UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Dallas, Suite 1000, Houston, Texas 77002
(Address of principal executive offices)(zip code)
Registrant's telephone number, including area code: 713-369-9000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Units New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on closing prices in the daily composite
list for transactions on the New York Stock Exchange on June 30, 2003 was
approximately $4,577,450,989. This figure assumes that only the general partner
of the registrant, Kinder Morgan, Inc., Kinder Morgan Management, LLC, their
subsidiaries and their officers and directors were affiliates. As of January 31,
2004, the registrant had 134,735,758 Common Units outstanding.
1
KINDER MORGAN ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
Page
Number
PART I
Items 1 and 2. Business and Properties............................ 3
Overview........................................... 3
General Development of Business.................... 3
Business Strategy.................................. 4
Recent Developments................................ 7
Financial Information about Segments............... 11
Narrative Description of Business.................. 11
Products Pipelines................................. 11
Natural Gas Pipelines.............................. 23
CO2................................................ 28
Terminals.......................................... 30
Major Customers.................................... 34
Regulation......................................... 34
Environmental Matters.............................. 37
Risk Factors....................................... 40
Other.............................................. 44
Financial Information about Geographic Areas....... 44
Available Information.............................. 44
Item 3. Legal Proceedings.................................. 45
Item 4. Submission of Matters to a Vote of Security Holders 45
PART II
Item 5. Market for Registrant's Common Equity and Related 46
Stockholder Matters................................
Item 6. Selected Financial Data............................ 47
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 49
Critical Accounting Policies and Estimates......... 49
Results of Operations.............................. 50
Liquidity and Capital Resources.................... 61
New Accounting Pronouncements...................... 70
Information Regarding Forward-Looking Statements... 70
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................ 71
Energy Financial Instruments....................... 71
Interest Rate Risk................................. 73
Item 8. Financial Statements and Supplementary Data........ 74
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 74
Item 9A. Controls and Procedures............................ 74
PART III
Item 10. Directors and Executive Officers of the Registrant. 75
Directors and Executive Officers of our General 75
Partner and the Delegate...........................
Corporate Governance............................... 77
Section 16(a) Beneficial Ownership Reporting 79
Compliance.........................................
Item 11. Executive Compensation............................. 79
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 83
Item 13. Certain Relationships and Related Transactions..... 85
Item 14. Principal Accounting Fees and Services............. 86
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................. 88
Index to Financial Statements...................... 91
Signatures......................................................... 164
2
PART I
Items 1 and 2. Business and Properties.
Overview
Kinder Morgan Energy Partners, L.P., a Delaware limited partnership, is a
publicly traded limited partnership that was formed in August 1992. We are the
largest publicly-traded pipeline limited partnership in the United States in
terms of market capitalization and we own the largest independent refined
petroleum products pipeline system in the United States in terms of volumes
delivered. Unless the context requires otherwise, references to "we," "us,"
"our," "KMP" or the "Partnership" are intended to mean Kinder Morgan Energy
Partners, L.P., our operating limited partnerships and their subsidiaries.
The address of our principal executive offices is 500 Dallas, Suite 1000,
Houston, Texas 77002, and our telephone number at this address is (713)
369-9000. Our common units trade on the New York Stock Exchange under the symbol
"KMP." In addition, you should read the following discussion and analysis in
conjunction with our Consolidated Financial Statements included elsewhere in
this report.
(a) General Development of Business
We provide services to our customers and create value for our unitholders
primarily through the following activities:
o transporting, storing and processing refined petroleum products;
o transporting, storing and selling natural gas;
o producing, transporting and selling carbon dioxide for use in, and selling
crude oil produced from, enhanced oil recovery operations; and
o transloading, storing and delivering a wide variety of bulk, petroleum and
petrochemical products at terminal facilities located across the United
States.
We focus on providing fee-based services to customers, generally avoiding
commodity price risks and taking advantage of the tax benefits of a limited
partnership structure. The portfolio of businesses we own or operate are grouped
into four reportable business segments according to the services we provide and
how our management makes decisions about allocating resources and measuring
financial performance. These segments are as follows:
o Products Pipelines: Delivers more than two million barrels per day of
gasoline, diesel fuel, jet fuel and natural gas liquids to various markets
on over 10,000 miles of products pipelines and 39 associated terminals
serving customers across the United States;
o Natural Gas Pipelines: Transports, stores and sells up to 7.8 billion cubic
feet per day of natural gas and has over 15,000 miles of natural gas
transmission pipelines, plus natural gas gathering and storage facilities;
o CO2: Produces, transports and markets carbon dioxide, commonly called CO2,
has over 1,100 miles of pipelines that transport carbon dioxide to oil
fields that use carbon dioxide to increase oil production in West Texas,
including interests in two oil fields we operate and interests in four
others, all of which are using or have used carbon dioxide injection
operations; and
o Terminals: Composed of approximately 52 owned or operated liquid and bulk
terminal facilities and approximately 57 rail transloading facilities
located throughout the United States, liquids terminal facilities
possessing a liquids storage capacity of approximately 55 million barrels
for refined petroleum products, chemicals and other liquid products, and
bulk and transloading facilities handling nearly 60 million tons of coal,
petroleum coke and other dry-bulk materials annually.
3
In February 1997, Kinder Morgan (Delaware), Inc., a Delaware corporation,
acquired all of the issued and outstanding stock of our general partner, changed
the name of our general partner to Kinder Morgan, G.P., Inc., and changed our
name to Kinder Morgan Energy Partners, L.P. Since that time, our operations have
experienced significant growth, and our net income has increased from $17.7
million, for the year ended December 31, 1997, to $697.3 million, for the year
ended December 31, 2003.
In October 1999, K N Energy, Inc., a Kansas corporation that provided
integrated energy services, acquired Kinder Morgan (Delaware), Inc. At the time
of the closing of this transaction, K N Energy, Inc. changed its name to Kinder
Morgan, Inc., referred to herein as KMI. In connection with the acquisition,
Richard D. Kinder, Chairman and Chief Executive Officer of our general partner
and its delegate (see below), became the Chairman and Chief Executive Officer of
KMI. KMI trades on the New York Stock Exchange under the symbol "KMI" and is one
of the largest energy transportation and storage companies in the United States,
operating, either for itself or on our behalf, more than 35,000 miles of natural
gas and products pipelines and approximately 80 terminals. As of December 31,
2003, KMI and its consolidated subsidiaries owned, through its general and
limited partner interests, an approximate 19.0% interest in us.
In addition to the distributions it receives from its limited and general
partner interests, KMI also indirectly receives an incentive distribution from
us as a result of its ownership of our general partner. This incentive
distribution is calculated in increments based on the amount by which quarterly
distributions to unitholders exceed specified target levels as set forth in our
partnership agreement, reaching a maximum of 50% of distributions allocated to
the general partner for distributions above $0.23375 per limited partner unit
per quarter. Including both its general and limited partner interests in us, at
the 2003 distribution level, KMI received approximately 51% of all quarterly
distributions from us, of which approximately 41% was attributable to its
general partner interest and 10% was attributable to its limited partner
interest. The actual level of distributions KMI will receive in the future will
vary with the level of distributions to the limited partners determined in
accordance with our partnership agreement.
In February 2001, Kinder Morgan Management, LLC, a Delaware limited liability
company referred to herein as KMR, was formed. Our general partner owns all of
KMR's voting securities and, pursuant to a delegation of control agreement, our
general partner delegated to KMR, to the fullest extent permitted under Delaware
law and our partnership agreement, all of its power and authority to manage and
control our business and affairs, except that KMR cannot take certain specified
actions without the approval of our general partner. Under the delegation of
control agreement, KMR, as the delegate of our general partner, manages and
controls our business and affairs and the business and affairs of our operating
limited partnerships and their subsidiaries. Furthermore, in accordance with its
limited liability company agreement, KMR's activities are limited to being a
limited partner in, and managing and controlling the business and affairs of us,
our operating limited partnerships and their subsidiaries.
In May 2001, KMR issued 2,975,000 of its shares representing limited
liability company interests to KMI and 26,775,000 of its shares to the public in
an initial public offering. The shares trade on the New York Stock Exchange
under the symbol "KMR." KMR became a limited partner in us by using
substantially all of the net proceeds from that offering to purchase i-units
from us. The i-units are a separate class of limited partner interests in us and
are issued only to KMR. Under the terms of our partnership agreement, the
i-units are entitled to vote on all matters on which the common units are
entitled to vote. In general, the i-units, common units and Class B units (the
Class B units are similar to our common units except that they are not eligible
for trading on the New York Stock Exchange), will vote together as a single
class, with each i-unit, common unit, and Class B unit having one vote. We pay
our quarterly distributions from operations and from interim capital
transactions to KMR in additional i-units rather than in cash. As of December
31, 2003, KMR, through its ownership of our i-units, owned approximately 25.9%
of all of our outstanding limited partner units. KMR shares and all classes of
our limited partner units were split two-for-one on August 31, 2001, and all
dollar and numerical references to such shares and units in this paragraph and
elsewhere in this report have been adjusted to reflect the effect of the split.
Business Strategy
Our business strategy is substantially the same today as it was when our
current management began managing our business in early 1997. The objective of
our business strategy is to grow our portfolio of businesses by:
4
o providing, for a fee, transportation, storage and handling services which
are core to the energy infrastructure of growing markets;
o increasing utilization of our assets while controlling costs by:
o operating classic fixed-cost businesses with little variable costs;
and
o improving productivity to drop top-line growth to the bottom line;
o leveraging economies of scale from incremental acquisitions and expansions
principally by:
o reducing needless overhead; and
o eliminating duplicate costs in core operations; and
o maximizing the benefits of our financial structure, which allows us to:
o minimize the taxation of net income, thereby increasing distributions
from our high cash flow businesses; and
o maintain a strong balance sheet, thereby allowing flexibility when
raising capital for acquisitions and/or expansions.
Primarily, our business model consists of a solid asset base designed and
operated to generate stable, fee-based income and distributable cash flow that
together provides overall long-term value to our unitholders. We do not face
significant risks relating directly to movements in commodity prices for two
principal reasons. First, we primarily transport and/or handle products for a
fee and are not engaged in the unmatched purchase and resale of commodity
products. Second, in those areas of our business, primarily oil production in
our CO2 business segment, where we do face exposure to fluctuations in commodity
prices, we engage in a hedging program to mitigate this exposure.
Generally, as utilization of our pipelines and terminals increases, our
fee-based revenues increase. Increases in utilization are principally driven by
increases in demand for gasoline, jet fuel, natural gas and other energy
products and bulk materials that we transport, store, or handle. Increases in
demand for these products and services are generally driven by demographic
growth in the markets we serve, including the rapidly growing western and
southeastern United States.
