, if so, claimed that the rate for that service was unlawful. Texaco sought
to have its claims addressed in the OR92-8 proceeding discussed above. Several
other West Line shippers filed similar complaints and/or motions to intervene.
The Commission consolidated all of these filings into Docket Nos. OR96-2 and set
the claims for a separate hearing. A hearing before an administrative law judge
was held in December 1996.
In March 1997, the judge issued an initial decision holding that the
movements on the Sepulveda pipelines were not subject to FERC jurisdiction. On
August 5, 1997, the FERC reversed that decision. On October 6, 1997, SFPP filed
a tariff establishing the initial interstate rate for movements on the Sepulveda
pipelines at the preexisting rate of five cents per barrel. Several shippers
protested that rate. In December 1997, SFPP filed an application for authority
to charge a market-based rate for the Sepulveda service, which application was
protested by several parties. On September 30, 1998, the FERC issued an order
finding that SFPP lacks market power in the Watson Station destination market
and that, while SFPP appeared to lack market power in the Sepulveda origin
market, a hearing was necessary to permit the protesting parties to substantiate
allegations that SFPP possesses market power in the origin market. A hearing
before a FERC administrative law judge on this limited issue was held in
February 2000.
On December 21, 2000, the FERC administrative law judge issued his initial
decision finding that SFPP possesses market power over the Sepulveda origin
market. The ultimate disposition of SFPP's application is pending before the
FERC.
Following the issuance of the initial decision in the Sepulveda case, the
FERC judge indicated an intention to proceed to consideration of the justness
and reasonableness of the existing rate for service on the Sepulveda pipelines.
On February 22, 2001, the FERC granted SFPP's motion to block such consideration
and to defer consideration of the pending complaints against the Sepulveda rate
until after FERC's final disposition of SFPP's market rate application.
OR97-2; OR98-1. et al. In October 1996, Ultramar filed a complaint at FERC
(Docket No. OR97-2) challenging SFPP's West Line rates, claiming they were
unjust and unreasonable and no longer subject to grandfathering. In October
1997, ARCO, Mobil and Texaco filed a complaint at the FERC (Docket No. OR98-1)
challenging the justness and reasonableness of all of SFPP's interstate rates,
raising claims against SFPP's East and West Line rates similar to those that
have been at issue in Docket Nos. OR92-8, et al., but expanding them to include
challenges to SFPP's grandfathered interstate rates from the San Francisco Bay
area to Reno, Nevada and from Portland to Eugene, Oregon - the North Line and
Oregon Line. In November 1997, Ultramar Diamond Shamrock Corporation filed a
similar, expanded complaint (Docket No. OR98-2). Tosco Corporation filed a
similar complaint in April 1998. The shippers seek both reparations and
prospective rate reductions for movements on all of the lines. SFPP answered
each of these complaints. FERC issued orders accepting the complaints and
consolidating them into one proceeding (Docket No. OR96-2, et al.), but holding
them in abeyance pending a FERC decision on review of the initial decision in
Docket Nos. OR92-8, et al.
In a companion order to Opinion No. 435, the FERC gave the complainants an
opportunity to amend their complaints in light of Opinion No. 435, which the
complainants did in January 2000. On May 17, 2000, the FERC issued an order
finding that the various complaining parties had alleged sufficient grounds for
their complaints to go forward to a hearing to assess whether any of the
challenged rates that are grandfathered under the Energy Policy Act will
continue to have such status and, if the grandfathered status of any rate is not
upheld, whether the existing rate is just and reasonable.
In August 2000, Navajo and RHC filed complaints against SFPP's East Line
rates and Ultramar filed an additional complaint updating its pre-existing
challenges to SFPP's interstate pipeline rates. In September 2000, FERC accepted
these new complaints and consolidated them with the ongoing proceeding in Docket
No. OR96-2, et al.
A hearing in this consolidated proceeding was held from October 2001 to March
2002. An initial decision by the administrative law judge is expected in the
latter half of 2002.
The complainants have alleged a variety of grounds for finding "substantially
changed circumstances." Applicable rules and regulations in this field are
vague, relevant factual issues are complex, and there is little precedent
available regarding the factors to be considered or the method of analysis to be
employed in making a determination of "substantially changed circumstances,"
which is the showing necessary to render "grandfathered" rates subject to
challenge. Given the newness of the grandfathering standard under the Energy
Policy Act and limited precedent, we cannot predict how these allegations will
be viewed by the FERC.
14
If "substantially changed circumstances" are found, SFPP rates previously
"grandfathered" under the Energy Policy Act will lose their "grandfathered"
status. If these rates are found to be unjust and unreasonable, shippers may be
entitled to a prospective rate reduction and a complainant may be entitled to
reparations for periods from the date of its complaint to the date of the
implementation of the new rates.
We are not able to predict with certainty the final outcome of the FERC
proceedings involving SFPP, should they be carried through to their conclusion,
or whether we can reach a settlement with some or all of the complainants.
Although it is possible that current or future proceedings could be resolved in
a manner adverse to us, we believe that the resolution of such matters will not
have a material adverse effect on our business, financial position or results of
operations.
CALNEV Pipe Line LLC
We acquired CALNEV Pipe Line LLC in March 2001. CALNEV provides interstate
and intrastate transportation from an interconnection with SFPP at Colton,
California to destinations in and around Las Vegas, Nevada.
OR01-08. In August 2001, ARCO filed a complaint against CALNEV's interstate
rates alleging that they were unjust and unreasonable. Tosco and Ultramar filed
interventions and subsequently filed complaints. In October 2001, the Commission
set the ARCO claim for investigation and hearing. The matter was first referred
to a settlement judge. On November 14, 2001, CALNEV filed a motion for rehearing
or, in the alternative, clarification of the Commission's October 2001 order.
CALNEV asserted that the Commission should have dismissed ARCO's complaint
because it did not meet the standards of the Commission's regulations or, in the
alternative, that the Commission should clarify the standards of pleading and
proof applicable to ARCO's complaint.
