UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Dallas, Suite 1000, Houston, Texas 77002
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 713-369-9000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------ -----------------------------------------
Common Units New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X]
No [ ]
Aggregate market value of the Common Units held by non-affiliates of the
registrant, based on closing prices in the daily composite list for transactions
on the New York Stock Exchange on June 28, 2002 was approximately
$3,243,518,408. This figure assumes that only the general partner of the
registrant, Kinder Morgan, Inc., Kinder Morgan Management, LLC, their
subsidiaries and their officers and directors were affiliates. As of January 31,
2003, the registrant had 129,971,518 Common Units outstanding.
1
KINDER MORGAN ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
Page
Number
PART I
Items 1. Business and Properties............................ 3
and 2. General............................................ 3
Business Strategy.................................. 4
Recent Developments................................ 6
Products Pipelines................................. 8
Natural Gas Pipelines.............................. 19
CO2 Pipelines...................................... 24
Terminals.......................................... 26
Major Customers.................................... 30
Employees.......................................... 30
Regulation......................................... 30
Environmental Matters.............................. 34
Risk Factors....................................... 36
Item 3. Legal Proceedings.................................. 40
Item 4. Submission of Matters to a Vote of Security Holders 40
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 41
Item 6. Selected Financial Data............................ 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 44
Critical Accounting Policies and Estimates......... 44
Results of Operations.............................. 45
Outlook............................................ 52
Liquidity and Capital Resources.................... 54
New Accounting Pronouncements...................... 68
Information Regarding Forward-Looking Statements... 69
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................ 71
Energy Financial Instruments....................... 71
Interest Rate Risk................................. 72
Item 8. Financial Statements and Supplementary Data........ 73
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 73
PART III
Item 10. Directors and Executive Officers of the Registrant. 74
Directors and Executive Officers of our General
Partner and the Delegate........................... 74
Section 16(a) Beneficial Ownership Reporting
Compliance......................................... 76
Item 11. Executive Compensation............................. 76
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters..... 82
Item 13. Certain Relationships and Related Transactions..... 84
Item 14. Controls and Procedures............................ 85
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................ 86
Index to Financial Statements...................... 89
Signatures..................................................... 160
Certifications................................................. 161
2
PART I
Items 1. and 2. Business and Properties.
General
Kinder Morgan Energy Partners, L.P., a Delaware limited partnership, is a
publicly traded limited partnership that was formed in August 1992. We are the
largest publicly-traded pipeline limited partnership in the United States in
terms of market capitalization and we own the largest independent refined
petroleum products pipeline system in the United States in terms of volumes
delivered. Unless the context requires otherwise, references to "we", "us",
"our", "KMP" or the "Partnership" are intended to mean Kinder Morgan Energy
Partners, L.P., our operating limited partnerships and their subsidiaries.
We make available free of charge on or through our Internet website, at
http://www.kindermorgan.com, our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. In addition, you should
read the following discussion and analysis in conjunction with our Consolidated
Financial Statements included elsewhere in this report.
The address of our principal executive offices is 500 Dallas, Suite 1000,
Houston, Texas 77002, and our telephone number at this address is (713)
369-9000. Our common units trade on the New York Stock Exchange under the symbol
"KMP".
We provide services to our customers and create value for our unitholders
primarily through the following activities:
o transporting, storing and processing refined petroleum products;
o transporting, storing and selling natural gas;
o producing, transporting and selling carbon dioxide for use in, and
selling crude oil produced from, enhanced oil recovery operations; and
o transloading, storing and delivering a wide variety of bulk, petroleum and
petrochemical products at terminal facilities located across the United
States.
We focus on providing fee-based services to customers, avoiding commodity
price risks and taking advantage of the tax benefits of a limited partnership
structure. The assets we own or operate are grouped into the following business
segments:
o Products Pipelines: Delivers gasoline, diesel fuel, jet fuel and natural
gas liquids to various markets on over 10,000 miles of products pipelines
and 32 associated terminals serving customers across the United States;
o Natural Gas Pipelines: Transports, stores and sells natural gas and has
over approximately 15,000 miles of natural gas transmission pipelines, plus
natural gas gathering and storage facilities;
o CO2 Pipelines: Produces, transports through pipelines and markets carbon
dioxide, commonly called CO2, to oil fields that use CO2 to increase
production of oil, and owns interests in and/or operates five oil fields in
West Texas; and
o Terminals: Composed of approximately 50 owned or operated liquid and bulk
terminal facilities and more than 60 rail transloading facilities located
throughout the United States. Our terminals segment can handle over 60
million tons of coal, petroleum coke and other dry-bulk materials annually
and has a liquids storage capacity of approximately 35 million barrels for
refined petroleum products, chemicals and other liquid products.
3
Since February 1997, our operations have experienced significant growth,
and our net income has increased from $17.7 million, for the year ended December
31, 1997, to $608.4 million, for the year ended December 31, 2002. In February
1997, Kinder Morgan (Delaware), Inc., a Delaware corporation, acquired all of
the issued and outstanding stock of our general partner, changed the name of our
general partner to Kinder Morgan, G.P., Inc., and changed our name to Kinder
Morgan Energy Partners, L.P.
In October 1999, K N Energy, Inc., a Kansas corporation that provided
integrated energy services, acquired Kinder Morgan (Delaware), Inc. At the time
of the closing of this transaction, K N Energy, Inc. changed its name to Kinder
Morgan, Inc., referred to herein as KMI. In connection with the acquisition,
Richard D. Kinder, Chairman and Chief Executive Officer of our general partner
and its delegate (see below), became the Chairman and Chief Executive Officer of
KMI. KMI trades on the New York Stock Exchange under the symbol "KMI" and is one
of the largest energy transportation and storage companies in the United States,
operating, either for itself or on our behalf, more than 30,000 miles of natural
gas and products pipelines. KMI also has significant retail distribution assets
and interests in electric generation assets. At December 31, 2002, KMI and its
consolidated subsidiaries owned, through its general and limited partner
interests, an approximate 19.2% interest in us.
In addition to the distributions it receives from its limited and general
partner interests, KMI also indirectly receives an incentive distribution from
us as a result of its ownership of our general partner. This incentive
distribution is calculated in increments based on the amount by which quarterly
distributions to unitholders exceed specified target levels as set forth in our
partnership agreement, reaching a maximum of 50% of distributions allocated to
the general partner for distributions above $0.23375 per limited partner unit
per quarter. Including both its general and limited partner interests in us, at
the 2002 distribution level, KMI received approximately 51% of all quarterly
distributions from us, of which approximately 40% is attributable to its general
partner interest and 11% is attributable to its limited partner interest. The
actual level of distributions KMI will receive in the future will vary with the
level of distributions to the limited partners determined in accordance with our
partnership agreement.
In February 2001, Kinder Morgan Management, LLC, a Delaware limited liability
company referred to herein as KMR, was formed. Our general partner owns all of
KMR's voting securities and, pursuant to a delegation of control agreement, our
general partner delegated to KMR, to the fullest extent permitted under Delaware
law and our partnership agreement, all of its power and authority to manage and
control our business and affairs, except that KMR cannot take certain specified
actions without the approval of our general partner. Under the delegation of
control agreement, KMR, as the delegate of our general partner, manages and
controls our business and affairs and the business and affairs of our operating
limited partnerships and their subsidiaries. Furthermore, in accordance with its
limited liability company agreement, KMR's activities are limited to being a
limited partner in, and managing and controlling the business and affairs of us,
our operating limited partnerships and their subsidiaries.
In May 2001, KMR issued 2,975,000 of its shares representing limited liability
company interests to KMI and 26,775,000 of its shares to the public in an
initial public offering. The shares trade on the New York Stock Exchange under
the symbol "KMR". KMR became a limited partner in us by using substantially all
of the net proceeds from that offering to purchase i-units from us. The i-units
are a separate class of limited partner interests in us and are issued only to
KMR. Under the terms of our partnership agreement, the i-units are entitled to
vote on all matters on which the common units are entitled to vote. In general,
the i-units, common units and Class B units (the Class B units are similar to
our common units except that they are not eligible for trading on the New York
Stock Exchange), will vote together as a single class, with each i-unit, common
unit, and Class B unit having one vote. We pay our quarterly distributions from
operations and from interim capital transactions to KMR in additional i-units
rather than in cash. At December 31, 2002, KMR, through its ownership of our
i-units, owned approximately 25.2% of all of our outstanding limited partner
units. KMR shares and all classes of our limited partner units were split
two-for-one on August 31, 2001, and all dollar and numerical references to such
shares and units in this paragraph and in this report have been adjusted to
reflect the effect of the split.
Business Strategy
Our business strategy is substantially the same today as it was when our
current management began managing our business in early 1997. The objective of
our business strategy is to grow our portfolio of businesses by:
o providing, for a fee, transportation, storage and handling services which
are core to the energy infrastructure of
4
growing markets;
o increasing utilization of our assets while controlling costs by:
o operating classic fixed-cost businesses with little variable costs;
and
o improving productivity to drop all top-line growth to the bottom
line;
o leveraging economies of scale from incremental acquisitions and
expansions principally by:
o reducing needless overhead; and
o eliminating duplicate costs in core operations; and
o maximizing the benefits of our financial structure, which allows us to:
o minimize the taxation of net income, thereby increasing
distributions from our high cash flow businesses; and
o maintain a strong balance sheet, thereby allowing flexibility when
raising capital for acquisitions and/or expansions.
We primarily transport and/or handle products for a fee and generally are not
engaged in the unmatched purchase and resale of commodity products. As a result,
we do not face significant risks relating directly to movements in commodity
prices.
Generally, as utilization of our pipelines and terminals increases, our
fee-based revenues increase. Increases in utilization are principally driven by
increases in demand for gasoline, jet fuel, natural gas and other energy
products transported and/or handled by us. Increases in demand for these
products are generally driven by demographic growth in markets we serve,
including the rapidly growing western and southeastern United States.
We regularly consider and enter into discussions regarding potential
acquisitions, including those from KMI or its affiliates, and are currently
contemplating potential acquisitions. While there are currently no unannounced
purchase agreements for the acquisition of any material business or assets, such
transactions can be effected quickly, may occur at any time and may be
significant in size relative to our existing assets or operations.
Products Pipelines. We plan to continue to expand our presence in the growing
refined petroleum products markets in the western and southeastern United States
through incremental expansions of pipelines and through pipeline and terminal
acquisitions that we believe will increase distributable cash. Because our North
System serves a relatively mature market, we intend to focus on increasing
throughput within the system by remaining a reliable, cost-effective provider of
transportation services and by continuing to increase the range of products
transported and services offered.
Natural Gas Pipelines. We intend to grow our Texas intrastate natural gas
transportation and storage businesses by identifying and serving significant new
customers with demand for capacity on our pipeline systems and reducing
volatility through long-term agreements. Kinder Morgan Interstate Gas
Transmission serves a stable, mature market, and thus we are focused on reducing
costs and securing throughput for this pipeline. New measurement systems and
other improvements will aid in managing expenses. We will explore expansion and
storage opportunities to increase utilization levels throughout our natural gas
pipeline systems. Trailblazer has recently expanded its system and has supported
the expansion with long-term commitments secured in 2002. Red Cedar Gathering
Company, a partnership with the Southern Ute Indian Tribe, is pursuing
additional gathering and processing opportunities on tribal lands.
CO2 Pipelines. Our carbon dioxide business has two primary strategies: (a)
increase third party sales and transport of carbon dioxide, or service provider,
and (b) increase flooding for our own account, or production. As a service
provider, our strategy is to offer customers "one-stop shopping" for carbon
dioxide supply, transportation
5
and technical support service. In our production business, we plan to grow
production from our SACROC oil field by increasing our use of carbon dioxide in
enhanced oil recovery projects. Outside the Permian Basin, we intend to compete
aggressively for new supply and transportation projects, including the
acquisition of attractive carbon dioxide injection projects that would further
increase the demand for our carbon dioxide reserves and utilization of our
carbon dioxide pipeline assets. Our management believes these projects will
arise as other United States oil producing basins mature and make the transition
from primary production to enhanced recovery methods.