The business strategies of our four business segments are as follows:
o Products Pipelines. We plan to continue to expand our presence in the
growing refined petroleum products markets in the western and southeastern
United States through incremental expansions of pipelines and through
strategic pipeline and terminal acquisitions that we believe will enhance
our ability to serve our customers while increasing distributable cash
flow. On systems serving relatively mature markets, such as our North
System, we intend to focus on increasing product throughput by continuing
to increase the range of products transported and services offered while
remaining a reliable, cost-effective provider of transportation services;
o Natural Gas Pipelines. We intend to grow our Texas intrastate natural gas
transportation and storage businesses by identifying and serving
significant new customers with demand for capacity on our pipeline systems
and reducing volatility through long-term agreements. On our two Rocky
Mountain natural gas pipeline systems, Kinder Morgan Interstate Gas
Transmission LLC and Trailblazer Pipeline Company, our goals are to
continue to operate our existing operations efficiently, to continue to
meet our customers' needs and to capitalize on expansion and growth
opportunities in expanding our role as a key player in moving natural gas
out of the Rocky Mountain region. Red Cedar Gas Gathering Company, our
partnership with the Southern Ute Indian Tribe, is pursuing additional
gathering and processing opportunities on tribal lands. Overall, we will
continue to explore expansion and storage opportunities to increase
utilization levels throughout our natural gas pipeline operations;
5
o CO2. Our carbon dioxide business has two primary strategies: (a) increase
the utilization of our carbon dioxide supply and transportation assets by
providing a full range of supply, transportation and technical support
services to third party customers and (b) increase, for our own account,
the economic benefits from our oil production activities by increasing oil
field carbon dioxide flooding and efficiently managing oil field operating
expenses. As a service provider, our strategy is to offer customers
"one-stop shopping" for carbon dioxide supply, transportation and technical
support service. In our production business, we plan to grow production
from our interests in oil fields located in the Permian Basin of West Texas
by increasing our use of carbon dioxide in enhanced oil recovery projects.
Outside the Permian Basin, we intend to compete aggressively for new supply
and transportation projects, including the acquisition of attractive carbon
dioxide injection projects that would further increase the demand for our
carbon dioxide reserves and utilization of our carbon dioxide supply and
pipeline assets. Our management believes these projects will arise as other
oil producing basins mature and make the transition from primary production
to enhanced recovery methods; and
o Terminals. We are dedicated to growing our terminals segment through a core
strategy which includes dedicating capital to expand existing facilities,
maintaining a strong commitment to operational safety and efficiency and
growing through strategic acquisitions. The bulk terminals industry in the
United States is highly fragmented, leading to opportunities for us to make
selective, accretive acquisitions. In addition to efforts to expand and
improve our existing terminals, we plan to design, construct and operate
new facilities for current and prospective customers. Our management
believes we can use newly acquired or developed facilities to leverage our
operational expertise and customer relationships. In addition, we believe
our experience and expertise in managing and operating our liquids and bulk
terminals businesses in an integrated manner gives us a competitive
advantage in pursuing acquisitions of terminals that handle both bulk and
liquid materials.
To accomplish our strategy, we will continue to rely on the following
three-pronged approach:
o Cost Reductions. We have reduced the total operating, maintenance, general
and administrative expenses of those operations that we owned at the time
Kinder Morgan (Delaware), Inc. acquired our general partner in February
1997. In addition, we have made similar reductions in the operating,
maintenance, general and administrative expenses of many of the businesses
and assets that we acquired or have assumed operations of since February
1997. Generally, these reductions in expense have been achieved by
eliminating duplicative functions that we and the acquired businesses each
maintained prior to their combination. We intend to continue to seek
further expense reductions throughout our businesses where appropriate;
o Internal Growth. We intend to grow income from our current assets through
(a) increased utilization and (b) internal expansion projects. We primarily
operate classic fixed cost businesses with little variable costs. By
controlling these variable costs, any increase in utilization of our
pipelines and terminals generally results in an increase in income.
Increases in utilization are principally driven by increases in demand for
gasoline, jet fuel, natural gas and other energy products and bulk
materials that we transport, store or handle. Increases in demand for these
products are typically driven by demographic growth in markets we serve,
including the rapidly growing western and southeastern United States. In
addition, we have undertaken a number of expansion projects that our
management believes will increase revenues from existing operations; and
o Strategic Acquisitions. We regularly seek opportunities to make additional
strategic acquisitions, to expand existing businesses and to enter into
related businesses. We periodically consider potential acquisition
opportunities, including those from KMI or its affiliates, as they are
identified, but we cannot assure you that we will be able to consummate any
such acquisition. While there are currently no unannounced purchase
agreements for the acquisition of any material business or assets, such
transactions can be effected quickly, may occur at any time and may be
significant in size relative to our existing assets or operations. Our
management anticipates that we will finance acquisitions by borrowings
under our bank credit facilities or by issuing commercial paper, and
subsequently reduce these short-term borrowings by issuing new long-term
debt securities, common units and/or i-units to KMR. For more information
on the costs and methods of financing for each of our 2003 acquisitions,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Capital
Requirements for Recent Transactions" included elsewhere in this report.
6
Achieving success in implementing our strategy will partly depend on the
following characteristics of our management's philosophy:
o Low cost asset operator and attention to detail. An important element of
our strategy to improve unitholder value is controlling costs whenever
possible. We believe that our overall cost and expense infrastructure has
been improved by numerous simplification and transformation efforts. We
continue to focus on improving employee and process productivity in order
to create a more efficient expense structure while, at the same time, we
insist on providing the highest level of expertise and uncompromising
service to our customers. We have recognized for years the need to have an
unwavering commitment to safety, and we employ full-time safety
professionals to provide training and awareness through ongoing programs
for every employee, especially those working with hazardous materials at
our pipeline and terminal facilities;
o Risk Management. We avoid businesses with direct commodity price exposure
wherever possible, and we hedge incidental commodity price risk. In the
normal course of business, we are exposed to risks associated with changes
in the market price of energy products; however, we attempt to limit these
risks by following established risk management policies and procedures,
including the use of energy financial instruments, also known as
derivatives. Our risk management process also includes identifying the
areas in our operations where assets are at risk of loss and areas where
exposures exist to third-party liabilities. Our management strives to
recognize and insure against such risk; and
o Alignment of incentives. Whenever possible, we align the compensation of
our management and employees with the interests of our unitholders. Under
KMI's stock option plan, all employees of KMI and its affiliates, including
employees of KMI's direct and indirect subsidiaries who operate our
businesses, are eligible to receive grants of options to acquire shares of
KMI common stock. The primary purpose for granting stock options under this
plan is to provide employees with an incentive to increase the value of
common stock of KMI. The value of KMI's common stock increases primarily
as a result of increases in distributions to our unitholders. KMI's ten
most senior executives (excluding Mr. Kinder, who receives $1 per year in
salary) have their base salaries capped at $200,000, are not eligible for
stock options, but instead are eligible to receive grants of KMI restricted
stock. Additionally, all employees, including the most senior executives,
are eligible for annual bonuses only when KMI and we meet annual earnings
per share and distributions per unit targets.
Recent Developments
During 2003, our assets increased 9% and our net income increased 15% from
2002 levels. In addition, distributions per unit increased 9% from $0.625 for
the fourth quarter of 2002 to $0.68 for the fourth quarter of 2003. The
following is a brief listing of significant developments since December 31,
2002. Additional information regarding most of these items is contained in the
rest of this report.
o Effective January 1, 2003, we acquired long-term lease contracts from New
York-based M.J. Rudolph Corporation to operate four bulk terminal
facilities at major ports along the East Coast and in the southeastern
United States. The acquisition also included the purchase of certain assets
that provide stevedoring services at these locations. The aggregate cost of
this acquisition was approximately $31.3 million. We paid $29.9 million of
the acquisition cost on December 31, 2002 and the remaining $1.4 million in
January 2003. 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 annually
transload nearly four million tons of products such as fertilizer, iron ore
and salt;
o On March 25, 2003, we announced the start of service on our new $89
million, 95-mile, 30-inch Mier-Monterrey natural gas pipeline that
stretches from South Texas to Monterrey, Mexico, one of Mexico's fastest
growing industrial areas. The new pipeline interconnects with the southern
end of our Kinder Morgan Texas pipeline system in Starr County, Texas, and
is designed to initially transport up to 375,000 dekatherms per day of
natural gas. Additionally, we entered into a 15-year contract with Pemex
Gas Y Petroquimica Basica, which subscribed for all of the capacity on the
pipeline. The pipeline connects to a 1,000-megawatt power plant complex
near Monterrey and to the PEMEX natural gas transportation system;
7
o On May 2, 2003, we were notified by the staff of the Securities and
Exchange Commission that the staff is conducting an informal investigation
concerning our public disclosures regarding the allocation of purchase
price between assets and goodwill in connection with our 2002 acquisition
of the assets of Kinder Morgan Tejas. The staff has not asserted that we
have acted improperly or illegally. Furthermore, the staff has indicated
that the Commission has not issued a formal order. We have voluntarily
agreed to cooperate fully with the staff's informal investigation. Even if
adjustments were made to the allocation between assets and goodwill, any
adjustments would not have an effect on cash available for distributions to
our limited partners. The primary effect of any adjustments would be to
either increase or decrease depreciation and amortization expense with a
corresponding increase or decrease in net income. This difference arises
because, in general, assets are required to be depreciated over time while
goodwill is not;
o On May 6, 2003, we completed construction and placed into service our new
$28.5 million carbon dioxide Centerline pipeline. The Centerline pipeline
originates near Denver City, Texas and transports carbon dioxide to the
Snyder, Texas area. The pipeline consists of 113 miles of 16-inch pipe and
primarily supplies the SACROC oil field unit in the Permian Basin of West
Texas, but is also available for existing and prospective third-party
carbon dioxide projects in the Horseshoe Atoll area of the Permian Basin;
o Effective June 1, 2003, we acquired MKM Partners, L.P.'s 12.75% ownership
interest in the SACROC oil field unit for $23.3 million and the assumption
of $1.9 million of liabilities. The SACROC unit is one of the largest and
oldest oil fields in the United States using carbon dioxide flooding
technology. This transaction increased our ownership interest in the SACROC
unit to approximately 97%;
o On June 10, 2003, we announced that we had entered into a long-term natural
gas transportation contract with Praxair, Inc. Under the 15-year agreement,
we have agreed to supply Praxair with up to 90,000 dekatherms of natural
gas per day from our Texas intrastate natural gas pipeline system. The gas
will be used to supply Praxair's steam-methane reformers at two new
hydrogen facilities located in Texas City, Texas, and Port Arthur, Texas.
These new hydrogen facilities are scheduled to be in production in 2004;
o On June 23, 2003, we completed a public offering of an additional 4,600,000
of our common units, including 600,000 units issued upon exercise by the
underwriters of an over-allotment option, at a price of $39.35 per unit,
less commissions and underwriting expenses. We received net proceeds of
$173.3 million for the issuance of these common units and we used the
proceeds to reduce the borrowings under our commercial paper program;
o On June 24, 2003, a non-binding, phase one initial decision was issued by
an administrative law judge hearing a Federal Energy Regulatory Commission
case on the rates charged by our Pacific operations' interstate portion of
its pipelines. The Energy Policy Act of 1992 "grandfathered" most of our
Pacific operations' interstate rates, deeming them lawful. However,
pursuant to rate challenges made by certain shippers, the administrative
law judge recommended that the FERC "ungrandfather" our Pacific operations'
interstate rates. If these rates are "ungrandfathered," they could be
lowered prospectively and complaining shippers could be entitled to
reparations for prior periods. Initial decisions have no force or effect
and must be reviewed by the FERC. Furthermore, the FERC is not obliged to
follow any of the administrative law judge's findings and can accept or
reject this initial decision in whole or in part. Ultimate resolution of
phase one and phase two of this matter by the FERC is not expected before
early 2005;
o On July 30, 2003, we experienced a rupture on our Products Pipelines'
Pacific operations' Tucson to Phoenix line that carries refined petroleum
products from Tucson to Phoenix. Through a combination of increased
deliveries on our Los Angeles to Phoenix line and terminal modifications at
our Tucson terminal that allowed volumes of Phoenix-grade gasoline to be
trucked into Phoenix, we were able to deliver most of the volumes into the
Phoenix area which normally would have flowed through the ruptured line.