In April 2002, CALNEV and the complainants were able to reach a mutually
agreeable resolution of the disputed claims, and a settlement agreement was
executed. In the settlement agreement, the parties agreed, among other things,
that for a period of five years CALNEV would not seek a rate increase at the
FERC or the California Public Utiltiies Commission except as permitted under
four specific exceptions and that the complainants would not file complaints
against CALNEV's rates, provided it complies with such exceptions. On May 21,
2002, the FERC granted the parties' joint motion to dismiss the three pending
complaints with prejudice and accepted CALNEV's withdrawal of its pending
request for rehearing.
ORO2-9. In April 2002, Chevron filed a complaint against CALNEV's interstate
rates, making allegations of unjust and unreasonable rates that were
substantially similar to those alleged by ARCO, Ultramar and Tosco in the OR01-8
docket. CALNEV answered Chevron's complaint on May 16, 2002, and Chevron moved
for leave to respond to CALNEV's answer on June 17, 2002. The Commission has yet
to rule on Chevron's motion or response and has not yet set Chevron's complaint
for investigation and hearing. CALNEV and Chevron have reached a settlement in
principle and are currently negotiating the details of a settlement agreement.
We are not able to predict with certainty the final outcome of the FERC
proceedings involving CALNEV, should they be carried through to their
conclusion, or whether we can reach a settlement with some or all of the
complainants. Although it is possible that current or future proceedings could
be resolved in a manner adverse to us, we believe that the resolution of such
matters will not have a material adverse effect on our business, financial
position or results of operations.
California Public Utilities Commission Proceeding
ARCO, Mobil and Texaco filed a complaint against SFPP with the California
Public Utilities Commission on April 7, 1997. The complaint challenges rates
charged by SFPP for intrastate transportation of refined petroleum products
through its pipeline system in the State of California and requests prospective
rate adjustments. On October 1, 1997, the complainants filed testimony seeking
prospective rate reductions aggregating approximately $15 million per year.
On August 6, 1998, the CPUC issued its decision dismissing the complainants'
challenge to SFPP's intrastate rates. On June 24, 1999, the CPUC granted limited
rehearing of its August 1998 decision for the purpose of addressing the proper
ratemaking treatment for partnership tax expenses, the calculation of
environmental costs and the public utility status of SFPP's Sepulveda Line and
its Watson Station gathering enhancement facilities. In pursuing these rehearing
issues, complainants seek prospective rate reductions aggregating approximately
$10 million per year.
15
On March 16, 2000, SFPP filed an application with the CPUC seeking authority
to justify its rates for intrastate transportation of refined petroleum products
on competitive, market-based conditions rather than on traditional,
cost-of-service analysis.
On April 10, 2000, ARCO and Mobil filed a new complaint with the CPUC
asserting that SFPP's California intrastate rates are not just and reasonable
based on a 1998 test year and requesting the CPUC to reduce SFPP's rates
prospectively. The amount of the reduction in SFPP rates sought by the
complainants is not discernible from the complaint.
The rehearing complaint was heard by the CPUC in October 2000 and the April
2000 complaint and SFPP's market-based application were heard by the CPUC in
February 2001. All three matters stand submitted as of April 13, 2001, and a
decision addressing the submitted matters is expected within three to four
months.
We believe that the resolution of such matters will not have a material
adverse effect on our business, financial position or results of operations.
Southern Pacific Transportation Company Easements
SFPP and Southern Pacific Transportation Company are engaged in a judicial
reference proceeding to determine the extent, if any, to which the rent
payable by SFPP for the use of pipeline easements on rights-of-way held by
SPTC should be adjusted pursuant to existing contractual arrangements
(Southern Pacific Transportation Company vs. Santa Fe Pacific Corporation, SFP
Properties, Inc., Santa Fe Pacific Pipelines, Inc., SFPP, L.P., et al.,
Superior Court of the State of California for the County of San Francisco,
filed August 31, 1994).
Although SFPP received a favorable ruling from the trial court in May 1997,
in September 1999, the California Court of Appeals remanded the case back to the
trial court for further proceeding. SFPP claims that the rent payable for each
of the years 1994 through 2004 should be approximately $4.4 million and SPTC
claims it should be approximately $15.0 million. We believe SPTC's position in
this case is without merit and we have set aside reserves that we believe are
adequate to address any reasonably foreseeable outcome of this matter. We expect
this matter to go to trial during the third quarter of 2002.
FERC Order 637
Kinder Morgan Interstate Gas Transmission LLC
On June 15, 2000, Kinder Morgan Interstate Gas Transmission LLC made its
filing to comply with FERC's Orders 637 and 637-A. That filing contained KMIGT's
compliance plan to implement the changes required by FERC dealing with the way
business is conducted on interstate natural gas pipelines. All interstate
natural gas pipelines were required to make such compliance filings, according
to a schedule established by FERC. From October 2000 through June 2001, KMIGT
held a series of technical and phone conferences to identify issues, obtain
input, and modify its Order 637 compliance plan, based on comments received from
FERC Staff and other interested parties and shippers. On June 19, 2001, KMIGT
received a letter from FERC encouraging it to file revised pro-forma tariff
sheets, which reflected the latest discussions and input from parties into its
Order 637 compliance plan. KMIGT made such a revised Order 637 compliance filing
on July 13, 2001. The July 13, 2001 filing contained little substantive change
from the original pro-forma tariff sheets that KMIGT originally proposed on June
15, 2000. On October 19, 2001, KMIGT received an order from FERC, addressing its
July 13, 2001 Order 637 compliance plan. In the Order addressing the July 13,
2001 compliance plan, KMIGT's plan was accepted, but KMIGT was directed to make
several changes to its tariff, and in doing so, was directed that it could not
place the revised tariff into effect until further order of the Commission.
KMIGT filed its compliance filing with the October 19, 2001 Order on November
19, 2001 and also filed a request for rehearing/clarification of the FERC's
October 19, 2001 Order on November 19, 2001. The November 19, 2001 Compliance
filing has been protested by several parties. KMIGT filed responses to those
protests on December 14, 2001. At this time, it is unknown when this proceeding
will be finally resolved. KMIGT currently expects that it may not have a fully
compliant Order 637 tariff approved and in effect until sometime in the third
quarter of 2002. The full impact of implementation of Order 637 on the KMIGT
system is under evaluation. We believe that these matters will not have a
material adverse effect on our business, financial position or results of
operations.
