F O R M 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 129,940,018 common units outstanding at November 1,
2002.
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 Nine Months Ended
September 30, 2002 and 2001................................... 3
Consolidated Balance Sheets-September 30, 2002 and
December 31, 2001............................................. 4
Consolidated Statements of Cash Flows-Nine Months Ended
September 30, 2002 and 2001................................... 5
Notes to Consolidated Financial Statements...................... 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................
Results of Operations........................................... 34
Financial Condition............................................. 40
Information Regarding Forward-Looking Statements................ 43
Item 3: Quantitative and Qualitative Disclosures About Market Risk........ 44
Item 4: Controls and Procedures........................................... 44
PART II. OTHER INFORMATION
Item 1: Legal Proceedings................................................. 45
Item 2: Changes in Securities and Use of Proceeds......................... 45
Item 3: Defaults Upon Senior Securities................................... 45
Item 4: Submission of Matters to a Vote of Security Holders............... 45
Item 5: Other Information................................................. 45
Item 6: Exhibits and Reports on Form 8-K.................................. 46
Signatures........................................................ 48
Certifications.................................................... 49
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Unit Amounts)
(Unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2002 2001 2002 2001
------------ --------------- ----------- --------------
Revenues
Natural gas sales $ 740,377 $ 308,784 $1,926,180 $1,356,092
Services 357,111 263,383 926,365 752,545
Product sales and other 23,832 66,377 162,776 294,307
---------- ---------- --------- ---------
1,121,320 638,544 3,015,321 2,402,944
---------- ---------- --------- ---------
Costs and Expenses
Gas purchases and other costs of sales 729,773 319,887 1,890,342 1,447,939
Operations and maintenance 92,644 80,768 278,399 266,947
Fuel and power 24,932 21,367 64,463 52,828
Depreciation and amortization 42,546 36,701 126,495 102,724
General and administrative 27,476 24,801 87,218 76,436
Taxes, other than income taxes 14,546 10,128 40,798 34,231
---------- ---------- --------- ---------
931,917 493,652 2,487,715 1,981,105
---------- ---------- --------- ---------
Operating Income 189,403 144,892 527,606 421,839
Other Income (Expense)
Earnings from equity investments 22,818 20,899 70,386 63,249
Amortization of excess cost of equity (1,394) (2,253) (4,182) (6,759)
investments
Interest, net (46,350) (40,985) (129,236) (136,067)
Other, net 232 147 617 (256)
Minority Interest (2,410) (2,350) (7,458) (7,985)
---------- ---------- --------- ---------
Income Before Income Taxes 162,299 120,350 457,733 334,021
Income Taxes (4,119) (4,558) (13,603) (12,336)
---------- ---------- --------- ---------
Net Income $ 158,180 $ 115,792 $ 444,130 321,685
========== ========== ========== =========
General Partner's interest in Net Income $ 70,380 $ 54,824 $ 197,408 $ 147,052
Limited Partners' interest in Net Income 87,800 60,968 246,722 174,633
---------- ---------- ---------- ---------
Net Income $ 158,180 $115,792 $ 444,130 $ 321,685
========== ======== ========== =========
Basic and Diluted Limited Partners' Net $ 0.50 $ 0.37 $ 1.46 $ 1.16
========== ======== ========== =========
Income per Unit
Weighted Average Number of Units used in Computation of Limited Partners' Net Income per Unit
Basic 174,781 165,064 169,171 149,971
========== ======== ========== =========
Diluted 174,932 165,277 169,345 150,177
========== ======== ========== =========
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)
September 30, December 31,
2002 2001
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 62,380 $ 62,802
Accounts and notes receivable
Trade 431,848 215,860
Related parties 38,172 52,607
Inventories
Products 3,576 2,197
Materials and supplies 7,086 6,212
Gas imbalances 33,358 15,265
Gas in underground storage 11,758 18,214
Other current assets 62,691 194,886
---------- ----------
650,869 568,043
---------- ----------
Property, Plant and Equipment, net 6,098,444 5,082,612
Investments 452,774 440,518
Notes receivable 3,029 3,095
Intangibles, net 659,293 563,397
Deferred charges and other assets 241,176 75,001
---------- ----------
TOTAL ASSETS $8,105,585 $6,732,666
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable
Trade $ 316,428 $ 111,853
Related parties 262 9,235
Current portion of long-term debt -- 560,219
Accrued interest 22,683 34,099
Deferred revenues 1,045 2,786
Gas imbalances 43,335 34,660
Accrued other current liabilities 209,640 209,852
---------- ----------
593,393 962,704
---------- ----------
Long-Term Liabilities and
Deferred Credits
Long-term debt, outstanding 3,611,061 2,237,015
Market value of interest rate swaps 157,545 (5,441)
Deferred revenues 29,837 29,110
Deferred income taxes 38,544 38,544
Other long-term liabilities
and deferred credits 226,452 246,464
---------- ----------
4,063,439 2,545,692
---------- ----------
Commitments and Contingencies
Minority Interest 41,927 65,236
---------- ----------
Partners' Capital
Common Units 1,848,019 1,894,677
Class B Units 127,186 125,750
i-Units 1,405,424 1,020,153
General Partner 69,293 54,628
Accumulated other comprehensive
income (loss) (43,096) 63,826
---------- ----------
3,406,826 3,159,034
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $8,105,58 $6,732,666
========= ==========
The accompanying notes are an integral part of
these consolidated financial statements.