The Tucson to Phoenix line resumed service on August 24, 2003. The impact
of the rupture on our results of operations was not material;
o On August 1, 2003, we received a favorable final order from the FERC
approving the rate methodology for shippers on the expansion of our Pacific
operations' East Line pipeline. In October 2002, we filed a petition
8
requesting that the FERC address several issues regarding the determination
of rates for our proposed $200million East Line expansion project. The East
Line is comprised of two parallel pipelines originating in El Paso, Texas,
extending to the west and connecting to our products terminal located in
Tucson, Arizona. One line continues running northwest and connects to our
products terminal located in Phoenix, Arizona. When completed, the
expansion will increase capacity on our El Paso to Tucson pipeline by
approximately 56% (53,000 barrels per day of refined petroleum products),
and on our Tucson to Phoenix pipeline by approximately 80% (44,000 barrels
per day of refined petroleum products). As part of this expansion project,
replacement of approximately 12 miles of pipeline within the city of Tucson
is underway and will be completed by mid-March 2004. The projected start-up
for the remainder of the expansion is sometime in the fourth quarter of
2005 or the first quarter of 2006;
o Effective August 1, 2003, we acquired reversionary interests in the Red
Cedar Gas Gathering Company held by the Southern Ute Indian Tribe. Our
purchase price was $10.0 million. The 4% reversionary interests were
scheduled to take effect September 1, 2004 and September 1, 2009. With the
elimination of these reversions, our ownership interest in Red Cedar will
remain at 49%;
o On August 5, 2003, we announced the formation of a joint venture with
Nicor, Inc. for the purpose of obtaining shipper commitments for the
proposed Advantage Southern Pipeline project. The 392-mile pipeline would
originate from the Cheyenne Hub, located in Weld County, Colorado, and
terminate near Greensburg, Kansas, where it would interconnect with several
major interstate pipeline systems. The pipeline would offer a competitive
alternative to shippers at the Cheyenne Hub by providing additional access
to natural gas produced in the Rocky Mountain region to meet growing demand
in the Midwest. On August 29, 2003, we concluded an open season on the
project, which gave interested shippers the opportunity to bid for firm
capacity on the proposed natural gas pipeline. As of January 31, 2004, we
were working with a number of shippers to remove contingencies, which would
then allow this project to go forward;
o Effective October 1, 2003, we acquired five refined petroleum products
terminals in the western United States for approximately $20.0 million from
Shell Oil Products U.S. In addition, as part of the transaction, Shell
entered into a long-term contract to store refined petroleum products in
the terminals. We plan to invest an additional $8.0 million in the
facilities in the near term. The terminals are located in Colton and
Mission Valley, California; Phoenix and Tucson, Arizona; and Reno, Nevada.
Combined, the terminals have 28 storage tanks with total capacity of
approximately 700,000 barrels for gasoline, diesel fuel and jet fuel. The
terminals also feature automated truck-loading equipment and offer a
variety of blending services;
o On October 9, 2003, following approval from the Federal Energy Regulatory
Commission, we announced the start of construction on our $30 million
project that involves the construction of pipeline, compression and storage
facilities to accommodate an additional six billion cubic feet of natural
gas storage capacity at our Kinder Morgan Interstate Gas Transmission LLC's
Cheyenne Market Center. This additional capacity has been fully subscribed
under 10-year contracts. The Cheyenne Market Center offers firm natural gas
storage capabilities that will allow the receipt, storage and subsequent
re-delivery of natural gas supplies at applicable points located in the
vicinity of the Cheyenne Hub in Weld County, Colorado and our Huntsman
storage facility in Cheyenne County, Nebraska. The Cheyenne Market Center
is expected to begin service during the summer of 2004;
o Effective November 1, 2003, we acquired certain assets in the Permian Basin
of West Texas from a subsidiary of Marathon Oil Corporation for $231.0
million and the assumption of $28.0 million of liabilities. The assets
acquired included Marathon's approximate 42.5% interest in the Yates oil
field unit, Marathon's 100% interest in the crude oil gathering system
surrounding the Yates field and Marathon's 100% interest in Marathon Carbon
Dioxide Transportation Company. Marathon Carbon Dioxide Transportation
Company owns a 65% ownership interest in the Pecos Carbon Dioxide Pipeline
Company, which owns a 25-mile carbon dioxide pipeline. Adding the acquired
interest in the Yates field to the 7.5% ownership interest we previously
owned raised our working interest in the Yates field to nearly 50% and
allows us to operate the field. One of the largest oil fields ever
discovered in the United States, Yates originally held more than five
billion barrels of oil, of which approximately 28% has been produced. This
field is located approximately 90 miles south of Midland, Texas;
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o Effective November 1, 2003, we acquired the remaining approximate 32%
ownership interest in MidTex Gas Storage Company, LLP from an affiliate of
NiSource Inc. for $15.8 million and the assumption of $1.7 million of debt.
We now own 100% of MidTex Gas Storage Company, LLP, a Texas limited
liability partnership that owns two salt dome natural gas storage
facilities located in Matagorda County, Texas;
o On December 3, 2003, we announced that we had acquired a 172 mile segment
of a 24-inch diameter Texas crude oil pipeline from Teppco Crude Pipeline,
L.P. and expect to convert it from carrying crude oil to natural gas. We
will spend approximately $30.0 million to acquire the intrastate pipeline,
prepare it for natural gas transportation service and build an additional
five mile pipeline lateral. Approximately $23.3 million of our total
spending will be made to convert to natural gas service the 135 mile
pipeline segment which extends from an intersection with our Kinder Morgan
Texas Pipeline system just west of Katy, Texas to the west side of Austin,
Texas. When completed, the pipeline will provide approximately 170
dekatherms per day of natural gas to the Austin market. In addition, Austin
Energy, Austin's city-owned electric utility, has entered into a long-term
contract for firm transportation and storage services, primarily to provide
gas supply to its Sand Hill power plant. Texas Gas Service, Austin's local
natural gas distribution company, has also signed a long-term contract to
support the project. We expect to begin gas service on the pipeline by the
middle of 2004;
o Effective December 11, 2003, we acquired seven refined petroleum products
terminals in the southeastern United States from ConocoPhillips Company and
Phillips Pipe Line Company. Our purchase price was approximately $15.1
million, consisting of approximately $14.0 million in cash and $1.1 million
in assumed liabilities. The terminals are located in Charlotte and Selma,
North Carolina; Augusta and Spartanburg, South Carolina; Albany and
Doraville, Georgia; and Birmingham, Alabama. We will fully own and operate
all of these terminals except for the facility in Doraville, Georgia, where
our ownership interest will be 30% and the facility will be operated by
Citgo. Combined, the terminals have 35 storage tanks with total capacity of
approximately 1.15 million barrels for gasoline, diesel fuel and jet fuel.
The facilities feature automated truck-loading equipment and offer a
variety of blending and additive-injection services. In addition, as part
of the transaction, ConocoPhillips entered into a long-term contract to use
the terminals;
o On December 16, 2003, we announced that we expect to declare cash
distributions of $2.84 per unit for 2004, an 8% increase over our cash
distributions of $2.63 per unit for 2003. This expectation included
contributions from assets owned by us as of the announcement data and did
not include any projected benefits from unidentified acquisitions;
o In December 2003, we completed the acquisition of two terminals in Tampa,
Florida for an aggregate consideration of approximately $29.5 million,
consisting of $26.0 million in cash and $3.5 million in assumed
liabilities. The principal purchase was a marine terminal acquired from a
subsidiary of IMC Global, Inc. We also entered into a long-term agreement
with IMC to enable it to be the primary user of the facility, which we will
operate and refer to as the Kinder Morgan Tampaplex terminal. We closed on
this portion of the transaction on December 23, 2003. The terminal sits on
a 114-acre site, and serves as a storage and receipt point for imported
ammonia, as well as an export location for dry bulk products, including
fertilizer and animal feed. The second facility includes assets from the
former Nitram, Inc. bulk terminal, which we plan to use as an inland bulk
storage warehouse facility for overflow cargoes from our Port Sutton import
terminal, also located in Tampa. We closed on the Nitram portion of the
transaction on December 10, 2003;
o During 2003, we spent $577.0 million for additions to our property, plant
and equipment, including both expansion and maintenance projects. Our
capital expenditures included the following:
o $272.2 million in our CO2 segment, mostly related to additional
infrastructure, including wells, injection and compression facilities,
to support the expanding carbon dioxide flooding operations at the
SACROC oil field unit;
o $108.4 million in our Terminals segment, mostly related to expansions at
our liquid terminal facilities located in Carteret and Perth Amboy, New
Jersey and Pasadena and Galena Park, Texas, as well as other smaller
projects;
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o $101.7 million in our Natural Gas Pipelines segment, mostly related to
completing the construction and start up of our Mier-Monterrey Pipeline
and to the expansion at the Cheyenne Market Center, both described
above; and
o $94.7 million in our Products Pipelines segment, mostly related to
infrastructure modifications at many of our California terminals so that
our shippers can blend ethanol, expansions to our North System pipeline
and a storage expansion project at our combined Carson/Los Angeles
Harbor terminal system in the state of California;
o On February 3, 2004, we announced that we had priced a public offering of
5,300,000 of our common units at a price of $46.80 per unit, less
commissions and underwriting expenses. We also granted to the underwriters
an option to purchase up to 795,000 additional common units to cover
over-allotments. On February 9, 2004, 5,300,000 common units were issued.
We received net proceeds of $237.8 million for the issuance of these common
units and we used the proceeds to reduce the borrowings under our
commercial paper program; and
o On February 4, 2004, we announced that we had reached an agreement with
Exxon Mobil Corporation to purchase seven refined petroleum products
terminals in the southeastern United States. The terminals are located in
Collins, Mississippi, Knoxville, Tennessee, Charlotte and Greensboro North
Carolina, and Richmond, Roanoke and Newington, Virginia. Combined, the
terminals have a total storage capacity of approximately 3.2 million
barrels for gasoline, diesel fuel and jet fuel. As part of the transaction,
Exxon Mobil has entered into a long-term contract to store products in the
terminals. The acquisition enhances our terminal operations in the
Southeast and complements our December 2003 acquisition of seven products
terminals from ConocoPhillips Company and Phillips Pipe Line Company. The
acquired operations will be included as part of our Products Pipelines
business segment.
(b) Financial Information about Segments
For financial information on our four reportable business segments, see Note
15 to our Consolidated Financial Statements.
(c) Narrative Description of Business
Products Pipelines
Our Products Pipelines segment consists of refined petroleum products and
natural gas liquids pipelines, related terminals and transmix processing
facilities, including:
o our Pacific operations, which include interstate common carrier pipelines
regulated by the Federal Energy Regulatory Commission, intrastate pipelines
in California regulated by the California Public Utilities Commission and
certain non rate-regulated operations and terminal facilities.