Separately, numerous petitioners, including KMIGT, have filed appeals of
Order 637 in the D.C. Circuit, potentially raising a wide array of issues
related to Order 637 compliance. Initial briefs were filed on April 6, 2001,
addressing issues contested by industry participants. Oral arguments on the
appeals were held before the courts in
16
December 2001. On April 5, 2002, the D.C. Circuit issued an order largely
affirming Order Nos. 637, et seq. The D.C. Circuit remanded the Commission's
decision to impose a 5-year cap on bids that an existing shipper would have to
match in the right of first refusal process. The D.C. Circuit also remanded the
Commission's decision to allow forward-hauls and backhauls to the same point.
Finally, the D.C. Circuit held that several aspects of the Commission's
segmentation policy and its policy on discounting at alternate points were not
ripe for review. The FERC has requested comments from the industry with respect
to the issues remanded by the D.C. Circuit. They were due July 30, 2002.
Trailblazer Pipeline Company
On August 15, 2000, Trailblazer Pipeline Company made a filing to comply with
FERC's Order Nos. 637 and 637-A. Trailblazer's compliance filing reflected
changes in:
o segmentation;
o scheduling for capacity release transactions;
o receipt and delivery point rights;
o treatment of system imbalances;
o operational flow orders;
o penalty revenue crediting; and
o right of first refusal language.
On October 15, 2001, FERC issued its order on Trailblazer's Order No. 637
compliance filing. FERC approved Trailblazer's proposed language regarding
operational flow orders and the right of first refusal, but is requiring
Trailblazer to make changes to its tariff related to the other issues listed
above. Most of the tariff provisions will have an effective date of January 1,
2002, with the exception of language related to scheduling and segmentation,
which will become effective at a future date dependent on when KMIGT's Order
No. 637 provisions go into effect. Trailblazer anticipates no adverse impact on
its business as a result of the implementation of Order No. 637.
On November 14, 2001, Trailblazer made its compliance filing pursuant to the
FERC order of October 15, 2001. That compliance filing has been protested.
Separately, also on November 14, 2001, Trailblazer filed for rehearing of that
FERC order. These pleadings are pending FERC action.
Standards of Conduct Rulemaking
On September 27, 2001, FERC issued a Notice of Proposed Rulemaking in
Docket No. RM01-10 in which it proposed new rules governing the interaction
between an interstate natural gas pipeline and its affiliates. If adopted as
proposed, the Notice of Proposed Rulemaking could be read to limit
communications between KMIGT, Trailblazer and their respective affiliates. In
addition, the Notice could be read to require separate staffing of KMIGT and its
affiliates, and Trailblazer and its affiliates. Comments on the Notice of
Proposed Rulemaking were due December 20, 2001. Numerous parties, including
KMIGT, have filed comment on the Proposed Standards of Conduct Rulemaking. On
May 21, 2002, FERC held a technical conference dealing with the Commission's
proposed changes in the Standard of Conduct Rulemaking. On June 28, 2002, KMIGT
and numerous other parties flied additional written comments under a procedure
adopted at the technical conference. The Proposed Rulemaking is awaiting further
Commission action. We believe that these matters, as finally adopted, will not
have a material adverse effect on our business, financial position or results of
operations.
Carbon Dioxide Litigation
Kinder Morgan CO2 Company, L.P. directly or indirectly through its
ownership interest in the Cortez Pipeline Company, along with other entities,
is a defendant in several actions in which the plaintiffs allege that the
defendants undervalued carbon dioxide produced from the McElmo Dome field and
overcharged for transportation costs, thereby allegedly underpaying royalties
and severance tax payments. The plaintiffs, who are seeking monetary damages
and injunctive relief, are comprised of royalty, overriding royalty and small
share working interest owners who claim that they were underpaid by the
defendants. These cases are: CO2 Claims Coalition, LLC v. Shell Oil Co., et
al., No. 96-Z-2451 (U.S.D.C. Colo. filed 8/22/96); Rutter & Wilbanks et al.
v. Shell Oil Co., et al., No. 00-Z-1854 (U.S.D.C. Colo. filed 9/22/00);
Watson v. Shell Oil Co., et al., No. 00-Z-1855 (U.S.D.C. Colo. filed
9/22/00); Ainsworth et al. v. Shell Oil Co., et al., No. 00-Z-1856 (U.S.D.C.
Colo. filed 9/22/00); United States ex rel. Crowley v. Shell Oil Company, et
al., No. 00-Z-1220 (U.S.D.C. Colo. filed 6/13/00); Shell Western E&P Inc. v.
Bailey, et al., No 98-28630 (215th Dist. Ct. Harris County, Tex. filed
6/17/98); Shores, et al. v. Mobil Oil Corporation, et al., No. GC-99-01184
(Texas Probate Court, Denton County filed 12/22/99); First State Bank of
Denton v. Mobil Oil Corporation, et al., No. PR-8552-01 (Texas Probate Court,
Denton County filed 3/29/01); and Celeste C. Grynberg v. Shell Oil Company,
et al., No. 98-CV-43 (Colo. Dist. Ct. Montezuma County filed 3/21/98).
17
At a hearing conducted in the United States District Court for the District
of Colorado on April 8, 2002, the Court orally announced that it had approved
the certification of proposed plaintiff classes and approved a proposed
settlement in the CO2 Claims Coalition, LLC, Rutter & Wilbanks, Watson,
Ainsworth and United States ex rel. Crowley cases. The Court entered a written
order approving the Settlement on May 6, 2002; plaintiffs counsel representing
Shores, et al appealed the court's decision to the 10th Circuit Court of
Appeals.
RSM Production Company et al. v. Kinder Morgan Energy Partners, L.P. et al.
Cause No. 4519, in the District Court, Zapata County Texas, 49th Judicial
District. On October 15, 2001, Kinder Morgan Energy Partners, L.P. was served
with the First Supplemental Petition filed by RSM Production Corporation on
behalf of the County of Zapata, State of Texas and Zapata County Independent
School District as plaintiffs. Kinder Morgan Energy Partners, L.P. was sued in
addition to 15 other defendants, including two other Kinder Morgan affiliates.
