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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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, 2004 was
approximately $5,153,909,088. As of January 31, 2005, the registrant had
147,555,658 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
History...................................... 4
Business Strategy............................ 4
Recent Developments.......................... 7
Financial Information about Segments.......... 10
Narrative Description of Business............. 10
Products Pipelines........................... 10
Natural Gas Pipelines........................ 22
CO2.......................................... 29
Terminals.................................... 32
Major Customers............................... 39
Regulation.................................... 39
Environmental Matters......................... 42
Risk Factors.................................. 45
Other......................................... 50
Financial Information about Geographic Areas.. 51
Available Information......................... 51
Item 3. Legal Proceedings.............................. 51
Item 4. Submission of Matters to a Vote of Security
Holders....................................... 51
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters and Issuer
Purchases of Equity Securities................ 52
Item 6. Selected Financial Data........................ 53
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations................................. 55
Critical Accounting Policies and Estimates.... 55
Results of Operations......................... 57
Liquidity and Capital Resources............... 70
Recent Accounting Pronouncements.............. 79
Information Regarding Forward-Looking
Statements................................... 79
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk............................. 81
Energy Financial Instruments.................. 81
Interest Rate Risk............................ 82
Item 8. Financial Statements and Supplementary Data.... 83
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........ 83
Item 9A. Controls and Procedures........................ 83
Item 9B. Other Information.............................. 84
PART III
Item 10. Directors and Executive Officers of the
Registrant.................................... 85
Directors and Executive Officers of
our General Partner and the Delegate......... 85
Corporate Governance......................... 87
Section 16(a) Beneficial Ownership
Reporting Compliance........................ 88
Item 11. Executive Compensation......................... 88
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................... 94
Item 13. Certain Relationships and Related
Transactions.................................. 96
Item 14. Principal Accounting Fees and Services......... 96
PART IV
Item 15. Exhibits and Financial Statement Schedules..... 98
Index to Financial Statements.................. 101
Signatures..................................................... 188
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 one
of the largest publicly-traded pipeline limited partnerships 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 subsidiary 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." 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 focus on providing fee-based services to customers and creating 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.
Our operations are conducted through our subsidiary operating limited
partnerships and their subsidiaries. While we conduct these operations, we focus
on generally avoiding commodity price risks and maximizing the benefits of our
characterization as a partnership for federal income tax purposes. 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 gasoline, diesel fuel, jet fuel and
natural gas liquids to various markets through over 10,000 miles of
products pipelines and 60 associated terminals serving customers
across the United States;
o Natural Gas Pipelines. Transports, stores and sells natural gas over
approximately 14,000 miles of natural gas transmission pipelines and
gathering lines, plus natural gas gathering and storage facilities;
o CO2. Produces, transports through pipelines and markets carbon
dioxide, commonly called CO2, to oil fields that use CO2 to increase
production of oil, owns interests in and/or operates six oil fields in
West Texas, and owns and operates a crude oil pipeline system in West
Texas; and
o Terminals. Composed of approximately 75 owned or operated liquid and
bulk terminal facilities and more than 55 rail transloading and
materials handling facilities located throughout the United States.
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History
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 $831.6 million for the year
ended December 31, 2004.
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 in this report 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
135 terminals. As of December 31, 2004, KMI and its consolidated subsidiaries
owned, through its general and limited partner interests, an approximate 18.5%
interest in us.
In addition to the distributions it receives from its limited and general
partner interests, KMI also 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
our 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 2004
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 our limited partners determined in
accordance with our partnership agreement.
In February 2001, Kinder Morgan Management, LLC, a Delaware limited
liability company referred to in this report 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, our limited partner units, consisting of 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, 2004, KMR, through its ownership of our
i-units, owned approximately 26.2% of all of our outstanding limited partner
units.
Business Strategy
The objective of our business strategy is to grow our portfolio of
businesses by:
o providing, for a fee, transportation, storage and handling services
which are core to the energy infrastructure of growing markets;
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o increasing utilization of our assets while controlling costs by:
o operating classic fixed-cost businesses with relatively 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 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. Generally, as
utilization of our pipelines and terminals increases, our fee-based revenues
increase. We do not face significant risks relating directly to short-term
movements in commodity prices for two principal reasons. First, we primarily
transport and/or handle products for a fee and are not engaged in significant
unmatched purchases and resales 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.
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 pipeline expansions 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
Rocky Mountain natural gas pipeline systems, 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 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 opportunities on tribal
lands. Overall, we will continue to explore expansion and storage
opportunities to increase utilization levels throughout our natural
gas pipeline operations;
o CO2. Our carbon dioxide sales and transportation business has two
primary strategies. First, we seek to 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. As a service provider, our strategy is to offer
customers "one-stop shopping" for carbon dioxide supply,
transportation and technical support service. Second, we seek to
increase the economic benefits from our oil and gas production
activities by increasing oil field carbon dioxide flooding,
efficiently managing oil field operating expenses, and capturing
downstream value in assets which complement our oil field operations.
