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F O R M 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number: 1-11234
KINDER MORGAN ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0380342
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
500 Dallas Street, Suite 1000, Houston, Texas 77002
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 713-369-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
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 [ ]
The Registrant had 130,033,218 common units outstanding at April 30, 2003.
1
KINDER MORGAN ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)......................... 3
Consolidated Statements of Income - Three Months Ended 3
March 31, 2003 and 2002................................
Consolidated Balance Sheets - March 31, 2003 and 4
December 31, 2002......................................
Consolidated Statements of Cash Flows - Three Months 5
Ended March 31, 2003 and 2002..........................
Notes to Consolidated Financial Statements............. 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 44
Results of Operations.................................. 44
Financial Condition.................................... 48
Information Regarding Forward-Looking Statements....... 52
Item 3: Quantitative and Qualitative Disclosures About Market
Risk..................................................... 53
Item 4: Controls and Procedures.................................. 53
PART II. OTHER INFORMATION
Item 1: Legal Proceedings........................................ 54
Item 2: Changes in Securities and Use of Proceeds................ 54
Item 3: Defaults Upon Senior Securities.......................... 54
Item 4: Submission of Matters to a Vote of Security Holders...... 54
Item 5: Other Information........................................ 54
Item 6: Exhibits and Reports on Form 8-K......................... 54
Signatures............................................... 56
Certifications........................................... 57
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Unit Amounts)
(Unaudited)
Three Months Ended March 31,
2003 2002
------------- ----------
Revenues
Natural gas sales.................................. $ 1,378,288 $ 469,868
Services........................................... 334,941 295,243
Product sales and other............................ 75,609 37,954
--------- ---------
1,788,838 803,065
--------- ---------
Costs and Expenses
Gas purchases and other costs of sales............. 1,375,414 448,093
Operations and maintenance......................... 93,899 87,291
Fuel and power..................................... 25,138 18,384
Depreciation and amortization...................... 49,805 41,326
General and administrative......................... 34,679 29,532
Taxes, other than income taxes..................... 14,751 12,583
--------- ---------
1,593,686 637,209
--------- ---------
Operating Income..................................... 195,152 165,856
Other Income (Expense)
Earnings from equity investments................... 24,305 23,271
Amortization of excess cost of equity investments.. (1,394) (1,394)
Interest, net...................................... (44,925) (39,022)
Other, net......................................... 277 (50)
Minority Interest.................................... (2,214) (2,827)
--------- ---------
Income Before Income Taxes and Cumulative Effect of .
a Change in Accounting Principle.................. 171,201 145,834
Income Taxes......................................... (4,188) (4,401)
---------- ----------
Income Before Cumulative Effect of a Change in
Accounting Principle.............................. 167,013 141,433
Cumulative effect adjustment from change in accounting
for asset retirement obligations.................. 3,465 -
--------- ---------
Net Income........................................... $ 170,478 $ 141,433
========= =========
Calculation of Limited Partners' interest in Net
Income:
Income Before Cumulative Effect of a Change in
Accounting Principle............................. $ 167,013 $ 141,433
Less: General Partner's interest.................... (76,425) (61,794)
---------- ----------
Limited Partners' interest.......................... 90,588 79,639
Add: Limited Partners' interest in Change in
Accounting Principle............................. 3,430 -
--------- ---------
Limited Partners' interest in Net Income............ $ 94,018 $ 79,639
========= =========
Basic and Diluted Limited Partners' Net Income per
Unit:
Income Before Cumulative Effect of a Change in
Accounting Principle............................. $ 0.50 $ 0.48
Cumulative effect adjustment from change in
accounting for asset retirement obligations...... 0.02 -
---------- ---------
Net Income.......................................... $ 0.52 $ 0.48
========== =========
Weighted average number of units used in computation
of Limited Partners' Net Income per unit:
Basic............................................... 181,377 166,049
========== =========
Diluted............................................. 181,510 166,246
========== =========
The accompanying notes are an integral part of
these consolidated financial statements.
3
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
2003 2002
----------- --------
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 36,881 $ 41,088
Accounts and notes receivable
Trade............................................ 763,094 457,583
Related parties.................................. 21,664 17,907
Inventories
Products......................................... 3,392 4,722
Materials and supplies........................... 8,965 7,094
Gas imbalances..................................... 51,280 25,488
Gas in underground storage......................... 3,707 11,029
Other current assets............................... 78,820 104,479
---------- ----------
967,803 669,390
---------- ----------
Property, Plant and Equipment, net.................... 6,381,802 6,244,242
Investments........................................... 320,835 311,044
Notes receivable...................................... 2,673 3,823
Goodwill.............................................. 869,840 856,940
Other intangibles, net................................ 17,356 17,324
Deferred charges and other assets..................... 241,925 250,813
---------- ----------
TOTAL ASSETS.......................................... $8,802,234 $8,353,576
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable
Trade............................................ $ 657,489 $ 373,368
Related parties.................................. 7,946 43,742
Current portion of long-term debt.................. 14,520 -
Accrued interest................................... 20,152 52,500
Deferred revenues.................................. 5,620 4,914
Gas imbalances..................................... 51,870 40,092
Accrued other current liabilities.................. 358,511 298,711
---------- ----------
1,116,108 813,327
---------- ----------
Long-Term Liabilities and Deferred Credits
Long-term debt, outstanding........................ 3,787,234 3,659,533
Market value of interest rate swaps................ 157,665 166,956
---------- ----------
3,944,899 3,826,489
Deferred revenues.................................. 23,143 25,740
Deferred income taxes.............................. 30,262 30,262
Other long-term liabilities and deferred credits... 220,292 199,796
---------- ----------
4,218,596 4,082,287
---------- ----------
Commitments and Contingencies (Note 3)
Minority Interest..................................... 41,976 42,033
---------- ----------
Partners' Capital
Common Units....................................... 1,831,477 1,844,553
Class B Units...................................... 123,068 123,635
i-Units............................................ 1,444,786 1,420,898
General Partner.................................... 74,919 72,100
Accumulated other comprehensive income (loss)...... (48,696) (45,257)
----------- -----------
3,425,554 3,415,929
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............... $8,802,234 $8,353,576
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
4
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended March 31,
-----------------------------
2003 2002
------------ --------
Cash Flows From Operating Activities
Net income..................................... $ 170,478 $141,433
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect adjustment from change in
accounting for asset retirement
obligations.............................. (3,465) --
Depreciation and amortization.............. 49,805 41,326
Amortization of excess cost of equity
investments.............................. 1,394 1,394
Earnings from equity investments........... (24,305) (23,271)
Distributions from equity investments...... 17,872 6,177
Changes in components of working capital... (37,079) 58,998
Other, net................................. (3,456) (3,486)
---------- ---------
Net Cash Provided by Operating Activities...... 171,244 222,571
--------- --------
Cash Flows From Investing Activities
Acquisitions of assets..................... (2,098) (758,340)
Acquisitions of investments................ (3,500) --
Additions to property, plant and equipment
for expansion and maintenance projects.. (145,831) (91,038)
Sale of investments, property, plant and
equipment, net of removal costs......... (823) (274)
Contributions to equity investments........ (9,415) (291)
Other...................................... 3,168 669
--------- --------
Net Cash Used in Investing Activities.......... (158,499) (849,274)
--------- --------
Cash Flows From Financing Activities
Issuance of debt........................... 955,365 1,800,337
Payment of debt............................ (813,365) (1,075,591)
Debt issue costs........................... (287) (60)
Proceeds from issuance of common units..... 780 680
Distributions to partners:
Common units........................... (81,232) (71,424)
Class B units.......................... (3,321) (2,922)
General Partner........................ (73,641) (55,300)
Minority interest...................... (2,236) (2,651)
Other, net................................. 985 98
--------- --------
Net Cash (Used in)/Provided by Financing
Activities..................................... (16,952) 593,167
--------- --------
Decrease in Cash and Cash Equivalents.......... (4,207) (33,536)
Cash and Cash Equivalents, beginning of period. 41,088 62,802
--------- --------
Cash and Cash Equivalents, end of period....... $ 36,881 $ 29,266
========= ========
Noncash Investing and Financing Activities:
Assets acquired by the assumption of
liabilities $ -- $105,597
The accompanying notes are an integral part of
these consolidated financial statements.
5
KINDER MORGAN ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Organization
General
Unless the context requires otherwise, references to "we," "us," "our" or the
"Partnership" are intended to mean Kinder Morgan Energy Partners, L.P. We have
prepared the accompanying unaudited consolidated financial statements under the
rules and regulations of the Securities and Exchange Commission. Under such
rules and regulations, we have condensed or omitted certain information and
notes normally included in financial statements prepared in conformity with
accounting principles generally accepted in the United States of America. We
believe, however, that our disclosures are adequate to make the information
presented not misleading. The consolidated financial statements reflect all
adjustments that are, in the opinion of our management, necessary for a fair
presentation of our financial results for the interim periods. You should read
these consolidated financial statements in conjunction with our consolidated
financial statements and related notes included in our Annual Report on Form
10-K for the year ended December 31, 2002.
Kinder Morgan, Inc. and Kinder Morgan Management, LLC
Kinder Morgan, Inc., a Kansas corporation, is the sole stockholder of
Kinder Morgan (Delaware), Inc. Kinder Morgan (Delaware), Inc., a Delaware
corporation, is the sole stockholder of our general partner, Kinder Morgan
G.P., Inc. Kinder Morgan, Inc. is referred to as "KMI" in this report.
Kinder Morgan Management, LLC, a Delaware limited liability company, was
formed on February 14, 2001. Our general partner owns all of Kinder Morgan
Management, LLC's voting securities and, pursuant to a delegation of control
agreement, our general partner delegated to Kinder Morgan Management, LLC, to
the fullest extent permitted under Delaware law and our partnership agreement,
all of its power and authority to manage and control the business and affairs of
us, our operating limited partnerships and their subsidiaries. Kinder Morgan
Management, LLC cannot take certain specified actions without the approval of
our general partner and its 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. Kinder Morgan Management, LLC is
referred to as "KMR" in this report.
Basis of Presentation
Our consolidated financial statements include our accounts and those of our
majority-owned and controlled subsidiaries and our operating partnerships. All
significant intercompany items have been eliminated in consolidation. Certain
amounts from prior periods have been reclassified to conform to the current
presentation.
Net Income Per Unit
We compute Basic Limited Partners' Net Income per Unit by dividing our limited
partners' interest in net income by the weighted average number of units
outstanding during the period. Diluted Limited Partners' Net Income per Unit
reflects the potential dilution, by application of the treasury stock method,
that could occur if options to issue units were exercised, which would result in
the issuance of additional units that would then share in our net income.
Asset Retirement Obligations
As of January 1, 2003, we account for asset retirement obligations pursuant to
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations." For more information on our asset retirement
obligations, see Note 4.
6
2. Acquisitions and Joint Ventures
During the first three months of 2003, we completed or made adjustments for
the following significant acquisitions. Each of the acquisitions was accounted
for under the purchase method and the assets acquired and liabilities assumed
were recorded at their estimated fair market values as of the acquisition date.
The preliminary amounts assigned to assets and liabilities may be adjusted
during a short period of time following the acquisition. The results of
operations from these acquisitions are included in the consolidated financial
statements from the effective date of acquisition.