Certain entities we acquired in the Kinder Morgan Tejas acquisition are also
defendants in this matter. The Petition alleges that these taxing units relied
on the reported volume and analyzed heating content of natural gas produced from
the wells located within the appropriate taxing jurisdiction in order to
properly assess the value of mineral interests in place. The suit further
alleges that the defendants undermeasured the volume and heating content of that
natural gas produced from privately owned wells in Zapata County, Texas. The
Petition further alleges that the County and School District were deprived of ad
valorem tax revenues as a result of the alleged undermeasurement of the natural
gas by the defendants. On December 15, 2001, the defendants filed motions to
transfer venue on jurisdictional grounds. There are no further pretrial
proceedings at this time.
Quinque Operating Company, et al. v. Gas Pipelines, et al.
Will Price, et al. v. Gas Pipelines, et al., (f/k/a Quinque Operating
Company et al. v. Gas Pipelines, et al.), Stevens County, Kansas District Court,
Case No. 99 C 30. In May, 1999, three plaintiffs, Quinque Operating Company, Tom
Boles and Robert Ditto, filed a purported nationwide class action in the Stevens
County, Kansas District Court against some 250 natural gas pipelines and many of
their affiliates. The District Court is located in Hugoton, Kansas. Certain
entities we acquired in the Kinder Morgan Tejas acquisition are also defendants
in this matter. The Petition (recently amended) alleges a conspiracy to underpay
royalties, taxes and producer payments by the defendants' undermeasurement of
the volume and heating content of natural gas produced from nonfederal lands for
more than twenty-five years. The named plaintiffs purport to adequately
represent the interests of unnamed plaintiffs in this action who are comprised
of the nation's gas producers, State taxing agencies and royalty, working and
overriding owners. The plaintiffs seek compensatory damages, along with
statutory penalties, treble damages, interest, costs and fees from the
defendants, jointly and severally. This action was originally filed on May 28,
1999 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. Subsequently, one of the defendants removed the action
to Kansas Federal District Court and the case was styled as Quinque Operating
Company, et al. v. Gas Pipelines, et al., Case No. 99-1390-CM, United States
District Court for the District of Kansas. Thereafter, we filed a motion with
the Judicial Panel for Multidistrict Litigation to consolidate this action for
pretrial purposes with the Grynberg False Claim Act cases referred to above,
because of common factual questions. On April 10, 2000, the MDL Panel ordered
that this case be consolidated with the Grynberg federal False Claims Act cases.
On January 12, 2001, the Federal District Court of Wyoming issued an oral ruling
remanding the case back to the State Court in Stevens County, Kansas. A case
management conference occurred in State Court in Stevens County, and a briefing
schedule was established for preliminary matters. Personal jurisdiction
discovery has commenced. Merits discovery has been stayed. Recently, the
defendants filed a motion to dismiss on grounds other than personal
jurisdiction, and a motion to dismiss of lack of personal jurisdiction for
non-resident defendants. The current Named plaintiffs are Will Price, Tom Boles,
Cooper Clark Foundation and Stixon Petroleum, Inc. Quinque Operating Company has
been dropped from the action as a Named Plaintiff.
Sweatman and Paz Gas Corporation v. Gulf Energy Marketin, LLC, et al.
Mel R. Sweatman and Paz Gas Corporation vs, Gulf Energy Marketing, LLC, et
al. On July 25, 2002, we were served with this suit for breach of contract,
tortious interference with existing contractual relationships, conspiracy to
commit tortuous interference and interference with prospective business
relationship. Mr. Sweatman and Paz Gas Corporation claim that, in connection
with our acquisition of Tejas Gas, LLC, we wrongfully caused gas volumes to be
shipped on our Kinder Morgan Texas Pipeline system instead of our Kinder Morgan
Tejas system. Mr. Sweatman and Paz Gas Corporation allege that this action
eliminated profit on Kinder Morgan Tejas, a portion of which Mr. Sweatman and
Paz Gas Corporation claim they are entitled under an agreement with a subsidiary
of ours acquired in the Tejas Gas acquisition. Our answer to this complaint has
not yet become due. Based on the information available to date and our
preliminary investigation, we believe this suit is without merit and intend to
defend it vigorously.
18
Although no assurances can be given, we believe that we have meritorious
defenses to all of these actions, that we have established an adequate reserve
to cover potential liability, and that these matters will not have a material
adverse effect on our business, financial position or results of operations.
Environmental Matters
We are subject to environmental cleanup and enforcement actions from time to
time. In particular, the federal Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) generally imposes joint and several
liability for cleanup and enforcement costs on current or predecessor owners and
operators of a site, without regard to fault or the legality of the original
conduct. Our operations are also subject to federal, state and local laws and
regulations relating to protection of the environment. Although we believe our
operations are in substantial compliance with applicable environmental
regulations, risks of additional costs and liabilities are inherent in pipeline
and terminal operations, and there can be no assurance that we will not incur
significant costs and liabilities. Moreover, it is possible that other
developments, such as increasingly stringent environmental laws, regulations and
enforcement policies thereunder, and claims for damages to property or persons
resulting from our operations, could result in substantial costs and liabilities
to us.
We are currently involved in the following governmental proceedings related
to compliance with environmental regulations associated with our assets:
o one cleanup ordered by the United States Environmental Protection Agency
related to ground water contamination in the vicinity of SFPP's storage
facilities and truck loading terminal at Sparks, Nevada;
o several ground water hydrocarbon remediation efforts under administrative
orders issued by the California Regional Water Quality Control Board and
two other state agencies;
o groundwater and soil remediation efforts under administrative orders
issued by various regulatory agencies on those assets purchased from GATX
Corporation, comprising Kinder Morgan Liquids Terminals LLC, CALNEV Pipe
Line LLC and Central Florida Pipeline LLC; and
o a ground water remediation effort taking place between Chevron, Plantation
Pipe Line Company and the Alabama Department of Environmental Management.
In addition, we are from time to time involved in civil proceedings relating
to damages alleged to have occurred as a result of accidental leaks or spills of
refined petroleum products, natural gas liquids, natural gas and carbon dioxide.