In our oil and gas
5
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. We intend
to compete for new supply and transportation projects, both inside and
outside the Permian Basin, 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 an 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 continue to seek greater productivity and cost
savings by focusing on the efficiencies of our operations and the
related incurrence of associated operating, maintenance, and general
and administrative expenses. In addition, we have made reductions in
the operating, maintenance, and general and administrative expenses of
many of the businesses and assets that we have acquired. Generally,
these reductions in expense have been achieved by eliminating
duplicative functions that we and the acquired businesses each
maintained prior to their combination;
o Internal Growth. We intend to grow income from our current assets both
through increased utilization of existing assets, and through internal
expansion projects. We primarily operate classic fixed cost businesses
with relatively little variable costs. By controlling 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 we
believe 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 regularly consider and enter into
discussions regarding potential acquisitions, including those from KMI
or its affiliates, and are currently contemplating potential
acquisitions. While there are currently no unannounced purchase
agreements for the acquisition of any material business or assets,
such transactions can be effected quickly, may occur at any time and
may be significant in size relative to our existing assets or
operations. We anticipate financing acquisitions by borrowings under
our bank credit facility or by issuing commercial paper, and
subsequently reducing 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
2004 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.
Achieving success in implementing our strategy will depend partly 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
6
time, we focus 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 our employees, 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 the Kinder Morgan Savings Plan, a defined contribution 401(k)
plan, all full-time employees of KMI and KMGP Services Company, Inc.
(the entities that employ all persons necessary for the operation of
our business) can contribute between 1% and 50% of base compensation,
on a pre-tax basis, into participant accounts. In addition to a
mandatory contribution equal to 4% of base compensation per year for
most plan participants, our general partner may make discretionary
contributions in years when specific performance objectives are met.
All employer contributions, including discretionary contributions, are
in the form of KMI stock that is immediately convertible into other
available investment vehicles at the employee's discretion.
Furthermore, KMI's ten most senior executives (excluding Mr. Kinder,
who receives $1 per year in salary and receives no bonus) have their
base salaries capped at $200,000 per year and 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 when KMI and we
meet annual earnings per share and distributions per unit targets.
Recent Developments
The following is a brief listing of significant developments since December
31, 2003. Additional information regarding most of these items may be found
elsewhere in this report.
o On February 9, 2004, we completed a public offering of an additional
5,300,000 of our common units at a price of $46.80 per unit, less
commissions and underwriting expenses. 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;
o Effective March 9, 2004, we acquired seven refined petroleum products
terminals in the southeastern United States from Exxon Mobil
Corporation for an aggregate consideration of approximately $50.9
million, consisting of $48.2 million in cash and the assumption of
$2.7 million of liabilities. In addition, as part of the transaction,
ExxonMobil entered into a long-term contract to store refined
petroleum products at the terminals. As of our acquisition date, we
expected to invest an additional $1.2 million in the facilities in the
near-term following acquisition. 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;
o On March 26, 2004, the Federal Energy Regulatory Commission issued an
order on the phase one initial decision that was issued on June 24,
2003 by an administrative law judge hearing a case on the rates
charged by our Pacific operations' interstate portion of its
pipelines. We believe 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. The FERC's phase one order
reversed the initial decision by finding that our Pacific operations'
rates for its North and Oregon Lines should remain "grandfathered" and
amended the initial decision by finding that SFPP's West Line rates
(i) to Yuma and Tucson, Arizona and to our CALNEV Pipeline, as of
1995, and (ii) to Phoenix, Arizona, as of 1997, should
7
no longer be "grandfathered" and are not just and reasonable. If these
rates are "ungrandfathered," they could be lowered prospectively and
complaining shippers could be entitled to reparations for prior
periods. Both SFPP and certain shippers have appealed the FERC's
decision to the United States Court of Appeals for the District of
Columbia;
o On June 1, 2004, we commenced service on our Kinder Morgan Interstate
Gas Transmission LLC's Cheyenne Market Center. This $28.4 million
project involved the construction of pipeline, compression and storage
facilities to accommodate an additional six billion cubic feet of
natural gas storage capacity, which has been fully subscribed under
10-year contracts. The Cheyenne Market Center offers firm natural gas
storage capabilities that allow for the receipt, storage and
subsequent re-delivery of natural gas supplies at applicable points
located in the vicinity of the Cheyenne Hub in Weld County, Colorado
and our Huntsman storage facility in Cheyenne County, Nebraska;
o On July 13, 2004, we announced that we had commenced service on our
135-mile natural gas 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. The $30 million project
included the December 2003 acquisition of the pipeline, the subsequent
conversion of the pipeline from crude oil to natural gas service, and
the construction of a 5-mile pipeline lateral to serve a municipal
power plant located in Austin, Texas. The pipeline adds approximately
170 dekatherms per day of natural gas to the Austin market and is
supported by long-term contracts with local utilities;
o On August 18, 2004, we entered into a new five-year unsecured
revolving credit facility with a total commitment of $1.25 billion.