4
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended Sept. 30,
---------------------------
2002 2001
---------- ----------
Cash Flows From Operating Activities
Net income $ 444,130 $ 321,685
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 126,495 102,724
Amortization of excess cost of equity investments 4,182 6,759
Earnings from equity investments (70,386) (63,249)
Distributions from equity investments 58,920 50,837
Changes in components of working capital (2,521) (59,768)
Other, net (14,551) 45,445
---------- ----------
Net Cash Provided by Operating Activities 546,269 404,433
---------- ----------
Cash Flows From Investing Activities
Acquisitions of assets (864,311) (1,453,174)
Additions to property, plant and equipment for
expansion and maintenance projects (342,562) (178,799)
Sale of property, plant and equipment,
net of removal costs 1,710 8,193
Contributions to equity investments (14,481) (2,658)
Other 1,289 (6,442)
---------- ----------
Net Cash Used in Investing Activities (1,218,355) (1,632,880)
---------- ----------
Cash Flows From Financing Activities
Issuance of debt 3,205,414 3,736,734
Payment of debt (2,432,731) (3,128,186)
Loans to related party -- (17,100)
Debt issue costs (14,180) (7,384)
Proceeds from issuance of common units 1,464 925
Proceeds from issuance of i-units 331,159 996,869
Contributions from General Partner 3,353 11,716
Distributions to partners:
Common units (227,327) (197,254)
Class B units (9,298) (5,579)
General Partner (182,742) (126,068)
Minority interest (7,365) (12,283)
Other, net 3,917 1,070
---------- ----------
Net Cash Provided by Financing Activities 671,664 1,253,460
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents (422) 25,013
Cash and Cash Equivalents, beginning of period 62,802 59,319
---------- ----------
Cash and Cash Equivalents, end of period $ 62,380 $ 84,332
========== ==========
Noncash Investing and Financing Activities:
Assets acquired by the assumption of liabilities $ 153,430 $ 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.
Basis of Presentation
Our consolidated financial statements include our accounts and those of our
majority-owned and controlled subsidiaries and our operating partnerships. All
significant intercompany items have been eliminated in consolidation. Certain
amounts from prior periods have been reclassified to conform to the current
presentation.
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.
2. Acquisitions and Joint Ventures
During the first nine 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 of time
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.
6
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. IMT is 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 equipment 31,781
Deferred charges and other assets 139
Minority interest 1,948
-------
$40,468
=======
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 $832.6 million, including the assumption of approximately $103.8
million of liabilities. Tejas Gas, LLC consists primarily 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 final purchase price adjustments. It
was based on an independent appraisal of fair market values as follows (in
thousands):
Purchase price:
Cash paid, including transaction costs $ 728,768
Liabilities assumed 103,787
---------
Total purchase price $ 832,555
=========
Allocation of purchase price:
Current assets $ 72,610
Property, plant and equipmemt,
incl. cushion gas 689,052
Goodwill 70,893
---------
$ 832,555
=========
The $70.9 million of goodwill was assigned to our Natural Gas Pipelines
business segment and the entire amount is expected to be deductible for tax
purposes.
7
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.
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.