Terminals. We are dedicated to growing our terminals segment through a core
strategy which includes dedicating capital to expand existing facilities,
maintaining a strong commitment to operational safety and efficiency and growing
through strategic acquisitions. During 2002, we increased our ownership and
operation of liquids and bulk terminals by the announcement of four major
investment projects totaling approximately $172 million. The bulk terminals
industry in the United States is highly fragmented, leading to opportunities for
us to make selective, accretive acquisitions. In addition to efforts to expand
and improve our existing terminals, we plan to design, construct and operate new
facilities for current and prospective customers. Our management believes we can
use newly acquired or developed facilities to leverage our operational expertise
and customer relationships. In addition, we believe the combination of our
liquids and bulk terminals businesses into one segment gives us a competitive
advantage in pursuing acquisitions of terminals that handle both bulk and liquid
materials.
Recent Developments
During 2002, our assets increased 24% and our net income increased 38% from
2001 levels. In addition, distributions per unit increased 14% from $0.55 for
the fourth quarter of 2001 to $0.625 for the fourth quarter of 2002.
The following is a brief listing of activity since December 31, 2001.
Additional information regarding these items is contained in the rest of this
report.
o In January 2002, we paid approximately $29 million to NOVA Chemicals
Corporation for an additional 10% ownership interest in the Cochin Pipeline
System. Including this acquisition, we now own approximately 44.8% of the
Cochin Pipeline System. The acquisition was effective as of December 31,
2001. We record our proportionate share of the operations of the Cochin
Pipeline System as part of our Products Pipelines business segment;
o 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 $881.5 million, including the assumption of
approximately $154.4 million of liabilities. Tejas Gas, LLC owns a 3,400
mile intrastate natural gas pipeline system with 16 compressor stations,
two natural gas storage facilities with approximately 3.5 billion cubic
feet per day of working gas capacity and three natural gas processing
treating facilities. The acquired assets are referred to as Kinder Morgan
Tejas in this report, and together with our Kinder Morgan Texas Pipeline
system, form our Texas intrastate natural gas pipeline group, which is
included in our Natural Gas Pipelines business segment and referred to as
Kinder Morgan Texas in this report;
o On February 4, 2002, we announced two acquisitions and a major expansion
project, both within our Terminals business segment, totaling approximately
$43 million. The purchases included Pittsburgh, Pennsylvania-based Laser
Materials Services LLC, later renamed Kinder Morgan Materials Services LLC,
operator of more than 60 transload facilities in 20 states, and a 66 2/3%
ownership interest in International Marine Terminals Partnership, which
operates a bulk terminal site in Port Sulphur, Louisiana. The major
expansion project to our Carteret, New Jersey liquids terminal added
400,000 barrels of liquids storage capacity;
o On April 24, 2002, we announced a $160 million investment project to expand
our carbon dioxide business. The project includes the construction of a
new $40 million pipeline that will be commonly known as the Centerline
Pipeline. The pipeline will originate near Denver City, Texas and transport
carbon dioxide to the Snyder,Texas area. The pipeline will consist of 113
miles of 16-inch pipe and will primarily supply the SACROC Unit in the
Permian Basin of West Texas, but will also be available for existing and
prospective third-party carbon dioxide projects in the Horseshoe Atoll area
of the Permian Basin. Construction is expected to be completed in mid-2003.
The project also includes the spending of approximately $120 million to add
6
additional infrastructure, including wells, injection and compression
facilities, to support the expanding carbon dioxide flooding operations at
the SACROC Unit. Based on positive response, by the end of 2002, we
committed an additional $63 million to develop SACROC. These expenditures
are expected to quadruple carbon dioxide deliveries to the SACROC Unit and
triple oil production when compared to 2001 levels of 80 million cubic feet
per day of carbon dioxide and 9,000 barrels per day of crude oil;
o 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. KMI operates, on our behalf,
Trailblazer's 436-mile interstate natural gas pipeline that runs from
Rockport, Colorado to Beatrice, Nebraska;
o On May 7, 2002, we completed and placed into service our previously
announced $59 million expansion project on the Trailblazer pipeline. The
expansion project began in August 2001, as growth in Rocky Mountain natural
gas supplies created the need for additional pipeline transportation
infrastructure. The expansion project increased transportation capacity on
the pipeline by 60% to 846,000 dekatherms per day of natural gas, and the
increase has already been fully subscribed by customers. The project
included installing two new compressor stations and adding 10,000
additional horsepower at an existing compressor station;
o On May 23, 2002, we announced an approximately $50 million investment in
our Terminals business segment. The investment provides for storage
expansions and upgrade projects at our liquids terminals located in
Carteret, New Jersey, Pasadena, Texas and Dravosburg, Pennsylvania, as well
as the acquisition of a bulk terminal bagging operation located adjacent to
our existing Milwaukee, Wisconsin dry-bulk terminal. The bulk of this
expansion work will take place at our Carteret and Pasadena liquids
terminals, and will follow the expansions that we initiated in 2001. The
expansion project at our Carteret (New York Harbor area) facility will
supplement the expansion we announced in February 2002 and will add an
additional 400,000 barrels of petroleum storage capacity and will include
the construction of a new 16-inch pipeline that will connect our Carteret
facility to the Buckeye Pipeline system, a major refined petroleum products
pipeline serving the East Coast. The expansion work at our Carteret
terminal is expected to be completed in the third quarter of 2003. The
expansion project at our Pasadena (Houston, Texas ship channel) facility
will increase storage capacity by another 300,000 barrels of petroleum
products and is expected to be completed in the second quarter of 2003;
o On June 27, 2002, we announced a $30 million investment project that
involves the construction of pipeline, compression and storage facilities
to accommodate an additional 6 billion cubic feet of natural gas storage
capacity at Kinder Morgan Interstate Gas Transmission LLC's Cheyenne Market
Center. This additional capacity has been fully subscribed under 10-year
contracts. The Cheyenne Market Center offers firm natural gas storage
capabilities that will allow for the receipt, storage and subsequent
re-delivery of natural gas supplies at applicable points located in the
vicinity of the Cheyenne Hub in Weld County, Colorado and our Huntsman
storage facility in Cheyenne County, Nebraska. The Cheyenne Market Center
is expected to begin service during the summer of 2004;
o On July 15, 2002, we announced a $116 million project to expand the
capacity on a 190-mile segment of the Plantation Pipe Line system. The
project will entail replacing an existing eight-inch pipeline between
Bremen, Georgia and Knoxville, Tennessee with a new 20-inch pipeline. The
expansion will double capacity on this segment of the pipeline to
approximately 90,000 barrels per day of refined petroleum products.
Construction will be initiated only after additional commitments from
interested shippers are obtained;
o On August 6, 2002, KMR closed the public offering of 12,478,900 of its
shares (including over-allotment shares) at a price of $27.50 per share,
less commissions and underwriting expenses. The net proceeds from the
offering were used to buy additional i-units from us. We used the proceeds
of approximately $331.2 million from the i-unit issuance to reduce the debt
we incurred in our acquisition of Kinder Morgan Tejas. On August 23, 2002,
we also issued $500 million of 31-year debt with a coupon of 7.3% and $250
million of five-year debt with a coupon of 5.35%. The equity and debt
financing activities completed our long-term
7
financing for our Kinder Morgan Tejas gas system. We have no significant
senior note maturities due until 2005;
o On August 31, 2002, we completed construction of a $70 million, 86-mile,
30-inch natural gas pipeline in Texas. The new pipeline transports natural
gas from an interconnect with KMI's Natural Gas Pipeline Company of America
system in Lamar County, Texas to an existing 1,000-megawatt electric
generating facility in Lamar County, as well as a new 1,789-megawatt
electric generating facility currently being built in Kaufman County, Texas
by FPL Energy, LLC, a subsidiary of FPL Group, Inc. FPL Energy has entered
into a 30-year long-term, binding firm transportation contract with us for
the full 325,000 dekatherms per day of natural gas capacity.
o On September 1, 2002, we entered into long-term transportation storage and
sales contracts with BP Energy of North America. Through the agreements, BP
will have access to our Kinder Morgan Texas pipeline system with
transportation capacity of up to one billion cubic feet of natural gas per
day and storage capacity of up to 19 billion cubic feet of natural gas.
These long-term BP contracts reserve a large portion of the 5 billion cubic
feet per day of natural gas peak capacity on Kinder Morgan Texas and are
expected to add significantly to operating results once the full contract
quantities are transported in the spring of 2003;
o On October 10, 2002, we announced an approximately $36 million investment
in our Terminals business segment. The investment includes the acquisition
of two terminal facilities and a storage expansion project at our liquids
terminal located in Perth Amboy, New Jersey. Effective September 1, 2002,
we acquired a bulk terminal facility along the Ohio River near Owensboro,
Kentucky, and a liquids terminal facility along the Mississippi River near
St. Gabriel, Louisiana. The bulk terminal is one of the nation's largest
storage and handling points for bulk aluminum and the liquids terminal
features 400,000 barrels of storage capacity and a related pipeline network
that serves the southern Louisiana area. The expansion at our Perth Amboy
terminal includes the construction of an additional 300,000 barrels of
storage capacity and increases the petroleum capacity at the facility by
more than 20%. The expansion was undertaken as a result of a long-term
storage agreement that we entered into with a petroleum customer;
o On November 11, 2002, we began construction on the new $87 million,
95-mile, 30-inch Mier-Monterrey natural gas pipeline that stretches from
South Texas to Monterrey, Mexico, one of Mexico's fastest growing
industrial areas. The new pipeline will interconnect with the southern end
of our Kinder Morgan Texas pipeline system in Starr County, Texas, and is
designed to initially transport up to 375,000 dekatherms per day of natural
gas. We have entered into a 15-year contract with Pemex Gas Y Petroquimica
Basica, which has subscribed for all of the capacity on the pipeline. The
pipeline will connect to a 1,000-megawatt power plant complex and to the
Pemex natural gas transportation system. Construction of the pipeline is
expected to be completed during the second quarter of 2003; and
o On January 7, 2003, we announced a $43 million investment to enlarge and
improve our bulk terminals businesses. The investment included the
acquisition of long-term lease contracts to operate four bulk terminal
facilities at major ports along the East Coast and in the southeastern
United States, and certain assets that provide stevedoring services at
these locations. In addition, we purchased four floating cranes at our bulk
terminal facility in Port Sulphur, Louisiana. The loading equipment
previously had been leased from a third party under an operating lease.