Review of assets related to Kinder Morgan Interstate Gas Transmission LLC
includes the environmental impacts from petroleum and used oil releases to the
soil and groundwater at nine sites. Additionally, review of assets related to
Kinder Morgan Texas Pipeline includes the environmental impacts from petroleum
releases to the soil and groundwater at six sites. Further delineation and
remediation of these impacts will be conducted. Reserves have been established
to address the closure of these issues.
On October 2, 2001, the jury rendered a verdict in the case of Walter
Chandler v. Plantation Pipe Line Company. The jury awarded the plaintiffs a
total of $43.8 million. The judge reduced the award to $42.6 million due to a
prior settlement with the plaintiffs by a third party. The verdict was divided
with the following award of damages:
o $0.3 million compensatory damages for property damage to the Evelyn
Chandler Trust;
o $4.1 million compensatory damages to Walter (Buster) Chandler;
o $1.2 million compensatory damages to Clay Chandler; and o $37 million
punitive damages.
Plantation has filed post judgment motions and an appeal of the verdict. The
appeal of this case will be directly heard by the Alabama Supreme Court. It is
anticipated that a decision by the Alabama Supreme Court will be received within
the next ten to fifteen months.
This case was filed in April 1997 by the landowner (Evelyn Chandler Trust)
and two residents of the property (Buster Chandler and his son, Clay Chandler).
The suit was filed against Chevron, Plantation and two individuals. The two
individuals were later dismissed from the suit. Chevron settled with the
plaintiffs in December 2000. The property and residences are directly across the
street from the location of a former Chevron products terminal. The Plantation
pipeline system traverses the Chevron terminal property. The suit alleges that
gasoline released from the terminal and pipeline contaminated the groundwater
under the plaintiffs' property. As noted above, a current
19
remediation effort is taking place between Chevron, Plantation and Alabama
Department of Environmental Management.
Although no assurance can be given, we believe that the ultimate resolution
of the environmental matters set forth in this note will not have a material
adverse effect on our business, financial position or results of operations. We
have recorded a total reserve for environmental claims in the amount of $67.8
million at June 30, 2002. As of June 30, 2002, we were not able to reasonably
estimate when the eventual settlements of these claims will occur.
Other
We are a defendant in various lawsuits arising from the day-to-day operations
of our businesses. Although no assurance can be given, we believe, based on our
experiences to date, that the ultimate resolution of such items will not have a
material adverse impact on our business, financial position or results of
operations. In addition, since many of our assets are subject to regulation, we
are subject to potential future challenges to our rates and to changes in
applicable rules and regulations that may have an adverse effect on our
business, financial position or results of operations.
4. Two-for-One Common Unit Split
On July 18, 2001, Kinder Morgan Management, LLC, the delegate of our general
partner, approved a two-for-one unit split of its outstanding shares and our
outstanding common units representing limited partner interests in us. The
common unit split entitled our common unitholders to one additional common unit
for each common unit held. Our partnership agreement provides that when a split
of our common units occurs, a unit split on our class B units and our i-units
will be effected to adjust proportionately the number of our class B units and
i-units. The two-for-one split occurred on August 31, 2001 to unitholders of
record on August 17, 2001. All references to the number of Kinder Morgan
Management, LLC shares, the number of our limited partner units and per unit
amounts in our consolidated financial statements and related notes, have been
restated to reflect the effect of the split for all periods presented.
5. Distributions
On May 15, 2002, we paid a cash distribution for the quarterly period ended
March 31, 2002, of $0.59 per unit to our common unitholders and to our class B
unitholders. Kinder Morgan Management, LLC, our sole i-unitholder, received
527,572 additional i-units based on the $0.59 cash distribution per common unit.
The distributions were declared on April 17, 2002, payable to unitholders of
record as of April 30, 2002.
On July 17, 2002, we declared a cash distribution for the quarterly period
ended June 30, 2002, of $0.61 per unit. The distribution will be paid on or
before August 14, 2002, to unitholders of record as of July 31, 2002. Our common
unitholders and class B unitholders will receive cash. Our sole i-unitholder
will receive a distribution in the form of additional i-units based on the $0.61
distribution per common unit. The number of i-units distributed will be 619,585.
For each outstanding i-unit that Kinder Morgan Management, LLC holds, a fraction
of an i-unit will be issued. The fraction is determined by dividing:
o the cash amount distributed per common unit
by
o the average of Kinder Morgan Management's shares' closing market prices
from July 15-26, 2002, the ten consecutive trading days preceding the date
on which the shares began to trade ex-dividend under the rules of the New
York Stock Exchange.
6. Intangibles
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 141 "Business Combinations" and Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets". These accounting
pronouncements require that we prospectively cease amortization of all
intangible assets having indefinite useful economic lives. Such assets,
including goodwill, are not to be amortized until their lives are determined to
be finite, however, a recognized intangible asset with an indefinite useful life
should be tested for impairment annually or on an interim basis if events or
circumstances indicate that the fair value of the asset has
20
decreased below its carrying value. We completed this initial transition
impairment test in June 2002 and determined that our goodwill is not impaired.
Our intangible assets include goodwill, lease value, contracts and
agreements. All of our intangible assets having definite lives are being
amortized on a straight-line basis over their estimated useful lives. SFAS Nos.