Trailblazer Pipeline Company
On May 6, 2002, we acquired the remaining 33 1/3% ownership interest in
Trailblazer Pipeline Company from Enron Trailblazer Pipeline Company for $68
million in cash. 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 transaction costs $80,125
-------
Total purchase price $80,125
=======
Allocation of purchase price:
Property, plant and equipmemt $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.
Owensboro Gateway Terminal
Effective September 1, 2002, we acquired the Lanham River Terminal near
Owensboro, Kentucky and related equipment for $7.7 million. As of September 30,
2002, we have paid approximately $7.2 million and established a $0.5 million
liability for final purchase price settlements. The facility is one of the
nation's largest storage and handling points for bulk aluminum. The terminal
also handles a variety of other bulk products, including petroleum coke, lime
and de-icing salt. The terminal is situated on a 92-acre site along the Ohio
River, and the purchase expands our presence along the river, complementing our
existing facilities located near Cincinnati, Ohio and Moundsville, West
Virginia. The acquired terminal will be referred to as the Owensboro Gateway
Terminal and is 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 $7,140
Purchase price reserve 500
Liabilities assumed 11
------
Total purchase price $7,651
======
Allocation of purchase price:
Current assets $ 42
Property, plant and equipment 4,265
Intangibles-agreements 54
Goodwill 3,290
------
$7,651
======
The $3.3 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 nine months ended September 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
Nine Months Ended
September 30,
2002 2001
---- ----
(Unaudited)
Revenues $3,257,969 $4,743,371
Operating Income 532,872 472,546
Net Income 452,641 389,660
Basic and diluted Limited Partners' Net Income
per unit $ 1.45 $ 1.05
Subsequent Event
On October 10, 2002, we announced that we had completed the acquisition of
the former ICOM marine terminal in St. Gabriel, Louisiana from the Canadian
National Railroad for approximately $17.6 million. The acquisition was made
effective September 1, 2002. The facility features 400,000 barrels of liquids
storage capacity and a related pipeline network that serves one of the fastest
growing petrochemical production areas in the country. The acquisition further
expands our terminal businesses along the Mississippi River. The acquired
terminal will be referred to as the Kinder Morgan St. Gabriel terminal and will
be included in our Terminals business segment.
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 CALNEV pipeline and related terminals acquired
from GATX Corporation. Tariffs charged by SFPP are subject to certain
proceedings at the Federal Energy Regulatory Commission 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. Generally, the interstate rates on our Pacific
operations' pipeline systems are "grandfathered" under the Energy Policy Act
of 1992 unless "substantially changed circumstances" are found to exist. To
the extent "substantially changed circumstances" are found to exist, our Pacific
operations may be subject to substantial exposure under these FERC complaints.
We currently believe that these FERC complaints seek approximately $197 million
in tariff reparations and prospective annual tariff reductions, the aggregate
average annual impact of which would be approximately $45 million. However,
even if "substantially changed circumstances" are found to exist, we believe
that the resolution of these FERC complaints will be for amounts substantially
less than the amount sought.
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;
9
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.;
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
10
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.
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.
11
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 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.
12
On November 7, 2001, the FERC issued an order ruling on the petitions for
rehearing of Opinion No. 435-B. The FERC 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 FERC 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 FERC'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 November 20, 2001, SFPP submitted its compliance filing and tariffs
implementing Opinion No. 435-B and the FERC's November 7, 2001 order. 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 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.
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.
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.
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 FERC 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 FERC to stay
that requirement pending judicial review.
On April 8, 2002, SFPP filed a petition for review of the FERC'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 FERC'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
13
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.
On September 26, 2002, the FERC issued an order ruling on the protests
against SFPP's November 20, 2001 and December 14, 2001 compliance filings
implementing Opinion No. 435-B and the November 7, 2001 Order. The FERC held
that:
o SFPP must measure supplemental costs against the total amount of
reparations for the entire reparations period (as opposed to
year-by-year);
o SFPP will not be permitted to include in its supplemental costs (a)
litigation expenses incurred during 1999 and 2000 or (b) payments made
to Navajo and RHC to settle certain FERC litigation;
o the tariff surcharge collected by SFPP for all shipments between
August 1, 2000 and December 1, 2001 is subject to refund; and
o in calculating its tax allowance, SFPP must exclude the ownership
interest attributable to an entity that the FERC found to be a mutual
fund.
The FERC rejected the requests by Navajo, ARCO (now BP West Coast Products)
and Mobil (now ExxonMobil) to extend the period for which they are entitled to
reparations beyond the periods specified in prior orders.