Our operations are grouped into four reportable business segments. For more
information on our reportable business segments, see Note 15 to our Consolidated
Financial Statements. These segments and their major assets are as follows:
Products Pipelines
Our Products Pipelines segment consists of refined petroleum products and
natural gas liquids pipelines, related terminals and transmix processing
facilities, including:
o our Pacific operations, which include interstate common carrier pipelines
regulated by the Federal Energy Regulatory Commission, intrastate pipelines
in California regulated by the California Public Utilities
8
Commission and certain non rate-regulated operations and terminal
facilities. Specifically, our Pacific operations include:
o our SFPP, L.P. operations, comprised of approximately 3,300 miles of
pipelines that transport refined petroleum products to some of the
faster growing population centers in the United States, including Los
Angeles, San Diego, and Orange County, California; the San Francisco
Bay Area; Las Vegas, Nevada (through our CALNEV pipeline) and Phoenix
and Tucson, Arizona, and 13 truck-loading terminals with an aggregate
usable tankage capacity of approximately 8.2 million barrels;
o our CALNEV pipeline operations, comprised of a 550-mile pipeline that
transports refined petroleum products from Colton, California to the
growing Las Vegas, Nevada market, and two refined petroleum products
terminals located in Barstow, California and Las Vegas, Nevada; and
o our West Coast terminals operations, which are comprised of seven
terminal facilities on the West Coast that transload and store
refined petroleum products;
o our Central Florida Pipeline, a 195-mile pipeline that transports refined
petroleum products from Tampa to the Orlando, Florida market and two
refined petroleum products terminals at Tampa and Orlando, Florida;
o our North System, a 1,600-mile pipeline that transports natural gas liquids
and refined petroleum products between south central Kansas and the Chicago
area and various intermediate points, including eight terminals, and our
50% interest in the Heartland Pipeline Company, which ships refined
petroleum products in the Midwest;
o our 51% interest in Plantation Pipe Line Company, which owns and operates a
3,100-mile pipeline system that transports refined petroleum products
throughout the southeastern United States, serving major metropolitan areas
including Birmingham, Alabama; Atlanta, Georgia; Charlotte, North Carolina;
and the Washington, D.C. area;
o our 44.8% interest in the Cochin Pipeline System, a 1,900-mile pipeline
transporting natural gas liquids and traversing Canada and the United
States from Fort Saskatchewan, Alberta to Sarnia, Ontario, including four
terminals;
o our Cypress Pipeline, a 104-mile pipeline transporting natural gas liquids
from Mont Belvieu, Texas to a major petrochemical producer in Lake Charles,
Louisiana; and
o our transmix operations, which include the processing of petroleum pipeline
transmix through transmix processing plants in Colton, California;
Richmond, Virginia; Dorsey Junction, Maryland; Indianola, Pennsylvania; and
Wood River, Illinois.
Pacific Operations
Our Pacific operations' pipelines are split into a South Region and a North
Region. Combined, the two regions consist of seven pipeline segments that serve
six western states with approximately 3,900 miles of refined petroleum products
pipeline and related terminal facilities.
Refined petroleum products and related uses are:
Product Use
----------- ---------------------------
Gasoline Transportation
Diesel fuel Transportation (auto, rail, marine), farm,
industrial and commercial
Jet fuel Commercial and military air transportation
Our Pacific operations transport over 1.1 million barrels per day of refined
petroleum products, providing pipeline service to approximately 44
customer-owned terminals, four commercial airports and 13 military bases. For
2002, the three main product types transported were gasoline (63%), diesel fuel
(21%) and jet fuel (16%). Our
9
Pacific operations also include 15 truck-loading terminals (13 on SFPP,
L.P. and two on CALNEV).
Our Pacific operations provide refined petroleum products to some of the
fastest growing population centers in the United States, including southern
California; Las Vegas and Reno, Nevada; and the Phoenix, Arizona region.
Pipeline transportation of gasoline and jet fuel generally has a direct
correlation with demographic patterns. We believe that the population growth
associated with the markets served by our Pacific operations will continue in
the foreseeable future.
South Region. Our Pacific operations' South Region consists of four pipeline
segments:
o West Line;
o East Line;
o San Diego Line; and
o CALNEV Line.
The West Line consists of approximately 630 miles of primary pipeline and
currently transports products for 45 shippers from six refineries and three
pipeline terminals in the Los Angeles Basin to Phoenix and Tucson, Arizona and
various intermediate commercial and military delivery points. Product for the
West Line can also come from foreign sources through the Los Angeles and Long
Beach port complexes and the three pipeline terminals. A significant portion of
West Line volumes is transported to Colton, California for local distribution
and for delivery to our CALNEV Pipeline. The West Line serves our terminals
located in Colton and Imperial, California as well as in Phoenix and Tucson,
Arizona.
The East Line is comprised of two parallel 8-inch and 12-inch pipelines
originating in El Paso, Texas and continuing approximately 300 miles west to our
Tucson terminal and one line continuing northwest approximately 130 miles from
Tucson to Phoenix. All products received by the East Line at El Paso come from a
refinery in El Paso or are delivered through connections with non-affiliated
pipelines from refineries in Texas and New Mexico. The East Line serves our
terminals located in Phoenix and Tucson as well as various intermediate
commercial and military delivery points.
The San Diego Line is a 135-mile pipeline serving major population areas in
Orange County (immediately south of Los Angeles) and San Diego. The same
refineries and terminals that supply the West Line also supply the San Diego
Line. The San Diego Line serves our terminals at Orange and Mission Valley as
well as shipper terminals in San Diego and San Diego Airport through a
non-affiliated connecting pipeline.
The CALNEV Pipeline consists of two parallel 248-mile, 14-inch and 8-inch
pipelines from our facilities at Colton, California to Las Vegas, Nevada. It
also includes approximately 55 miles of pipeline serving Edwards Air Force Base.
This pipeline originates at Colton, California and serves two CALNEV terminals
at Barstow, California and Las Vegas, Nevada. The CALNEV Pipeline also serves
the military at Edwards Air Force Base and Nellis Air Force Base, as well as
certain smaller delivery points, including the Burlington Northern Santa Fe and
Union Pacific railroad yards.
North Region. Our Pacific operations' North Region consists of three pipeline
segments:
o the North Line;
o the Bakersfield Line; and
o the Oregon Line.
The North Line consists of approximately 1,075 miles of pipeline in five
segments originating in Richmond and Concord, California. This line serves our
terminals located in Brisbane, Sacramento, Chico, Fresno and San Jose,
California, and Reno, Nevada. The products delivered through the North Line come
from refineries in the San
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Francisco Bay Area. The North Line also receives product transported from
various pipeline and marine terminals that deliver products from foreign and
domestic ports.
The Bakersfield Line is a 100-mile, 8-inch pipeline serving Fresno,
California. A refinery located in Bakersfield, California supplies substantially
all of the products shipped through the Bakersfield Line.
The Oregon Line is a 114-mile pipeline serving 16 shippers. Our Oregon Line
receives products from marine terminals in Portland, Oregon and from Olympic
Pipeline. Olympic Pipeline is a non-affiliated pipeline that transports products
from the Puget Sound, Washington area to Portland. From its origination point in
Portland, the Oregon Line extends south and serves our terminal located in
Eugene, Oregon.
West Coast Terminals. These terminals are operated as part of our Pacific
operations.
The terminals include:
o the Carson Terminal;
o the Los Angeles Harbor Terminal;
o the Gaffey Street Terminal;
o the Richmond Terminal;
o the Linnton and Willbridge Terminals; and
o the Harbor Island Terminal.
The West Coast Terminals are fee-based terminals. They are located in several
strategic locations along the west coast of the United States and have a
combined total capacity of nearly eight million barrels of storage for both
petroleum products and chemicals.
The Carson Terminal and the connecting Los Angeles Harbor Terminal are
strategically located near the many refineries in the Los Angeles Basin. The
combined Carson/LA Harbor system is connected to numerous other pipelines and
facilities throughout the Los Angeles area, which gives the system significant
flexibility and allows customers to quickly respond to market conditions.
Storage at the Carson facility is primarily arranged via term contracts with
customers, ranging from one to five years. Term contracts represent 56% of total
revenues at the facility.
The Gaffey Street Terminal in San Pedro, California, is adjacent to the Port
of Los Angeles. This facility serves as a marine fuel storage and blending
facility for the marketing of local or imported bunker fuels for Los Angeles
ship traffic.
The Richmond Terminal is located in the San Francisco Bay Area. The facility
serves as a storage and distribution center for chemicals, lubricants and
paraffin waxes. It is also the principal location in northern California through
which tropical oils are imported for further processing, and from which United
States' produced vegetable oils are exported to consumers in the Far East.
The Linnton and Willbridge Terminals are located in Portland, Oregon. These
facilities handle petroleum products for distribution to both local and regional
markets. Refined products are received by pipeline, marine vessel, barge, and
rail car for distribution to local markets by truck; to southern Oregon via our
Oregon Line; to Portland International Airport via a non-affiliated pipeline;
and to eastern Washington and Oregon by barge.
The Harbor Island Terminal is located in Seattle, Washington. The facility is
supplied via pipeline and barge from northern Washington-state refineries,
allowing customers to distribute fuels economically to the greater Seattle-area
market by truck. The terminal also has the largest capacity of marine fuel oil
tanks in Puget Sound, along with a multi-component, in-line blending system for
providing customized bunker fuels to the marine
11
industry.
Truck-Loading Terminals. Our Pacific operations include 15 truck-loading
terminals (13 on SFPP, L.P. and two on CALNEV) with an aggregate usable tankage
capacity of approximately nine million barrels. The truck terminals are located
at destination points on each of our Pacific operations' pipelines as well as at
certain intermediate points along each pipeline. The simultaneous truck-loading
capacity of each terminal ranges from 2 to 12 trucks. We provide the following
services at these terminals:
o short-term product storage;
o truck-loading;
o vapor recovery;
o deposit control additive injection;
o dye injection;
o oxygenate blending; and
o quality control.
The capacity of terminaling facilities varies throughout our Pacific
operations, and we do not own terminaling facilities at all pipeline delivery
locations. We charge a separate fee (in addition to pipeline tariffs) for these
additional terminaling services. These fees are not regulated except for the
fees at the CALNEV terminals. At certain locations, we make product deliveries
to facilities owned by shippers or independent terminal operators.
Markets. Currently our Pacific operations' pipeline system serves
approximately 76 shippers in the refined products market, with the largest
customers consisting of:
o major petroleum companies;
o independent refiners;
o the United States military; and
o independent marketers and distributors of refined petroleum products.
A substantial portion of the product volume transported is gasoline. Demand
for gasoline depends on such factors as prevailing economic conditions,
vehicular use patterns and demographic changes in the markets served. We expect
the majority of our Pacific operations' markets to maintain growth rates that
exceed the national average for the foreseeable future.
Currently, the California gasoline market is approximately 940,000 barrels
per day. The Arizona gasoline market is served primarily by us at a market
demand of approximately 155,000 barrels per day. Nevada's gasoline market is
approximately 60,000 barrels per day and Oregon's is approximately 100,000
barrels per day. The diesel and jet fuel market is approximately 510,000 barrels
per day in California, 80,000 barrels per day in Arizona, 50,000 barrels per day
in Nevada and 60,000 barrels per day in Oregon. We transport over 1.1 million
barrels of petroleum products per day in these states.
The volume of products transported is directly affected by the level of
end-user demand for such products in the geographic regions served. Certain
product volumes can experience seasonal variations and, consequently, overall
volumes may be lower during the first and fourth quarters of each year.
California has mandated the elimination of MTBE (methyl tertiary-butyl ether)
from gasoline by January 1, 2004. MTBE-blended gasoline will be replaced by an
ethanol blend. Since ethanol is not shipped in our pipelines,
12
this will result in a small reduction in California gasoline volumes. Some
suppliers/marketers are switching to ethanol before the required date, thus some
reduction in gasoline volumes will begin in January 2003. We believe the fees we
will earn for new ethanol-related services at our terminals will more than
offset the expected reduction in pipeline transportation fees.
Supply. The majority of refined products supplied to our Pacific operations'
pipeline system come from the major refining centers around Los Angeles, San
Francisco and Puget Sound, as well as waterborne terminals located near these
refining centers.
Competition. The most significant competitors of our Pacific operations'
pipeline system are proprietary pipelines owned and operated by major oil
companies in the area where our pipeline system delivers products as well as
refineries with related trucking arrangements within our market areas. We
believe that high capital costs, tariff regulation and environmental permitting
considerations make it unlikely that a competing pipeline system comparable in
size and scope will be built in the foreseeable future. However, the possibility
of pipelines being constructed to serve specific markets is a continuing
competitive factor. The use by major oil companies of trucks in certain markets
has resulted in minor but notable reductions in product volumes delivered to
certain shorter-haul destinations in the Los Angeles and San Francisco Bay
areas. We cannot predict with certainty whether the use of short-haul trucking
will continue or increase in the future.