The new facility expires on August 18, 2009, and replaced our 364-day
and three-year facilities, which had total commitments of $1.05
billion. The five-year facility will result in benefits over our prior
credit facilities, including lower annual fees, reduced pricing and
rollover risk, and lower administrative costs. Our credit covenants
remained substantially unchanged as compared to the previous
facilities, with the only meaningful modification being the removal of
any net worth restriction. The facility primarily serves as a backup
to our commercial paper program, which had $416.9 million outstanding
as of December 31, 2004;
o Effective August 31, 2004, we acquired all of the partnership
interests in Kinder Morgan Wink Pipeline, L.P., formerly Kaston
Pipeline Company, L.P., from KPL Pipeline Company, LLC and RHC
Holdings, L.P. for an aggregate consideration of approximately $100.3
million, consisting of $89.9 million in cash and the assumption of
$10.4 million of liabilities. The acquisition included a 450-mile
crude oil pipeline system, consisting of four mainline sections,
numerous gathering systems and truck off-loading stations. The
mainline sections, all in the State of Texas, have a total capacity of
115,000 barrels of crude oil per day. As part of the transaction, we
entered into a long-term throughput agreement with Western Refining
Company, L.P. to transport crude oil into Western's 107,000 barrel per
day refinery in El Paso, Texas. As of the acquisition date, we
expected to invest approximately $11.0 million over the next five
years to upgrade the assets;
o On September 9, 2004, a non-binding, phase two initial decision was
issued by an administrative law judge hearing the FERC case on the
rates charged by our Pacific operations' interstate portion of its
pipelines. If affirmed by the FERC, the phase two initial decision
would establish the basis for prospective rates and the calculation of
reparations for complaining shippers with respect to our Pacific
operations' West Line and East Line. However, as with the phase one
initial decision, issued on June 24, 2003, the phase two initial
decision has no force or effect and must be fully reviewed by the
FERC, which may accept, reject or modify the decision. A FERC order on
phase two of the case is not expected before the third quarter of
2005. Furthermore, any such order may be subject to further FERC
review, review by the United States Court of Appeals for the District
of Columbia Circuit, or both;
o Effective October 1, 2004, we acquired an additional undivided 5%
interest in the Cochin Pipeline System from a subsidiary of
ConocoPhillips Corporation for approximately $10.9 million. We record
our 49.8% proportionate share of the results of operations of the
Cochin Pipeline System as part of our Products Pipelines business
segment;
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o Effective October 6, 2004, we acquired Kinder Morgan River Terminals
LLC, formerly Global Materials Services LLC, from Mid-South Terminal
Company, L.P. for an aggregate consideration of approximately $89.6
million, consisting of $31.8 million in cash and $57.8 million of
assumed liabilities. Kinder Morgan River Terminals LLC operates a
network of 21 river terminals and two rail transloading facilities
primarily located along the Mississippi River system. The network
provides loading, storage and unloading points for various bulk
commodity imports and exports. As of the acquisition date, we expected
to invest an additional $9.4 million over the next two years to expand
and upgrade the terminals, which are located in 11 Mid-Continent
states;
o On October 13, 2004, we announced that Shell Trading (U.S.) Company
had assumed ownership of the processing rights at our transmix
facilities located in Richmond, Virginia; Indianola, Pennsylvania; and
Wood River, Illinois. In a transaction that closed on September 30,
2004, Shell Trading purchased the eastern transmix trading business
formerly owned by Duke Energy Merchants LLC, which included a transmix
processing agreement with us effective through March 16, 2011;
o Effective November 1, 2004, we acquired all of the partnership
interests in TransColorado Gas Transmission Company from two
wholly-owned subsidiaries of KMI. TransColorado Gas Transmission
Company is a Colorado general partnership and, at the date of
acquisition, owned assets of approximately $284.5 million. As
consideration for TransColorado, we paid to KMI $211.2 million in cash
and assumed liabilities of approximately $9.3 million. In addition, we
issued 1,400,000 common units having a market value of approximately
$64 million to KMI. TransColorado owns a 300-mile interstate natural
gas pipeline that originates in the Piceance Basin of western Colorado
and extends to the Blanco Hub in northwest New Mexico, providing a
strategic link to the southwestern United States and other key
markets;
o Effective November 5, 2004, we acquired ownership interests in nine
refined petroleum products terminals in the southeastern United States
from Charter Terminal Company and Charter-Triad Terminals, LLC for an
aggregate consideration of approximately $75.2 million, consisting of
$72.4 million in cash and $2.8 million of assumed liabilities. Three
terminals are located in Selma, North Carolina, and the remaining
facilities are located in Greensboro and Charlotte, North Carolina;
Chesapeake and Richmond, Virginia; Athens, Georgia; and North Augusta,
South Carolina. We fully own seven of the terminals and jointly own