Kinder Morgan Tejas
Effective January 31, 2002, we acquired all of the equity interests of Tejas
Gas, LLC, a wholly-owned subsidiary of InterGen (North America), Inc., for an
aggregate consideration of approximately $881.5 million, consisting of $727.1
million in cash and the assumption of $154.4 million of liabilities. Tejas Gas,
LLC consists primarily of a 3,400-mile natural gas intrastate pipeline system
that extends from south Texas along the Mexico border and the Texas Gulf Coast
to near the Louisiana border and north from near Houston to east Texas. The
acquisition expanded our natural gas operations within the State of Texas. The
acquired assets are referred to as Kinder Morgan Tejas in this report and are
included in our Natural Gas Pipelines business segment. The combination of these
systems is part of our Texas intrastate natural gas pipeline group.
Our purchase price and our allocation to assets acquired and liabilities
assumed was as follows (in thousands):
Purchase price:
Cash paid, including transaction costs.............. $ 727,094
Liabilities assumed................................. 154,455
---------
Total purchase price................................ $ 881,549
=========
Allocation of purchase price:
Current assets...................................... $ 56,496
Property, plant and equipment, including cushion gas 674,147
Goodwill ........................................... 150,906
---------
$ 881,549
=========
Our allocation to assets acquired and liabilities assumed was based on an
appraisal of fair market values. The $150.9 million of goodwill was assigned to
our Natural Gas Pipelines business segment and the entire amount is expected to
be deductible for tax purposes.
Bulk Terminals from M.J. Rudolph
Effective January 1, 2003, we acquired long-term lease contracts from New
York-based M.J. Rudolph Corporation to operate four bulk facilities at major
ports along the East Coast and in the southeastern United States. The
acquisition also includes the purchase of certain assets that provide
stevedoring services at these locations. The aggregate cost of the acquisition
was approximately $31.3 million. On December 31, 2002, we paid $29.9 million for
the Rudolph acquisition and this amount was included with Other current assets
on our accompanying balance sheet. In the first quarter of 2003, we paid the
remaining $1.4 million and we allocated our aggregate purchase price to the
appropriate asset and liability accounts. The acquired operations serve various
terminals located at the ports of New York and Baltimore, along the Delaware
River in Camden, New Jersey, and in Tampa Bay, Florida. Combined, these
facilities transload nearly four million tons annually of products such as
fertilizer, iron ore and salt. The acquisition expands our growing Terminals
business segment and complements certain of our existing terminal facilities and
will be included in our Terminals business segment.
Our purchase price and our allocation to assets acquired and liabilities
assumed was as follows (in thousands):
7
Purchase price:
Cash paid, including transaction costs.... $ 31,337
Liabilities assumed....................... 6
--------
Total purchase price...................... $ 31,343
========
Allocation of purchase price:
Current assets............................ $ 84
Property, plant and equipment............. 18,250
Intangibles-agreements ................... 100
Deferred charges and other assets ........ 9
Goodwill ................................. 12,900
--------
$ 31,343
========
The $12.9 million of goodwill was assigned to our Terminals business segment
and the entire amount is expected to be deductible for tax purposes.
Pro Forma Information
The following summarized unaudited Pro Forma Consolidated Income Statement
information for the three months ended March 31, 2003 and 2002, assumes all of
the acquisitions we have made since January 1, 2002, including the ones listed
above, had occurred as of January 1, 2002. We have prepared these unaudited Pro
Forma financial results for comparative purposes only. These unaudited Pro Forma
financial results may not be indicative of the results that would have occurred
if we had completed these acquisitions as of January 1, 2002 or the results that
will be attained in the future. Amounts presented below are in thousands, except
for the per unit amounts:
Pro Forma
Three Months Ended
March 31,
2003 2002
---- ----
(Unaudited)
Revenues....................................... $1,788,838 $1,051,357
Operating Income............................... 195,152 174,155
Income Before Cumulative Effect of a Change in
Accounting Principle......................... 167,013 149,845
Net Income..................................... 170,478 149,845
Basic and diluted Limited Partners' Net Income
per unit:
Income Before Cumulative Effect of a Change in
Accounting Principle......................... $ 0.50 $ 0.50
Net Income..................................... $ 0.52 $ 0.50
3. Litigation and Other Contingencies
Federal Energy Regulatory Commission Proceedings
SFPP, L.P.
SFPP, L.P., referred to herein as SFPP, is the subsidiary limited partnership
that owns our Pacific operations, excluding CALNEV Pipe Line LLC and related
terminals acquired from GATX Corporation. Tariffs charged by SFPP are subject to
certain proceedings at the FERC involving shippers' complaints regarding the
interstate rates, as well as practices and the jurisdictional nature of certain
facilities and services, on our Pacific operations' pipeline systems. Generally,
the interstate rates on our Pacific operations' pipeline systems are
"grandfathered" under the Energy Policy Act of 1992 unless "substantially
changed circumstances" are found to exist. To the extent "substantially changed
circumstances" are found to exist, our Pacific operations may be subject to
substantial exposure under these FERC complaints.
The complainants in the proceedings before the FERC have alleged a variety of
grounds for finding "substantially changed circumstances." Applicable rules and
regulations in this field are vague, relevant factual issues are complex, and
there is little precedent available regarding the factors to be considered or
the method of analysis to be employed in making a determination of
"substantially changed circumstances." Given the relative newness of the
grandfathering standard under the Energy Policy Act and limited precedent, we
cannot predict how
8
these allegations will be viewed by the FERC.
If "substantially changed circumstances" are found, SFPP rates previously
"grandfathered" under the Energy Policy Act will lose their "grandfathered"
status. If these rates are found to be unjust and unreasonable, shippers may be
entitled to prospective rate reductions and complainants may be entitled to
reparations for periods from the date of their respective complaint to the date
of the implementation of the new rates.
We currently believe that these FERC complaints seek approximately $154
million in tariff reparations and prospective annual tariff reductions, the
aggregate average annual impact of which would be approximately $45 million. We
are not able to predict with certainty the final outcome of the pending FERC
proceedings involving SFPP, should they be carried through to their conclusion,
or whether we can reach a settlement with some or all of the complainants.
However, even if "substantially changed circumstances" are found to exist, we
believe that the resolution of these FERC complaints will be for amounts
substantially less than the amounts sought and that the resolution of such
matters will not have a material adverse effect on our business, financial
position or results of operations.
OR92-8, et al. proceedings. In September 1992, El Paso Refinery, L.P.
---------------------------
filed a protest/complaint with the FERC:
o challenging SFPP's East Line rates from El Paso, Texas to Tucson and
Phoenix, Arizona;
o challenging SFPP's proration policy; and
o seeking to block the reversal of the direction of flow of SFPP's six-inch
pipeline between Phoenix and Tucson.
At various subsequent dates, the following other shippers on SFPP's South
System filed separate complaints, and/or motions to intervene in the FERC
proceeding, challenging SFPP's rates on its East and/or West Lines:
o Chevron U.S.A. Products Company;
o Navajo Refining Company;
o ARCO Products Company;
o Texaco Refining and Marketing Inc.;
o Refinery Holding Company, L.P. (a partnership formed by El Paso Refinery's
long-term secured creditors that purchased its refinery in May 1993);
o Mobil Oil Corporation; and
o Tosco Corporation.
Certain of these parties also claimed that a gathering enhancement fee at
SFPP's Watson Station in Carson, California was charged in violation of the
Interstate Commerce Act.
The FERC consolidated these challenges in Docket Nos. OR92-8-000, et al., and
ruled that they are complaint proceedings, with the burden of proof on the
complaining parties. These parties must show that SFPP's rates and practices at
issue violate the requirements of the Interstate Commerce Act.
A FERC administrative law judge held hearings in 1996, and issued an initial
decision on September 25, 1997. The initial decision agreed with SFPP's position
that "changed circumstances" had not been shown to exist on the West Line, and
therefore held that all West Line rates that were "grandfathered" under the
Energy Policy Act of 1992 were deemed to be just and reasonable and were not
subject to challenge, either for the past or prospectively, in the Docket No.
OR92-8 et al. proceedings. SFPP's Tariff No. 18 for movement of jet fuel from
Los Angeles to Tucson, which was initiated subsequent to the enactment of the
Energy Policy Act, was specifically excepted from that ruling.
9
The initial decision also included rulings generally adverse to SFPP on such
cost of service issues as:
o the capital structure to be used in computing SFPP's 1985 starting rate
base;
o the level of income tax allowance; and
o the recovery of civil and regulatory litigation expenses and certain
pipeline reconditioning costs.
The administrative law judge also ruled that SFPP's gathering enhancement
service at Watson Station was subject to FERC jurisdiction and ordered SFPP to
file a tariff for that service, with supporting cost of service documentation.
SFPP and other parties asked the FERC to modify various rulings made in the
initial decision. On January 13, 1999, the FERC issued its Opinion No. 435,
which affirmed certain of those rulings and reversed or modified others.
With respect to SFPP's West Line, the FERC affirmed that all but one of the
West Line rates are "grandfathered" as just and reasonable and that "changed
circumstances" had not been shown to satisfy the complainants' threshold burden
necessary to challenge those rates. The FERC further held that the rate stated
in Tariff No. 18 did not require rate reduction. Accordingly, the FERC dismissed
all complaints against the West Line rates without any requirement that SFPP
reduce, or pay any reparations for, any West Line rate.
With respect to the East Line rates, Opinion No. 435 made several changes in
the initial decision's methodology for calculating the rate base. It held that
the June 1985 capital structure of SFPP's parent company at that time, rather
than SFPP's 1988 partnership capital structure, should be used to calculate the
starting rate base and modified the accumulated deferred income tax and
allowable cost of equity used to calculate the rate base. It also ruled that
SFPP would not owe reparations to any complainant for any period prior to the
date on which that complainant's complaint was filed, thus reducing by two years
the potential reparations period claimed by most complainants.
SFPP and certain complainants sought rehearing of Opinion No. 435 by the FERC.
In addition, ARCO, RHC, Navajo, Chevron and SFPP filed petitions for review of
Opinion No. 435 with the U.S. Court of Appeals for the District of Columbia
Circuit, all of which were either dismissed as premature or held in abeyance
pending FERC action on the rehearing requests.
On March 15, 1999, as required by the FERC's order, SFPP submitted a
compliance filing implementing the rulings made in Opinion No. 435, establishing
the level of rates to be charged by SFPP in the future, and setting forth the
amount of reparations that would be owed by SFPP to the complainants under the
order. The complainants contested SFPP's compliance filing.
On May 17, 2000, the FERC issued its Opinion No. 435-A, which modified Opinion
No. 435 in certain respects. It denied requests to reverse its rulings that
SFPP's West Line rates and Watson Station gathering enhancement facilities fee
are entitled to be treated as "grandfathered" rates under the Energy Policy Act.
It suggested, however, that if SFPP had fully recovered the capital costs of the
gathering enhancement facilities, that might form the basis of an amended
"changed circumstances" complaint.
Opinion No. 435-A granted a request by Chevron and Navajo to require that
SFPP's December 1988 partnership capital structure be used to compute the
starting rate base from December 1983 forward, as well as a request by SFPP to
vacate a ruling that would have required the elimination of approximately $125
million from the rate base used to determine capital structure. It also granted
two clarifications sought by Navajo, to the effect that SFPP's return on its
starting rate base should be based on SFPP's capital structure in each given
year (rather than a single capital structure from the outset) and that the
return on deferred equity should also vary with the capital structure for each
year. Opinion No. 435-A denied the request of Chevron and Navajo that no income
tax allowance be recognized for the limited partnership interests held by SFPP's
corporate parent, as well as SFPP's request that the tax allowance should
include interests owned by certain non-corporate entities. However, it granted
Navajo's request to make the computation of interest expense for tax allowance
purposes the same as for debt return.