Longhorn Partners Pipeline is a joint venture pipeline project that is
expected to begin transporting refined products from refineries on the Gulf
Coast to El Paso and other destinations in Texas in 2003. Increased product
supply in the El Paso area could result in some shift of volumes transported
into Arizona from our West Line to our East Line. While increased movements into
the Arizona market from El Paso would displace higher tariff volumes supplied
from Los Angeles on our West Line, our East Line is currently running at full
capacity and such shift of supply sourcing has not had, and is not expected to
have, a material effect on operating results.
Competitors of the Carson Terminal in the refined products market include
Shell Oil Products U.S. and BP (formerly Arco Terminal Services Company). In the
crude/black oil market, competitors include Edison Pipeline & Terminal Company,
Wilmington Liquid Bulk Terminals (Vopak) and BP. Competitors to Gaffey Street
include ST Services, Chemoil and Wilmington Liquid Bulk Terminals (Vopak).
Competition to the Richmond Terminal's chemical business comes primarily from
IMTT. Competitors to our Linnton and Willbridge Terminals include ST Services,
ChevronTexaco and Shell Oil Products U.S. Our Harbor Island Terminal competes
primarily with nearby terminals owned by Shell Oil Products U.S. and
ConocoPhillips.
Central Florida Pipeline
We own and operate a liquids terminal in Tampa, Florida, a liquids terminal
in Taft, Florida (near Orlando, Florida) and an intrastate common carrier
pipeline system that serves customers' product storage and transportation needs
in Central Florida. The Tampa Terminal contains 31 above-ground storage tanks
consisting of approximately 1.4 million barrels of storage capacity and is
connected to two ship dock facilities in the Port of Tampa that unload refined
products from barges and ocean-going vessels into the terminal. The Tampa
Terminal provides storage for gasoline, diesel fuel and jet fuel for further
movement into either trucks through five truck-loading racks or into the Central
Florida Pipeline system. The Tampa Terminal also provides storage for chemicals,
predominantly used to treat citrus crops, delivered to the terminal by vessel or
rail car and loaded onto trucks through five truck-loading racks. The Taft
Terminal contains 22 above-ground storage tanks consisting of approximately
670,000 barrels of storage capacity, providing storage for gasoline and diesel
fuel for further movement into trucks through 11 truck-loading racks.
The Central Florida Pipeline system consists of a 110-mile, 16-inch pipeline
that transports gasoline and an 85-mile, 10-inch pipeline that transports diesel
fuel and jet fuel from Tampa to Orlando, with an intermediate delivery point on
the 10-inch pipeline at Intercession City, Florida. The Central Florida Pipeline
is the only major refined products pipeline in the State of Florida. In addition
to being connected to our Tampa Terminal, the pipeline system is connected to
terminals owned and operated by TransMontaigne, Citgo, BP, and Marathon Ashland
Petroleum. The 10-inch pipeline is connected to our Taft Terminal and is also
the sole pipeline supplying jet fuel to the Orlando International Airport in
Orlando, Florida. In 2002, the pipeline transported approximately 94,000 barrels
per day of refined products, with the product mix being approximately 68%
gasoline, 14% diesel fuel, and 18% jet fuel.
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Markets. The estimated total refined petroleum product demand in the State of
Florida is approximately 785,000 barrels per day. Gasoline is, by far, the
largest component of that demand at approximately 500,000 barrels per day. The
total refined petroleum products demand for the Central Florida region of the
state, which includes the Tampa and Orlando markets, is estimated to be 335,000
barrels per day, or approximately 43% of the consumption of refined products in
the state. Our market share is approximately 120,000 barrels per day, or
approximately 36% of the Central Florida market. Most of the jet fuel used at
Orlando International Airport is moved through our Tampa Terminal and the
Central Florida Pipeline system. The market in Central Florida is seasonal, with
demand peaks in March and April during spring break and again in the summer
vacation season, and is also heavily influenced by tourism, with Disney World
and other amusement parks located in Orlando.
Supply. The vast majority of refined petroleum products consumed in Florida
is supplied from major refining centers in the gulf coast of Louisiana and
Mississippi and refineries in the Caribbean basin. A lesser amount of refined
products is being supplied by refineries in Alabama and by Texas Gulf Coast
refineries via marine vessels and through pipeline networks that extend to
Bainbridge, Georgia. The supply into Florida is generally transported by
ocean-going vessels to the larger metropolitan ports, such as Tampa, Port
Everglades near Miami, and Jacksonville. Individual markets are then supplied
from terminals at these ports and other smaller ports, predominately by trucks,
except the Central Florida region, which is served by a combination of trucks
and pipelines.
Competition. With respect to the terminal operations at Tampa, the most
significant competitors are proprietary terminals owned and operated by major
oil companies, such as Marathon Ashland Petroleum, BP and Citgo, located along
the Port of Tampa, and the ChevronTexaco and Motiva terminals in Port Tampa.
These terminals generally support the storage requirements of their parent or
affiliated companies' refining and marketing operations and provide a mechanism
for an oil company to enter into exchange contracts with third parties to serve
its storage needs in markets where the oil company may not have terminal assets.
Due to the high capital costs of tank construction in Tampa and state
environmental regulation of terminal operations, we believe it is unlikely that
new competing terminals will be constructed in the foreseeable future.
With respect to the Central Florida Pipeline system, the most significant
competitors are trucking firms and marine transportation firms. Trucking
transportation is more competitive in serving markets west of Orlando that are a
relatively short haul from Tampa, and with respect to markets east of Orlando,
our competition is trucks and product movements from marine terminals on the
east coast of Florida. We are utilizing tariff incentives to attract volumes to
the pipeline that might otherwise enter the Orlando market area by truck from
Tampa or by marine vessel into Cape Canaveral.
Federal regulation of marine vessels, including the requirement, under the
Jones Act, that United States-flagged vessels contain double-hulls, is a
significant factor in reducing the fleet of vessels available to transport
refined petroleum products. Marine vessel owners are phasing in the requirement
based on the age of the vessel and some older vessels are being redeployed into
use in other jurisdictions rather than being retrofitted with a double-hull for
use in the United States. Although we believe it is unlikely that a new pipeline
system comparable in size and scope will be constructed, due to the high cost of
pipeline construction and environmental and right-of-way permitting in Florida,
the possibility of such pipelines being built is a continuing competitive
factor.
North System
Our North System is an approximately 1,600-mile interstate common carrier
pipeline for natural gas liquids and refined petroleum products. Additionally,
we include our 50% ownership interest in Heartland Pipeline Company as part of
our North System operations. ConocoPhillips owns the remaining 50% of Heartland
Pipeline Company.
Natural gas liquids are typically extracted from natural gas in liquid form
under low temperature and high pressure conditions. Natural gas liquids products
and related uses are as follows:
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Product Use
-------------- ----------------------------------------
Propane Residential heating, industrial and agricultural
uses, petrochemical feedstock
Isobutane Further processing
Natural gasoline Further processing or blending into gasoline motor
fuel
Ethane/Propane Feedstock for petrochemical plants or peak-shaving
Mix facilities
Normal butane Feedstock for petrochemical plants or blending into
gasoline motor fuel
Our North System extends from south central Kansas to the Chicago area. South
central Kansas is a major hub for producing, gathering, storing, fractionating
and transporting natural gas liquids. Our North System's primary pipeline is
comprised of approximately 1,400 miles of 8-inch and 10-inch pipelines and
includes:
o two parallel pipelines (except for a single 50-mile pipeline segment in
Nebraska and Iowa), that originate at Bushton, Kansas and continue to a
major storage and terminal area in Des Moines, Iowa;
o a third pipeline, that extends from Bushton to the Kansas City, Missouri
area; and
o a fourth pipeline that extends from Des Moines to the Chicago area.
Through interconnections with other major liquids pipelines, our North
System's pipeline system connects mid-continent producing areas to markets in
the Midwest and eastern United States. We also have defined sole carrier rights
to use capacity on an extensive pipeline system owned by Williams Energy
Partners, L.P. that interconnects with our North System. This capacity lease
agreement requires us to pay $2.0 million per year, is in place until February
2013 and contains a five-year renewal option. In addition to our capacity lease
agreement with Williams, we also have a reversal agreement with Williams to help
provide for the transport of summer-time surplus butanes from Chicago area
refineries to storage facilities at Bushton. We have an annual minimum joint
tariff commitment of $0.6 million to Williams for this agreement.
Our North System has approximately 8.3 million barrels of storage capacity,
which includes caverns, steel tanks, pipeline line-fill and leased storage
capacity. This storage capacity provides operating efficiencies and flexibility
in meeting seasonal demands of shippers and provides propane storage for our
truck-loading terminals.
The Heartland pipeline system, which was completed in 1990, comprises one of
our North System's main line sections that originate at Bushton, Kansas and
terminates at a storage and terminal area in Des Moines, Iowa. We operate the
Heartland pipeline, and Conoco Pipe Line operates Heartland's Des Moines, Iowa
terminal and serves as the managing partner of Heartland. In 2000, Heartland
leased to ConocoPhillips Inc. 100% of the Heartland terminal capacity at Des
Moines, Iowa for $1.0 million per year on a year-to-year basis. The Heartland
pipeline lease fee, payable to us for reserved pipeline capacity, is paid
monthly, with an annual adjustment. The 2003 lease fee will be approximately
$1.07 million.
In addition, our North System has seven propane truck-loading terminals and
one multi-product complex at Morris, Illinois, in the Chicago area. Propane,
normal butane and natural gasoline can be loaded at our Morris terminal.
Markets. Our North System currently serves approximately 50 shippers in the
upper Midwest market, including both users and wholesale marketers of natural
gas liquids. These shippers include all three major refineries in the Chicago
area. Wholesale marketers of natural gas liquids primarily make direct large
volume sales to major end-users, such as propane marketers, refineries,
petrochemical plants and industrial concerns. Market demand for natural gas
liquids varies in respect to the different end uses to which natural gas liquids
products may be applied. Demand for transportation services is influenced not
only by demand for natural gas liquids but also by the available supply of
natural gas liquids. Heartland provides transportation of refined petroleum
products from refineries in the Kansas and Oklahoma areas to a BP Amoco terminal
in Council Bluffs, Iowa, a ConocoPhillips terminal in Lincoln, Nebraska and
Heartland's Des Moines terminal. The demand for, and supply of, refined
petroleum products in the geographic regions served by the Heartland pipeline
system directly affect the volume of refined petroleum products transported by
Heartland.
15
Supply. Natural gas liquids extracted or fractionated at the Bushton gas
processing plant have historically accounted for a significant portion
(approximately 40-50%) of the natural gas liquids transported through our North
System. Other sources of natural gas liquids transported in our North System
include large oil companies, marketers, end-users and natural gas processors
that use interconnecting pipelines to transport hydrocarbons. In 2000, KMI sold
to ONEOK, Inc. the Bushton plant along with other assets previously owned by
KMI. Refined petroleum products transported by Heartland on our North System are
supplied primarily from the National Cooperative Refinery Association crude oil
refinery in McPherson, Kansas and the ConocoPhillips crude oil refinery in Ponca
City, Oklahoma.
Competition. Our North System competes with other natural gas liquids
pipelines and to a lesser extent with rail carriers. In most cases, established
pipelines are the lowest cost alternative for the transportation of natural gas
liquids and refined petroleum products. Consequently, pipelines owned and
operated by others represent our primary competition. With respect to the
Chicago market, our North System competes with other natural gas liquids
pipelines that deliver into the area and with rail car deliveries primarily from
Canada. Other Midwest pipelines and area refineries compete with our North
System for propane terminal deliveries. Our North System also competes
indirectly with pipelines that deliver product to markets that our North System
does not serve, such as the Gulf Coast market area. Heartland competes with
other refined petroleum product carriers in the geographic market served.