Specifically, our Pacific operations include:
o our SFPP, L.P. operations, comprised of approximately 2,800 miles of
pipelines that transport refined petroleum products to some of the
fastest growing population centers in the United States, including
Southern California; the San Francisco Bay Area; Las Vegas, Nevada
(through our CALNEV pipeline) and Phoenix and Tucson, Arizona, and 13
truck-loading terminals with an aggregate usable tankage capacity of
approximately 9.9 million barrels;
o our CALNEV pipeline operations, comprised of approximately 550-miles
of pipelines that transport refined petroleum products from Colton,
California to the growing Las Vegas, Nevada market, McCarran
International Airport in Las Vegas, Nevada, and refined petroleum
products terminals located in Barstow, California and Las Vegas,
Nevada; and
o our West Coast terminals operations, which are comprised of seven
terminal facilities on the West Coast that transload and store
refined petroleum products;
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o our Central Florida Pipeline, two pipelines that total 195-miles and
transport refined petroleum products from Tampa to the Orlando, Florida
market and two refined petroleum products terminals at Tampa and Orlando,
Florida;
o our North System, a 1,600-mile pipeline that transports natural gas liquids
in both directions between south central Kansas and the Chicago area and
various intermediate points, including eight terminals, and our 50%
interest in the Heartland Pipeline Company, which ships refined petroleum
products in the Midwest;
o our 51% interest in Plantation Pipe Line Company, which owns the 3,100-mile
Plantation pipeline system that transports refined petroleum products
throughout the southeastern United States, serving major metropolitan
areas including Birmingham, Alabama; Atlanta, Georgia; Charlotte, North
Carolina; and the Washington, D.C. area;
o our newly-formed Kinder Morgan Southeast Terminals, currently consisting of
seven refined petroleum products terminals acquired in December 2003 from
ConocoPhillips and Phillips Pipe Line Company;
o our 44.8% interest in the Cochin Pipeline system, a 1,900-mile pipeline
transporting natural gas liquids and traversing Canada and the United
States from Fort Saskatchewan, Alberta to Sarnia, Ontario, including five
terminals;
o our Cypress Pipeline, a 104-mile pipeline transporting natural gas liquids
from Mont Belvieu, Texas to a major petrochemical producer in Lake Charles,
Louisiana; and
o our Transmix operations, which include the processing of petroleum pipeline
transmix through transmix processing plants in Colton, California;
Richmond, Virginia; Dorsey Junction, Maryland; Indianola, Pennsylvania; and
Wood River, Illinois.
Pacific Operations
Our Pacific operations' pipelines are split into a South Region and a North
Region. Combined, the two regions consist of seven pipeline segments that serve
six western states with approximately 3,300 miles of refined petroleum products
pipeline and related terminal facilities.
Refined petroleum products and related uses are:
Product Use
------- ----------------------
Gasoline Transportation
Diesel fuel Transportation (auto, rail, marine), agricultural,
industrial and commercial
Jet fuel Commercial and military air transportation
Our Pacific operations transport over 1.1 million barrels per day of refined
petroleum products, providing pipeline service to approximately 39
customer-owned terminals, eight commercial airports and 15 military bases. For
2003, the three main product types transported were gasoline (62%), diesel fuel
(22%) and jet fuel (16%). Our Pacific operations also include 15 truck-loading
terminals (13 on SFPP, L.P. and two on CALNEV).
Our Pacific operations provide refined petroleum products to some of the
fastest growing population centers in the United States, including
California; Las Vegas and Reno, Nevada; and the Phoenix, Arizona region.
Pipeline transportation of gasoline and jet fuel generally has a direct
correlation with demographic patterns. We believe that the population growth
associated with the markets served by our Pacific operations will continue in
the foreseeable future.
South Region. Our Pacific operations' South Region consists of four pipeline
segments:
o West Line;
o East Line;
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o San Diego Line; and
o CALNEV Line.
The West Line consists of approximately 660 miles of primary pipeline and
currently transports products for 38 shippers from six refineries and three
pipeline terminals in the Los Angeles Basin to Phoenix and Tucson, Arizona and
various intermediate commercial and military delivery points. Product for the
West Line can also come from foreign and domestic sources through the Los
Angeles and Long Beach port complexes and the three pipeline terminals. A
significant portion of West Line volumes is transported to Colton, California
for local distribution and for delivery to our CALNEV Pipeline. The West Line
serves our terminals located in Colton and Imperial, California as well as in
Phoenix and Tucson, Arizona.
The East Line is comprised of two parallel 8-inch diameter and 12-inch
diameter pipelines originating in El Paso, Texas and continuing approximately
300 miles west to our Tucson terminal and one line continuing northwest
approximately 130 miles from Tucson to Phoenix. All products received by the
East Line at El Paso come from a refinery in El Paso or are delivered through
connections with non-affiliated pipelines from refineries in Texas and New
Mexico. The East Line serves our terminals located in Phoenix and Tucson as well
as various intermediate commercial and military delivery points. We have
embarked on a major expansion of this pipeline system. The expansion consists of
replacing 160 miles of 8-inch diameter pipe between El Paso and Tucson and 84
miles of 8-inch diameter pipe between Tucson and Phoenix, with 16-inch and
12-inch diameter pipe, respectively.
The San Diego Line is a 135-mile pipeline serving major population areas in
Orange County (immediately south of Los Angeles) and San Diego. The same
refineries and terminals that supply the West Line also supply the San Diego
Line. The San Diego Line serves our terminals at Orange and Mission Valley as
well as shipper terminals in San Diego and San Diego Airport through a
non-affiliated connecting pipeline.
The CALNEV Line consists of two parallel 248-mile, 14-inch and 8-inch
diameter pipelines from our facilities at Colton, California to Las Vegas,
Nevada. It also includes approximately 55 miles of pipeline serving Edwards Air
Force Base. CALNEV originates at Colton, California and serves two CALNEV
terminals at Barstow, California and Las Vegas, Nevada. The CALNEV pipeline also
serves McCarran International Airport, Edwards Air Force Base and Nellis Air
Force Base, as well as certain smaller delivery points, including the Burlington
Northern Santa Fe and Union Pacific railroad yards.
North Region. Our Pacific operations' North Region consists of three pipeline
segments:
o the North Line;
o the Bakersfield Line; and
o the Oregon Line.
The North Line consists of approximately 820 miles of trunk pipeline in five
segments originating in Richmond and Concord, California. This line serves our
terminals located in Brisbane, Sacramento, Chico, Fresno and San Jose,
California, and Reno, Nevada. The products delivered through the North Line come
from refineries in the San Francisco Bay Area and from various pipeline and
marine terminals that deliver products from foreign and domestic ports. The
14-inch diameter pipeline between Concord and Sacramento is currently being
replaced with a 20-inch diameter pipeline, expected to be in service by the end
of the fourth quarter of 2004.
The Bakersfield Line is a 100-mile, 8-inch diameter pipeline serving Fresno,
California. A refinery located in Bakersfield, California, which supplies
substantially all of the products shipped through the Bakersfield Line, has
announced that it will cease operations by the end of 2004. We are currently
evaluating the effects of this closure on our Pacific operations in the San
Joaquin Valley; however, we expect the effect to be relatively neutral to the
overall operating results of our Pacific operations' pipelines.
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The Oregon Line is a 114-mile pipeline serving 11 shippers. Our Oregon Line
receives products from marine terminals in Portland, Oregon and from Olympic
Pipeline. Olympic Pipeline is a non-affiliated pipeline that transports products
from the Puget Sound, Washington area to Portland. From its origination point in
Portland, the Oregon Line extends south and serves our terminal located in
Eugene, Oregon.
West Coast Terminals. These terminals are operated as part of our Pacific
operations.
The terminals include:
o the Carson Terminal;
o the Los Angeles Harbor Terminal;
o the Gaffey Street Terminal;
o the Richmond Terminal;
o the Linnton and Willbridge Terminals; and
o the Harbor Island Terminal.
The West Coast terminals are fee-based terminals. They are located in several
strategic locations along the west coast of the United States and have a
combined total capacity of nearly eight million barrels of storage for both
petroleum products and chemicals.
The Carson terminal and the connected Los Angeles Harbor terminal are
strategically located near the many refineries in the Los Angeles Basin. The
combined Carson/LA Harbor system is connected to numerous other pipelines and
facilities throughout the Los Angeles area, which gives the system significant
flexibility and allows customers to quickly respond to market conditions.
Storage at the Carson facility is primarily arranged via term contracts with
customers, ranging from one to five years. Term contracts represent 56% of total
revenues at the facility.
The Gaffey Street terminal in San Pedro, California, is adjacent to the Port
of Los Angeles. This facility serves as a marine fuel storage and blending
facility for the marketing of local or imported bunker fuels for Los Angeles
ship traffic.
The Richmond terminal is located in the San Francisco Bay Area. The facility
serves as a storage and distribution center for chemicals, lubricants and
paraffin waxes. It is also the principal location in northern California through
which tropical oils are imported for further processing, and from which United
States' produced vegetable oils are exported to consumers in the Far East.
The Linnton and Willbridge terminals are located in Portland, Oregon. These
facilities handle petroleum products for distribution to both local and regional
markets. Refined products are received by pipeline, marine vessel, barge, and
rail car for distribution to local markets by truck; to southern Oregon via our
Oregon Line; to Portland International Airport via a non-affiliated pipeline;
and to eastern Washington and Oregon by barge.
The Harbor Island terminal is located in Seattle, Washington. The facility is
supplied via pipeline and barge from northern Washington-state refineries,
allowing customers to distribute fuels economically to the greater Seattle-area
market by truck. The terminal is the largest marine fuel oil storage facility in
Puget Sound and also has a multi-component, in-line blending system for
providing customized bunker fuels to the marine industry.
Truck-Loading Terminals. Our Pacific operations include 15 truck-loading
terminals (13 on SFPP, L.P. and two on CALNEV) with an aggregate usable tankage
capacity of approximately ten million barrels. The truck terminals are located
at most destination points on each of our Pacific operations' pipelines as well
as some intermediate points along each pipeline. The simultaneous truck-loading
capacity of each terminal ranges from two to 12 trucks. We provide the following
services at these terminals:
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o short-term product storage;
o truck-loading;
o vapor handling;
o deposit control additive injection;
o dye injection;
o oxygenate blending; and
o quality control.
The capacity of terminaling facilities varies throughout our Pacific
operations. We charge a separate fee (in addition to pipeline tariffs) for these
additional terminaling services. These fees are not regulated except for the
fees at the CALNEV terminals. At certain locations, we make product deliveries
to facilities owned by shippers or independent terminal operators.
Markets. Currently our Pacific operations' pipeline system serves
approximately 68 shippers in the refined products market, with the largest
customers consisting of:
o major petroleum companies;
o independent refiners;
o the United States military; and
o independent marketers and distributors of refined petroleum products.
A substantial portion of the product volume transported is gasoline. Demand
for gasoline depends on such factors as prevailing economic conditions,
vehicular use patterns and demographic changes in the markets served. If current
trends continue, we expect the majority of our Pacific operations' markets to
maintain growth rates that will exceed the national average for the foreseeable
future.
Currently, the California gasoline market is approximately 940,000 barrels
per day. The Arizona gasoline market is served primarily by us at a market
demand of approximately 155,000 barrels per day. Nevada's gasoline market is
approximately 60,000 barrels per day and Oregon's is approximately 100,000
barrels per day. The diesel and jet fuel market is approximately 510,000 barrels
per day in California, 80,000 barrels per day in Arizona, 50,000 barrels per day
in Nevada and 60,000 barrels per day in Oregon. We transport over 1.1 million
barrels of petroleum products per day in these states.
The volume of products transported is directly affected by the level of
end-user demand for such products in the geographic regions served. Certain
product volumes can experience seasonal variations and, consequently, overall
volumes may be lower during the first and fourth quarters of each year.
California mandated the elimination of MTBE (methyl tertiary-butyl ether)
from gasoline by January 1, 2004. Since this date, MTBE-blended gasoline has
been replaced by ethanol-blended gasoline. Since ethanol cannot be shipped by
pipeline, we are realizing a downward adjustment in gasoline delivery volumes in
California; however, our overall revenues are not expected to be adversely
impacted as we charge a fee to blend ethanol at our terminals.