the remaining two. The nine facilities have a combined 3.2 million
barrels of storage. As of the acquisition date, we expected to invest
an additional $2 million over the next two years to upgrade the
facilities. All of the terminals are connected to products pipelines
owned by either Plantation Pipe Line Company or Colonial Pipeline
Company, and the acquisition will increase our southeast terminal
storage capacity 76% (to 7.7 million barrels) and terminal throughput
capacity 62% (to over 340,000 barrels per day);
o On November 10, 2004, we completed a public offering of 5,500,000 of
our common units at a price of $46.00 per unit, less commissions and
underwriting expenses. On December 8, 2004, we issued an additional
575,000 units upon the exercise by the underwriters of an
over-allotment option. We received net proceeds of $268.3 million for
the issuance of these 6,075,000 common units. At approximately the
same time as our November public offering, KMR issued 1,300,000 of its
shares at a price of $41.29 per share, less closing fees and
commissions. The net proceeds from the offering were used by KMR to
buy additional i-units from us, and we received net proceeds of $52.6
million for the issuance of 1,300,000 i-units. We used the proceeds
from each of these three issuances to reduce the borrowings under our
commercial paper program;
o On November 12, 2004, we closed a public offering of $500 million in
principal amount of 5.125% senior notes due November 15, 2014. The
proceeds to us from the issuance of the notes, after underwriting
discounts and commissions, were approximately $496.3 million, which we
used to reduce commercial paper debt;
o Effective December 1, 2004, we acquired substantially all of the
assets used to operate the major port distribution facility located at
the Fairless Industrial Park in Bucks County, Pennsylvania. The
aggregate cost of the acquisition was approximately $7.5 million,
consisting of $7.2 million in cash and $0.3 million in assumed
liabilities. The bulk terminal facility is located on the Delaware
River and is the largest port on the East Coast for the handling of
semi-finished steel slabs, which are used as feedstock by domestic
steel mills. The facility, referred to as our Kinder Morgan Fairless
Hills Terminal, was purchased from Novolog Bucks
9
County, Inc. The port operations at Fairless Hills also include the
handling of other types of steel and specialized cargo that caters to
the construction industry and service centers that use steel sheet and
plate. As of the acquisition date, we expected to invest an additional
$8.3 million in the facility;
o On December 8, 2004, we announced that we expect to declare cash
distributions of $3.13 per unit for 2005, a 9% increase over our cash
distributions of $2.87 per unit for 2004. This expectation includes
contributions from assets owned by us as of the announcement date and
does not include any projected benefits from unidentified
acquisitions;
o On December 15, 2004, we announced the start of service on our new $95
million, 70-mile, 20-inch replacement common carrier refined petroleum
products pipeline between Concord and Sacramento, California. This
project included replacing an existing 14-inch diameter refined
products pipeline with a new 20-inch diameter line and rerouting
portions of the pipeline away from environmentally sensitive areas and
residential neighborhoods. The capital expansion project significantly
increases the capacity on the pipeline and provides the necessary
infrastructure to help meet the region's growing demand for gasoline,
diesel and jet fuel. Capacity on the new pipeline is approximately
167,000 barrels per day, and with additional pumping capability,
maximum capacity could increase to over 200,000 barrels per day;
o During 2004, we spent $747.3 million for additions to our property,
plant and equipment, including both expansion ($628.0 million) and
maintenance projects ($119.3 million). Our capital expenditures
included the following:
o $302.9 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 and Yates oil field units in West Texas;
o $213.8 million in our Products Pipelines segment, mostly related
to expansion work on our Pacific operations' Concord to
Sacramento, California products pipeline, the expansion of our
Pacific operations' East Line products pipeline, described above,
and to a storage and expansion project at our combined Carson/Los
Angeles Harbor terminal system in the State of California;
o $124.2 million in our Terminals segment, largely related to
expanding the petroleum products storage capacity at our liquid
terminal facility located in Carteret, New Jersey and the
construction of a cement facility at our Dakota bulk terminal
located in St. Paul, Minnesota, as well as other smaller
projects; and
o $106.4 million in our Natural Gas Pipelines segment, mostly
related to completing the construction and start up of our
Cheyenne Market Center and our Katy to Austin, Texas intrastate
natural gas pipeline project, both described above; and
o On February 24, 2005, we announced that we had received the necessary
permits and approvals from the city of Carson, California, to
construct new storage tanks as part of a major expansion of our West
Coast petroleum products storage and transfer terminal located in
Carson, California. The almost $40 million investment includes the
addition of ten new tanks that will increase storage capacity at the
facility by 800,000 barrels (16%) and help meet Southern California's
growing demand for petroleum products.