10
Opinion No. 435-A reaffirmed that SFPP may recover certain litigation costs
incurred in defense of its rates (amortized over five years), but reversed a
ruling that those expenses may include the costs of certain civil litigation
with Navajo and El Paso. It also reversed a prior decision that litigation costs
should be allocated between the East and West Lines based on throughput, and
instead adopted SFPP's position that such expenses should be split equally
between the two systems.
As to reparations, Opinion No. 435-A held that no reparations would be awarded
to West Line shippers and that only Navajo was eligible to recover reparations
on the East Line. It reaffirmed that a 1989 settlement with SFPP barred Navajo
from obtaining reparations prior to November 23, 1993, but allowed Navajo
reparations for a one-month period prior to the filing of its December 23, 1993
complaint. Opinion No. 435-A also confirmed that FERC's indexing methodology
should be used in determining rates for reparations purposes and made certain
clarifications sought by Navajo.
Opinion No. 435-A denied Chevron's request for modification of SFPP's
prorationing policy. That policy required customers to demonstrate a need for
additional capacity if a shortage of available pipeline space existed. SFPP's
prorationing policy has since been changed to eliminate the "demonstrated need"
test.
Finally, Opinion No. 435-A directed SFPP to revise its initial compliance
filings to reflect the modified rulings. It eliminated the refund obligation for
the compliance tariff containing the Watson Station gathering enhancement fee,
but required SFPP to pay refunds to the extent that the initial compliance
tariff East Line rates exceeded the rates produced under Opinion No. 435-A.
In June 2000, several parties filed requests for rehearing of rulings made in
Opinion No. 435-A. Chevron and RHC both sought reconsideration of the FERC's
ruling that only Navajo is entitled to reparations for East Line shipments. SFPP
sought rehearing of the FERC's:
o decision to require use of the December 1988 partnership capital structure
for the period 1984-88 in computing the starting rate base;
o elimination of civil litigation costs;
o refusal to allow any recovery of civil litigation settlement payments; and
o failure to provide any allowance for regulatory expenses in prospective
rates.
On July 17, 2000, SFPP submitted a compliance filing implementing the rulings
made in Opinion No. 435-A, together with a calculation of reparations due to
Navajo and refunds due to other East Line shippers. SFPP also filed a tariff
stating revised East Line rates based on those rulings.
ARCO, Chevron, Navajo, RHC, Texaco and SFPP sought judicial review of Opinion
No. 435-A in the U.S. Court of Appeals for the District of Columbia Circuit. All
of those petitions except Chevron's were either dismissed as premature or held
in abeyance pending action on the rehearing requests. On September 19, 2000, the
court dismissed Chevron's petition for lack of prosecution, and subsequently
denied a motion by Chevron for reconsideration of that dismissal.
On September 13, 2001, the FERC issued Opinion No. 435-B, which ruled on
requests for rehearing and comments on SFPP's compliance filing. Based on those
rulings, the FERC directed SFPP to submit a further revised compliance filing,
including revised tariffs and revised estimates of reparations and refunds.
Opinion No. 435-B denied SFPP's requests for rehearing, which involved the
capital structure to be used in computing starting rate base, SFPP's ability to
recover litigation and settlement costs incurred in connection with the Navajo
and El Paso civil litigation, and the provision for regulatory costs in
prospective rates. However, it modified the FERC's prior rulings on several
other issues. It reversed the ruling that only Navajo is eligible to seek
reparations, holding that Chevron, RHC, Tosco and Mobil are also eligible to
recover reparations for East Line shipments. It ruled, however, that Ultramar
Diamond Shamrock ("UDS") is not eligible for reparations in the Docket No.
OR92-8 et al. proceedings.
11
The FERC also changed prior rulings that had permitted SFPP to use certain
litigation, environmental and pipeline rehabilitation costs that were not
recovered through the prescribed rates to offset overearnings (and potential
reparations) and to recover any such costs that remained by means of a surcharge
to shippers. Opinion No. 435-B required SFPP to pay reparations to each
complainant without any offset for unrecovered costs. It required SFPP to
subtract from the total 1995-1998 supplemental costs allowed under Opinion No.
435-A any overearnings not paid out as reparations, and allowed SFPP to recover
any remaining costs from shippers by means of a five-year surcharge beginning
August 1, 2000. Opinion No. 435-B also ruled that SFPP would only be permitted
to recover certain regulatory litigation costs through the surcharge, and that
the surcharge could not include environmental or pipeline rehabilitation costs.
Opinion No. 435-B directed SFPP to make additional changes in its revised
compliance filing, including:
o using a remaining useful life of 16.8 years in amortizing its starting
rate base, instead of 20.6 years;
o removing the starting rate base component from base rates as of August 1,
2001;
o amortizing the accumulated deferred income tax balance beginning in 1992,
rather than 1988;
o listing the corporate unitholders that were the basis for the income tax
allowance in its compliance filing and certifying that those companies are
not Subchapter S corporations; and
o "clearly" excluding civil litigation costs and explaining how it limited
litigation costs to FERC-related expenses and assigned them to appropriate
periods in making reparations calculations.
On October 15, 2001, Chevron and RHC filed petitions for rehearing of
Opinion No. 435-B. Chevron asked the FERC to clarify:
o the period for which Chevron is entitled to reparations; and
o whether East Line shippers that have received the benefit of
FERC-prescribed rates for 1994 and subsequent years must show that there
has been a substantial divergence between the cost of service and the
change in the FERC's rate index in order to have standing to challenge
SFPP rates for those years in pending or subsequent proceedings.
RHC's petition contended that Opinion No. 435-B should be modified on
rehearing, to the extent it:
o suggested that a "substantial divergence" standard applies to complaint
proceedings challenging the total level of SFPP's East Line rates
subsequent to the Docket No. OR92-8 et al. proceedings;
o required a substantial divergence to be shown between SFPP's cost of
service and the change in the FERC oil pipeline index in such subsequent
complaint proceedings, rather than a substantial divergence between the
cost of service and SFPP's revenues; and
o permitted SFPP to recover 1993 rate case litigation expenses through a
surcharge mechanism.
ARCO, UDS and SFPP filed petitions for review of Opinion No. 435-B (and in
SFPP's case, Opinion Nos. 435 and 435-A) in the U.S. Court of Appeals for the
District of Columbia Circuit. The court consolidated the UDS and SFPP petitions
with the consolidated cases held in abeyance and ordered that the consolidated
cases be returned to its active docket.
On November 7, 2001, the FERC issued an order ruling on the petitions for
rehearing of Opinion No. 435-B. The FERC held that Chevron's eligibility for
reparations should be measured from August 3, 1993, rather than the September
23, 1992 date sought by Chevron. The FERC also clarified its prior ruling with
respect to the "substantial divergence" test, holding that in order to be
considered on the merits, complaints challenging the SFPP rates set by applying
the FERC's indexing regulations to the 1994 cost of service derived under the
Opinion No. 435
12
orders must demonstrate a substantial divergence between the indexed rates and
the pipeline's actual cost of service. Finally, the FERC held that SFPP's 1993
regulatory costs should not be included in the surcharge for the recovery of
supplemental costs.
On November 20, 2001, SFPP submitted its compliance filing and tariffs
implementing Opinion No. 435-B and the FERC's November 7, 2001 Order. Motions to
intervene and protest were subsequently filed by ARCO, Mobil (which now submits
filings under the name ExxonMobil), RHC, Navajo and Chevron, alleging that SFPP:
o should have calculated the supplemental cost surcharge differently;
o did not provide adequate information on the taxpaying status of its
unitholders; and
o failed to estimate potential reparations for ARCO.
On December 7, 2001, Chevron filed a petition for rehearing of the FERC's
November 7, 2001 Order. The petition requested the FERC to specify whether
Chevron would be entitled to reparations for the two year period prior to the
August 3, 1993 filing of its complaint.
On December 10, 2001, SFPP filed a response to those claims. On December 14,
2001, SFPP filed a revised compliance filing and new tariff correcting an error
that had resulted in understating the proper surcharge and tariff rates.
On December 20, 2001, the FERC's Director of the Division of Tariffs and Rates
Central issued two letter orders rejecting SFPP's November 20, 2001 and December
14, 2001 tariff filings because they were not made effective retroactive to
August 1, 2000. On January 11, 2002, SFPP filed a request for rehearing of those
orders by the FERC, on the ground that the FERC has no authority to require
retroactive reductions of rates filed pursuant to its orders in complaint
proceedings.
On January 7, 2002, SFPP and RHC filed petitions for review of the FERC's
November 7, 2001 Order in the U.S. Court of Appeals for the District of Columbia
Circuit. On January 8, 2002, the court consolidated those petitions with the
petitions for review of Opinion Nos. 435, 435-A and 435-B. On January 24, 2002,
the court ordered the consolidated proceedings to be held in abeyance until the
FERC acts on Chevron's request for rehearing of the November 7, 2001 Order.
Motions to intervene and protest the December 14, 2001 corrected submissions
were filed by Navajo, ARCO and ExxonMobil. UDS requested leave to file an
out-of-time intervention and protest of both the November 20, 2001 and December
14, 2001 submissions. On January 14, 2002, SFPP responded to those filings to
the extent they were not mooted by the orders rejecting the tariffs in question.
On February 15, 2002, the FERC denied rehearing of the Director of the
Division of Tariffs and Rates Central's letter orders. On February 21, 2002,
SFPP filed a motion requesting that the FERC clarify whether it intended SFPP to
file a retroactive tariff or simply make a compliance filing calculating the
effects of Opinion No. 435-B back to August 1, 2000; in the event the order was
clarified to require a retroactive tariff filing, SFPP asked the FERC to stay
that requirement pending judicial review.
On April 8, 2002, SFPP filed a petition for review of the FERC's February 15,
2002 Order in the U.S. Court of Appeals for the District of Columbia Circuit. BP
West Coast Products, LLC (formerly ARCO), ExxonMobil, and Tosco filed motions to
intervene in that proceeding. A motion to intervene was also filed by Valero
Energy Corporation ("Valero Energy") (which had merged with UDS on December 31,
2001) and Valero Energy's newly acquired shipper subsidiary Ultramar Inc. On
April 9, 2002, the Court of Appeals consolidated SFPP's petition with the
petitions for review of the FERC's prior orders and directed the parties "to
file motions to govern future proceedings" by May 9, 2002. Motions were filed by
SFPP, RHC, Navajo, Chevron and the "Indicated Parties" (BP West Coast Products,
ExxonMobil, Ultramar Inc., UDS and Tosco). The FERC requested that the Court of
Appeals continue to hold the consolidated cases in abeyance pending the
completion of proceedings before the agency on rehearing.
13
On June 25, 2002, the Court of Appeals granted the ExxonMobil and Valero
Energy motions to intervene, and directed intervenors on the side of petitioners
to notify the court of that status and provide a statement of issues to be
raised. ExxonMobil filed a notice on July 2, 2002; Ultramar Inc. and Valero
Energy on July 10, 2002. On July 12, 2002, SFPP responded to the ExxonMobil
notice in order to urge the Court of Appeals not to rely on ExxonMobil's
categorization of the issues and party alignments in allocating briefing.