Heartland's principal competitor is Williams Energy Partners, L.P.
Plantation Pipe Line Company
We own approximately 51% of Plantation Pipe Line Company, a 3,100-mile
pipeline system serving the southeastern United States. ExxonMobil owns the
remaining 49% interest and represents the single largest shipper on the
Plantation system. On December 21, 2000, we assumed day-to-day operations of
Plantation pursuant to agreements with Plantation Services LLC and Plantation
Pipe Line Company. Plantation serves as a common carrier of refined petroleum
products to various metropolitan areas, including Birmingham, Alabama; Atlanta,
Georgia; Charlotte, North Carolina; and the Washington, D.C. area. We believe
favorable demographics in the southeastern United States will serve as a
platform for increased utilization and expansion of Plantation's pipeline
system. For the year 2002, Plantation delivered 637,061 barrels per day, a 3%
improvement over 2001 and an all-time record high volume. These delivered
volumes are comprised of gasoline (68%), diesel/heating oil (20%) and jet fuel
(12%).
Markets. Plantation ships products for approximately 40 companies to
terminals throughout the southeastern United States. Plantation's principal
customers are Gulf Coast refining and marketing companies, fuel wholesalers, and
the United States Department of Defense. Plantation's top six shippers represent
slightly over 80% of total system volumes.
The seven states in which Plantation operates represent a collective pipeline
demand of approximately 2.0 million barrels per day of refined products.
Plantation currently has direct access to about 1.5 million barrels per day of
this overall market. The remaining 0.5 million barrels per day of demand lies in
markets (e.g. Nashville, Tennessee; North Augusta, South Carolina; Bainbridge,
Georgia; and Selma, North Carolina) currently served by Colonial Pipeline
Company. These markets represent potential growth opportunities for the
Plantation system.
In addition, Plantation delivers jet fuel to the Atlanta, Georgia; Charlotte,
North Carolina; and Washington, D.C. airports (Ronald Reagan National and
Dulles). While jet fuel shipments on Plantation have improved from the post
September 11, 2001 lows, combined deliveries to the four major airports served
by Plantation continue to be approximately 5% below historical levels. A
significant portion of this deficit is tied to Ronald Reagan National Airport
where demand is down 27% from pre-September 11 levels. We expect to see
continuing growth in jet fuel demand as we recover to pre-September 11 levels.
Plantation continues to develop its project to more than double its capacity
into the Knoxville, Tennessee market. The project scope involves the replacement
of the existing 8-inch diameter pipeline with a larger diameter pipeline.
Plantation is currently working to secure additional shipper volume commitments
to support the investment for this expansion.
16
Plantation is also developing a project to connect to the Colonial Pipeline
system at Greensboro, North Carolina. When this connection becomes operational,
Plantation shippers will have the option of carrying volumes to Greensboro and
then continuing to move to northeast markets via Colonial. This connection will
improve the liquidity of the Plantation system and will create additional
opportunities to attract incremental volumes.
Supply. Products shipped on Plantation originate at various Gulf Coast
refineries from which major integrated oil companies and independent refineries
and wholesalers ship refined petroleum products. Plantation is directly
connected to and supplied by a total of nine major refineries representing over
two million barrels per day of refining capacity.
Competition. Plantation competes primarily with Colonial Pipeline Company,
which also runs from Gulf Coast refineries throughout the southeastern United
States and extends into the northeastern states.
Cochin Pipeline System
We own 44.8% of the Cochin Pipeline System, a 1,938-mile, 12-inch
multi-product pipeline operating between Fort Saskatchewan, Alberta and Sarnia,
Ontario.
The Cochin Pipeline System and related storage and processing facilities
consist of Canadian operations and United States operations:
o the Canadian facilities are operated under the name of Cochin Pipe
Lines, Ltd.; and
o the United States facilities are operated under the name of Dome
Pipeline Corporation.
The pipeline operates on a batched basis and has an estimated system capacity
of approximately 112,000 barrels per day. Its peak capacity is approximately
124,000 barrels per day. It includes 31 pump stations spaced at 60 mile
intervals and five United States propane terminals. Associated underground
storage is available at Fort Saskatchewan, Alberta and Windsor, Ontario.
Markets. Formed in the late 1970's as a joint venture, the pipeline traverses
three provinces in Canada and seven states in the United States transporting
high vapor pressure ethane, ethylene, propane, butane and natural gas liquids to
the Midwestern United States and eastern Canadian petrochemical and fuel
markets. The system operates as a National Energy Board (Canada) and Federal
Energy Regulatory Commission (United States) regulated common carrier, shipping
products on behalf of its owners as well as other third parties.
Supply. The system is connected to the Enterprise pipeline system in
Minnesota and in Iowa, and connects with our North System at Clinton, Iowa. The
Cochin Pipeline System has the ability to access the Canadian Eastern Delivery
System via the Windsor Storage Facility Joint Venture at Windsor, Ontario.
Injection into the system can occur from:
o BP Amoco, ChevronTexaco or Dow fractionation facilities at Fort
Saskatchewan, Alberta;
o TransCanada Midstream storage at five points within the provinces of
Canada; or
o the Enterprise West Junction, in Minnesota.
Competition. The pipeline competes with Enbridge Energy Partners for natural
gas liquids longhaul business from Fort Saskatchewan, Alberta and Windsor,
Ontario. The pipeline's primary competition in the Chicago natural gas liquids
market comes from the combination of the Alliance pipeline system, which brings
unprocessed gas into the United States from Canada, and from Aux Sable, which
processes and markets the natural gas liquids in the Chicago market.
Cypress Pipeline
Our Cypress Pipeline is an interstate common carrier pipeline system
originating at storage facilities in Mont
17
Belvieu, Texas and extending 104 miles east to the Lake Charles, Louisiana
area. Mont Belvieu, located approximately 20 miles east of Houston, is the
largest hub for natural gas liquids gathering, transportation, fractionation and
storage in the United States.
Markets. The pipeline was built to service Westlake Petrochemicals
Corporation in the Lake Charles, Louisiana area under a 20-year ship-or-pay
agreement that expires in 2011. The contract requires a minimum volume of 30,000
barrels per day and in 1997, Westlake agreed to ship at least an additional
13,700 barrels per day through late 2002, which was later extended through May
2003. Also in 1997, we expanded the Cypress Pipeline's capacity by 25,000
barrels per day to 57,000 barrels per day.
Supply. Our Cypress Pipeline originates in Mont Belvieu where it is able to
receive ethane and ethane/propane mix from local storage facilities. Mont
Belvieu has facilities to fractionate natural gas liquids received from several
pipelines into ethane and other components. Additionally, pipeline systems that
transport specification natural gas liquids from major producing areas in Texas,
New Mexico, Louisiana, Oklahoma and the Mid-Continent Region supply ethane and
ethane/propane mix to Mont Belvieu.
Competition. The pipeline's primary competition into the Lake Charles market
comes from Louisiana offshore gas.
Transmix Operations
Our transmix operations consist of transmix processing facilities located in
Richmond, Virginia; Dorsey Junction, Maryland; Indianola, Pennsylvania; Wood
River, Illinois; and Colton, California.
Transmix occurs when dissimilar refined petroleum products are co-mingled in
the pipeline transportation process. Different products are pushed through the
pipelines abutting each other, and the area where different products mix is
called transmix. At our transmix processing facilities, we process and separate
pipeline transmix generated in the United States into pipeline-quality gasoline
and light distillate products. Transmix processing is performed for Duke Energy
Merchants on a "for fee" basis pursuant to a long-term contract expiring in
2010, and for Colonial Pipeline Company at Dorsey Junction, Maryland.
Our Richmond processing facility is comprised of a dock/pipeline, a
170,000-barrel tank farm, a processing plant, lab and truck rack. The facility
is composed of four distillation units that operate 24 hours a day, 7 days a
week providing a processing capacity of approximately 8,000 barrels per day.
Both the Colonial and Plantation pipelines supply the facility, as well as
deep-water barge (25 feet draft), transport truck and rail. We also own an
additional 3.6-acre bulk products terminal with a capacity of 55,000 barrels
located nearby in Richmond.
Our Dorsey Junction processing facility is located within the Colonial
Pipeline Dorsey Junction terminal facility. The 5,000-plus barrel per day
processing unit began operations in February 1998. It operates 24 hours a day, 7
days a week providing dedicated transmix separation service for Colonial.
Our Indianola processing facility is located near Pittsburgh, Pennsylvania
and is accessible by truck, barge and pipeline, primarily processing transmix
from Buckeye, Colonial, Sun and Teppco pipelines. It has capacity to process
12,000 barrels of transmix per day and operates 24 hours per day, 7 days a week.
The facility is comprised of a 500,000-barrel tank farm, a quality control
laboratory, a truck-loading rack and a processing unit. The facility can ship
output via the Buckeye pipeline as well as by truck.
Our Wood River processing facility was constructed in 1993 on property owned
by ConocoPhillips and is accessible by truck, barge and pipeline, primarily
processing transmix from both Explorer and ConocoPhillips pipelines. It has
capacity to process 5,000 barrels of transmix per day. Located on approximately
three acres leased from ConocoPhillips, the facility consists of one processing
unit. Supporting terminal capability is provided through leased tanks in
adjacent terminals.
Our Colton processing facility, completed in the spring of 1998, and located
adjacent to our products terminal in Colton, California, produces refined
petroleum products that are delivered into our Pacific operations' pipelines for
shipment to markets in Southern California and Arizona. The facility can process
over 5,000 barrels per day.
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Markets. The Gulf and East Coast refined petroleum products distribution
system, particularly the Mid-Atlantic region, provides the target market for our
East Coast transmix processing operations. The Mid-Continent area and the New
York Harbor are the target markets for our Pennsylvania and Illinois assets. Our
West Coast transmix processing operations support the markets served by our
Pacific operations. We are working to expand our Mid-Continent and West Coast
markets.
Supply. Transmix generated by Colonial, Plantation, Sun, Teppco, Explorer and
our Pacific operations provide the vast majority of our supply. These suppliers
are committed to our transmix facilities by long-term contracts. Individual
shippers and terminal operators provide additional supply. Duke Energy Merchants
is responsible for transmix supply acquisition other than at the Dorsey Junction
facility, which is supplied by Colonial Pipeline Company.
Competition. Placid Refining is our main competitor in the Gulf coast area
and Tosco Refining is a major competitor in the New York harbor area. There are
various processors in the Mid-Continent area, primarily Phillips and Williams
Energy Services, who compete with our expansion efforts in that market. Shell
Oil US and a number of smaller organizations operate transmix processing
facilities in the West and Southwest. These operations compete for supply that
we envision as the basis for growth in the West and Southwest. Our Colton
processing facility also competes with major oil company refineries in
California.
Natural Gas Pipelines
Our Natural Gas Pipelines segment consists of natural gas transportation,
storage, gathering and matched purchases/sales for both interstate and
intrastate pipelines. Within this segment, we own over 13,400 miles of natural
gas pipelines and associated storage and supply lines that are strategically
located at the center of the North American pipeline grid. Our transportation
network provides access to the major gas supply areas in the western United
States, Texas and the Midwest, as well as major consumer markets. Our Natural
Gas Pipeline assets, consisting of assets primarily acquired since late 1999,
include:
o our Texas intrastate natural gas pipeline group, which includes Kinder
Morgan Texas Pipeline and Kinder Morgan Tejas, a combined 5,800-mile
intrastate natural gas pipeline system along the Texas Gulf Coast;
o Kinder Morgan Interstate Gas Transmission LLC, which owns a 6,100-mile
natural gas pipeline, including the Pony Express pipeline system, that
extends from northwestern Wyoming east into Nebraska and Missouri and south
through Colorado and Kansas;
o Trailblazer Pipeline Company, which transmits natural gas from Colorado
through southeastern Wyoming to Beatrice, Nebraska;
o our Casper and Douglas natural gas gathering systems, which are comprised
of approximately 1,560 miles of natural gas gathering pipelines and two
facilities in Wyoming capable of processing 210 million cubic feet of
natural gas per day;
o our 49% interest in the Red Cedar Gathering Company, which gathers natural
gas in La Plata County, Colorado and owns and operates a carbon dioxide
processing plant;
o our 50% interest in Coyote Gas Treating, LLC, which owns a 250 million
cubic feet per day natural gas treating facility in La Plata County,
Colorado; and
o our 25% interest in Thunder Creek Gas Services, LLC, which gathers,
transports and processes methane gas from coal beds in the Powder River
Basin of Wyoming.