(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:
10
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 2,500 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 nine 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 six
terminal facilities on the West Coast that transload and store
refined petroleum products;
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 system 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 Kinder Morgan Southeast Terminals LLC, comprised of 23 refined
petroleum products terminals acquired between December 2003 and
November 2004;
o our 49.8% 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 (a blend of dissimilar refined petroleum products
that have become co-mingled in the pipeline transportation process)
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 3,100 miles of refined petroleum products
pipeline and related terminal facilities.
11
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, nine commercial airports and 15 military bases. For
2004, 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-Tucson, Arizona corridor. Pipeline
transportation of gasoline and jet fuel generally has a direct correlation with
demographic patterns. We believe that the population growth associated with the
markets served by our Pacific operations will continue in the foreseeable
future.
South Region. Our Pacific operations' South Region consists of four
pipeline segments:
o West Line;
o East Line;
o San Diego Line; and
o CALNEV Line.
The West Line consists of approximately 670 miles of primary pipeline and
currently transports products for 37 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 project also includes the construction
of a major origin pump station. The project is estimated to cost $210 million
and is scheduled to be completed in the first quarter of 2006.
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
12
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.
On December 15, 2004, we announced the start of service on our new $95
million, 70-mile, 20-inch replacement common carrier pipeline between Concord
and Sacramento, California. The project included replacing the existing 14-inch
diameter refined products pipeline with a new 20-inch diameter line and
rerouting portions of the pipeline away from environmentally sensitive areas and
residential neighborhoods. The capital expansion project increases the capacity
on the pipeline from 119,000 barrels per day to 167,000 barrels per day, and
with additional pumping capability, maximum capacity could increase to 200,000
barrels per day.
The Bakersfield Line is a 100-mile, 8-inch diameter pipeline serving
Fresno, California. The Oregon Line is a 114-mile pipeline serving 13 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 and include:
o the Carson Terminal;
o the Los Angeles Harbor 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 52% of total
revenues at the facility.
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
13
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:
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 our 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 75 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 970,000 barrels
per day. The Arizona gasoline market is served primarily by us at a market
demand of approximately 121,000 barrels per day. Nevada's gasoline market is
approximately 50,000 barrels per day and Oregon's is approximately 96,000
barrels per day. The diesel
14
and jet fuel market is approximately 560,000 barrels per day in California,
73,000 barrels per day in Arizona, 40,000 barrels per day in Nevada and 63,000
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. MTBE-blended gasoline has been replaced by
ethanol-blended gasoline. Since ethanol cannot be shipped by pipeline, we are
realizing a reduction in gasoline volumes delivered in California; however, our
overall revenues were not adversely impacted as our terminals receive a fee to
blend ethanol.
Supply. The majority of refined products supplied to our Pacific
operations' pipeline system come from the major refining centers around Los
Angeles, San Francisco and Puget Sound, as well as waterborne terminals located
near these refining centers.
Competition. The most significant competitors of our Pacific operations'
pipeline system are proprietary pipelines owned and operated by major oil
companies in the area where our pipeline system delivers products as well as
refineries with related trucking arrangements within our market areas. We
believe that high capital costs, tariff regulation and environmental permitting
considerations make it unlikely that a competing pipeline system comparable in
size and scope to our Pacific operations will be built in the foreseeable
future. However, the possibility of pipelines being constructed or expanded 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 continues to compete for
short haul movements by pipeline. The mandated elimination of MTBE and required
substitution of ethanol in California gasoline has 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 began
transporting refined products from refineries on the Gulf Coast to El Paso and
other destinations in Texas in late 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,
Orange County, Mission Valley, and San Diego, California and Phoenix and Tucson,
Arizona and Las Vegas, Nevada. Short haul trucking from the refinery centers is
also a competitive factor to close-in terminals.