On May 31, 2002, SFPP filed FERC Tariff No. 70, which implemented the FERC's
annual indexing adjustment. Motions to intervene and protest were filed by
Navajo and Chevron, contesting any indexing adjustment to the litigation
surcharge permitted by Opinion No. 435-B. On June 28, 2002, the FERC's Director
of the Division of Tariffs and Rates rejected Tariff No. 70 on the ground that
the surcharge should not be indexed. On July 2, 2002, SFPP filed FERC Tariff No.
73 to replace Tariff No. 70 in compliance with that decision, which resulted in
an average reduction from Tariff No. 70 of approximately $.0002 per barrel.
On September 26, 2002, the FERC issued an order ruling on the protests against
SFPP's November 20, 2001 and December 14, 2001 compliance filings implementing
Opinion No. 435-B and the November 7, 2001 Order. The FERC held that:
o SFPP must measure supplemental costs against the total amount of reparations
for the entire reparations period (as opposed to year-by-year);
o SFPP will not be permitted to include in its supplemental costs (a)
litigation expenses incurred during 1999 and 2000 or (b) payments made to
Navajo and RHC to settle certain FERC litigation;
o the tariff surcharge collected by SFPP for all shipments between August 1,
2000 and December 1, 2001 is subject to refund; and
o in calculating its tax allowance, SFPP must exclude the ownership interest
attributable to an entity that the FERC found to be a mutual fund.
The FERC rejected the requests by Navajo, BP West Coast Products and
ExxonMobil to extend the period for which they are entitled to reparations
beyond the periods specified in prior orders.
The September 26, 2002 Order also ruled on SFPP's request for clarification of
the February 15, 2002 Order as to whether it was required to make a retroactive
tariff filing or rather a compliance filing calculating the effects of Opinion
No. 435-B beginning August 1, 2000. The FERC held that SFPP was required to file
a tariff retroactive to August 1, 2000. The FERC did not rule on SFPP's
alternative request for a stay. The FERC also ruled on Chevron's request for
rehearing of the November 7, 2001 Order, clarifying that Chevron was eligible
for reparations for shipments on the East Line for the two years prior to the
filing of its complaint.
On October 22, 2002, ExxonMobil filed a Request for Clarification or, in the
Alternative, Rehearing of the September 26, 2002 Order. ExxonMobil requested
that the FERC clarify that ExxonMobil was eligible for reparations for East Line
rates.
Following the September 26, 2002 Order, several parties filed motions to
govern future proceedings with the U.S. Court of Appeals for the District of
Columbia Circuit. BP West Coast Products and ExxonMobil (the "Indicated
Parties") and Valero Energy, Ultramar Inc. and Tosco (the "Joint Parties")
requested that the court return the petitions for review to its active docket
but sever the docket involving compliance filing issues. The FERC filed a motion
that did not take a definitive position on whether the petitions for review
should continue to be held in abeyance, but noted that compliance filing issues
were still pending before the FERC. SFPP, Chevron, Navajo and RHC filed
responses to the motions to govern future proceedings. On December 6, 2002, the
Court of Appeals granted the motion of the "Indicated Parties" and "Joint
Parties" to return the petitions for review to the Court's active docket. The
Court also severed the docket relating to compliance filing issues and directed
the parties to submit a proposed briefing schedule and format. On January 6,
2003, SFPP and FERC filed a joint briefing proposal, and the shipper parties
jointly filed a separate briefing proposal.
14
On October 18, 2002, Chevron filed a petition for review of Opinion Nos. 435,
435-A and 435-B in the U.S. Court of Appeals for the District of Columbia
Circuit. The Court of Appeals consolidated that petition with the main docket on
November 20, 2002. Tosco and BP West Coast Products moved to intervene in that
docket, and those motions were granted on December 10, 2002.
Petitions for review of the September 26, 2002 Order were filed in the U.S.
Court of Appeals for the District of Columbia Circuit by Navajo, on October 24,
2002, and by SFPP, on November 8, 2002. The Court consolidated those petitions
with the main docket on November 5, 2002 and November 12, 2002, respectively.
Valero Marketing and Supply Company ("Valero Marketing and Supply") moved to
intervene in both dockets and Tosco moved to intervene in the docket for the
SFPP petition. On January 6, 2003, Valero Marketing and Supply filed a motion to
substitute itself for UDS in the UDS petition for review of Opinion No. 435-B.
On January 21, 2003, SFPP filed a response, stating that it did not object to
the proposed substitution provided Valero Marketing and Supply was not permitted
to create or enlarge any claim for damages. On January 24, 2003, ConocoPhillips
filed a motion to substitute itself for Tosco in the consolidated dockets, and
on January 27, 2003, filed a similar motion in the severed docket relating to
compliance filing issues. On February 4, 2003, the Court of Appeals granted the
ConocoPhillips motion for substitution.
On October 25, 2002, SFPP filed Tariff No. 75 implementing changes required by
the September 26, 2002 Order, and on October 28, 2002, SFPP submitted a
compliance filing pursuant to that order. Valero Marketing and Supply filed a
motion to intervene and protest regarding the compliance filing and tariff, and
Tosco protested the compliance filing. Navajo Refining Company, L.P. moved to
intervene in proceedings relating to the tariff, and Chevron and Equilon
Enterprises LLC filed comments and related pleadings challenging the compliance
filing and seeking additional relief.
On January 29, 2003, the FERC issued an order accepting the October 28,
2002 compliance filing subject to the condition that SFPP recalculate gross
reparations in determining its per barrel surcharge and submit a revised tariff
reflecting that change within fifteen days of the order. The FERC rejected all
other challenges to that compliance filing. On February 13, 2003, SFPP filed its
revised compliance filing along with Tariff No. 81, implementing the provisions
of the January 29, 2003 Order. No party protested that filing. Valero Marketing
and Supply moved to intervene in the sub-docket related to Tariff No. 81 and
Valero Marketing and Supply and Ultramar Inc. moved to intervene in the
sub-docket related to the compliance filing.
On February 24, 2003, the FERC modified the basis on which maximum
allowable oil pipeline rates are adjusted for inflation, from the producer price
index for finished goods minus one percent to the unadjusted producer price
index for finished goods. On February 25, 2003, SFPP filed Tariff No. 82, which
implemented that indexing change with respect to its prospective rates. Tariff
No. 82 was protested by BP West Coast Products, Chevron, ExxonMobil, Valero
Marketing and Supply, and ConocoPhillips Company, in Docket No. IS03-131. On
March 28, 2003, the Commission denied the protests and accepted Tariff No. 82.
On March 7, 2003, SFPP filed a revised compliance filing in Docket No. OR92-8,
which adjusted the refund calculations in SFPP's October 28, 2002 compliance
filing to account for the change in the oil pipeline pricing index as of July 1,
2001. On March 24, 2003, BP West Coast Products protested this revised
compliance filing. On March 27, 2003, Navajo Refining Company, LP filed an
answer to the BP West Coast Products protest in which it also challenged the
adjustment to the refund calculation made in the revised compliance filing. On
April 14, 2003, SFPP made reparation payments of $42.7 million and refund
payments of $1.7 million as ordered by the Commission pursuant to SFPP's March
7, 2003 revised compliance filing.
Petitions for review of the January 29, 2003 Order were filed by
ConocoPhillips on February 6, 2003, SFPP on March 10, 2003 and Chevron on March
27, 2003. SFPP moved to intervene in the ConocoPhillips docket. ExxonMobil and
BP West Coast Products moved to intervene in the SFPP docket.
On March 7, 2003, the United States Court of Appeals for the District of
Columbia Circuit severed from the main docket all dockets relating to petitions
for review of the February 15, 2002, September 26, 2002, and January 29, 2003
Orders. The Court of Appeals ordered those dockets to be held in abeyance
pending resolution of the main docket. The Court of Appeals also issued a
briefing schedule for the main docket, with opening briefs due May 9, 2003 and
final briefs due September 17, 2003. No date for oral argument was set, and the
panel that will hear the
15
case has not yet been announced. The Court also granted the motion of Valero
Marketing and Supply to substitute itself for UDS.
Sepulveda proceedings. In December 1995, Texaco filed a complaint at FERC
---------------------
Docket No. OR96-2) alleging that movements on SFPP's Sepulveda pipelines
(Line Sections 109 and 110) to Watson Station, in the Los Angeles basin,
were subject to FERC's jurisdiction under the Interstate Commerce Act, and,
if so, claimed that the rate for that service was unlawful. Texaco sought to
have its claims addressed in the OR92-8 proceeding discussed above. Several
other West Line shippers filed similar complaints and/or motions to intervene.
The FERC consolidated all of these filings into Docket No. OR96-2 and set the
claims for a separate hearing. A hearing before an administrative law judge was
held in December 1996.
In March 1997, the judge issued an initial decision holding that the movements
on the Sepulveda pipelines were not subject to FERC jurisdiction. On August 5,
1997, the FERC reversed that decision. On October 6, 1997, SFPP filed a tariff
establishing the initial interstate rate for movements on the Sepulveda
pipelines at the preexisting rate of five cents per barrel. Several shippers
protested that rate. In December 1997, SFPP filed an application for authority
to charge a market-based rate for the Sepulveda service, which application was
protested by several parties. On September 30, 1998, the FERC issued an order
finding that SFPP lacks market power in the Watson Station destination market
and that, while SFPP appeared to lack market power in the Sepulveda origin
market, a hearing was necessary to permit the protesting parties to substantiate
allegations that SFPP possesses market power in the origin market. A hearing
before a FERC administrative law judge on this limited issue was held in
February 2000.
On December 21, 2000, the FERC administrative law judge issued his initial
decision finding that SFPP possesses market power over the Sepulveda origin
market. On February 28, 2003, the FERC issued an order upholding that decision.
Because the FERC found that SFPP did not have market power over two of the three
major customers at the Sepulveda origin market and because the third customer is
now an affiliate of SFPP, SFPP filed a request for rehearing of that order on
March 31, 2003, which is pending before the FERC.
Following the issuance of the initial decision in the Sepulveda case, the FERC
judge indicated an intention to proceed to consideration of the justness and
reasonableness of the existing rate for service on the Sepulveda pipelines. On
February 22, 2001, the FERC granted SFPP's motion to block such consideration
and to defer consideration of the pending complaints against the Sepulveda rate
until after FERC's final disposition of SFPP's market rate application. As part
of its February 28, 2003 order denying SFPP's application for market-based
ratemaking authority, the FERC remanded the proceeding to the ongoing litigation
in Docket No. OR96-2, et al. for a determination of whether SFPP's current rate
for service on the Sepulveda line is just and reasonable.
OR97-2; OR98-1. et al. proceedings. In October 1996, Ultramar filed a
----------------------------------
complaint at FERC (Docket No. OR97-2) challenging SFPP's West Line rates,
claiming they were unjust and unreasonable and no longer subject to
grandfathering. In October 1997, ARCO, Mobil and Texaco filed a complaint at the
FERC (Docket No. OR98-1) challenging the justness and reasonableness of all of
SFPP's interstate rates, raising claims against SFPP's East and West Line rates
similar to those that have been at issue in Docket Nos. OR92-8, et al. discussed
above, but expanding them to include challenges to SFPP's grandfathered
interstate rates from the San Francisco Bay area to Reno, Nevada and from
Portland to Eugene, Oregon - the North Line and Oregon Line. In November 1997,
Ultramar Diamond Shamrock Corporation filed a similar, expanded complaint
(Docket No. OR98-2). Tosco Corporation filed a similar complaint in April 1998.