The September 26, 2002 Order also ruled on SFPP's request for clarification
of the February 15, 2002 Order as to whether it was required to make a
retroactive tariff filing or rather a compliance filing calculating the effects
of Opinion No. 435-B beginning August 1, 2000. The FERC held that SFPP was
required to file a tariff retroactive to August 1, 2000. The FERC did not rule
on SFPP's alternative request for a stay. The FERC also ruled on Chevron's
request for rehearing of the November 7, 2001 Order, clarifying that Chevron was
eligible for reparations for shipments on the East Line for the two years prior
to the filing of its complaint.
On October 22, 2002, ExxonMobil filed a Request for Clarification or, in
the Alternative, Rehearing of the September 26, 2002 Order. ExxonMobil requested
that the FERC clarify that ExxonMobil was eligible for reparations for East Line
rates.
On October 28, 2002, SFPP submitted its compliance and tariff filing
implementing the September 26, 2002 Order.
Following the September 26, 2002 Order, several parties filed motions to
govern future proceedings with the U.S. Court of Appeals for the District of
Columbia Circuit. BP West Coast Products LLC and ExxonMobil (the "Indicated
Parties") and Valero Energy Corporation, Ultramar Inc. and Tosco Corporation
(the "Joint Parties") requested that the court return the petitions for review
to its active docket but sever the docket involving compliance filing issues.
The FERC filed a motion that did not take a definitive position on whether the
petitions for review should continue to be held in abeyance, but noted that
compliance filing issues were still pending before the FERC. SFPP, Chevron,
Navajo and RHC filed responses to the motions to govern future proceedings.
On October 18, 2002, Chevron filed a petition for review of Opinion Nos.
435, 435-A and 435-B in the U.S. Court of Appeals for the District of Columbia
Circuit. Petitions for review of the September 26, 2002 Order have been filed in
the U.S. Court of Appeals for the District of Columbia Circuit by Navajo, on
October 24, 2002, and by SFPP, on November 8, 2002.
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 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 FERC
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.
14
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. proceedings. 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 fourth quarter 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.
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.
15
OR02-4 proceedings. On February 11, 2002, Chevron, an intervenor in the
OR96-2 proceeding, filed a complaint against SFPP in Docket No. OR02-4 along
with a motion to consolidate the complaint with the OR96-2 proceeding. On May
21, 2002, the FERC dismissed Chevron's complaint and motion to consolidate.
Chevron filed a request for rehearing and on September 25, 2002, the FERC
dismissed Chevron's rehearing request. Chevron continues to participate in the
OR96-2 proceeding as an intervenor.
We are not able to predict with certainty the final outcome of the pending
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.
In April 2002, Chevron filed a complaint against CALNEV's interstate rates,
making allegations of unjust and unreasonable rates. CALNEV answered Chevron's
complaint on May 16, 2002, and Chevron moved for leave to respond to CALNEV's
answer on June 17, 2002.
In September of 2002, CALNEV and Chevron were able to reach a mutually
agreeable resolution of the disputed claims, and a settlement 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 Utilities Commission except as permitted under four specific
exceptions and that Chevron would not file complaints against CALNEV's rates,
provided it complies with such exceptions. On October 10, 2002, the FERC granted
the parties' joint motion to dismiss the complaint with prejudice.
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.
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.
The CPUC has recently issued a resolution approving a 2001 request by SFPP
to raise its California rates to reflect increased power costs. The resolution
approving the requested rate increase also requires SFPP to submit cost data for
2001, 2002, and 2003 to assist the CPUC in determining whether SFPP's overall
rates for California intrastate transportation
16
services are reasonable. The resolution reserves the right to require refunds,
from the date of issuance of the resolution, to the extent the CPUC's analysis
of cost data to be submitted by SFPP demonstrates that SFPP's California
jurisdictional rates are unreasonable in any fashion.
There is no way to quantify the potential extent to which the CPUC could
determine that SFPP's existing California rates are unreasonable or estimate the
amount of dollars potentially subject to refund if the draft order is adopted by
the CPUC. SFPP believes that if it is required by the CPUC to submit cost data
in justification of its rates that representative data will indicate that SFPP's
existing rates for California intrastate services remain reasonable and that no
refunds are justified.
We believe that the resolution of such matters will not have a material
adverse effect on our business, financial position or results of operations.