Supply. The majority of refined products supplied to our Pacific operations'
pipeline system come from the major refining centers around Los Angeles, San
Francisco and Puget Sound, as well as waterborne terminals located near these
refining centers.
15
Competition. The most significant competitors of our Pacific operations'
pipeline system are proprietary pipelines owned and operated by major oil
companies in the area where our pipeline system delivers products as well as
refineries with related trucking arrangements within our market areas. We
believe that high capital costs, tariff regulation and environmental permitting
considerations make it unlikely that a competing pipeline system comparable in
size and scope to our Pacific operations will be built in the foreseeable
future. However, the possibility of pipelines being constructed to serve
specific markets is a continuing competitive factor.
The use of trucks for product distribution from either shipper-owned
proprietary terminals or from their refining centers remains a competitive
threat for short haul movements by pipeline. The mandated elimination of MTBE
and required substitution of ethanol in California gasoline resulted in at least
a temporary increase in trucking distribution from shipper owned terminals. We
cannot predict with any certainty whether the use of short haul trucking will
decrease or increase in the future.
Longhorn Partners Pipeline is a joint venture pipeline project that is
expected to begin transporting refined products from refineries on the Gulf
Coast to El Paso and other destinations in Texas in 2004. Increased product
supply in the El Paso area could result in some shift of volumes transported
into Arizona from our West Line to our East Line. Increased movements into the
Arizona market from El Paso would currently displace higher tariff volumes
supplied from Los Angeles on our West Line. However, our East Line is currently
running at full capacity and we have plans to increase East Line capacity to
meet market demand. The planned capacity increase will require significant
investment which should, under the FERC cost of service methodology, result in a
more balanced tariff between our East and West Lines. Such shift of supply
sourcing has not had, and is not expected to have, a material effect on our
operating results.
Terminals owned by our Pacific operations also compete with terminals owned
by our shippers and by third party terminal operators in numerous locations.
Competing terminals are located in Reno, Sacramento, San Jose, Stockton, Colton,
Mission Valley, and San Diego, California and Phoenix and Tucson, Arizona and
Las Vegas, Nevada.
Competitors of the Carson terminal in the refined products market include
Shell Oil Products U.S. and BP (formerly Arco Terminal Services Company). In the
crude/black oil market, competitors include Pacific Energy, Wilmington Liquid
Bulk Terminals (Vopak) and BP. Competitors to Gaffey Street include ST Services,
Chemoil and Wilmington Liquid Bulk Terminals (Vopak). Competition to the
Richmond terminal's chemical business comes primarily from IMTT. Competitors to
our Linnton and Willbridge terminals include ST Services, ChevronTexaco and
Shell Oil Products U.S. Our Harbor Island terminal competes primarily with
nearby terminals owned by Shell Oil Products U.S. and ConocoPhillips.
Central Florida Pipeline
We own and operate a liquids terminal in Tampa, Florida, a liquids terminal
in Taft, Florida (near Orlando, Florida) and an intrastate common carrier
pipeline system that serves customers' product storage and transportation needs
in Central Florida. The Tampa terminal contains 31 above-ground storage tanks
consisting of approximately 1.4 million barrels of storage capacity and is
connected to two ship dock facilities in the Port of Tampa that unload refined
products from barges and ocean-going vessels into the terminal. The Tampa
terminal provides storage for gasoline, diesel fuel and jet fuel for further
movement into either trucks through five truck-loading racks or into the Central
Florida pipeline system. The Tampa terminal also provides storage for chemicals,
predominantly used to treat citrus crops, delivered to the terminal by vessel or
rail car and loaded onto trucks through five truck-loading racks. The Taft
terminal contains 22 above-ground storage tanks consisting of approximately
670,000 barrels of storage capacity, providing storage for gasoline and diesel
fuel for further movement into trucks through 11 truck-loading racks.
The Central Florida pipeline system consists of a 110-mile, 16-inch diameter
pipeline that transports gasoline and an 85-mile, 10-inch diameter pipeline that
transports diesel fuel and jet fuel from Tampa to Orlando, with an intermediate
delivery point on the 10-inch pipeline at Intercession City, Florida. In
addition to being connected to our Tampa terminal, the pipeline system is
connected to terminals owned and operated by TransMontaigne, Citgo, BP, and
Marathon Ashland Petroleum. The 10-inch diameter pipeline is connected to our
Taft terminal and is also the sole pipeline supplying jet fuel to the Orlando
International Airport in Orlando, Florida. In 2003, the pipeline
16
transported approximately 96,000 barrels per day of refined products, with the
product mix being approximately 68% gasoline, 14% diesel fuel, and 18% jet fuel.
Markets. The estimated total refined petroleum product demand in the State of
Florida is approximately 785,000 barrels per day. Gasoline is, by far, the
largest component of that demand at approximately 500,000 barrels per day. The
total refined petroleum products demand for the Central Florida region of the
state, which includes the Tampa and Orlando markets, is estimated to be 335,000
barrels per day, or approximately 43% of the consumption of refined products in
the state. Our market share is approximately 120,000 barrels per day, or
approximately 36% of the Central Florida market. The balance of the market is
supplied primarily by trucking firms and marine transportation firms. Most of
the jet fuel used at Orlando International Airport is moved through our Tampa
terminal and the Central Florida pipeline system. The market in Central Florida
is seasonal, with demand peaks inMarch and April during spring break and again
in the summer vacation season, and is also heavily influenced by tourism, with
Disney World and other amusement parks located in Orlando.
Supply. The vast majority of refined petroleum products consumed in Florida
is supplied via marine vessels from major refining centers in the gulf coast of
Louisiana and Mississippi and refineries in the Caribbean basin. A lesser amount
of refined products is being supplied by refineries in Alabama and by Texas Gulf
Coast refineries via marine vessels and through pipeline networks that extend to
Bainbridge, Georgia. The supply into Florida is generally transported by
ocean-going vessels to the larger metropolitan ports, such as Tampa, Port
Everglades near Miami, and Jacksonville. Individual markets are then supplied
from terminals at these ports and other smaller ports, predominately by trucks,
except the Central Florida region, which is served by a combination of trucks
and pipelines.
Competition. With respect to the terminal operations at Tampa, the most
significant competitors are proprietary terminals owned and operated by major
oil companies, such as Marathon Ashland Petroleum, BP and Citgo, located along
the Port of Tampa, and the ChevronTexaco and Motiva terminals in Port Tampa.
These terminals generally support the storage requirements of their parent or
affiliated companies' refining and marketing operations and provide a mechanism
for an oil company to enter into exchange contracts with third parties to serve
its storage needs in markets where the oil company may not have terminal assets.
Due to the high capital costs of tank construction in Tampa and state
environmental regulation of terminal operations, we believe it is unlikely that
new competing terminals will be constructed in the foreseeable future.
With respect to the Central Florida pipeline system, the most significant
competitors are trucking firms and marine transportation firms. Trucking
transportation is more competitive in serving markets west of Orlando that are a
relatively short haul from Tampa, and with respect to markets east of Orlando,
our competition comes from trucks loading at marine terminals on the east coast
of Florida. We are utilizing tariff incentives to attract volumes to the
pipeline that might otherwise enter the Orlando market area by truck from Tampa
or by marine vessel into Cape Canaveral.
Federal regulation of marine vessels, including the requirement, under the
Jones Act, that United States-flagged vessels contain double-hulls, is a
significant factor in reducing the fleet of vessels available to transport
refined petroleum products. Marine vessel owners are phasing in the requirement
based on the age of the vessel and some older vessels are being redeployed into
use in other jurisdictions rather than being retrofitted with a double-hull for
use in the United States. We believe it is unlikely that a new pipeline system
comparable in size and scope to our Central Florida Pipeline operations will be
constructed, due to the high cost of pipeline construction and environmental and
right-of-way permitting in Florida. However, the possibility of such a pipeline
being built is a continuing competitive factor.
North System
Our North System is an approximate 1,600-mile interstate common carrier
pipeline used to deliver natural gas liquids and refined petroleum products.
Additionally, we include our 50% ownership interest in Heartland Pipeline
Company as part of our North System operations. ConocoPhillips owns the
remaining 50% of Heartland Pipeline Company.
17
Natural gas liquids are typically extracted from natural gas in liquid form
under low temperature and high pressure conditions. Natural gas liquids products
and related uses are as follows:
Product Use
Propane Residential heating, industrial and agricul-
tural uses, petrochemical feedstock
Isobutane Further processing
Natural gasoline Further processing or blending into gasoline
motor fuel
Ethane/Propane Mix Feedstock for petrochemical plants or peak-
shaving facilities
Normal butane Feedstock for petrochemical plants or blending
into gasoline motor fuel
Our North System extends from south central Kansas to the Chicago area. South
central Kansas is a major hub for producing, gathering, storing, fractionating
and transporting natural gas liquids. Our North System's primary pipelines are
comprised of approximately 1,400 miles of 8-inch and 10-inch diameter pipelines
and include:
o two pipelines that originate at Bushton, Kansas and continue to a major
storage and terminal area in Des Moines, Iowa;
o a third pipeline, that extends from Bushton to the Kansas City, Missouri
area; and
o a fourth pipeline that extends from Des Moines to the Chicago area.
Through interconnections with other major liquids pipelines, our North
System's pipeline system connects mid-continent producing areas to markets in
the Midwest and eastern United States. We also have defined sole carrier rights
to use capacity on an extensive pipeline system owned by Magellan Midstream
Partners, L.P. that interconnects with our North System. This capacity lease
agreement requires us to pay $2.1 million per year, is in place until February
2013 and contains a five-year renewal option. In addition to our capacity lease
agreement with Magellan, we also have a reversal agreement with Magellan to help
provide for the transport of summer-time surplus butanes from Chicago area
refineries to storage facilities at Bushton. We have an annual minimum joint
tariff commitment of $0.6 million to Magellan for this agreement.
Our North System has approximately 5.6 million barrels of storage capacity,
which includes caverns, steel tanks, pipeline line-fill and leased storage
capacity. This storage capacity provides operating efficiencies and flexibility
in meeting seasonal demands of shippers and provides propane storage for our
truck-loading terminals.
The Heartland pipeline system, which was completed in 1990, comprises one of
our North System's main line sections that originate at Bushton, Kansas and
terminates at a storage and terminal area in Des Moines, Iowa. We operate the
Heartland pipeline, and ConocoPhillips operates Heartland's Des Moines, Iowa
terminal and serves as the managing partner of Heartland. In 2000, Heartland
leased to ConocoPhillips Inc. 100% of the Heartland terminal capacity at Des
Moines, Iowa for $1.0 million per year on a year-to-year basis. The Heartland
pipeline lease fee, payable to us for reserved pipeline capacity, is paid
monthly, with an annual adjustment. The 2004 lease fee will be approximately
$1.1 million.
In addition, our North System has seven propane truck-loading terminals at
various points in three states along the pipeline system and one multi-product
complex at Morris, Illinois, in the Chicago area. Propane, normal butane and
natural gasoline can be loaded at our Morris terminal.