Competitors of our 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. Competition to our 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
15
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 facility
also has a truck rack that can load in excess of 200 trucks per day and a
railroad 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 control room for the pipeline is located
at the Tampa terminal. 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 2004, the pipeline transported
approximately 103,000 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 800,000 barrels per day. Gasoline is, by far, the
largest component of that demand at approximately 545,000 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
approximately 350,000 barrels per day, or 44% of the consumption of refined
products in the state. Our market share is approximately 140,000 barrels per
day, or 40% 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 in March and April during spring break and again in
the summer vacation season, and is also heavily influenced by tourism, with
Disney World and other amusement parks located in Orlando.
Supply. The vast majority of refined petroleum products consumed in Florida
is supplied 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 close to the marine
terminals on the east and west coasts 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.
16
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 system 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.
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 agricultural
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, which requires us to pay approximately $2.2 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 was completed in 1990 and is owned by the
Heartland Pipeline Company. We own a 50% equity interest in Heartland. The
pipeline 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.
Heartland leases 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
17
reserved pipeline capacity, is paid monthly, with an annual adjustment. The 2005
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 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.
During the first quarter of 2003, and again in the first quarter of 2004,
the North System experienced a general decline in throughput volumes due to a
lack of product supplies caused by shippers (primarily propane shippers)
reducing their inventory levels at the close of the winter season. In addition
to the general decline in throughput volumes, shippers were unable to get all of
their product out of the system, as a significant volume was required to be held
as line-fill. Following numerous discussions and meetings with our shippers in
an attempt to remedy this situation, including a plan to require shippers to
carry a minimum line-fill in our system, the consensus was for us to purchase
product to be used as line-fill and pass the carrying cost on to the shippers
through a cost of service filing with the FERC. A cost of service filing was
made with the FERC to be effective on June 1, 2004, raising our tariff rates by
$0.12 per barrel on product transported north of the Bushton/Conway, Kansas
area. This rate went into effect without protest or intervention.
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. An affiliate of
ExxonMobil owns the remaining 49% ownership interest. ExxonMobil is the largest
shipper on the Plantation system both in terms of volumes and revenues. We
operate the system 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.
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For the year 2004, Plantation delivered an average of 620,363 barrels per
day of refined petroleum products. These delivered volumes were comprised of
gasoline (65%), diesel/heating oil (22%) and jet fuel (13%). Average delivery
volumes for 2004 were 1.3% higher than the 612,451 barrels per day delivered
during 2003. The increase was driven by regional demand growth in all
transportation-related fuels: gasoline up 0.9%; low sulfur diesel up 4.9%; and
jet fuel up 2.8%.
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 five 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
another pipeline company. These markets represent potential growth opportunities
for the Plantation system.
In addition, Plantation delivers jet fuel to the Atlanta, Georgia;
Charlotte, North Carolina; and Washington, D.C. airports (Ronald Reagan National
and Dulles). Combined jet fuel shipments to these four major airports increased
1.5% (led by a 10% increase in shipments to Ronald Reagan National) in 2004. An
improving domestic economy should help improve jet fuel demand in 2005.
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 in this report 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.
On December 11, 2003, KMST acquired seven petroleum products terminals from
ConocoPhillips and Phillips Pipe Line Company for an aggregate consideration of
approximately $15.3 million, consisting of approximately $14.3 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.
On March 9, 2004, KMST acquired seven additional refined petroleum products
terminals from Exxon Mobil Corporation for an aggregate consideration of
approximately $50.9 million, consisting of approximately $48.2 million in cash
and $2.7 million in assumed liabilities. The terminals are located 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. All seven
of these terminals are served by Plantation and two are also connected to
Colonial.
On November 5, 2004, KMST acquired ownership interests in nine additional
refined petroleum products terminals from Charter Terminal Company and
Charter-Triad Terminals, LLC for an aggregate consideration of
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approximately $75.2 million, consisting of approximately $72.4 million in cash
and $2.8 million in assumed liabilities. Three terminals are located in Selma,
North Carolina, and the remaining facilities are located in Greensboro and
Charlotte, North Carolina; Chesapeake and Richmond, Virginia; Athens, Georgia;
and North Augusta, South Carolina. The terminals have a combined storage
capacity of approximately 3.2 million barrels for gasoline, jet fuel and diesel
fuel. We fully own seven of the terminals and jointly own the remaining two. All
of the terminals are connected to products pipelines owned by either Plantation
Pipe Line Company or Colonial Pipeline Company. The acquisition increased our
southeast terminal storage capacity 76% (to 7.7 million barrels) and terminal
throughput 62% (to over 340,000 barrels per day).
Markets. KMST acquisition and marketing activities are focused on the
Southeastern United States from Mississippi through Virginia, including
Tennessee and Florida. The primary marketing activity involves the receipt of
petroleum products from common carrier pipelines, short-term storage in terminal
tankage, and subsequent loading onto tank trucks. KMST has a physical presence
in markets representing almost 80% of the pipeline-supplied demand in the
Southeast and offers a competitive alternative to marketers seeking a
relationship with a truly independent truck terminal service provider.