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 FERC. 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. 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 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 FERC'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 FERC's decision to allow forward-hauls and
backhauls to the same point. Finally, the D.C. Circuit held that several aspects
of the FERC'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
17
30, 2002.
On October 31, 2002, the FERC issued an order in response to the D.C.
Circuit's remand of certain Order 637 issues. The order:
o eliminated the requirement of a 5-year cap on bid terms that an
existing shipper would have to match in the right of first refusal
process, and found that no term matching cap at all is necessary given
existing regulatory controls;
o affirmed FERC's policy that a segmented transaction consisting of both
a forwardhaul up to contract demand and a backhaul up to contract
demand to the same point is permissible; and
o accordingly required, under Section 5 of the NGA, pipelines that the
FERC had previously found must permit segmentation on their systems to
file tariff revisions within 30 days to permit such segmented
forwardhaul and backhaul transactions to the same point.
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. 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 FERC'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
FERC 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.
The FERC also issued a Notice of Proposed Rulemaking in Docket No.
RM02-14-000 in which it proposed new regulations for cash management practices,
including establishing limits on the amount of funds that can be swept from a
regulated subsidiary to a non-regulated parent company. Kinder Morgan Interstate
Gas Transmission LLC filed comments on August 28, 2002. We believe that these
matters, as finally adopted, will not have a material adverse effect on our
business, financial position or results of operations.
In addition to the matters described above, we may face additional
challenges to our rates in the future. Shippers on our pipelines do have rights
to challenge the rates we charge under certain circumstances prescribed by
applicable regulations. There can be no assurance that we will not face
challenges to the rates we receive for services on our pipeline systems in the
future. In addition, since many of our assets are subject to regulation, we are
subject to potential future changes in applicable rules and regulations that may
have an 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. As of
mid-October 2002, the matter is currently in trial.
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
18
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).
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.
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 below, 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. The Court in Kansas has
issued a case management order addressing the initial phasing of the case. In
this initial phase, the court will rule on motions to dismiss (jurisdiction and
sufficiency of pleadings), and if the action is not dismissed, on class
certification. Merits discovery has been stayed. Recently, the defendants filed
a motion to dismiss on grounds other than personal jurisdiction, which was
denied by the Court in August, 2002. The Motion to Dismiss for lack of Personal
Jurisdiction of the nonresident defendants has been briefed and is awaiting
decision. 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.
United States of America, ex rel., Jack J. Grynberg v. K N Energy
Civil Action No. 97-D-1233, filed in the U.S. District Court, District of
Colorado. This action was filed on June 9, 1997 pursuant to the federal False
Claim Act and involves allegations of mismeasurement of natural gas produced
from federal and Indian lands. The Department of Justice has decided not to
intervene in support of the action. The complaint is part of a larger series of
similar complaints filed by Mr. Grynberg against 77 natural gas pipelines
(approximately 330 other defendants). Certain entities we acquired in the Kinder
Morgan Tejas acquisition are also defendants in this matter. An earlier single
action making substantially similar allegations against the pipeline industry
was dismissed by Judge Hogan of the U.S. District Court for the District of
Columbia on grounds of improper joinder and lack of jurisdiction. As a result,
Mr. Grynberg filed individual complaints in various courts throughout the
country. In 1999, these cases were consolidated by the Judicial Panel for
Multidistrict Litigation, and transferred to the District of Wyoming. The MDL
case is called In Re Natural Gas Royalties Qui Tam Litigation, Docket No. 1293.
Motions to Dismiss were filed and an oral argument on the Motion to Dismiss
occurred on March 17, 2000. On July 20, 2000 the United States of America filed
a motion to dismiss those claims by Grynberg that deal with the manner in which
defendants valued gas produced from federal leases. Judge Downes denied the
defendant's motion to dismiss on May 18, 2001. Pretrial proceedings are
underway.
Sweatman and Paz Gas Corporation v. Gulf Energy Marketing, 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. We have filed a motion to remove
the case from venue in Dewitt County, Texas to Harris County, Texas, and a
hearing has been set for November 2002 to argue this motion. Based on the
19
information available to date and our preliminary investigation, we believe this
suit is without merit and we intend to defend it vigorously.