The shippers seek both reparations and prospective rate reductions for movements
on all of the lines. SFPP answered each of these complaints. FERC issued orders
accepting the complaints and consolidating them into one proceeding (Docket No.
OR96-2, et al.), but holding them in abeyance pending a FERC decision on review
of the initial decision in Docket Nos. OR92-8, et al.
In a companion order to Opinion No. 435, the FERC gave the complainants an
opportunity to amend their complaints in light of Opinion No. 435, which the
complainants did in January 2000. On May 17, 2000, the FERC issued an order
finding that the various complaining parties had alleged sufficient grounds for
their complaints to go forward to a hearing to assess whether any of the
challenged rates that are grandfathered under the Energy Policy Act will
continue to have such status and, if the grandfathered status of any rate is not
upheld, whether the existing rate is just and reasonable.
16
In August 2000, Navajo and RHC filed complaints against SFPP's East Line rates
and Ultramar filed an additional complaint updating its pre-existing challenges
to SFPP's interstate pipeline rates. In September 2000, the FERC accepted these
new complaints and consolidated them with the ongoing proceeding in Docket No.
OR96-2, et al.
A hearing in this consolidated proceeding was held from October 2001 to March
2002. An initial decision by the administrative law judge is expected in the
second quarter of 2003.
OR02-4 proceedings.
------------------
On February 11, 2002, Chevron, an intervenor in the OR96-2 proceeding, filed
a complaint against SFPP in Docket No. OR02-4 along with a motion to consolidate
the complaint with the OR96-2 proceeding. On May 21, 2002, the FERC dismissed
Chevron's complaint and motion to consolidate. Chevron filed a request for
rehearing and on September 25, 2002, the FERC dismissed Chevron's rehearing
request. In October 2002, Chevron filed a request for rehearing of the FERC's
September 25, 2002 Order. On April 4, 2003, Chevron filed a motion for expedited
consideration of its rehearing request. Its rehearing request remains pending.
Chevron continues to participate in the OR96-2 proceeding as an intervenor.
California Public Utilities Commission Proceeding
ARCO, Mobil and Texaco filed a complaint against SFPP with the California
Public Utilities Commission on April 7, 1997. The complaint challenges rates
charged by SFPP for intrastate transportation of refined petroleum products
through its pipeline system in the State of California and requests prospective
rate adjustments. On October 1, 1997, the complainants filed testimony seeking
prospective rate reductions aggregating approximately $15 million per year.
On August 6, 1998, the CPUC issued its decision dismissing the complainants'
challenge to SFPP's intrastate rates. On June 24, 1999, the CPUC granted limited
rehearing of its August 1998 decision for the purpose of addressing the proper
ratemaking treatment for partnership tax expenses, the calculation of
environmental costs and the public utility status of SFPP's Sepulveda Line and
its Watson Station gathering enhancement facilities. In pursuing these rehearing
issues, complainants sought prospective rate reductions aggregating
approximately $10 million per year.
On March 16, 2000, SFPP filed an application with the CPUC seeking authority
to justify its rates for intrastate transportation of refined petroleum products
on competitive, market-based conditions rather than on traditional,
cost-of-service analysis.
On April 10, 2000, ARCO and Mobil filed a new complaint with the CPUC
asserting that SFPP's California intrastate rates are not just and reasonable
based on a 1998 test year and requesting the CPUC to reduce SFPP's rates
prospectively. The amount of the reduction in SFPP rates sought by the
complainants is not discernible from the complaint.
The rehearing complaint was heard by the CPUC in October 2000 and the April
2000 complaint and SFPP's market-based application were heard by the CPUC in
February 2001. All three matters stand submitted as of April 13, 2001, and a
decision addressing the submitted matters is expected within three to four
months.
The CPUC has recently issued a resolution approving a 2001 request by SFPP to
raise its California rates to reflect increased power costs. The resolution
approving the requested rate increase also requires SFPP to submit cost data for
2001, 2002, and 2003 to assist the CPUC in determining whether SFPP's overall
rates for California intrastate transportation services are reasonable. The
resolution reserves the right to require refunds, from the date of issuance of
the resolution, to the extent the CPUC's analysis of cost data to be submitted
by SFPP demonstrates that SFPP's California jurisdictional rates are
unreasonable in any fashion. On February 21, 2003, SFPP submitted the cost data
required by the CPUC, which submittal was protested by Valero Marketing and
Supply Company, Ultramar Inc., BP West Coast Products LLC, Exxon Mobil Oil
Corporation, and Chevron Products Company. Issues raised by the protest,
including the reasonableness of SFPP's existing intrastate transportation rates,
will be the subject of evidentiary hearings and are expected to be resolved by
the CPUC by the first quarter of 2004.
17
We currently believe the CPUC complaints seek approximately $15 million in
tariff reparations and prospective annual tariff reductions, the aggregate
average annual impact of which would be approximately $31 million. There is no
way to quantify the potential extent to which the CPUC could determine that
SFPP's existing California rates are unreasonable or estimate the amount of
dollars potentially subject to refund as a consequence of the CPUC resolution
requiring the provision by SFPP of cost-of-service data. SFPP believes that
submission of the required, representative cost data required by the CPUC will
indicate that SFPP's existing rates for California intrastate services remain
reasonable and that no refunds are justified.
We believe that the resolution of such matters will not have a material
adverse effect on our business, financial position or results of operations.
Trailblazer Pipeline Company
As required by its last rate case settlement, Trailblazer Pipeline Company
made a general rate case filing at the FERC on November 29, 2002. The filing
provides for a small rate decrease and also includes a number of non-rate tariff
changes. By an order issued December 31, 2002, FERC effectively bifurcated the
proceeding. The rate change was accepted to be effective on January 1, 2003,
subject to refund and a hearing. Most of the non-rate tariff changes were
suspended until June 1, 2003, subject to refund and a technical conference
procedure.
Trailblazer sought rehearing of the FERC order with respect to the refund
condition on the rate decrease. On April 15, 2003, the FERC granted
Trailblazer's rehearing request to remove the refund condition that had been
imposed in the December 31, 2002 Order. The Intervenors have sought rehearing as
to the FERC's acceptance of certain non-rate tariff provisions. A prehearing
conference on the rate issues was held on January 16, 2003. A procedural
schedule was established under which the hearing will commence on October 8,
2003, if the case is not settled. Discovery has commenced as to rate issues.
The technical conference on non-rate issues was held on February 6, 2003.
Those issues include:
o capacity award procedures;
o credit procedures;
o imbalance penalties; and
o the maximum length of bid terms considered for evaluation in the right of
first refusal process.
Comments on these issues as discussed at the technical conference were filed
by parties in March 2003. An order on the technical conference issues is
expected sometime during the second quarter of 2003.
FERC Order 637
Kinder Morgan Interstate Gas Transmission LLC
On June 15, 2000, Kinder Morgan Interstate Gas Transmission LLC made its
filing to comply with FERC's Orders 637 and 637-A. That filing contained KMIGT's
compliance plan to implement the changes required by the FERC dealing with the
way business is conducted on interstate natural gas pipelines. All interstate
natural gas pipelines were required to make such compliance filings, according
to a schedule established by the FERC. From October 2000 through June 2001,
KMIGT held a series of technical and phone conferences to identify issues,
obtain input, and modify its Order 637 compliance plan, based on comments
received from FERC staff and other interested parties and shippers. On June 19,
2001, KMIGT received a letter from the FERC encouraging it to file revised
pro-forma tariff sheets, which reflected the latest discussions and input from
parties into its Order 637 compliance plan. KMIGT made such a revised Order 637
compliance filing on July 13, 2001. The July 13, 2001 filing contained little
substantive change from the original pro-forma tariff sheets that KMIGT
originally proposed on June 15, 2000. On October 19, 2001, KMIGT received an
order from the FERC, addressing its July 13, 2001 Order 637 compliance plan. In
the Order addressing the July 13, 2001 compliance plan, KMIGT's plan was
accepted, but KMIGT was directed to make several changes to its tariff, and in
doing so, was directed that it could not place the revised tariff
18
into effect until further order of the FERC. KMIGT filed its compliance filing
with the October 19, 2001 Order on November 19, 2001 and also filed a request
for rehearing/clarification of the FERC's October 19, 2001 Order on November 19,
2001. Several parties protested the November 19, 2001 compliance filing. KMIGT
filed responses to those protests on December 14, 2001. At this time, it is
unknown when this proceeding will be finally resolved. The full impact of
implementation of Order 637 on the KMIGT system is under evaluation. We believe
that these matters will not have a material adverse effect on our business,
financial position or results of operations.
Separately, numerous petitioners, including KMIGT, have filed appeals of Order
637 in the D.C. Circuit, potentially raising a wide array of issues related to
Order 637 compliance. Initial briefs were filed on April 6, 2001, addressing
issues contested by industry participants. Oral arguments on the appeals were
held before the court in December 2001. On April 5, 2002, the D.C. Circuit
issued an order largely affirming Order Nos. 637, et seq. The D.C. Circuit
remanded the FERC's decision to impose a 5-year cap on bids that an existing
shipper would have to match in the right of first refusal process. The D.C.
Circuit also remanded the FERC's decision to allow forward-hauls and backhauls
to the same point. Finally, the D.C. Circuit held that several aspects of the
FERC's segmentation policy and its policy on discounting at alternate points
were not ripe for review. The FERC requested comments from the industry with
respect to the issues remanded by the D.C. Circuit. They were due July 30, 2002.
On October 31, 2002, the FERC issued an order in response to the D.C.
Circuit's remand of certain Order 637 issues. The order:
o eliminated the requirement of a 5-year cap on bid terms that an existing
shipper would have to match in the right of first refusal process, and found
that no term matching cap is necessary given existing regulatory controls;
o affirmed FERC's policy that a segmented transaction consisting of both a
forwardhaul up to contract demand and a backhaul up to contract demand to
the same point is permissible; and
o accordingly required, under Section 5 of the Natural Gas Act, pipelines that
the FERC had previously found must permit segmentation on their systems to
file tariff revisions within 30 days to permit such segmented forwardhaul
and backhaul transactions to the same point.
On December 23, 2002, KMIGT filed revised tariff provisions (in a separate
docket) in compliance with the October 31, 2002 Order concerning the elimination
of the right of first refusal five-year term matching cap. In an order issued
January 22, 2003, the FERC approved such revised tariff provisions to be
effective January 23, 2003.
Trailblazer Pipeline Company
On August 15, 2000, Trailblazer Pipeline Company made a filing to comply with
the FERC's Order Nos. 637 and 637-A. Trailblazer's compliance filing reflected
changes in:
o segmentation;
o scheduling for capacity release transactions;
o receipt and delivery point rights;
o treatment of system imbalances;
o operational flow orders;
o penalty revenue crediting; and
o right of first refusal language.
On October 15, 2001, the FERC issued its order on Trailblazer's Order No. 637
compliance filing. The FERC approved Trailblazer's proposed language regarding
operational flow orders and the right of first refusal, but
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required Trailblazer to make changes to its tariff related to the other issues
listed above.
On November 14, 2001, Trailblazer made its compliance filing pursuant to the
FERC order of October 15, 2001 and also filed for rehearing of the October 15,
2001 order. On April 16, 2003, the FERC issued its order on Trailblazer's
compliance filing and rehearing order. The FERC denied Trailblazer's requests
for rehearing and approved the compliance filing subject to modifications that
must be made within 30 days of the order.