141 and 142 also require that we disclose the following information related to
our intangible assets still subject to amortization and our goodwill (in
thousands):
June 30, Dec. 31,
2002 2001
------------- ---------
Goodwill $ 655,632 $ 566,633
Accumulated amortization (19,899) (19,899)
------------ ------------
Goodwill, net 635,733 546,734
------------ ------------
Lease value 6,124 6,124
Contracts and other 10,712 10,739
Accumulated amortization (290) (200)
------------ ------------
Other intangibles, net 16,546 16,663
------------ ------------
Total intangibles, net $ 652,279 $ 563,397
============ ============
Changes in the carrying amount of goodwill for the six months ended June 30,
2002 are summarized as follows (in thousands):
Products Natural Gas CO2
Pipelines Pipelines Pipelines Terminals Total
--------- --------- --------- --------- -----
Balance at Dec. 31, 2001 $ 262,765 $ 87,452 $ 46,101 $ 150,416 $ 546,734
Goodwill acquired 417 -- -- -- 417
Goodwill dispositions, net -- -- -- -- --
Impairment losses -- -- -- -- --
----------- ---------- --------- --------- ----------
Balance at Mar. 31, 2002 $ 263,182 $ 87,452 $ 46,101 $ 150,416 $ 547,151
=========== ========== ========= ========= ==========
Goodwill acquired -- 83,262 -- 5,320 88,582
Goodwill dispositions, net -- -- -- -- --
Impairment losses -- -- -- -- --
----------- ---------- --------- --------- ----------
Balance at June 30, 2002 $ 263,182 $ 170,714 $ 46,101 $ 155,736 $ 635,733
=========== ========== ========= ========= ==========
Amortization expense consists of the following (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
-------- -------- -------- ----------
Goodwill $ -- $ 3,385 $ -- $ 5,967
Lease value 35 1,396 70 2,793
Contracts and other 10 10 20 20
-------- -------- -------- ----------
$ 45 $ 4,791 $ 90 $ 8,780
======== ======== ======== ==========
Our weighted average amortization period for our intangible assets is
approximately 42 years. The following table shows the estimated amortization
expense for these assets for each of the five succeeding fiscal years (in
thousands):
2003 $ 180
2004 $ 180
2005 $ 180
2006 $ 180
2007 $ 180
21
Had SFAS No. 142 been in effect prior to January 1, 2002, our reported
limited partners' interest in net income and net income per unit would have been
as follows (in thousands, except per unit amounts):
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported limited partners' interest in net income $ 79,283 $ 53,620 $ 158,922 $ 113,665
Add: limited partners' interest in goodwill amortization -- 3,350 -- 5,907
-------- -------- --------- ---------
Adjusted limited partners' interest in net income $ 79,283 $ 56,970 $ 158,922 $ 119,572
======== ======== ========= =========
Basic limited partners' net income per unit:
Reported net income $ 0.48 $ 0.36 $ 0.96 $ 0.80
Goodwill amortization -- 0.02 -- 0.04
-------- -------- --------- ---------
Adjusted net income $ 0.48 $ 0.38 $ 0.96 $ 0.84
======== ======== ========= =========
Diluted limited partners' net income per unit:
Reported net income $ 0.48 $ 0.36 $ 0.95 $ 0.80
Goodwill amortization -- 0.02 -- 0.04
-------- -------- --------- ---------
Adjusted net income $ 0.48 $ 0.38 $ 0.95 $ 0.84
======== ======== ========= =========
7. Debt
Our debt and credit facilities as of June 30, 2002, consist primarily of:
o a $750 million unsecured 364-day credit facility due October 23, 2002;
o a $200 million unsecured 364-day credit facility due February 20, 2003;
o an $85.2 million unsecured two-year credit facility due June 29, 2003
(Trailblazer Pipeline Company is the obligor on the facility);
o a $300 million unsecured five-year credit facility due September 29,
2004;
o $79.5 million of Series F First Mortgage Notes due December 2004 (our
subsidiary, SFPP, L.P. is the obligor on the notes);
o $200 million of 8.00% Senior Notes due March 15, 2005;
o $40 million of Plaquemines, Louisiana Port, Harbor, and Terminal
District Revenue Bonds due March 15, 2006 (our subsidiary, International
Marine Terminals, is the obligor on the bonds);
o $35 million of 7.84% Senior Notes, with a final maturity of July 2008 (our
subsidiary, Central Florida Pipe Line LLC, is the obligor on the notes);
o $250 million of 6.30% Senior Notes due February 1, 2009;
o $250 million of 7.50% Senior Notes due November 1, 2010;
o $700 million of 6.75% Senior Notes due March 15, 2011;
o $450 million of 7.125% Senior Notes due March 15, 2012;
o $25 million of New Jersey Economic Development Revenue Refunding Bonds
due January 15, 2018 (our subsidiary, Kinder Morgan Liquids Terminals
LLC, is the obligor on the bonds);
o $87.9 million of Industrial Revenue Bonds with final maturities ranging
from September 2019 to December 2024 (our subsidiary, Kinder Morgan
Liquids Terminals LLC, is the obligor on the bonds);
o $23.7 million of tax-exempt bonds due 2024 (our subsidiary, Kinder
Morgan Operating L.P. "B", is the obligor on the bonds);
o $300 million of 7.40% Senior Notes due March 15, 2031;
o $300 million of 7.75% Senior Notes due March 15, 2032; and
o a $1.25 billion short-term commercial paper program.
None of our debt or credit facilities are subject to payment acceleration as
a result of any change to our credit ratings.
Our short-term debt at June 30, 2002, consisted of:
o $996.8 million of commercial paper borrowings;
o $42.5 million under the SFPP, L.P. 10.7% First Mortgage Notes;
o $31.0 million under Trailblazer's unsecured two-year credit facility;
22
o $5.0 million under the Central Florida Pipeline LLC Notes; and
o $3.5 million in other borrowings.
On August 6, 2002, Kinder Morgan Management, LLC issued in a public offering,
an additional 12,478,900 of its shares, including 478,900 shares upon exercise
by the underwriters of an over-allotment option, at a price of $27.50 per share,
less commissions and underwriting expenses. The net proceeds from the offering
were used to buy i-units from us. After commissions, underwriting expenses and
unit issuance costs, we will receive net proceeds of approximately $328.6
million for the issuance of 12,478,900 i-units. We used the proceeds from the
i-unit issuance to reduce the borrowings under our commercial paper program.
We intend and have the ability to refinance $276.3 million of our short-term
debt on a long-term basis under our unsecured five-year credit facility. We do
not anticipate any liquidity problems. Our average interest rate for outstanding
borrowings during the second quarter of 2002 was approximately 5.06% per annum.
For additional information regarding our debt facilities, see Note 9 to our
consolidated financial statements included in our Form 10-K for the year ended
December 31, 2001.