Maher et ux. v. Centerpoint Energy, Inc. d/b/a Reliant Energy,
Incorporated, Reliant Energy Resources Corp., Entex Gas Marketing Company,
Kinder Morgan Texas Pipeline, L.P., Kinder Morgan Energy Partners, L.P., Houston
Pipeline Company, L.P. and AEP Gas Marketing, L.L.C., No. 30875 (District Court,
Wharton County Texas).
On October 21, 2002, Kinder Morgan Texas Pipeline, L.P. and Kinder Morgan
Energy Partners, L.P. were served with the above-entitled Complaint. A First
Amended Complaint was served on October 23, 2002, adding additional defendants
Kinder Morgan G.P., Inc., Kinder Morgan Tejas Pipeline GP, Inc., Kinder Morgan
Texas Pipeline GP, Inc., Tejas Gas, LLC and HPL GP, LLC. The First Amended
Complaint purports to bring a class action on behalf of those Texas residents
who purchased natural gas for residential purposes from the so-called "Reliant
Defendants" in Texas at any time during the period encompassing "at least the
last ten years."
The Complaint alleges that Reliant Energy Resources Corp., by and through
its affiliates, has artificially inflated the price charged to residential
consumers for natural gas that it allegedly purchased from the non-Reliant
defendants, including the above-listed Kinder Morgan entities. The Complaint
further alleges that in exchange for Reliant Energy Resources Corp.'s purchase
of natural gas at above market prices, the non-Reliant defendants, including the
above-listed Kinder Morgan entities, sell natural gas to Entex Gas Marketing
Company at prices substantially below market, which in turn sells such natural
gas to commercial and industrial consumers and gas marketers at market price.
The Complaint purports to assert claims for fraud, violations of the Texas
Deceptive Trade Practices Act, and violations of the Texas Utility Code against
some or all of the Defendants, and civil conspiracy against all of the
defendants, and seeks relief in the form of, inter alia, actual, exemplary and
statutory damages, civil penalties, interest, attorneys' fees and a constructive
trust ab initio on any and all sums which allegedly represent overcharges by
Reliant and Reliant Energy Resources Corp.
The Kinder Morgan defendants' answers to this Complaint have not yet become
due. Based on the information available to date and our preliminary
investigation, the Kinder Morgan defendants believe that the claims against them
are without merit and intend to defend against them vigorously.
Marie Snyder, et al v. City of Fallon, United States Department of the
Navy, Exxon Mobil Corporation, Kinder Morgan Energy Partners, L.P., Speedway Gas
Station and John Does I-X, No. cv-N-02-0251-ECR-RAM (United States District
Court, District of Nevada).
On July 9, 2002, we were served with a purported Complaint for Class Action
in which the plaintiffs, on behalf of themselves and others similarly situated,
assert that a leukemia cluster has developed in the City of Fallon, Nevada. The
Complaint alleges that the plaintiffs have been exposed to unspecified
"environmental carcinogens" at unspecified times in an unspecified manner and
are therefore "suffering a significantly increased fear of serious disease." The
plaintiffs seek a certification of a class of all persons in Nevada who have
lived for at least three months of their first ten years of life in the City of
Fallon between the years 1992 and the present who have not been diagnosed with
leukemia.
The Complaint purports to assert causes of action for nuisance and "knowing
concealment, suppression, or omission of material facts" against all defendants,
and seeks relief in the form of "a court-supervised trust fund, paid for by
defendants, jointly and severally, to finance a medical monitoring program to
deliver services [to members of the purported class] that include, but are not
limited to, testing, preventative screening and surveillance for conditions
resulting from, or which can potentially result from exposure to environmental
carcinogens," incidental damages, and attorneys' fees and costs.
We responded to the Complaint with a Motion to Dismiss on the grounds that
it fails to state a claim against us upon which relief can be granted. This
motion is currently pending before the court. Based on the information available
to date and our preliminary investigation, we believe that the claims against us
are without merit and intend to defend against them vigorously.
Although no assurances can be given, we believe that we have meritorious
defenses to all of these actions, that, to the extent an assessment of the
matter is possible, 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.
20
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 there under, 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 and have
established a reserve to address the costs associated with the cleanup:
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.
Furthermore, our review of assets related to Kinder Morgan Interstate Gas
Transmission LLC indicates possible environmental impacts from petroleum and
used oil releases into the soil and groundwater at nine sites. Additionally, our
review of assets related to Kinder Morgan Texas Pipeline indicates possible
environmental impacts from petroleum releases into the soil and groundwater at
six sites. Further delineation and remediation of any environmental impacts from
these matters 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 six to eight 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 remediation effort is
taking place between Chevron, Plantation and Alabama Department of Environmental
Management.