Markets. Our North System currently serves approximately 50 shippers in the
upper Midwest market, including both users and wholesale marketers of natural
gas liquids. These shippers include all three major refineries in the Chicago
area. Wholesale marketers of natural gas liquids primarily make direct large
volume sales to major end-users, such as propane marketers, refineries,
petrochemical plants and industrial concerns. Market demand for natural gas
liquids varies in respect to the different end uses to which natural gas liquids
products may be applied. Demand for transportation services is influenced not
only by demand for natural gas liquids but also by the available supply of
natural gas liquids. Heartland provides transportation of refined petroleum
products from refineries in the Kansas and Oklahoma areas to a BP terminal in
Council Bluffs, Iowa, a ConocoPhillips terminal in Lincoln, Nebraska and
Heartland's Des Moines terminal. The demand for, and supply of, refined
petroleum products in the
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geographic regions served by the Heartland pipeline system directly affect the
volume of refined petroleum products transported by Heartland.
Supply. Natural gas liquids extracted or fractionated at the Bushton gas
processing plant have historically accounted for a significant portion
(approximately 40-50%) of the natural gas liquids transported through our North
System. Other sources of natural gas liquids transported in our North System
include large oil companies, marketers, end-users and natural gas processors
that use interconnecting pipelines to transport hydrocarbons. Refined petroleum
products transported by Heartland on our North System are supplied primarily
from the National Cooperative Refinery Association crude oil refinery in
McPherson, Kansas and the ConocoPhillips crude oil refinery in Ponca City,
Oklahoma.
Competition. Our North System competes with other natural gas liquids
pipelines and to a lesser extent with rail carriers. In most cases, established
pipelines are the lowest cost alternative for the transportation of natural gas
liquids and refined petroleum products. Consequently, pipelines owned and
operated by others represent our primary competition. With respect to the
Chicago market, our North System competes with other natural gas liquids
pipelines that deliver into the area and with rail car deliveries primarily from
Canada. Other Midwest pipelines and area refineries compete with our North
System for propane terminal deliveries. Our North System also competes
indirectly with pipelines that deliver product to markets that our North System
does not serve, such as the Gulf Coast market area. Heartland competes with
other refined petroleum product carriers in the geographic market served.
Heartland's principal competitor is Magellan Midstream Partners, L.P.
Plantation Pipe Line Company
We own approximately 51% of Plantation Pipe Line Company, a 3,100-mile
pipeline system serving the southeastern United States. ExxonMobil owns the
remaining 49% interest and represents the single largest shipper on the
Plantation system. On December 21, 2000, we assumed day-to-day operations of
Plantation pursuant to agreements with Plantation Services LLC and Plantation
Pipe Line Company. Plantation serves as a common carrier of refined petroleum
products to various metropolitan areas, including Birmingham, Alabama; Atlanta,
Georgia; Charlotte, North Carolina; and the Washington, D.C. area.
For the year 2003, Plantation delivered 612,451 barrels per day, a 3.9%
reduction from a record high in 2002. These delivered volumes were comprised of
gasoline (65%), diesel/heating oil (22%) and jet fuel (13%). The decline in
volume in 2003 compared to 2002 was primarily attributable to several unusual
events. First, three refineries in the State of Louisiana, ExxonMobil (Baton
Rouge), Marathon Ashland (Garyville), and Placid (Port Allen), experienced
extended refinery outages during February and March. Secondly, Chevron's
refinery in Pascagoula, Mississippi experienced an extended outage from February
into April. Finally, Murphy's refinery in Meraux, Louisiana experienced a major
fire in June and was down until November. Another factor affecting Plantation
was the implementation of a more stringent sulfur specification for the Atlanta
gasoline market. Due to limited availability of this grade of gasoline from
Plantation source refineries, much of this gasoline into the Atlanta market was
supplied from Colonial Pipeline.
Plantation is expecting a 1.8% improvement in overall volumes during 2004. It
is anticipated that this growth will primarily be driven by an improving economy
and a significantly reduced level of refinery outages.
Markets. Plantation ships products for approximately 40 companies to
terminals throughout the southeastern United States. Plantation's principal
customers are Gulf Coast refining and marketing companies, fuel wholesalers, and
the United States Department of Defense. Plantation's top six shippers represent
slightly over 80% of total system volumes.
The eight states in which Plantation operates represent a collective pipeline
demand of approximately 2.0 million barrels per day of refined products.
Plantation currently has direct access to about 1.5 million barrels per day of
this overall market. The remaining 0.5 million barrels per day of demand lies in
markets (e.g. Nashville, Tennessee; North Augusta, South Carolina; Bainbridge,
Georgia; and Selma, North Carolina) currently served by Colonial Pipeline
Company. These markets represent potential growth opportunities for the
Plantation system.
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In addition, Plantation delivers jet fuel to the Atlanta, Georgia; Charlotte,
North Carolina; and Washington, D.C. airports (Ronald Reagan National and
Dulles). Combined jet fuel shipments to these four major airports increased 0.1%
(led by an 18.6% increase in shipments to Ronald Reagan National) in 2003. Jet
fuel demand at Atlanta and Dulles was negatively impacted due to continued weak
international travel. An improving domestic economy should help improve jet fuel
demand in 2004.
Supply. Products shipped on Plantation originate at various Gulf Coast
refineries from which major integrated oil companies and independent refineries
and wholesalers ship refined petroleum products. Plantation is directly
connected to and supplied by a total of nine major refineries representing over
two million barrels per day of refining capacity.
Competition. Plantation competes primarily with the Colonial pipeline system,
which also runs from Gulf Coast refineries throughout the southeastern United
States and extends into the northeastern states.
Kinder Morgan Southeast Terminals LLC
Kinder Morgan Southeast Terminals LLC, a wholly-owned subsidiary referred to
herein as KMST, was formed in 2003 for the purpose of acquiring and operating
high-quality liquid petroleum products terminals located primarily along the
Plantation/Colonial pipeline corridor in the Southeastern United States.
Terminals acquired and operated by KMST will be independent with no affiliation
to major oil companies or marketers.
On December 11, 2003, KMST acquired seven petroleum products terminals from
ConocoPhillips and Phillips Pipe Line for an aggregate consideration of
approximately $15.1 million, consisting of approximately $14.1 million in cash
and $1.0 million in assumed liabilities. These seven terminals contain
approximately 1.15 million barrels of storage capacity. The terminals are
located in the following markets: Selma, North Carolina; Charlotte, North
Carolina; Spartanburg, South Carolina; North Augusta, South Carolina; Doraville,
Georgia; Albany, Georgia; and Birmingham, Alabama. ConocoPhillips has entered
into a long-term contract to use the terminals. All seven terminals are served
by Colonial Pipeline and three are also connected to Plantation.
KMST has also recently reached agreement with ExxonMobil to purchase seven of
its refined petroleum products terminals at the following locations: Newington,
Virginia; Richmond, Virginia; Roanoke, Virginia; Greensboro, North Carolina;
Charlotte, North Carolina; Knoxville, Tennessee; and Collins, Mississippi. The
terminals have a combined storage capacity of approximately 3.2 million barrels
for gasoline, jet fuel and diesel fuel. ExxonMobil has entered into a long-term
contract to use the terminals. This transaction is expected to close during
March 2004. All seven of these terminals are served by Plantation and two are
also connected to Colonial.
Markets. KMST acquisition and marketing activities will be focused on the
Southeastern United States from Mississippi through Virginia, including
Tennessee. The primary marketing activity will involve receipt of petroleum
products from common carrier pipelines, short-term storage in terminal tankage,
and subsequent loading onto tank trucks. With the close of the ExxonMobil
acquisition, KMST will have a physical presence in markets representing over 75%
of the pipeline-supplied demand in the Southeast. KMST will offer a competitive
alternative to marketers seeking a relationship with a truly independent truck
terminal service provider.
Supply. Product supply will be predominately from either Plantation,
Colonial, or both. To the maximum extent practicable, connectivity to both
Plantation and Colonial will be sought.
Competition. There are relatively few independent terminal operators in the
Southeast. Most of the refined product terminals in this region are owned by
large oil companies (BP, Motiva, Citgo, Marathon Ashland, and Chevron) who use
these assets to support their own proprietary market demands as well as product
exchange activity. These oil companies are not generally seeking third party
throughput customers. Magellan Midstream Partners (formerly Williams Energy
Partners) and TransMontaigne Product Services represent the only two significant
independent terminal operators in this region.
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Cochin Pipeline System
We own 44.8% of the Cochin pipeline system, an approximate 1,900-mile,
12-inch diameter multi-product pipeline operating between Fort Saskatchewan,
Alberta and Sarnia, Ontario.
The Cochin pipeline system and related storage and processing facilities
consist of Canadian operations and United States operations:
o the Canadian facilities are operated under the name of Cochin Pipe Lines,
Ltd.; and
o the United States facilities are operated under the name of Dome Pipeline
Corporation.
The pipeline operates on a batched basis and has an estimated system capacity
of approximately 112,000 barrels per day. Its peak capacity is approximately
124,000 barrels per day. It includes 31 pump stations spaced at 60 mile
intervals and five United States propane terminals. Associated underground
storage is available at Fort Saskatchewan, Alberta and Windsor, Ontario.
Markets. Formed in the late 1970's as a joint venture, the pipeline traverses
three provinces in Canada and seven states in the United States transporting
high vapor pressure ethane, ethylene, propane, butane and natural gas liquids to
the Midwestern United States and eastern Canadian petrochemical and fuel
markets. The system operates as a National Energy Board (Canada) and Federal
Energy Regulatory Commission (United States) regulated common carrier, shipping
products on behalf of its owners as well as other third parties. The system is
connected to the Enterprise pipeline system in Minnesota and in Iowa, and
connects with our North System at Clinton, Iowa. The Cochin pipeline system has
the ability to access the Canadian Eastern Delivery System via the Windsor
Storage Facility Joint Venture at Windsor, Ontario.
Supply. Injection into the system can occur from:
o BP, EnerPro or Dow fractionation facilities at Fort Saskatchewan, Alberta;
o Provident Energy storage at five points within the provinces of Canada; or
o the Enterprise West Junction, in Minnesota.
Competition. The pipeline competes with railcars and Enbridge Energy Partners
for natural gas liquids longhaul business from Fort Saskatchewan, Alberta and
Windsor, Ontario. The pipeline's primary competition in the Chicago natural gas
liquids market comes from the combination of the Alliance pipeline system, which
brings unprocessed gas into the United States from Canada, and from Aux Sable,
which processes and markets the natural gas liquids in the Chicago market.
Cypress Pipeline
Our Cypress pipeline is an interstate common carrier pipeline system
originating at storage facilities in Mont Belvieu, Texas and extending 104 miles
east to the Lake Charles, Louisiana area. Mont Belvieu, located approximately 20
miles east of Houston, is the largest hub for natural gas liquids gathering,
transportation, fractionation and storage in the United States.
Markets. The pipeline was built to service Westlake Petrochemicals
Corporation in the Lake Charles, Louisiana area under a 20-year ship-or-pay
agreement that expires in 2011. The contract requires a minimum volume of 30,000
barrels per day.
Supply. The Cypress pipeline originates in Mont Belvieu where it is able to
receive ethane and ethane/propane mix from local storage facilities. Mont
Belvieu has facilities to fractionate natural gas liquids received from several
pipelines into ethane and other components. Additionally, pipeline systems that
transport specification natural gas liquids from major producing areas in Texas,
New Mexico, Louisiana, Oklahoma and the Mid-Continent Region supply ethane and
ethane/propane mix to Mont Belvieu.
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Competition. The pipeline's primary competition into the Lake Charles market
comes from Louisiana onshore and offshore natural gas liquids.
Transmix Operations
Our transmix operations consist of transmix processing facilities located in
Richmond, Virginia; Dorsey Junction, Maryland; Indianola, Pennsylvania; Wood
River, Illinois; and Colton, California.