Texas Intrastate Pipeline Group
Our Texas intrastate natural gas pipeline group consists of two primary
systems, Kinder Morgan Texas Pipeline and Kinder Morgan Tejas Pipeline. The
Tejas system was acquired on January 31, 2002 from Intergen, a joint
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venture owned by affiliates of the Royal Dutch Shell Group of Companies, and
Bechtel Enterprises Holding, Inc. The group is referred to herein as Kinder
Morgan Texas. These pipelines are increasingly interconnected and operate as a
single pipeline system, which provides its customers and suppliers with improved
flexibility and reliability. The combined assets include over 5,800 miles of
pipeline with a peak capacity of approximately 5 billion cubic feet per day of
natural gas and control of over 30 billion cubic feet of natural gas storage
capacity. In addition, Kinder Morgan Texas has the capability to process over 1
billion cubic feet per day of natural gas for liquids extraction and treat
approximately 250 million cubic feet per day of natural gas for carbon dioxide
removal.
Kinder Morgan Texas serves the Texas Gulf Coast, transporting, processing and
treating gas from multiple onshore and offshore supply sources to serve the
Houston/Beaumont/Port Arthur, Texas industrial markets, as well as local gas
distribution utilities, electric utilities and merchant power generation
markets.
Kinder Morgan Texas serves as a buyer and seller of natural gas, as well as a
transporter of natural gas. Its business is increasingly structured as a fee for
service business. Fee for service businesses include transportation, storage,
processing and treating. Kinder Morgan Texas' purchases and sales of natural gas
are primarily priced with reference to market prices in the consuming region of
its system. The difference between the purchase and sale prices is the rough
equivalent of a transportation fee.
Markets. Kinder Morgan Texas' market area consumes over 8 billion cubic feet
per day of natural gas. Of this amount, we estimate that 75% is industrial
demand (including on-site, cogeneration facilities), about 15% is merchant
generation demand and the remainder is split between local natural gas
distribution utility and power utility demand. The industrial demand is
primarily year-round load. Local natural gas distribution load peaks in the
winter months and is complemented by power demand (both merchant and utility
generation) which peaks in the summer months. As new merchant gas fired
generation has come online and displaced traditional utility generation, Kinder
Morgan Texas has successfully attached these new generation facilities to its
pipeline system in order to maintain its share of natural gas supply for power
generation.
Mexico is an increasingly important market for Kinder Morgan Texas. It serves
this market through interconnection with the facilities of Pemex at the United
States-Mexico border near Arguellas, Mexico and, starting in the second quarter
of 2003, through interconnection with our Monterrey, Mexico natural gas pipeline
project. Current deliveries through the existing interconnection near Arguellas
are approximately 250,000 dekatherms per day of natural gas and deliveries to
Monterrey are expected to be 375,000 dekatherms per day of natural gas. Kinder
Morgan Texas primarily provides transport service to these markets on a fee for
service basis, including a significant demand component, which is paid
regardless of actual throughput. Revenues earned from our activities in Mexico
are paid in U.S. dollar equivalent.
Supply. Kinder Morgan Texas purchases its gas directly from producers
attached to its system in South Texas, East Texas and along the Texas Gulf
Coast. It also purchases gas at interconnects with interstate and intrastate
pipelines. While Kinder Morgan Texas does not produce gas, it maintains an
active well connection program to offset natural declines in production along
its system, and to secure supplies for additional demand in its market area.
Kinder Morgan Texas has access to both onshore and offshore sources of supply,
and is well positioned to interconnect with liquefied natural gas projects under
development by others along the Texas Gulf Coast.
Gathering, Processing and Treating. Kinder Morgan Texas owns and operates
various gathering systems in South and East Texas. These systems aggregate
pipeline quality natural gas supplies into Kinder Morgan Texas' main
transmission pipelines, and in certain cases, aggregate natural gas that must be
processed or treated into its own facilities or the facilities of others. Kinder
Morgan Texas owns two processing plants, its Texas City Plant in Galveston
County, Texas and its Galveston Bay plant in Chambers County, Texas, which
combined can process 150 million cubic feet per day of natural gas for liquids
extraction. In addition, Kinder Morgan Texas has contractual rights to process
approximately 1 billion cubic feet per day of natural gas at various third party
owned facilities. Kinder Morgan Texas also owns and operates three natural gas
treating plants that offer carbon dioxide and/or hydrogen sulfide removal.
Kinder Morgan Texas can treat for carbon dioxide removal up to 150 million cubic
feet per day of natural gas at its Fandango Complex in Zapata County, Texas, and
approximately 40 million cubic feet per day of natural gas at its Thompsonville
Facility in Jim Hogg County, Texas. In addition, Kinder Morgan Texas owns and
operates the Indian Rock Plant located in Upshur County, Texas that is capable
of treating 45 million
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cubic feet per day of natural gas for carbon dioxide and/or hydrogen sulfide
removal. These facilities are operated, or shut in, in accordance with the
prevailing economic conditions for processing and treating services and the
availability of gas requiring such services.
Storage. Kinder Morgan Texas owns the West Clear Lake natural gas storage
facility located in Harris County, Texas. Under a long term contract, Coral
Energy Resources, L.P. operates the facility and controls the 96 billion cubic
feet of natural gas working capacity, and Kinder Morgan Texas provides
transportation services into and out of the facility. Kinder Morgan Texas has
also developed a salt dome storage facility located near Markham, Texas with a
subsidiary of NISOURCE Industries, Inc. The facility consists of two salt dome
caverns with approximately 7.5 billion cubic feet of total natural gas storage
capacity, over 5.4 billion cubic feet of working natural gas capacity and up to
500 million cubic feet per day of peak deliverability. The storage facility is
leased by a partnership in which Kinder Morgan Texas and a subsidiary of NIPSCO
are partners. Kinder Morgan Texas has executed a 20-year sublease with the
partnership under which it has rights to 50% of the facility's working natural
gas capacity, 85% of its withdrawal capacity and approximately 70% of its
injection capacity. Kinder Morgan Texas also leases salt dome caverns from Dow
Hydrocarbon & Resources, Inc. and BP America Production Company in Brazoria
County, Texas. The salt dome caverns are referred to as the Stratton Ridge
Facilities and have a combined capacity of 11.8 billion cubic feet of natural
gas, working natural gas capacity of 6.6 billion cubic feet and a peak day
deliverability of up to 450 million cubic feet per day of natural gas. In
addition, Kinder Morgan Texas controls through contractual arrangements another
19.3 billion cubic feet of third party natural gas storage capacity in the
Houston, Texas area and 4 billion cubic feet of natural gas storage capacity in
the East Texas area.
Competition. The Texas intrastate natural gas market is highly competitive,
with many markets connected to multiple pipeline companies. Kinder Morgan Texas
competes with interstate and intrastate pipelines, and their shippers, to attach
new markets and supplies and for transportation, processing and treating
services.
Kinder Morgan Interstate Gas Transmission LLC
Through Kinder Morgan Interstate Gas Transmission LLC, referred to herein as
KMIGT, we own approximately 5,000 miles of transmission lines in Wyoming,
Colorado, Kansas, Missouri and Nebraska. KMIGT provides transportation and
storage services to KMI affiliates, third-party natural gas distribution
utilities and other shippers. Pursuant to transportation agreements and FERC
tariff provisions, KMIGT offers its customers firm and interruptible
transportation and storage services, including no-notice transportation and park
and loan services. Under KMIGT's tariffs, firm transportation and storage
customers pay reservation fees each month plus a commodity charge based on the
actual transported or stored volumes. In contrast, interruptible transportation
and storage customers pay a commodity charge based upon actual transported
and/or stored volumes. Reservation fees are based upon geographical location
(KMIGT does not have seasonal rates) and the distance of the transportation
service provided. Under the no-notice service, customers pay a fee for the right
to use a combination of firm storage and firm transportation to effect
deliveries of natural gas up to a specified volume without making specific
nominations.
The system is powered by 28 transmission and storage compressor stations with
approximately 149,000 horsepower. The pipeline system provides storage services
to its customers from its Huntsman Storage Field in Cheyenne County, Nebraska.
The facility has approximately 39.5 billion cubic feet of total storage
capacity, 12.5 billion cubic feet of working gas capacity and can withdraw up to
101 million cubic feet of natural gas per day.
Markets. Markets served by KMIGT provide a stable customer base with
expansion opportunities due to the system's access to growing Rocky Mountain
supply sources. Markets served by KMIGT are comprised mainly of local natural
gas distribution companies and interconnecting interstate pipelines in the
mid-continent area. End-users for the local natural gas distribution companies
typically include residential, commercial, industrial and agricultural
customers. The pipelines interconnecting with KMIGT in turn deliver gas into
multiple markets including some of the largest population centers in the
Midwest. Natural gas demand for crop irrigation during the summer from
time-to-time exceeds heating season demand and provides KMIGT consistent volumes
throughout the year without a significant impact from seasonality.
Supply. Approximately 18%, by volume, of KMIGT's firm contracts expire within
one year and 26% expire within one to five years. Affiliated entities are
responsible for approximately 22% of the total firm transportation
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and storage capacity under contract on KMIGT's system. Over 98% of the
system's firm transport capacity is currently subscribed.
Competition. KMIGT competes with other interstate and intrastate gas
pipelines transporting gas from the supply sources in the Rocky Mountain and
Hugoton Basins to mid-continent pipelines and market centers.
Trailblazer Pipeline Company
On May 6, 2002, we acquired the remaining 33 1/3% ownership interest in the
Trailblazer Pipeline Company that we did not already own. Trailblazer Pipeline
Company, referred to herein as Trailblazer, is an Illinois partnership and its
principal business is to transport and redeliver natural gas to others in
interstate commerce. It does business in the states of Wyoming, Colorado,
Nebraska and Illinois. Natural Gas Pipeline Company of America, a subsidiary of
KMI, manages, maintains and operates Trailblazer, for which it is reimbursed at
cost. Trailblazer's 436-mile natural gas pipeline system originates at an
interconnection with Wyoming Interstate Company Ltd.'s pipeline system near
Rockport, Colorado and runs through southeastern Wyoming to a terminus near
Beatrice, Nebraska where Trailblazer's pipeline system interconnects with
Natural Gas Pipeline Company of America's and Northern Natural Gas Company's
pipeline systems.
Trailblazer's pipeline is the fourth and last segment of a 791-mile pipeline
system known as the Trailblazer Pipeline System, which originates in Uinta
County, Wyoming with Canyon Creek Compression Company, a 22,000 horsepower
compressor station located at the tailgate of BP Amoco Production Company's
processing plant in the Whitney Canyon Area in Wyoming (Canyon Creek's
facilities are the first segment). Canyon Creek receives gas from the BP Amoco
processing plant and provides transportation and compression of gas for delivery
to Overthrust Pipeline Company's 88-mile, 36-inch diameter pipeline system at an
interconnection in Uinta County, Wyoming (Overthrust's system is the second
segment). Overthrust delivers gas to Wyoming Interstate's 269-mile, 36-inch
diameter pipeline system at an inter-connection (Kanda) in Sweetwater County,
Wyoming (Wyoming Interstate's system is the third segment). Wyoming Interstate's
pipeline delivers gas to Trailblazer's pipeline at an interconnection near
Rockport in Weld County, Colorado.