In addition to the Chandler case, in 1999, other individuals living in
close proximity to the Chandlers filed eight lawsuits against Plantation,
Chevron and an environmental consulting firm, CH2MHill. These individuals live
in a community called Greenridge, which is outside of Moundville, Alabama. The
eight lawsuits were filed in and are currently pending in the circuit court of
Hale County, Alabama. The Greenridge plaintiffs allege property damage from
groundwater contaminated by petroleum hydrocarbons. The Greenridge plaintiffs
also allege personal injuries from exposure to fumes from contaminated
groundwater that discharges to the swamp near their houses. The eight lawsuits
were consolidated into one trial that was scheduled for December 2002 but has
been continued. A new trial date has not been set but is anticipated during
2003. Plantation believes that the ultimate resolution of the Greenridge cases
will not have a material adverse effect on its business, financial position or
results of operations.
21
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 $59.7
million at September 30, 2002. As of September 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 August 14, 2002, we paid a cash distribution for the quarterly period
ended June 30, 2002, of $0.61 per unit to our common unitholders and to our
class B unitholders. Kinder Morgan Management, LLC, our sole i-unitholder,
received 619,585 additional i-units based on the $0.61 cash distribution per
common unit. The distributions were declared on July 17, 2002, payable to
unitholders of record as of July 31, 2002.
On October 16, 2002, we declared a cash distribution for the quarterly
period ended September 30, 2002, of $0.61 per unit. The distribution will be
paid on or before November 14, 2002, to unitholders of record as of October 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 937,658. 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 October 15-28, 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. 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 decreased below its
carrying value. We completed this initial transition impairment test in June
2002 and determined that our goodwill was not impaired as of January 1, 2002.
22
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):
Sept. 30, Dec. 31,
2002 2001
--------- ---------
Goodwill $ 662,636 $ 566,633
Accumulated amortization (19,899) (19,899)
--------- ---------
Goodwill, net 642,737 546,734
--------- ---------
Lease value 6,124 6,124
Contracts and other 10,767 10,739
Accumulated amortization (335) (200)
--------- ---------
Other intangibles, net 16,556 16,663
--------- ---------
Total intangibles, net $ 659,293 $ 563,397
========= =========
Changes in the carrying amount of goodwill for the nine months ended
September 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
========= ========= ========= ========= =========
Goodwill acquired -- 3,432 -- 3,572 7,004
Goodwill dispositions, -- -- -- -- --
net
Impairment losses -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at Sept. 30, 2002
$ 263,182 $ 174,146 $ 46,101 $ 159,308 $ 642,737
========= ========= ========= ========= =========
Amortization expense on intangibles, including amortization of excess
intangible costs of equity investments, consists of the following (in
thousands):
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Goodwill $ -- $ 3,646 $ -- $ 9,613
Lease value 35 1,161 105 3,954
Contracts and
other 10 10 30 30
-------- -------- -------- --------
$ 45 $ 4,817 $ 135 $ 13,597
======== ======== ======== ========
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
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):
23
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported limited partners'
interest in net income $ 87,800 $ 60,968 $ 246,722 $ 174,633
Add: limited partners' interest
in goodwill amortization -- 3,609 -- 9,516
-------- -------- --------- ---------
Adjusted limited partners'
interest in net income $ 87,800 $ 64,577 $ 246,722 $ 184,149
======== ======== ========= =========
Basic limited partners' net
income per unit:
Reported net income $ 0.50 $ 0.37 $ 1.46 $ 1.16
Goodwill amortization -- 0.02 -- 0.06
------ ------ ------ ------
Adjusted net income $ 0.50 $ 0.39 $ 1.46 $ 1.22
Diluted limited partners' net
income per unit:
Reported net income $ 0.50 $ 0.37 $ 1.46 $ 1.16
Goodwill amortization -- 0.02 -- 0.06
------ ------ ------ ------
Adjusted net income $ 0.50 $ 0.39 $ 1.46 $ 1.22
====== ====== ====== ======
7. Debt
Our debt and credit facilities as of September 30, 2002, consisted
primarily of:
o a $750 million unsecured 364-day credit facility due October 23, 2002
(subsequently replaced October 16, 2002 by a $494 million unsecured
364-day credit facility due October 14, 2003);
o a $300 million unsecured five-year credit facility due September 29,
2004 (subsequently replaced October 16, 2002 by a $411.7 million
unsecured three-year credit facility due October 15, 2005);
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 $250 million of 5.35% Senior Notes due August 15, 2007; o $30 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;
o $500 million of 7.30% Senior Notes due August 15, 2033; and
o a $1.05 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. However, the margin that we pay
with respect to LIBOR based borrowings under our credit facilities is tied to
our credit ratings.