Trailblazer anticipates no adverse impact on its business as a result of
the implementation of Order No. 637.
Standards of Conduct Rulemaking
On September 27, 2001, the FERC issued a Notice of Proposed Rulemaking in
Docket No. RM01-10 in which it proposed new rules governing the interaction
between an interstate natural gas pipeline and its affiliates. If adopted as
proposed, the Notice of Proposed Rulemaking could be read to limit
communications between KMIGT, Trailblazer and their respective affiliates. In
addition, the Notice could be read to require separate staffing of KMIGT and its
affiliates, and Trailblazer and its affiliates. Comments on the Notice of
Proposed Rulemaking were due December 20, 2001. Numerous parties, including
KMIGT, have filed comment on the Proposed Standards of Conduct Rulemaking. On
May 21, 2002, the FERC held a technical conference dealing with the FERC's
proposed changes in the Standard of Conduct Rulemaking. On June 28, 2002, KMIGT
and numerous other parties filed additional written comments under a procedure
adopted at the technical conference. The Proposed Rulemaking is awaiting further
FERC action. We believe that these matters, as finally adopted, will not have a
material adverse effect on our business, financial position or results of
operations.
The FERC also issued a Notice of Proposed Rulemaking in Docket No. RM02-14-000
in which it proposed new regulations for cash management practices, including
establishing limits on the amount of funds that can be swept from a regulated
subsidiary to a non-regulated parent company. Kinder Morgan Interstate Gas
Transmission LLC filed comments on August 28, 2002. We believe that these
matters, as finally adopted, will not have a material adverse effect on our
business, financial position or results of operations.
Southern Pacific Transportation Company Easements
SFPP and Southern Pacific Transportation Company are engaged in a judicial
reference proceeding to determine the extent, if any, to which the rent
payable by SFPP for the use of pipeline easements on rights-of-way held by
SPTC should be adjusted pursuant to existing contractual arrangements
(Southern Pacific Transportation Company vs. Santa Fe Pacific Corporation, SFP
Properties, Inc., Santa Fe Pacific Pipelines, Inc., SFPP, L.P., et al.,
Superior Court of the State of California for the County of San Francisco,
filed August 31, 1994).
Although SFPP received a favorable ruling from the trial court in May 1997, in
September 1999, the California Court of Appeals remanded the case back to the
trial court for further proceeding. SFPP claims that the rent payable for each
of the years 1994 through 2004 should be approximately $4.4 million and SPTC
claims it should be approximately $15.0 million. We believe SPTC's position in
this case is without merit and we have set aside reserves that we believe are
adequate to address any reasonably foreseeable outcome of this matter. The trial
of this matter ended in early March 2003 and we expect the judge's ruling
sometime in the second quarter of 2003.
Carbon Dioxide Litigation
Kinder Morgan CO2 Company, L.P. directly or indirectly through its ownership
interest in the Cortez Pipeline Company, along with other entities, has been
named as a defendant with several others in a series of lawsuits in the United
States District Court in Denver, Colorado and certain state courts in Colorado
and Texas. The plaintiffs include several private royalty, overriding royalty
and working interest owners at the McElmo Dome (Leadville) Unit in southwestern
Colorado. Plaintiffs in the Colorado state court action also are overriding
royalty interest owners in the Doe Canyon Unit. Plaintiffs seek to also
represent classes of claimants composed of all private and governmental royalty,
overriding royalty and working interest owners, and governmental taxing
authorities who have an interest in the carbon dioxide produced at the McElmo
Dome Unit. Plaintiffs claim they and the members of any classes that might be
certified have been damaged because the defendants have maintained a low price
for carbon dioxide in the enhanced oil recovery market in the Permian Basin and
maintained a high cost of pipeline
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transportation from the McElmo Dome Unit to the Permian Basin. Plaintiffs claim
breaches of contractual and potential fiduciary duties owed by defendants and
also allege other theories of liability including:
o common law fraud;
o fraudulent concealment; and
o negligent misrepresentation.
In addition to actual or compensatory damages, certain plaintiffs are
seeking punitive or trebled damages as well as declaratory judgment for
various forms of relief, including the imposition of a constructive trust
over the defendants' interests in the Cortez Pipeline and the Partnership.
These cases are: CO2 Claims Coalition, LLC v. Shell Oil Co., et al., No.
96-Z-2451 (U.S.D.C. Colo. filed 8/22/96); Rutter & Wilbanks et al. v. Shell
Oil Co., et al., No. 00-Z-1854 (U.S.D.C. Colo. filed 9/22/00); Watson v.
Shell Oil Co., et al., No. 00-Z-1855 (U.S.D.C. Colo. filed 9/22/00);
Ainsworth et al. v. Shell Oil Co., et al., No. 00-Z-1856 (U.S.D.C. Colo.
filed 9/22/00); Shell Western E&P Inc. v. Bailey, et al., No 98-28630 (215th
Dist. Ct. Harris County, Tex. filed 6/17/98); Shores, et al. v. Mobil Oil
Corporation, et al., No. GC-99-01184 (Texas Probate Court, Denton County
filed 12/22/99); First State Bank of Denton v. Mobil Oil Corporation, et al.,
No. PR-8552-01 (Texas Probate Court, Denton County filed 3/29/01); and
Celeste C. Grynberg v. Shell Oil Company, et al., No. 98-CV-43 (Colo. Dist.
Ct. Montezuma County filed 3/21/98).
At a hearing conducted in the United States District Court for the District of
Colorado on April 8, 2002, the Court orally announced that it had approved the
certification of proposed plaintiff classes and approved a proposed settlement
in the CO2 Claims Coalition, LLC, Rutter & Wilbanks, Watson, and Ainsworth
cases. The Court entered a written order approving the Settlement on May 6,
2002. Plaintiffs counsel representing Shores, et al. appealed the court's
decision to the 10th Circuit Court of Appeals. On December 26, 2002, the 10th
Circuit Court of Appeals affirmed in all respects the District Court's Order
approving settlement. Following the decision of the 10th Circuit, the plaintiffs
and defendants jointly filed motions to abate the Shell Western E&P Inc., Shores
and First State Bank of Denton cases in order to afford the parties time to
discuss potential settlement of those matters. These Motions were granted on
February 6, 2003. In the Celeste C. Grynberg case, the parties are currently
engaged in discovery. On March 24, 2003, the plaintiffs' counsel in the Shores
matter filed a Petition for Writ of Certiorari in the United States Supreme
Court seeking to have the Court review and overturn the decision of the 10th
Circuit Court of Appeals.
RSM Production Company, et al. v. Kinder Morgan Energy Partners, L.P., et
al.
Cause No. 4519, in the District Court, Zapata County Texas, 49th Judicial
District. On October 15, 2001, Kinder Morgan Energy Partners, L.P. was
served with the First Supplemental Petition filed by RSM Production
Corporation on behalf of the County of Zapata, State of Texas and Zapata
County Independent School District as plaintiffs. Kinder Morgan Energy
Partners, L.P. was sued in addition to 15 other defendants, including two other
Kinder Morgan affiliates. Certain entities we acquired in the Kinder Morgan
Tejas acquisition are also defendants in this matter. The Petition alleges that
these taxing units relied on the reported volume and analyzed heating content of
natural gas produced from the wells located within the appropriate taxing
jurisdiction in order to properly assess the value of mineral interests in
place. The suit further alleges that the defendants undermeasured the volume and
heating content of that natural gas produced from privately owned wells in
Zapata County, Texas. The Petition further alleges that the County and School
District were deprived of ad valorem tax revenues as a result of the alleged
undermeasurement of the natural gas by the defendants. On December 15, 2001, the
defendants filed motions to transfer venue on jurisdictional grounds. There are
no further pretrial proceedings at this time.
Will Price, et al. v. Gas Pipelines, et al., (f/k/a Quinque Operating
Company et al. v. Gas Pipelines, et al.)
Stevens County, Kansas District Court, Case No. 99 C 30. In May, 1999, three
plaintiffs, Quinque Operating Company, Tom Boles and Robert Ditto, filed a
purported nationwide class action in the Stevens County, Kansas District Court
against some 250 natural gas pipelines and many of their affiliates. The
District Court is located in Hugoton, Kansas. Certain entities we acquired in
the Kinder Morgan Tejas acquisition are also defendants in this matter. The
Petition (recently amended) alleges a conspiracy to underpay royalties, taxes
and producer payments by the defendants' undermeasurement of the volume and
heating content of natural gas produced from nonfederal lands
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for more than twenty-five years. The named plaintiffs purport to adequately
represent the interests of unnamed plaintiffs in this action who are comprised
of the nation's gas producers, State taxing agencies and royalty, working and
overriding owners. The plaintiffs seek compensatory damages, along with
statutory penalties, treble damages, interest, costs and fees from the
defendants, jointly and severally. This action was originally filed on May 28,
1999 in Kansas State Court in Stevens County, Kansas as a class action against
approximately 245 pipeline companies and their affiliates, including certain
Kinder Morgan entities. Subsequently, one of the defendants removed the action
to Kansas Federal District Court and the case was styled as Quinque Operating
Company, et al. v. Gas Pipelines, et al., Case No. 99-1390-CM, United States
District Court for the District of Kansas. Thereafter, we filed a motion with
the Judicial Panel for Multidistrict Litigation to consolidate this action for
pretrial purposes with the Grynberg False Claim Act cases referred to below,
because of common factual questions. On April 10, 2000, the MDL Panel ordered
that this case be consolidated with the Grynberg federal False Claims Act cases
discussed below. On January 12, 2001, the Federal District Court of Wyoming
issued an oral ruling remanding the case back to the State Court in Stevens
County, Kansas. The Court in Kansas has issued a case management order
addressing the initial phasing of the case. In this initial phase, the court
will rule on motions to dismiss (jurisdiction and sufficiency of pleadings), and
if the action is not dismissed, on class certification. Merits discovery has
been stayed. Recently, the defendants filed a motion to dismiss on grounds other
than personal jurisdiction, which was denied by the Court in August, 2002. The
Motion to Dismiss for lack of Personal Jurisdiction of the nonresident
defendants has been briefed and is pending. The current named plaintiffs are
Will Price, Tom Boles, Cooper Clark Foundation and Stixon Petroleum, Inc.
Quinque Operating Company has been dropped from the action as a named plaintiff.
On April 10, 2003, the court issued its decision denying plaintiffs' motion for
class certification. Plaintiffs have indicated they will move the Court for
permission to amend the Complaint.
United States of America, ex rel., Jack J. Grynberg v. K N Energy
Civil Action No. 97-D-1233, filed in the U.S. District Court, District of
Colorado. This action was filed on June 9, 1997 pursuant to the federal False
Claim Act and involves allegations of mismeasurement of natural gas produced
from federal and Indian lands. The Department of Justice has decided not to
intervene in support of the action. The complaint is part of a larger series of
similar complaints filed by Mr. Grynberg against 77 natural gas pipelines
(approximately 330 other defendants). Certain entities we acquired in the Kinder
Morgan Tejas acquisition are also defendants in this matter. An earlier single
action making substantially similar allegations against the pipeline industry
was dismissed by Judge Hogan of the U.S. District Court for the District of
Columbia on grounds of improper joinder and lack of jurisdiction. As a result,
Mr. Grynberg filed individual complaints in various courts throughout the
country. In 1999, these cases were consolidated by the Judicial Panel for
Multidistrict Litigation, and transferred to the District of Wyoming. The
multidistrict litigation matter is called In Re Natural Gas Royalties Qui Tam
Litigation, Docket No. 1293. Motions to dismiss were filed and an oral argument
on the motion to dismiss occurred on March 17, 2000. On July 20, 2000, the
United States of America filed a motion to dismiss those claims by Grynberg that
deal with the manner in which defendants valued gas produced from federal
leases, referred to as valuation claims. Judge Downes denied the defendant's
motion to dismiss on May 18, 2001. The United States' motion to dismiss most of
plaintiff's valuation claims has been granted by the court. Grynberg has
appealed that dismissal to the 10th Circuit, which has requested briefing
regarding its jurisdiction over that appeal. Discovery is now underway to
determine issues related to the Court's subject matter jurisdiction arising out
of the False Claim Act.