Supply. Product supply is predominately from either Plantation, Colonial,
or both. To the maximum extent practicable, we try to connect KMST terminals to
both Plantation and Colonial.
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 and TransMontaigne Product
Services represent the other independent terminal operators in this region.
Cochin Pipeline System
We own 49.8% of the Cochin pipeline system, a joint venture that operates
an approximate 1,900-mile, 12-inch diameter multi-product pipeline operating
between Fort Saskatchewan, Alberta and Sarnia, Ontario. Effective October 1,
2004, we acquired our most recent ownership interest (5%) from subsidiaries of
ConocoPhillips. An affiliate of BP owns the remaining 50.2% ownership interest
and is the operator of the pipeline.
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. 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;
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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 long-haul 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.
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 liquid 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. Effective September 30, 2004,
Shell Trading (U.S.) Company assumed ownership of the processing rights at our
transmix facilities located in Richmond, Virginia; Indianola, Pennsylvania; and
Wood River, Illinois. Shell Trading purchased the eastern transmix trading
business formerly owned by Duke Energy Merchants LLC, which included a transmix
processing agreement effective through March 16, 2011. At these locations, Shell
procures transmix supply from pipelines and other parties, pays a processing fee
to us, and then sells the processed gasoline and fuel oil through their
marketing and distribution networks. The arrangement includes a minimum
processing volume and fee to us, as well as an opportunity to extend the
processing agreement beyond the 2011 date.
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 three 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, which is currently not in service,
with a capacity of 55,000 barrels located nearby in Richmond.
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Our Dorsey Junction processing facility is located near Baltimore, Maryland
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 the 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 Colton, and
Shell acquires transmix for processing at Indianola, Richmond and Wood River.
The Dorsey Junction facility is supplied by Colonial Pipeline Company.
Competition. Placid Refining is our main competitor in the Gulf Coast area.
There are various processors in the Mid-Continent area, primarily
ConocoPhillips, Gladieux Refining and Williams Energy Services, who compete with
our expansion efforts in that market. 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 sales, transportation, storage,
gathering, processing and treating. Within this segment, we own approximately
14,000 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 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. Kinder
Morgan Texas and Kinder Morgan Tejas are the two largest systems in
this group, and combined, consist of approximately 5,800 miles of
intrastate natural gas pipelines 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);
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o our three Rocky Mountain interstate natural gas pipeline systems:
Kinder Morgan Interstate Gas Transmission LLC, Trailblazer Pipeline
Company and TransColorado Gas Transmission Company. KMIGT owns a
4,562-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. TransColorado owns a 300-mile
natural gas pipeline system that extends from the Western Slope of
Colorado to northwestern New Mexico. As of December 31, 2004, the
combined peak transport capacity for our Rocky Mountain pipeline
systems was approximately 2.5 billion cubic feet per day of natural
gas, and the combined storage capacity was approximately 10.0 billion
cubic feet of natural gas;
o our Casper and Douglas natural gas gathering systems, which are
comprised of over 1,500 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
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
natural gas pipelines with a peak transport capacity of approximately five
billion cubic feet per day and approximately 120 billion cubic feet of natural
gas storage capacity. In addition, the system, through owned assets and
contractual arrangement with third parties, has the capability to process over
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 natural gas
pipeline that stretches from south Texas to Monterrey, Mexico and can transport
up to 375,000 dekatherms per day. 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
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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 certain of these new generation facilities to our pipeline
systems in order to maintain our share of natural gas supply for power
generation.
We serve the Mexico 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 150,000 to 200,000 dekatherms per day of natural gas and
deliveries to Monterrey generally range from 150,000 to 300,000 dekatherms per
day. 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 or third-party facilities. We own two processing plants: our
Texas City Plant in Galveston County, Texas and our Galveston Bay Plant in
Chambers County, Texas, which is currently idle. Combined, these plants can
process 115 million cubic feet per day of natural gas for liquids extraction. In
addition, we have contractual rights to process approximately 735 million 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 155 million cubic feet per day of
natural gas for carbon dioxide removal at our Fandango Complex in Zapata County,
Texas, 50 million cubic feet per day of natural gas at our Indian Rock Plant in
Upshur County, Texas and approximately 45 million cubic feet per day of natural
gas at our Thompsonville Facility located in Jim Hogg County, Texas.
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 provide 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 4.2 billion cubic feet of
working natural gas capacity and up to 500 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.