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 and underwriting
expenses, we received net proceeds of approximately $331.2 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.
24
Our outstanding short-term debt at September 30, 2002, consisted of:
o $132.1 million of commercial paper borrowings;
o $42.5 million under the SFPP, L.P. 10.7% First Mortgage Notes; and
o $5.0 million under the Central Florida Pipeline LLC Notes.
We intend and have the ability to refinance our $179.6 million of short-
term debt on a long-term basis under our unsecured long-term credit facility.
Accordingly, such amounts have been classified as long-term debt in our
accompanying consolidated balance sheet. We do not anticipate any liquidity
problems. Our average interest rate for outstanding borrowings during the third
quarter of 2002 was approximately 5.00% per annum.
For additional information regarding our debt facilities, see Note 9 to our
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2001.
Credit Facilities
On June 30, 2002, we had three existing bank credit facilities:
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;
and
o a $300 million unsecured five-year credit facility due September
29, 2004.
No borrowings were outstanding under our three credit facilities at June
30, 2002. In August 2002, upon the completion of our i-unit equity sale, we
terminated, under the terms of the agreement, our $200 million unsecured 364-day
credit facility that was due February 20, 2003. At September 30, 2002, no
borrowings were outstanding under our remaining two credit facilities.
On October 16, 2002, we announced that we had successfully renegotiated our
bank credit facilities by replacing our $750 million unsecured 364-day credit
facility due October 23, 2002 and our $300 million unsecured five-year credit
facility due September 29, 2004 with two new credit facilities. The new
facilities include:
o a $494.0 million unsecured 364-day credit facility due October 14, 2003;
and
o a $411.7 million unsecured three-year credit facility due October 15,
2005.
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 by our outstanding commercial paper borrowings.
Furthermore, in addition to the borrowing capacity of this $905.7 million, we
may close on additional commitments during the fourth quarter of 2002.
Our new credit facilities are with a syndicate of financial institutions.
Wachovia Bank, National Association is the administrative agent under both
credit facilities. The terms of our two new credit facilities are substantially
similar to the terms of our previous credit facilities. However, our prior
credit facilities limited debt as a multiple of EBITDA (earnings before
interest, taxes and depreciation expenses) for the prior four quarters to an
amount not greater than 4.0. Our new facilities have increased the limit of that
multiple to an amount not greater than 5.0. Interest on the two credit
facilities accrues at our option at a floating rate equal to either:
o the 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 new three-year credit facility also permits us to obtain bids for fixed
rate loans from members of the lending syndicate.
Senior Notes
Under an indenture dated August 19, 2002, and a First Supplemental
Indenture dated August 23, 2002, we completed a private placement of $750
million in debt securities to qualified institutional buyers in reliance on Rule
144A under the Securities Act of 1933. The indenture is a contract between us
and Wachovia Bank, National Association, which acts as trustee. The notes
represent additional unsecured obligations of ours and rank equally with all of
our unsecured and unsubordinated debt. The notes consist of $500 million in
principal amount of 7.30%
25
Senior Notes due August 15, 2033 and $250 million in principal amount of 5.35%
Senior Notes due August 15, 2007, unless sooner redeemed. The notes are not
entitled to the benefits of a sinking fund.
Although only $500 million aggregate principal amount of the 7.30% notes
and $250 million aggregate principal amount of the 5.35% notes were originally
issued, so long as no Event of Default under the indenture has occurred and is
continuing, we may issue and sell additional notes of either or both series and
with the same terms, without the consent of holders of either series of the
notes. Any additional notes of a series, together with the previously issued
notes of that series, will constitute a single series of notes under the
indenture.
Interest on each series of notes is payable semi-annually in arrears on
February 15 and August 15 of each year. The notes are redeemable, at our option,
at any time at a price equal to 1