Markets. Significant growth in Rocky Mountain natural gas supplies has
prompted a need for additional pipeline transportation service. In August 2000,
Trailblazer announced an approximate $58.7 million expansion to its system,
which would provide an additional capacity of approximately 324,000 dekatherms
of natural gas per day. On January 10, 2001, Trailblazer filed an application
with FERC requesting authorization to construct and operate the facilities that
would expand its capacity by 324,000 dekatherms of natural gas per day to
provide new firm long-term transportation service. On May 18, 2001, the FERC
issued an "Order Issuing Certificate" approving Trailblazer's application.
Trailblazer now has a certificated capacity of 846 million cubic feet per day of
natural gas. The FERC also granted Trailblazer's request to assess incremental
rates and fuel for shippers taking capacity related to the expansion facilities.
The expansion project started in Rockport, Colorado, where Trailblazer's
pipeline interconnects with pipelines owned by Colorado Interstate Gas Co.,
Wyoming Interstate Company, West Gas and KMIGT, and terminated in Gage County,
Nebraska. With this project, Trailblazer installed two new compressor stations
and added additional horsepower at an existing compressor station. On May 7,
2002, the expansion facilities were placed into service.
Supply. Less than 1%, by volume, of Trailblazer's firm contracts expire
before one year and 39% expire within one to five years. Affiliated entities
hold less than 1% of the total firm transportation capacity. All of the system's
firm transport capacity is currently subscribed.
Competition. While competing pipelines have been announced which would move
gas east out of the Rocky Mountains, the main competition that Trailblazer
currently faces is that the gas supply in the Rocky Mountain area either stays
in the area or is moved west and therefore is not transported on Trailblazer's
pipeline.
Casper and Douglas Natural Gas Gathering and Processing Systems
We own and operate our Casper and Douglas natural gas gathering and
processing facilities.
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The Douglas gathering system is comprised of approximately 1,500 miles of
4-inch to 16-inch diameter pipe that gathers approximately 50 million cubic feet
per day of natural gas from 650 active receipt points. Douglas Gathering has an
aggregate 24,495 horsepower of compression situated at 17 field compressor
stations. Gathered volumes are processed at our Douglas plant, located in
Douglas, Wyoming. Residue gas is delivered into KMIGT and recovered liquids are
injected in ConocoPhillips Petroleum's natural gas liquids pipeline for
transport to Borger, Texas.
The Casper gathering system is comprised of approximately 60 miles of 4-inch
to 8-inch diameter pipeline gathering approximately 20 million cubic feet per
day of natural gas from eight active receipt points. Gathered volumes are
delivered directly into KMIGT. Current gathering capacity is contingent upon
available capacity on KMIGT and the Casper Plant's 50 to 80 million cubic feet
per day processing capacity.
We believe that Casper-Douglas' unique combination of
percentage-of-proceeds, sliding scale percent-of-proceeds and keep whole plus
fee processing agreements helps to reduce our exposure to commodity price
volatility.
Markets. Casper and Douglas are processing plants servicing gas streams
flowing into KMIGT.
Competition. There are three other natural gas gathering and processing
alternatives available to conventional natural gas producers in the Greater
Powder River Basin. However, Casper and Douglas are the only two plants in the
region that provide straddle processing of natural gas streams flowing into
KMIGT upsteam of our two plant facilities. The other regional facilities include
the Hilight (80 million cubic feet per day) and Kitty (17 million cubic feet per
day) plants owned and operated by Western Gas Resources, and the Sage Creek
Processors (50 million cubic feet per day) plant owned and operated by Devon
Energy.
Red Cedar Gathering Company
We own a 49% equity interest in the Red Cedar Gathering Company, a joint
venture organized in August 1994, referred to in this document as Red Cedar. The
Southern Ute Indian Tribe owns the remaining 51%. Red Cedar owns and operates
natural gas gathering, compression and treating facilities in the Ignacio Blanco
Field in La Plata County, Colorado. The Ignacio Blanco Field lies within the
Colorado portion of the San Juan Basin, most of which is located within the
exterior boundaries of the Southern Ute Indian Tribe Reservation. Red Cedar
gathers coal seam and conventional natural gas at wellheads and at several
central delivery points, for treating, compression and delivery into any one of
four major interstate natural gas pipeline systems and an intrastate pipeline.
Red Cedar's gas gathering system currently consists of over 800 miles of
gathering pipeline connecting more than 700 producing wells, 65,000 horsepower
of compression at 17 field compressor stations and two carbon dioxide treating
plants. A majority of the natural gas on the system moves through 8-inch to
20-inch diameter pipe. The capacity and throughput of the Red Cedar system as
currently configured is approximately 700 million cubic feet per day of natural
gas.
Coyote Gas Treating, LLC
We own a 50% equity interest in Coyote Gas Treating, LLC, referred to herein
as Coyote Gulch. Coyote Gulch is a joint venture that was organized in December
1996. El Paso Field Services Company owns the remaining 50% equity interest. The
sole asset owned by the joint venture is a 250 million cubic feet per day
natural gas treating facility located in La Plata County, Colorado. We are the
managing partner of Coyote Gas Treating, LLC.
The inlet gas stream treated by Coyote Gulch contains an average carbon
dioxide content of between 12% and 13%. The plant treats the gas down to a
carbon dioxide concentration of 2% in order to meet interstate natural gas
pipeline quality specifications, and then compresses the natural gas into the
TransColorado Gas Transmission pipeline for transport to the Blanco, New Mexico
San Juan Basin Hub.
Effective January 1, 2002, Coyote Gulch entered into a five-year operating
lease agreement with Red Cedar. Under the terms of the lease, Red Cedar operates
the facility and is responsible for all operating and maintenance expense and
capital costs. In place of the treating fees that were previously received by
Coyote Gulch from Red Cedar, Red Cedar is required to make monthly lease
payments.
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Thunder Creek Gas Services, LLC
We own a 25% equity interest in Thunder Creek Gas Services, LLC, referred to
herein as Thunder Creek. Thunder Creek is a joint venture that was organized in
September 1998. Devon Energy owns the remaining 75% equity interest. Thunder
Creek provides gathering, compression and treating services to a number of coal
seam gas producers in the Powder River Basin. Throughput volumes include both
coal seam and conventional plant residue gas. Thunder Creek is independently
operated from offices located in Denver, Colorado with field offices in Glenrock
and Gillette, Wyoming.
Thunder Creek's operations are a combination of mainline and low pressure
gathering assets. The mainline assets include 235 miles of 4-inch to 24-inch
diameter pipeline, 19,360 horsepower of mainline compression and carbon dioxide
removal facilities consisting of a 240 million cubic feet per day carbon dioxide
treating plant complete with dehydration. The mainline assets receive gas from
26 receipt points and can deliver treated gas to three delivery points including
Colorado Interstate Gas, Wyoming Interstate Gas Company and KMIGT. The low
pressure gathering assets include 161 miles of 4-inch to 14-inch gathering
pipeline and 50,488 horsepower of field compression. Gas is gathered from 43
receipt points and delivered to the mainline at four primary locations.
CO2 Pipelines
Our CO2 Pipelines segment consists of Kinder Morgan CO2 Company, L.P. and its
consolidated affiliates, referred to herein as KMCO2. Together, they transport,
market and produce carbon dioxide for use in enhanced oil recovery operations
and own interests in other related assets in the continental United States,
through the following:
o our carbon dioxide pipelines, including:
o our Central Basin Pipeline, a 320-mile carbon dioxide pipeline
located in the Permian Basin of West Texas between Denver City, Texas
and McCamey, Texas;
o our Centerline Pipeline, a 120-mile carbon dioxide pipeline,
currently under construction with an estimated completion date of
mid-2003, located in the Permian Basin of West Texas between Denver
City, Texas and Snyder, Texas; and
o our interests in carbon dioxide pipelines, including an approximate
89% interest in the Canyon Reef Carriers Pipeline, a 50% interest in
the Cortez Pipeline and a 13% undivided interest in the Bravo
Pipeline System;
o our interests in carbon dioxide reserves, including an approximate 45%
interest in the McElmo Dome and an approximate 11% interest in the Bravo
Dome;
o our interests in oil-producing fields, including an approximate 84% working
interest in the SACROC Unit and minority interests in the Sharon Ridge
Unit, the Reinecke Unit, the MidCross Unit and the Yates Field Unit, all of
which are located in the Permian Basin of West Texas; and
o our interests in gasoline plants, including an approximate 22% ownership
interest in the Snyder Gasoline Plant, a 51% ownership interest in the
Diamond M Gas Plant and a 100% ownership interest in the North Snyder
Plant, all of which are located in the Permian Basin of West Texas (we also
own 50% net profits interests in 52.9% ownership of the Snyder Gasoline
Plant).
Our CO2 pipelines and related assets allow us to market a complete package of
carbon dioxide supply, transportation and technical expertise to the customer.
Carbon dioxide is used in enhanced oil recovery projects as a flooding medium
for recovering crude oil from mature oil fields.
On March 5, 1998, we and affiliates of Shell Exploration & Production Company
combined our carbon dioxide activities and assets into a partnership named Shell
CO2 Company, Ltd. Shell CO2 Company, Ltd. was established to transport, market
and produce carbon dioxide for use in enhanced oil recovery operations in the
continental
24
United States. Initially, we had a 20% interest in Shell CO2 Company,
Ltd. and Shell had the remaining 80% interest.
On April 1, 2000, we acquired Shell's 80% interest in Shell CO2 Company, Ltd.
for $212.1 million. After the closing, we renamed Shell CO2 Company, Ltd.,
Kinder Morgan CO2 Company, L.P. As is the case with our four other operating
partnerships, we own a 98.9899% limited partner interest in KMCO2, and our
general partner owns a direct 1.0101% general partner interest. Kinder Morgan
SACROC L.P., a limited partnership formed in December 2002 and owned by two
wholly-owned subsidiaries of KMCO2, primarily owns our interests in the SACROC
Unit.
On January 1, 2001, KMCO2 formed a joint venture, named MKM Partners, L.P.,
with Marathon Oil Company in the southern Permian Basin of West Texas. The joint
venture consists of a nearly 13% interest in the SACROC unit and a 49.9%
interest in the Yates Field unit. It is owned 85% by Marathon Oil Company and
15% by KMCO2.
Carbon Dioxide Pipelines
Placed in service in 1985, our Central Basin Pipeline consists of
approximately 143 miles of 16-inch to 20-inch main pipeline and 178 miles of
4-inch to 12-inch lateral supply lines located in the Permian Basin between
Denver City, Texas and McCamey, Texas with a throughput capacity of 650 million
cubic feet per day. At its origination point in Denver City, our Central Basin
Pipeline interconnects with all three major carbon dioxide supply pipelines from
Colorado and New Mexico, namely the Cortez Pipeline (operated by KMCO2) and the
Bravo and Sheep Mountain Pipelines (operated by Occidental and BP Amoco,
respectively). Central Basin Pipeline's mainline terminates near McCamey where
it interconnects with the Canyon Reef Carriers Pipeline. The tariffs charged by
the Central Basin Pipeline are not regulated.
Currently under construction, our Centerline Pipeline consists of
approximately 113 miles of 16-inch pipe located in the Permian Basin between
Denver City, Texas and Snyder, Texas. Centerline Pipeline, when completed in
mid-2003, will have a capacity of 250 million cubic feet per day.