Transmix occurs when dissimilar refined petroleum products are co-mingled in
the pipeline transportation process. Different products are pushed through the
pipelines abutting each other, and the area where different products mix is
called transmix. At our transmix processing facilities, we process and separate
pipeline transmix into pipeline-quality gasoline and light distillate products.
Transmix processing is performed for Duke Energy Merchants on a "for fee" basis
pursuant to a long-term contract expiring in 2010, and for Colonial Pipeline
Company at Dorsey Junction, Maryland.
Our Richmond processing facility is comprised of a dock/pipeline, a
170,000-barrel tank farm, a processing plant, lab and truck rack. The facility
is composed of four distillation units that operate 24 hours a day, 7 days a
week providing a processing capacity of approximately 8,000 barrels per day.
Both the Colonial and Plantation pipelines supply the facility, as well as
deep-water barge (25 feet draft), transport truck and rail. We also own an
additional 3.6-acre bulk products terminal with a capacity of 55,000 barrels
located nearby in Richmond.
Our Dorsey Junction processing facility is located within Colonial's Dorsey
Junction terminal facility. The 5,000-plus barrel per day processing unit began
operations in February 1998. It operates 24 hours a day, 7 days a week providing
dedicated transmix separation service for Colonial.
Our Indianola processing facility is located near Pittsburgh, Pennsylvania
and is accessible by truck, barge and pipeline. It primarily processes transmix
from Buckeye, Colonial, Sun and Teppco pipelines. It has capacity to process
12,000 barrels of transmix per day and operates 24 hours per day, 7 days a week.
The facility is comprised of a 500,000-barrel tank farm, a quality control
laboratory, a truck-loading rack and a processing unit. The facility can ship
output via the Buckeye pipeline as well as by truck.
Our Wood River processing facility was constructed in 1993 on property owned
by ConocoPhillips and is accessible by truck, barge and pipeline. It primarily
processes transmix from both Explorer and ConocoPhillips pipelines. It has
capacity to process 5,000 barrels of transmix per day. Located on approximately
three acres leased from ConocoPhillips, the facility consists of one processing
unit. Supporting terminal capability is provided through leased tanks in
adjacent terminals.
Our Colton processing facility, completed in the spring of 1998, and located
adjacent to our products terminal in Colton, California, produces refined
petroleum products that are delivered into our Pacific operations' pipelines for
shipment to markets in Southern California and Arizona. The facility can process
over 5,000 barrels per day.
Markets. The Gulf and East Coast refined petroleum products distribution
system, particularly the Mid-Atlantic region, provides the target market for our
East Coast transmix processing operations. The Mid-Continent area and the New
York Harbor are the target markets for our Pennsylvania and Illinois assets. Our
West Coast transmix processing operations support the markets served by our
Pacific operations. We are working to expand our Mid-Continent and West Coast
markets.
Supply. Transmix generated by Colonial, Plantation, Sun, Teppco, Explorer and
our Pacific operations provide the vast majority of our supply. These suppliers
are committed to our transmix facilities by long-term contracts. Individual
shippers and terminal operators provide additional supply. Duke Energy Merchants
is responsible for acquiring transmix supply at all facilities other than at the
Dorsey Junction facility, which is supplied by Colonial Pipeline Company.
Competition. Placid Refining is our main competitor in the Gulf coast area
and Tosco Refining is a major competitor in the New York harbor area. There are
various processors in the Mid-Continent area, primarily Phillips
22
and Williams Energy Services, who compete with our expansion efforts in that
market. Shell Oil US and a number of smaller organizations operate transmix
processing facilities in the West and Southwest. These operations compete for
supply that we envision as the basis for growth in the West and Southwest. Our
Colton processing facility also competes with major oil company refineries in
California.
Natural Gas Pipelines
Our Natural Gas Pipelines segment, which contains both interstate and
intrastate pipelines, consists of natural gas transportation, storage,
gathering, processing, treating and matched purchases/sales. Within this
segment, we own over 13,400 miles of natural gas pipelines and associated
storage and supply lines that are strategically located at the center of the
North American pipeline grid. Our transportation network provides access to the
major gas supply areas in the western United States, Texas and the Midwest, as
well as major consumer markets. Our Natural Gas Pipeline assets include the
following:
o our Texas intrastate natural gas pipeline group, which consists of
approximately 5,800 miles of intrastate natural gas pipeline with a peak
transport capacity of approximately five billion cubic feet per day of
natural gas and approximately 120 billion cubic feet of natural gas storage
capacity (including the West Clear Lake natural gas storage facility
located in Harris County, Texas, which is committed under a long term
contract to Coral Energy as part of our Kinder Morgan Tejas acquisition).
Our intrastate natural gas pipeline group operates primarily along the
Texas Gulf Coast and includes the following four pipeline systems: Kinder
Morgan Texas Pipeline, Kinder Morgan Tejas, Mier-Monterrey Mexico Pipeline,
and the North Texas Pipeline;
o our two Rocky Mountain interstate natural gas pipeline systems: Kinder
Morgan Interstate Gas Transmission LLC and Trailblazer Pipeline Company.
KMIGT owns a 6,100-mile natural gas pipeline system, including the Pony
Express pipeline system, that extends from northwestern Wyoming east into
Nebraska and Missouri and south through Colorado and Kansas. Our
Trailblazer pipeline is a 436-mile pipeline that transports natural gas
from Colorado to Beatrice, Nebraska;
o our Casper and Douglas natural gas gathering systems, which are comprised
of approximately 1,560 miles of natural gas gathering pipelines and two
facilities in Wyoming capable of processing 210 million cubic feet of
natural gas per day;
o our 49% interest in the Red Cedar Gathering Company, which gathers natural
gas in La Plata County, Colorado and owns and operates two carbon dioxide
processing plants;
o our 50% interest in Coyote Gas Treating, LLC, which owns a 250 million
cubic feet per day natural gas treating facility in La Plata County,
Colorado; and
o our 25% interest in Thunder Creek Gas Services, LLC, which gathers,
transports and processes methane gas from coal beds in the Powder River
Basin of Wyoming.
Texas Intrastate Pipeline Group
As described above, our Texas intrastate natural gas pipeline group consists
of the following four pipeline systems: Kinder Morgan Texas Pipeline, Kinder
Morgan Tejas, Mier-Monterrey Mexico Pipeline and the North Texas Pipeline.
Our Kinder Morgan Tejas system was acquired on January 31, 2002 from
Intergen, a joint venture owned by affiliates of the Royal Dutch Shell Group of
Companies, and Bechtel Enterprises Holding, Inc. The system has become
increasingly interconnected with our Kinder Morgan Texas Pipeline system, which
was acquired on December 31, 1999 from KMI. These pipelines essentially operate
as a single pipeline system, providing customers and suppliers with improved
flexibility and reliability. The combined assets include over 5,800 miles of
pipeline with a peak transport capacity of approximately five billion cubic feet
per day of natural gas and approximately 120 billion cubic feet of natural gas
storage capacity. In addition, the system has the capability to process over
23
one billion cubic feet per day of natural gas for liquids extraction and treat
approximately 250 million cubic feet per day of natural gas for carbon dioxide
removal.
Collectively, the system primarily serves the Texas Gulf Coast, transporting,
processing and treating gas from multiple onshore and offshore supply sources to
serve the Houston/Beaumont/Port Arthur, Texas industrial markets, as well as
local gas distribution utilities, electric utilities and merchant power
generation markets. It serves as a buyer and seller of natural gas, as well as a
transporter of natural gas. The purchases and sales of natural gas are primarily
priced with reference to market prices in the consuming region of its system.
The difference between the purchase and sale prices is the rough equivalent of a
transportation fee.
Our North Texas Pipeline, a $65 million investment, was completed in August
2002. The system consists of an 86-mile, 30-inch diameter pipeline that
transports natural gas from an interconnect with KMI's Natural Gas Pipeline
Company of America in Lamar County, Texas to a 1,750-megawatt electric
generating facility located in Forney, Texas, 15 miles east of Dallas, Texas. It
has the capacity to transport 325,000 dekatherms per day of natural gas and is
fully subscribed under a 30 year contract. Our Mier-Monterrey Pipeline, an $89
million investment, was completed in March 2003. The system consists of a
95-mile, 30-inch diameter pipeline that stretches from south Texas to Monterrey,
Mexico and can transport up to 375,000 dekatherms per day of natural gas. The
pipeline connects to a 1,000-megawatt power plant complex and to the PEMEX
natural gas transportation system. We have entered into a 15 year contract with
Pemex Gas Y Petroquimica Basica, which has subscribed for all of the pipeline's
capacity.
Markets. Our Texas intrastate natural gas pipeline group's market area
consumes over eight billion cubic feet per day of natural gas. Of this amount,
we estimate that 75% is industrial demand (including on-site, cogeneration
facilities), about 15% is merchant generation demand and the remainder is split
between local natural gas distribution and utility power demand. The industrial
demand is primarily year-round load. Local natural gas distribution load peaks
in the winter months and is complemented by power demand (both merchant and
utility generation) which peaks in the summer months. As new merchant gas fired
generation has come online and displaced traditional utility generation, we have
successfully attached these new generation facilities to our pipeline systems in
order to maintain our share of natural gas supply for power generation.
Mexico is an increasingly important market. We serve this market through
interconnection with the facilities of Pemex at the United States-Mexico border
near Arguellas, Mexico and Monterrey, Mexico. Current deliveries through the
existing interconnection near Arguellas are approximately 200,000 dekatherms per
day of natural gas and deliveries to Monterrey generally range from 200,000 to
300,000 dekatherms per day of natural gas. We primarily provide transport
service to these markets on a fee for service basis, including a significant
demand component, which is paid regardless of actual throughput. Revenues earned
from our activities in Mexico are paid in U.S. dollar equivalent.
Supply. We purchase our natural gas directly from producers attached to our
system in South Texas, East Texas and along the Texas Gulf Coast. We also
purchase gas at interconnects with third-party interstate and intrastate
pipelines. While our intrastate group does not produce gas, it does maintain an
active well connection program in order to offset natural declines in production
along its system and to secure supplies for additional demand in its market
area. Our intrastate system has access to both onshore and offshore sources of
supply, and is well positioned to interconnect with liquefied natural gas
projects currently under development by others along the Texas Gulf Coast.
Gathering, Processing and Treating. Our intrastate natural gas group owns and
operates various gathering systems in South and East Texas. These systems
aggregate pipeline quality natural gas supplies into our main transmission
pipelines, and in certain cases, aggregate natural gas that must be processed or
treated at its own facilities or the facilities of others. We own two processing
plants: our Texas City Plant in Galveston County, Texas and our Galveston Bay
Plant in Chambers County, Texas. Combined, these plants can process 150 million
cubic feet per day of natural gas for liquids extraction. In addition, we have
contractual rights to process approximately one billion cubic feet per day of
natural gas at various third-party owned facilities. We also own and operate
four natural gas treating plants that offer carbon dioxide and/or hydrogen
sulfide removal. We can treat up to 150 million cubic feet per day of natural
gas for carbon dioxide removal at our Fandango Complex in Zapata
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County, Texas, 60 million cubic feet per day of natural gas at our M.P. 16 Plant
in Webb County, Texas and approximately 40 million cubic feet per day of natural
gas at our Thompsonville Facility in Jim Hogg County, Texas. Not all of these
plants are currently operating. Economic conditions and gas quality conditions
dictate operations. In addition, we own and operate the Indian Rock Plant
located in Upshur County, Texas. The plant is capable of treating 45 million
cubic feet per day of natural gas for carbon dioxide and/or hydrogen sulfide
removal.