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 in this report
as KMIGT, owns approximately 4,562 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. KMIGT also has the authority to make gas purchases and sales, as
needed for system operations, pursuant to its currently
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effective FERC gas tariff. 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 160,000 horsepower. The pipeline system provides storage
services to its customers from its Huntsman Storage Field in Cheyenne County,
Nebraska. On June 1, 2004, KMIGT implemented its Cheyenne Market Center service,
which provides nominated storage and transportation service between its Huntsman
Storage Field and multiple interconnecting pipelines at the Cheyenne Hub. This
service is fully subscribed for a period of ten years and added an incremental
withdrawal capacity of 68 million cubic feet of natural gas per day and
increased the working gas capacity by 3.5 billion cubic feet. The Huntsman
Storage facility now has approximately 39.5 billion cubic feet of total storage
capacity, 16 billion cubic feet of working gas capacity and can withdraw up to
169 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 of 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 to power pumps 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 15%, by volume, of KMIGT's firm contracts expire
within one year and 39% expire within one to five years. Our affiliates are
responsible for approximately 21% 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.
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 natural gas in interstate commerce. It does business in
the states of Wyoming, Colorado and Nebraska. 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 it 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
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interconnection near Rockport in Weld County, Colorado.
Trailblazer provides transportation services to third-party natural gas
producers, marketers, gathering companies, local distribution companies and
other shippers. Pursuant to transportation agreements and FERC tariff
provisions, Trailblazer offers its customers firm and interruptible
transportation. Under Trailblazer's tariffs, firm transportation customers pay
reservation charges each month plus a commodity charge based on actual volumes
transported. Interruptible transportation customers pay a commodity charge based
upon actual volumes transported.
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.
Supply. As of December 31, 2004, 6% of Trailblazer's firm contracts, by
volume, expire before one year and 40%, 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. 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. However, on
March 24, 2004, the FERC issued a certificate approving the Cheyenne Plains
pipeline project that was developed by Colorado Interstate Gas Company. This
project, which commenced service in December 2004, allows for the transportation
of 560,000 dekatherms per day of natural gas from Weld County, Colorado to
Greensburg, Kansas and competes with Trailblazer for natural gas pipeline
transportation demand from the Rocky Montitain area. In addition, Cheyenne
Plains received approval from the FERC to expand its facilities to provide an
additional 170,000 dekatherms per day of capacity for a total capacity of
730,000 dekatherms. The proposed expansion is anticipated to go into service in
early 2006. No assurance can be given that additional competing pipelines will
not be developed in the future.
TransColorado Gas Transmission Company
TransColorado Gas Transmission Company is a Colorado general partnership
that owns a 300-mile interstate natural gas pipeline that extends form the
Western Slope of Colorado to northwestern New Mexico. KMIGT manages, maintains
and operates TransColorado, for which it is reimbursed at cost. We acquired all
of the ownership interests in TransColorado from KMI effective November 1, 2004.
The TransColorado Pipeline, which extends from approximately 20 miles southwest
of Meeker, Colorado to Bloomfield, New Mexico, has 20 points of interconnection
with five interstate pipelines, one intrastate pipeline, eight gathering
systems, and two local distribution companies, thereby providing relatively
significant flexibility in the receipt and delivery of natural gas. The pipeline
system is powered by five compressor stations in mainline service having an
aggregate of approximately 26,500 horsepower.
Gas flowing south through the pipeline moves onto the El Paso, Transwestern
and Southern Trail pipeline systems. TransColorado receives gas from two coal
seam natural gas treating plants located in the San Juan Basin of Colorado and
from pipeline and gathering system interconnections within the Paradox and
Piceance Basins of western Colorado. TransColorado provides transportation
services to third-party natural gas producers, marketers, gathering companies,
local distribution companies and other shippers. Pursuant to transportation
agreements and FERC tariff provisions, TransColorado offers its customers firm
and interruptible transportation and interruptible park and loan services. Under
TransColorado's tariffs, firm transportation customers pay reservation charges
each month plus a commodity charge based on actual volumes transported.
Interruptible transportation customers pay a commodity charge based upon actual
volumes transported. The underlying reservation and commodity charges are
assessed pursuant to a maximum recourse rate structure, which does not vary
based on the distance gas is transported. TransColorado has the authority to
negotiate rates with customers if it has first offered service to those
customers under its reservation and commodity charge rate structure.
TransColorado's revenues and volumes have historically been higher during
the second and third quarters of the calendar year, resulting from two factors:
winter heating market loads to the north of TransColorado and summer air
conditioning market loads to the south of TransColorado.
26
Markets. TransColorado acts principally as a feeder pipeline system from
the developing natural gas supply basins on the Western Slope of Colorado into
the interstate natural gas pipelines that lead away from the Blanco Hub area of
New