Credit Facilities
No borrowings were outstanding under our three credit facilities at June 30,
2002. However, the amount available for borrowing under our credit facilities is
reduced by a $23.7 million letter of credit that supports Kinder Morgan
Operating L.P. "B"'s tax-exempt bonds and our outstanding commercial paper
borrowings.
Our three credit facilities are with a syndicate of financial institutions.
First Union National Bank is the administrative agent under our five-year credit
facility and our 364-day facility that expires on October 23, 2002. JPMorgan
Chase Bank is the administrative agent under our 364-day facility that expires
on February 20, 2003. Interest on these three credit facilities accrues at our
option at a floating rate equal to either:
o the applicable administrative agent's base rate (but not less than the
Federal Funds Rate, plus 0.5%); or
o LIBOR, plus a margin, which varies depending upon the credit rating of our
long-term senior unsecured debt.
Our five-year credit facility also permits us to obtain bids for fixed rate
loans from members of the lending syndicate.
Senior Notes
At June 30, 2002, our unamortized liability balance due on the various series
of our senior notes was as follows (in millions):
8.0% senior notes due March 15, 2005 $ 199.8
6.30% senior notes due February 1, 2009 249.4
7.5% senior notes due November 1, 2010 248.7
6.75% senior notes due March 15, 2011 698.2
7.125% senior notes due March 15, 2012 448.0
7.40% senior notes due March 15, 2031 299.3
7.75% senior notes due March 15, 2032 298.5
-----
Total $2,441.9
========
Commercial Paper Program
Effective March 31, 2002 and June 30, 2002, our commercial paper program
provided for the issuance of up to $1.25 billion of commercial paper. Borrowings
under our commercial paper program reduce the borrowings allowed under our
credit facilities. As of June 30, 2002, we had $996.8 million of commercial
paper outstanding with an interest rate of 2.14%.
Trailblazer Pipeline Company Debt
At June 30, 2002, the outstanding balance under Trailblazer's $85.2 million
two-year revolving credit facility was $31.0 million. The revolving credit
facility expires on June 29, 2003, and had a weighted average interest rate of
2.805% at June 30, 2002, which reflects LIBOR plus a margin of 0.875%. Pursuant
to the terms of the revolving
23
credit facility, Trailblazer partnership distributions are restricted by certain
financial covenants. In late July, we paid the outstanding balance under
Trailblazer's revolving credit facility.
Kinder Morgan Operating L.P. "B" Debt
The $23.7 million principal amount of tax-exempt bonds due 2024 were issued
by the Jackson-Union Counties Regional Port District. These bonds bear interest
at a weekly floating market rate. During the second quarter of 2002, the
weighted-average interest rate on these bonds was 1.45% per annum, and at June
30, 2002, the interest rate was 1.33%. We have an outstanding letter of credit
issued under our credit facilities that supports our tax-exempt bonds. The
letter of credit reduces the amount available for borrowing under our credit
facilities.
International Marine Terminals Debt
As of February 1, 2002, we own a 66 2/3% interest in International Marine
Terminals (IMT) partnership (see Note 2). The principal assets owned by IMT are
dock and wharf facilities financed by the Plaquemines Port, Harbor and Terminal
District (Louisiana) $40,000,000 Adjustable Rate Annual Tender Port Facilities
Revenue Refunding Bonds (International Marine Terminals Project) Series 1984A
and 1984B. The bonds mature on March 15, 2006. The bonds are backed by two
letters of credit issued by KBC Bank N.V. On March 19, 2002, an Amended and
Restated Letter of Credit Reimbursement Agreement relating to the letters of
credit was entered into by IMT and KBC Bank. In connection with that agreement,
we agreed to guarantee the obligations of IMT in proportion to our ownership
interest. Our obligation is approximately $30.3 million for principal, plus
interest and other fees.
Cortez Pipeline Company Debt
Pursuant to a certain Throughput and Deficiency Agreement, the owners of
Cortez Pipeline Company (Kinder Morgan CO2 Company, L.P. - 50% owner; a
subsidiary of Exxon Mobil Corporation - 37% owner; and Cortez Vickers Pipeline
Company - 13% owner) are required, on a percentage ownership basis, to
contribute capital to Cortez Pipeline Company in the event of a cash deficiency.
The Throughput and Deficiency Agreement contractually supports the financings of
Cortez Capital Corporation, a wholly-owned subsidiary of Cortez Pipeline
Company, by obligating the owners of Cortez Pipeline Company to fund cash
deficiencies at Cortez Pipeline Company, including cash deficiencies relating to
the repayment of principal and interest. Parent companies of the respective
Cortez Pipeline Company owners further severally guarantee, on a percentage
basis, the obligations of the Cortez Pipeline Company owners under the
Throughput and Deficiency Agreement.
Due to our indirect ownership of Cortez through Kinder Morgan CO2 Company,
L.P., we severally guarantee 50% of the debt of Cortez Capital Corporation.
Shell Oil Company shares our guaranty obligations jointly and severally through
December 31, 2006 for Cortez's debt programs in place as of April 1, 2000.
At June 30, 2002, the debt facilities of Cortez Capital Corporation consisted
of:
o a $127 million committed 364-day revolving credit facility due December
26, 2002;
o a $48 million committed 364-day revolving credit facility due July 17,
2002;
o $115.7 million of Series D notes due May 15, 2013; and
o a $175 million short-term commercial paper program.
At June 30, 2002, Cortez had $155.8 million of commercial paper outstanding
with an interest rate of 1.82%, the average interest rate on the series D notes
was 6.9322% and there were no borrowings under the credit facilities.
On July 16, 2002, the $127 million and the $48 million revolving credit
facilities were combined into one $175 million committed revolving credit
facility due December 26, 2002.
8. Partners' Capital
At June 30, 2002, our partners' capital consisted of 129,922,218 common
units, 5,313,400 class B units and 31,617,905 i-units. Together, these
166,853,523 units represent the limited partners' interest and an effective 98%
economic interest in the Partnership, exclusive of our general partner's
incentive distribution. Our common unit total consisted of 111,020,191 units
held by third parties, 17,178,027 units held by KMI and its consolidated
affiliates (excluding our general partner) and 1,724,000 units held by our
general partner. Our class B units were held entirely by Kinder Morgan, Inc. and
our i-units were held entirely by Kinder Morgan Management, LLC. Our general
partner has an effective 2% interest in the Partnership, excluding the general
partner's incentive distribution.