Storage. We own the West Clear Lake natural gas storage facility located in
Harris County, Texas. Under a long term contract, Coral Energy Resources, L.P.
operates the facility and controls the 96 billion cubic feet of natural gas
working capacity, and we provides transportation service into and out of the
facility. We lease a salt dome storage facility located near Markham, Texas. The
facility consists of two salt dome caverns with approximately 7.5 billion cubic
feet of total natural gas storage capacity, over 4.8 billion cubic feet of
working natural gas capacity and up to 400 million cubic feet per day of peak
deliverability. We also lease salt dome caverns from Dow Hydrocarbon &
Resources, Inc. and BP America Production Company in Brazoria County, Texas. The
salt dome caverns are referred to as the Stratton Ridge Facilities and have a
combined capacity of 11.8 billion cubic feet of natural gas, working natural gas
capacity of 5.4 billion cubic feet and a peak day deliverability of up to 400
million cubic feet per day. In addition, we control, through contractual
arrangements, another ten billion cubic feet of third-party natural gas storage
capacity in the Houston, Texas area and 4.1 billion cubic feet of natural gas
storage capacity in the East Texas area.
Competition. The Texas intrastate natural gas market is highly competitive,
with many markets connected to multiple pipeline companies. We compete with
interstate and intrastate pipelines, and their shippers, for attachments to new
markets and supplies and for transportation, processing and treating services.
Kinder Morgan Interstate Gas Transmission LLC
Kinder Morgan Interstate Gas Transmission LLC, referred to herein as KMIGT,
owns approximately 5,000 miles of transmission lines in Wyoming, Colorado,
Kansas, Missouri and Nebraska. It provides transportation and storage services
to KMI affiliates, third-party natural gas distribution utilities and other
shippers. Pursuant to transportation agreements and Federal Energy Regulatory
Commission tariff provisions, KMIGT offers its customers firm and interruptible
transportation and storage services, including no-notice transportation and park
and loan services. Under KMIGT's tariffs, firm transportation and storage
customers pay reservation fees each month plus a commodity charge based on the
actual transported or stored volumes. In contrast, interruptible transportation
and storage customers pay a commodity charge based upon actual transported
and/or stored volumes. Reservation fees are based upon geographical location
(KMIGT does not have seasonal rates) and the distance of the transportation
service provided. Under the no-notice service, customers pay a fee for the right
to use a combination of firm storage and firm transportation to effect
deliveries of natural gas up to a specified volume without making specific
nominations.
The system is powered by 28 transmission and storage compressor stations with
approximately 149,000 horsepower. The pipeline system provides storage services
to its customers from its Huntsman Storage Field in Cheyenne County, Nebraska.
The facility has approximately 39.5 billion cubic feet of total storage
capacity, 12.5 billion cubic feet of working gas capacity and can withdraw up to
101 million cubic feet of natural gas per day.
Markets. Markets served by KMIGT provide a stable customer base with
expansion opportunities due to the system's access to growing Rocky Mountain
supply sources. Markets served by KMIGT are comprised mainly of local natural
gas distribution companies and interconnecting interstate pipelines in the
mid-continent area. End-users for the local natural gas distribution companies
typically include residential, commercial, industrial and agricultural
customers. The pipelines interconnecting with KMIGT in turn deliver gas into
multiple markets including some of the largest population centers in the
Midwest. Natural gas demand for crop irrigation during the summer from
time-to-time exceeds heating season demand and provides KMIGT relatively
consistent volumes throughout the year.
Supply. Approximately 18%, by volume, of KMIGT's firm contracts expire within
one year and 26% expire within one to five years. Affiliated entities are
responsible for approximately 22% of the total contracted firm transportation
and storage capacity on KMIGT's system. Over 98% of the system's firm transport
capacity is currently subscribed.
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Competition. KMIGT competes with other interstate and intrastate gas
pipelines transporting gas from the supply sources in the Rocky Mountain and
Hugoton Basins to mid-continent pipelines and market centers.
Trailblazer Pipeline Company
Trailblazer Pipeline Company is an Illinois partnership and its principal
business is to transport and redeliver natural gas to others in interstate
commerce. It does business in the states of Wyoming, Colorado, Nebraska and
Illinois. Natural Gas Pipeline Company of America, a subsidiary of KMI, manages,
maintains and operates Trailblazer, for which it is reimbursed at cost.
Trailblazer's 436-mile natural gas pipeline system originates at an
interconnection with Wyoming Interstate Company Ltd.'s pipeline system near
Rockport, Colorado and runs through southeastern Wyoming to a terminus near
Beatrice, Nebraska where Trailblazer's pipeline system interconnects with
Natural Gas Pipeline Company of America's and Northern Natural Gas Company's
pipeline systems.
Trailblazer's pipeline is the fourth and last segment of a 791-mile pipeline
system known as the Trailblazer Pipeline System, which originates in Uinta
County, Wyoming with Canyon Creek Compression Company, a 22,000 horsepower
compressor station located at the tailgate of BP Amoco Production Company's
processing plant in the Whitney Canyon Area in Wyoming (Canyon Creek's
facilities are the first segment). Canyon Creek receives gas from the BP Amoco
processing plant and provides transportation and compression of gas for delivery
to Overthrust Pipeline Company's 88-mile, 36-inch diameter pipeline system at an
interconnection in Uinta County, Wyoming (Overthrust's system is the second
segment). Overthrust delivers gas to Wyoming Interstate's 269-mile, 36-inch
diameter pipeline system at an inter-connection (Kanda) in Sweetwater County,
Wyoming (Wyoming Interstate's system is the third segment). Wyoming Interstate's
pipeline delivers gas to Trailblazer's pipeline at an interconnection near
Rockport in Weld County, Colorado.
Markets. Significant growth in Rocky Mountain natural gas supplies has
prompted a need for additional pipeline transportation service. Trailblazer has
a certificated capacity of 846 million cubic feet per day of natural gas. In May
2002, we completed a fully-subscribed, $48 million expansion project on the
Trailblazer system that expanded its transportation capacity by 324,000
dekatherms of natural gas per day. The expansion increased capacity on the
pipeline by approximately 60% and provides new firm long-term transportation
service. In conjunction with the expansion, the FERC also granted Trailblazer's
request to assess incremental rates and fuel for shippers taking capacity
related to the expansion facilities.
Supply. As of December 31, 2003, none of Trailblazer's firm contracts expire
before one year and 38%, by volume, expire within one to five years. Affiliated
entities hold less than 1% of the total firm transportation capacity. All of the
system's firm transport capacity is currently subscribed.
Competition. While competing pipelines have been announced which would move
gas east out of the Rocky Mountains, the main competition that Trailblazer
currently faces is that the gas supply in the Rocky Mountain area either stays
in the area or is moved west and therefore is not transported on Trailblazer's
pipeline. In October 2003, the FERC issued a preliminary determination approving
the Cheyenne Plains pipeline project that is being developed by Colorado
Interstate Gas Company. This project, which has a proposed in service date of
August 2005, would allow for the transportation of 560,000 dekatherms per day of
natural gas from Weld County, Colorado to Greensburg, Kansas and is expected to
compete with Trailblazer.
Casper and Douglas Natural Gas Gathering and Processing Systems
We own and operate our Casper and Douglas natural gas gathering and
processing facilities.
The Douglas gathering system is comprised of approximately 1,500 miles of
4-inch to 16-inch diameter pipe that gathers approximately 35 million cubic feet
per day of natural gas from 650 active receipt points. Douglas Gathering has an
aggregate 24,495 horsepower of compression situated at 17 field compressor
stations. Gathered volumes are processed at our Douglas plant, located in
Douglas, Wyoming. Residue gas is delivered into KMIGT and recovered liquids are
injected in ConocoPhillips Petroleum's natural gas liquids pipeline for
transport to Borger, Texas.
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The Casper gathering system is comprised of approximately 60 miles of 4-inch
to 8-inch diameter pipeline gathering approximately 20 million cubic feet per
day of natural gas from eight active receipt points. Gathered volumes are
delivered directly into KMIGT. Current gathering capacity is contingent upon
available capacity on KMIGT and the Casper Plant's 50 to 80 million cubic feet
per day processing capacity.
We believe that Casper-Douglas' unique combination of percentage-of-proceeds,
sliding scale percent-of-proceeds and keep whole plus fee processing agreements
helps to reduce our exposure to commodity price volatility.
Markets. Casper and Douglas are processing plants servicing gas streams
flowing into KMIGT.
Competition. There are three other natural gas gathering and processing
alternatives available to conventional natural gas producers in the Greater
Powder River Basin. However, Casper and Douglas are the only two plants in the
region that provide straddle processing of natural gas streams flowing into
KMIGT upsteam of our two plant facilities. The other regional facilities include
the Hilight (80 million cubic feet per day) and Kitty (17 million cubic feet per
day) plants owned and operated by Western Gas Resources, and the Sage Creek
Processors (50 million cubic feet per day) plant owned and operated by Devon
Energy.
Red Cedar Gathering Company
We own a 49% equity interest in the Red Cedar Gathering Company, a joint
venture organized in August 1994, referred to in this document as Red Cedar. The
Southern Ute Indian Tribe owns the remaining 51%. Red Cedar owns and operates
natural gas gathering, compression and treating facilities in the Ignacio Blanco
Field in La Plata County, Colorado. The Ignacio Blanco Field lies within the
Colorado portion of the San Juan Basin, most of which is located within the
exterior boundaries of the Southern Ute Indian Tribe Reservation. Red Cedar
gathers coal seam and conventional natural gas at wellheads and several central
delivery points, for treating, compression and delivery into any one of four
major interstate natural gas pipeline systems and an intrastate pipeline.
Red Cedar's gas gathering system currently consists of over 900 miles of
gathering pipeline connecting more than 700 producing wells, 76,000 horsepower
of compression at 21 field compressor stations and two carbon dioxide treating
plants. A majority of the natural gas on the system moves through 8-inch to
20-inch diameter pipe. The capacity and throughput of the Red Cedar system as
currently configured is approximately 750 million cubic feet per day of natural
gas.
Coyote Gas Treating, LLC
We own a 50% equity interest in Coyote Gas Treating, LLC, referred to herein
as Coyote Gulch. Coyote Gulch is a joint venture that was organized in December
1996. Gulf Terra Energy Partners, L.P. owns the remaining 50%. The sole asset
owned by the joint venture is a 250 million cubic feet per day natural gas
treating facility located in La Plata County, Colorado. We are the managing
partner of Coyote Gas Treating, LLC.
The inlet gas stream treated by Coyote Gulch contains an average carbon
dioxide content of between 12% and 13%. The plant treats the gas down to a
carbon dioxide concentration of 2% in order to meet interstate natural gas
pipeline quality specifications, and then compresses the natural gas into the
TransColorado Gas Transmission pipeline for transport to the Blanco, New
Mexico-San Juan Basin Hub.
Effective January 1, 2002, Coyote Gulch entered into a five-year operating
lease agreement with Red Cedar. Under the terms of the lease, Red Cedar operates
the facility and is responsible for all operating and maintenance expense and
capital costs. In place of the treating fees that were previously received by
Coyote Gulch from Red Cedar, Red Cedar is required to make monthly lease
payments.
Thunder Creek Gas Services, LLC
We own a 25% equity interest in Thunder Creek Gas Services, LLC, referred to
herein as Thunder Creek. Thunder Creek is a joint venture that was organized in
September 1998. Devon Energy owns the remaining 75%. Thunder Creek provides
gathering, compression and treating services to a number of coal seam gas
producers in the Powder River Basin. Throug