We operate and own a 50% ownership interest in the 502-mile, 30-inch Cortez
Pipeline. This pipeline carries carbon dioxide from the McElmo Dome source
reservoir to the Denver City, Texas hub. The Cortez Pipeline currently
transports in excess of 700 million cubic feet per day, including approximately
90% of the carbon dioxide transported on our Central Basin Pipeline.
In addition, we own a 13% undivided interest in the 218-mile, 20-inch Bravo
Pipeline, which delivers to the Denver City hub and has a capacity of more than
350 million cubic feet per day. Major delivery points along the line include the
Slaughter Field in Cochran and Hockley Counties, Texas, and the Wasson field in
Yoakum County, Texas. Tariffs on the Cortez and Bravo pipelines are not
regulated.
In addition, we own 89% of the Canyon Reef Carriers Pipeline. The Canyon Reef
Carriers Pipeline extends 138 miles from McCamey, Texas, to our SACROC field.
This pipeline is 16 inches in diameter and has a capacity of approximately 290
million cubic feet per day and makes deliveries to the SACROC, Sharon Ridge,
Cogdell, Amaker Tipett and Reinecke units.
Markets. Our principal market for carbon dioxide is for injection into mature
oil fields in the Permian Basin, where industry demand is expected to be
comparable to historical demand for the next several years. We are exploring
additional potential markets, including enhanced oil recovery targets in the
North Sea and California, and coal bed methane production in the San Juan Basin
of New Mexico.
Competition. Our primary competitors for the sale of carbon dioxide include
suppliers that have an ownership interest in McElmo Dome, Bravo Dome and Sheep
Mountain Dome carbon dioxide reserves, and Petro Source, which gathers waste
carbon dioxide from natural gas production in the Val Verde Basin of West Texas.
Our ownership interests in the Cortez and Bravo pipelines are in direct
competition with other carbon dioxide pipelines. We also compete with other
interests in McElmo Dome and Cortez Pipeline, for transportation of carbon
dioxide to the Denver City, Texas market area. There is no assurance that new
carbon dioxide source fields will not be discovered which could compete with us
or that new methodologies for enhanced oil recovery could replace carbon dioxide
flooding.
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Carbon Dioxide Reserves
We operate, and own approximately 45% of, the McElmo Dome, which contains
more than 10 trillion cubic feet of nearly pure carbon dioxide. Deliverability
and compression capacity exceeds one billion cubic feet per day. McElmo Dome
produces from the Leadville formation at 8,000 feet with 44 wells that produce
at individual rates of up to 60 million cubic feet per day.
We also own approximately 11% of Bravo Dome, which holds reserves of
approximately two trillion cubic feet of carbon dioxide. Bravo Dome produces
approximately 320 million cubic feet per day, with production coming from more
than 350 wells in the Tubb Sandstone at 2,300 feet.
Oil Reserves
The SACROC unit, in which we have increased our interest to approximately
84%, is comprised of approximately 50,000 acres located in the Permian Basin in
Scurry County, Texas. SACROC was discovered in 1948 and has produced over 1.2
billion barrels of oil since inception. We have continued the development of the
carbon dioxide project initiated by the previous owners and have arrested the
decline in production through increased carbon dioxide injection. The current
purchased carbon dioxide injection rate is 140 million cubic feet per day, up
from 120 million cubic feet per day in 2001, and the oil production rate in
February 2003 was approximately 17,000 barrels of oil per day from 160 producing
wells, up from 10,000 barrels of oil per day in December 2001.
Gas Plant Interests
We own 22% of, and now operate, the Snyder Gasoline Plant, 51% of the Diamond
M Gas Plant and 100% of the North Snyder Plant. We also own 50% net profits
interests in 52.9% ownership of the Snyder Gasoline Plant. These plants process
gas produced from the SACROC unit and neighboring carbon dioxide projects,
specifically the Sharon Ridge, Reinecke and Cogdell units, all of which are
located in the Permian Basin area of West Texas.
Terminals
Our Terminals segment includes the business portfolio of approximately 50
terminals that transload and store coal, dry-bulk materials and
petrochemical-related liquids, as well as more than 60 transload operations in
20 states.
Liquids Terminals
Kinder Morgan Liquids Terminals LLC, referred to herein as KMLT, is comprised
of 12 bulk liquids terminal facilities and 59 rail transloading and materials
handling operations. Together, these facilities have a total capacity of
approximately 35 million barrels of liquid products, primarily gasoline,
distillates, petrochemicals and vegetable oil products. In 2002, our liquids
terminals handled approximately 480 million barrels of clean petroleum,
petrochemical and vegetable oil products for 240 different customers, and our
transloading operations handled approximately 59,000 rail cars. The liquids
terminals are located in Houston, New York Harbor, South Louisiana, Chicago,
Cincinnati and Pittsburgh.
Houston. KMLT's Houston terminal complex, located in Pasadena and Galena
Park, Texas along the Houston Ship Channel, has approximately 18 million barrels
of capacity. The complex is connected via pipeline to 14 refineries, four
petrochemical plants and ten major outbound pipelines. In addition, the
facilities have four ship docks and seven barge docks for inbound and outbound
movements. The terminals are served by the Union Pacific railroad.
New York Harbor. KMLT owns two facilities in the New York Harbor area, one in
Carteret, N.J. and the other in Perth Amboy, N.J. The Carteret facility has a
capacity of approximately 6.9 million barrels of petroleum and petrochemical
products. This facility has two ship docks with a 37-foot mean low water depth
and four barge docks. It is connected to the Colonial, Buckeye, Sun and Harbor
pipeline systems and CSX and Norfolk Southern railroads. The Perth Amboy
facility has a capacity of approximately 2.3 million barrels of petroleum and
petrochemical products. Tank sizes range from 2,000 gallons to 300,000 barrels.
The facility has one ship dock and one barge
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dock. This facility is connected to the Colonial and Buckeye pipeline
systems and CSX and Norfolk Southern railroads.
South Louisiana. KMLT owns two facilities in South Louisiana: one in the Port
of New Orleans located in Harvey, Louisiana and the other near a major
petrochemical complex in Geismar, Louisiana. The New Orleans facility has
approximately 3.0 million barrels of total tanks ranging in sizes from 416
barrels to 200,000 barrels. There are three ship docks and one barge dock, and
the Union Pacific railroad provides rail service. The terminal also provides
ancillary drumming, packaging and cold storage services. A second facility is
located approximately 75 miles north of the New Orleans facility on the left
descending bank of the Mississippi River near the town of St. Gabriel,
Louisiana. The facility has approximately 400,000 barrels of tank capacity and
the tanks vary in sizes ranging from 1,990 barrels to 80,000 barrels. There are
three local pipeline connections at the facility which enable the movement of
products from the facility to the petrochemical plants in Geismar, Louisiana.
Chicago. KMLT owns two facilities in the Chicago market. One facility is in
Argo, Illinois about 14 miles southwest of downtown Chicago. The facility has
approximately 2.4 million barrels of capacity in tankage ranging from 50,000
gallons to 80,000 barrels. The Argo terminal is situated along the Chicago
sanitary and ship channel and has three barge docks. The facility is connected
to TEPPCO and Westshore pipelines, as well as a new direct connection to Midway
Airport. The Canadian National railroad services this facility. The other
facility is located in the Port of Chicago along the Calumet River. The facility
has approximately 741,000 barrels of capacity in tanks ranging from 12,000
gallons to 55,000 barrels. There are two ship docks and four barge docks, and
the facility is served by the Norfolk Southern railroad.
Cincinnati. KMLT has two facilities along the Ohio River in Cincinnati, Ohio.
The total storage is approximately 850,000 barrels in tankage ranging from 120
barrels to 96,000 barrels. There are 3 barge docks, and the NNU and CSX
railroads provide rail service.
Pittsburgh. This KMLT facility is located in Dravosburg, Pennsylvania, along
the Monongahela River. There is approximately 250,000 barrels of storage in
tanks ranging from 1,200 to 38,000 barrels. There are two barge docks, and
Norfolk Southern railroad provides rail service.
Rail Transloading Operations: We acquired Laser Materials Services LLC on
January 1, 2002, and in June 2002, we changed its name to Kinder Morgan
Materials Services LLC, referred to herein as KMMS. KMMS operates more than 60
rail transloading facilities, of which 57 are located east of the Mississippi
River. The CSX railroad provides rail service for 52 facilities and the Norfolk
Southern, Union Pacific, Kansas City Southern and A&W railroads provide rail
service for the remaining seven facilities. Approximately 50% of the products
handled by KMMS are liquids and 50% are dry bulk products. KMMS also designs and
builds transloading facilities, performs inventory management services and
provides value-added services such as blending, heating and sparging.
Competition. We are one of the largest independent operators of liquids
terminals in North America. Our largest competitors are Williams, ST Services,
IMTT, Vopak, Oil Tanking and Transmontaigne.
Bulk Terminals
Our Bulk Terminals consist of 38 bulk terminals, which handle approximately
60 million tons of bulk products annually. These terminals have 2 million tons
of covered storage and 14 million tons of open storage.
Coal Terminals
We handled approximately 25 million tons of coal in 2002, which is 45% of the
total volume at our bulk terminals.
Our Cora Terminal is a high-speed, rail-to-barge coal transfer and storage
facility. Built in 1980, the terminal is located on approximately 480 acres of
land along the upper Mississippi River near Cora, Illinois, about 80 miles south
of St. Louis, Missouri. The terminal has a throughput capacity of about 15
million tons per year that can be expanded to 20 million tons with certain
capital additions. The terminal currently is equipped to store up to one million
tons of coal. This storage capacity provides customers the flexibility to
coordinate their supplies of coal
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with the demand at power plants. Storage capacity at the Cora Terminal could
be doubled with additional capital investment.
Our Grand Rivers Terminal is operated on land under easements with an initial
expiration of July 2014. Grand Rivers is a coal transloading and storage
facility located along the Tennessee River just above the Kentucky Dam. The
terminal has current annual throughput capacity of approximately 12 to 15
million tons with a storage capacity of approximately two million tons. With
capital improvements, the terminal could handle 25 million tons annually.
Our Pier IX Terminal is located in Newport News, Virginia. The terminal
originally opened in 1983 and has the capacity to transload approximately 12
million tons of coal annually. It can store 1.3 million tons of coal on its
30-acre storage site. In addition, the Pier IX Terminal operates a cement
facility, which has the capacity to transload over 400,000 tons of cement
annually. In late 2002, Pier IX also began to operate a synfuel plant on site.
Volumes of synfuel produced in 2003 could be between one and two million tons.
In addition, we operate the LAXT Coal Terminal in Los Angeles, California. In
2002, LAXT ceased shipping export coal. We received notice in January 2003 that
the facility was being sold and that our contract to operate the facility would
end in the first quarter of 2003.
We also developed our Shipyard River Terminal in Charleston, South Carolina,
to be able to unload, store and reload coal imported from various foreign
countries. The imported coal is expected to be cleaner burning low sulfur and
would be used by local utilities to comply with the Clean Air Act. Shipyard
River Terminal has the capacity to handle 2.5 million tons per year.
Markets. Coal continues to dominate as the fuel of choice for electric
generation, accounting for more than 50% of United States electric generation
feedstock. Forecasts of overall coal usage and power plant usage for the next 20
years show an increase of about 1.5% per year. Current domestic supplies are
predicted to last for several hundred years. Most coal transloaded through our
coal terminals is destined for use in coal-fired electric generation.
We believe that obligations to comply with the Clean Air Act Amendments of
1990 will cause shippers to increase the use of cleaner burning low sulfur coal
from the western United States and from foreign sources. Approximately 80% of
the coal loaded through our Cora Terminal and our Grand Rivers Terminal is low
sulfur coal originating from mines located in the western United States,
including the Hanna and Powder River basins in Wyoming, western Colorado and
Utah. In 2002, four major customers accounted for approximately 90% of all the
coal l