24
At December 31, 2001, our Partners' capital consisted of 129,855,018 common
units, 5,313,400 class B units and 30,636,363 i-units. Our total common units
outstanding consisted of 110,071,392 units held by third parties, 18,059,626
units held by Kinder Morgan, Inc. and its consolidated affiliates (excluding our
general partner) and 1,724,000 units held by our general partner. Our class B
units were held entirely by Kinder Morgan, Inc. and our i-units were held
entirely by Kinder Morgan Management, LLC.
Our class B units were issued in December 2000. The class B units are similar
to our common units except that they are not eligible for trading on the New
York Stock Exchange. Our i-units were initially issued in May 2001. The i-units
are a separate class of limited partner interests in us. All of our i-units are
owned by Kinder Morgan Management, LLC, a wholly-owned subsidiary of our general
partner, and are not publicly traded. In accordance with its limited liability
company agreement, Kinder Morgan Management's activities are restricted to being
a limited partner in, and controlling and managing the business and affairs of,
the Partnership, our operating partnerships and our subsidiaries.
Through the combined effect of the provisions in our partnership agreement
and the provisions of Kinder Morgan Management, LLC's limited liability company
agreement, the number of outstanding Kinder Morgan Management, LLC shares and
the number of i-units will at all times be equal. Furthermore, under the terms
of our partnership agreement, we agreed that we will not, except in liquidation,
make a distribution on an i-unit other than in additional i-units or a security
that has in all material respects the same rights and privileges as our i-units.
The number of i-units we distribute to Kinder Morgan Management, LLC is based
upon the amount of cash we distribute to the owners of our common units.
Typically, if cash is paid to the holders of our common units, we will issue
additional i-units to Kinder Morgan Management, LLC. The fraction of an i-unit
paid per i-unit owned by Kinder Morgan Management, LLC will have the same value
as the cash payment on the common unit. Based on the preceding, Kinder Morgan
Management, LLC received 527,572 i-units on May 15, 2002. These additional
i-units distributed were based on the $0.59 per unit distributed to our common
unitholders on that date.
For the purposes of maintaining partner capital accounts, our partnership
agreement specifies that items of income and loss shall be allocated among the
partners in accordance with their percentage interests. Normal allocations
according to percentage interests are made, however, only after giving effect to
any priority income allocations in an amount equal to the incentive
distributions that are allocated 100% to our general partner.
Incentive distributions allocated to our general partner are determined by
the amount that quarterly distributions to unitholders exceed certain specified
target levels. Our distribution of $0.59 per unit paid on May 15, 2002 for the
first quarter of 2002 required an incentive distribution to our general partner
of $61.0 million. Our distribution of $0.525 per unit paid on May15, 2001 for
the first quarter of 2001 required an incentive distribution to our general
partner of $41.0 million. The increased incentive distribution to our general
partner paid for the first quarter of 2002 over the distribution paid for the
first quarter of 2001 reflects the increase in the amount distributed per unit
as well as the issuance of additional units.
Our declared distribution for the second quarter of 2002 of $0.61 per unit
will result in an incentive distribution to our general partner of $64.4
million. This compares to our distribution of $0.525 per unit and incentive
distribution to our general partner of $50.1 million for the second quarter of
2001.
Subsequent Event
On August 6, 2002, Kinder Morgan Management, LLC issued in a public offering,
an additional 12,478,900 of its shares, including 478,900 shares upon exercise
by the underwriters of an over-allotment option, at a price of $27.50 per share,
less commissions and underwriting expenses. The net proceeds from the offering
were used to buy i-units from us. After commissions, underwriting expenses and
unit issuance costs, we will receive net proceeds of approximately $328.6
million for the issuance of 12,478,900 i-units. We used the proceeds from the
i-unit issuance to reduce the debt we incurred in our acquisition of Kinder
Morgan Tejas during the first quarter of 2002.
9. Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Accounting for
Comprehensive Income", requires that enterprises report a total for
comprehensive income. For each of the six months ended June 30, 2002 and 2001,
the only difference between our net income and our comprehensive income was the
unrealized gain or loss on derivatives utilized for hedging purposes. For more
information on our hedging activities, see Note 10. Our total comprehensive
income is as follows (in thousands):
25
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ------------ --------- ---------
Net income $144,517 $104,226 $285,950 $205,893
Cumulative effect transition adjustment -- -- -- (22,797)
Change in fair value of derivatives used for hedging purposes (14,920) (16,798) (81,856) (37,007)
Reclassification of change in fair value of derivatives to net income 11,531 13,716 (12,828) 53,974
-------- --------- -------- ------
Comprehensive income $141,128 $101,144 $191,266 $200,063
======== ======== ========= ========
10. Risk Management
Hedging Activities
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No.133" and No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". SFAS No. 133 established
accounting and reporting standards requiring that every derivative financial
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. SFAS No. 133 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 those criteria, SFAS
No. 133 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.
Our normal business activities expose us to risks associated with changes in
the market price of natural gas and associated transportation, natural gas
liquids, crude oil and carbon dioxide. Through Kinder Morgan, Inc., we use
energy financial instruments to reduce our risk of price changes in the spot and
fixed price of natural gas, natural gas liquids and crude oil markets. Our risk
management activities are only used in order to protect our profit margins and
our risk management policies prohibit us from engaging in speculative trading.
Commodity-related activities of our risk management group are monitored by our
Risk Management Committee, which is charged with the review and enforcement of
our management's risk management policy.
The fair value of these risk management instruments reflects the estimated
amounts that we would receive or pay to terminate the contracts at the reporting
date, thereby taking into account the current unrealized gains or losses on open
contracts. We have available market quotes for substantially all of the
financial instruments that we use. Our Form 10-K for the year ended December 31,
2001 contains additional information about the risks we face and the hedging
program we employ to mitigate those risks.
Approximately $0.3 million was recognized in earnings as a loss during the
second quarter of 2002 as a result of ineffectiveness of the