Mel R. Sweatman and Paz Gas Corporation v. Gulf Energy Marketing, LLC, et
al.
On July 25, 2002, we were served with this suit for breach of contract,
tortious interference with existing contractual relationships, conspiracy to
commit tortuous interference and interference with prospective business
relationship. Mr. Sweatman and Paz Gas Corporation claim that, in connection
with our acquisition of Tejas Gas, LLC, we wrongfully caused gas volumes to be
shipped on our Kinder Morgan Texas Pipeline system instead of our Kinder Morgan
Tejas system. Mr. Sweatman and Paz Gas Corporation allege that this action
eliminated profit on Kinder Morgan Tejas, a portion of which Mr. Sweatman and
Paz Gas Corporation claim they are entitled to receive under an agreement with a
subsidiary of ours acquired in the Tejas Gas acquisition. We have filed a motion
to remove the case from venue in Dewitt County, Texas to Harris County, Texas,
and our motion was denied in a venue hearing in November 2002.
22
In a Second Amended Original Petition, Sweatman and Paz assert new and
distinct allegations against us, principally that we were a party to an alleged
commercial bribery committed by us, Gulf Energy Marketing, and Intergen inasmuch
as we, in our role as acquirer of Kinder Morgan Tejas, allegedly paid Intergen
to not renew the underlying Entex contracts belonging to the Tejas/Paz joint
venture. Moreover, new and distinct allegations of breach of fiduciary and
bribery of a fiduciary are also raised in this amended petition for the first
time.
Based on the information available to date and our preliminary investigation,
we believe this suit is without merit and we intend to defend it vigorously.
Maher et ux. v. Centerpoint Energy, Inc. d/b/a Reliant Energy,
Incorporated, Reliant Energy Resources Corp., Entex Gas Marketing Company,
Kinder Morgan Texas Pipeline, L.P., Kinder Morgan Energy Partners, L.P.,
Houston Pipeline Company, L.P. and AEP Gas Marketing, L.L.C., No. 30875
(District Court, Wharton County Texas).
On October 21, 2002, Kinder Morgan Texas Pipeline, L.P. and Kinder Morgan
Energy Partners, L.P. were served with the above-entitled Complaint. A First
Amended Complaint was served on October 23, 2002, adding additional
defendants Kinder Morgan G.P., Inc., Kinder Morgan Tejas Pipeline GP, Inc.,
Kinder Morgan Texas Pipeline GP, Inc., Tejas Gas, LLC and HPL GP, LLC. The
First Amended Complaint purports to bring a class action on behalf of those
Texas residents who purchased natural gas for residential purposes from the
so-called "Reliant Defendants" in Texas at any time during the period
encompassing "at least the last ten years."
The Complaint alleges that Reliant Energy Resources Corp., by and through its
affiliates, has artificially inflated the price charged to residential consumers
for natural gas that it allegedly purchased from the non-Reliant defendants,
including the above-listed Kinder Morgan entities. The Complaint further alleges
that in exchange for Reliant Energy Resources Corp.'s purchase of natural gas at
above market prices, the non-Reliant defendants, including the above-listed
Kinder Morgan entities, sell natural gas to Entex Gas Marketing Company at
prices substantially below market, which in turn sells such natural gas to
commercial and industrial consumers and gas marketers at market price. The
Complaint purports to assert claims for fraud, violations of the Texas Deceptive
Trade Practices Act, and violations of the Texas Utility Code against some or
all of the Defendants, and civil conspiracy against all of the defendants, and
seeks relief in the form of, inter alia, actual, exemplary and statutory
damages, civil penalties, interest, attorneys' fees and a constructive trust ab
initio on any and all sums which allegedly represent overcharges by Reliant and
Reliant Energy Resources Corp.
On November 18, 2002, the Kinder Morgan defendants filed a Motion to Transfer
Venue and, Subject Thereto, Original Answer to the First Amended Complaint. The
parties are currently engaged in preliminary discovery. Based on the information
available to date and our preliminary investigation, the Kinder Morgan
defendants believe that the claims against them are without merit and intend to
defend against them vigorously.
Marie Snyder, et al v. City of Fallon, United States Department of the
Navy, Exxon Mobil Corporation, Kinder Morgan Energy Partners, L.P., Speedway Gas
Station and John Does I-X, No. cv-N-02-0251-ECR-RAM (United States District
Court, District of Nevada)("Snyder"); and Frankie Sue Galaz, et al v. United
States of America, City of Fallon, Exxon Mobil Corporation, Kinder Morgan Energy
Partners, L.P., Berry Hinckley, Inc., and John Does I-X, No.
cv-N-02-0630-DWH-RAM (United States District Court, District of
Nevada)("Galaz").
On July 9, 2002, we were served with a purported Complaint for Class Action in
the Snyder case, in which the plaintiffs, on behalf of themselves and others
similarly situated, assert that a leukemia cluster has developed in the City of
Fallon, Nevada. The Complaint alleges that the plaintiffs have been exposed to
unspecified "environmental carcinogens" at unspecified times in an unspecified
manner and are therefore "suffering a significantly increased fear of serious
disease." The plaintiffs seek a certification of a class of all persons in
Nevada who have lived for at least three months of their first ten years of life
in the City of Fallon between the years 1992 and the present who have not been
diagnosed with leukemia.
The Complaint purports to assert causes of action for nuisance and "knowing
concealment, suppression, or omission of material facts" against all defendants,
and seeks relief in the form of "a court-supervised trust fund, paid for by
defendants, jointly and severally, to finance a medical monitoring program to
deliver services to members of the purported class that include, but are not
limited to, testing, preventative screening and surveillance for conditions
23
resulting from, or which can potentially result from exposure to environmental
carcinogens," incidental damages, and attorneys' fees and costs.
The defendants responded to the Complaint by filing Motions to Dismiss on the
grounds that it fails to state a claim upon which relief can be granted. On
November 7, 2002, the United States District Court granted the Motion to Dismiss
filed by the United States, and further dismissed all claims against the
remaining defendants for lack of Federal subject matter jurisdiction. Plaintiffs
filed a Motion for Reconsideration and Leave to Amend, which was denied by the
Court on December 30, 2002. Plaintiffs have filed a Notice of Appeal to the
United States Court of Appeals for the 9th Circuit, which appeal is currently
pending.
On December 3, 2002, plaintiffs filed an additional Complaint for Class Action
in the Galaz matter asserting the same claims in the same Court on behalf of the
same purported class against virtually the same defendants, including us. On
February 10, 2003, the defendants filed Motions to Dismiss the Galaz Complaint
on the grounds that it also fails to state a claim upon which relief can be
granted. This motion to dismiss was granted as to all defendants on April 3,
2003.
Based on the information available to date and our preliminary investigation,
we believe that the claims against us in the Snyder and Galaz matters are
without merit and intend to defend against them vigorously.
Walter Chandler v. Plantation Pipe Line Company
On October 2, 2001, the jury rendered a verdict against Plantation Pipe Line
Company in the case of Walter Chandler v. Plantation Pipe Line Company. The jury
awarded the plaintiffs a total of $43.8 million. The judge reduced the award to
$42.6 million due to a prior settlement with the plaintiffs by a third party.
This case was filed in April 1997 by the landowner (Evelyn Chandler Trust) and
two residents of the property (Buster Chandler and his son, Clay Chandler). The
suit was filed against Chevron, Plantation and two individuals. The two
individuals were later dismissed from the suit. Chevron settled with the
plaintiffs in December 2000. The property and residences are directly across the
street from the location of a former Chevron products terminal. The Plantation
pipeline system traverses the Chevron terminal property. The suit alleges that
gasoline released from the terminal and pipeline contaminated the groundwater
under the plaintiffs' property. As noted below, a current remediation effort is
taking place among Chevron, Plantation and Alabama Department of Environmental
Management.
In addition to the Chandler case, in 1998 and 1999, other entities and
individuals living in close proximity to the Chandlers filed lawsuits against
Plantation, Chevron and an environmental consulting firm, CH2MHill, alleging
property damage and personal injuries from groundwater contaminated with
petroleum hydrocarbons. In February 2003, Plantation settled, through a
confidential settlement, all of these lawsuits as well as the Chandler
litigation. Plantation believes that the settlement of these lawsuits and the
Chandler litigation will not have a material adverse effect on its business,
financial position or results of operations.
Marion County, Mississippi Litigation
In 1968, Plantation discovered a release from its 12-inch pipeline in Marion
County, Mississippi. The pipeline was immediately repaired. In 1998 and 1999, 62
lawsuits were filed on behalf of 263 plaintiffs in the Circuit Court of Marion
County, Mississippi. The majority of the claims are based on alleged exposure
from the 1968 release, including claims for property damage and personal injury.
Plantation has resolved some of the lawsuits but lawsuits by 236 of the
plaintiffs are still pending. Although a trial date has not been set for any of
the remaining cases, it is anticipated that a trial on a portion of the lawsuits
will be scheduled in 2003. Plantation believes that the ultimate resolution of
these Marion County, Mississippi cases will not have a material effect on its
business, financial position or results of operations.
24
Exxon Mobil Corporation v. GATX Corporation, Kinder Morgan Liquids
Terminals, Inc. and ST Services, Inc.
On April 23, 2003, Exxon Mobil Corporation filed the Complaint in the Superior
Court of New Jersey, Gloucester County. Our answer to the Complaint is due June
27, 2003. The lawsuit relates to environmental remediation obligations at a
Paulsboro, New Jersey liquids terminal owned by ExxonMobil from the mid-1950s
through November 1989, by GATX Terminals Corp. from 1989 through September 2000,
and owned currently by ST Services, Inc. Prior to selling the terminal to GATX
Terminals, ExxonMobil performed an environmental site assessment of the terminal
required prior to sale pursuant to state law. During the site assessment,
ExxonMobil discovered items that required remediation and the New Jersey
Department of Environmental Protection issued an order that required ExxonMobil
to perform various remediation activities to remove hydrocarbon contamination at
the terminal. ExxonMobil, we understand, is still remediating the site and has
not been removed from the state's cleanup order; however, ExxonMobil claims that
the remediation continues because of GATX Terminals' storage of a fuel additive,
MTBE, at the terminal during GATX Terminals' ownership of the terminal. When
GATX Terminals sold the terminal to ST Services, the parties indemnified one
another for certain environmental matters. When GATX Terminals was sold to us,
GATX Terminals' indemnification obligations to ST Services may have passed to
us, consequently, at issue is any indemnification obligations we may owe to ST
Services in respect to environmental remediation of MTBE at the terminal. The
Complaint seeks any and all damages related to remediating MTBE at the terminal,
and, according to the New Jersey Spill Compensation and Control Act, treble
damages may be available for actual dollars incorrectly spent by the successful
party in the lawsuit for remediating MTBE at the terminal.
Exxon Mobil Corporation v. Enron Gas Processing Co., Enron Corp., as party
in interest for Enron Helium Company, a division of Enron Corp., Enron
Liquids Pipeline Co., Enron Liquids Pipeline Operating Limited Partnership,
Kinder Morgan Operating L.P. "A," and Kinder Morgan, Inc., No. 2000-45252
(189th Judicial District Court, Harris County, Texas)
On September 1, 2000, Plaintiff Exxon Mobil Corporation filed its Original
Petition and Application for Declaratory Relief against Kinder Morgan
Operating L.P. "A," Enron Liquids Pipeline Operating Limited Partnership
n/k/a Kinder Morgan Operating L.P. "A," Enron Liquids Pipeline Co. n/k/a
Kinder Morgan G.P., Inc., Enron Gas Processing Co. n/k/a ONEOK Bushton
Processing, Inc., and Enron Helium Company. Plaintiff added Enron Corp. as
party in interest for Enron Helium Company in its First Amended Petition and
added Kinder Morgan, Inc. as a Defendant. The claims against Enron Corp.
were severed into a separate cause of action. Plaintiff's claims are based
on a Gas Processing Agreement entered into on September 23, 1987 between
Mobil Oil Corp. and Enron Gas Processing Company relating to gas produced in
the Hugoton Field in Kansas and processed at the Bushton Plant, a natural gas
processing facility located in Kansas. Plaintiff also asserts claims
relating to the Helium Extraction Agreement entered between Enron Helium
Company (a division of Enron Corp.) and Mobil Oil Corporation dated March 14,
1988. Plaintiff alleges that Defendants failed to deliver propane and to
allocate plant products to Plaintiff as required by the Gas Processing
Agreement and originally sought damages of approximately $5.9 million.
Plaintiff filed its Third Amended Petition on February 25, 2003. In its Third
Amended Petition, Plaintiff alleges claims for breach of the Gas Processing
Agreement and the Helium Extraction Agreement, requests a declaratory judgment
and asserts claims for fraud by silence/bad faith, fraudulent inducement of the
1997 Amendment to the Gas Processing Agreement, civil conspiracy, fraud, breach
of a duty of good faith and fair dealing, negligent misrepresentation and
conversion. As of April 7, 2003, Plaintiff alleged damages for the period
November 1987 through March 1997 in the amount of $30.7 million. On May 2, 2003,
Plaintiff added claims for the period April 1997 through February 2003 in the
amount of $12.9 million. The parties are currently engaged in discovery. Based
on the information available to date in our investigation, the Kinder Morgan
Defendants believe that the claims against them are without merit and intend to
defend against them vigorously.
Although no assurances can be given, we believe that we have meritorious
defenses to all of these actions, that, to the extent an assessment of the
matter is possible, we have established an adequate reserve to cover potential
liability, and that these matters will not have a material adverse effect on our
business, financial position or results of operations.
25
Environmental Matters
We are subject to environmental cleanup and enforcement actions from time to
time. In particular, the federal Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) generally imposes joint and several
liability for cleanup and enforcement costs on current or predecessor owners and
operators of a site, without regard to fault or the legality of the original
conduct. Our operations are also subject to federal, state and local laws and
regulations relating to protection of the environment. Although we believe our
operations are in substantial compliance with applicable environmental
regulations, risks of additional costs and liabilities are inherent in pipeline,
terminal and carbon dioxide field and oil field operations, and there can be no
assurance that we will not incur significant costs and liabilities. Moreover, it
is possible that other developments, such as increasingly stringent
environmental laws, regulations and enforcement policies thereunder, and claims
for damages to property or persons resulting from our operations, could result
in substantial costs and liabilities to us.
We are currently involved in the following governmental proceedings related to
compliance with environmental regulations associated with our assets and have
established a reserve to address the costs associated with the cleanup:
o one cleanup ordered by the United States Environmental Protection Agency
related to ground water contamination in the vicinity of SFPP's storage
facilities and truck loading terminal at Sparks, Nevada;
o several ground water hydrocarbon remediation efforts under administrative
orders issued by the California Regional Water Quality Control Board and two
other state agencies;
o groundwater and soil remediation efforts under administrative orders issued
by various regulatory agencies on those assets purchased from GATX
Corporation, comprising Kinder Morgan Liquids Terminals LLC, CALNEV Pipe
Line LLC and Central Florida Pipeline LLC; and
o a ground water remediation effort taking place between Chevron, Plantation
Pipe Line Company and the Alabama Department of Environmental Management.
In addition, we are from time to time involved in civil proceedings relating
to damages alleged to have occurred as a result of accidental leaks or spills of
refined petroleum products, natural gas liquids, natural gas and carbon dioxide.
Furthermore, our review of assets related to Kinder Morgan Interstate Gas
Transmission LLC indicates possible environmental impacts from petroleum and
used oil releases into the soil and groundwater at nine sites. Additionally, our
review of assets related to Kinder Morgan Texas Pipeline indicates possible
environmental impacts from petroleum releases into the soil and groundwater at
six sites. Further delineation and remediation of any environmental impacts from
these matters will be conducted. Reserves have been established to address the
closure of these issues.
Although no assurance can be given, we believe that the ultimate resolution of
the environmental matters set forth in this note will not have a material
adverse effect on our business, financial position or results of operations. As
of March 31, 2003, we have recorded a total reserve for environmental claims
in the amount of $46.6 million. However, we were not able to reasonably estimate
when the eventual settlements of these claims will occur.
Other
We are a defendant in various lawsuits arising from the day-to-day operations
of our businesses. Although no assurance can be given, we believe, based on our
experiences to date, that the ultimate resolution of such items will not have a
material adverse impact on our business, financial position or results of
operations.
In addition to the matters described above, we may face additional challenges
to our rates in the future. Shippers on our pipelines do have rights to
challenge the rates we charge under certain circumstances prescribed by
applicable regulations. There can be no assurance that we will not face
challenges to the rates we receive for services on our pipeline systems in the
future. In addition, since many of our assets are subject to regulation, we are
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subject to potential future changes in applicable rules and regulations that may
have an adverse effect on our business, financial position or results of
operations.
4. Change in Accounting for Asset Retirement Obligations
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 provides accounting and reporting guidance for legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction or normal operation of a long-lived asset. The
provisions of this Statement are effective for fiscal years beginning after June
15, 2002. We adopted SFAS No. 143 on January 1, 2003.
SFAS No. 143 requires companies to record a liability relating to the
retirement and removal of assets used in their businesses. Its primary impact on
us will be to change the method of accruing for oil production site restoration
costs related to our CO2 Pipelines business segment. Prior to January 1, 2003,
we accounted for asset retirement obligations in accordance with SFAS No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies." Under
SFAS No. 143, the fair value of asset retirement obligations are recorded as
liabilities on a discounted basis when they are incurred, which is typically at
the time the assets are installed or acquired. Amounts recorded for the related
assets are increased by the amount of these obligations. Over time, the
liabilities will be accreted for the change in their present value and the
initial capitalized costs will be depreciated over the useful lives of the
related assets. The liabilities are eventually extinguished when the asset is
taken out of service. Specifically, upon adoption of this Statement, an entity
must recognize the following items in its balance sheet:
o a liability for any existing asset retirement obligations adjusted for
cumulative accretion to the date of adoption;
o an asset retirement cost capitalized as an increase to the carrying
amount of the associated long-lived asset; and
o accumulated depreciation on that capitalized cost.
Amounts resulting from initial application of this Statement shall be measured
using current information, current assumptions and current interest rates. The
amount recognized as an asset retirement cost shall be measured as of the date
the asset retirement obligation was incurred. Cumulative accretion and
accumulated depreciation shall be measured for the time period from the date the
liability would have been recognized had the provisions of this Statement been
in effect to the date of adoption of this Statement.
The cumulative-effect adjustment for this change in accounting principle
resulted in income of $3.5 million in the first quarter of 2003. Furthermore, as
required by SFAS No. 143, we recognized the cumulative-effect of initially
applying SFAS No. 143 as a change in accounting principle as described in
Accounting Principles Board Opinion 20, "Accounting Changes." The
cumulative-effect adjustment results from the difference between the amounts
recognized in our consolidated balance sheet prior to the application of SFAS
No. 143 and the net amount recognized in our consolidated balance sheet pursuant
to SFAS No. 143.
In our CO2 Pipelines business segment, we are required to plug and abandon oil
wells that have been removed from service and to remove our surface wellhead
equipment and compressors. As of March 31, 2003, we have recognized asset
retirement obligations in the aggregate amount of $11.3 million relating to
these requirements at two existing sites within our CO2 Pipelines segment.
In our Natural Gas Pipelines business segment, if we would cease providing
utility services, we would be required to remove surface facilities from land
belonging to our customers and others. Our Texas intrastate natural gas pipeline
group has various condensate drip tanks and separators located throughout its
natural gas pipeline systems, as well as inactive gas processing plants,
laterals and gathering systems which are no longer integral to the overall
mainline transmission systems, and asbestos-coated underground pipe, which is
being abandoned and retired. Our Kinder Morgan Interstate Gas Transmission
system has compressor stations which are no longer active and other
miscellaneous facilities, all of which have been officially abandoned. We
believe we can reasonably estimate both the time and costs associated with the
retirement of these facilities. As of March 31, 2003, we have recognized
27
asset retirement obligations in the aggregate amount of $2.8 million relating to
the businesses within our Natural Gas Pipelines segment.
We have included $0.8 million of our total $14.1 million asset retirement
obligations as of March 31, 2003 with Accrued other current liabilities in the
accompanying consolidated balance sheet and the remaining $13.3 million with
Other long-term liabilities and deferred credits. No assets are legally
restricted for purposes of settling our asset retirement obligations. A
reconciliation of the beginning and ending aggregate carrying amount of our
asset retirement obligations for the quarter ended March 31, 2003 is as follows
(in thousands):
Balance at Dec. 31, 2002................... $ -
Cumulative effect transition adjustment.... 14,125
Liabilities incurred....................... -
Liabilities settled........................ (202)
Accretion expense.......................... 171
Revisions in estimated cash flows.......... -
-----------
Balance at Mar. 31, 2003................... $ 14,094
===========
Pro Forma Information
If SFAS No. 143 had been applied as of January 1, 2002, our liability for
asset retirement obligations would have been approximately $14.1 million at
March 31, 2002 and December 31, 2002. The following table illustrates the Pro
Forma impact on the carrying amounts of the obligations for each of the three
months ended March 31, 2002 and March 31, 2003 as if SFAS No. 143 had been
adopted on January 1, 2002 (in thousands):
Three Months Three Months
Ended Ended
Mar. 31, 2003 Mar. 31, 2002
------------- -------------
Balance at beginning of period....... $ 14,125 $14,344
Liabilities incurred................. -- --
Liabilities settled.................. (202) (437)
Accretion expense.................... 171 233
Revisions in estimated cash flows.... -- --
--------- ---------
Balance at end of period............. $ 14,094 $ 14,140
========= =========
For each of the three months ended March 31, 2003 and 2002, our reported
limited partners' interest in net income and net income per unit would have
been as follows (in thousands, except per unit amounts):
Three Months Ended
March 31,
--------------------